UNITED FINISHING MILLS LIMITED, FAISALABAD VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2003 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 2057 (2003)

Customs Act, (IV of 1969)---

----S. 18---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)(i)(a)---S.R.O. 1050(I)/95-Goods dutiable---Levy of regulatory duty---Legality of---Release of goods on interim orders of High Court against Bank guarantee--High Court declared the imposition of regulatory duty as unlawful---Supreme Court accepted the appeals of the Department after a lapse of two years and declared the imposition of regulatory duty as lawful---Notice for payment of amount in terms of lapsed guarantees alongwith compensation-- Complainant contended that Supreme Court judgment setting aside the High Court's judgment did not revive the liability of the bank or the complainant to make payments in terms of the lapsed bank guarantees-- Validity--Customs authorities were responsible to demand payment and press for recovery of customs duty and sales tax when the decision was taken in their favour---Noh-enforcement of guarantees suited the complainant as well as the Bank as the customs authorities did not pursue the recovery of duty and taxes due to collusion or neglect---When appeals of both the sides were decided by the Supreme Court maintaining the levy of the customs duty, sales tax and the regulatory duty, it was the responsibility of the Customs Authorities to effect recovery and it was also obligatory on the part of the Bank to fulfil its liabilities and meet the conditions of the guarantee---Inaction and inefficiency on the part of the customs officials in not recovering the dues, could not be overlooked or condoned---Contention that the Bank was absolved of the responsibility of paying dues, for which they had submitted the guarantees and encashment notices were first issued on 5-8-1996 and subsequently in 1999, 2001 and 2002, was not accepted---Claim that bank, guarantees furnished by the complainant had lost validity was not established---Notice issued was not accepted being illegal, improper, of no legal effect---Complaint lacked merit and was rejected by the Federal Tax Ombudsman.

Riaz Hussain Naqvi, Consultant.

Ashhad Jawad, Deputy Collector of Customs (Appraisement).

FINDINGS/DECISION

Messrs United Finishing Mills Limited, Faisalabad, have complained against the Customs authorities for issuing notices to Messrs Saudi Pak Commercial Bank Ltd., Faisalabad, to pay the guaranteed amounts of the lapsed guaranteed alongwith compensation @ 20% per annum. The Complainants have stated that they filed four writ petitions before the Lahore-High Court challenging the imposition of regulatory duty under S.R.O. 1050(I)/95 on goods imported by them and the High Court passed interim orders for release of the goods against bank guarantees. They furnished three bank guarantees, dated 8-2-1996 and another three guarantees, dated 13-2-1996 issued by Prudential Commercial Bank Limited (now Saudi Pak Commercial Bank Limited), Faisalabad. The Lahore High Court, vide judgment, dated 28-8-1996, declared the imposition of regulatory duty as unlawful. The judgment had the legal effect of discharging both the Bank and the Complainants of their liabilities under the guarantees; and the guarantees, therefore, automatically lapsed on 28-8-1996.

2. The Complainants stated that the Supreme Court accepted the respondent's appeals after a lapse of two years and declared the imposition of regulatory duty as lawful. Pursuant to this decision, the Deputy Collector of Customs (Appraisement) directed the Saudi Pak Commercial Bank Limited to pay the amount of Rs.83,34,000 in terms of the lapsed guarantees alongwith compensation as 20% per annum failing which he threatened to initiate punitive proceedings against the Bank. He 'has been continuously pressurizing the Bank as well as the Complainants to make the said payment. Subsequently the Customs authorities have stopped accepting their guarantees on the Complainant's behalf.

3. They stated that the Bank had provided guarantees in terms of the interim orders passed by the Lahore High Court pending the decisions in the writ petitions which were decided in favour of the Complainants. Therefore, the bank guarantees stood discharged and the Bank as well as the Complainants stood relieved of their obligations under the guarantees. The bank guarantee ceased to exist as legally enforceable documents with effect from the date of High Court's decision i.e. 28-8-1996. The subsequent Supreme Court judgment of 1999 setting aside the High Court's judgment did not revive the liability of the Bank or the Complainants make payments in terms of the lapsed bank guarantees.

4. The Complainants further stated that they had requested the Member (Customs), vide letter, dated 13-9-2002, to declare the encashment notice, dated 14-6-2002 as illegal, improper, and of no legal effect, to restrain the Deputy Collector of Customs from pressurizing the Bank as well as the Complainants to make the payments on the lapsed bank guarantees, and to recall punitive proceedings against the Saudi Pak Commercial Bank for non-payment of dues. However, the Member (Customs) did not take any action despite reminders, dated 27-9-2002, 1-11-2002 and 29-11-2002. They stated that the aforesaid actions amounted to maladministration as defined in section 2(3)(i)(a) of the Establishment of the Office of the Federal Tax Ombudsman Ordinance, 2000. They requested that the encashment notice and subsequent actions be declared as illegal, improper, of no legal effect, and appropriate relief may be granted to them.

5. The Deputy Collector of Customs (Appraisement) replied to the complaint that the Complainants had claimed exemption of customs duty, regulatory duty and sales tax on import of four consignments of textile machinery. They were asked to pay the customs duty and sales tax at concessionary rates and regulatory duty in full. They filed writ petitions in the High Court and the Court, vide its interim order, dated 8-1-1996, ordered submissions of bank guarantees for customs duty, indemnity bond for sales tax, and posted-dated cheque for regulatory duty in one case, and in three other petitions orders for release of the consignments against bank guarantees for the customs duty, sales tax and the regulatory duty. One condition of the bank guarantees was that, after six months, the Bank would pay the guaranteed amount within seven days of the expiry of the Constitutional period of six months. Since the importers/guarantors failed to provide a decision in their favour, notices for encashment of bank guarantees were issued to the guarantor Bank on 5-8-1996.

6. The Deputy Collector stated that the reply to this notice the Complainants, vide letter, dated 13-8-1996, forwarded a copy, of their Counsel's letter, dated 11-8-1996, that they were moving an application for stay order. Since there was no fresh specific order for stay of recovery, the Bank was bound to pay the guaranteed amounts of customs duty, sales tax, and regulatory duty on the receipt of the encashment notice, dated 5-8-1996. Despite the lapse of more than six years neither the importers nor the Bank have paid, the guaranteed amount. Therefore, another encashment notice was issued to the Bank on 14-6-2002. In reply, the importers, vide letter dated 22-6-2002; agreed to make the payment of Rs.43,50,000 instead of the demanded amount of Rs.83,34,000 claiming some calculation difference. The Collectorate kept the encashment of two bank guarantees in abeyance and asked the Bank and importers, vide its notice, dated 25-6-2002, to pay the admitted amount of Rs.43,50,000 alongwith 20% compensation subject to subsequent calculation reconciliation. They did not pay the amount on one pretext or another. The Complainants have influenced the Bank not to pay the guaranteed amount. Now they have approached the Federal Tax Ombudsman to hold the Government money by twisting the facts.

7. The Deputy Collector stated that the High Court judgment, dated 28-8-1996 was only for regulatory duty, it was challenged in the Supreme Court and was admitted for hearing, and thus the implementation of the High Court's judgment was kept in abeyance. The Complainant's contention that the bank guarantees had automatically lapsed was not correct because the guarantees covered regulatory duty, customs duty and sales tax and the notice for encashment was issued on 5-8-1996 within the validity period of the guarantees. The Supreme Court allowed the Department's appeal in respect of the regulatory duty vide judgment, dated 12-1-1999 declaring that the imposition of the regulatory duty was lawful and could be recovered from the importers. The importers were required to pay the regulatory duty secured through the post-dated cheques arid the bank guarantees. They failed to pay the regulatory duty and also withheld payment of customs duty and sales tax without any legal justification. The demand notices issued by the respondents were legal and in accordance with the conditions of the guarantees.

8. The Deputy Collector stated that since the Bank failed to honour its commitment, it was the legal right of the customs not to accept its fresh guarantees. The Complainants had accepted in their letter; dated 22-6-2002 that the bank guarantees were for customs duty only. The encashment notices were issued on 5-8-1996 and there was no question of expiry of the-guarantees. When the Supreme Court decided the Department's appeal in 1999; another notice was issued on 2-6-1999 followed by notices, dated 26-3-2001, 21-12-2001, 16-6-2002 and 26-6-2002. He reiterated that the Complainants have repeatedly given the impression that the bank guarantees were for regulatory duty only whereas they covered customs duty, sales tax and regulatory duty. He argued that the guarantees remained alive and the customs authorities had the right to take action to recover the dues. He requested that the Complainants/Bank be directed to comply with the encashment notices which were legal and issued with lawful authority and they be directed to pay the outstanding dues alongwith 20% per annum compensation.

9. The Advocate representing the complainants submitted a rejoinder, dated 31-3-2003 stating that it was correct that the High Court passed interim orders for release of consignments against bank guarantees for the disputed amounts of customs duty, sales tax and regulatory duty. It was also correct that encashment notices for three bank guarantees were issued on 5-8-1996. He stated that the High Court had issued order, dated 21-8-1996 staying recovery till the decision of the writ petition provided the petitioners kept the guarantees alive. Since the guarantees were alive till 12-8-1997, the encashment notice was stayed. The complainant's writ petition was decided by the High Court vide judgment, dated 28-8-1996. No revised encashment notice was received by the Complainants or the Bank in terms of High Court's decision between 28-8-1996 till 12-8-1997 when the bank guarantees expired. He argued that the bank guarantees ceased to exist as legally enforceable instrument with effect from 13-8-1997 and the subsequent decision of the Supreme Court did not have the effect of reviving the liability of the Bank or the Complainants in terms of expired bank guarantees. He requested that the encashment notices and actions pursuant thereto be declared as illegal, improper, and of no legal effect.

10. During the hearing of the, complaint the learned consultant, representing the Complainants, stated that the bank guarantees were issued don 8-2-1996 and were valid up to 8-8-1996. In the last paragraph of the guarantees, it was stipulated that they would be valid up to 7-8-1997. The stay order expired on 7-8-1996 but the Department issued a notice on 5-8-1996 in respect of the three bank guarantees. The importers again approached the High Court who issued a new stay order that the encashment of bank guarantees was stopped provided the petitioners kept the guarantees alive till the decision of their petition. The Department has denied the existence of the second stay order and they have been relying on the notice they issued on 5-8-1996.

11. The learned consultant stated that the High Court passed order on 28-8-1996 and held that customs duty and sales tax were leviable on the goods but regulatory duty was not leviable, The Department went in appeal to the Supreme Court which was decided vide order, dated 12-1-1999 that regulatory duty was also leviable on the goods. Pursuant to the Supreme Court's order, the Department issued a fresh recovery notice, dated 14-6-2002 for three bank guarantees but this notice was in respect of six bank guarantees.

12. The learned consultant argued that in terms of the High Court's second stay order, the bank guarantees were valid till the decision given the by High Court, which was announced on 28-8-1996, and consequently the validity of the bank guarantees expired. He stated that he agreed that the bank guarantees were alive till 7-8-1997, but thereafter they ceased to be valid documents and the encashment notice, dated 14,6-2002 was not enforceable. In terms of the bank guarantees and also factually the notice was time-barred. However, the Department could take recourse to other legal avenues for recovery of duty and taxes as prescribed in the law.

13. The Deputy Collector of Customs responded that when the notice was first issued on 5-8-1996, the bank guarantees were valid and the Department's claim for recovery of dues was established. He contended that the guarantees remained valid till such, time the guarantor made that payment. The first notice was issued to the Bank, which had issued the guarantees, and the subsequent notices had also been endorsed to the importers. The Deputy Collector stated that the complainants had responded to the encashment notice vide their letter, dated 20-6-2002 where the difference in calculation was communicated and clarification was sought so that the claim could be settled. It was apparent that the importers were willing to pay the amount and there was difference in calculation only.

14. The statements and arguments of both the sides discussed in the foregoing paragraphs have been examined. The complainants' have contended that when the High Court decided that imposition of regulatory duty was unlawful; the liabilities of both the Bank and the Complainants were discharged as a result of which the guarantees lapsed automatically on 28-8-1996. The bank guarantee ceased to exist as legally enforcement documents from this date and the Supreme Court judgment of 1999 did not revive the bank's liability or, that of the complainants.

15. The respondents have taken the stand that one condition of the guarantees was that after six months the Bank would pay the guaranteed amount within seven days and since a decision in favour of the Complainants was not available within six months (and encashment notice had also been sent on 5-8-1996), the Bank should have honuored it by paying the guaranteed amounts. But the Bank has not paid the guaranteed amounts even after lapse of more than six years. Consequent on the decision of the Supreme Court for levy of regulatory duty in favour of the respondents, the Bank should have paid the duty secured through its guarantees but the liability was not discharged.

16. The contention of the Department is two-fold. Firstly, the guarantees covered the customs duty and sales tax in addition to regulatory duty. The (importers and the) Bank did not pay the customs duty and sales tax adjudged against the importers. The guarantees were neither discharged nor did they lapse and remained alive. Secondly, by virtue of issuing the notice, dated 5-8-1996, the demand of the Department had been established. In accordance with the covenants of the guarantees, it has been argued by the Department, the Bank was obligated to honours its commitment and pay the guaranteed amounts.

17. According to the text of the guarantees, the bank undertook to make the payment of the guaranteed amounts automatically without a call/notice at the expiration of six months from the dates of the High Court's interim orders. If the decision of the High Court for release of the guaranteed amounts was not submitted within six months, the Bank undertook to make the payment of Government levies within seven days of the expiration of the Constitutional limitation failing which compensation @ 20 % per annum' shall be paid for the period from the date of expiration/decision to the date actual payment was made. The Customs authorities issued the encashment notice before the expiry of the six months period and thus established their claim with the Bank for the guaranteed amounts. Since the guarantees covered the customs duty and sales tax also, which were not paid by the Bank despite decision in favour of the respondent; the liability of these dues and the guarantees, which covered the regulatory duty, remained intact.

18. It was the responsibility of the Customs Authorities to demand payment and press for recovery of customs duty and sales tax when the decision was taken in their favour. However, the non-enforcement of the guarantees suited the Complainants as well as the Bank that the Customs did not pursue the recovery of duty and taxes due to collusion or neglect. When the appeals of both the sides were decided by the Supreme Court maintaining the levy of the Customs duty, sales tax and the regulatory duty, it was the responsibility of the Customs Authorities to effect recovery and it was also obligatory on the part of the Bank to fulfil its liabilities and meet the conditions of the guarantees. The inaction and inefficiency on the part of the Customs officials for not recovering the dues cannot be overlooked or condoned. However, the contention that the Bank was absolved of the responsibility of paying the dues, for which they had submitted the guarantees and the encashment notices were first issued on 5-8-1996 and subsequently in 1999, 2001 and 2002 cannot be accepted.

19. From the facts brought out and arguments advanced by the respondents, the claim that the bank guarantees furnished by the Complainant had lost validity is not established. The contention that the notice issued by the Deputy Collector of Customs was illegal, improper and of no legal effect, is not acceptable and the Complainants' request cannot be acceded to. The Complaint lacks merit and is rejected.

C.M.A./778/FTO Complaint rejected.