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Petitioner: MESSRS COLONY TEXTILE MILLS LTD., LAHORE VS Respondent: THE COMMISSIONER OF SALES JUDGMENT
Court Name: Lahore High Court Judge(s): Karam Elahi Chauhan, Munawar Elahee Rana Title:MESSRS COLONY TEXTILE MILLS LTD., LAHORE vs THE COMMISSIONER OF SALES
JUDGMENT
Reported As: PLD 1976 Lahore 243 Result: Reference answered accordingly Judgment JUDGMENT KARAM ELAHEE CHAUHAN, J.-The assessee runs a textile mills and a cotton factory in Multan. He purchases cotton which goes through the following processes:- (a) First of all it is ginned whereby cotton seed and cotton are separated by cotton ginning machines and this process is called "Ginning" of the cotton. (In Urdu it is called ROI BAILNA ). (b) While separating cotton from cotton-seed by the process of "ginning" certain amount of cotton '(or to be more exact short stiple cotton fibre) still remains stuck up to the cotton-seed which is later removed by an--other process known as "delinting" worked by delinting machines or delinters. This "delinted" cotton was sold in the assessment year in question by the assessee. (c) The cotton obtained after ginning under (a) above in then put to another process which is known as the process of "blowing" which divides it into two separate fibres known as (i) fine fibre (also called as superior fibre or long stripped fibre), and (ii) rough fibre-(which is also known as inferior or smaller fibre). This procees in Urdu is known as (ROI BAILNA YA KATNA). (d) The fine fibre is utilised by the assessee by the process of 'spinning' (known in Urdu as ROI KATNA) (worked by spindles) in the manufacture of fine yarn from which cloth is made by weaving through looms (this process is known as "KAPRA BUNANA). The inferior fibre though it is capable of being utilised in the manufacture of inferior yarn from which goods like 'durries' and carpets etc. Are made, but the assessee sold away the same in the open market in the assessment year in question. The assessee calls the inferior fibre as " cotton waste". 2. In the instant case the assessee, as already noted above, sold away the (i)"delinted cotton" and (ii) "cotton waste", These sales were assessed to Sales Tax by the Sales Tax Officer by his order
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dated 27-6-1969. On appeal of the assessee the Appellate Assistant Commissioner by means of his order dated 28-11-1970 held that both the above items were not taxable, because, according to him, they were nothing but another form of "ginned cotton" on which reduced rate of tax was payable vide Notification issued under section 7 of the Act and bearing No. 1010(K)/62 dated 22-9- 1962' (which in its own turn amended an earlier Notification bearing No. 11 dated 27-6-1951)-and wherein it was indicated that "ginned cotton and cotton-seeds" were to be taxed at 3j per cent., ginned cotton to be taxed at the export stage and cotton seed at the ginning stage. "(For these notifications see The Law of Sales Tax in Pakistan (Fourth Revised Edition) by S. M. Raza Naqvi, page 87). The present not being a case of export, the Appellate Assistant Commissioner held that even reduced rate tax was not leviable on the goods in question. The Department went in further appeal to the Appellate Tribunal which by means of its judgment and order dated 3-5-1971 accepted the same, reversed the order of the Appellate Assistant Commissioner and restored that of the Sales Tax Officer holding that the goods in question were 'manufactured goods' having distinct names and characteristics, capable of different use and could no longer be called "ginned cotton" and were, therefore, liable to Sales Tax and that the aforesaid Notification had no application to the facts and circumstances of the present case. The actual finding recorded in this respect was that (goods like) 'durries' and "carpets" could rather be made only from the (so called). "Waste cotton". Though not specifically mentioned in its order but it appears that the "Tribunal also took note of another Notification bearing No. S. R. O. 448(K)/69 dated 22-6-1964. Actually this is a Notification whereby "ginned cotton and cotton-seeds" were added as item No. 43 into the list of goods as contained in Notification No. 9 dated 27-6-1951 where it was indicated that "in exercise of the powers conferred by subsection (1) of section 7 of the Sales Tax Act, 1951 (111 of 1951), the Central Government is pleased to exempt the goods or class of goods specified hereunder being goods manufactured or produced fn Pakistan from the tax payable under the Act, but except in case of goods specified in item 33 (a) nothing in this exemption shall affect the tax payable on the raw materials from which the goods are manufactured". (These notifica--tions are reproduced at pages 81 and 82 of Raza Naqvi's book mentioned earlier). The Tribunal took the view that since the goods in question were not "ginned cotton" and were utilised in the manufacture of goods like 'durries' and carpets etc.- which could be made only from them the exemption mentioned hereinbefore was not applicable to them. (It is propably for this reason that the Tribunal has asked this Court to decide this case with reference to the aforesaid Notification dated 22-6-1964 as is clear from their reply/written statement dated 8-5-1972). The assessee has come up in reference to this Court requiring us to answer the following questions :- "Whether on facts and in the circumstances of the case the learned Appellate Tribunal was right in holding that "waste cotton" sold by the assessee was a manufactured article in respect of which the assessee was liable to Sales Tax under section 3 read with clause (11) and not a refuse or remains of the raw material i.e. Ginned cotton which had resulted in the failure of production or has not resulted in the production of any goods?." (2) "Whether on facts and in the circumstances of the case the learned Tribunal was right in holding that the sales of Rs. 1,47,606 on account of delinted cotton were liable to tax under the Sales Tax Act under section 3 of the Sales Tax Act 1951 ? (3) "Whether on facts and in the circumstances of the case there is any material to support the finding of the Tribunal that Durries, Carperrs, cotton wool etc. Can only be manufactured out of cotton waste." In its written statement/reply dated 8-5-1972, the Department has taken objection to the form of the question posed by the assessee and has submitted that only the following question arises from the order of the Tribunal and that the same may be answered by this Court I-
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"Whether the Tribunal was not right in holding that cotton waste and "delinted cotton" do not qualify for exemption from Sales Tax under Item No. 43 of the Notification No. S. R. O. 488-(K) 64, dated 22-6-1964 issued under subsection (1) of section 7 of the Sales Tax Act, 1951 in respect of the ginned cotton"? (This is the same Notification of which mention has been made by us earlier). 3. Learned counsel for the petitioners introduced us to the definitions of "goods", "manufacturer or producer" and "partly manufactured goods" as contained in clauses (6), (11) and (12) respectively of section 2 and also referred to sections 3, 4, and 7 of the Sales Tax Act III of 1951. They read as follows :- Section 2, Definitions.-In this Act, unless the context otherwise requires,- "(6) "goods" means all kinds of movable property other than actionable claims, money, stocks, shares and securities; (7) -------------------------------------------------------------------------------------- -------.. (8) (9) (10) -------------------------------------------------------------------------------------- -.. (11) "manufacturer or producer" means a person who engages, whether exclusively or not, in the production or manufacture of goods, and includes a printer, publisher, lithographer or engraver, or a person engaged in the ginning of cotton, and also any person (not being an employee) who manufactures goods, whether or not the materials of which the goods are manufactured are owned by him. Provided that where one person, other than a person engaged in the ginning of cotton, manufactures goods for another, wholly or in part out of materials supplied by that other, and the goods are not for the use of, but are for sale by, that other, the person supplying the materials shall be deemed to be the manufacturer, and the person who so manufactures the goods shall be deemed not to be the manufacturer. The expression also includes- (i) The assignee, trustee in bankruptcy, liquidator, executor, or curator of any manufacturer or producer and, generally, any person who continues the business of a manufacturer or producer or disposes of his assets in any fiduciary capacity; (it) any person, firm or company which owns, hold, claims, or uses any patent, proprietary, sales or other right to goods being manufactured, whether by them, in their name, or for or on their behalf by other, whether such person, firm or company sells, distributes, consigns, or otherwise disposes of the goods or not; (12) (iii) "partly manufactured goods" means only goods which are to be incorporated into and from a constituent or component part of an article which is subject to the tax;" Section 3. Charge of tax.-(1) There shall be levied and collected a tax on the value of- (a) All goods produced or manufactured in Pakistan payable by the manufacturer or producer ; , (b) All goods imported into Pakistan, payable by the importer; (c) all goods sold by a licensed wholesaler, payable by the licensed wholesaler; (d) such goods or classes of goods as the Board may, by notification in the official Gazette, specify in this behalf which are exported ,from Pakistan, payable by the exporter ; (e) such goods or classes of goods purchased without payment of Sales Tax by a licensed manufacturer or producer of taxable goods as are not used in the manufacture or production of taxable goods, payable by such manufacturer or producer. (2) The tax shall be a tax of fifteen per cent. On the value of the goods as aforesaid except in the case of goods specified in the schedule to this Act in which case it shall be such percentage as
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may be fixed by the Board by notification in the official Gazette. (3) The value of the goods shall be- (i) in the case of goods falling under clause (a) of subsection (1)-the sale price ; (ii) in the case of goods falling under clause (b) or clause (d) of the said subsection the duty paid value ; (iii) in the case of goods failing under clause (c) of the said subsection being imported goods the duty paid value ; (iv) in the case of goods falling under clause (c) of the said subsection being goods manufactured or produced in Pakistan the price for which the goods were purchased by the licensed wholesaler. (4) The tax in respect of the goods mentioned in clauses (a) (c) and (d) of subsection (1) and clause (d) of subsection (6) shall be payable on the occurrence of the first of the following events- (i) When the goods are delivered to the purchaser, or (ii) When the property in the goods passes to the purchaser, or (iii) when the goods are sent, consigned or exported to any place outside Pakistan, and for the purposes of this clause the goods shall be deemed to have been sold when they are sent, consigned or exported to any such place as aforesaid, or (iv) when the goods are actually used by the manufacturer or producer: Provided that in the case of goods specified in the First Schedule to the Central Excise and Salt Act, 1944 (I of 1944), (hereinafter referred to as the said Act) the tax shall be payable at the same time and in the same manner as the duty of excise and the provisions of the said Act relating to the payment of duty and the removal of goods, shall so far as may be apply to the payment of the tax under this Act as they apply for the purposes of the said Act. (5) The tax in respect of the goods mentioned in clauses (b) and (d) of subsection (1) shall be paid on importation or exportation, as the case may be, as provided hereunder- (i) Where the goods on importation are directly cleared for home consumption-before the order of such clearance is made by the Customs Officer, (ii) Where the goods on importation are taken out of bond for home consumption-before the goods are removed from the warehouse, (iii) where the goods are exported by sea-before the shipping bill is passed by the Customs Collector; (iv) Where the goods are imported or exported by land before the permit for the passage of the goods out of or into foreign territory is issuedand the provisions of the Sea Customs Act, 1878, and of the Land Customs Act, 1924, relating respectively to payment or refund of duty the -clearance, shipping and removal of goods and the passage of goods ,out of or into foreign territory shall, so far as may be, applied to ;the payment of the tax under this Act as they apply for the purposes .Of those Acts. '(6) Determination of value for tax in certain circumstances: where goods are produced or manufactured in Pakistan under such circumstances or conditions as render it difficult to determine the value thereof for the tax because- (a) A lease of such goods or the right of using the same but not the right of property therein is sold or given, or (b) such goods having a royalty imposed thereon. The royalty is uncertain, or is not from other causes a reliable means of estimating the value of the goods, or (c) such goods are manufactured by contract for labour only and not including the value of the goods that enter into the same, or under any other unusual or peculiar manner or conditions, or ,(d) such goods are for use by the manufacturer or producer and not for sale; The Sales Tax Officer may determine the value for the tax under this Act and all such transactions shall, for the purposes of this Act, be regarded as sales.
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(7) If any person other than the manufacturer or producer or importer or licensed wholesaler or exporter hereinbefore mentioned acquires from or against any one of these persons the right to sell any goods, whether as a result of the operation of law or of any transaction not taxable under section 4, the sale of such goods by him shall be taxable .As if made by the manufacturer or producer or importer or licensed wholesaler or exporter; as the case may be, and the person so selling shall be liable to pay the tax. Section 4. Tax not payable on certain transactions.-Notwithstanding anything contained in section 3, tl)e tax shall not be payable on- ;(a) goods sold by a licensed manufacturer to another licensed manu--facturer if the goods are partly manufactured goods, or, (b) goods imported by a licensed manufacturer if the goods are partly manufactured goods, or (c) goods imported by a licensed wholesaler, or (d) goods sold by a licensed manufacturer to a licensed wholesaler or a licensed exporter; or (e) goods sold by a licensed wholesaler to a licensed manufacturer if the goods are partly manufactured goods, or (f ) goods sold by a licensed wholesaler to another licensed wholesaler, or (g) goods sold by a licensed exporter to another licensed exporter ; Provided that if a licensed wholesaler sells goods to another licensed wholesaler at a price less than the value upon which the tax would be computed under clause (iii) or clause (iv) of subsection (3) of section 3, the vendor shall forthwith become liable to pay the tax upon the difference between such value and his sale price: Provided further that nothing contained in .Clause (a) or .Clause (d) shall apply to the sale of cotton yarn and such other goods or class of goods as the Central Government may, by notification in the official Gazette specify in this behalf." Section 7. Exemptions.-(1) The Central Government may, by notifica--tion in the official Gazette, exempt any goods or class of goods or any person or class of persons from the tax payable under this Act, and may also, by notification as aforesaid, make reduction in the rate of tax leviable in respect of any goods or class of goods. (2) Any exemption notified under subsection (1) may be made subject to such conditions as may be specified in the notification. (3) The Board may, by special order in each case, exempt from the payment of the whole or any part of the tax under circumstances of an exceptional nature to be stated in such order, any goods on which the tax is leviable." Law on the subject. 4. The first point argued by the learned counsel for the petitioner was that to hold that goods have been manufactured or produced or that a. Person is engaged in the manufacture or production of a goods, it was-- essential that (a) there must be a transformation and the mere fact that some labour has been applied through machinery will not make it a manufacturer production unless the process has progressed so far that transformation ensures; and (b) secondly the article becomes commercially known as another article different from that at which it begins its existence. On this principle it was suggested by way of an illustration example that "ginning" strictly speaking, could not be termed as a process of manufacture or production of cotton seed or ginned cotton, inasmuch as, after ginning the new components remained the same which were already contained in the generic kapass. The principle advanced by the learned counsel seems to be of extreme view and cannot be said to be of universal application especially when it does not seem to have been endorsed by our Supreme Court in Superintendent of Central Excise, Lyallpur v. Ch. Faqir Muhammad (PLD 1959 SC (Pak.) 103) where their Lordships were confronted with a similar
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contention which had, found favour in the High Court. The actual passage of the High Court judgment which came under examination before the Supreme Court was to the following effect:- "Now when the cloth is given to the petitioner for calendaring, it is --either cloth or cotton cloth as envisaged by entry 15 of the Central Excise and Salt Act, 1944 and there is no doubt that it remains the --same article even after the petitioner has calendered it because, though the cloth may get a fines look and may fetch more price, its relevant contents remain precisely the same. If the contents of the cloth do not change by the process of calendering to which the petitioner subjects it I fail to see how that process can be deemed to be a process in the manufacture or production of the cloth. If the First Schedule of the Central Excise and Salt Act had made calendered cloth, as distinguished from cloth dealt with in. Entry 15 of the Schedule, an excisable article it is obvious that the process of calendering would have altered the goods for the purposes of the schedule but as the only entry which can be invoked by the respondent is entry 15 of the Schedule which concerns itself only with cloth, I cannot see how the respondent can claim, as was claimed by this learned counsel, that because the price of the cloth after calendering would be more than it was before it was calendered the process of calendering was manufacture of cloth within the meaning of the definition of that term contained in section 1(f ) of the Act. It is well settled that taxing Statutes and it is hardly open to question that the Central Excise and Salt Act, 1944, is a taxing statute should be very strictly construed so that the Government does not get money for a thing which the Legislature did not intend to be liable to tax. But even if that strict interpretation is not applied to the case of the petitioner. The business of calendering cannot be brought within section 6 of the Central Excise and Salt Act, 1944, or Rule 171 (1) (c) of Central Excise Rules, 1944." The Supreme Court did not accept the above enunciation of law and held as follows:- "As contended for the appellant this conclusion of the learned Judges is not correct. "Manufacture" is defined in the Act (section 2 (f ) as including any process incidental or ancillary to the completion of the manufactured product. We are unable to agree with the view of the learned Judges that unless the content of the article is changed it remains the same in spite of its being given a finish. It might have been so if without the finish the goods were not marketable, but uncalendered cloth is also sold in the market. The fact that its price is higher after it is calendered shows that the purchasing public regards calendered cloth as a different article having a positive and specific use in its new state. There is no force in the argument of the learned Advocate for the respondent that calendering is nothing more than ironing the cloth already manufactured. That calendering like dyeing, bleaching and printing is a distinct process which transforms the article is clear from the following extract from Encyclopaedia Britannica (1953 Edition, Vol. 5, page 846): "In its modern significance, finishing comprises a large and diverse range of processes intended to produce in the fabric a desired appearance or feel; and the machines required for this purpose are correspondingly numerous and varied, finishing operations require plant for, to name some of the important processes, shearing, stretching, drying, damping, pressing, embossing, impregnating, covering and raising cotton cloths. Classification of finishes in relation to the many different kinds of cotton fabrics is difficult, because many of the processes are applicable to a wide range of clothes. They may be considered under the following headings Gray goods, Le. Cloth direct from the loom, white goods, Le. Cloth which has undergone a bleaching process, plain dyed goods; colours and black print red goods; raised goods. Grey goods.-These may be finished pure i.e. Without any additional size or stiffening. After passing through a shearing machine or a combined moting and shearing machine, the cloth may be conditioned in a damping machine of the brush type or the spray type (fig. 1) and afterwards calendered in a suitable calender such as the three bowl swissing calender (fig. 2) or a five or seven bowl calender arranged to give a bright finish on both sides of the cloth, or a friction calender giving a glazed surface on one side only. Grey goods which are stiffened before being calendered are passed through a range comprising a mangle
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and cylinder drying machine (fig. 3). The mangle may have two or three bowls, and the draying set may be horizontal or vertical. There can thus be no doubt that calendering is a process ancillary to the completion of the manufactured product which is the calendered cloth. It is true that under section 6 a licence is necessary only if the manufactured goods are excisable; but there is nothing in Article 15 of the First Schedule to show that it excludes calendered cloth. If the respondent's mills had manufactured cloth and calendered it before issuing it out he could not have pleaded that as calendered cloth is not specifically mentioned in the Article 15 of the First Schedule he need not pay duty at all. As for the liability to pay duty a second time, which has been pressed before us on behalf of the respondent, there is the fact that notification No. 6 dated 29-4-1955 issued-' under section 37 of the Act exempts cloth undergoing any process incidental or ancillary to the completion of its manufacture from so much of the duty liable under the Act as may have already been levied on it prior to that process. In the present case duty was admittedly levied when the cloth was manufactured by the concerned mill and before it came into the market, and to that extent further duty is not leviable on it after it is calendered. But that does not mean that calendared cloth is not excisable". In the Law of Sales Tax by Muhammhd Amin Butt (the learned counsel in this case), and Muhammad Saeed But (1969 Edition), there occurs an instructive passage at page 58 with reference to Hiralal Jitmal v. Commissioner of Sales Tax (1957) 8 S T C 325, Badri Prasad Prabha Shankar v. Sales Tax Commissioner U P (1963) 14 S T C 208 and G. K Kulkarni v. State (1957) 8 S T C 294 wherein it is written that "in order to constitute manufacture" it is not necessary that there must be a transformation in the materials and that the transformation must have progressed so far that the manufactured article becomes commercially known as another and different article from the raw materials. All that is necessary is that the material should have been changed or modified by man's art or industry so as to make it capable of being sold in an acceptable form to satisfy some want, or desire or fancy or taste of man". Examined in the light of these legal pronouncements even the illustrative example which was given by the learned counsel with regard to ginning of cotton cannot be endorsed or taken as a guide. It will be evident that when kapass is ginned the commodities which come into being are two different commodities, namely, cotton-seed and ginned cotton both of which are different in commercial…
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