(a) Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑S. 10‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑C.B.R. Letter C. No. 2(7) STP/99‑Pt, dated 1‑10‑2002‑‑‑Excess amount to be carried forward or refunded‑‑‑Suspicious unit‑‑‑Refund claim of complainant was withheld by the Department without issuance of show‑cause notice and complainant was declared as suspicious unit because only four purchases were made from the supplier, which was placed on the suspected list in spite of the fact that payment was made by crossed cheques through banking channels Validity‑‑‑If one of the suppliers was fake, the buyer should not have been placed on the suspected list unless collusion was established and there was evidence to prove that the transactions were fake‑‑‑Central Board of Revenue blocked the refund claims but no show -cause notice in this regard had been issued‑‑‑If there was tangible evidence against the complainant, the same should have been disclosed to them, the charges framed in the form of show‑cause notice and opportunity provided to them to rebut the same and represent their case‑ Situation showed a one‑sided action on the part of Department to condemn the complainant to the "suspected" category, deny the refund without due process, and harass them‑‑‑In one of its directives, Central Board of Revenue, had issued instructions that refund claims should not be rejected for a few suspected invoices, and refund be disallowed only is to the extent of fake invoices, and the remaining amount sanctioned---This directive had been violated by the sales tax authorities ‑‑Entire process, action and proceedings suffered from maladministration as they were arbitrary, based on presumption and irrelevant grounds, unjust and oppressive‑‑‑Administrative excess was proved which involved improper motive as defined in S. 2(3)(d) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000‑‑‑Federal Tax Ombudsman recommended that Central Board of Revenue (i) direct the Collector concerned to (a) carry out investigation and verification on the lines mentioned in paragraph 15, re‑examine the status of this unit and, should it be established that it had been included in the list of suspected units merely on the basis of a few purchases from a supplier in 2002 whose premises was found closed in 2003 without adverse tangible evidence de‑list it from the said list (b) afford opportunity to the complainants if not already done, to rebut the objections raised in the audit observation and if necessary issue show‑cause notice only on the basis of concrete evidence (c) examine the blocked refund claims with a view to verifying the physical transportation of goods, their, entry in their records and actual shipment, as mentioned in paragraph 15, and decide the refund claims expeditiously on the basis of verified facts (ii) investigate into the allegation of maltreatment meted out to the Complainant and appropriate disciplinary action be taken against the defaulting officials.

Complaint No. 275 of 2002 and PTCL 2003 CL. 2003 ref.

(b) Sales tax‑‑‑

‑‑‑‑ Points of investigations to verify fake transactions‑‑‑Department should have carried out investigation to verify (i) the physical transfer of goods from the supplier to the purchaser on the basis of dispatch note, receipt note, the transport documents, entry in the purchaser's books of account; (ii) payment through banking channels to ascertain the genuineness of the transactions and validity of invoices inclusive of sales tax (iii) receipt of goods and export thereof from the complainant's records etc.

A. Rahim Lakhany, Chartered Accountant and Ajeet Sunder for the Complainant.

Dr. Mubashir Baig, Dy. Collector of Sales Tax and Syed Alley Jaffer Dy. Superintendent for Respondent.

FINDING/DECISION

The complaint has been filed against the Secretary, Sales Tax (Audit). C.B.R for declaring the Complainants as a suspicious unit vide letter, dated 21‑6‑2003. The Complainants have stated that their unit was registered person with the Sales Tax Collectorate (West), Karachi, they were a leading exporter of Bed‑linen to Europe, they had an outstanding tax record, and were granted Gold category on 10‑8‑2002. The unit, situated at F‑152‑SITE, Karachi, was duly registered with the Income Tax Department and income tax assessment for the financial year ended 30‑6‑2002 had been finalized, copy of the assessment order enclosed with the complaint.

2. The Complainants stated they have been filing Sales Tax Return- cum‑Payment Challans regularly and depositing due sales tax. They submitted copies of monthly challans for the last 12 months July, 2002 to June, 2003. They stated that their name was placed on the suspected list because of their suppliers Messrs G.I. Traders. They had made the payment through banking channels regularly and obtained bill of entry from the suppliers of the goods. They had also submitted copy of the supplier's ledger, copy of his bank statement and‑ copies of the bills of entry and the registration certificate of Messrs G.I. Traders.

3. The Complainants stated that neither any proper notice was given to them nor any reason offered to place their name in the list of suspected persons. They have never claimed input tax on the basis of so- called fake/flying invoices and the Department did not provide any evidence in this regard. Even otherwise the complainants should not be penalized for any fault of the suppliers. The sales tax audit of their record was conducted regularity by the Sales Tax Department.

4. The complainants alleged that the action of the Secretary (Sales Tax Audit), C.B.R. was arbitrary, capricious, unjustified and amounted to harassment defined as maladministration under section 2(3)(i)(a), (ii), and (iv) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000. They requested that Secretary, Sales Tax (Audit), be directed to de‑list their name from the suspected list and the pending refund claims be sanctioned with immediate effect.

5. The Collector of Sales Tax and Central Excise (West) Karachi replied to the complaint that Messrs G.I. Traders were issuing suspected/fake invoices and the Complainants had claimed refund against the same. As such both the suppliers and the complainants were placed on the list of suspected persons. Their, abnormal tax behavior was confirmed after detailed audit and scrutiny of their record by the Post Refund Audit Division. He stated that it was evident from the record that they had claimed input tax on the basis of fake/flying, invoices issued by the suppliers.

6. The Collector stated that reasonable time was allowed to the Complainants to deposit the Government dues which they failed to do. The recovery proceedings were initiated by adjusting the dues against the pending claims which did not come within the definition of maladministration. He stated that President of Pakistan had ruled in the Complaint No. 429‑K/2001 that a bona fide decision of any agency based on valid reasons and established practice did not amount to maladministration. He also referred to the decision of the Sindh High Court in the case of Messrs Zahid Habib that the charges levelled against the claimants in post refund audit should be responded by them and the matter be treated under proceedings of investigation and adjudication. He contended that the jurisdiction of the Federal Tax Ombudsman was barred under section 9(2)(b) of the Establishment of the office of Federal Tax Ombudsman Ordinance, 2000.

7. Mr. Abdul Rahim Lakhany, Consultant, representing the Complainants, stated during the hearing that the name of Messrs KAM International has been placed on the list of suspected unit by the C.B.R. on the grounds that they purchased goods from Messrs G.I. Traders. C.B.R. mentioned in its letter, dated 21‑6‑2003 that the report was received that G.I. Traders was found closed and no business activity was observed. Therefore, the units which 'made purchases from the suspected unit were also placed on the list of suspected persons and C.B.R. had asked the Collector to withhold their pending claims, vide directive, dated 21‑6‑2003.

8. He stated that the refund claims of August, 2002 to July, 2003 amounting to Rs.88,755,969 have been blocked by the Sales Tax Department. They had made only four purchases from G.I. Traders, Karachi, on 13‑2‑2002, 10‑6‑2002, 26‑6‑2002 and 25‑11‑2002 and the total sales tax paid to them amounted to Rs.1,11,634. The payment was made by crossed cheques through banking channels as evident from the copies of the bank statement submitted with the complaint. These transactions took place in 2002 and Gil Traders was reported and categorized as a suspected unit in June, 2003.

9. He referred to C&R's instructions, vide C. No. 2(7)‑STP/99- Pt, dated 1‑10‑2002, that it would not be justified to reject a refund claim just because a few invoices were issued by suspected units. The field formations were directed that the appropriate action would be to disallow refund claim to the extent of fake invoices and sanction the remaining amount. He also referred to the decision of the Federal Tax Ombudsman in Complaint No.275 of 2002 that if payment through crossed cheque was established, it would be a genuine transaction unless rebutted by the Department by solid evidence. In the present complaint, the refund claims have been withheld by the Department but no show -cause notice has been issued, which was against the principle of natural justice.

10. The learned Consultant stated that because of the alleged suspected status of a small supplier, the sales tax authorities have not only placed the name of the unit on the suspected list but they have harassed them for more than a year, the sales tax officials refuse to touch their files and process the cases. Although a Gold Category Exporter and awarded for export performance to European countries, the Department has harassed them. The learned Consultant requested that the Complainants' name should be struck off from the list of suspected units.

11. The Deputy Collector stated that the post‑refund audit of the Complainant was started in 2002 and audit observation was issued on 4‑3‑2003. Its reply was not found satisfactory and a contravention case for recovery of Rs.78.8 million in sales tax and Rs.15 million additional tax was formulated on 30‑6‑2003 and sent for issue of show‑cause notice. He stated that besides transaction with G.I. Traders, C.B.R had some additional information on the basis of which they decided to place the name on the list of suspected units and comprehensive audit had already been carried out.

12. Mr. Lakhany stated in his counter‑arguments that. the issue of audit observation did not establish any offence without issue of show -cause notice and adjudication of the contravention case, about which they have not knowledge. The Complainants cannot be treated guilty of any offence. The Department does not have the powers to decide the guilt of a unit without due process of law. The Complainants are in the export business and have been exporting goods regularly but the sales tax officials were treating them as untouchables merely because their names have been placed on the suspected list without any justification, without any cogent reason, without disclosing the reasons, and without any adverse decision. It has been held by the Sindh High Court, PTCL 2003 CL 2003, in the case of United Exports that intimation of audit' observation did not constitute a show‑cause notice.

13. Mr. Shoaib Majid, proprietor of Messrs KAM International described at considerable length the harassment that he and his firm has been subjected to for the last one year when post‑refund audit was started. He stated that his unit was one of the major exporters of bed 4inen, mostly to France, and its outstanding, record of performance was acknowledged by the Ministry of Commerce and Export Promotion Bureau. But the Sales Tax Department has meted out a very shabby treatment to his business concern. He and his officials have been visiting the office almost on the lower functionaries, and a deliberate policy was set in motion not to solve their genuine problems, not to sanction genuine refunds and not to treat him and his staff with courtesy.

14. From the submissions made in the complaint, the arguments put of hearing and the response of the Department, the position emerges as follows:‑‑

(1) The Complainants made four purchases from G.I. Traders in 2002, which was placed on the suspected list in June, 2003.

(2) Payment was made by crossed cheques through banking channels.

(3) C.B.R. placed it on the suspected list and directed the Collector to withhold pending refund claims as a result of which refund of Rs.88,755,969 for July, 2002 to June, 2003 was blocked.

(4) According to the Department a contravention case for recovery of Rs. 78 million sales tax and Rs.15 million additional tax was formulated un 30‑6‑2003 and sent for issue of show‑cause notice, which has not yet been issued.

(5) The proprietor of the Complainant's firm bitterly complained about the alleged maltreatment meted out to him and his officials despite the outstanding record of export performance.

15. It has been admitted by the Department that the name of the Complainant's firm has been included in the list of suspected units because one supplier was involved in some malpractice. There is considerable force in the argument that if one of the suppliers was fake the buyer should not have been placed on the suspected list unless collusion was established and there was evidence to prove that the transactions were fake. The respondents should have carried outs investigation to verify;

(i) the physical transfer of goods from the supplier to the purchaser on the basis of dispatch note, receipt note, the transport' documents, entry in the purchaser's books of account;

(ii) payment through banking channels to ascertain the genuineness of the transactions and validity of invoices inclusive of sales tax;

(iii) physical receipt of goods and export thereof from the Complainants' records etc.

If the purchases by the Complainants were found genuine, their claim for de‑listing from the suspected list would be justified.

16. The Complainants have not been confronted with the evidence established against them as a result of comprehensive audit issued on 4‑3‑2003. Their reply has not been taken into account and reconciliation of the facts, and figures not carried out. C.B.R. has blocked the refund claims but no show‑cause notice in their regard has been issued. If there is tangible evidence against the Complainants, the same should have been disclosed to them, the charges framed in the form of show‑cause notice, and opportunity provided to them to rebut the same and represent their case.

17. The situation as brought out from the foregoing paragraphs shows a one‑sided action on the part of the Department to condemn the Complainants to the "suspected" category, deny the refund without due process, and harass them as alleged by the proprietor. It may be recalled that in one of its directives, C.B.R. had issued instructions that refund claims should not be rejected for a few suspected invoices, refund be disallowed only to the extent of fake invoice, and the remaining amount sanctioned. Clearly this directive has been violated by the sales tax authorities. The entire process, action and proceeding suffer from maladministration as they are arbitrary, based on presumption and irrelevant grounds, unjust and oppressive. The administrative excess is proved which involves improper motive as defined in clause (d) of subsection 3 of section 2 of Establishment of Office of Federal Tax Ombudsman Ordinance 2000.

18. It is recommended that C.B.R.

(i) direct the Collector concerned tos

(a) carry out investigation and verification on the lines mentioned in paragraph 15, re‑examine the status of this unit and should it be established that it has been included in the list of suspected units merely on the basis of a few purchases from a supplier in 2002 whose premises was found closed in 2003 without adverse tangible evidence, de‑list it from the said list;

(b) afford opportunity to the Complainants, if not already done, to rebut the objections raised in the audit observation and necessary issue show‑cause notice only on the basis of concrete evidence; and

(c) examine the blocked refund claims with a view to verifying the physical transportation of goods, their entry in their records and actual shipment, as mentioned in paragraph 15, and decide the refund claims expeditiously on the basis of verified facts.

(ii) Investigate into the allegation of maltreatment meted out to the Complainants and appropriate disciplinary action be taken against the defaulting officials.

(iii) Above action be completed within thirty days and compliance reported within forty‑five days.

C.M.A.110/FTO Order accordingly.