Messrs S.F. TRADERS VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2007 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1420 (2004)

(a) Sales Tax Act (III of 1951)---

---S. 10---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)7--Refund---Complaint was filed against alleged illegal adjudication and rejection of claim for refund of sales tax amounting to Rs.30,43,132---Complainant alleged that they had not received show-cause notice, adjudication was ex parte, no audit observation was issued, payments were made through crossed cheques/Bank drafts, costs of taxable goods inclusive of sale tax was paid by them and Department should not refuse refund if the suppliers were not traceable---Department in its reply had asserted that refund was claimed on fake/flying invoices made in the same premises and complainant and suppliers were one and the same person and Banking transactions were made "to manoeuvre to fulfil the requirements of section 73 of the Sale Tax Act, 1951" and that Adjudication Order was correct and there was no maladministration---Validity---Customs Authorities had held that the refund claimed was based on fake invoices and the input tax had not been paid by the suppliers---Show-cause notice was not served on the complainants and their claim was summarily rejected by adjudicating branch---Validity of each invoice and transaction j was not examined---Cogent reasons were not given---Existence suppliers, genuineness of transfer, payment of sales tax through Banking Channels, purchase record with regard to quality and quantity should have been examined before rejection of refund claim---Rejection 00 mere suspicion was maladministration---Federal Tax Ombudsman recommended that Central Board of Revenue to set aside the order passed by the Deputy Collector of Sales Tax and direct the Collector to determine the admissibility of the claim on the basis of transfer of goods against valid transport documents, payment of value of goods inclusive of sales tax, receipts of goods and satisfy himself on the crucial points as mentioned in by the Ombudsman and decide the claim after hearing and through a speaking order.

(b) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 9(2)(a)---Sub judice---Jurisdiction---Manner in which the refund claim was dealt with betrayed disregard for due process of law---Claim was rejected merely on suspicion---Issue agitated before the office was different from the matter pending in the High Court about the return of seized documents---Argument that available legal remedies should have been exhausted did not impinge on the jurisdiction of the office to investigate into a case of manifest maladministration.

Tahir Razzaq Khan, FCA, for the Complainant.

Dr. S.M. Shoaib, Deputy Collector of Sales Tax for Respondent.

FINDINGS/DECISION

The complaint has been filed against the allegedly illegal adjudication order No.1 of 2004 passed by the Deputy Collector (Refund-V) rejecting refund of sales tax without valid justification. The complainants have stated they had filed claim for refund of sales tax Rs.3,043,132 paid on goods purchased from the registered persons and exported in April and May, 2003. Their suppliers were not in the defaulters' list, they were neither fugitive nor untraceable when the transactions were executed. The Collectorate had black-listed them merely on the basis of suspicion and whims and the reasons best known to them.

2. he complainants stated that when they received notice, dated 1-11-2003 for hearing on 10-11-2003, (i) they replied that they had not received the show-cause notice (SCN) and a suit was also pending in the High Court and, therefore, no action should be taken till the decision of the Court. However, the Deputy Collector issued a final notice, dated 9-12-2003, (ii) they again requested for copy of SCN but received an ex parte adjudication order dated 13-1-2004 rejecting the refund without assigning any reasons. They stated that (iii) under section 25(3) of the Sales Tax Act it was mandatory to issue audit observation, which was not done; (iv) they had made the payment through crossed cheques/bank drafts in accordance with section 73 of the Act; (v) the goods had been physically obtained from various suppliers and subsequently exported which could be proved; (vi) they had paid the cost of taxable goods inclusive of sales tax; (vii) under section 3(3) the liability to deposit sales tax in the exchequer lay with the persons making taxable supplies; and (viii) at this belated stage the Department should not refuse refund if the suppliers were not traceable or certain cases had been initiated against them.

3. The complainants referred to the rulings of this office in Complaints No.1345 of 2001 of Messrs Arzoo Textile Mills Limited, No. 1770 of 2001 of Messrs Ihsan Yousaf Textile (Pvt.) Limited, and No.950-L/2001 in case of Messrs Kashmir Edible Oil Limited, and quoted the decision that "if loss has occurred to the Government due to loopholes in the system, the proper course would be to penalize those who designed the scheme but not the taxpayers who handed over the money in good faith".

4. They alleged that the Department had acted capriciously and vindictively to cover up their lapses, the adjudication order was without jurisdiction and contrary to law, it showed neglect, ineptitude, inefficiency in the discharge of duties and attracted the jurisdiction of this office under section 2(3) of Ordinance No.XXXV of 2000 for redress of maladministration. They requested that, action be taken, under Efficiency and Disciplinary Rules, against Dr. S.M. Shoaib, Deputy Collector, for abuse and misuse of powers, adjudication of case without jurisdiction, and lack of knowledge of principles of natural justice, the Collector be asked to reopen the case under section 45A of the Act and, after ascertaining the truth through an independent inquiry, issue order of refund.

5. The Deputy Collector of Sales Tax replied to the complaint that a credible information was received from C.B.R. that Messrs Diamond Textile Traders, Messrs Super Tex Enterprises and Messrs Green Land Business Traders were conniving to claim refund on fake/flying invoices, with the direction to take action against them under sections 38 and 40A of the Sales Tax Act. As a result of the search of the premises of Diamond Textile Mills it was found that besides the documents of Messrs Al-Habib Trading Company and Messrs Diamond Textile Traders, the documents of Messrs Radiant Trading, Messrs Zam Zam Textile, Messrs S.F. Traders, Messrs Super Tex, Messrs World Business Traders, Messrs Green Land Traders and other units were lying in the same premises. Mr. Zahid Habib, present at the premises, did not provide any satisfactory explanation and all the available record was taken into custody. The scrutiny of the documents revealed that Mr. Zahid Habib, Chief Executive of Al Habib Trading Company, was running the racket D of preparing fake invoices and claiming refund. The units of Punjab supplied invoices to wholesalers of Karachi who issued invoices to the exporting companies run by Mr. Zahid Habib and all these companies were involved in this trade. The Deputy Collector stated that refund of more than Rs.90.966 million had been claimed by these companies owned by the relatives of Mr. Zahid Habib.

6. He stated that a SCN was served on the complainants on 3-9-2003 through a courier service under section 56 of the Act. Despite reminders no one appeared for hearing and the case was 'decided ex parte as the proceedings could not be withheld indefinitely. He stated that (i) it was not a case of audit under section 25 of the Act but action under sections 38 and 40A; (ii) the Complainants and suppliers were one and banking transactions were made "to manoeuvre to fulfil the requirement of section 73 of the Sales Tax Act"; (iii) they submitted fake and flying invoices which were made in the same premises in violation of section 22. He requested that the complaint be rejected on the grounds that (i) the complainants intentionally avoided to appear for hearing and did not file an appeal, (ii) the matter pending in the High Court being sub judice, and the refund of tax being a case of assessment, the matter was outside the jurisdiction of this office; (iii) the request for action under section 45-A(4) read with section 45-A(1) of the Act was not valid because legal remedy under section 45-B was available; (iv) there was no maladministration in issuing the adjudication order, and (v) in the absence of any (contrary) order of the Appellate Authority, the adjudication order should not be considered vindictive, capricious, biased and illegal.

7. During the hearing of the complaint, the complainant's Authorized Representative (AR) reiterated at length the arguments and stated that the allegation of purchases from unregistered persons and submission of fake/flying invoices to obtain illegal refund was without lawful basis. The four basic components for validity of tax refund namely (i) genuine transfer of goods from the supplier to the purchaser, (ii) verification of quality/quantity of goods so purchased, (iii) verification of payment of value and sales tax to the supplier through the regular banking channels to the satisfaction of the Department, and (iv) export of the same goods to foreign buyer, could be verified from the documents and there was no justification to deny the refund.

8. AR further stated that the fact that Mr. Zahid Habib, Chief Executive of one of the firms, was related to the proprietors of the other firms did not necessarily mean that he was conducting some illegal business. He argued that involving 9 companies in the tax fraud without tangible evidence only betrayed the prejudiced approach of the Department. He added that the burden of proof for commission of tax fraud by the complainants lay with the Department but it has failed to establish the allegation with concrete proof. The Deputy Collector reiterated the position stated in the Respondent's reply to the complaint.

9. The submissions made and the arguments put forward by both the sides, have been examined. The complainants have contended that the suppliers were not on the suspected list when the transactions took place and the invoices issued, the payments were made to the suppliers through regular banking channels, and the goods were exported. It has been argued that validity of the invoices submitted by the complainants were not examined but disregarded on the basis of a preliminary investigation report that Mr. Zahid Habib was the central figure master-minding the issue of fake/flying invoices and fraudulently claiming refund of sales tax. It was held by the customs that the refund claim was based on fake invoices and the input tax had not been paid by the suppliers.

10. With regard to the objection regarding the jurisdiction, the issue agitated before this office is totally different from the matter pending before the High Court about the return of the seized documents. The argument that the matter is sub judice is not maintainable. This office has taken cognizance of the complaint also because the manner in which the refund claim has been dealt with betrays disregard for due process of law. The claim was rejected by the Deputy Collector on the ground that it was a suspected unit and there was "a sufficient reason to believe that the amount of sales tax input claimed as refund has not been deposited/paid in the Government exchequer". It has been established that SCN was not served on the complainants, they were not given opportunity to represent their case, and their claim was summarily rejected by the Adjudicating Officer without examining the validity of each invoice and transaction and without giving cogent reasons which clearly shows the mala fide of the Adjudicating Officer. The adjudication order suffers from impropriety and illegality. The argument that the available legal remedies should have been exhausted does not impinge on the jurisdiction of this office to investigate into a case of manifest maladministration.

11. The Sales Tax Authorities should have thoroughly examined (i) whether the suppliers were in existence at the time of supplies, (ii) whether the goods were genuinely transferred from the suppliers to the purchasers, (iii) whether genuine transfer of value of goods inclusive of sales tax had been made through regular banking channels, (iv) whether the goods were stored and accounted for in the purchase record consistent with the quantity and quality mentioned in the invoices and other documents, and (v) whether the same goods which were supplied by the suppliers and received by the purchasers had been eventually exported by the complainants. They should have determined the genuineness and validity or otherwise of each invoice instead of summary rejection of the refund claim merely on the suspected status of the unit. It constitutes a case of arbitrary decision, which is unjust, unreasonable and oppressive in character and based on irrelevant and unsustainable grounds. It is a clear case of maladministration as defined under subsection (3) of section 2 of Ordinance No.XXXV of 2000.

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

(i) set aside the order passed by the Deputy Collector of Sales Tax:

(ii) direct the Collector to determine the admissibility of the claim on the basis of transfer of goods from the suppliers to the purchasers against valid transport documents, genuine transfer of value of goods inclusive of sales tax from the purchasers to the suppliers, record of the receipt of goods in the purchaser's account books and export of goods and satisfy himself on the crucial points mentioned at paragraph 11 above;

(iii) decide the refund claim after giving to the complainant opportunity of being heard and issue a speaking order based on cogent reasons. within thirty days; and

(iv) Compliance be reported within forty-five days.

M.I./346/FTO????????????????????????????????????????????????????????????????????????????????????? Order accordingly.