Lahore High Court (LHC) has declared that cigarettes manufactured in Azad Jammu & Kashmir (non-tariff area) and brought to Pakistan (tariff area) for sales/consumption are excluded from applicability of Federal Excise Act, 2005, but it does not absolve the AJK-based companies from payment of duties/taxes on production in the AJ&K.
Sources said that the LHC Rawalpindi Bench has issued a detailed judgment in favor of tax department in the case of M/s Walton Tobacco Company in a writ petition number 1636 of 2017. Through the petition, the AJK-based company has sought release of the goods seized by the staff of Inland Revenue RTO Rawalpindi and prayed for issuance of a direction to abstain from interfering in its lawful business.
Brief facts of the case as stated in the writ petition are that the company was registered in Azad Jammu & Kashmir, under the Companies Ordinance, 1984. The company has set up a unit at Chitar Pari, Mirpur Road, Mirpur, AJ&K, where cigarettes of different brands such as "Bridge", "World Cup", "Gold Seal", "Gold Cup" etc are manufactured for supply in the AJ&K and Pakistan.
It is alleged that the company holds a valid license for manufacturing of cigarettes which are supplied after fulfilling due formalities prescribed by law, including payment of federal excise duty and sales tax. It is asserted that on 21.04.2017 the staff of RTO Rawalpindi illegally and unlawfully intercepted Truck No LES 4819 at Jhelum and seized 280 cartons of Bridge brand cigarettes.
According to the LHC judgment, admittedly, the cigarettes seized by the respondent (FBR) officials were manufactured in the factory established by the petitioner (company) in Azad Jammu & Kashmir territory. Under section 2(17) of the Federal Excise Act, 2005 AJ&K has been defined as a "non-tariff area" to which the Act does not apply.
No doubt initially by virtue of SRO 649(1)12005, dated 1.7.2005, duty of excise was leviable in the manner prescribed by the Central Board of Revenue on the goods mentioned in column 2 of the said notification ie cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes produced or manufactured in the non-tariff areas and brought to the tariff areas.
However, subsequently through notification dated 8.7.2005 the SRO dated 1.7.2005 was amended in the manner that in the preamble, after the words "non-tariff areas" the words "excluding the territory of Azad Jammu and Kashmir" were asserted. So, there remains no confusion or ambiguity in understanding the issue that the cigarettes which are produced or manufactured by the petitioner - Company in AJ&K (non-tariff area) - and brought to Pakistan (tariff area) for sales and consumption are excluded from the applicability of section 3 (1)(b) of the Federal Excise Act, 2005.
The said conclusion, however, does not absolve the petitioner from the liability of payment of tax and duties on manufacturing or production in AJ&K, It is admitted by both the parties that Tax Laws of Pakistan ie Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 are mutatis mutandis applicable in Azad Jammu & Kashmir.
In writ petition the AJK-based company has admitted that Federal Excise Duty @ Rs 1,649 per 1,000 sticks is levied on cigarettes produced by it while Sales Tax is chargeable @ 17 percent. In writ petition it is asserted that the seized 280 cartons of Bridge brand cigarettes were duly covered with valid federal excise duty and sales tax.
However, the petitioner has failed to bring on record any documentary proof to show that any tax or excise duty which was leviable on the cigarettes manufactured or produced in AJ&K was ever paid by the petitioner. Even the invoice, allegedly produced by the driver of the seized truck before the excise officials, has not been appended with the petition.
In these circumstances, the stance of the FBR officials (respondents), prima facie, seems to be correct that the seized goods were brought to territory of Pakistan in the name of a ghost customer and the invoice so issue was also fake one.
In this view of the matter, the court is of the considered view that the officials of respondents had rightly exercised powers under Rule 63 of the Federal Excise Rules, 2005 for search of the truck and, on failure of the driver to produce documents to show payment of tax and duties lawfully seized the goods loaded on it. This act of the FBR officials cannot be treated or declared as illegal interference in the business of the petitioner.
As the petitioner asserted that the seized goods were covered under valid Federal Excise and Sale Tax invoices but this fact has been disputed by the other side, the court in exercise of powers under Article 199 of the Constitution cannot go into the disputed questions of facts. This controversy can only be resolved by the competent tax authorities.
The petitioner's representation for unconditional release of the seized goods is pending adjudication before the competent forum where it may avail the opportunity by producing the documents showing payment of duties and taxes on the seized goods in AJ&K besides proving that the same were sold to a genuine buyer.
The FBR officials argued that as the cigarettes loaded in the truck intercepted at Jhelum were non-tax paid and the buyer mentioned in the invoice was found to be non-existent, therefore, action on the part of the tax authorities was justified as being in accordance with Rule 63 of the Federal Excise Rules, 2005; that though the provisions of section 3 of the Federal Excise Act, 2005 are not applicable in view of SRO 649(1)/2005, dated 1.7.2005 on the goods which are manufactured in "non-tariff" area and brought to "tariff area" but under the garb of this SRO tax and duties cannot be evaded through Benami transactions; that the petitioner by way of dumping of low price/non-tax paid cigarette in Pakistani market is causing huge financial loss to the public exchequer; that the petitioner is maintaining two parallel streams of production and supplies ie documented (tax paid) and non-documented (non-tax paid) and as such is involved in tax evasion; that the petitioner in the garb of SRO 649(1)12005 cannot be allowed mass supply of non-tax paid cigarettes in Pakistani market; that the seized goods cannot be released without payment of duty and taxes in accordance with law; and that the impugned seizure being in accordance with law the instant petition is liable to be dismissed with special costs, tax department pleaded.
Resultantly, the instant petition being not maintainable has been dismissed, the LHC order added.
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