Messrs WELFARE TRADING COMPANY, KARACHI VS SECRETARY, REVENUE DIVISION, ISLAMABAD
2004 P T D 1893
[Federal Tax Ombudsman]
Before Justice (Retd.) Saleem Akhtar, Federal Tax Ombudsman
Messrs WELFARE TRADING COMPANY, KARACHI
Versus
SECRETARY, REVENUE DIVISION, ISLAMABAD
Complaint No.C‑485‑K of 2003, decided on /01/.
th
October, 2003. Sales Tax Act (VII of 1990)‑‑‑--
‑‑‑‑Ss. 10, 34(4)(c), 67 & 73‑‑‑Sales Tax Refund Rules, 2002, R.8(3)‑‑ Excess amount to . be carried forward, or refunded‑‑‑Export of textile goods‑‑‑Claim of refund‑‑‑Refund was sanctioned‑‑‑Cheque was prepared but recalled and destroyed‑‑‑Department issued show‑cause notice on the ground that the status of the suppliers was suspected‑ and the amount of input claimed as refund had not been deposited/paid into the Government exchequer by the supplier in spite of the fact that all‑the payments were made by the complainant/assessee to supplier through normal banking channel and also the parties were identified from whom raw material was purchased and sales tax invoices received from them duly showed that the sales tax had indeed been charged from the complainant/assessee and paid to the registered supplier alongwith the cost of raw material purchased‑‑‑Validity‑‑‑Transaction, was genuine‑‑‑Goods had been physically transported from the suppliers to the purchasers and eventually exported‑‑‑Banking transactions showed that cost of goods including sales, tax had been duly paid by the purchasers‑‑‑No justification existed to withhold the refund claimed or issue a show‑cause notice for rejection of refund and imposition of penalty‑‑‑Responsibility for payment of sales tax lay with the suppliers and the Department should have proceeded against the suppliers and not against the purchasers‑‑‑Nothing, had been brought on record to establish the involvement‑of complainant/assessee in the alleged tax fraud or collusion between them and the suppliers‑‑‑Sales Tax Department 'had neither carried out intensive investigation and audit nor had reached any definite conclusion thus the consequent delay in disposal of tile refund claim demonstrated sheer inefficiency‑‑‑Department should either establish the fault of‑the complainant/assessee and conclude the proceedings or pay the refund‑‑‑Show‑cause notice was a defective document as no concrete grounds had been mentioned to justify the initiation of penal proceedings against the complainant/assessee‑‑‑Federal Tax Ombudsman recommen ded that Central Board of Revenue to direct the Collector of Sales Tax to (i) withdraw the defective Show‑Cause Notice (ii),carry out investigation and audit (on the lines stated above) to determine the genuineness of the transaction and payment of sales tax to the supplier as per the invoices submitted in the supportive documents (iii) issue fresh show‑cause notice on the basis of concrete evidence of complicity/involvement of the complainant/assessee in a tax fraud and finalize the proceedings; or (iv) decide the refund claim if the genuineness of the claim is established.
2000 PTC 399 rel.
Abdul Salam, Proprietor.
Arshad Shaheryar, Consultant.
Jamshed Talpur, Assistant Collector of Sales Tax (East).
Abdul Rehman Rind, Assistant Collector of Sales Tax (East).
FINDINGS/DECISION
The complaint relates to the non‑payment of legally admissible sales tax refund and the issuance of allegedly arbitrary show‑cause notice (SCN) legally not sustainable under the Sales Tax Act. The complainants have stated in the complaint that they are a commercial exporter engaged in the export of textile goods. In August, 2002, they purchased textile goods from the manufacturers/wholesalers on payment of sales tax against proper sale tax invoices. The payment was made through proper banking instruments. These purchases and the claim for refund of Rs.9,33,063 were duly reflected in their monthly Sales Tax Return‑cum- Payment Challan pertaining to August, 2002. After export of the textile, they filed requisite documents for sanction of legally admissible refund on 30‑9‑2007.
2. The complainants stated that they kept visiting the Collectorate for sanction of their refund, which it was required to pay within 30 days of the receipt of the claim. But no objection was communicated. The refund was sanctioned on 22‑12‑2002, the cheque was prepared but it was recalled and destroyed. After lapse of about six months, they received a show‑cause notice (SCN), dated 7‑3‑2003 alleging that the status of the suppliers was suspected and the‑amount of input claimed as refund had not been deposited/paid into the Government exchequer, the admissibility of the refund claim was void, calling upon them to state why the refund claim for Rs.9,33,063 should not be rejected and penal action initiated under section 33(4)(c) of the Sales Tax Act for claiming refund on the basis of suspected unit, disclosing any impropriety on their part and without providing any evidence to substantiate their suspicion.
3. The complainants submitted the following grounds of complaint:‑‑
(1)The SCN was not legally sustainable as, under section 3 of the Sales Tax Act, the payment of tax was the responsibility of, the suppliers making the taxable supply. The suppliers were liable to deposit the tax as the tax collection was a trust and should not be manipulated or misappropriated.
(2)Payment was made to the supplier through cheques/pay orders and the complainants should not be held legally liable for non payment of the tax by them. They also had in possession sales tax invoices issued by the suppliers after the payment had been made. Therefore, the charge for claiming refund on the basis fake/flying invoices could not be leveled against the complainants. Any violation of the law should attract penal action against the suppliers and not against the buyers.
(3)The Lahore High Court has held in the case of Superior Textile Mills Limited (2000 PTC, Lahore High Court 399) that the responsibility to payment of tax lay on the suppliers. The same view was held by the Federal Tax Ombudsman in the recommendation in Complaint No. 1770 of 2001 that "liability to pay sales tax is on the person making taxable suppliers subject to the exception provided under section 3(3A) ibid. It was further held that "As far as complainant‑company is concerned, its responsibility is only confined to the extent of providing identity of the parties from whom raw material was purchased and that the sales tax invoices received from them should show that the sales tax had indeed been charged from the complainant company and paid to the registered supplier alongwith the cost of raw material purchased". It was observed that the Department should pursue recovery from the companies on which legal responsibility lay for deposit of sales tax. It was thus established that where the payment of tax had been made to a registered person as required under the law, the complainants could not be deprived of their right of legitimate refund.
(4)Rule 8 of the Sales Tax Refund Rules made it mandatory that a notice should be issued to the claimant, disclosing the reasons why the claim was not admissible, to show cause why claim or part thereof should not be rejected and the claimant‑ proceeded against under the relevant provisions of law. However, SCN had been issued to the complainants without fulfilling the requirement of the Rules it was legally not sustainable and should be set aside.
(5)The Sales Tax Act does not provide for power to act on suspicion as it has used the expression "reason to believe". This is a much stronger phrase and the law also requires that the belief should be a reasonable one. The Department has failed to provide any admissible evidence in support of the allegation, to charge them of criminal liability, and to reject their refund claim. A person could not be charged of criminal liability unless the Department was in possession of tangible material to establish complicity, abetment, collusion or connivance.
(6)SCN also threatened to initiate penal action under sec tion 33(4)(c) of the Sales Tax Act. The pre‑requisite condition for invoking this provision was that the onus of proof was on the Department that false documents had been submitted knowingly or fraudulently. The department has failed to discharge this onus in this regard. When the proof of payment has already been provided with a refund claim, the liability to pay the sales tax was that of the suppliers.
4. The complainants stated that as a result of the illegal action initiated by the Department, a huge amount of their fund was stuck up with the Department and they were facing acute liquidity crises and their exports had come to a grinding halt for the last one‑year. They requested that the SCN not sustainable under law be withdrawn, the Department be directed to pay admissible refund claim alongwith 14% interest per annum under section 67 of the Sales Tax Act immediately, and the Department be restrained from any penal and coercive action till the final decision of the case.
5. The Assistant Collector of Sales Tax stated in the parawise comments that when the refund claim was filed by the complainants on 30‑9‑2002, it was found that purchases had been made from the units included by the C.B.R. in the list of units suspected of issuing flying/fake invoices. The complainants were called upon vide SCN, dated 7‑3‑2003 to show cause as to why the claim not be rejected. They failed to clarify their position or respond to SCN or the call notice and the refund claim has, therefore, not yet been disposed of.
6. He stated that SCN was legally sustainable under Rule 8 of the Refund Rules, 2000. In the instant case the supplies made to the complainants were not genuine as the suppliers were suspected of issuing and selling flying/fake invoices. It was also suspected that the physical movement of the goods between the suppliers and the complainants had never taken place and, no sales tax had been charged and paid into the Government treasury. He alleged that the possibility of collusion between the complainants and suppliers could not be ruled out as both could have benefited at the expense of the Government if refund was paid.
7. The Assistant Collector stated that the complainants had made payment to the suppliers through banking channels to complete the cycle of paper transaction and facilitate the sanction of the fraudulent, invalid and non‑genuine refund. The invoices on the basis of which the complainants were claiming refund were fake and no tax had ever been paid into the Government treasury in respect of these invoices. The refund claim was under investigation. It has neither been rejected nor sanctioned as the complainants have failed to reply to the contents of the SCN. The Assistant Collector requested that the complaint being without merit be rejected.
8. The Consultant submitted following additional arguments in his rejoinder to the Department's reply to the complaint:‑
(i)There is no provision in the Sales Tax Act that, for zero‑rating of exported goods, the exporter shall provide evidence of payment of sales tax by the suppliers to the Government. Payment of tax was the responsibility of the suppliers and not that of the buyers. .
(ii)The exporter was entitled to refund if he held a tax invoice of goods procured locally and exported subject to fulfillment of conditions of section 73 of the Sales Tax Act.
(iii)The allegation of collusion between the exporter and the supplier has not been established as it is based on conjecture and surmises. Suspicion cannot fake the place of proof.
(iv)The impugned SCN was not based on sufficient material; therefore, the proceedings be struck down.
(v)C.B.R. has no legal authority to issue a list of suspected units and a buyer could not be held hostage for the wrong‑doings of another person when he had fulfilled his legal obligation.
(vi)A person could not be saddled with criminal liability for initiating penal action unless the Department was in possession tangible material to establish the complicity, abetment, collusion or connivance with a high degree of proof in order to establish the offence. The Department has provided no evidence to establish the commission of offence.
(vii)The contention that the list of suspected units issued by the C.B.R. was freely accessible was spot (enable as the departmental correspondence was not a public notice and C.B.R. was not empowered under the Sales Tax Act to issue any such notification to the detriment of the registered person who paid tax to the suppliers under the bona fide impression that the same would be deposited in the Government treasury.
(viii)In a case of Messrs Excellent Enterprises, Karachi, the Federal Tax Ombudsman has held that the supplier's firm was not a suspected unit when it supplied the goods.
9. The Consultant reiterated during the hearing that the complainants had made purchases against valid sales tax invoices, the payments were made through cheques/pay orders as required under section 73 of the Sales Tax Act, and the declaration was made in the Sales Tax Return‑Cum‑Payment Challan for August, 2002. The goods were exported as verifiable from the bills of exports. The refund claim was got received in the Department on 30‑9‑2002. ,
10. He stated that no action was taken by the Department for more than a year and, thereafter, a SCN, dated 7‑3‑2003 was issued to them by the Deputy Collector alleging that the invoices submitted by them had been issued by suspected units. He argued that (i) C.B.R. had no authority to declare a unit as suspected and SCN could not be issued, to genuine registered person, (ii) the allegation in the SCN was baseless because if the sales tax had not been deposited by the suppliers, the fault lay with them, (iii) the Department should furnish evidence to support the allegation that the suppliers were not genuine, and (iv) the allegation that the purchases were actually paper transactions was not correct as they had furnished evidence of invoices under which the goods were shipped to Karachi and shipping bills against which the goods were exported.
11. He contested the legal validity of the so‑called list of suspected units and questioned whether any legal action could be initiated on the basis of C.B.R.'s internal correspondence with its subordinate offices, He argued that the presentation of the purchase invoices, the proof of payment as required under section 73 of the Sales Tax Act, and the corresponding shopping bills constituted a conclusive proof to the effect that the goods had been purchased and exported. He requested that this office give a ruling whether a registered person could be held liable for any violation of the law made by suppliers not within his knowledge and whether he was party to it when the Department had failed to establish any material evidence of the connivance to that effect.
12. The Assistant Collector of Sales Tax responded to the arguments stated that he did not have the exact date on which the C.B.R. had issued the list of suspected units wherein the names of the suppliers were included. He had a combined list of 1316 suspected units, which represented several lists issued by the authorities. He stated that under rule 8 of Sales Tax Refund Rules, 2002, the Department had the right to issue a SCN where it was found that any refund claim was not genuine. When the complainants filed the refund claim in September, 2002, inquiry was made from the Collectorate for verification but no reply was received. The investigation was still on and the Department had approached the Collectorates to verify the invoices of the suppliers so that they were able to reach any definite conclusion.
13. The Consultant added after filing of the refund claim, all records have been shown to the sales tax authorities and necessary verification has been made. If the sales tax authorities and the C.B.R. had knowledge about the illegal activities of some suppliers, they should have publicly notified the names of the suspected units to forewarn the business community. The complainants were not aware of the so‑called list of suspected units circulated within the Department, its credibility or the validity was not above board, and it should not impact on their credibility.
14. The submissions made in the complaint, its reply, and arguments recorded. during the hearing of the complaint have been examined. According to the complaint, the documents of the refund claim were filed on 30‑9‑2002, but no action was taken by the Department and no objection was raised and, after more than six months, a SCN was issued by the Deputy Collector calling upon the complainants to show cause why the refund claim not be rejected and penal action under section 33 (4)(c) of Sales Tax Act not taken. Clearly the SCN was based on a mere apprehension as the names of the suppliers were mentioned in list of suspected units allegedly involved in the issuing of fake/flying invoices. The allegation had been made against the suppliers but the SCN was issued to the purchasers/exporters without disclosing any complicity or illegal activity on their part.
15. The complainants have contended that everything including bank transactions have been verified. It is apparent that due diligence has not been exercised by the sales tax authorities to verify the validity of the supportive documents submitted by the complainants. Before issuing the SCN, the respondents should have carried out intensive investigation to ascertain the factual position such as:‑‑
(i)Verify whether transfer of goods between the supplier and the purchaser had taken place. The evidence of dispatch note, the receipt note, the transport documents, the entry in the books of the purchaser should have been checked.
(ii)The verification of payment through banking channels should have been carried out with a view to ascertain the genuineness of the payment of the cost of goods inclusive of the sales tax and validity of the invoices.
(iii)Verify from the accounts books of the complainants that goods were deposited in and taken out of their warehouses and physically exported as per the shipping documents and mate receipt.
(iv)It has been stated that in several instances the transaction of goods had taken place before the supplier was declared as a suspected unit. This aspect too should have been checked to ascertain the genuineness or otherwise of the transaction and the invoice.
16. If it was established that the transaction was genuine, the goods had been physically transported from the suppliers to the purchasers and eventually exported, and that the banking transactions showed that cost of goods including sales tax had been duly paid by the purchasers, there would be no justification to detain the refund claim or issue a SCN for rejection of refund and imposition of penalty. The responsibility for payment of sales tax lay with the suppliers and the Department should have proceeded against the suppliers and not against the purchasers.
17. Nothing has been brought on record to establish the involvement of the complainants in the alleged tax fraud or collusion between them and the suppliers. The Sales Tax Department has not carried out intensive investigation and audit and not reached any definite conclusion and the consequent delay in disposal of refund claim demonstrates sheer inefficiency. The Department should either establish the fault of the complainants and conclude the proceedings or pay the refund. SCN is a defective document as no concrete grounds have been mentioned to justify the initiation of penal proceedings against the complainants.
18. It is recommended that C.B.R. direct the Collector of Sales Tax to
(i)withdraw the defective SCN;
(ii)carry out investigation and audit (on the lines stated above) to determine the genuineness of the transaction and payment of sales tax to the supplier as per the invoices submitted in the supportive documents;
(iii)issue fresh SCN on the basis of concrete evidence of complicity/ involvement of the complainants in a tax fraud and finalize the proceedings; or
(iv)decide the refund claim if the genuineness of the claim is established; and
(v)finalize the aforesaid recommendations, within forty‑five days.
(vi)Compliance be reported within two months.
C.M.A./5/FTOOrder accordingly