Cir Refund Zone Lto vs M/S Fatima Fertilizers

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

STR No.95 of 2025

The Commissioner Inland Revenue, Refund Zone, LTO, Multan Versus

M/s Fatima Fertilizers Company Limited, Lahore

JUDGMENT

Date of hearing: 23.09.2026.

Applicant by: Mr. Muhammad Suleman Bhatti, Advocate. Respondent by: M/s. Ahmad Pervaiz Malik and Asad Zaman Tarar, Advocates.

MUHAMMAD SAJID MEHMOOD SETHI, J.:- This consolidated judgment shall decide instant Reference Application under Section 47 of the Sales Tax Act, 1990 (“the Act of 1990”), along with connected Reference Applications i.e. STR No.96 of 2025 as common questions of law and facts are involved in these cases.

2.The following questions of law, asserted to have arisen out of the impugned order dated 25.09.2025, passed by learned Appellate Tribunal Inland Revenue of Pakistan Division Bench, Multan (“Appellate Tribunal”), have been pressed and argued for our opinion:-

I. Whether, in view of the Finance Act, 2022, which made the supply of fertilizer exempt from sales tax w.e.f. 01.07.2022, the input tax attributable to unconsumed closing stock as on 30.06.2022 could lawfully be refunded under Section 10 of the Act?

II. Whether the Tribunal failed to appreciate that the registered person was legally obliged to non-credit or reverse input tax on closing stock under Section 8(1)(a) of the Sales Tax Act, 1990?

3.Briefly, in the instant Reference Application, the respondent- taxpayer, engaged in manufacture and supply of fertilizer, claimed

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refund under Section 10 of the Act of 1990 read with Rule 34 of the Sales Tax Rules, 2006 for the tax period June 2022. Fertilizer supplies were exempted with effect from 01.07.2022 through the Finance Act, 2022. The Department disallowed Rs.2,090,813,441/-, being input tax attributable to raw material and finished goods forming part of the closing stock as on 30.06.2022, on the ground that such stock was to be utilized for exempt supplies after 01.07.2022. The learned Appellate Tribunal, however, allowed the refund, principally holding that the input tax had been incurred when fertilizer was taxable and that the subsequent exemption could not affect the entitlement. In the connected Reference Application, the respondent- taxpayer had imported Rock Phosphate on 17.05.2008, which was cleared from Karachi Port on 27.05.2008, whereas the resultant fertilizer was exempted from sales tax with effect from 11.06.2008 through SRO 535(1)/2008. The Department disallowed the input tax claimed on the imported raw material under Section 8(1)(a) of the Act of 1990. The learned CIR(A), however, annulled the order of the assessing officer and allowed the appeal. The learned Appellate Tribunal, relying principally upon the earlier order of this Court in W.P. No.12752 of 2010 and the judgment in The Commissioner Inland Revenue, Legal Zone, Large Taxpayers Office, Lahore and another v. Messrs Mayfair Spinning Mills Ltd. and others (2025 SCMR 1), upheld the order of the learned CIR(A).

4.Learned counsel for the applicant-department submits that the learned Appellate Tribunal, while considering the effect of the exemption of fertilizer, failed to adequately examine the principal statutory question whether input tax attributable to unconsumed stock could lawfully be adjusted or refunded when the corresponding output supplies had become exempt. He contends that Section 7 of the Act of 1990 itself makes the entitlement to input tax adjustment subject to the provisions of Section 8 and that the specific effect of Section 8(1)(a) upon inputs subsequently utilized for exempt supplies required determination. He argues that the learned Appellate Tribunal wrongly

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treated the entitlement as having conclusively accrued merely because the input tax was incurred before the exemption, without distinguishing between inputs already consumed in making taxable supplies and goods which remained unconsumed when the exemption became operative. In relation to the connected matter, learned counsel submits that the learned Appellate Tribunal similarly failed to determine whether the imported Rock Phosphate was actually consumed in the manufacture of taxable supplies before the exemption came into force and whether the mere date of import was sufficient to establish admissibility of the input tax. He further submits that the earlier order of this Court and the judgment in Mayfair Spinning Mills’ case supra were applied without examining their precise applicability to the facts of the present cases. In support, he has referred to Messrs Chiltan Ghee Mills, Quetta and others v. Deputy Collector of Sales Tax (Refund), Customs House, Quetta and others (2016 SCMR 2183), The Commissioner Inland Revenue, Legal Zone, Large Taxpayers Office, Lahore and another v. Messrs Mayfair Spinning Mills Ltd. and others (2025 SCMR 1) and Commissioner Inland Revenue Regional Tax Office, Peshawar v. Messrs Cherat Cement Company Ltd. Nowshera (2026 SCMR 545).

5.Conversely, learned counsel for the respondent-taxpayers supports the impugned orders and submits that the input tax was incurred at a time when fertilizer was taxable and was, therefore, admissible under Section 7 of the Act of 1990. In respect of the principal Reference Application, he contends that the subsequent exemption could not retrospectively deprive the taxpayer of an entitlement arising from purchases made during the preceding tax period. In the connected matter, he submits that the Rock Phosphate had been imported and cleared before issuance of SRO 535(I)/2008 and, therefore, the input tax could not be disallowed on the basis of a subsequent exemption. In support, he has relied upon The Commissioner Inland Revenue, Karachi v. Messrs Attock Cement Pakistan Limited, Karachi (2023 PTD 320), The Commissioner

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Inland Revenue, Legal Zone, Large Taxpayers Office, Lahore and another v. Messrs Mayfair Spinning Mills Ltd. and others (2025 SCMR 1), M/s. Mayfair Spinning Mills Ltd., Lahore v. Customs, Excise and Sales Tax Appellate Tribunal, Lahore and two others (PTCL 2002 CL. 115), Sales Tax Appeal No.K-163 of 2004, decided on 27th September, 2005 [2007 PTD (Trib.) 634] and order dated 07.02.2024, passed by the CIR (Appeals), Karachi in the case of M/s. Bayer Pakistan (Pvt.) Ltd.

6.Arguments heard. Available record perused.

7.The controversy, in our considered view, could not have been resolved merely by identifying the date on which the input tax was incurred. The material question was the legal consequence of the fertilizer supplies becoming exempt with effect from 01.07.2022, while the input tax in dispute was attributable to raw material and finished goods which admittedly formed part of the closing stock as on 30.06.2022. A distinction was, therefore, required to be maintained between the incurrence of input tax, its availability for adjustment, and the point at which any corresponding statutory entitlement to adjustment or refund could be said to have accrued or crystallized. The mere payment of input tax at an earlier stage does not, in isolation, determine its ultimate statutory treatment; such treatment remains subject to the conditions, limitations and exclusions prescribed by the Act. The input-tax mechanism is not an independent source of refund but forms part of the statutory scheme governing taxation of taxable supplies. Consequently, where the legal character of the corresponding output supplies subsequently changes from taxable to exempt, the question whether an unadjusted input-tax entitlement survives that change necessarily requires examination of the statutory scheme as a whole. The relevant inquiry, therefore, was not exhausted by the historical fact that input tax had been incurred when fertilizer was taxable. It extended to the status, intended use and statutory treatment of the goods to which such input tax related at the point when the exemption became operative. This distinction was

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fundamental to the controversy and required an express determination by the learned Tribunal.

8.Section 7 of the Act permits adjustment of input tax paid in respect of taxable supplies made or to be made. The Hon'ble Supreme Court in Mayfair Spinning Mills’ case supra has explained the expression “made, or to be made” and recognized that actual consumption of raw material within the same tax period is not, in itself, an indispensable condition for adjustment. Thus, the mere circumstance that the relevant stock remained unconsumed during June 2022 could not, standing alone, furnish a complete answer against the taxpayer. At the same time, Section 7 cannot be read in isolation from Section 8. The statutory scheme expressly places limitations upon the admissibility of input tax, and the provisions must be construed harmoniously so that effect is given to the legislative scheme as a whole. Section 8(1)(a), in particular, requires consideration of input tax relating to goods used or to be used for a purpose other than making taxable supplies. The expression “to be used” assumes significance in the present controversy because it requires attention not merely to the past use of the goods but also to their legally relevant intended future use. The learned Tribunal was, therefore, required to determine whether the disputed closing stock remained intended and available for use in making taxable supplies, or whether, upon the exemption becoming operative, its relevant future use fell within the statutory exclusion contemplated by Section 8(1)(a). The question consequently was not simply whether input tax had been incurred before 01.07.2022; it was whether, on the facts and under the combined operation of Sections 7 and 8, the statutory entitlement continued to exist after the corresponding output supplies ceased to be taxable. A determination under Section 7 without examining the possible operation of Section 8(1)(a) could not constitute a complete adjudication of the controversy.

9.The judgment of the Hon'ble Supreme Court in Chiltan Ghee Mills’ case supra was also materially relevant. The said authority

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examined the interplay between Sections 7 and 8(1)(a) and recognized, in the factual circumstances considered therein, that input tax attributable to goods used in the manufacture of exempt supplies could not be reclaimed. Although the factual matrix of Chiltan Ghee Mills’ case supra is not identical to the case before us, the statutory principle governing the relationship between input tax and taxable output could not simply be ignored. The appropriate course was to identify the precise statutory principle emerging from the judgment and then determine its applicability to the facts of the present case. The learned Tribunal was, therefore, required to examine whether the goods represented by the disputed input tax remained attributable to taxable supplies or, having regard to the exemption and their intended subsequent use, attracted the exclusion contemplated by Section 8(1)(a). This necessarily called for findings regarding the nature and status of the closing stock and its intended use after 01.07.2022. The Tribunal, however, did not undertake this exercise and proceeded substantially on the basis that the input tax had been incurred before the exemption. Such approach did not answer the statutory question arising from the subsequent change in the taxability of the output supplies.

10.Equally, the judgment in Attock Cement’s case supra was material for consideration. While recognizing Section 7 as the statutory mechanism for adjustment of input tax, the Hon'ble Supreme Court examined the effect of exemption of the relevant output supplies upon input tax which had remained unadjusted and considered the consequential refund claim in the context of Section 66. The authority thus underscored the importance of examining the statutory consequence of an output exemption upon unadjusted input tax, rather than treating the historical payment of input tax as conclusive of its subsequent treatment. Although the factual and statutory setting of Attock Cement’s case supra is not identical to the present case, its reasoning required the learned Tribunal to address a question which goes to the heart of the present controversy: whether,

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after the output supplies became exempt, the disputed input tax continued to be available under the adjustment mechanism or was required to be considered under the specific statutory provision governing refund. Since the respondent-taxpayer's claim in the present case was founded upon Section 10 read with the relevant Rules, the learned Tribunal was specifically required to examine whether the conditions prescribed by Section 10 were independently satisfied and whether the nature of the closing-stock input tax brought it within the scope of that provision. This distinction between the general mechanism of adjustment and the specific statutory entitlement to refund was not adequately addressed in the impugned order.

11.The principle concerning accrued and vested rights discussed by the Hon'ble Supreme Court in Mayfair Spinning Mills’ case supra also required careful consideration. In the pharmaceutical matters examined therein, the relevant input-tax adjustments had already accrued, been availed of and crystallized during the period when the supplies were taxable, and therefore related to past and closed transactions. The significance of that principle lies in the distinction between a right which has already accrued and been acted upon under the existing statutory regime and a claim which remains subject to the fulfilment of further statutory conditions or future events. The present case, however, concerns input tax relatable to raw material and finished goods which remained in closing stock as on 30.06.2022. The learned Tribunal was, therefore, required to determine whether the entitlement in respect of such stock had already been adjusted, availed of or otherwise crystallized before the exemption became operative, or whether the claim remained dependent upon the subsequent use of the goods and the making of taxable supplies. This distinction was particularly material because the future tax treatment of the output supplies changed by operation of law with effect from 01.07.2022. The question whether the disputed input tax represented a completed and crystallized statutory benefit or an entitlement whose exercise remained subject to future statutory conditions was thus central to the

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controversy. The impugned order does not demonstrate that this distinction was considered or answered. Reliance upon the fact that the input tax had been incurred during a period when fertilizer was taxable, without determining whether the corresponding entitlement had already accrued and crystallized, therefore, did not adequately resolve the issue.

12.The judgment in Cherat Cement’s case supra likewise could not be treated as automatically deciding the controversy, as its principal issue concerned limitation under Section 66 and involved a factual situation in which taxable supplies resumed after an intervening period of exemption. Nevertheless, the authority was material because it required consideration of the statutory consequences flowing from a change in the taxability of supplies and the treatment of input-tax claims arising around such transitional periods. The learned Tribunal was required to examine the authority in its proper statutory context, determine the principle actually laid down therein and then explain whether that principle applied, and to what extent, to the controversy before it. An adjudicating forum is not required to accept every authority cited before it; however, where material authorities bearing directly upon the statutory provisions in controversy are relied upon, the forum is required to consider, distinguish or apply them for stated reasons. A speaking order must disclose the reasoning process by which the material statutory provisions and authorities have been brought to bear upon the facts. Section 24-A of the General Clauses Act, 1897 reinforces this requirement by obliging an authority exercising statutory power to act justly, fairly and reasonably and to give reasons for its order. The requirement is not satisfied by merely reproducing the submissions of the parties and thereafter recording a conclusion. The order must demonstrate that the adjudicating authority has identified the real controversy, considered the material statutory provisions, applied the relevant legal principles and recorded reasons for accepting or rejecting the competing positions. In the present case, the impugned order does not disclose such an exercise.

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The learned Tribunal did not adequately determine: (i) whether and to what extent input tax attributable to the unconsumed closing stock remained admissible after the exemption became operative; (ii) whether the relevant input-tax benefit had already accrued, been availed of or crystallized before 01.07.2022; (iii) whether Section 8(1)(a) applied having regard to the intended future use of the goods; and (iv) whether the statutory requirements of Section 10 were independently fulfilled. These questions went to the very foundation of the respondent's claim. Their absence from the reasoning renders the impugned order deficient as a speaking order and legally unsustainable to the extent under consideration.

13.The same deficiency is apparent in the connected Reference Application concerning Rock Phosphate. The learned Tribunal principally proceeded from the fact that the Rock Phosphate had been imported and cleared before the exemption and relied upon the earlier order passed by this Court in W.P. No.12752 of 2010. Mere importation or clearance before the exemption, however, could not by itself conclude the question of admissibility of the corresponding input tax. It was incumbent upon the Tribunal to examine the precise ratio of the earlier decision and its factual and statutory context, and thereafter determine whether the principle laid down therein actually governed the controversy before it. The Tribunal was further required to determine the intended and actual use of the imported Rock Phosphate, whether it had been consumed in making taxable supplies before the exemption became operative, and, if not, the legal consequence of its remaining available for use after the output supplies became exempt. The applicability of Section 8(1)(a) and the effect of the exemption therefore required an independent determination on the record of the connected case. Reliance upon an earlier decision, without identifying the precise question decided therein and without examining the factual circumstances to which its ratio was directed, could not substitute for such adjudication.

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There is, furthermore, a material discrepancy in the impugned order regarding the date of SRO No.535(I)/2008. The order appears to mention 27.06.2008 as the date of issuance of the SRO, whereas the date appearing from the material placed before us is 11.06.2008. The discrepancy assumes legal significance because the precise date on which the exemption became operative bears directly upon the relationship between the date of import, date of clearance, use or consumption of the imported material and commencement of the exemption. The Tribunal was, therefore, required to verify the notification from the original record and record a clear finding regarding its date and legal effect. A determination resting upon an unverified or incorrect date of the exemption notification cannot safely furnish the foundation for deciding the taxpayer's entitlement to input tax. The learned Tribunal's failure to address these matters further demonstrates that the connected case was not adjudicated upon the complete statutory and factual framework.

When confronted with these deficiencies, learned counsel for the respondent-taxpayer could not satisfactorily explain why the aforesaid material statutory questions, factual aspects and authorities had not been adequately addressed in the impugned order. We are, therefore, of the considered view that the matter requires reconsideration by the learned Tribunal, being the statutory forum entrusted with determination of the factual and mixed questions arising from the claim. We are not inclined, at this stage, to finally determine whether the respondent-taxpayers are entitled to adjustment or refund. The precise treatment of the disputed input tax, the applicability of Sections 7, 8 and 10, the question whether any entitlement had accrued or crystallized before the exemption, the effect of the exemption upon unconsumed stock, and, in the connected matter, the precise date and legal effect of the exemption notification, are all matters which should first be examined and determined by the learned Tribunal upon the basis of the complete record and in accordance with law. No opinion is, therefore, expressed on the

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ultimate merits of the claims, and all such questions are left open for fresh and independent determination by the learned Tribunal.

14.For what has been discussed above, the impugned orders dated 25.09.2025 passed by the learned Appellate Tribunal in both cases are set aside. The matters are remanded to the learned Appellate Tribunal for fresh adjudication in accordance with law, after affording proper opportunity of hearing to both sides. The learned Tribunal shall independently examine the controversy in the light of Sections 7, 8(1)(a) and 10 of the Sales Tax Act, 1990, the factual status and use of the relevant inputs, the question whether any input-tax entitlement had already accrued, been availed of and crystallized, and the applicability and effect of the judgments noticed herein, including the cases of Mayfair Spinning Mills, Attock Cement, Chiltan Ghee Mills and Cherat Cement supra, according to their respective factual and statutory contexts. In the connected matter, the Tribunal shall also examine the precise effect of the earlier order passed in W.P. No.12752 of 2010 and the relevant dates concerning SRO No.535(1)/2008. The learned Appellate Tribunal shall endeavour to decide the matters through reasoned and speaking orders, preferably within a period of sixty days from receipt of a certified copy of this judgment.

Both Reference Applications stand disposed of in the above terms.

15.Office shall send a copy of this judgment under the seal of the Court to the learned Appellate Tribunal in terms of Section 47(5) of the Sales Tax Act, 1990.

(Sultan Tanvir Ahmad) (Muhammad Sajid Mehmood Sethi) Judge Judge

APPROVED FOR REPORTING

Judge Judge

*A.H.S.*