Messrs MASSECO VS SECRETARY, REVENUE DIVISION, KARACHI

2002 P T D 2237

[Federal Tax Ombudsman]

Before Justice (Retd. Teem Akhtar, Federal Tax Ombudsman

Messrs MASSECO

Versus

SECRETARY, REVENUE DIVISION, KARACHI

Complaint No.C‑1473‑K of 2001, decided/on 23rd January, 2002..

Sales taX Act (VII of1990)‑‑‑‑‑Ss. 6, 7, 3, 2(44), 33(2)(7), 34 & 36‑‑‑C.B.R. Circular No.9‑S dated 2‑8‑1997‑‑‑S.R.O. 800(1)/87‑‑‑S.R.O. 1195(1)/90‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑ Time and manner of payment‑‑‑Storage tank was developed and temporarily installed for six months for storage of chemicals‑‑‑Invoice showed that tank was a sample and not for sale‑‑‑Sample was rejected and deal was not finalized‑‑‑Tank was subsequently sold to another buyer after one year at less than the cost price and sales tax was paid thereon‑‑‑Department demanded sales tax, additional tax and penalties' after a period of three years without considering the tax already paid on the basis of invoice made for sample and not for sale‑‑‑Validity‑‑‑Sale of tank within the meaning of taxable supply of the storage tank under the Sales Tax Act, 1990 took place when the storage tank was supplied and sales tax was paid‑‑‑No justification existed to charge sales tax at a value higher than the actual price or to demand additional tax and penalty as the tax was paid on the day of sale and the delay in the adjudication process was neither relevant nor attributable to the complainant‑‑‑Order passed by the Department was declared to be arbitrary, unjust and based on irrelevant grounds which had no legal validity‑‑‑Federal Tax Ombudsman recommended that Central Board of Revenue set aside order passed by the Deputy Collector (Adjudication‑III), that directions should be issued to the Collector of Sales Tax to finalize the assessment on the basis of transaction value of the storage tank as on 1‑12‑1999 when the t able supply actually took place.

Khushnooa d A. Khan, Attorney for the Complainant.

Imtiaz Ahmad Shaikh, Deputy Collector of Sales Tax (East), Karachi.

ORDER

The complaint is directed against the order in original dated 21‑5‑2001 issued by the Deputy Collector of Sales Tax (West) requiring the complainant to pay sales tax, additional tax and penalties without any direction about adjustment of tax of Rs.40,800 paid in December, 1999. The complainant is a retired Commodore of Pakistan Navy, highly qualified in marine engineering and shipbuilding. His company developed a storage tank of international standards to store chemicals and installed it in the premises of Caltex for six months testing. This was done under a sales tax invoice which clearly mentioned that the Sample was not for sale. The sample tank was rejected and eventually sold to a buyer at the price of Rs.312,800 and sales tax amounting to Rs.40,800 was deposited on 1‑12‑1999.

2. In 1998 an Audit Officer of the Directorate‑General Audit and Evaluation, Revenue Receipt, visited the complainant's premises and reported about the manufacture and sale of a tank of Fiber Glass of 10,000 Gallons through sales tax invoice, dated 30‑4‑1998 but tax not paid during month of April, 1998. This act was held in contravention of the provisions of sections 2(44) and 6(2) of the Sales Tax Act. After several hearings a one‑sided order was passed requiring the complainant to pay the sales tax under section 36, additional tax under section 34 and penalties under sections 33(2) and 33(7) of the Sales Tax Act after a period of three years without considering the tax (of Rs.40,800) already paid and the facts submitted by the complainant.

3. According to the complainant the first part of the complaint was that the audit observation was communicated by the Audit Officer on 17‑9‑1998, but the demand notice was issued on 16‑4‑1999 after 8 months without issuing any show‑cause notice. After 320 days a show‑cause notice was issued on 4‑8‑1999 and the order‑in‑original dated 21‑5‑2001 was received by the complainant on 3‑7‑2001 i.e. 977 days after the issuance of audit observation and 766 days after the issuance of show‑cause notice. Hearings were fixed on five dates from 12‑8‑1999 to 8‑9‑2000 and the Sales Tax Department was demanding penalties and additional tax which had mostly arisen from prolonged delays in processing of the case and passing of the order. The second paragraph of section 36(3) provides that the order should be made without 45 days of issuance of show‑cause notice and the period in no case should exceed 90 days.

4. In the second part, t e complainant has questioned the jurisdiction of the Audit Officer. According to him under section 25 of the Sales Tax Act only Sales Tax Officer can ask to produce records and documents. The appointment of the officer is made under section 30 of the Sales Tax Act where there is no indication for appointment of DGRRA's Auditor as a Sales Tax Officer. The Circular No.9‑S dated 2‑8‑1997 issued by the CBR is not a part of the Act. SRO 800(1)/87 referred to in the circular too has been superseded by SRO 1195(1)/90 which provides. for the audit of the Government Departments. It authorises the Auditor‑General of Pakistan to audit the receipts of the Central Government and DGRA staff has no legal authority to visit the offices of sales taxpayers and audit their records. The complainant requested to call for and examine the record of the case, set aside the impugned order, and grant relief.

5. The Collector (Adjudication), responding to the complaint stated that the case was reported by the staff of Revenue Receipts Audit and submitted to the Collectorate of Sales Tax. Show‑cause notice was issued on 4‑8‑1999 and hearings were fixed for 12‑8‑1999, 23‑12‑1999

and 19-1-2002 but the case was not decided. Consequent on the establishment of Adjudication Collectorate effective from 1‑7‑2000, the case file was transferred to the Adjudicating Officer who fixed hearings on 22-8-2000 and 8‑9‑2000 but no one appeared from the Revenue receipt audit and the Collectorate side to represent the case. The adjudicating Officer decided the case according to the provisions of law. Under section 46 of the Sales Tax Act the complainant had the option to appeal before the Appellate Tribunal for redress of grievance.

6. The complaint was also referred to the Collector of Sales Tax for comments. She replied that 8iere was no provision in sales tax law to dl goods as sample without payment of tax. Thus the complainant contravened the provisions of sections 3, 6 and 7 of the Sales Tax Act.

7. During the hearing of the complaint Mr. Khushnood A. Khan, the authorised representative of the complainant, reiterated the arguments Cat forward in the complaint and emphasized that DGRRA official was not authorized to enter the premises, visit offices of sales taxpayers and audit their record. The audit staff lacked jurisdiction and acted beyond his authority. The audit officials were authorised to audit of the record of offices of federal Taxes only.

8. With regard to the facts of the case, he stated, a sample tank was erected and temporary installed for six months in the premises of Messrs Caltex. There was no prescribed procedure for temporary installation of a manufactured item in the Sales Tax Act. However, for transparency sake the complainant prepared an invoice dated 30‑4‑1998 Clearly describing the fact that it was a sample not for sale. No other document or system was prescribed. The sample was rejected and the deal with not finalised. The storage tank being a unique item could not be shifted immediately and another buyer was not readily available. It took one year before the buyer could be persuaded to purchase the tank at less than cost price. The same took place on 1‑12‑1999 and an invoice prepared the same day and sales tax was paid.

9. On the basis of audit observation, dated 17‑9‑1998, demand notice was issued on 16‑4‑1999 for Rs.80,000 without determining the slue and calculating the tax While the show‑cause notice was issued on 13‑1999. He 4rgued that the Adjudicating Officer did not take into consideration the facts that the Sale Tax Officials acted against law, he did not examine the payment nor the period prescribed for decision and Voted for3 7 months before taking a decision. He added that sales tax was livable on sale and not for sample not for sale. The final sale was in fact a distress sale. The intention of the complainant was entirely bona, fide and documents were prepared both at the time of installation of the sample as well as the final sale. The valuation of the tank by the officials was without any basis. On one of the hearings before the Adjudication Officer, computerised calculation sheet was submitted. The actual cost incurred was 8.3,89,000, but the distress sale price was Rs.2,72,000 on which sales tax of Rs.40,000 had been paid.

10. This is a unique case where the manufacturer, developed a storage tank designed to store chemicals. The storage tanks are not manufactured on the assembly line or in mass production. These are specially designed for storage of specific chemicals. In this case there was not even a proper order or contract for supply of storage tank. It was a first time venture required to be tested before approval and sale.. It could not be manufactured and then shifted to premises for testing for a period of 6 months. It must have been assembled and erected in the premises of Caltex. The manufacturer prepared an invoice dated 13‑4‑1998 for a sample not for sale for the sake of' transparency. Eventually Caltex did not approve it and the sale did not materialise. It was subsequently sold to another party as a distress sale at a low price.

11. On the basis of this invoice the Revenue Receipt Audit reported against the complainant and eventually a show‑cause notice was issued. Clearly the sale of tank within the meaning of taxable supply of the storage tank under the Sales Tax Act took place when the storage tank was supplied on 1‑12‑1999 and sales tax amounting to the sum of Rs.40,800 was paid.. There is no justification to charge sales tax at value higher than the actual price or to demand additional tax and penalty as the tax was paid on the day of sale and the delays in the adjudication process are neither relevant nor attributable to the complainant.

12. The order passed by the Deputy Collector (Adjudication‑III) is arbitrary, unjust, based on irrelevant grounds and has no legal validity. It is recommended that:‑‑

(i) CBR set aside order passed by the Deputy Collector (Adjudication‑III) and

(ii) direct the Collector of Sales Tax to finalise the assessment on the basis of transaction value of the storage tank on 1‑12‑1999 when the taxable supply actually took place.

C. M. A. /M‑. A. K. /337/FTO Order accordingly.