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Petitioner: Messrs ISHTIAQ TEXTILE MILLS LTD. VS Respondent: FEDERATION OF PAKISTAN through JUDGMENT
Court Name: Sindh High Court Judge(s): Khawaja Naveed Ahmed Title:Messrs ISHTIAQ TEXTILE MILLS LTD. vs FEDERATION OF PAKISTAN through
JUDGMENT
Reported As: 2008 CLD 1079 Result: Suit decreed Judgment JUDGMENT ' KHAWAJA NAVEED AHMAD, J.---This Suit No,1628 of 1999 has been filed by Messrs Ishtiaq Textile Mills Limited in the original civil jurisdiction of this Court against Federation of Pakistan through Secretary, Finance Division; State Bank of Pakistan through Governor, State Bank of Pakistan; and Muslim Commercial Bank Limited, New Chaili Branch, Karachi, as defendants, for declaration and injunction. 2. Briefly the facts of the case as stated by the plaintiff in the plaint are that plaintiff is a Public Limited Company carrying a business of manufacturing of Cotton Yarn exporting/selling in the local market. Defendant No,1 has announced a scheme know as "Pay-As-You-Earn Scheme Act, 1973" for the purposes to facilitate the importers to import machinery/equipment on credit for establishment of industrial unit in foreign exchange, as may be prescribed, was to be met from out of the export earnings of such industrial unit or enterprise. The said scheme was regulated by the defendant No,2, State Bank of Pakistan ("SBP"), on behalf of the Government of Pakistan vide Notification dated 20-3-1973, which inter alia provides that an industrial unit or enterprise shall be liable to pay to the SBP, the defendant No,2, by way of penalty a sum not exceeding 27 per cent of the value in Pakistan Rupee if the percentage of the export earnings is not sufficient to meet the cost of the machinery and equipment and other prescribed charges in foreign exchange. The Act of 1973 further provides that the SBP could levy 27% penalty on the amount by which export earnings of the industrial unit or enterprise shall fall short of the aggregate of the cost and charges referred to in Rule 4 of the said Act. Rule 4 is reproduced as under:--
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"If in any financial year, any industrial unit or enterprise is not in a position to meet any of its liabilities specified in Clause 7 of the Scheme from within fifty per cent of the earnings specified in that clause, or from within such higher percentage of the said earnings as may have been allowed under the said clause, the Federal Government may allow payment, at the official rate of exchange, of the amount of foreign exchange required to meet the liabilities, subject to the condition of a penalty equal to twenty seven per cent of the value in Pak Rupees of the amount of such foreign exchange." 3. The plaintiff, in order to establish its textile mill, entered into a contract with Messrs C.ITOH & Co. (H.K.) Limited, to import textile machinery. The total cost of the machinery including interest was Rs,123,556,071. The plaintiff paid a sum of Rs,9,215,578 being 10% of the contract amount was paid to the suppliers at the time of signing of contract and a sum of Rs,4,445,900 being 5% of the contract amount at the time of opening of L/C. Balance 85% amounting to Rs,109,894,593 was repayable in 12 biannual instalments commencing from 16-4-1990 upto 16-10-1995. The plaintiff further states in the plaint that during the period from July, 1989 to October, 1995 it realized a total amount of Rs,182,296,453 by exporting its manufactured yarn whereas the total price payable to the suppliers of machinery was Rs,109,894,593.00. 4. However, according to the contents of the plaint, there was short earning of foreign exchange for the years 1991-92, 1992-93 and onwards, which is as under:-- Financial Year Realized in Rs. 50% of realized for repayment Rs.Repayment Rs. Excess (Short) Rs. July, 1989 To une, 199035,226,703 17,613,352 15,571,091 2,042,260 July, 1990 To June, 199197,674,606 48,837,303 19,248,596 29,588,707 July, 1991 To June, 199216,255,283 8,127,642 18,315,765(10,188,124) July, 1992 To June, 199316,217,809 8,108,905 17,382,935 (9,274,031) July, 1993 To June, 199416,922,052 8,461,026 16,450,105 (7.989.079) July, 1994 To Oct., 1995 15,517,274 (15,517,274)
July, 1995 To Oct., 1995 7,408,826 (7,408,826) Total 182,296,453 91,148,227 109,894,593 (18,746,366) 5. The reason for shortage in the earnings has been given in the plaint to the effect that export of yarn was banned by the Government from January, 1994 to July, 1994. Apart from this, the following were the reasons for the shortage in the earnings:-- (i) Bad law and order situation in the Dadu District, strikes, abduction cases, demand of ransom and Bhatta on a regular basis which affected the supplies, labour, material and free movement of the goods. (ii) Cotton crop in the year 1993-94 in Pakistan was badly affected because of which Government of Pakistan became importer of cotton. The plaintiff had also imported cotton from America but the quality of that cotton was of very inferior quality, therefore, the poor quality of yarn which could not be exported, was sold in the local market on throwaway price;
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(iii) On account of poor quality of cotton, the plaintiff s production of yarn was reduced from 4,556,628 kgs. To 4,245,007 kgs, the difference being 311,621 kgs; and (iv) Japan had imposed anti-dumping duty in 1994 because of which the export of yarn from Pakistan was reduced considerably. 6. The plaintiff states that it had already got its foreign exchange risk covered by making payment of 3% per annum on the total amount of the instalment and has paid Rs,11,538,558 in this account. The plaintiff further stated in the plaint that the defendant No,2 in spite of full knowledge of the plaintiffs foreign exchange earnings paid difference between booked value of Japanese Yen and the prescribed rate prevalent at the time of remittance at which rate the plaintiff used to purchase Yen for remittance. As the defendant No,1 did not raise any objection regarding not meeting the target, the plaintiff remained under belief that their obligations are approved by the defendants Nos.1 and 2. It is the further case of the plaintiff that after the remittance of entire amount of price and interest thereon to the suppliers, the defendant No,1 on or about 16-4-1996 intimated that the plaintiff has allegedly short export the goods and illegally and unlawfully levied a penalty and interest to the tune of Rs,39,298,709. 7. The plaintiffs further stand is that the defendants Nos.1 and 2 had acted indiscriminately against the plaintiff as in many cases like Kofcot Textile Mills Ltd., Gushan Spinning Mills Ltd., Ibrahim Textile Mills Ltd. And Imran Spinning Mills Ltd., no penalty was imposed on them in spite of the fact that their performance was far inferior to that of the plaintiff. 8. The plaintiff, therefore, has filed this Civil Suit on 12-11-1999 against the Islamic Republic of Pakistan, State Bank of Pakistan and Muslim Commercial Bank Ltd., defendants Nos.1 to 3 respectively, seeking following prayers:-- (i) A declaration to the effect that the levy of penalty of amount of Rs,39,298,709 by the defendants 1 and 2 is illegal, unwarranted and without any basis and without any show-cause notice to the plaintiff and the said amount together with mark-up/interest and excise duty Rs,382,536 as calculated by the defendant No,3 is liable to be refunded by the defendants Nos.1 and 2 to the defendant No,3 and that the plaintiff is not liable to pay the same to any defendant. (ii) A declaration to the effect that the Rules framed under "Pay-As-You-Earn Scheme Act, 1973" are ultra wires and in excess of delegation and liable to be struck down as such. (iii) An injunction restraining the defendants from declaring and treating the plaintiff as defaulter and restraining the defendant No:3 from demanding and/or recovering any amount due to wrong penalty or mark-up thereon. (iv)Costs of suit. (v) Any further/other/additional relief or reliefs which this Hon'ble Court may deem fit and proper in the circumstances of the case." 9. Notices were issued to the defendants and on 27-4-2000 the defendants Nos.2 and 3 filed their written statements denying the averments made in the plaint. The defendant No,2 submitted that Pay-As-You-Earn Scheme was announced to enable entrepreneurs to import machinery for the establishment of industrial units or enterprises on credit and to pay for the cost of machinery and equipment so imported and other permissible charges in foreign exchange out of the export earnings of the industrial units or enterprises. The defendant No,2 further stated in the written statement that the exchange risk coverage scheme has no nexus with the earning and remittance of the amount under Pay-As-You-Earn Scheme, both the schemes are different and exchange risk coverage scheme provides protection from fluctuating rate of foreign exchange. The defendant No,2 further stated in the written statement that penalty was charged as per the Scheme and no discrimination has been made with the plaintiff. It is further submitted by the defendant No,2 that as per the provisions of Rules governing the Scheme the amount realized in foreign currency is countable for financial year July to June and excess balances, if any, is not carried over to next
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financial year as shown in the chart given by the plaintiff. The defendant No,2 prayed for dismissal of the suit with cost. The defendant No,3 in its written statement has also denied the averments made in the plaint. The defendant No,3 submitted that the plaintiffs earnings come to Rs,172,875,963.29, whereas they were entitled to export upto Rs,367,613,042 but they failed to do so and the shortfall of Rs,194,737,078.71 occurred, therefore, the defendant No,2 rightly levied penalty at the rate of 27% and penal interest at the rate of 9% and recovered the amount of penalty amounting to Rs,38,253,762.00 plus Rs,224,021.00 (total comes to Rs,38,477,783.00 )under the Scheme. It is further submitted by the defendant No,3 that the defendant No,2 prior to imposing the penalty issued notices to defendant No,3 vide letter dated 22-9-1993, which was forwarded to the plaintiff by the defendant No,3 vide letter dated 3-10-1993, photocopies whereof have been annexed as R and R-1 respectively. It is further submitted by the defendant No,3 that the plaintiff opened letter of credit and also entered into an agreement for irrevocable documentary credit freely negotiable in beneficiary's country. The defendant No,3 further stated in its written statement that it repeatedly wrote letters to the plaintiff that due to shortfall in exports the defendant No,2 may impose penalty at the rate of 27 % per annum plus interest. At the rate of 9 %, if they failed to supply the documents of earnings statement during the year 1993-94, 1994-95 and 1995-96 immediately to the defendant No,2. Consequently, on the failure of the plaintiff, the defendant No,2 vide letters dated 11-4-1996 and 25-10-1997 imposed penalty of Rs,38,253,762.00 and Rs,224,021.00, total to Rs,38,477,783 and recovered the said penalty from defendant No,3. Thereafter the defendant No,3 wrote to the plaintiff for repayment of the penalty amount to it but the plaintiff on one pretext or the other avoided to pay the same and all the time they informed the defendant No,3 that they are settling the matter with the defendant No,2. According to the defendant No,3, it has rightly debited the amount of penalty and mark-up thereon as levied by the defendant No,2 and recovered from him on behalf of the plaintiff, the defendant No,3 has every right to recover the outstanding amount from the plaintiff in view of the agreement, documents of letter of credit and consent given by the plaintiff. 10. On 21-8-2000 the Court appointed Mr. Ghafoor Ahmed, Advocate as commissioner to record evidence while on 6-9-2000 following issues were adopted:-- (i) Whether the short export of yarn was wilful on the part of the plaintiff? (ii) What is the effect of booking foreign exchange risk at 3 % per annum for the purposes of remitting the instalment? (iii) What is the effect of the defendant No,2 not raising objection regarding the short earning of the foreign exchange? (iv) Whether the defendants Nos. 1 and 2 have rightly charged penalty as per rules and laws? (v) Whether the defendants Nos. 1 and 2 have discriminated against the plaintiff inasmuch as they did not charge penalty from various mills as mentioned in para 12 of the plaint? (vi) Whether the defendant No,2 has charged penalty as per the rules and laws in force?" 11. The plaintiff has examined one witness, namely, Dewan Imran who filed his affidavit-in-evidence on 7-10-2000 before the Commissioner who was appointed to take evidence of the parties and he has been cross-examined by the defendants Nos.1, 2 and 3. The defendant No,1 has not examined any witness. Defendant No,2 examined its witness Shabbir Ahmed (exhibit 46) who also filed his affidavit-in-evidence (Exh.47). Defendant No,3 has produced two witnesses, firstly Muhammad Taufiq who filed his affidavit-in-evidence (Exh.74) and secondly Maqbool Naeem (Exh.99) who also filed his affidavit-in-evidence (Exh.100). The defence witnesses were also cross-examined by the learned counsel for the plaintiff. On 12-4-2002 the learned counsel for the defendant No,1 has made a statement that the defendant No,1 adopts the evidence recorded on behalf of the defendant No,2.
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12. On 26-8-2002 the learned Commissioner returned the commission after recording evidence and thereafter the matter was fixed for final arguments. 13. Mr. Mansoor-ul-Arfin, learned counsel for the plaintiff has argued that the plaintiffs witness Dewan Muhammad Imran Farooqui in para 8 of his affidavit-in-evidence gave the reasons of shortage in the production of the yarn by the plaintiff and consequent short-export thereof and earning in foreign exchange required under the Scheme. The plaintiffs reiterated the contents of the plaint and in reply to a question put by Mr. A. Tariq Ali, Advocate for defendant No,1 the witness has stated that "it is correct to suggest that the target of earning could not be achieved due to the imposition of restriction of import in Japan. Voluntarily states that this is not the only reason for shortfall in the earning." The learned counsel further pointed out that to another question put to the witness that Japan had not imposed restrictions on the plaintiffs mill, the witness replied that imposition was general and not for specific mill. This question was repeatedly asked from the plaintiffs witness and every time, his reply was same. However, no question was put to this witness as to other reasons of shortfall given in plaint as well as in his affidavit-in-evidence. The law is that if on a particular point, there is no cross-examination, the point stands proved and admitted by the other party to be correct. Thus it is established that the shortfall in the export of the goods was not wilful. The learned counsel further submitted that the case of the plaintiff is that the defendants Nos.1 and 2 did not suffer any loss as the plaintiff has been making payment of 3 % as foreign exchange risk cover for the purposes of remitting the same to the supplier. He also submitted that the defendants 1 and 2 also did not suffer any loss on shortfall of export earnings. 14. Mr. Mansoor-ul-Arfin, learned counsel for the plaintiff, further submitted that regularly necessary information was being forwarded to the defendant No,2 and yet it did not take any objection as to the shortfall nor did it give any warning to the plaintiff about the shortfall earning of the plaintiff. He pointed out that in para. 19 of the affidavit-in-evidence, the plaintiffs witness has stated that it was after remittance of the entire amount of price and interest thereon to the supplier that the plaintiff was informed after 11-4-1996 about the alleged shortage and deduction of penalty and interest thereon. He also pointed out that in para 18 of the affidavit-in-evidence, the plaintiffs witness has specifically stated that although the defendants Nos.1 and 2 were in the knowledge of plaintiffs not meeting the target, the defendant No,1 did not take any objection and thereby waived their right to levy any penalty and had such objection been taken in time, the plaintiff would have tried to purchase the yarn from the market for export to meet the target. According to the learned counsel, this statement was not questioned in cross-examination by either of defendants. However, the fact remains that no notice was served on the plaintiff prior to levy and recovery of penalty and interest thereon as is the requirement of every statute. According to the learned counsel for the plaintiff, the principle of natural justice is that every party who is going to be affected by the act should be afforded an opportunity to explain. In this regard he pointed out that in cross-examination, the witness of the defendant No,2 was specifically put the following question:- "Did you call the plaintiff to explain the reasons when on post facto checking the State Bank came to know that there was a shortfall in the target?" ' The answer of the witness was that since the defendant No,3 was authorized dealer, they call the documents from them and finally the witness replied that "it is correct to suggest that we did not give an opportunity to the plaintiff to meet the target before imposing the penalty." He also submitted that again the said witness in cross-examination has admitted that "it is correct to suggest that no notice was given to the plaintiff before charging the interest'. He also pointed out that the Muhammad Taufiq (Exh. 73), defendant's witness, in cross-examination to the plaintiffs counsel also admitted that "the SBP or the Government had not sent any notice to MCB calling any explanation for not reaching the target". The learned counsel for the plaintiff has submitted that the
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admitted position is that no notice was sent to the plaintiff to explain the shortfall and/or to meet the shortfall. As such, the imposition of penalty and interest was unlawful. 15. Advancing arguments on Issues Nos.4 and 6, the learned counsel for the plaintiff submitted that penalty could not be charged under the Scheme or rules framed thereunder as the imposition and the recovery are against the principles of natural justice as stated above and further there is no assertion from either of the defendants that there was wilful default on the part of the plaintiff. He submitted that there is no evidence from the side of the defendants that the shortfall in export was wilful on the part of the plaintiff. According to the learned counsel for the plaintiff, in any event, no penalty could be imposed after taking into consideration all facts and circumstances of this case, in view of the evidence brought on record and the averments which had not been denied by the either of the defendants and the same has not been subjected to any cross-examination from the defendant's side. The learned counsel in support of his arguments has relied upon the case of Neelam Textile Mills. v. State Bank of Pakistan PLD 1999 Karachi 433 to the effect that the expression "liable to pay" occurring in section 4 of Pay-As-You-Earn Scheme Act indicates that the legislature intended to confer a certain amount of discretion upon concerned authorities to levy or not to levy a penalty or levy penalties, in different amounts depending upon gravity of offending act. In the cited case, a learned Division Bench of this Court set aside levy of penalty holding that the same was without proper authority and of no legal effect and the State Bank of Pakistan was directed to refund the amount to the petitioner within three months. The learned counsel placed special reliance on the following observation made in paragraph 15 at page 440 of the above judgment, which is reproduced as under:-- "........................... It is, therefore evident that framers were conscious of the fact that at times it might not be possible for an importer of machinery to generate sufficient foreign exchange earnings for reason beyond his control, and therefore, ample discretion was conferred upon the Government to provide appropriate relaxation in a fit case. We, therefore, find considerable force in Khawaja Shamsul Islam's contention to the effect that penalty could not be imposed in the absence of a definite finding of wilful default on the part of the petitioner and in any event, it could only be imposed after taking into consideration all the facts and circumstances of a particular case. It would be highly incongruous to assume that while a person obtaining foreign exchange in advance and yet failing to import machinery will escape penalty if he repatriates the amount after expiry of the time allowed for import, but one, who generates foreign exchange through export earnings and repatriates all such earnings would be mechanically liable to penalty merely because the amount was repatriated after a particular date. We are, therefore, of the view that if Rule 4 is construed in the manner suggested by Mr. Rehmani, the same would be liable to be struck down as being repugnant to the parent Act and ultra vires the rule making power." ' In respect of the above cited case, the counsel for the defendant No,2 has contended that leave has been granted by the Hon'ble Supreme Court. However, no stay of recovery was granted. In fact, the amount of penalty has been refunded as per Court's order. The learned counsel further placed reliance on the following two reported cases:-- (i) Suleman Spinning Mills Ltd. v. Federation of Pakistan reported in PLD 2001 Lahore 324. (ii) Colony Thal Textile Mills Ltd. v. Federation of Pakistan reported in PLD 2001 Lahore 518. 16. In the first case quoted herein-above, it has been held that the words "shall be liable to pay" under section 4(2)(b) of the Pay-As-You-Earn Scheme Act, 1973 calls for a determination by SBP that the establishment has committed some violation of the Act for the reasons in its control and then proceed to decide whether or not any penalty is liable to be paid, if so, at what rate? The Court further held that Rule 4 of Pay-As-You-Earn Scheme is ultra vires the main Act and has therefore no effect. For these reasons, the penalty imposed directly was ordered to be refunded immediately. It was further held that Rule 4 is ultra vires the main Act inasmuch as in section 4(2)(b) of the Act,
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there was a discretion to levy penalty at any rate not exceeding 27 % but Rule 4 made it mandatory and it took away the power of SBP whether or not to levy any penalty after determining whether violation of the Act was within or beyond the control of the party. Appeal against judgment of this case was dismissed by a Division Bench of the Lahore Court. In the second case of Colony Thal Textile Mills Ltd. It has been held that penalty cannot be imposed automatically by the Federal Government or the State Bank of Pakistan, but the concerned authority should grant hearing to the person and pass any order under section 4(2) of the Act. 17. 17. While advancing arguments on Issue No,5, Mr. Mansoor-ul-Arfin submitted different mills, including Kofcot Textile Mills Ltd., Gulshan Spinning Mills Ltd., Ibrahim Textile Mills Ltd. And Imran Spinning Mills Ltd. Have not been subjected to levy of penalty although their cases were worst than the plaintiff. He pointed out that the witness of the defendant No,2 produced the recommendation of the Finance Ministry, Government of Pakistan in the case of Fawad Textile Mills Ltd. Which was not subjected to the penalty. However, this witness refused to produce the cases of Kofcot Textile Mills Ltd., Gulshan Spinning Mills Ltd., Ibrahim Textile Mills Ltd. And Imran Spinning Mills Ltd. Although notice under Order XII, C.P.C. Was served to produce these files. However, it was not denied that no penalty was imposed on these mills. According to the learned counsel, illustration (e) to Article 129 of Qanun-eShahadat lays down that if a party does not produce the evidence in its possession, it would be deemed that the production thereof would be unfavourable to the party who withholds it. He submitted that Exh. 18 is the letter dated 3-10-2000 from the State Bank of Pakistan to the counsel of the plaintiff under cover of which a letter dated 18-9-2000 (Exh. 20) from Zafar Hassan Reza, Secretary, (IFR), Government of Pakistan, Finance Division, External Finance Wing has been produced. Para. 4 of this letter admits that Ministry of Industries had granted relaxation condonation of Kofcot Textile Mills Ltd., Gulshan Spinning Mills Ltd. And Imran Spinning Mills Ltd. He further pointed out that on Exhibit 44, a representation from the plaintiff, there is a note from the plaintiff and which has been certified by Tanweer Hussain, Assistant Economic Advisor, Finance Division, Government of Pakistan, which admits a concession was given to the above…
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