J. K. BROS. (PVT.) LTD., FAISALABAD VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2003 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 63 (2002)

(a) Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑S.10(4)‑‑‑Sales Tax Refund Rules, 2000, R.7(4)‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑ Excess amount to be carried forward or refunded‑‑‑Extent of payment of refund claimed‑‑‑Time limit for verification of refund claimed‑‑ Suspected invoices‑‑‑Investigation of‑‑‑Time limit ‑‑‑Refund‑‑ Withholding of‑‑‑Validity‑‑‑Department was right that the law provides for necessary verification in the case of suspected invoices etc. and that no specific time frame had been provided for completing the investigation which did not, however, mean that he Department could withhold refunds indefinitely on the plea that investigation was being made‑‑‑No investigation could be continued for unreasonably long period‑‑‑Dependent on the facts and circumstances of the case a reasonable time had to be fixed‑‑‑Department did not in fact clearly show on what lines the investigation was now being made considering that the parties involved were statedly not traceable at their given addresses, it was also not made clear as to whether in the case of cross cheques issued by the complainant, an attempt was made to identify the bank accounts through which the cheques were encashed‑‑ Apart from one unit, all the alleged suspected units, belong to relevant Collectorate and there was no reason why the Department should not be able to expeditiously finalize inquiries regarding these units‑‑ Department, in circumstances, could not be allowed itself to withhold the refund without, apparent, any specific investigation being in progress.

(b) Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑S.10‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑Excess amount to be carried forward or refunded‑‑‑Complainant assessee had purchased raw material from various registered sellers against valid sales. tax invoices and payment was made through cheques ‑‑‑Complainant/assessee utilized the same material in manufacturing of its products which were duly exported and filed its refund claims against such valid sales tax returns‑‑‑Department withheld refund of certain input tax invoices of certain suspected units till their verification 'as the amount of tax collected by such registered person had not been deposited in the Government treasury ‑‑‑Validity‑‑ Contention of the Department that the amount of tax collected by registered person had not been deposited in the Government treasury could not be a ground for withholding the refund‑‑‑If it was proved that manufacturer had purchased from the registered person who had collected tax from him then as the registered person who under law acts as an agent of the Department it was the responsibility of the said agent to deposit the tax within specified period as required by law‑‑‑Purchaser manufacturer could not be held liable for non‑deposit of such tax in the Government Treasury‑‑‑Department should regularly monitor and take action against registered person who having recovered and collected the tax fail to deposit in the Government Treasury‑‑‑Person who had already paid the tax as required by law he could not be held liable for such‑tax for the default of the Department and its agent‑‑‑If it was established, in the present case, that tax had been paid by the manufacturer which they claimed to have made through cross‑cheques then only question remained to be ascertained was whether the transactions were genuine or not‑‑‑If payment through cross‑cheques was established presumption would be that the transaction genuine unless rebutted by the Department by strong evidence ‑‑‑On the mere ground of non‑deposit of tax by the registered person in Government Treasury, refund could not be with held‑‑‑Federal Tax Ombudsman recommended that verification process be finalized within 90 days in which the complainant should also be associated and if as a result of investigation the invoices are not found to be fake and fraudulent the refund 'amount be paid to the complainant/assessee within 15 days of completion of investigation.

Saood Nasrullah Cheema and Naveed Suhail Malik for the Complainant.

Muhammad Ismail, Deputy Collector Sales Tax for Respondent.

FINDINGS/DECISION

This is a complaint by a Private Limited Company relating to non‑payment of sales tax refund. The main points in the complaint are as under:

(i) The complainant Company is a manufacturer and exporter of textile fabrics and yarn and is registered under the category of "Manufacturer" and "Exporter" with the Collectorate of Sales Tax, Faisalabad.

(ii) During the months of November and December, 2000 and February, 2001, the complainant exported its products and duly filed its refund claims against valid sales tax returns.

(iii) Sales tax invoices showing valid purchases of raw material were also filed with the returns.

(iv) The complainant had purchased raw material from various registered sellers against valid sales tax invoices and had utilized the same in the manufacture of its products which were duly exported.

(v) The complainant was thus fully entitled to the refunds for the three months mentioned above.

(vi) The Collectorate of Sales Tax, Faisalabad has not sanctioned the refund despite the lapse of almost 1‑1/2 years. It is learnt from correspondence with the Collectorate that the refund has been withheld due to inability of the Collectorate to verify the invoices issued by certain units from which the complainant had purchased raw material.

(vii) The complainant Company had fully discharged its duty by paying sales tax to the suppliers of raw material which was physically purchased and utilized in the manufacture of exported goods. The complainant has thus been made to suffer without any reason.

It has been prayed that the injustice done to complainant be rectified and the respondent be directed to issue the refund alongwith mark‑up.

2. The respondent's reply has been received and the representatives of the complainant and the respondent have attended and have been heard. The main points in the respondent's reply are as under:

(i) The complainant's refund claims for November and December, 2000 and February, 2001 were processed and admissible refund was sanctioned. It was, however, observed during the scrutiny that the complainant had presented input tax invoices of certain suspected units and the refund pertaining to these units was withheld till their verification. As a result of the verification two of the suspected units viz. Messrs M.A. Industries and Messrs Amjad Fabrics were found to be genuine and refund against invoices of these units was, therefore, sanctioned. In the case of two other registered persons viz. Messrs Aamna Looms Industry, Faisalabad and Messrs N.S. Enterprises, Faisalabad investigation is still in progress and it had been found that the sales tax has not been deposited in Government Treasury.

(ii) Refund actually means the return of the amount deposited in the treasury and since no sales tax has been paid into Government account the complainant is not entitled to refund.

(iii) The two units appear to be fake units which have issued bogus invoices, to various exporters including the complainant and inquiries are also being made regarding the involvement of the parties in the commission of tax fraud.

(iv) There is no maladministration as the amount of sales tax has been withheld in respect of the suspected units in terms of section 10(4) of the Sales Tax Act till the verification of input tax invoices which has not been found possible so far due to the apparent non‑existence of the suppliers.

It has been prayed that the complaint may be filed as admissible portion of refund has already been paid while the remaining claim is being verified in order to safeguard the interest of the exchequer.

3. It was noted that the complainant did not indicate the actual amount of refund which had not been paid and even during the hearing, the complainant's representatives were not very definite about the amounts involved. The respondent's representative, however, provided the following figures of refund paid and withheld during the relevant period:

It appears from the above that inquiries are apparently also being, made by the respondent regarding invoices issued by H.A. Fabrics, Hamad Textile and Aysha Fabrics in addition to the two parties mentioned in the respondent's reply. It was c6ntended that these parties have not been traced so far and that the issuance of bogus invoices by fake units has been found to be a large scale fraud involving billions of rupees. It was pleaded that the Department may be alloyed to carry out its investigation which it is duly authorized to do without any specific time limit under section 10(4) of the Sales Tax Act and rule 7(4) of the Sales Tax Rules. The complainant on the other hand reiterated that the refund claims in question were genuine and that all the purchases were made from registered persons which meant that the Sales Tax Department would have already verified the genuineness of the parties at the time of registration. It was also claimed that all the payments were made through cross cheques and that this further proved the genuineness of the parties from whom the purchases were made.

4. The contentions of the two sides have been considered and the respondent is found to be correct in saying that the law provides for necessary verification in the case of suspected invoices etc. and that no specific time frame have been provided for completing the investigation. This does not, however, mean that the Department can withhold refunds indefinitely on the plea that investigation is being made. Nor can investigation be continued for unreasonably long period. Dependent on the facts and circumstances of the case a reasonable time has to be fixed. During the hearing the respondent's representative did not in fact clearly show on what lines the investigation was now being made considering that the parties involved were statedly not traceable at their given addresses. It was also not made clear whether in the case of cross cheques issued by the complainant, an attempt was made to identify the bank accounts through which the cheques were encashed. It is also clear that apart from Messrs M.A. Industry, Lahore, all the so‑called suspected units belong to the Faisalabad Collectorate and there is no reason why the Department should not be able to expeditiously finalize inquiries regarding these units. Under the circumstances the Department cannot allow itself to withhold the refund without, apparently, any specific investigation being in progress.

5. The contention of the Department that the amount of tax collected by registered person has not been deposited in the Government Treasury cannot be a ground for withholding the refund. If it is proved that manufacturer has purchased from the registered person who has collected tax from him then as the registered person who under law acts as an agent of the Department it is the responsibility of the said agent to deposit the tax within specified period as required by law. The purchaser/manufacturer thus cannot be held liable for non‑deposit of such tax in the Government Treasury. Under law the Department should regularly monitor and take action against registered persons who having recovered and collected the tax fail to deposit in the Government Treasury. A person who has already paid the tax as required by law he cannot be held liable for such tax for the default of the Department and its agent. Such complaints have been filed by several persons and in Complaint No.250 of 2002 a detailed decision has been given pointing out the specific irregularities and negligence by the Department and recommendation has been to redress the grievances and streamline the tax administration. In the present case if it is established that tax has been paid by the manufacturer which they claimed to have made through cross cheque then only question remains to be ascertained is whether the transactions are genuine or not? If payment through cross‑cheque is established presumption will be that the transaction was genuine unless rebutted by the Department by strong evidence. Therefore, on the mere ground of non‑deposit of tax by the registered person in Government Treasury refund cannot be withheld.

6. It is recommended that:

(i) Verification process be finalized within 90 days in which the complainant should also be associated. If as a result of investigation the invoices are not found to be fake and fraudulent the refund amount be paid to the complainant within 15 days of completion of investigation.

(ii) Compliance report with investigation report be submitted within 20 days of the completion of, investigation.

C.M.A./483/FTO Order accordingly.