The Appellate Tribunal Inland Revenue Lahore has held that products such as samosas, tornados, patties and rolls, etc, containing more than 20 percent meat by weight are exempted from levy of sales tax.
The background facts are that in the case of K&N's Foods Pvt Limited, the Commissioner Inland Revenue, Large Taxpayers Unit, Lahore through an order under section 38 of the Sales Tax Act, 1990 deputed a team of tax officials to undertake physical stock taking of, finished goods, work-in-progress and raw material on the basis that its certain products like Samosas, tornados, patties and rolls are taxable but the company is not paying sales tax on them.
Through a separate order under section 27(b) the Company was required to file a special sales tax return in addition to the normal one wherein the columns of ready-to-eat, ready-to-cook, samosas and rolls were prescribed in respect of products which the Department was considering as taxable.
Against the aforesaid orders under section 38 and 27(b) the company filed direct appeal before the Tribunal in pursuance of section 46(1)(b). The Counsel of the appellant Company Mudassar Shujauddin Advocate argued that impugned orders have been issued on the presumption that the named products of the appellant mentioned in the orders are taxable but sales tax is not being paid n them. Whereas, the legal position is that under Sr.No.83 of Table 1 of Sixth Schedule of the Sales Tax Act the poultry meat and similar products of prepared, frozen or preserved meat falling under the PCT Heading 1602.3200 are exempt from sales tax. The Counsel made reliance on Explanatory Notes published by the World Customs Organisation, a body of United Nations, regarding the Harmonized Commodity Description and Coding System. According to which Chapter 16 also covers food preparations including so-called prepared meal consisting of meat together with vegetables, sauce etc. provided they contain more than twenty percent weight of meat.
The Tribunal after hearing both the sides held that the arguments of the Counsel carry weight. The operative part of the order of the Tribunal revealed that whereas the proceedings under section 38 can be initiated only on the basis of material evidence regarding the element of tax fraud. Here, instead of tax fraud, the issue is of interpretation of clause (83) of Table 1 of the Sixth Schedule regarding exemption from sales tax of poultry meat prepared products. The Commissioner merely on the basis of product and marketing terms of ready-to-eat and ready-to-cook, without establishing the taxability in the context of Explanatory Notes to the PCT Headings, has held these products taxable and that too without identifying the PCT Heading other than 1602.3200 under which these may fall, if taxable and the basis thereof. Maybe the Commissioner is assuming that the poultry meat has not been used in Smosas, Tornadoz, Achari Samosa, Puff Patteze and Patteze, etc. Whereas, the attending AR has established that as per Explanatory Notes of the relevant Publications their products fall under Sr.No.83 and are exempt and that the registered person is paying sales tax on one of the product namely, stok (chicken cube) which contained chicken meat by less than 20 percent by weight.
Considering the law as contained in Sr.No.72 and 83 of Table 1 of Sixth Schedule, Explanatory Notes of Sixth Schedule the relevant publications of Pakistan Customs and World Customs Organisation and the case law relied upon we can hold that order under section 38 is without jurisdiction as there is no element of tax fraud rather the named products are exempt from sales tax and the nominal increase of 5% in input tax on imported material used in exempt supplies is also justifiable considering the increased exempt turnover declared. Therefore the order under section 38 is not legally tenable.
Same is the case of order under section 27(b) requiring Special Return based on the erroneous understanding regarding taxability of the named products. Since in the regular monthly sales tax returns the taxable supplies of taxable items of the registered person is already taken care of therefore there is no rationale for burdening the compliant taxpayer with Special Return and that too without giving justifiable reason as envisaged under section 24 of the General Clauses Act. As per above discussion, the appeals succeed and the impugned orders are set aside, order of the tribunal added.