SHV ENERGY PAKISTAN (PVT.) LTD. VS APPELLATE TRIBUNAL INLAND REVENUE, 2018 PTD-ISLAMABAD 767 (2018)

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

----Ss.2(39), 3 & 13---Levy and recovery of sales tax---Scope---Supply---Scope---In order to attract levy and charge of sales tax under Sales Tax Act, 1990, transfer of right to dispose of goods as an owner was essential to constitute taxable supply in the context of S.3 of Sales Tax Act, 1990---Question of entitlement in respect of adjustment of input tax would be relevant only if it was established that disposition or transaction fell within the ambit of supply .

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

----Ss.2(39), 3, 13 & 47---Taxable supply---Adjustment of input tax from output tax---Scope---Applicant companies were engaged in purchase of Liquefied Petroleum Gas (LPG) from oil exploration and production companies and then sell the Gas in cylinders of various capacities to distributors---Cylinders were supplied to distributors against refundable security deposit---Assessing officer issued notice claiming input tax relating to purchase of cylinders for depositing sales tax in exchequer---Validity---Cylinders used for transportation of supply of LPG were returned by distributors to applicant companies---No transfer in any mode whatsoever of any right to dispose of the cylinders as owner existed nor consideration was involved for such purpose--- Refundable security deposit did not fall within the express consideration ---Use of cylinders was not a disposition for consideration, nor it involved transfer of a right to dispose of as owner---LPG supplied by applicant companies attracted levy and charge of sales tax under S.3 of Sales Tax Act, 1990, while transaction relating to cylinders was of a nature which was excluded from the scope thereof---Applicant companies were not entitled to claim, adjust or deduct input tax from output tax in the relevant tax period---Use of cylinders for supply of LPG by applicant companies did not attract levy of charge of sales tax under Sales Tax Act, 1990 and were not entitled to claim and adjust input tax from output tax in respect of cylinders---Such inadmissible input tax was recoverable along with default surcharge in accordance with S.34 of Sales Tax Act, 1990---Reference was disposed of accordingly.

Ali Sibtain Fazli, ASC, Malik Sardar Khan Awan, AHC, Hasham Ahmed Khan, AHC and Abad Ur Rahman, AHC for Applicants.

Mst. Dr. Farhat Zafar, ASC, Sh. Anwar Ul Haq, ASC and Hafiz Munawar Iqbal, AHC for Respondents.

Date of hearing: 26th October, 2017.

ORDER

ATHAR MINALLAH, J.---Through this consolidated judgment we shall decide the instant Sales Tax Reference, along with S.T.R. No.13/2012 titled 'Commissioner Inland Revenue (Zone-I) v. Messrs SHV Energy Pakistan (Pvt.) Ltd. and S.T.R. No.07/2013 titled 'Messrs Capgas (Pvt.) v. Appellate Tribunal Inland Revenue, etc., since common questions of law have been proposed for our consideration.

2.Sales Tax Reference No.264/2011 and Sales Tax Reference No.07/2013 have been filed by the taxpayers, namely, Messrs SHV Energy Pakistan (Pvt.) Ltd. and Messrs Capgas (Pvt.) Ltd. respectively (hereinafter referred to as the 'applicant Companies') while through Sales Tax Reference No.13/2012 the Department, through the Commissioner Inland Revenue (Zone-I), has proposed questions of law for our consideration. The questions of law in all the three References are common.

3.The facts in brief are that the applicant Companies are registered under the Sales Tax Act, 1990 (hereinafter referred to as the 'Act of 1990'). They are, inter alia, engaged in the purchase and sale of Liquefied Petroleum Gas (hereinafter referred to as the 'LPG'). Both the applicant cpmpanies have been granted respective licences by the competent authority under Rule 7 of the Liquefied Petroleum Gas (Production and Distribution) Rules, 2001. The said rules have been made by the Federal Government in exercise of powers conferred under section 2 of the Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948. The applicant Companies purchase LPG from the oil exploration and production companies or refineries. The LPG is stored in the facilities and tanks established by the applicant Companies before its onward sale to the Distributors. The LPG is sold and delivered to the Distributors through the mode of 'decanting'. The LPG is decanted into cylinders of various capacities. The LPG is then supplied to the distributors in cylinders and the latter is required to deposit with the applicant Companies an amount as refundable security for the return of the said cylinders. The said 'refundable security deposit' is released to the distributors after the return of the cylinders. The refundable security deposits are shown in the annual balance sheets of the applicant Companies as a 'liability'. The cylinders, in which LPG is supplied to the Distributors, are owned by the applicant Companies and at no stage is their ownership intended to be transferred. The applicant Companies were issued respective show-cause notices. Messrs Capgas (Pvt.) Ltd. was issued a show-cause notice, dated 12-03-2012, wherein it was alleged that the latter had claimed input tax amounting to Rs.5.644 million relating to the purchase of cylinders during the period from July-2007 to July-2011. The said show-cause notice was adjudicated by the Deputy Commissioner Audit-III, Zone-I vide Order-in-Original No.13/2012, dated 25-06-2012. An appeal was preferred and the same was disposed of by the learned Commissioner Inland Revenue (Appeals), Islamabad (hereinafter referred to 'CIR(A)') vide Sales Tax Order-in-Appeal No.28/2012, dated 10-09-2012. The applicant Companies preferred appeals before the learned Appellate Tribunal Inland Revenue, Islamabad (hereinafter referred to as the 'Tribunal') which were dismissed vide judgment dated 10-09-2005. In the case of Sales Tax Reference No.264/2011 and Sales Tax Reference No.13/2012, show-cause notice dated 02-03-2010 was issued by the Additional Collector Sales Tax, alleging that the Applicant Companies had supplied cylinders to its Distributors and that the leviable sales tax was not deposited in the exchequer. The said show-cause notice was adjudicated by the Additional Commissioner (Audit-III) vide Order-in-Original No. 6/2010, dated 29-06-2010. The appeal preferred by the applicant Company was disposed-of vide Sales Tax Order-in-Appeal, dated 04-12-2010. The applicant Company preferred an appeal before the learned Tribunal and the same was disposed-of vide judgment dated 30-04-2011. The learned Tribunal has held that the supply of LPG in cylinders to the Distributors attracts levy and charge of sales tax while the cylinders itself are excluded from its scope. Nevertheless, it has been further held that since sales tax is not levied or charged to the extent of the cylinders, therefore, the applicant Companies were not entitled to claim any input tax in relation thereto. The applicant Companies as well as the Department have raised questions of law for our consideration, arising out of the judgments rendered by the learned Tribunal.

4.The learned counsel appearing on behalf of the applicant Companies have argued that; the cylinders are used for the purpose of supplying LPG to the Distributors and, therefore, the learned Tribunal has rightly concluded that, to the extent of such cylinders, sales tax is not attracted; the learned Tribunal, however, has erred in holding that the applicant Companies are not entitled to claim input tax; the learned Tribunal has travelled beyond the show-cause notice by directing that inadmissible input tax be recovered from the applicant Companies; the adjustment of input tax, if any, has attained finality and, therefore, the same cannot be recovered.

5.The learned counsels appearing on behalf of the Department, on the other hand, have contended that; the LPG is supplied in the containers and, therefore, the amounts deposited as security form part of the value for the purposes of charge and levy of sales tax; the learned Tribunal has erred in interpreting the provisions of the Act of 1990; the definition of the expression 'supply' includes the delivery of cylinders to the distributors in the instant case; cylinder falls within the definition of 'goods' and its disposition would therefore attract the definition of 'supply' thus attracting the charge of sales tax under section 3 of the Act of 1990.

6.The learned counsel have been heard and the record perused with their able assistance.

7.It is an admitted position that the applicant Companies purchase and sell LPG. The sale and supply of LPG is made through the Distributors. For the purpose of supply of LPG to the Distributors, it is decanted from the storage tanks to cylinders having various capacities. The cylinders are returned by the Distributors to the applicant Companies. At the time of taking delivery the Distributors deposit an amount as security which is referred to as 'refundable security deposit'. This refundable security deposit is returned by the applicant Companies upon receiving the cylinders from the Distributors. The cylinders are, therefore, exclusively used as containers for the supply of LPG. The Department is of the view that the disposition of the cylinders attracts the levy and charge of sales tax under section 3 of the Act of 1990 while the learned Tribunal has held otherwise. On the other hand, it is the case of the applicant Companies that though the learned Tribunal has rightly concluded that the disposition of cylinders is not liable to payment of sales tax but it has erred by holding that the input tax relating thereto was not admissible. In order to answer the questions raised for our consideration it would be advantageous to survey the relevant provisions of the Act of 1990.

8.The Act of 1990 was enacted so as to consolidate and amend the law relating to the levy of tax on the sale, importation, exportation, production, manufacture or consumption of goods. Section 2 defines various expressions. Subsection (12) of section 2 defines 'goods' as including every kind of movable property other than actionable claims, money, stocks, shares and securities. 'Input tax' is defined in section 2(14) as, inter alia, meaning tax levied under the Act of 1990 on supply of goods to a person or on the import of goods. The expression 'sales tax' is defined in sub section (29A) of section 2 and 'tax' in subsection (34) ibid. The expression 'supply' is defined in subsection (33) of section 2. The definition of supply, as it exists today, was amended through the Finance Act, 2008, which was assented on 26-06-2008. Before the amendment, subsection (33) of section 2 was as follows:--

"(33) "supply" includes sale, lease or other disposition of goods carried out for consideration and also includes-

(a) putting to private, business or non-business use of goods acquired, produced or manufactured in the course of business;

(b) auction or disposal of goods to satisfy a debt owed by a person [and]

(c) possession of taxable goods held immediately before a person ceases to be a registered person

(d) ***

[Provided that the Federal Government, may by notification in the official Gazette, specify such other transactions which shall or shall not constitute supply]"

The definition inserted through the Finance Act, 2008 is as follows:--

"(33) "supply" means a sale or other transfer of the right to dispose of goods as owner, including such sale or transfer under a hire purchase agreement, and also includes -

(a) putting to private, business or non-business use of goods produced or manufactured in the course of taxable activity for purposes other than those of making a taxable supply;

(b) auction or disposal of goods to satisfy a debt owed by a person;

(c) possession of taxable goods held immediately before a person ceases to be a registered person [; and]

[(d) in case of manufacture of goods belonging to another person, the transfer or delivery of such goods to the owner or to a person nominated by him:

Provided that the Federal Government may, by notification in the official Gazette, specify such other transactions which shall or shall not constitute supply;]"

9.The expressions 'taxable activity', 'taxable goods', 'taxable supply', 'time of supply', 'value of supply' have been defined in subsections (35), (39), (41) and (44) of section 2 respectively. The charging section is section 3 and subsection (1) thereof provides that subject to the provisions of the Act of 1990, there shall be charged, levied and paid a tax known as 'sales tax' at the rate of 17% of the value of, (a) taxable supply made by a registered person in the course or furtherance of any taxable activity carried out by the latter and, (b) goods imported into Pakistan. Section 4 describes such goods which are charged tax at the rate of zero percent. Section 6 prescribes the time and manner of payment of sales tax. Section 7 describes the manner for determining the tax liability of a registered person and it provides that, for the purpose of such determination, a registered person shall be entitled to deduct input tax paid or payable during the tax period for the purposes of taxable supplies made or to be made by the latter from the output tax. The expression 'output tax' is defined in subsection (20) of section 2 as, inter alia, tax levied under the Ordinance of 2002 on the supply of goods made by a registered person. The determination of tax liability under section 7 is subject to sections 8 and 8B ibid. Section 8B specifies the eventualities in respect of the scope of adjustment of input tax. Section 10 provides for the mechanism and conditions relating to the refund of input tax.

10.A plain reading of the above provisions clearly shows that the sales tax is levied and charged under section 3 of the Act of 1990. Section 3 is the charging section and specifies the scope of tax known as 'sales tax'. The charge, levy and payment of sales tax is attracted when a registered person makes taxable supplies in the course or furtherance of any taxable activity carried out by such registered person. It is noted that for the purposes of levy, charge and payment of sales tax, the value of supply is also required to be ascertained since it forms the basis for the calculation of the tax. In the context of the levy, charge and /payment of sales tax under section 3 there are, inter alia, three fundamental factors which attract the levy and charge, i.e. firstly, there must be a taxable supply, secondly, the value of taxable supply must be determined and, thirdly, that the taxable supply must have been made in the course or furtherance of any taxable activity by a registered person. As noted above, the expressions 'taxable supply', 'value of supply' and 'taxable activity' have been explicitly defined under the Act of 1990. 'Taxable supply' has been defined as meaning supply of taxable goods made under section 13...". Section 2(39) defines 'taxable goods' as meaning all goods other than goods which have been exempt under section 13. The definition of the expression 'supply', before and after its amendment through the Finance Act, 2008, has been reproduced above. The definition prior to the amendment, made through the Finance Act, 2008, included within its ambit the sale, lease or other disposition of goods carried out for consideration or putting to private, business or non-business use of goods acquired, produced, manufactured in the course of business. The definition after the amendment is exclusive i.e. meaning a sale or other transfer of the right of disposal of goods as owner, including sale or transfer under purchase agreement or putting to private, business or non-business use of goods produced and manufactured in the course of taxable activity for the purpose of other than those making a taxable supply. The argument raised by the learned counsel for the Department to the effect that mere 'disposition' is sufficient to constitute 'supply' of taxable goods would tantamount to giving a wrong interpretation of the definition of 'supply' under the Act of 1990, whether before or after the amendment through the Finance Act, 2008. The definition prior to the amendment did not envisage mere disposition of goods but it had to be for 'consideration'. The amendment made through the Finance Act, 2008 removed even the slightest ambiguity by explicitly restricting the definition to sale or other transfer of the right to dispose of goods as an owner including such sale or transfer under hire purchase agreement. The expressions 'disposition' and 'consideration' are not defined in the Act of 1990. The said two expressions are defined in the Black's Law Dictionary Eighth Edition as follows.

"Disposition (dis-pa-zish-an), n. 1. The act of transferring something to another's care or possession, esp. by deed or will; the relinquishing of property, a testamentary disposition of all the assets."

"Consideration, n. 1. Something (such as an act, an forbearance, or a return promise) bargained for and received by a promisor from a promise; that which motivates a person to do something, esp. to engage in a legal act. Consideration, or a substitute such as promissory estoppels, is necessary for an agreement to be enforceable."

11.It is obvious from the above meaning of the two expressions that the definition of 'supply' even before the amendment made through the Finance Act, 2008 definitely had a nexus with the sale or other transfer of the right to dispose of goods as an owner. The essential factor was transfer of the right of disposal of goods as an owner and not merely giving temporary possession for a limited purpose. A combined reading of the above highlighted provisions, therefore, unambiguously shows that in order to attract the levy and charge of sales tax under the Act of 1990, transfer of the right to dispose of goods as an owner is essential to constitute 'taxable supply' in the context of section 3 ibid. Moreover, the question of entitlement in respect of adjustment of input tax would be relevant only if it is established that the disposition or transaction falls within the ambit of 'supply'. A registered person is entitled to deduct input tax paid or payable during the relevant tax period in respect of taxable supplies made or to be made by the latter from the output tax. As a corollary, if the nature of disposition of goods does not fall within the definition of 'supply' or 'taxable supply' then neither will the levy or charge of sales tax under section 3 of the Act of 1990 be attracted nor in such an eventuality would the registered person be entitled to deduct input tax from the output tax.

12.In the instant case it is an admitted position that the cylinders used for transportation of supply of LPG are returned by the Distributors to the applicant Companies. There is no transfer in any mode whatsoever of any right to dispose of the cylinders as owner nor consideration is involved for such a purpose. The 'refundable security deposit' by no stretch of the imagination falls within the expression 'consideration'. The use of cylinders, therefore, is not a disposition for consideration, nor does it involve transfer of a right to dispose of as owner. The LPG supplied by the applicant Companies indeed attracts the levy and charge of sales tax under section 3 of the Act of 1990, while the transaction relating to the cylinders is of a nature which is excluded from the scope thereof. Consequently the applicant Companies are not entitled to claim, adjust or deduct input tax from the output tax in the relevant tax period. The scheme of the Act of 1990 is based on the concept of self assessment. The registered person is under a statutory obligation to file a tax return and determine the sales tax liability without supervision or interference by the sales tax officials. Any determination of liability on the basis of erroneous or wrongful adjustment of input tax is loss to the revenue and thus recoverable. In the instant case the input claimed by the applicant Companies in relation to the cylinders was definitely inadmissible and, therefore, the learned Tribunal has rightly held that the same is recoverable under the Act of 1990. There is no force in the argument raised by the learned counsel who have appeared on behalf of the applicant Companies that the learned Tribunal was not competent to direct the recovery of input tax which was wrongly claimed and adjusted by the applicant Companies in respect of the cylinders.

13.The questions of law proposed for our consideration are answered in the light of the above discussion. In a nutshell, we hold and declare that the use of cylinders for the supply of LPG by the applicant Companies did not attract the levy and charge of sales tax under the Act of 1990 and consequently they were not entitled to claim and adjust input tax from the output tax in respect of the cylinders. Such inadmissible input tax is, therefore, recoverable along with Default Surcharge in accordance with section 34 of the Act of 1990.

14.A copy of this judgment shall be sent to the learned Tribunal under the seal of this Court.

MH/26/Isl Order accordingly.