PAK ELEKTRON LTD. VS FEDERAL BOARD OF REVENUE, 2018 PTD-LAHORE-HIGH-COURT-LAHORE 778 (2017)

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

----S. 131 & Sixth Schedule---Exemption---Object---Grant of exemption is a delegated power on Federal Government and Federal Government may prescribe conditions subject to which exemptions are granted---Primary purpose of grant of exemptions is in respect of supply of goods or import of goods specified in Sixth Schedule of Sales Tax Act, 1990 by the Legislature.

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

----Ss. 2(11), 13 & Sixth Schedule, Table 2 Sr. No. 12 [as amended by Finance Act (XVII of 2012)]---Supplies against international tender---Exemption on duty---Retrospective effect---Scope---Petitioner company contended that contracts in question be dealt with in manner provided in Sales Tax Act, 1990 prior to promulgation of Finance Act, 2012---Validity---Petitioner had already been awarded contracts against international tenders and date of awards predate amendment in question---Any amendment made through Finance Act, 2012 could not be deemed to take away or impair vested rights acquired through contracts which in fact created a new obligation on petitioner; it would work discriminately against petitioner and impose substantially enhanced cost of doing business hitherto unforeseen by petitioner at time of submitting its bid for international tenders and award of contract in pursuance thereof---Amendment was a subsequent event and petitioner had not factored in impact of that amendment which in turn imposed a disproportionate financial burden on petitioner---High Court declared that amendment would not apply to contracts concluded by petitioner retrospectively---Constitutional petition was allowed in circumstances.

Munawar ul Islam and Shoaib Rashid for Petitioners.

Ch. Muhammad Zafar Iqbal for Respondents.

Nadeem Mehmood Mian, Assistant Attorney General.

JUDGMENT

SHAHID KARIM, J.--This petition under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973 ("the Constitution") seeks a declaration that the contracts mentioned in paragraph 8 of the petition be dealt with in the manner provided in the Sales Tax Act, 1990 ("the Act, 1990") prior to the promulgation of the Finance Act, 2012. Also, the petition seeks to restrain the respondent No. 5 permanently from applying the modification made through the deletion of Serial No. 4 of the Fifth Schedule and insertion at Serial No. 12 in Table 2 of the Sixth Schedule of the Act, 1990 ("the amendment") which was brought about by virtue of Finance Act, 2012. The petition also lays a challenge to the constitutionality of the provisions of Finance Act, 2012 by which deletion of Serial No. 4 of the Fifth Schedule of the Act, 1990 took place as also Serial No. 12 in Table 2 of the Sixth Schedule was inserted by the provisions of Finance Act, 2012.

2.The facts forming the backcloth of this petition is that prior to the promulgation of Finance Act, 2012 the supplies made by the petitioner pursuant to international tenders was classified in the Fifth Schedule of the Act, 1990 and sales tax at the rate of zero per cent was charged on such supplies made by the manufacturers under Section 4 of the Act, 1990. The significance of this was that the manufacturers were entitled to deduct input tax paid on raw material for such supplies from the output tax in terms of section 7 of the Act, 1990. Thus, the petitioner was entitled to the input tax adjustment and according to the contents of the petition the rationale for such zero rating is based on the fact that worldwide exports are zero rated. It was on this basis that the petitioner conducted its feasibility and participated in the international tenders which have been mentioned in paragraph 8 of the petition. The irrevocable bids supported by bid bonds were submitted by the petitioner prior to the promulgation of the provisions under challenge of the Finance Act, 2012. According to the chart which has been drawn up in paragraph 8, the award of contract in each of the five contracts awarded against international tenders to the petitioner pre-dates 30.06.2012, that is, the date of the promulgation of the Finance Act, 2012. Apart from the general challenge to the constitutionality of the provisions as adumbrated, the two other grounds of challenge are as follows:--

i.The amendment brought through the Finance Act, 2012 cannot be applied retrospectively to contracts which stood concluded before the amendments were put into effect.

ii.The amendments work discriminately against the petitioner and similarly placed manufacturers who bid for international tenders and, therefore, the cost of conducting business is increased enormously to the detriment of the petitioner and makes the petitioner uncompetitive to bid against international tenders.

3.Section 13 of the Act, 1990 (at the relevant time) deals with exemptions. It reads as under:-

"13. Exemption.--(1) Notwithstanding the provisions of section 3, supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the Federal Government, be exempt from tax under this Act.

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

(a)the Federal Government may, by notification in the official Gazette, exempt any taxable supplies made or import or supply of any goods or class of goods, from the whole or any part of the tax chargeable under this Act, subject to the conditions and limitations specified therein; and

(b)the Board may, by special order in each case stating the reasons, exempt any import or supply of goods of such description or class, as may be specified from the payment of the whole or any part of the tax chargeable under this Act.

(3)The exemption from tax chargeable under subsection (2) may be allowed from any previous date specified in the notification issued under clause (a) or, as the case may be, order made under clause (b) of char subsection."

4.The amendment which was brought about by Finance Act, 2012 and to which a challenge has been laid is to the following effect:--

"(b) in Table-II--

i. against serial number 2 in column (1), in column (2), after the word "seeds", the words "other than cotton seed" shall be inserted;

ii. after serial number 11 in column (1) and the entries relating thereto in columns (2) and (3), the following new serial number and the entries relating thereto shall be added, namely:--

"12. Supplies against international tender Respective headings".

5.By the amendment, reproduced above, the virtual effect was that the supplies against international tender was included in exempt supplies and this had the unsavory effect on the petitioners' supplies, in that, the petitioners were deprived of input tax adjustment. It is pertinent to mention that the exemption remained in force for one year only and was deleted through the Finance Act, 2013 and so the exemption was withdrawn thereby. Since then, the goods supplied by the petitioners are zero rated and the petitioners continue to enjoy the benefit of input tax adjustment. In a nub, the challenge of the petitioners is that the exemption is ultra vires section 13 of the Act, 1990, in that, the exemption inserted through serial No. 12 in Table 2 of the sixth schedule is in respect of supplies against respective international headings, that is, tender but does not relate to any supply of goods. According to the counsel, only goods can be specified in the sixth schedule of the Act for the purpose of exemption in terms of section 13(1) whereas in the instant case, instead of specifying 'goods' supplies under international tenders' have been exempted.

6.From a reading of section 13, reproduced above, it is evident that the grant of exemption is a delegated power on the Federal Government and the Federal Government may prescribe the conditions subject to which the exemptions are to be granted. However, the primary purpose of the grant of exemptions is in respect of supply of goods or import of goods specified in the Sixth Schedule by the legislature. Juxtaposing the mandate of section 13 with regard to exemptions with serial No. 12 inserted in Table 2 of the Sixth Schedule would show that the exemption is not in respect of any prescribed goods or import of goods but generally specifies the entry that relates to supplies against international tender. Therefore, the ineluctable conclusion upon a holistic reading of an amendment made through serial No. 12 is that all supplies of goods against international tender are to be exempted from tax under the Act, 1990. The contention of the learned counsel for the petitioner to the effect that the supplies against international tender is outwith the authority of the Federal Government as it travels beyond the mandate of section 13 and is thus ultra vires and erroneous. Although, serial No. 12 merely mentions 'supplies against international tender' but the necessary inference is that it relates to supply of goods against international tenders and there could be no other meaning assigned to the said expression as the serial No. 12 in the Sixth Schedule has to be read in conjunction with section 13 of the Act, 1990. Thus, all supplies of goods made against international tenders are granted exemption by virtue of inserting serial No. 12 in Table 2 of Sixth Schedule. This view is supported by a general review of the other entries in Table 2 of the Sixth Schedule in which the legislature has chosen to refer to a broad and general array of goods while granting exemption and serial No. 12 merely follows the pattern that the legislature has put in place while granting exemption to various supplies. This argument finds support from a consideration of the definition of the term 'supply' given in section 2(33) of the Act, 1990, which reads thus:--

"2(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."

7.It is plain, therefore, that supply has an essential relation with goods and is the sale or other transfer of the right to dispose of goods as owner. This is further made clear by referring to the definition of "exempt supply" in section 2(11) of the Act, 1990, which says:--

"2(11) -- "exempt supply" means a supply which is exempt from tax under section 13"

8.Nothing turns on this aspect of the matter and the challenge to that extent fails.

9.There is, however, force in the contention of the learned counsel for the petitioner with regard to the retrospective application of the provisions of serial No. 12 in Table 2 of the Sixth Schedule. It is not in dispute that the contracts were concluded for the supply of goods prior to the amendment brought about on 30.06.2012. In this regard, a reference to the rule expounded in Al-Samrez Enterprise v. Federation of Pakistan 1986 SCMR 1917 will become applicable in the facts and circumstances of the case. It was held by the Supreme Court of Pakistan as follows:--

"It is well-settled that an enactment which prejudicially affected vested rights or the legality of past transactions, or impairs contracts cannot be given retrospective operation. Thus, Maxwell's Interpretation of Statutes, 1962 Edition at page 206 observed:

"Every statute, it has been said, which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect of transactions or considerations already past, must be presumed, out of respect to the legislature, to be intended not to have a retrospective operation."

"We are, therefore, clearly of the opinion that if a binding contract was concluded between the appellants and the foreign exporter or steps` were taken by the appellants creating a vested right to the then existing notification granting exemption, the same could not be taken away and destroyed in modification of the earlier one, on the ground that under section 21 of the General Clauses Act, the Government could exercise the power of modification. The question before us is not whether the second notification was ultra vires the powers of the Government but whether the second notification would be applicable to the case of the appellants resulting in taking away the exemption already granted "

"These acts including the contractual commitments made by them were done on the assurance contained in the prior notification extending the exemption from the payment of duty."

"It will be inequitable and unjust to deprive a person who acts upon such assurance of the right to exemption and expose him to unforeseen loss in the business transaction by suddenly withdrawing the exemption after he has made legal commitments. It is in this perspective that a right is created in his favour and a subsequent withdrawal of exemption cannot be given retrospective operation by an executive act to destroy this right."

10.Thus, the Supreme Court of Pakistan settled the rule that the acts including the contractual commitments which are made prior to coming into force of enactments taking away those rights, in fact, impinge upon the vested rights which have come to inhere in persons who are prejudicially affected by those acts. Such acts of the legislature or made under the powers of delegated legislation cannot affect vested rights, legality of past transactions and impair contracts which have been concluded and which cannot be upset by giving retrospective operation to a piece of legislation or through a notification. In my opinion, the petitioner had already been, warded contracts against international tenders and the date of the awards pre-date the amendment which is the subject matter of challenge herein. Thus, any amendment made through Finance Act, 2012 cannot be deemed to take away or impair vested rights acquired through the contracts which, in fact, create a new obligation on the petitioner. It would also work utterly discriminately against the petitioner and impose substantially enhanced cost of doing business hitherto unforeseen by the petitioner at the time of submitting its bid for the international tenders and the award of the contract in pursuance thereof. Since the amendment was a subsequent event, the petitioner had not factored in the impact of that amendment which, in turn, imposed a disproportionate financial burden on the petitioner. It was said by Lord Mansfield (considered the father of English commercial law):--

"The successful conduce of trade, investment and business generally is prompted by a body of accessible legal rules governing commercial rights and obligations. In all mercantile transactions, the great object should be certainty; and therefore it is of more consequence that a rule be certain."

11.The learned counsel for the petitioner has drawn the attention of this Court to a letter dated 12.10.2012 issued by the Engineering Development Board (EDB) of the Government of Pakistan which analyzed the impact of changes in the sales tax by Finance Act, 2012 vis a vis supply of goods through international tenders. The following observations are relevant for our purposes:--

"2. EDB has analyzed the matter in detail and is of the view that the above said amendments has put the local industry at a disadvantage vis-a-vis foreign suppliers as the sales tax paid on import/local purchase of inputs for the manufacture of engineering goods for supply against international tenders, has become a part of their cost and adjustment of this sales tax is not allowed under the new scenario thus making the local industry uncompetitive against foreign suppliers. Moreover, the said amendments have created an anomalous situation whereby finished goods are now exempted from sales tax while the inputs, to be used for the manufacture of these goods, are not exempted from sales tax."

12.The learned counsel for the respondents placed his entire reliance on section 6 of the Act, 1990 to contend that by deeming clause, section 31A of the Customs Act, 1969 and its effect has been incorporated in the Act, 1990. Section 6 is as follows:--

"6. Time and manner of payment.---(1) The tax in respect of goods imported into Pakistan shall be charged and paid in the same manner and at the same time as if it were a duty of customs payable under the Customs Act, 1969 and the provisions of the said Act including section 31 A thereof shall, so far as they relate to collection, payment and enforcement including recovery of tax under this Act on such goods where no specific provision exists in this Act, apply.

(IA) Notwithstanding anything contained in any other law for the time being in force, including but not limited to the Protection of Economic Reforms Act, 1992 (XII of 1992), and notwithstanding any decision or judgment of any forum, authority or court whether passed, before or after the promulgation of the Finance Act, 1998 (III of 1998), the provisions of section 31-A of the Customs Act, 1969 (IV of 1969), referred to in subsection (1) shall be incorporated in and shall be deemed to have always been so incorporated in this Act and no person shall be entitled to any exemption from or adjustment of or refund of tax on account of the absence of such a provision in this Act, or in consequence of any decision or judgment of any forum, authority or court passed on that ground or on the basis of the doctrine of promissory estoppel or on account of any promise or commitment made or understanding given whether in writing or otherwise, by any government department or authority.

(2) The tax in respect of taxable supplies made during a tax period shall be paid by the registered person by the date as prescribed in this respect.

Provided that the Board may, by a notification in the Official Gazette, direct that the tax in respect of all or such classes of supplies (other than zero -rated supplies) of all or such taxable goods, as may be specified in the aforesaid notification, shall be charged, collected and paid in any other way, mode, manner or at time as may be specified therein.

(3) The tax due on taxable supplies shall be paid by any of the following modes, namely:-

(i) through deposit in a bank designated by the Board; and

(ii) through such other mode and manner as may be specified by the Board"

13.The consequence is that "the amount of duty that may have become payable in consequence of the withdrawal of the whole or any part of the exemption or concession from duty whether before or after the conclusion of a contract or agreement for the sale of such goods or opening of a letter of credit in respect thereof', shall be included in the rate duty applicable to any goods. This should receive a short shrift. The provision applies to any purported duty becoming payable "in consequence of the withdrawal of the whole or a part of exemption or concession". Here, on the contrary, exemption is being extended to the petitioner to which cavil has been taken and the issue, in essence, relates to determination of tax liability in terms of section 7 of the Act and is not concerned with the withdrawal of exemption and the rate of tax. The question here relates to charging of goods to tax at the rate of zero per cent or their exemption thereof. The consequences that flow out of the two is at the heart of this case.

14.There are other issues like discrimination and rights under Article 18 of the Constitution but I have not felt the need to enter that thicket since the matter can be decided within the narrow confines of retrospectivity.

15.In view of the above, this petition is allowed. It is held that the amendment (since deleted) shall not apply to the contracts concluded by the petitioner and mentioned in paragraph 8 of the petition retrospectively. The notice under Section 38B of the Act, 1990 dated 25.04.2013 is also set aside.

MH/P-5/L Petition allowed.