Peshawar High Court rules tobacco without industrial processing exempt from federal excise duty

The Peshawar High Court (PHC) has ruled that Federal Excise Duty (FED) cannot be charged on green leaf or hand-stemmed tobacco that has not been processed through a Green Leaf Threshing (GLT) unit. The decision provides significant relief to the tobacco industry by clarifying that such products do not meet the legal definition of "un-manufactured tobacco."

A division bench consisting of Justice Syed Arshad Ali and Justice Muhammad Faheem Wali delivered the judgment while hearing a writ petition from M/s Pak Hills Tobacco Company Pvt Ltd against the Federation of Pakistan and other respondents. Advocate Ishtiaq Ahmad Senior represented the petitioner.

The court observed that because green leaf and hand-stemmed tobacco without GLT processing do not fall under the definition of "un-manufactured tobacco" in Section 2(24 A) of the Federal Excise Act, 2005, they cannot be taxed under Section 3 of the same Act. The bench further clarified that hand-stemming, regardless of whether tools or machinery are used, does not count as a manufacturing process that justifies the imposition of federal excise duty.

As a result of the ruling, the court set aside show-cause notices and orders, directing authorities to immediately release 3,375 kilograms of seized hand-stemmed tobacco, a vehicle, equipment, and records, and to de-seal the company's premises and machinery. The court did allow authorities to keep specific stock for up to 15 days if they have grounds to believe it was processed through a GLT unit, provided they issue a reasoned order after giving the affected party a hearing.

The judgment also struck down compulsory registration notices based on the premise that hand-stemming constitutes manufacturing. However, the court noted that authorities can still start new proceedings if they find evidence that a company is actually operating a GLT unit.

The bench noted that while the FED-related proceedings were set aside, this does not automatically cancel any separate liabilities regarding sales tax, penalties, or confiscation, which must be determined independently. Regarding the specific relief for Pak Hills Tobacco Company, the court ordered the release of the 3,375 kilograms of tobacco and the vehicle, while leaving the question of any applicable sales tax liability open for determination under relevant law.