Messrs ARZOO TEXTILE MILLS LTD., FAISALABAD VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2002 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 2451 (2002)

Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss.36, 11, 3, 7, 33, 34, 45 & 3‑‑‑Sales Tax Refund Rules, 1996‑‑ Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑Recovery of amount of tax not levied or short levied or erroneously refunded‑‑Show‑cause notice for recovery of amount refunded alongwith penalty and additional tax on the ground that the same was obtained against fake invoices and sales tax had not been paid on such invoices by the suppliers‑‑‑Validity‑‑‑Complainant had discharged its duty by paying sales tax to the supplier, credit for which was claimed in the monthly sales tax returns and allowed by the Sales Tax Department‑‑‑Suppliers had failed to meet their legal responsibility, by not depositing the sales tax recovered from the complainant‑‑‑Section 3 of the Sales Tax Act, 1990 clearly places the responsibility for payment of sales tax at the prescribed rate on the registered suppliers‑‑ Functionaries of Sales Tax having failed to detect the payment of sales tax by the supplies/registered persons' plausible reason that would come to the mind was that the sales tax returns tiled monthly gave particulars indicating the total tax deposited, without giving the details of the sales transactions party‑wise with names and addresses, tax invoices numbers, value of goods sold and the output tax audit was only after audit was carried out when the records/account books of the parties were physically checked that such evasion came to the light‑‑‑Such lacuna in the procedure laid down by the Central Board of Revenue required to be rectified and Complainant did not appear to be at fault‑‑‑Federal Tax Ombudsman recommended that the Collectorate of Sales Tax should pursue recovery of sales tax from the companies on which legal responsibility lay under S.3 of the Sales Tax Act. 1990. being suppliers, Additional Collector (Adjudication) may examine reconciliation between the yarn consumed and the quantity of goods exported to satisfy himself that yarn was physically transferred from the suppliers account to the complainant's account and the lacuna‑identified in the procedure prescribed for payment of sales tax and claim of adjustment in the monthly sales tax returns be rectified.

Tahir Razzaque, F.C.A. for the Complainant.

Abdul Rasheed Sheikh, Additional Collector Sales Tax for Respondent.

DECISION/FINDINGS

Messrs Arzoo Textile Mills Ltd., Faisalabad, a public company dealing in manufacture and export of textile made ups and fabrics, registered under the category of "manufacturer" and "Exporter" with the Collectorate of Sales Tax, Faisalabad under Registration No.04‑04‑5111 038‑73 has taken exception to show‑cause notice issued to it by the Additional Collector (Adjudication) Faisalabad, on the ground that some Yarn purchased and utilized in the manufacture of exported goods was from Messrs Nusrat Textile Mills Limited, Messrs A.R.R. Corporation, Lahore and Messrs Mutakabbir Textile, Lahore on fake invoices issued by these parties, without supply of any goods.

2. Relevant facts in brief, are that the complainant company purchased yarn from various manufacturers and utilized the same in its manufacture of textile made ups and fabrics which were exported out of the country. Sales tax paid at Rs.47,10,974 on the raw material i.e. yarn purchased was claimed as refund on the exported goods for the period between March, 1997 and May, 1998 and was allowed after verification in terms of Sales Tax Refund Rules, 1996. The Collectorate of Sales Tax and Central Excise, Lahore vide Letters Nos.I&P/ST/34/2000/4822. dated 2‑8‑2000 and No.1&P/ST/92/2000/ 1538, dated 13‑4‑2001 informed the Collector Sales Tax, Faisalabad that the three parties have got themselves registered on the basis of fake documents and issued invoices without supply of any goods. On the basis of this information, the Collector of $ales Tax, Faisalabad made out a contravention case against the complainant.

3. The matter was referred to the Additional Collector (Adjudication) who issued a show‑cause notice to the complainant asking it to explain as to why refund amounting to Rs.47,10,974 paid to them should not be recovered alongwith additional tax and penalties. On receipt of the show‑cause notice, dated 23‑7‑2001, the complainant company has approached this office with the prayer that an appropriate order may be passed to quash the impugned show‑cause notice being totally uncalled for non‑judicial, arbitrary, vague and contrary to the facts and circumstances of the case, and that the Additional Collector (Adjudication), Collectorate of Customs, Sales Tax and Central Excise may be ordered not to pass an order till the disposal of this complaint.

4. In reply it has been submitted by the Collectorate of Sales Tax Faisalabad that no victimization or harassment has been caused to the complainant. A case was made out on the basis of report received from Collector Sales Tax, Lahore vide his letters, dated 13‑4‑2001 and 6‑8‑2001, whereby he had reported the names of registered persons who were involved in the issuance of fake invoices and asked for stoppage of refund/adjustments of their buyers in the Faisalabad collectorate. The complainant‑company had obtained a refund on the basis of these fake invoices from Messrs Nusrat Textile Mills, Lahore Messrs A.R.R. Corporation, Lahore and Messrs Mutakabbir Textile, Lahore, who had paid no Sales Tax to the Department.

5. The Department further submitted that issuance of show‑cause was the requirement under section 11 read with the section 45 of the Sales Tax Act providing an opportunity to the registered person to clarify his position. Recovery notice without show‑cause notice would have been termed as illegal, therefore, recovery of the refund amount could not be made unless adjudged by the forum constituted under the Sales Tax Act. Since the refund of Rs.47,10,974 has been obtained against fake invoices on which sale tax has ,not been paid, the Department initiated the action lawfully against the complainant company. The Department has elaborated further that refund was issued earlier on the basis of available documents produced by the complainant‑company alongwith the claim. At the time of claim of refund of sale tax the complainant undertook that if any discrepancy is detected, they would be responsible for the same at any stage. However, subsequently after intimation from the Collectorate of Sales Tax, Lahore, it came to light that the three persons namely Messrs Nusrat Textile Mills, Lahore, Messrs A.R.R. Corporation, Lahore and Messrs Mutakabbir Textile, Lahore and others have been issuing fake invoices and it is only a paper work without any physical transaction. Since invoices against refund were found to be fake, a contravention report was made out on the basis of which a show‑cause notice has been issued, and refund received on the basis of these invoices is recoverable alongwith an additional tax and penalty as envisaged under sections 33, 34 and 36 of the Act. Goods were exported, but sales tax had not been paid on the raw material purchased from these persons. In terms of section 7 of the Sales Tax Act a registered person can claim input.‑‑tax if the, output tax has been deposited in the Government exchequer by the supplier. Therefore the complainant a registered person claimed refund on the basis of fake invoices.

6. The Department has prayed that the complainant has obtained refund unlawfully on the basis of fake invoices and therefore refund is recoverable alongwith additional tax and penalty under sections 34 and 36 read with section 33(4) of the Act.

7. Mr. Tahir Razzaque, F.C.A. appeared to represent the complainant company while Mr. Abdul Rasheed Sheikh, Additional Collector Sales Tax, Faisalabad represented the department. The learned A.R. raised a preliminary legal objection regarding proceedings initiated under section 36 of the Act. He submitted that section 36(3) of the Act enjoins upon the officer of sales tax. that the order for recovery of erroneously refunded amount must necessarily to be passed within 45 days of the issuance. of the show‑cause notice or within such extended period as may for reasons to be recorded in writing be fixed by the Assessing Officer of sales tax, provided that such extended period shall not exceed 90 days. In this case the show‑cause notice was issued on 23‑7‑2001 and the order was passed on 5‑12‑2001. which was after all most 4‑1/2 months. This order should have been passed within 45 days i.e. by 6‑9‑2001. Even if the period may be considered to have been extended for which no reasons have been recorded in writing, permit the officer of sales tax to pass an order up to 90 days from the date of issuance of show‑cause notice. The order should have therefore been passed if not by 6‑9‑2001, at least by 21‑10‑2001 which was not done. The case was fixed on 7 different dates after issuance of a show‑cause notice on 23‑7‑2001, but was not finalized. In fact the prescribed period of 45 days had already elapsed before the complaint was filed on 12‑9‑2001. This is a typical example of maladministration.

8. Continuing further the learned

A.R. submitted that as tar as the .complainant‑company is concerned, its record clearly shows that its purchases from these three parties included the element of sales tax as borne out by sales tax invoices. The fact remains that the raw material utilized in the exported goods was physically purchased and is fully supported by the documentary evidence right from the gate passes up to various stags of manufacture and final disposal. Yarn was purchased from these very three parties among others in the past years also and the Department had never raised any objection to refund the input tax. In the instant case also refund was issued after proper verification in the light of Sales Tax Refund Rules, 1996, which were applicable at the material time. As far as the complainant‑company is concerned it is not involved in any erroneous claim of refund given by the‑department and proceedings initiated are not called for both in law and on facts.

9. The learned A.R. relied upon the provisions of section 3 of the Act, which read as under:

Section 3 of the Act provides that:‑‑‑

"Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax @ 15% of the value of‑‑

(a) taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him and

(b) goods imported into Pakistan."

10. The A.R. submitted that the Department, therefore, should pursue the recovery from the three companies on which legal responsibility lay for deposit of sales tax, as they were the suppliers of raw material. As far as the complainant‑company is concerned its responsibility is confined only to provide the identity of the parties from whom the yarn was purchased and that the sales tax invoices received from them should show that sales tax had indeed been charged from the complainant company.

11. Mr. Abdul Rasheed Sheikh, Additional Collector Sales Tax, Faisalabad recounted the facts as stated in the Departmental reply.

12. The learned D.R. referred to section 11(2) of the Act where it is laid down that:‑‑‑ Where a person had not paid the tax due on supply made or had made, short input tax credit or refund which is not admissible for reasons other than: those specified in subsection (1); an officer of sales tax shall make an assessment of tax actually payable or determine the amount of tax credit or tax refund which he has unlawfully claimed and shall impose a penalty and charge additional tax in accordance with sections 33 and 34. Concluding his arguments the learned D.R. submitted that the matter being sub judice before the Additional Collector Sales Tax and Central Excise (Adjudication), Faisalabad, the complainant should defend its case there.

13. After perusal of the record and hearing the arguments advanced by both the representatives of the parties to the dispute it is evident that the Department has given two reasons for issuing the show‑cause notice under section 11 read with section 36 of the Act. The first is that the supplier companies namely Messrs Nusrat Textile Mills Limited, Messrs A.R.R. Corporation, Lahore and Messrs Mutakabbir Textile, Lahore have not physically supplied the raw material to the complainant and secondly the three registered persons who made supplies to the complainant did not deposit the sales tax payable thereon, and since sales tax on the raw material had not been deposited into the treasury, its adjustment against the final tax liability was not permissible in view of section 7 of Act. The record produced by the complainant showed that it had been maintained right from the stage of gate passes showing arrival of raw material, its entry in the stock register, various stages of consumption of raw material up to the finished goods stage and the goods exported were reconcilable with these finished goods. Therefore it takes the bottom out of the claim of the Department that yarn had not been supplied to the complainant company. The second reason assigned for the action initiated was that sales tax had not been deposited on the supplies made to the complainant by the suppliers. Sales tax invoice produced showed element of sales tax having been separately charged from the complainant by supplier. This further shows that it is the supplier registered persons who have played fraud not only with the complainant but with the Government treasury as well. The complainant had discharged its duty by paying sales tax to the supplier, credit for which was claimed in the monthly sales tax returns and allowed by the Sales Tax Department. It was the suppliers of yarn who had failed to meet their legal responsibility, by not depositing the sales tax recovered from the complainant. After all section 3 of the Act clearly places the responsibility for payment of sales tax at the prescribed rate on the registered suppliers. The next logical question is as to why did the functionaries in the Collectorate of Sales Tax Lahore fail to detect the payment of sales tax by the three suppliers registered persons? The plausible reason that comes to mind is that the sales tax returns filed monthly give particulars indicating the total tax deposited, without given the details of the sales transactions party‑wise with names and addresses, tax invoices numbers, value of goods sold and the output tax. It is only after audit is carried out when the records/account books of the parties are physically checked that such evasion comes to light. This appears to be a lacuna in the procedure laid down by the Board which requires to be rectified. As far as the complainant, company is concerned it does not appear to be at fault.

14. In view of the above facts and circumstances, it is recommended that:‑‑‑

(i) The Collectorate of Sales Tax, Lahore should pursue recovery of sales tax from three companies on which legal responsibility lay under section 3 of the Act being suppliers of yarn.

(ii) The Additional Collector (Adjudication), Faisalabad may examine reconciliation between the ‑yarn consumed and the quantity of goods exported to satisfy himself that yarn was physically transferred from the suppliers account to the complainant account.

(iii) The lacuna‑identified in paragraph 13 in the procedure prescribed for payment of sales tax and claim of adjustment in the monthly sales tax returns be rectified.

(iv) Compliance be reported within 60 days.

C.M.A./M.A.K./332/FTO

Order accordingly.