Messrs FORTUNE HOUSE, LAHORE VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2006 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1528 (2005)

Sales Tax Act (VII of 1990)---

----S. 10(2)---Sales Tax Refund Rules 2002, Rr. 7(1)(2) & 5(3)(4)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)---Excess amount to be carried forward or refunded---Non-payment of refund within 30 days---Department did not pay the refund due to complainant despite the fact that S.10(2) of the Sales Tax Act, 1990 stipulated that input tax incurred in connection with zero rated supply be refunded not later than 30 days of the filing of returns subject to such conditions as the Central Board of Revenue prescribed---Department contended that refund claimed was deferred ' till completion of supplier's audit to avoid sanctioning inadmissible refunds---Validity---Delay was noticeable in respect of refund claimed- -Audit of the supplier initiated or intended to be initiated had not been completed and the complainant's refund claimed had been held up without any justification---Complainant's refund claimed had been subjected to inaction and delay by the Revenue which also tantamount to `maladministration'---Complainant exhibited a positive attitude that complainant's supplier would be prepared for audit of the relevant period and would supply all information and record required for the purpose to enable the Revenue to complete the audit within a period of one month and the complainant would be prepared for the claims to be decided by the Revenue on their merit in accordance with the provisions of law---Maladministration was established, however, considering Revenue's commitment it was directed to complete supplier's audit and other inquiries within one month and to decide complainant's refund claimed on merit---Federal Tax Ombudsman recommended that Central Board of Revenue direct the concerned authority to complete supplier's audit and other inquiries within a period of one month, as promised by the DR, and decide the complainant's refund claims on their merit in accordance with the provisions of law after enlisting complainants point of view and advise the dealing officials to adhere to the provisions of Sales Tax Act, 1990 and the Rules framed thereunder so as to avoid creating unnecessary complications and causing hardship to the dealing public.

Abbas Raza Rizvi CMA for the Complainant.

Dr. Mirza Mubashir Baig, D.C. Sales Tax and Muhammad Ismail, Auditor, Sales Tax for Respondents,

DECISION/FINDINGS

JUSTICE (RETD.) MUNIR A. SHAIKH, FEDERAL TAX OMBUDSMAN).---Facts of the complaint are that the complainant, a commercial exporter, had filed two refund claims for Rs.467,116 and Rs.616,636 (aggregating Rs.1,083,752) for tax periods February and May, 2004 on 28-4-2004 and 21-8-2004 respectively under, section 10(2) of the Sales Tax Act, 1990. The respondents did not pay the refund due to the complainant despite the fact that the aforesaid section stipulated that input tax incurred in connection with zero rated supply (exports) be refunded not later than 30 days of the filing. of returns subject to such conditions as the Board prescribed. According to Rule 7(1) of the Sales Tax Refund Rules 2002 (Notification S.R.O. 575(I)/2002, dated 31-8-2002) refund to a commercial exporter was to be sanctioned and paid within one month of the submission of supportive documents to the extent of input tax shown in sales tax invoices issued by registered local manufacturers or suppliers of the goods actually exported. As per Rule 7(2) of the aforesaid Rules the aforesaid time-limit, however, did not apply to cases subjected to further inquiry or audit under sub-rules (3) to (5) of Rule 5 of the Rules provided that the officer incharge informed the claimant about the subjection of his refund claim to inquiry or audit. The complainant was never informed formally (in writing) about subjection of its claims to further inquiry or audit as required by the Rules. Sub-Rule (4) of rule 5 of the aforesaid Rules also stipulated that if any further inquiry or audit was required to establish the genuineness and admissibility of the claim .or otherwise the officer incharge could make or cause to be made such inquiry or audit after approval from the Additional Collector under intimation to the refund claimant. The complainant was not intimated about the inquiry or audit nor whether Additional Collector's approval had been obtained for subjecting its claims to inquiry/audit. According to sub-rule (5) of rule 5 of the Rules the senior auditor conducting an inquiry or audit in.terms of sub-rule (4) of Rule 5 of the Rules could examine business record and commercial documents of the complainant or any person concerned with refund claim to satisfy himself about the genuineness and admissibility of the claim. Complainant's audit was conducted in August, 2004 and audit report was issued on 2-9-2004. Similarly the audit of complainant's supplier was also conducted and audit report issued on 9-2-2004. In response to inquiries conducted by the D.C. (Refunds) the complainant's supplier had confirmed the genuineness of supplies made to the complainant. Likewise, in response to D.C. (Refund)'s communication made to them, the Banks confirmed that the complainant had made payments to its supplier in compliance of the provisions of section' 73 of the Sales Tax Act, 1990. The banks had also confirmed the receipt of sale proceeds in foreign exchange against export goods.. Yet the refunds due to the complainant were not paid. Wilful delay in payment of refund claims in violation of the provisions of section 10(2) of the Act read with rules 7(1), 7(3) and 5(4) of the Sales Tax Refund Rules, 2002 amounted to 'maladministration'. Respondents may be directed to make immediate payment of refunds together with compensation under section 67 of the Sales Tax Act, 1990 for delaying payment thereof. They may also be directed to deal with complainant's refund claims justly, without any discrimination.

2. The respondents, while acknowledging receipt of complainant's refund claims on 28-4-2004 and 21-8-2004, have submitted that while refund claim for tax period February, 2004 was being processed the claim for tax period May, 2004 was pending. The complainant had claimed a refund of Rs.467,115 (tax period February, 2004) out of which an amount of Rs.356,048 was claimed against invoices issued by Messrs Classic Knitwear (supplier). The tax profile of Messrs Classic Knitwear indicated discrepancies such as negative value-addition in some tax periods and issuance, in some other tax periods, of sales invoices more than supplier's actual capacity, making the genuineness of refund claims doubtful. The status of Messrs Classic Knitwear (supplier) needed to be investigated to avoid sanctioning unlawful and fraudulent refunds. Whereas audit of the complainant was conducted and completed for the period from July, 2003 to June, 2004 in September, 2004 the Collectorate had asked department's Audit Management Cell to undertake supplier's audit. The supplier was also addressed to provide relevant information/documents to enable verification of invoices. Scrutiny and investigation of requisite information/documents showed negative value-addition and issuance of excessive sales tax invoices by the supplier during different tax periods. However, a thorough, investigation of stocks and inventory was required to determine the status of the supplier. The refund claims were deferred till completion of supplier's audit to avoid sanctioning inadmissible refunds. Mr. Abbas Raza (complainant's AR) was informed accordingly. While the audit of the complainant was conducted for the period upto 30-6-2004, the audit of the supplier was due for the period July, 2003 onwards to which the refund claims pertained. Delay took place because of verification of documents. No maladministration was committed. The complaint was premature as the respondents had not taken any adverse action hurting complainant's interest, hence it was not maintainable. The reasons of delay in payment of refund were intimated to complainant's A.R. Refund would be sanctioned after complete scrutiny and verification of sales tax invoices on the basis of which the complainant had claimed refund.

3. During the hearing, the AR submitted that the complainant had exported knitted garments to USA and the UK. It had submitted refund claims on 28-4-2004 and 21-8-2004 which were not paid in violation of the provisions of Sales Tax Act,, 1990 and the Rules made thereunder. The officer incharge neither sought permission from the Additional Collector before subjecting the refund claims to investigation/audit nor was the complainant informed about it. Complainant's supplier was supplying goods not only to the complainant but to many other exhorters to whom the respondents were making refund payments. Asked to elaborate, he explained that complainant's supplier supplied yarn to the manufacturers of garments who, in turn, supplied readymade garments to various parties against proper sales tax invoices. Complainant's supplier was not blacklisted by the Sales Tax Department. He refuted department's contention about negative value addition by the supplier adding that supplier's audit for an earlier period had shown value-addition of 10%. Supplier's audit for the tax period July, 2003 onwards was initiated by the respondents in October, 2004 and even though the supplier had delivered the relevant records the audit was till pending completion. Messrs Classic Knitwear, the supplier, had been paying considerable amounts of income tax and sales tax. The department had no reason to believe that the complainant had indulged in fraudulent practices.

4. Admitting receipt of refund claims in February and August, 2004 the DR submitted that the provisions of subsection (4) of section 10 of the Sales Tax Act, 1990 and the Rules cited by the complainant were not applicable because the refund claims were being investigated to determine (i) whether or not the complainant had made payment of sale price to the supplier in accordance with the provisions of section 73 of the Sales Tax Act, 1990 and (ii) whether or not the supplier had physically supplied the goods to the complainant. The DR further added that the supplier's profile showed that it was issuing more tax invoices than its capacity. While the complainant's audit had been completed the supplier's audit could not be completed. The supplier did not have any in-house manufacturing facility. He dealt in yarn only but supplied Polo Shirts to the complainant. The complainant might have acquired the goods from other sources. The C.B.R. had suspended audits in November, 2004. However, audits could be undertaken and completed with Collector's permission on a case-to-case basis. Asked as to when the supplier's audit would be completed the DR replied that it would be completed within one month and complainant's refund claim would then be decided on merit in accordance with the provisions of law. Asked as to why the refund claim for the tax period May, 2004 was kept pending the DR submitted that the Collectorate was awaiting the results of investigation of refund claim for tax period February, 2004. Further asked to produce evidence, to show Additional Collector's permission for investigating/auditing complainant's refund claim the DR stated that no such permission was available on record. He also admitted that the complainant was not formally informed about subjection of his claims to investigation and audit. However, the banks were addressed to find out whether the complainant had made payments to the supplier in accordance with the provisions of section 73 of the Sales Tax Act, 1990. The DR pointed out that complainant's audit had revealed that it had not made full payments to the supplier. The AR, however, argued that the complainant had made all the payments subsequent to its audit because section 73 of the Act allowed payments within 120 days of issuance of tax invoices. The DR stated that the Department had reasons to believe that some fraudulent practice might have taken place requiring investigation of claims. Asked as to when the complainant's refund would be settled the DR submitted that supplier's audit would be completed within one month and if no discrepancies were noted refund would be paid or else a show-cause notice would be issued to the complainant and the case decided on merit in accordance with the 'provisions of law after providing the complainant the opportunity of defence. Complainant's AR submitted that he would have no objection to this course of action provided that the audit of the supplier and other inquiries in hand were completed promptly within a period of one month, as promised by the DR, and the refund claims were decided on merit. He further added that complainant's supplier would be ready for audit and the Department should complete it promptly.

5. The arguments of the parties and the record of the case have been considered and examined. The respondents do not deny receipt of refund claims on 28-4-2004 and 21-8-2004. Subject to certain limitations, refunds to the commercial exporters were required to be paid within a period of one month under section 10(2) of the Sales Tax Act, 1990 read with Refund 7(1) of the Sales Tax Refund Rules, 2002. No doubt, according to Rule 7(3) of the aforesaid Rules one months' time-limit did not apply to cases subjected to further inquiry or audit under sub-rules (3) to (5) of Rule 5 of the Rules but proviso to Rule 7(3) reads "provided that the officer incharge shall inform the claimant about subjection of his refund claim to inquiry or audit, as the case may be". Further according to sub-rule (4) of Rule 5 of the Rules the officer incharge could cause inquiry or audit only after approval froth the Additional Collector under intimation to the claimant. The record shows that neither any approval was obtained from the Additional Collector, as required, nor was the complainant intimated in writing. These omissions on the part of the Revenue were clearly violative of the provisions of the Act and the relevant Rules and amounted to maladministration. It is evident that the respondents have delayed decision on complainant's refund claims. Respondents' contention that the processing of refund claim for May, 2004 was held up because they were awaiting the results of the inquiry and investigation of claim for tax period February, 2004 is not tenable. Delay is noticeable in respect of each of the two refund claims. The audit of the supplier initiated or intended to be initiated has not been completed and the complainant's refund claims have been held up without any justification. Clearly, complainant's refund claims have been subjected to inaction and delay by the Revenue which also tantamount to `maladministration' within the meaning of section 2(3) of the Establishment of the Office of the Federal Tax Ombudsman Ordinance, 2000.During the complaint proceedings the complainant's AR exhibited a positive attitude in that he submitted that the complainant's supplier would be prepared for audit of the relevant period and would supply all information and record required for the purpose to enable the respondents to complete the audit within a period of one month, as promised by the DR, and that the complainant c would be prepared for the claims to be decided by the respondents on their merit in accordance with the provisions of law. In fact, the AR agreed to the course of action suggested by the DR during complaint proceedings. Clearly, maladministration is established as brought out above. However, considering DR's commitment to complete supplier's audit and other inquiries within one month and to decide complainant's refund claims on merit and AR's positive reaction to DR's gesture, it is recommended that the C.B.R. direct the concerned authority to:

(i) Complete supplier's audit and other linquiries within a period of one month, as promised by the DR, and decide the complainant's refund claims on their merit in accordance with the provisions of law after enlisting complainant's point of view.

(ii) Advise the dealing official to adhere to the provisions of Sales Tax Act, 1990 and the Rules framed thereunder so as to avoid (i) creating unnecessary complications and (ii) causing hardship to the dealing public.

(iii) Compliance be reported within 30 days.

C . M . A ./402/FTOOrder accordingly.