Find a Lawyer

(On appeal from the judgment and order, dated 22‑10‑1973 of the Lahore High Court, Lahore, passed in Tax Reference No. 116 of 1971).

(a) Constitution of Pakistan (1973)‑

‑‑ Art. 185 (3)‑Sales Tax Act (III of 1950), S. 7‑Notification No. SRO 475 (k)/65, dated 14th June, 1965‑Leave to appeal granted to consider whether on abolition of sales tax on electric fans, with effect from 14th June, 1965, sales tax could be retrospectively imposed on raw material used in the manufacture of fans and imputed earlier by assessee free of sales tax, at the time when finished goods (fans) were assessable to sales tax.

(b) Sales Tax Act (III of 1950)‑--

‑‑Ss. 7, 5 (b), 3 (1) (b) & 5 (1) (b)‑Notification No. S.R.O. 475 (K)/ 65, dated 14th June, 1965‑Exemption of fans from sales tax‑Raw material used in fans‑Partly manufactured goods after having been assimilated in production of fans were not liable to sales tax.

The assessee was a licensed manufacturer of electric fans and was exempt from the payment of tax on partly manufactured goods imported for being incorporated into the end‑product under section 4 (b) of the Act. The partly manufactured goods in the normal course were leviable to charge under section 3 (1) (b) and the stage at which the sales tax was payable was after import but before clearance by the Customs authorities under section (1) (b) of the Act. That stage had passed away. The partly manufactured goods had been assimilated in the production of fans and the critical date on which these were sought to be assessed for payment of tax was the closing date that is, 14th June, 1965. On that date they had lost their original shape and could not be subjected to any event as prescribed under sections 4 (1) (a) and (b) of the Act. That being so they were not liable to the payment of the tax.

On the critical date a notification was issued under section 7 of the Act granting exemption to the fans produced or manufactured by the assessee without any condition. Therefore, as there was a wholesale exemption, the raw material which had been incorporated could not be regarded as having a separate identity for the purpose of payment of tax.

Commissioner of Income‑tax East Pakistan v. Ayurvedic Pharmacy, (Dacca) Ltd. P L D 1970 S C 93 ; Latif Bawany Jute Mills Ltd. v. Sales Tax Officer 1971 P T D 26 and Commissioner of Sales Tax v. Muhammad Hussain and Company 1974 P T D 20 rel.

Latif Bawany Jute Mills Ltd. v. Sales Tax Officer P L D 1971 Dacca 26; Commissioner of Sales Tax v. H. Muhammad Hussain & Co. 1974 P T D 20 ; The King v. Fraser Companies Ltd. 1931 S C M R 490 and Bank of Nova Scotia v. The King 1930 S C R 174 ref.

Noorani Cotton Corporation v. Sales Tax Officer P L D 1965 S C 161 distinguished.

Muhammad Ilyas Khan, Advocate Supreme Court of Pakistan instructed by S. Inayat Hussain, Advocate‑on‑Record for Appellant.

Ex parte for Respondent.

Date of hearing : 25th May, 1986.

MUHAMMAD HALEEM, C. J.

‑This appeal, by leave, arises from the judgment of the High Court, dated 22nd of October, 1973, by which second part of the question, namely, whether the Tribunal was justified to grant exemption from sales tax on the element of raw material of finished goods, was answered in the affirmative.

Leave to appeal was granted to consider whether on the abolition of sales tax on electric fans with effect from 14th June, 1965, sales tax could be retrospectively imposed on raw material used in the manufacture of fans and earlier imported by the respondent free of sales tax, at the time when the finished goods namely fans were assessable to sales tax.

The dispute relates to the charge year 1964‑65. The respondent (hereinafter called "the assessee") is a private limited Company, and was engaged in the manufacture of electric fans and held the usual manufactur ing licence issued under section 8 of the Sales Tae Act, 1951. The normal assessment for the charge year was completed by the Sales Tax Officer on the 4th of August, 1966 on a turnover of Rs. 11,909. But subsequently it transpired that Lt.‑Col. Mushtaq Hussain, who held the office of the assessee as Managing Director had been advancing loans to it in connection with its business. On 11th of December, 1964, he transferred his holdings in the Company to one Mst. Iqbal Begum pursuant to an agreement, as a result of which the Company under its new management decided to transfer the following goods to the ex‑Director in lieu of the outstanding loan advanced by him to the Company :

(i) Finished goods of the value of Rs. 13,690.

(ii) Raw material of the value of Rs. 32,208.

The Central Board of Revenue issued a Notification No. S. R. O. 475 (K) 65, dated the 14th of June, 1965, under section 7 of the Sales Tax Act, 1951 by which the fans were exempted from sales tax. On this date, the value of the closing stock of the finished goods belonging to the Company was Rs. 3,625. The department, however, felt that the raw material utilized in the manufacture of the electric fans had escaped the assessment. Accordingly, the Sales Tax Officer (Companies), Circle I, Rawalpindi, issued a notice to the assessee under section 28 of the Sales Tax Act ; and by order, dated 18th of November, 1969, made a fresh assessment as the said officer was of the opinion that the transfer of the finished goods amounting to Rs. 13,690 by the assessee to its ex‑Managing Director on 11th of December, 1964, constituted a sale taxable under the law. However, out of the stocks finished goods of the value of Rs. 2,506 had already been subjected to the sales tax under the original assessment. The Sales Tax Officer, therefore, levied the sales tax on the remaining stock of Rs. 11,184 sold by the assessee. As he was also of the opinion that by reason of the manufacturing licence the assessee had purchased raw material for its own use free of sales tax, but later on a part of this raw material valued at Rs. 39,208 was transferred by the assessee by way of sale to Lt.‑Col. Mushtaq Hussain, it was, therefore, brought back to tax. The Sales Tax Officer also levied the tax on the raw material used in the manufacture of finished goods of the value of Rs. 3,625 constituting the closing stock of the assessee on the 14th of June, 1965, the date on which this notification was issued.

Aggrieved by this order, the assessee appealed to the Appellate Assistant Commissioner of Sales Tax, A‑Range, Rawalpindi, and succeeded as the appellate authority was of the opinion that under the notification, dated 14th of June, 1965, neither the electric fans nor the raw material could be subjected to sales tax. Essentially, this view was based on the fact that under section 3 (5) of the Act, sales tax was attracted at the stage of the import of raw material and not after they had been used up in the manufacture of finished goods as at that time no such provision, as corresponding to section 3 (1) (b) of the Act introduced on the 1st of July, 1967, was available. The department, accordingly, appealed against that order before the Income‑tax Appellate Tribunal, Peshawar Bench, Peshawar, which was partly accepted as it upheld the levy on the value of finished goods amounting to Rs. 11,184 transferred to Lt.‑Col. Mushtaq Hussain as being a sale taxable under the law. But as regards the next item of raw material valued at Rs. 39,208, which also stood transferred to Lt.‑Col. Mushtaq Hussain, the appellate authority was of the opinion that it did not constitute a sale taxable under the law at the relevant time as the subsequent amendment inserted had no retrospective effect. Therefore, the element of raw material incorporated in the finished goods could not be brought back to tax.

The Commissioner of Sales Tax, Rawalpindi Range, directly filed an application in the High Court under section 17 (1) of the amendment Act and prayed for the decision of the following question:

"Whether on the facts and in the circumstances of the, case, the Tribunal was justified in granting exemption from sales tax on Rs. 39,208 the value of raw material transferred to Lt.‑Col. Mushtaq Hussain and the element of raw material included in Rs. 3,625 the value of closing stock of finished goods, lying with the Company on 14th June, 1965

The first part of the question was answered by the High Court in favour of the department while the second against it:

Before us it was contended on behalf of the appellant that although the partly manufactured goods imported were exempt from payment of tax under sections, 4 (a) and 4 (b) of the Sales Tax Act, yet by reason of the definition of this expression in section 2 (12) of the Act, the raw material incorporated in the fans ceased to be partly manufactured goods and he came taxable the moment the end product was exempted from payment of tax. For this proposition, in addition to the above provisions, he relied on section 3 of the Act and to the observations of Kaikaus, J., in Noorani Cotton Corporation v. Sales Tax Officer (P L D 1965 S C 161):

"Now what is the device adopted for ensuring that sales tax is paid only at one stage in spite of what is contained in the charging section making all manufactured goods when they go to the purchaser liable to the payment of tax The device adopted, as will appear from section 4 is, that the sale of 'partly manufactured goods' to a manufacturer is not liable to the charge of tax. It may be clarified here that the Sales Tax Act does not recognise a manufacturer who has not obtained a licence under it for manufacture. The provision in section 4 is that the sale by a licensed manufacturer to another licensed manufacturer of partly manufactured goods is not liable to the incidence; of tax. The definition of 'partly manufactured goods' is that they are goods which are to be incorporated into another article. So, these provisions area sufficient guarantee that the tax will be paid only with respect to the last stage of manufacture of goods. However, there is one difficulty which had to be removed Suppose the manufactured article into which partly manufactured goods are to be incorporated is for some reason not liable to the payment of sales tax In that case if no tax is paid on partly manufactured goods no tax will be paid at all. Therefore, in the definition of 'partly manufactured goods' a limitation has been introduced that the article into which the goods are to be incorporated should be one which is liable to the payment of sales tax. If it is not liable to payment of tax then the goods which are incorporated into it are also manufactured goods on which sales tax has to be paid."

Further:

"But suppose that the last article is not liable to the payment of sales tax. Unless a special provision was made that person would not be paying any tax on the production of the first article too. This situation is met by the general provision in the last part of section 3(6) that the keeping of goods by the manufacturer for his own use would be regarded as a sale."

And lastly:

"In fact learned counsel for the appellants began his argument by saying that cottonseed oil was admittedly exempt and his contention was that as cottonseed oil was exempt any article which is incorporated into it should also be exempt, a contention which is clearly not sustainable in view of what is contained in the Sales Tax Act. If the cottonseed oil was not exempt from the payment of sales tax, then admittedly the manufacture or production of cottonseed itself which is being used for the making of cottonseed oil would not be liable to payment of sales tax for though the keeping of cottonseed by the manufacturer for extracting cottonseed oil was a sale, it was A sale of partly manufactured goods and, therefore, not subject to the payment of tax."

The ratio of this case is that if end‑product is not liable to the payment of sales tax then unless a provision is made that a person would not pay tax on the production of the first article, that is, the partly manufactured goods to be assimilated in the end‑product will be liable to the payment of tax in accordance with the general provision in the last part, that is, clause (d) of section 3 (6) of the Act. This case was, however, decided by the High Court on the assumption of both the parties that cottonseed oil was exempt from payment of tax, but that was not so as it was not exempt under section 7 of the Act. Therefore, the manufacture or production of cottonseed itself, which was used for the manufacturing cottonseed oil, would not be liable to the payment of sales tax for though the keeping of the cottonseed by the manufacturer for extracting cottonseed oil was a sale under section 3 (6) (d), it was not a sale of partly manufactured goods, and, therefore, not subject to payment of tax. As against this view; the High Court has placed reliance on the cases of Latif Bawany Jute Mills Ltd. v. Sales Tax Officer (P L D 1971 Dacca 26), Commissioner of Sales Tax v. H. Muhammad Hussain & Co. (1974 P T D 20). In both these cases, the decision in Noorani Cotton Corporation's case was distinguished.

In the first case the question for consideration was whether sales tax at any time became payable on the constituents namely sacking cloth or hessian (a partly manufactured goods) that went into making the gunny bags which upon their export were exempted from the payment of sales tax by the Central Government under the notification issued under section 7 of the Act. The contention of the department was that the hessian or sacking cloth, and, for that matter, even jute twine and jute yarn that went into the product of gunny bags, each one of the constituents being partly manufactured goods as soon as they were used in the manufacture of gunny bags became liable to the payment of sales tax on it. This contention, upon a consideration of sections 3 and 7 of the Act, was repelled on the ground that there was a clear‑cut distinction between 'leviability' in respect of the goods under section 3(1) of the Act and 'payability of tax' which is controlled by section 3(4) of the Act, as the goods to become leviable to tax have to come under section 3(1) of the Act and a transaction to become a taxable event must find mention in section 3(4) a the Act, and as done of the taxable events prescribed in section 3(4) of the Act ever took place in respect of any one of these constituents, there was no liability to the payment of sales tax on sacking cloth or hessian which went into the production of gunny bags. That this distinction was highlighted by the legislature in its subsequent amendment adding a new clause namely clause (i) to section 3 (4) of the Act pursuant to section 4 of the Finance Act, 1966, which runs as under:

"When the goods are actually used by the manufacturer or producer."

It was stressed that under this clause as soon as the manufacturer or producer who has manufactured or produced the goods actually uses the goods, the tax at once becomes payable on it.

The department was, accordingly, non‑suited on the ground that as none of the taxable events prescribed in section 3 (4) of the Act ever took place in respect of any one of these two constituents, there was no payability of tax.

The distinction thus emphasized was that whatever the meaning of the term use of the goods by the manufacturer or producer may be, no tax on such goods become payable unless and until such use of the goods has been made a taxable event under section 3 (4) of the Act as was by the new added clause. Again another significant feature was brought on as from the language of the section 3 (6) (d) of the Act that the words for use by the manufacturer or producer" could only mean independent utilization of the products by the manufacturer or producer as contra‑distinguished from the assimilation of the goods in the process of manufacture culminating, in the end‑product. This feature is obvious if clause (d) of this subsection was compared with the added subsection (e) to section 3(1) of the Act by the Finance Act. 1967 and the proviso to section 2(11) of the Sales Tax Act.

Noorani Cotton Corporation's case was also distinguished on the factual basis on the ground that in that case the end‑product was not liable to payment of sales tax as it was in the case under consideration, and it was observed that while holding so there was no inconsistency with. the view of the Supreme Court in that case as to the applicability of section 3(6) (d) of the Act which was considered with reference to the definition of the word "sale" as given in section 2 (11) of the Act. And that as the manufactures bad not kept hessian or sacking cloth for their own use as distinguished from its own in the shape of assimilation in the process of manufacture leading to end‑product, that is, gunny bags, section 3(6) (d) would have no application as it only dealt with the use of the end‑product by the manufacturer, that is, where instead of selling the end‑product the manu facturer retains it for its own independent use. In this context it was further held that there are no words in section 3 (6) (d) of the Act to justify its extension to the assimilation of the goods in the earlier stages of manufacture leading to the end‑product.

Two Canadian cases, namely, The King v. Fraser Companies Ltd. (1931 S C R 490), Bank of Nova Scotia v. The King (1930 S C R 174), were also relied on in support of this proposition. There too there was a similar provision like section 3(6) (d). In the second case also Noorani Cottons Corporation's case was noticed but again distinguished on the ground that the remarks were of general nature and that at that time it did not deal with the precise question of law as it was before the Court now. The Judges also referred to the case of Latif Bawany Jute Mills Ltd., and relied on the clear‑cut distinction between leviability to charge in respect of the goods under section 3 (1) of the Act and payability to tax under section 3 (4) of the Act. They also relied on the observations of the Supreme Court in the case of Commissioner of Income‑tax East Pakistan v. Ayurvedic Pharmacy, Dacca Ltd. (P L D 1970 S C 93) to the effect that once the goods were exempted under section 7 of the Act, they go out of the purview of the Act, and their gross takings could not be taken into account for any of the purposes of the Act in the absence of express words permitting the same.

In this milieu the contention formulated earlier was repelled by the High Court relying on the authority of the two decisions in Latif Bawany Jute Mills Ltd. v. Sales Tax Officer and Commissioner of Sales Tax v. H Muhammad Hussain Company.

Having elaborated the distinction drawn in the cases cited at the Bar, we are of the view that the decision in Noorani Cotton Corporation's case turns on its own peculiar facts and on the interpretation of section 3 (6) (d) read with section 2 (11) of the Act.

Now coming to the facts of the case, the assessee was a licensed manufacturer of electric fans and was exempt from the payment of tax on partly manufactured goods imported for being incorporated into the end‑product under section 4 (b) of the Act. The partly manufactured goods in the normal course were leviable to charge under section 3(1) (b) and the stage at which the sale tax was payable was after import but before clearance by the Customs authorities under section 5 (1) (b) of the Act. That stage had passed away. The partly manufactured goods had been assimilated in the production of fans, and the critical date on which these were sought to be assessed for payment of tax was the closing date, that is, 14th June, 1965. On that date they had lost their original shape and could not be subjected to any event as prescribed under section 4 (1) (a) and (b) of the Act. That being so they were not liable to the payment of the tax. In this context the High Court rightly decided the case on the basis of the two judgments cited above while distinguishing Noorani Cotton Corporation's case.

Lastly, on the critical date a notification was issued under section 7 of the Act granting exemption to the fans produced or manufactured by the assessee without any condition. Therefore, as there was a wholesale exemption, the raw material which had been incorporated could not be regarded as having a separate identity for the purpose of payment of tax. In this connection reference may be made to the judgment of this Court in the case of Commissioner of Income‑tax East Pakistan (supra).

For the foregoing reasons, the appeal fails and is hereby dismissed, but with no order as to costs.

M. B A. Appeal dismissed.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.