The Member Inland Revenue

Federal Board of Revenue

Islamabad.

SUBJECT:   IMPOSITION OF SALES TAX & S.E.D ON MANUFACTURED FOOD

                        Kindly refer to the Board’s letter C.No.105(2)S-IR-III/2011 dated 25.08.2011 reported on statute pages of the monthly Tax Review for the month of September 2011 on page ST-800 (copy enclosed Annexure-A). I have minutely studied the contents of the said letter and very humbly wish to submit that it has compromised the department’s stance adopted in the case reported as Mughal-e-Azam Banquet Complex v Federation of Pakistan 2011 PTD 2260 (Lahore High Court-Annexure-B) which in any case was not based on correct interpretation of law. In my humble opinion the matter needs reappraisal by the Board on the basis of the arguments hereunder.  

2. Before commenting any further it shall be in the fitness of things to reproduce the relevant portion of the Board’s letter which needs reconsideration, i.e. operative part of the first paragraph and whole of paragraph 2 of Annexure-A which read as follows:

“….The services provided / rendered by marriage halls are not liable to FED as not being mentioned in the Second Schedule to the Federal Excise Act, 2005. However, under the Punjab Sales Tax Ordinance, 2000, services provided and rendered by marriage halls and lawns were chargeable to sales tax till June, 2005. This levy was abolished since July 2005, so services provided or rendered by marriage halls and lawns are no longer chargeable to sales tax.

2.         The services provided by the marriage halls / lawns are classified under PCT Heading 9801.3000 while those provided by the caterers are separately classified under heading 9801.5000. A marriage hall may provide a number of services like, providing sitting venue for the guests, entertaining guests with music programs, lighting and decorations of the hall, providing food/drinks for the guests etc. All these services are provided by the marriage halls in the normal course of business. When services provided by marriage halls are exempt from sales tax, it would mean that all services, which a marriage hall provides in the normal course of business, are exempt from sales tax. Provision of food / drinks in a marriage hall is rather an essential service provided by it in the normal course of business and, therefore, cannot be subjected to tax separately.”

3. At the very outset with utmost reverence it is pointed out that reference to the Second Schedule to the Federal Excise Act, 2005 while discussing taxability or otherwise of the services provided by the marriage halls / lawns in the first paragraph of the subject letter (as quoted above) is incorrect. In fact excisable services are mentioned in Table II of the First Schedule to the Federal Excise Act, 2005 and not in the Second Schedule which describes “goods on which duty is collectible under sales tax mode:

4. It is admitted with respect that the services rendered by marriage halls are not taxable either under the Federal Excise Act, 2005 or under the Sales Tax Act, 1990. These services fall under Chapter 98 of the Customs Tariff. The relevant HS Codes are given in Annexure-C. However, serving cooked food i.e. supplying tangible movable goods is certainly not included in “providing services”. Items which can be considered as prepared foodstuff are scattered throughout in the Customs Tariff but are mostly found in Chapters 16 to 24. For the purposes of Sales Tax cooked food is actually included in “goods” as defined in clause (12) of section 2 of the Sales Tax Act, 1990 in the following words:

            “(12)    “goods” include every kind of movable property other than actionable claims, money, stocks, shares and securities;”

5. The honorable Supreme Court of Pakistan has ruled authoritatively in paragraph 24 of its judgment in re: Collector of Sales Tax & Central Excise v Sanghar Sugar Mills Ltd Karachi & others PTCL 2007 CL 565 = [(2007) 96 TAX 105 (S.C. Pak)] that all goods are liable to sales tax unless exemption is provided under section 13 or Sixth Schedule of the Act ibid Annexure-D. In paragraph 16 the honorable Court was pleased to record the following:

            “16.     …. It follows that sales tax would be applicable in respect of taxable supply made during the course of a business activity. It also follows that it is immaterial whether the supplier is in the business of the relevant goods or not so involved but the sale of these items & the utilization of these sale consideration in the business activity is definitely to be considered in the course of or furtherance of the business / taxable activity.”

6. After a careful study I have inferred that apart from the conditional exemption to “cottage industry” given at S.No.3 of Table-2 of the Sixth Schedule, the only exemption available to cooked food is found at S. No. 7, 8 and 9 of Table-2 of the Sixth Schedule to the Act in the following words:

                                                TABLE-2 OF THE SIXTH SCHEDULE

7. The issue of taxability of supply of cooked food under the Sales Tax Act, 1990 cropped up before the learned Tribunal and the judgment which is in favor of Revenue is reported as Balana Restaurant, Peshawar v Assistant Collector Sales Tax & Federal Excise (Refunds) Peshawar PTCL 2010 CL 581 (Trib). The matter was then referred by the registered person to the honorable Peshawar High Court and the reference was also decided against him vide judgment reported by the title Balana Restaurant, Peshawar v Collector Sales Tax Peshawar 2010 PTD 1286 (H.C. Pesh). The two judgments are Annexure E & Annexure F.

8. Having established the taxability of cooked food supplied by marriage halls and lawns under the Sales Tax Act, 1990 I now turn my attention to its taxability under the Federal Excise Act. Since cooked food is not mentioned in Table-I of the First Schedule to the Federal Excise Act, 2005, it cannot be subjected to Federal Excise Duty. However, cooked food being a manufactured item never enjoyed exemption from Special Excise Duty (SED) which was imposed under section 3A of the Act ibid read with SRO 655(I)/2007 dated 29.06.2007 initially at the rate of 1% and enhanced to 2.5% by the Federal Excise (Amendment) Ordinance, 2011 promulgated on 15.03.2011. (The SED was abolished by Finance Act, 2011.) It is worth mentioning that notification SRO 655(I)/2007 dated 29.06.2007 was challenged unsuccessfully before the honorable Lahore High Court through multiple writ petitions, which were dismissed through a single consolidated judgment reported as Brothers Sugar Mills Ltd v Government of Pakistan 2011 PTD 2465 (H.C. Lah). (Annexure-G). The notification was upheld subsequently in Intra-Court appeal as well (unreported as yet). Thus there is no reason why SED may not be recovered from the marriage halls against cooked food supplied by them.

9. It seems that in spite of the detailed guidelines provided by the Board vide Federal Excise General Order No. 3 of 2007 dated 30.07.2007 regarding SED (Annexure-H), the Board was influenced by letter No.530/2009–LAW-I by the Law & Justice Division which was circulated vide Board’s letter C.No.1(3) FED/2007 dated 25.07.2009 (copy enclosed for ease of reference-Annexure-I). The Law & Justice Division had merely explained that services provided or rendered by hotels & restaurants do not attract SED. But supply of cooked food is a distinct activity comprising supply of manufactured “goods” and is not merely service, thus not covered by the said letter. Even otherwise it is the duty of the assessing officer and the courts to interpret law and it is possible to deviate from the opinion of the Law & Justice Division. In one such case while dissenting from the legal opinion of the Law & Justice Division in the case Collector of Sales Tax & Central Excise v Sanghar Sugar Mills Ltd Karachi & others PTCL 2007 CL 565 (Already annexed at D) the honorable Apex Court of Pakistan has held in para 23 on page 590 of the report that the opinion of Law & Justice Division is not binding in the following words:

            “23.     The OM issued by the Ministry of Law, Justice & Human Rights, Islamabad contains an information and does not have any effect on the legality of the matter when it is not supported by any other statutory instructions / orders from the authority competent to do so under the Act & rules made there under and cannot be equated with the legislative instruments, and which is also subject to the decision of the Court.”

10. Based on the above interpretation of law I am convinced that supply of cooked food by marriage halls / lawns is liable to sales tax under the Act of 1990. It was also liable to Special Excise Duty up to 30.06.2011 till the omission of section 3A from the Federal Excise Act, 2005.

11. Coming now to Aerated waters or Beverages supplied by such marriage halls. These are taxable on the basis of section 3(2) of the Sales Tax Act, 1990 read with the Third Schedule to the Act as items on which sales tax is recovered on the basis of retail price from the manufacturer. FED is also charged from manufacturers only as stipulated in section 3 of the Federal Excise Act, 2005. Since tax is recovered from the manufacturers and loss of revenue does not occur on their supply by marriage halls I do not wish to offer any comments on their liability under the Sales Tax Act, 1990 or under the Federal Excise Act, 2005, because such drinks are liable to taxation in the hands of manufacturers.

12. It is submitted with respect and all the humility at my command that remedial action may be taken if so approved.

                                                                                      (ZULQARNAIN TIRMIZI)

                                                                                                Director DOT