DAEWOO PAKISTAN EXPRESS BUS SERVICE LIMITED VS FEDERATION OF PAKISTAN through Secretary Law Division, 2016 PTD-LAHORE-HIGH-COURT-LAHORE 152 (2015)

(a) Sales Tax Act (VII of 1990)---

----S. 7A---Value Added Tax (VAT)---Connotation---VAT is a tax levied on value added in each stage of production and distribution process and can be aptly defined as ultimate form of consumption taxation.

(b) Interpretation of statutes---

----Fiscal statute---Ambiguity---Effect---Such provisions must be strictly construed and if there is any ambiguity, it has to be resolved in favour of taxpayer.

Pakistan through Secretary Finance and another v. Kohat Cement Company and others PLD 1995 SC 659 rel.

(c) Sales Tax Act (VII of 1990)---

----Ss. 7A & 8 (g)---Sales Tax Special Procedures Rules, 2007, Rr.58F(2) & 58C(1)---Constitution of Pakistan, Art. 199---Constitutional petition---Value Added Tax (VAT)---Notices of recovery---Stage of import---Petitioner company was aggrieved of notice issued by authorities for recovery of VAT---Validity---Importer was held entitled to deduct import tax paid during a tax period for the purposes of taxable supplies made from output tax---Value addition tax paid at import stage formed part of input tax---Only caveat was that refund of excess input tax over output would not be refunded to a registered person---Petitioner company was paying value addition tax and would not be able to claim tax credit in terms of S. 7 of Sales Tax Act, 1990, read with Rules---Petitioner company was barred from doing so in terms of S. 8(g) of Sales Tax Act, 1990, as goods and services were acquired for personal or non-business consumption---Such worked discriminately for petitioner company in relation to other importers similarly placed---High Court set aside notices issued by authorities in respect of payment of value addition tax as the same were without lawful authority and of no legal effect---High Court also set aside demand for payment of value addition tax by show cause notices---Petition was allowed in circumstances.

Muhammad Younas v. Central Board of Revenue PLD 1964 SC 113; Messrs FMC United (Pvt.) Ltd. v. Federation of Pakistan and 3 others 2011 PTD 346 and Amreli Steels (Pvt.) Ltd. and others v. Federation of Pakistan and others 2004 PTD 2930 rel.

Khurram Shehbaz Butt for Petitioner.

Syed Sajjad Haider Rizvi and Sarfaraz Ahmad Cheema for FBR/Respondents.

Date of hearing: 22nd June, 2015.

JUDGMENT

SHAHID KARIM, J.---This petition under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973 lays a challenge to the imposition of minimum value addition tax levied on the petitioner-company purportedly in terms of section 7A of Sales Tax Act, 1990 (Act, 1990) and Sales Tax Special Procedures Rules, 2007 (Rules, 2007) promulgated by SRO No.678(I)/2007 dated 06.07.2007 w.e.f. 15.07.2007.

2. The relevant facts are that the petitioner-company is a non-listed public limited company. It derives its income from inter-city passenger transport service across the country. The services provided by the company are exempted from the levy of sales tax. The petitioner-company is also a registered person for the purpose of Sales Tax Act, 1990 (Act, 1990) and within the meaning of section 2(25) of the Act, 1990. It is averred in the petition that the petitioner-company imports buses spare parts, lubricants, wet towels and other goods for its self-consumption and therefore, was liable to be registered under section 14 of the Act, 1990 read with sub-rule (c) of rule 4 of Chapter I to the Sales Tax Rules, 2006. The petitioner-company, ever since its registration, has been furnishing sales tax returns with the sales tax department.

3. On 6.2.2009, a show cause notice was issued to the petitioner-company and the basis was the report by the internal audit department. The demand raised in the show cause notice was in respect of the purported liability of the petitioner-company to pay value addition tax at the rate of 10%. Detailed reply was submitted by the petitioner-company to the notice dated 16.2.2009 and the true legal proposition was sought to be laid out in the said reply and on the basis of which it was requested that the show cause notice be withdrawn. Precisely, the stance of the petitioner-company was that it was not liable to pay the value addition tax sought to be levied and recovered from the petitioner-company. In the same vein, the petitioner-company filed a representation with the Chief (Sales Tax) (now Chief Inland Revenue), Federal Board of Revenue (FBR), Lahore. The respondent No.4, however, allowed the goods to be cleared without payment of the value addition tax. However, a clarification was sought by the said respondent on the issue from the FBR vide letter dated 23.7.2009 and a reminder dated 5.11.2009. The FBR through Secretary (Law & Procedure) vide clarification letter dated 29.9.2009 issued its clarification by which it was held that the petitioner-company was liable to the payment of value addition tax under rule 58-B of Chapter X of the Rules, 2007 issued vide SRO No.480(I)/2007 dated 9.6.2007 in addition to the sales tax payable under section 3 of the Act, 1990. The petitioner-company upon receipt of the clarification once again made a representation to the Secretary (Law & Procedure) of FBR requesting the reconsideration of its earlier clarification. Meanwhile, the respondent No.1 issued a series of recovery notices for the payment of value addition tax from the petitioner-company, a list of which has been mentioned in paragraph (j) of the petition. The FBR once again turned down the representation of the petitioner-company through its letter dated 9.2.2010 and affirmed its earlier view. A similar effort foundered once again and the FBR through its second summary showed its inability to accept the request of petitioner-company through its letter dated 17.4.2010.

4. The learned counsel for the petitioner primarily based his submissions on two grounds; (i) the learned counsel submits that the petitioner-company is not liable for the payment of value addition tax as this tax is payable by only such importers who make value addition to the goods supplied to other persons. Since the petitioner is not making any value addition, therefore, it is not liable for the payment of value addition tax in addition to the sales tax chargeable at the statutory rate provided under section 3 of the Act, 1990. According to him, the scheme of section 7(A) of the Act, 1990 and the Special Procedure for Payment of Sales Tax by Importers when read in conjunction with each other, leave it in no manner of doubt that manufacturers importing goods for in-house consumption are not covered by registered persons liable for the payment of value addition tax. He has drawn the attention of this Court to a subsequent amendment brought about by Notification No. S.R.O. 367(I)/2013 dated May 8, 2012 by which clause (iii) to the proviso of rule 58-B was added and it was clarified that registered service providers importing goods for their in-house business use shall not be liable to the payment of value addition tax.

5. The learned counsel for the respondents, on the other hand, made a spirited defence of the stance taken by FBR in its various clarification letters issued in response to the representations filed by the petitioner-company. According to the learned counsel for the respondents, the petitioner-company is covered by the provisions of section 7(A) of the Act, 1990 and the Special Procedure for Payment of Sales Tax by Importers and cannot be heard to lay a claim to any exemption in this regard unless an exemption is specifically granted by the Federal Government.

6. The issue in the instant petition relates to the payment or otherwise of value addition tax in terms of section 7(A) of the Act, 1990 by the petitioner-company. According to the learned counsel for the respondents, since the goods being imported by the petitioner-company are not covered by the proviso of the Special Procedure for Payment of Sales Tax by Importers no exemption from the payment of value addition tax can be claimed by the petitioner-company. According to him, an exemption has to be clearly granted in favour of registered person and cannot be claimed as of right unless a registered person is covered by the letter of exemption.

7. However, the question that is sought to be raised by the learned counsel for the petitioner is not a question regarding claim of exemption. It is a vexed question as to whether the petitioner-company is covered by the provisions of section 7(A) of the Act, 1990 and thus liable to the payment of sales tax on account of minimum value addition.

8. For facility, section 7(A) of the Act, 1990 is reproduced as under:--

"7A. Levy and collection of tax on specified goods on value addition.---

(1) Notwithstanding anything contained in this Act or the rules made there under, the Federal Government may specify, by notification in the official Gazette, that sales tax chargeable on the supply of goods of such description or class shall, with such limitations or restrictions as may be prescribed, be levied and collected on the difference between the value of supply for which the goods are acquired and the value of supply for which the goods, either in the same state or on further manufacture, are supplied.

(2) Notwithstanding anything contained in this Act or the rules made there under, the Federal Government may, by notification in the official Gazette, and subject to the conditions, limitations, restrictions and procedure mentioned therein, specify the minimum value addition required to be declared by certain persons or categories of persons, for supply of goods of such description, or class as may be prescribed, and to waive the requirement of audit or scrutiny of records if such minimum value addition is declared."

9. It would also be expedient to reproduce rule 58-B of the Special Procedure for Payment of Sales Tax by Importers, which reads as under:

"58B. Payment of sales tax on account of minimum value addition.---(The sales tax on account of minimum value addition (hereinafter referred to as value addition tax in this Chapter), shall be levied and collected at import stage on goods as specified aforesaid at the rate of three per cent of the value of goods in addition to the tax chargeable under section 3 of the Act or a notification issued thereunder."

10. It is made clear that clause (iii) to the proviso of rule 58-B was added on 8.5.2012 and is an event which took place subsequent to the filing of the instant petition. Learned counsel for the respondents does not dispute the fact that subsequent to the insertion of clause (iii) to the proviso of rule 58-B, the petitioner-company is not being charged and levied value addition tax and, therefore, the subject matter of this petition would relate to the period prior to the issuance of Notification No.S.R.O. 367 dated 8.5.2012. As to the impact of this Notification on the proceedings in the instant petition as also whether the said Notification operates retrospectively and upon pending claims or not, I shall revert in the latter part of this judgment.

11. The nub of the controversy and the clear stance on which the case of the petitioner company is premised, has been brought forth in the letters and representations made by the petitioner-company to the FBR. Precisely, it is the claim of the petitioner-company that in terms of the provisions of rule 58-B for application of value addition tax, only those commercial importers are covered who import goods for the purpose of subsequent supply to the other persons in the same state or by adding value to those goods. In other words, the spirit underlying the value addition tax, is founded on the value addition of the goods imported by an importer. In the case of the petitioner-company no value addition is made and the goods which are being imported are self-consumed and those goods are neither supplied nor sold in any part of the market. However, the clarification issue by the FBR is cursory and does not make a reference to any elaborate reasons which have formed the basis for the opinion of FBR. The clarifications issued by the FBR do not bring forth clearly the reasons which have compelled the FBR to hold that the petitioner-company is liable for the payment of value addition tax. However, what is clear from a holistic reading of the various letters and clarifications issued by the FBR, that the FBR considers that the exemption from the payment of value addition tax is permissible only to the registered manufacturers who import goods for in-house consumption. This finding returned by the FBR finds expressed in clause (i) of rule 58-B of the Special Procedure for Payment of Sales Tax by Importers.

12. As a prefatory, I would dwell upon the genesis of the Sales Tax Act, 1990 and the broad sweep that it covers. The Act, 1990 is an amalgam of the retail sales tax and the whole sale and manufacturing single stage taxes on the one hand and the regime of value-added tax (VAT) on the other. The VAT originated in France in 1955 and was perceived by the member-countries of European Union as the ideal means to "promote neutrality and uniformity of tax burden and to provide incentives for increased productivity and industrialization". It has often been described as the quintessential modern tax in the backdrop of the economic and technological changes of the second half of the century. "The history of taxation reveals no other tax that has swept the world in some thirty years, from theory to practice and has carried along with it academics who were once dismissive and countries that once rejected it." (Tait, Alan A., 1988, why a Value-added Tax? Value-added Tax, International Practice and Problems, Washington D.C International Monetary Fund. Chapter 1. p.1). The VAT can be looked upon as a multistage tax which produces a yield equivalent to that of a single stage retail sales tax. It can also be defined as a multi-stage sales tax levied as a proportion of the value added, that is, sales minus purchases (Tait, Alan, A., op.cit.). VAT differs from retail sales tax in that retail sales tax is usually applied to sale of goods and not service sectors like construction, telecommunication, transport and various professional services to which VAT is extended and made applicable. In short, VAT is the first consumption tax which has successfully integrated taxation on services with taxation of goods.

13. Section 3 of the Act, 1990 levies sales tax on the taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him and upon goods imported into Pakistan. The provisions of section 3 of the Act, 1990 treat imports at part with domestically produced goods. Here we are concerned with section 7-A of the Act, 1990 which falls for construction and which forms the provenance of the power to enact rule 58-B of Rules, 2007. Chapter X in which rule 58-B finds its place was inserted by S.R.O. 678(I)/2007 (and has been amended from time to time). Section 7-A is an embodiment of value-added tax regime and gives the power to the Federal Government to specify the minimum value addition required to be declared by certain persons or categories of persons as may be prescribed. This power has found expression in the enactment of rules 58-A to 58-E. For the purpose of present petition, subsection (2) of section 7-A is relevant. As brought forth above, the Federal Government has specified the minimum value addition required to be declared by importers by a Notification SRO 678(I)/2007. The minimum value addition has been referred to as value addition tax. This is where the concept underlying VAT will come into play and assume importance. The mere fact that the tax has been described by the nomenclature value addition tax betrays the intention of the Legislature and lends some actuality to the analysis. It ineluctably follows that there has to be "value addition" and "supply of goods" in order to attract the levy under section 7-A of the Act, 1990, and the twin conditions must be satisfied. Conversely, if a registered person is not supplying any goods after value addition he is not covered by the mischief of section 7-A of the Act, 1990.

14. The concept is not notional or fictional and is grounded in practability. To reiterate, the petitioner-company's liability under section 3 of the Act, 1990 remains intact and is being discharged. The challenge in this petition is merely to the levy of value addition tax under section 7-A of the Act, 1990. The petitioner-company submits that neither is there value addition of the goods being imported by the company nor does the company supply those goods. Thus the twin conditions in order to attract the levy under section 7-A are conspicuously absent in the petitioner's case. Therefore, though the company is an importer, it is not liable to pay value addition tax. The proviso to rule 58-B is an amplification of the basis which permeates section 7-A and which has been alluded to hereinabove. By (i) of proviso to rule 58-B, the goods as are imported by a manufacturer for in-house consumption has been taken out of the leviability of value addition tax. The Legislature thus thought that logically the goods which are not subject to value addition ought to be taken out of the sweep of section 7-A and the rules.

15. As adumbrated, the crucial words which constitute the nub of S.7A(2) of Act, 1990 are 'minimum value addition required to be declared' and 'supply of goods'. Had the word 'supply' been used in isolation, it would have been an uphill task to take the petitioner-company out of the imposition of value addition tax since by the definition of supply as given in section 2(33) of the Act, 1990, it would include a sale or other transfer and putting to private, business or non-business use of goods. It is admitted by the respondent-department and is a common ground that the petitioner company uses the goods, in-house, without there being any value addition. Thus, the two terms viz. 'minimum value addition' and 'supply' have to be read in combination with each other in order to cull out the true intent of the Legislature.

16. A tax under section 7A of the Act, 1990 like any other tax, has three elements: (1) the nature of tax; (2) the measure of tax and (3) the machinery for its collection. Of them, the nature of the tax is of the first importance. 'VAT is a tax levied on the value added in each stage of the production and distribution process and can be aptly defined as the ultimate form of consumption taxation since the value added by a firm represents the difference between its receipts and its cost of purchased inputs, which could be levied as the firm's net consumption of inputs' (Shah, Saurin, and Towe, Christopher., 1995, A US valued-added tax-A review of the Issues, PPAA/95/8, Washington DC International Monetary Fund). How important is the nature of a tax, can be illustrated by reference to Muhammad Younas v. Central Board of Revenue (PLD 1964 SC 113) which was a case decided in the context of excise duty: It was held that:--

"It is obvious that the taxing authority will impose it at a stage at which it would be most convenient and most lucrative but that is a matter which does not, in our view, affect the essential nature of the tax. The excise duty which is an indirect tax must, in the ultimate resort, always fall on the consumer but as to the stage at which it is to be collected there can be no inflexible rule. If a legislature is competent to make laws with respect to duties of excise, the question as to whether that power extends to imposing duties on home-produced or home-manufactured goods at any stage up to consumption must always be determined upon the true construction of the enactment itself. All that can be said is that subject to the provisions of the statute, a duty of excise is a tax on goods produced or manufactured in the taxing country, and it ought normally not to be confused with a tax which is a turnover or sales tax."

17. The observations made by the Supreme Court of Pakistan in Pakistan through Secretary Finance and another v. Kohat Cement Company and others (PLD 1995 SC 659) (though a minority view) are also relevant in order to arrive at the true construction of the term 'minimum value addition' used in section 7A of the Act, 1990. They are:

" The concept of the excise duty is a Constitutional concept. While under the Government of India Act, 1935, excise duty was a central subject, and sales tax was a provincial subject, under our Constitution, as also under the Indian Constitution, both are now central subjects. (see items 44 and 49 of Federal Legislative list in the Fourth Schedule to the 1973 Constitution). But that fact cannot alter the fundamental nature of the excise duty. Even under the Government of India Act, the Provincial, and not the Federal, legislature had power, in certain cases, to impose a duty of excise as also the sales tax. In those excepted cases, so observed their Lordships of the Privy Council in G.G. in Council v. Province of Madras AIR 1945 PETITIONER-COMPANY 98, 101, "there appears to be no reason why the Provincial Legislature should not impose a duty of excise in respect of the commodity manufactured and then a tax on first or other sales of the same commodity "

16. The decided cases referred to above have long settled that the duty of excise is primarily a duty levied upon a manufacturer or producer in respect of the commodity manufactured or produced. Unlike the sales tax, where the liability to tax arises on the occasion of a sale, it is the fact of manufacture or production which attracts the duty of excise, even though it may be collected at a later stage. This is recognized by section 3 of the Act of 1944 itself--that section authorizes the levy and collection "in such manner" as may be manufactured in Pakistan."

18. Section 7A is a taxing provision and in construing it, I have been guided by the foundational principle that such provisions must be strictly construed, that is to say if there be any ambiguity, it shall be resolved in favour of the taxpayer. It was held by the Supreme Court of Pakistan in the Kohat Cement Company case that:--

" The rule of law, and it is a Constitutional rule, "that no pecuniary burden can be imposed upon the subjects of this country, by whatever name it may be called, whether tax, due, rate, or toll, except under clear and distinct legal authority, established by those who seek to impose the burden, has so often been the subject of legal decisions that it may be deemed a legal axiom " (Wilde C.J. in Goshing v. Velry (1850) 12 QB 328, 407. The rule is "that a charge cannot be made unless the power to charge is given by test going far beyond the proposition that it would be reasonable or even conducive or incidental to charge for the provision of a service " Reg v. Richmond (1992) 2 AC 48, 67."

19. The power to issue a notification has been conferred by section 7-A and must conform to the ambit and scope of that section. However, the Federal Government has inserted the notification by way of Chapter X in the Rules, 2007. The power to issue and prescribe special procedure is derived from section 71 of the Act, 1990. This may seem anomalous at first blush. However, the principle remains the same. The Federal Government must not travel beyond the delegated power of Legislation conferred upon it by law.

20. The proposition that the levy of value addition tax does not extend to imports meant for in-house consumption is lent credence by consideration of sub-rule (2) of rules 58-B and 58-C(1) of the Rules, 2007. These are reproduced hereunder in order to appreciate them properly:--

"58B(2) The value addition tax paid at import stage shall form part of input tax, and the importer shall deduct the same from the output tax due for the tax period, subject to limitations and restrictions under the Act, for determining his net liability. The excess of input tax over output tax shall be carried forwarded to the next tax period as provided in section 10 of the Act."

58C(1) In no case, the refund of excess input tax over output tax, which is attributable to tax paid at import stage, shall be refunded to a registered person."

21. A combined reading of these provisions makes it clear that these relate to allowance of tax credit to a registered person. In other words, an importer is held entitled to deduct import tax paid during a tax period for the purposes of taxable supplies made, from the out put tax and the value addition tax paid at the import stage shall form part of input tax. The only caveat is that the refund of excess input tax over output tax shall not be refunded to a registered person. Obviously, while the petitioner-company shall be paying the value addition tax yet will not be able to claim tax credit in terms of section 7 of the Act, 1990 read with the rules referred to above. The petitioner-company shall be barred from doing so in terms of section 8(g) of Act, 1990, as being goods and services acquired for personal or non business consumption. This will work discriminately for the petitioner-company in relation to the other importers similarly placed.

22. Another fact which exercises a gravitational pull on the issue in hand is the insertion of section 58-B (iii) of the Rules, 2007 by Notification SRO 367(I)/2013, dated 8.5.2013. The learned counsel for the parties are not in dissention with each other on the fact that after the addition of clause (iii) of Rule 58-B, Rules, 2007 the petitioner-company is not being required to pay the value addition tax. Rule 58-B(iii) of the Rules, 2007 is reproduced as under:--

"58B(iii) registered service providers importing goods for their in-house business use or for furtherance of their taxable activity and not intended for further supply."

23. According to the learned counsel for the petitioner-company the addition of clause (iii) vindicates the stance of the petitioner-company and removes any doubt surrounding the issue. According to him the said clause (iii) is clarificatory in nature and must be taken to operate retrospectively. Whether clause (iii) is clarificatory becomes moot in view of my holding that the petitioner-company is not covered by the mischief of section 7-A of the Act, 1990 and thus not liable to pay value addition tax.

In recent times, two judgments have dealt with the scope of section 7-A of the Act, 1990. In M/s FMC United Private Limited v. Federation of Pakistan and 3 others (2011 PTD 346), the following observations are relevant and are being reproduced as under:--

"Section 7A(1) deals with the "fixed value addition" scheme, while section 7A(2) relates to the "minimum value addition" scheme."

" In the Absence of any further details given in the S.R.O. No.645(I)/06 the perusal of other S.R.Os. which have been issued under section, 7A of the Act has been undertaken by the Court and one detailed S.R.O No.480(I)/2007 dated 9-06-2007 is relevant which provides for The Sales Tax Special Procedure Rules, 2007. Its Chapter X (inserted by S.R.O. 678(I)/07 dated July 6, 2007 deals with the special procedure for payment of sales tax by the importers. Rules 58-A, C, D and E deal with the procedures to be followed by the importers while Rule 58(B) provides for levy of Sales Tax on account of minimum tax value addition at the rate of 2% of the value of the goods in addition to the tax chargeable under section 3 of the Act. The said subsection further provides that the value addition tax paid at the import stage shall form part of the input tax and the importers shall deduct the same from the output tax due for the tax period for determining his net tax liability. The excess of input tax over output tax shall be carried forward to the next period as provided in section 10 of the Act."

24. However, the issue in the above judgment of this Court related to subsection (1) of section 7A of the Act, 1990. The said judgment is, therefore, not directly relevant to the facts and circumstances of the present case.

25. The facts in Amreli Steels (Pvt.) Ltd. and others v. Federation of Pakistan and others (2004 PTD 2930) and the issue of law involved was also distinct from the issue involved in the present case. However, the following observations are relevant:--

" The matter of fact is that, the vast majority of business transactions in Pakistan belongs to undocumented/unorganized sector and therefore, in order to bring such section into the tax net, it was incumbent to evolve a formula and devise the methods whereby they could be brought into the tax net in a pragmatic manner. In order to cater this necessity the Legislature in its wisdom enacted section 7A and in pursuance thereof, the Federal Government framed the rules contained in Chapter 12 of the Rules, for the purposes of determining value to supply in the undocumented/unorganized sector."

26. In view of the above, the petition is accepted. The impugned notices issued by the respondents in respect of the payment of value addition tax are hereby declared without lawful authority and of no legal effect. The demand for the payment of value addition tax vide demand show cause notices is also set aside. In compliance of the order of this Court dated 8.6.2012, an amount of Rs.77,37,377/- was deposited with the respondents which shall be refunded in terms of that order.

I owe a word of thanks to the Research Centre of Lahore High Court for the invaluable assistance rendered.

MH/D-4/LPetition allowed.