SHAKEEL AHMED VS FEDERATION OF PAKISTAN through Secretary, Revenue Division, 2016 PTD-KARACHI-HIGH-COURT-SINDH 577 (2015)

Sales Tax Act (VII of 1990)---

----Ss. 3 & 7---Recovery of Sales Tax at one stage---Petitioners were operators of Compressed Natural Gas stations and plea raised by them was that they were required to pay sales tax at the stage of purchasing natural gas not on the value of natural gas but on the value at which they were required to sell Compressed Natural Gas to consumers, as such the same enhanced sales tax from 17 % to 32%---Validity---Sales tax was charged only at the rate of 17% at one stage i.e. at the time Compressed Natural Gas station operators purchased natural gas from gas company which otherwise could be charged at two stages i.e. at the time of making purchases of natural gas and then at the time of selling of Compressed Natural Gas to its consumers after giving adjustment of input tax paid on purchase of natural gas---Such two stage procedure was reduced to one without having any adverse effect on Compressed Natural Gas station owners as they even under S. 3(8) of Sales Tax Act, 1990, as it so stood to pay sales tax on the value of Compressed Natural Gas at the rate of 17 % only and the same was exactly that was being done---Instead of recovering sales tax at two stages, it was being done at one stage, which procedure was akin to the procedure envisaged under S. 3(2)(a) of Sales Tax Act, 1990---Entire burden of sales tax recovered by gas company from Compressed Natural Gas station operators at the time of selling natural gas was passed on to Compressed Natural Gas consumers and not a fraction of it was borne by Compressed Natural Gas station operators---Even if the levy was unlawful, even then the burden had transferred to the end consumer---No illegality existed in charging sales tax in the manner provided under the provisions of S. 3(8) of Sales Tax Act, 1990---Constitutional petition was dismissed in circumstances.

2014 SCMR 220 and Cotton Ellahi's case PLD 1997 SC 582 ref.

Khalid Jawed Khan with M. Ahmar, Syed Irshadur Rehman, Fahim Zia Abrar, Raja Fateh Shaikh, Munawar Ali, Amjad Ali holding brief for Moulvi Iqbal Haider, Khurshid Javed, Hakim Ali Khan, Ms. Lubna Pervez, Malik Altaf Javed, Sanaullah Noor Ghori and Shafqat Zaman for Petitioners.

Sarfraz Ali Metlo with Barkat Ali, Amjad Javed Hashmi, Kafeel Ahmed Abbasi, Farmanullah Khan and Asim Iqbal for Respondents.

Mukesh Kumar A.A.-G.

Dr. Farrukh Ansari CIR, Dr. Najeeb Ahmed Memon CIR, Shajeel Ahmad DCIR and Zia Ahmed Khan Asstt. Manager Audit.

Date of hearing: 6th October, 2015.

JUDGMENT

FAISAL ARAB, C.J.---In all these connected petitions, the petitioners have challenged the vires of section 3(8) of the Sales Tax Act, 1990 whereby sales tax is charged on the value of CNG at the stage when natural gas is purchased by the CNG Stations. Section 3(8) reads as under:--

"3(8) Notwithstanding anything contained in any law or notification made thereunder, in case of supply of natural gas to CNG stations, the Gas Transmission and Distribution Company shall charge sales tax from the CNG stations at the rate of seventeen per cent of the value of supply to the CNG consumers, as notified by the Board from time to time, but excluding the amount of tax, as provided in clause (46) of section 2".

2.In all these connected petitions, we are not required to examine the reasonableness of the price of one kilogram of CNG that is fixed by OGRA from time to time. This issue is subject matter of other petitions that are pending. All that we have to sec is the validity of the sales tax chargeable under Section 3(8) of the Sales Tax Act, 1990.

3.On behalf of the petitioners, the main arguments were advanced by Mr. Khalid Javed Khan, advocate in C.P No.D-3266/2014. He contended that by invoking Section 3(8) of the Sales Tax Act, the CNG Stations owners are required to pay sales tax at the stage of purchasing the natural gas, not on the value of the natural gas but on the value at which the CNG stations are required to sell CNG to CNG consumers. This, according to him, has the effect of enhancing the rate of sales tax from 17% as prescribed under Section 3(1) to 32% which is even higher than the 26% that was prescribed under Section 3(8) that was repeated in 2014. He submitted that after the decision of the Supreme Court in Human Rights Case No.14392/2013 reported in 2014 SCMR 220, sales tax on CNG can only be charged under the Normal Tax Regime as envisaged under Section 3(1) of the Sales Tax Act, 1990 after giving corresponding benefit of adjustment of input tax as provided under Section 7(1) of the Sales Tax Act, 1990. He contended that in the present case however the sales tax is being charged under Section 3(8) that was inserted in 2014. According to him, when similar section inserted in 2012 was repealed after it was declared to be ultra vires of Section 3(1) by the Supreme Court in the above referred case, then inserting Section 3(8) again in 2014, though wording it differently, amounts to nullifying the judgment of the Supreme Court and is liable to be struck down on the same principle as was done earlier by the Supreme Court.

4.Dr. Najeeb Ahmed Memon, the Commissioner Inland Revenue, who was present in Court was asked to first explain the stand of the department on the issue. He submitted that the real intent of introducing subsection (8) of Section 3 through the Finance Act, 2014 was to charge sales tax from the CNG owners at 17% of the value of CNG, at one stage earlier i.e. when CNG Stations purchase natural gas from the Sui Southern Gas Company. This is also a valid form of charging sales tax as the ultimate effect of charging sale tax remains within the confines of Section 3(1) i.e. only 17% is charged from the CNG Station Operators on the value at which CNG is sold to the CNG consumers. He explained that this mechanism provided in Section 3(8) is almost similar to the widely prevalent mechanism of charging sales tax under Section 3(2)(a) under which sales tax is charged from the manufacturers at the rate of 17% of the price at which the product is sold by the manufacturers not to the whole sellers or the retailers but by the retailers to the end consumers. He then referred to Section 3(2)(b) which also entitles the Federal Government to impose sales tax in such manner as may be specified in the Notification and this has exactly been done in the present case.

5.Mr. Sarfraz Ali Metlo, the learned advocate for the department argued that under Section 3(8), sales tax is charged from the CNG Stations on the basis of Presumptive Tax Regime and adopting such mechanism was validated by the Hon'ble Supreme Court in Cotton Ellahi's case reported in PLD 1997 SC 582. He next contended that the provisions of the repealed Section 3(8) were struck down by the Supreme Court only for the reasons that firstly it prescribed the rate of sales tax at 26% which was higher than the then prevalent rate of 16% prescribed under Section 3(1) and this is not the case under the present Section 3(8). He submitted that in the present case only 17% is charged on the value of CNG that is sold to CNG consumers which is recovered at the stage when CNG Station Operators purchase natural gas from Gas Company. He next submitted that the other ground on which the Supreme Court earlier struck down the levy of sales tax was that the repealed Section 3(8) was inserted in the Sales Tax Act, 1990 on the basis of a Presidential Ordinance and not through an Act of the Parliament.

6.Mr. Amjad Javed Hashmi, learned advocate for the department in one of the connected petitions, argued that the grievance of the petitioners to challenge the method of charging sales tax under Section 3(8) and seeking adjustment of input tax under Section 7(1) is not justified. He explained that OGRA fixes the price at which CNG is to be sold and at the time of fixing the CNG price, all expenditures incurred by the CNG Station Operators for the conversion of natural gas into CNG including the cost of electricity charges and lubricants on which sales tax is also paid by the CNG Station Operators, is taken into consideration and when the price of CNG is so fixed, the CNG, owners stand to recover the entire cost including the component of sales tax which was paid on the consumption of electricity and lubricants. He submitted that once the entire selling cost of CNG is duly accounted for by OGRA at the time of fixation of its price, the CNG owners cannot seek adjustment of the sales tax paid on the consumption of electricity and lubricants under the garb of Section 7(1) of the Sales Tax Act, 1990 as it would amount to claim adjustment twice. Mr. Kafeel Ahmed Abbasi, Advocate adopted the arguments of Mr. Sarfraz Ali Metlo and Amjad Jawed Hashmi.

7.As we have already mentioned, in all these cases, the formula which the Oil and Gas Regulatory Authority (OGRA) adopts in fixing retail price of one kilogram of CNG under rule 13 of CNG (Production and Marketing) Rules, 1992, which includes profit margin of CNG Stations Operators, is not in issue here. The issue is only whether the sales tax could be charged from the CNG Station owners at the time of purchasing natural gas from Gas Company at the value on which CNG is sold to the end consumers i.e. the procedure that is prescribed under the provisions of Section 3(8) of the Sales Tax Act, 1990. There is no denying the fact that the State is entitled to charge 17% Sales Tax from the CNG Station Operators on the value of supply of CNG made to the CNG consumers. No one can dispute this. In the present case it is to be seen whether sales tax is being charged to such an extent only.

8.In order to charge sales tax on the basis of the procedure prescribed under Section 3(8), there are two factors which are to be taken into consideration. The first is the formula under which the natural gas is converted into CNG. This formula is contained in a Notification. It determines how much natural gas is consumed into converting it into CNG. Once the quantity of CNG produced from the natural gas purchased by CNG Stations in a tax period is determined, after taking into account the element of wastage as well, then this quantity of CNG is multiplied by the price which the OGRA has fixed for the sale of CNG to the end consumer. This gives the value of the CNG produced from the natural gas purchased in a tax period. On this value, sales tax at the rate of 17% only is charged. Thus sales tax is charged only at the rate of 17% at one stage i.e. at the time CNG Station Operators make purchases of natural gas from Gas Company which otherwise could be charged at two stages i.e. at the time of making purchases of natural gas and then at the time of selling of CNG to the CNG consumers after giving adjustment of input tax paid on the purchase of natural gas. This two stage procedure was reduced to one without having any adverse effect on the CNG Station owners as they even under Section 3(8) as it stand today pay sales tax on the value of CNG at the rate of 17% only and this is exactly that is being done in the present case. Thus, instead of recovering sales tax at two stages, it is being done at one stage, which procedure is akin to the procedure envisaged under Section 3(2)(a). For the sake of convenience, provisions of Sections 3(1) and 3(2)(a) and (b) are reproduced below:--

"3. (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of seventeen per cent of the value of--

(a)Taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him.

(2)Notwithstanding the provisions of subsection (1),--

(a)taxable supplies specified in the Third Schedule shall be charged to tax at the rate of seventeen percent of the retail price which along with the amount of sales tax shall be legibly, prominently and indelibly printed or embossed by the manufacturer on each article, packet, container, package, cover or label, as the case may be:

Provided that the Federal Government may, by notification in the official Gazette, exclude any taxable supply from the said Schedule or include any taxable supply therein;

(aa) -------------------------------------------

(b) The Federal Government may, subject to such conditions and restrictions as it may impose, by notification in the official Gazette, declare that in respect of any goods or class of goods imported into or produced or any taxable supplies made by a registered person or a class of registered persons, the tax shall be charged, collected and paid in such manner and at such higher or lower rate or rates as may be specified in the said notification.

9.Thus, the effect of adopting the mechanism for charging sales tax under Section 3(8) is that sales tax is charged at 17% only on the price at which CNG is to be sold by the CNG Station Operators to the end consumers. Additionally, as the entire burden of sales tax recovered by the Gas Company from the CNG Station Operators at the time of selling natural gas is passed on to the CNG consumers and not a fraction of it is borne by the CNG stations operators, then the question to challenge the procedure does not arise. Had the levy been unlawful even then the burden stands transferred to the end consumer, therefore, no relief can be claimed.

10.In view of the above discussion, there exists no illegality in charging sales tax in the manner provided under the provisions of Section 3(8) of the Sales Tax Act, 1990 and all these petitions were liable to be dismissed along with all pending applications.

11.By short order dated 06.10.2015 all these forth two petitions were dismissed and these are the reasons for the same.

MH/S-68/SindhPetition dismissed.