Messrs SIDDIQSONS WEAVING MILLS (PVT.) LIMITED, KARACH VS SECRETARY. REVENUE DIVISION, ISLAMABAD, 2002 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 2245 (2002)

Customs Act (IV of 1969)‑‑‑‑‑‑‑S. 219‑‑‑Deferment of Import Duty Rules, 1991, R.6‑‑‑S. R. O. 490(1)/85, dated 23‑5‑1985 [as amended by S. R. O. 432(1)/87]‑‑ Establishment of Office of Federal Tax Ombudsman Ordinance, 2000, S.9‑‑‑Facility of deferred payment was availed and Bank guarantees were furnished against such facility‑‑‑Non‑payment of instalments‑‑‑Bank guarantees were not encashed by the Customs Authorities in time but after the period of six years on receipt of information from the Appraising Intelligence Branch‑‑‑Surcharge on principal amount and compound surcharge on accrued surcharge was demanded by the Customs Authorities for late payment‑‑‑Validity‑‑‑Tax liability was covered by Bank guarantees‑‑‑Failure to pay the first instalment should have triggered the alarm bells and action to enforce the guarantees should have been taken immediately‑‑‑Action was actually taken after six years when Appraising Intelligence Branch received the information‑‑For this neglect and abnormal delay the responsibility squarely lay on the Customs Authorities‑‑‑Bank discharged its liability by paying thi guaranteed amount on demand by the Customs‑‑‑No justification existe,' to demand surcharge on the deferred amount and surcharge on surcharge from the assessee or the Bank for failure of the Department to encash the guarantees in time‑‑‑Federal Tax Ombudsman recommended that Central Board of Revenue should direct the Collector of Customs to identify the officials responsible for negligence and take necessary action against them; return Bank guarantee documents to the Bank; direct the Collector of Customs that levy of surcharges as demanded by the Department had no legal validity and the notice issued to the complainants and the Bank be withdrawn/cancelled.

Muhammad Afzal Awan, Advocate.

Ashhad Jawwad, Deputy Collector of Customs.

ORDER

The complaint relates to the huge amounts of various surcharges demanded by the Customs Authorities for delay in encashment of bank guarantees on account of their own negligence that instead of encashing the bank guarantees on the date of expiry i.e. 21‑6‑1995, they claimed the guarantees on 21‑6‑2001. The complainants stated that they had furnished four bank guarantees for Rs.50,31,958 to the Customs for release of machinery imported in 1990‑91 under the Deferment of Import Duty Rules, covering customs duty Rs.38,63,308 and mark‑up Rs.11,68,650 total Rs.50,31,958, under S.R.0.490(1)/85. The repayment schedule prescribed the instalments during the years 1991 to 1995. In case of failure of the importer to pay the guaranteed amount, the respondent could claim it from the bank.

2. The complainants stated that they could not comply with the repayment schedule and the respondent asked the bank on 21‑6‑2001, instead of 11‑6‑1995, to pay the amount of Rs.50,31,958 according to the terms of the guarantee. In the event of the failure of Siddiqsons Weaving Mills (Pvt.) to pay the guaranteed amounts on the due dates as mentioned in the said debentures, the payment shall be duly made by us on a demand in writing by the Collector of Customs. The bank discharged the liability without delay and paid the guaranteed amount after deducting Rs.7,65,686 already paid by the complainants. With this payment the liability was discharged. The Customs Authorities did not return the bank guarantee documents which they were obliged to release immediately on payment of the amount. When the matter was pursued for return of the guarantee documents, the Deputy Collector of Customs gave a notice, dated 28‑8‑2001 to the bank for payment of Rs.62,66,574. A copy of the notice was endorsed to the complainants. ‑

3. The complainants argued that the respondent could not take benefit of its own negligence, the bank had paid to the respondents on demand as per terms and conditions of the bank guarantees, and the guarantees stood discharged and the matter closed. There was no contract between the bank, the respondent and the complainants for any kind of surcharge. The complainants requested that the respondent be directed to return the legal documents to the bank which was its legal obligation.

4. C.B.R. forwarded the comments of the Deputy Collector of Customs, Bank Guarantee Cell, on the complaint. He stated that the complainants had submitted four bank guarantees for Rs.50,31.958 to avail the facility of deferred payment scheme under S.R.O. 490(1)/91. They were required to pay, the duty and surcharge in 8 half‑yearly instalments by June, 1995. After payment of instalment of Rs.7,65,686 no further payment was made. When information was received in the Appraising Intelligence Branch (AIB) that the complainants had failed to make the payment of the principal amount and the surcharge a notice was issued to them as well as to the guarantor bank, on 21‑4‑2001, to pay the principal amount as..well as accrued surcharges in terms of rule 6 (of the Deferment of Import Duty Rules) and Condition No‑4 of the prescribed bank guarantee.

5. The complainants and Rs.7,65,686 had been paid, amount s.44,31,.624 as accrued surcharge made according to the schedule. The complainant facility of deferred payment under S.R.0.490(I)/91 and were bound by the conditions of the Deferment of Import Duty Rules. The matter was reported to the C. B. R., who gave the ruling that the defaulted, amount be recovered from the importers.

6. The deputy Collector added that the \collector had sent two letters asking the complaints in 1992 to furnish bank guarantees on prescribed format, which was not done. The Collectorate also sent six letters to the complaints and the bank during 1994 to 1++7 asking o pay the amount but neither they mad the payment nor submitted prescribed guarantees/debentures, Thus the bank guarantees originally submitted were not in prescribed format and the payment too was not made according to the schedule, the complainant filed to avail the facility of deferred payment under S.R.O.491(I)/91 and were bound by the conditions the deferment of Import Duty Ruled. The matters were reported to the C.B.R., who gave the ruling that the defaulted amount be recovered from the importers.

7. During hearing of the complaint, the learned Advocate representing the complainants stated that bank guarantees filed by the bank on behalf of his clients were filed in terms of S.R.O.432(I)/87 which did not contain the condition of accrued surcharge and compound surcharge under rule 6 and condition 4. The guarantees were issued on 31‑8‑1991. Although S.R.0.490(I)/90, dated 30‑5‑1991 had been issued, yet the guarantees were issued in pursuance of (S.R.0.490(1)/85 amended by) S.R.O. 432(1)/87. In this S.R.O. there was no provision of accrued and compound surcharges. The Department admitted in its letter dated 13‑11‑1992 that the facility of deferred payment under S.R.O. 490(1)/85, dated 23‑5‑1985 had been extended to the complainant. (However, the factual position is that the condition of surcharge was prescribed in this S.R.O. also).

8. The Deputy Collector representing the Department stated that the main reason for not enforcing the bank guarantees was that the guarantees were not on prescribed format. He admitted that despite non payment of instalments and non‑compliance of the demand to furnish right guarantees, the action to enforce the available guarantees was not taken. He further argued that since the guarantees were defective and did not provide for surcharge, their enforcement would have secured the principal amount but would have put in jeopardy the recovery of accumulated surcharge on surcharge as provided in condition (4) of the bank guarantee format. The department accorded priority to secure the bank guarantees in the proper form to include the condition of accrued surcharge and compound surcharge over encashment thereof.

9. The learned Advocate submitted photo copies of decision in Petitions Nos. D‑236, 237, D‑641, 642, D‑880 of 1992, dated 30th August, 2001 in which the High Courts have held that section 219 of Customs Act only empowered the _C.B.R. to make Rules and that the portion of the Rule pertaining to levy and imposition of surcharge was beyond the jurisdiction of the Board under section 219 of the Act.

10. The facts relating to the complaint have been discussed above in considerable detail. There was some confusion about the applicable notification; whether it was S.R.O. 490(1)/85, 432(1)/87 or 490(1)/91. It has been clarified that S.R.0.490(I)/85 as amended by S.R.O. 432(1)/87 was applicable.

11. The arguments that the Department first wanted to get the guarantees on proper format and was keen to secure surcharges besides the principal amount has no force. Clearly the section or the group which released the machinery in the deferred payment facility in the first instance and was required to monitor and ensure the timely payment of instalments had failed to perform its duty. The Bank Guarantee Cell also neglected to take action on the maturity of the guarantees which should either have been enforced or released if the guaranteed amounts had been paid in accordance with the schedule. The importers were required to pay the pre‑determined instalment on due dates. The tax liability was covered by bank guarantees. Failure to pay the first instalment should have triggered the alarm bells and action to enforce the guarantees should have been taken immediately. But the action was actually taken after six years when AIB received the information. For this neglect and abnormal delay the responsibility squarely lies on the Customs Authorities. They could have issued a show‑cause notice at the first default of the importer in tailing to pay the instalment or encashed bank the guarantee(s). This is a case of manifest maladministration.

12. The amounts of duty payable on the import of machinery and surcharge were protected by the bank guarantees .furnished by the complainant. The department should have encashed the guarantees when importer defaulted in payment. The surcharge is payable on the deferred amount and the condition (4) of the bank guarantee provides for the payment of surcharge on the amount of surcharged payable in case the importer requests the Customs Authorities not to take action to recover the dues under sub‑para. (6)(a) of the conditions. However, the operative condition in the bank guarantee format is at paragraph (3) where the bank undertakes to pay deferred amount or the surcharge within 10 days from the date of receipt of demand in the event of default of the importer to pay the instalment. Clearly the bank discharged its liability by paying the guaranteed amount on demand by the Customs. The bank guarantee documents should, therefore, be returned to the bank. There is no justification to demand surcharge on the deferred amount and surcharge on surcharge from the complainants or the bank for failure of the department to encash the guarantees in time.

13. It is recommended that C.B.R. direct the Collector of Customs to:

(i)Identify the official responsible for negligence and take necessary action against them;

(ii)return bank guarantee documents to the bank;

(iii)direct him that levy of surcharges as demanded by the department has no legal validity and the notice issued to the complainants and the bank be withdrawn/cancelled: and

(iv)report compliance within one month.

C.M.A./M.A.K./327/FTOComplaint accepted.