AL SAMREZ ENTERPRISE vs THE FEDERATION OF PAKISTAN

ZAFFAR HUSSAIN MIRZA, J.--The Federal Government of Pakistan, respondent No. 1, had issued a Notification No. S.R.O. 372 (1)/72, dated 8th June, 1972, in exercise of the powers conferred by section 19 of the Customs Act, 1969, exempting certain items of machinery or articles for use with machinery or as component parts or spare parts of the machinery, as defined in the notification and set out in the table given there under, from "so much of the Customs duties liveable thereon as is in excess of 20% ad valorem." Exemption from Sales-tax stood already granted under notification, dated 29th June, 1970, issued under section 7 of the Sales Tax Act, 1951. It is the case of the appellants Al-Samrez Enterprise that on the faith of the said notifications the appellants purchased 100 metric tons of strained copper wire on3rd June, 1977, from Messrs Cloth and Company Limited of Japan which were duly booked on the London Metal Exchange. The crucial point on the factual Plane, according to the case of the appellants is that the contract was confirmed in writing on 7th June, 1977, by means of a memo of sale executed between the parties. On 9th June, 1977, the appellants deposited the sum of Rs.35,000 in the State Bank of Pakistan towards the fees of a Commercial import licence for the import of the said goods, which licence was duly issued on 10th June, 1977, The further facts pleaded by the appellants are that they had instructed Habib Bank Limited on 8th June, 1977, to open an irrevocable letter of credit as payment for the said goods, instructions for which had been given in advance. Since the goods in question were on the free list, the letter of credit was actually opened on 15th June, 1977, which was the last date under the contract. The genesis of the controversy in this appeal goes back to the fact that on 11th June, 1977, respondent No. 1, issued a Notification No. SRO.499(1)./77, which purported to amend the earlier notification in two respects; firstly, the figure prescribing the ceiling for customs duty at 20% was raised to 25% and secondly, a condition was imposed that the exemption would only be available to goods imported against an industrial licence. By yet another notification, dated 4th August, 1977, respondent No. 1 withdrew exemption from sales tax also, although according to the appellants prior to the issuance of said notification the goods had already been shipped in part.

2. The goods arrived at Karachi Port, on 13th September, 1977, but, the Customs Authorities refused to clear the same except on the basis of enhanced duty stated in the subsequent Notification. The appellants protested and claimed that they had acquired a vested right in terms of the un amended notification. As the Customs Authorities rejected the claim of the appellants and persisted in demanding the enhanced duty, appellants challenged the demand in a writ petition in the Sind High Court, which was, however, summarily dismissed by a Division Bench of the Court vide its order, dated 28th September, 1977. The reasons that prevailed with the learned Judges of the Division Bench in dismissing the writ petition of the appellants in limine are summarised in the following extract from the judgment:-- "In the instant case, right if any, which may be said to have accrued to the petitioners, could not have accrued before 10th June, 1977, when the licence applied for the import of goods in question was issued by the petitioners by the CCI&E. The goods admittedly could not have been imported without licence and if the petitioners, in anticipation of the grant of the licence entered into any contract they did so at their own risk and cannot raise superstructure of any right on a contract entered into earlier. In para. 4 of the petition it is alleged that the petitioners had deposited a sum of Rs.35,000 in the State Bank of Pakistan towards fees of Commercial Import licence, on 9-6-1977 as per Annexure 'D'. The said annexure is a challan dated 18th June. 1977 and the amount of Rs.35,000 was in fact deposited in cash in the State Bank of Pakistan on 20th June, 1977. The allegation made in para. 4 of the petition that the amount was deposited on 9th June, 1977, therefore, incorrect. Admittedly, the Letter of Credit was also established on 15th June, 1977 and as such payment of fees for Commercial Licence as well as establishment of Letter of Credit took place after the Notification, dated 11 June, 1977, had already been issued. The only document produced in support of the contention that contract had been entered into between the parties on 7th June, 1977, is a memo of the same date, filed as Annexure 'C' to the petition, which was signed and executed at Karachi, it provides that a Letter of Credit shall be established by the Buyers in favour of the Sellers by the 15th June, 1977, otherwise the Sellers reserve the right to cancel the contract without prejudice to any claim for damages thereby incurred. But it is not understood how a precise and firm date as 15th June, 1977, for establishment of Letter of Credit, could be contemplated by the parties in the circumstances, it cannot be said that the petitioners acquired any vested right even before the issuance of requisite import licence which was granted on 10th June, 1977. The revised notification was issued on the very next day and it was well within the power of the petitioners to have stopped the import of goods if they found that revised duty did not suit them. The petitioners opened the got, requisite Letter of Credit, on 15-6-1977, knowing full well that the rate of duty stood revised and, therefore, they had chosen to import the goods in the wake of the revised decision of the Government and it is too late in the day to challenge the imposition of import duty after the arrival of the goods. Section 30 of the Customs Act provides that value of any rate of duty applicable to any imported goods shall be the value and the rate of duty in force as on the date on which a Bill of- Entry is presented under section 79 of the Customs Act, and, therefore, no exemption can be taken to the imposition of duty as now claimed by the Customs Authorities."

3. It will be observed that the main point on which the Division Bench rejected the case of the appellants was the date on which they had paid the licence fees of Rs.35,000 in the State Bank of Pakistan. But as he appellants discovered an error in presenting documentary evidence in support of their averment in the writ petition that the licence fees had been paid on 9th June, 1977, they filedth a review application along with which they produced copy of the correct challan showing the deposit of licence fees by the appellants on 9th June, 1977. It was explained that the document earlier produced, dated 18 June, 1977, pertained to the payment in relation to another consignment. However, the Division Bench dismissed the review application by order, dated 1st November, 1977, on the view that this new evidence did not bring about a material change in the fabric of the main order passed by the Court which proceeded on several other grounds.

4. Being aggrieved by the aforesaid order passed by the High Court, the appellants came up before this Court and leave was granted to examine whether the High Court was right in reaching the conclusion on the material placed before it, that no authentic document was produced to establish that in fact a binding contract had taken place between the foreign principals and the appellants before the issue of the impugned notification on 11th June, 1977. In this connection notice was taken of the copy of the contract between the parties which was placed before the High Court (page 38 of the printed paper book) as well as the fact that the appellants had opened a Letter of Credit and obtained the import licence before the crucial date, namely, 11th June, 1977. On the basis of this evidence the question for consideration was whether the impugned notification having been issued after the contract between the appellants and Japanese Exporter, could be given retrospective effect and enhanced customs duty and sales tax on goods booked before the said notification could be legally demanded.

5. It was contended by Mr. A.K. Brohi, learned counsel appearing for the appellants, that the appellants, being induced by the notification that 8th June, 1972, granting exemption from payment of customs duty and sales tax as stated earlier had entered into a contract which created a legal obligation on them and, therefore, a vested right to enjoy the exemption had accrued in their favour, which could not be destroyed by the Government withdrawing the benefits of the exemption by a subsequent notification. On the other hand the main reliance by Mr. Muzaffar Hassan, learned counsel for the respondents was on section 30 of the Customs Act, 1969. He supported the impugned order on the said provision of law and argued that the customs authorities were under a legal duty to give effect to the changed rate of duty applicable on the imported goods which was in force when the bill of entry was presented by the appellants. Section 30 of the Customs Act, 1969, reads as follows:-- "The value of and the rate of duty applicable to, any imported goods shall be the value and the rate of duty in force--

(a) in the case of goods cleared for home consumption under section 79, on the date on which a bill of entry -is presented under that section; and

(b) in the case of goods cleared from a warehouse under section 104, on the date on which a bill of entry for clearance of such goods is presented under that section: Provided that ...............................

Provided further that ---------------------------"

6. Now in view of the plain language of- section 30 the rate of duty applicable to the imported goods no doubt would be the one which is operative on the date when the bill of entry is presented for the clearance of the goods under section 79. But the important point to note is that there is no question before us as to what was the rate of duty applicable to the category of goods on the day of their arrival. The crucial point is whether the appellants were entitled to the exemption from the payment of such duty as was in force on that date. In this regard two provisions of the Customs Act have an important bearing which have to be kept in mind. Section 18 of the Customs Act, which is the charging section, as it stood at the relevant time provided for the levy of customs duties "at such rates as may be prescribed under the Tariff Act, 1934 (XXXII of 1934), or under any other law for the time being in force," inter alia, on the goods imported. On the other hand section 19 of theth Customs Act, vests the Federal Government with the general power to exempt from customs duties, which reads as under:-- "The Federal Government, subject to such conditions, limitations or restrictions if any, as it thinks fit to impose, may, by notification in the official Gazette, exempt any goods imported into, or exported from, Pakistan or into or from any specified port or station or area therein, from the whole or any part of the customs-duties chargeable thereon."

The exemption from customs duties on the goods of the type with which we are concerned in this case was first granted to the extent mentioned therein by notification, dated 8th June, 1972, in exercise of this power. It is in assertion of the same power by virtue of section 21 of the General Clauses Act, that the Government partly withdrew the exemption and modified the earlier notification on 11th June, 1977. The effect of exemption from the payment of a tax or duty levied by a fiscal statute in exercise of statutory power must be understood for a proper appreciation of the controversy in this case. In this connection it will be instructive to refer to a passage defining the nature and purpose of exemption in the Corpus Juris Secundum, 1954 Edition, Volume 84, para. 215, page 411; "Exemption, as applied to taxation, presupposes a liability, and is properly applied only to a grant of immunity to persons or property which otherwise would have been liable to assessment, and exists only by virtue of constitutional or statutory provisions.

Exemption, as applied to taxation, is freedom from the burden of enforced contribution to the expenses and maintenance of Government, and may include freedom from the burden of taxes accrued and unpaid as well as from the burden of future levies. The term, as here used, presupposes a liability, and is properly applied only to a grant of immunity to persons or property which otherwise would have been liable to assessment, and, thus, is distinguishable from immunity from taxation which exists apart from any exempting statute or constitutional provision, or from abatement whereby the property is relieved of its share of the burden of taxation after the assessm ent has been made and the tax levied, or from a deduction which is merely a subtraction.

Exemptions from taxation are regarded not only as in derogation of sovereign authority, but of common right as well, and exist only by virtue of constitutional or statutory provisions. Thus, the right to immunity is not inherent in the persons or property exempted, but is a matter of grace and not of right, and exists only by grant. An exemption may arise from a contract which has received legislative sanction, and such an exemption will be governed by the terms of the contract, and be subject to the rules of law applicable to contracts. Where an exemption is granted by statute, whether or not a particular person or particular property is entitled to the immunity depends on the facts and circumstances of the case."

From the above it would be seen that the concept of exemption presupposes a liability and is a grant or immunity from the payment of duty which would otherwise be attracted in respect of the goods. It has accordingly been held that "non-liability" and "exemption" are different concepts, the first connotes that the subject was never in the tax net, while the latter connotes that it was, but has been permitted to escape. Re Sharpe, Queensland Trustees, Ltd. v. Commissioner of Stamp Duties, 1944 St. R. Qd. 26 at page 33.

7. Accordingly it would appear that the mere grant of exemption under section 19 does not have the effect of modifying or altering that levy of duty under section 18 which continues to be in force.

But the only legal effect is that the liability for the payment of duty that accrues under section 18 on the importation of dutiable goods is wiped off to the extent exempted. The two sections, therefore, clearly operate independently and the exercise of power under section 19, is distinct in character and scope, so that it cannot have the effect of nullifying the statutory provisions contained in section 18 whereby the charge is created by the statute itself. In this context it is not difficult to understand that section 30 has no material bearing on the controversy before us and its provisions would not be violated either way on the determination of question whether the exemption from the payment of duty, earlier granted was applicable to the case of the appellants or not. This brings us to the main question whether in the circumstances of this case the appellants had acquired vested right to the exemption in terms of the earlier notification and whether they were legally liable to be deprived of the same by virtue of the subsequent revised notification. The question whether the grant of exemption from tax creates a right which once having been vested in the subject, cannot be destroyed by a fresh exercise of the same power by way of modification, was first considered by this Court in Civil Appeal No. 3-P of 1965, Government of Pakistan and another v.

Messrs Mardan Industries Limited and another (unreported). It was held that the 'power to take advantage of notification can be termed as right'. In Collector of Central Excise and Land Customs v. Azizuddin Industries Ltd. PLD 1970 SC 439, which was a case of withdrawal of exemption from the payment of excise duty under the Central Excises and Salt Act, 1944, the following dictum was laid down:-- "It is a settled rule that an executive authority cannot in exercise of the rule-making power or the power to amend, vary or rescind an earlier order, take away the rights vested in the citizens by law."

The conclusion of the Court in respect of this legal question was expressed in the following words:-- "The respondent had acquired a vested right of exemption from the levy of excise duty on all the goods produced or manufactured by it for a period of four years under the Notifications of the Central Government referred to above. 'That vested right could not, therefore, be taken away by an executive action. The Notification, dated the 28th February, 1964, being completely destructive of the right vested in the respondent-company was in this view without lawful authority and of no legal effect."

The subsequent notification impugned in this case was issued in exercise of statutory power and has the force of a statutory instrument. Accordingly the Rules of a statutory construction are attracted to the interpretation and determination of its legal effect. It is well-settled that an enactment which prejudicially affected vested rights or the legality of past transactions, or impairs contracts cannot be given retrospective operation. Thus, Maxwell's Interpretation of Statutes, 1962 Edition at page 206 observed: "Every statute, it has been said, which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect of transactions or considerations already past, must be presumed, out of respect to the legislature, to be intended not to have a retrospective operation."

The principle of law enunciated above has been recognised in Corpus Juris of this country and also statutorily in section 6 of the General Clauses Act. For instances of the application of this rule of interpretation reference may be made to In re : March Mander v. Harris (1884) 27 Ch. D. 166 and Jones v. Ogle (1872) L.R. 8 Ch. A.

192. We are, therefore, clearly of the opinion that if a binding contract was concluded between the appellants and the foreign exporter or steps were taken by the appellants creating a vested right to the then existing notification granting exemption, the same could not be taken away and destroyed in modification of the earlier one, on the ground that under section 21 of the General Clauses Act, the Government could exercise the power of modification. The question before us is not whether the second notification was ultra vires the powers of the Government but whether the second notification would be applicable to the case of the appellants resulting in taking away the exemption already granted.

8. The next question is whether the appellants on the facts of the present case had acquired a vested right to avail of the exemption provided for in the earlier notification. In this behalf the important facts established on the record are that the contract for the purchase of goods between the appellants and the foreign exporter was concluded on 7th June, 1977, as evidenced by memo of even date placed on the record page 38 of the printed record. One of the terms of the contract which has material bearing on the question in consideration is ac follows: "An irrevocable letter of credit shall be established by the Buyers in favour of the Sellers by 15-6- 1977 days after the date of Memo, otherwise the Sellers reserve the right to cancel this contract without prejudice and claim for damages thereby incurred."

In pursuance of this contract the appellants instructed their bankers, Messrs Habib Bank Limited, Foreign Exchange, Karachi, on 8th June, 1977, as evidenced by document on page 43 of the printed record. The fees for import of goods and opening of Letter of Credit were deposited with the Chief Controller of Imports and Exports on 10th June, 1977 (page 41 of the printed record). This document shows that the item under which the goods were being imported was on the Free List. All these facts which occurred prior to the date of the amended notification issued on 11th June, 1977, clearly established that the appellants had acquired a vested right to the exemptions under the prior notification applicable at that time. These acts including the contractual commitments made by them were done on the assurance contained in the prior notification extending the exemption from the payment of duty. Indeed it is well-settled that tax exemptions are founded on public policy such as the encouragement of manufacturing and other industries or trades. They are granted on the theory that they will benefit the public generally or are awarded as compensation for services rendered in the performance of some function deemed socially desirable. Therefore, the exemption notification is basically addressed to public at large or in any case to prospective importers. It will be inequitable and unjust to deprive a person who acts upon such assurance of the right to exemption and expose him to unforeseen loss in the business transaction by suddenly withdrawing .The exemption after he has made legal commitments. It is in this perspective that a right is created in his favour and a subsequent withdrawal of exemption cannot be given retrospective operation by an executive act to destroy this right. The High Court in its review order did not doubt the genuineness of the assertion made by the appellants that the fee for opening the Letter of Credit was deposited by them on 10th June, 1977, but gave no importance to this fact on the assumption that an import licence was necessary. The item in question being on the free list it was not necessary to obtain an import licence and it was only sufficient to deposit fees for opening the Letter of Credit. Therefore, the fact that the Letters of Credit were opened on 15th June, 1977, is of no significance but in any case the explanation for delay is contained in the letter of the Habib Bank on record. The main ground that prevailed with the High Court to hold that the revised notification which was in force on the date when the Bill of Entry was presented was that under section 30 of the Customs Act the rate of duty applicable with reference to the date of the Bill of Entry was chargeable. However, as discussed above the particular rate of duty was in force is not relevant to the controversy but whether exemption from this rate could be availed by the appellants. Clearly in respect of an item on the free list an importer could make binding and irrevocable commitments with a foreign supplier without obtaining an import licence. We, therefore, do not agree with the view taken by the learned Judges of the High Court that no vested right was created or that the transaction is open to doubt as fraudulent as an attempt to evade the payment of duty. As already observed retrospective operation cannot be given to executive orders so as to destroy contractual rights and obligation H already accrued. In the result this appeal succeeds and the constitutional petition of the appellants is accepted. The appeal is allowed with no order as to costs. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.