Appellate Tribunal Inland Revenue, Lahore, has held if the taxpayer cannot give the particulars of the buyers, the assessing officer cannot assume that the sale of yarn has not been made to the manufacturers of textile sector. In its latest order (ITA No. 621/LB/2017), ATIR Lahore has further held that yarn being a raw material has no commercial use outside the textile sector; rather the only commercial use is power loom industry which mostly works as cottage industry which are manufacturers but are not required to be registered for the purpose of sales tax.
It was also held that since sales tax and income tax are administered by the same assessing officer; therefore, the FBR clarification issued in the context of sales tax would be applicable on income tax as well. The version of assessing officer that since particulars of the buyers have not been given therefore the yarn has been sold to the retailers is a grave misconception contrary to the market reality where there are no such retailers of yarn. Resultantly, the appeal is accepted and orders of the authorities are vacated, the order added.
The background facts are that the taxpayer was a commercial importer of yarn and had sold the same to the persons whose particulars were not provided being unregistered persons under the Sales Tax Act, 1990. On failure to provide the particulars of the buyers, the assessing officer held that the sales have been made to the retailers and the taxpayer was required to collect advance income tax under section 236H of Income Tax Ordinance, 2001. Whereas, contention of the taxpayer was that in spite of being unregistered, the buyers are manufacturers and the provisions of section 236H are not applicable where sales are made to the unregistered manufacturers as yarn has no commercial use outside the textile sector. On appeal, the Commissioner (Appeals) remanded the case back to the officer with the direction to verify the contention. On that, the taxpayer filed second appeal before the Appellate Tribunal Inland Revenue through his Counsel Shahid Jami Advocate.
The authorised representative (AR) stated that in the show cause notice as well as in the order, the officer has admitted that the appellant is a commercial importer of yarn and yarn is a raw material of textile industry and the viscose yarn imported by the appellant has no commercial use other than in the power loom industry which mostly works as cottage industry.
The AR further explained that earlier an issue was raised by the department on which FBR issued a clarification which is very relevant to decide the point in issue. The issue as mentioned in the clarification dated 12.12.2014 is availing of reduced rate of 2% under SRO 1125(I)/2011 on supplies of textile yarn made to unregistered person whose details remained unknown. As per clarification, Gujranwala Art Silk Merchants Association pleaded to the FBR that textile yarn has no use other than that in the textile sector.
The AR argued that principle laid down in the Sales Tax Clarification regarding yarn is squarely applicable on the income tax side as well as the yarn being a raw material has only commercial utility for the manufacturers of textile sector mostly belonging to the cottage industry. The AR explained that as evident from Annex-C of the monthly sales tax return, sale of yarn has been made to the registered manufacturer as well as to the unregistered person and by no stretch of imagination sales of yarn to them can be presumed as sales to the retailer for inability of the appellant to provide particulars of the buyers belonging to the cottage industry. The AR explained that concept of cottage industry is recognised in the taxing statute and has been defined in section 2(5AB) of the Sales Tax Act, 1990.
The AR further stated that Section 14(1)(a) of the Sales Tax Act, 1990 provides that manufacturer falling under the cottage industries are not required to be registered. The AR referred to a departmental precedent of Shakeel Impex wherein another assessing officer has accepted the identical contention that the taxpayer is importer of yarn and as yarn is consumed by the manufacturer of textile items therefore provision of section 236H pertaining sales to the retailers are not attracted and had filed the proceedings initiated under section 161. The AR pointed out that contrary to the aforesaid clarification of the FBR, the officer has not brought on record any evidence of even a single transaction of sales to the retailer or has mentioned any retailer existing in Gujranwala who is selling yarn as retailer to the general public for the purpose of consumption as envisaged in the definition of retailer contained in section 2(28) of the Sales Tax Act, 1990.
On the other hand, departmental representative (DR) supported the order of the authorities below with the findings recorded therein and pleaded that the FBR clarification is for the purpose of sales tax and is not applicable to the income tax issue.
The ATIR has examined the arguments of both the sides and the case record including the FBR's clarification as well as departmental precedent attached with the appeal papers. Appellate Tribunal Inland Revenue is convinced that the FBR's clarification was though in the context of sale of yarn to the unregistered persons whose particulars could not be provided yet, the same is squarely applicable in the income tax proceedings at hand. Here too the issue is that yarn is an industrial raw material and its only commercial use is by the manufacturer of textile sector for weaving of cloth. After consolidation of jurisdiction of sales tax and income tax with the same officer, there cannot be any rationale for not following the principle laid down by the FBR in the connected mater of income tax.
The issue pertains to availing the reduced rate of 2% under SRO 1125(I)/2011 dated 31.12.2011 on supplies of textile yarns made to unregistered persons whose details remained unknown. The issue has been examined. The association has pleaded that the textile yarn has no use other than that in the textile sector. This contention carries weight.
In view of this, the Board is of view that since generally textile yarns have no use other than that in the textile industry, it is not justified to make any demand on the strength of condition (vi) of SRO 1125(I)/2011, if the details of buyers have not been provided. Such demand is only justified if the department comes up with the evidence that the supply has been made to a person not operating in the five sectors of the said SRO. The RTO's advice is to take necessary action under the law, keeping in view the FBR clarification.
In the income tax proceedings, the same issue is involved that is covered in the clarification that there is sale of yarn to the unregistered person and the details of the unregistered buyers have not been provided. This is especially so in view of section 214(1) of the Income Tax Ordinance which states that all income tax authorities and other persons employed in the execution of the ordinance shall observe and follow the orders, instructions and directions issued by the Board. Similar stipulation is contained in section 72 of the Sales Tax Act, 1990.
In the light of foregoing discussion, the Appellate Tribunal Inland Revenue is convinced that the yarn being an industrial raw material is used by the manufacturer only whether belonging to organised textile sector or unorganized cottage industries which are not required to be registered but are manufacturers as per definition contained in section 2(5AB) of the Sales Tax Act, 1990 which is relevant for the point in issue for income tax as well. Whereas, the version of the assessing officer that since particulars of the buyers have not been given therefore the yarn has been sold to the retailers is a grave misconception contrary to the market reality where there are no such retailers of yarn. Resultantly, the appeal is accepted and orders of the authorities are vacated, the order added.