Messrs DELTA INNOVATIONS LIMITED, KARACHI VS SECRETARY, REVENNUE DIVISION, ISLAMABAD, 2007 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 601 (2006)

Customs Act (IV of 1969)---

----S. 81---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.2(3) & 22---S.R.O. 436(I)/2001, dated 18-6-2001---Provisional assessment of duty---Consignments of parts and components of motorcycles and trucks were released against bank guarantees with the undertaking to supply the Provisional and Final Certificates of the Central Board of Revenue---Such certificate had been furnished but bank guarantees had not been released and no reply had been given to several letters and applications sent to the Collector which amounted to maladministration---Department contended that provisional release of parts and components of motorcycles was allowed subject to the issuance of provisional/final certificate but the provisional certificate issued by Central Board of Revenue clearly specified "that concession shall be available prospectively from the date of issuance of the Provisional Certificate"---Since all imports of the parts and components were made prior to the issuance of the provisional certificate, the same were not entitled to any concession---Validity---Central Board of Revenue had not given any reasons/justification as to why on the application made in January, 2003 the survey was conducted in December, 2003; that why a provisional certificate was not issued till ordered by the High Court; that as to why it had been specifically mentioned in the provisional certificate that it would have only prospective effect, thus in effect, depriving the assemblers the benefit of tax concession apparently genuinely due to him and that why the Central Board of Revenue had not issued a final certificate despite the fact that more than two years had elapsed since, the date of survey and issue of the provisional certificate---Complainant had been the victim of' neglect, inattention, unnecessary delay, manifest departure from established practice without valid reasons and, surprisingly for the Central Board of Revenue, an arbitrary and unjust approach to decide the issues of the unit---Maladministration, in circumstances was established---Federal Tax Ombudsman recommended Central Board of Revenue to allow, the benefit of S.R.O. 436(I)/2001 effective from October, 2003 when the first consignment was cleared against bank guarantee under the order of the Collector of Customs; to issue a final certificate for 15000 units of motorcycles as mentioned in the survey report and the MOU between applicant and the Chinese Motorcycles company to establish a motorcycle manufacturing assembly plant with annual production of, 15000 units; and to re-examine the declaration in the Form-S survey application about the production capacity of 30,000 motorcycles per annum on double shift basis, get the unit resurveyed, and taking into consideration its past performance, may consider revising the capacity and that 17 bank guarantees out of which 8 related to trucks which reportedly were not disputed and 9 guarantees for CKD kits of motorcycles be released.

Afzal Awan, Advocate.

Manzoor Ahmad, General Manager.

Imran Iqbal, Advocate.

Imran Javaid, Consultant.

S.M. Shoaib, Secretary (I.I&T-III), C.B.R..

Irfan Javed, Deputy Collector of Customs (Appraisement).

Ms. Misbah Khatana, Deputy Collector of Customs (Appraisement).

FINDINGS/DECISION

JUSTICE (RETD.) MUNIR A. SHEIKH, FEDERAL TAX OMBUDSMAN.---The complaint alleging maladministration against the Customs Authorities has been filed for not releasing the bank guarantees despite submission of the Provisional and Final Certificates of the C.B.R. The complainants stated that they imported consignments of parts and components of motorcycles and trucks, which were released against bank guarantees with the undertaking to supply the aforesaid certificate later on as the matter was pending with the C.B.R. It was alleged that certificates have been furnished but (17) bank guarantees have not been released and no reply has been given to several letters and applications sent to the Collector (for release of the guarantees) which amounted to maladministration.

2. The complainants stated that under the fiscal incentive of S.R.O. 436(I)/2001 for manufacture of trucks and motorcycles they applied to C.B.R. on 29-1-2003 for issue of survey certificate. They imported consignments of CKD kits and applied to the Collector of Customs on 6-10-2003 to allow release of the CKD kits provisionally under section 81 of the Customs Act pending the issue of survey certificate which was allowed for a period of three months (extended by one month). They again applied to C.B.R. vide letters, dated 26-8-2003, 11-9-2003, 6-10-2003, 11-1-2003, 31-12-2003 and 27-1-2004 for issue of the provisional/final survey certificates for assembly of motorcycles and trucks but no action was taken.

3. The complainants stated that they were forced to file a writ petition in the Rawalpindi Bench of Lahore High Court, on the grounds that the component parts of motorcycles and trucks were importable on payment of customs duty @ 25% ad val whereas S.R.O. 436(1)/2001 allowed exemption of duty in excess of 30% for import of motorcycles in CKD condition. Since the motorcycles components imported by them attracted lesser rate of duty, they did not claim the benefit of S.R.O. 436(1)/2001 but the Directorate-General of Customs Intelligence raised a frivolous and vexatious objection that they must come in the regime of S.R.O. 436(I)/2001 for levy of 30% customs duty. In order to avoid harassment by the Customs Intelligence they agreed to opt for the aforesaid S.R.O. in applications to C.B.R. for issuance of provisional/final survey certificate for manufacture of motorcycles and trucks.

4. It was alleged that C.B.R. withheld the issuance of provisional and final survey certificates and ordered encashment of the bank guarantees. It was stated that EDB had approved their deletion programme on 9-1-2002, there was no justification to withhold the final survey certificate, and the inaction on the part of C.B.R. was mala fide in law. The High Court was requested to direct C.B.R. to allow the import of spare parts of motorcycles without the burden of S.R.O. 436(I)/2000 and issue final certificate on Form "S".

5. The High Court observed in its order, dated 12-2-2004 that "the petitioner claims certain benefits under S.R.O. 436(I)/2001, dated 18-5-2001 and his grievance is that survey certificate or form "S" is not being issued by respondent No.2", (C.B.R.) and directed C.B.R. "to finalize survey certificate or Form "S", if the same is pending with him in respect of the petitioner-company within a period of 30 days from the receipt of this order..."

6. The complainants stated that despite the fact that they had in-house facility to manufacture motorcycles and trucks they were not allowed to avail fiscal incentive under S.R.O. 436(I)/2001. In other identical cases C.B.R. had issued survey certificates to manufacturers of Honda, Yamaha, Hero etc. but a different treatment to their company was meted out and a defective certificate applicable prospectively was issued under High Court's order. With regard to the statement of the Secretary C.B.R. about recovery proceedings against which the Complainants had filed C.Ps. Nos. D-516/2004 and D-920/2004, (and Sindh High Court had allowed parts and accessories of motorcycles without forcing them the burden of S.R.O. 436(I)/2001), it was stated that this petition had no nexus with the 17 consignments released under S.R.O. 436(I)/2001.

7. It was stated that the Customs Authorities have not responded to their five applications for release of bank guarantees for about three years causing them financial loss and even the guarantees for trucks against which there was no objection have not been released. It was also the duty of the customs to obtain suitable amendment in the survey certificate from C.B.R. and release the bank guarantees. It was alleged that the issue of defective certificate and non-release of bank guarantees for about three years amounted to maladministration. It was requested that the respondents be directed to release the bank guarantees and compensation equal to surcharge @ 14% per annum be granted to them under section 22 of the FTO Ordinance, 2000.

8. The Deputy Collector of Customs (Appraisement) replied to the complaint that provisional release of parts and components of motorcycles was allowed subject to the issue of provisional/final certificate but the provisional certificate, dated 13-3-2004 issued by C.B.R. clearly specified "that concession shall be available prospectively from the date of issuance of the Provisional Certificate." Since all imports of parts and components were made prior to the issuance of the provisional certificate, the same were not entitled to any concession. Further, the certificate has been issued for 7500 units and the Complainants imported 16000 kits, the remaining 8500 units would be chargeable to statutory rate of duty for completely built up (CBU) units. It was contended that the complaint was not entertainable as the complainants had failed to fulfil the conditions of S.R.O. 436(1)/ 2001.

9. With a view to ascertaining the reasons for delay in the issue of the survey certificate and its prospective applicability, Revenue Division was asked, vide notice, dated 26-5-2006 to furnish its comments and depute and authorized representative to attend hearing. Secretary (I.T. & T.III) C.B.R. submitted the following comments vide C. No.2(38) Survey-II/2002 dated 12-6-2006.

(i) Complainants were importing component parts as partial kits for assembling motorcycles under H.S. 87.11 leviable to duty @ 90% but clearing the same under 87.14 as parts and accessories to be used as spare parts @ 25% duty.

(ii) They had approached the Engineering Development Board (EDB) for approval of Deletion Programme of "Star DS-70" brand motorcycle which was approved on 20-12-2002 with the condition that "The manufacturer shall ensure that neither they nor their vendors used smuggled parts/imported parts to make up the supplies". However, the complainants vide letter, dated 29-1-2003 requested the C.B.R. not to consider their request under S.R.O. 436(I)/2001 (30% duty) as manufacturer of motorcycles but to allow them concessionary imports under S.R.O. 357(1)/2002 Q 15% duty as manufacturer of components and sub-assemblies of motorcycles. (According to subsequent survey report they are manufacturers of motorcycles having technical collaboration with a Chinese motorcycle company).

(iii) Complainants were not the manufacturers of parts but of motorcycles and their request was considered under S.R.O. 436(I)/2001. The Director-General Intelligence and Investigation reported that they were not following the procedure under the said S.R.O. but cleared CKD kits as auto-parts at a lower rate of 25% duty.

(iv) On the direction of the Lahore High Court, provisional Survey Certificate for 7500 motorcycles was issued on 13-3-2004 under S.R.O. 436(1)/2001 but this benefit could not be given retrospective effect. On the other hand Indigenization Committee of EDB in its meeting of' 16-1-2004 decided that the reported shortfall in deletion of Star motorcycles would attract statutory rate chargeable on the relevant CBU vehicles on CKD kits imported after 30-6-2003 upto 30-6-2004.

(v) Appraisement Collectorate was directed to initiate recovery proceedings but the complainants filed another petition in the Sindh High Court to allow import of parts and accessories of motorcycles without the burden of S.R.O. 436(I)/2001 which was allowed by the Court and C.B.R. has requested its legal advisor to file CPLA in the Supreme Court against the judgment of the High Court.

10. The complainants' counsel submitted a rejoinder to the comments of the C.B.R. as follows:--

(i) It was denied that complainants were importing components parts; in all the seventeen cases, only components for manufacture of motorcycles and trucks were imported. If the goods in fact were spare-parts, there was no need for bank guarantees.

(ii) The point raised by the Secretary C.B.R. about the shortfall determined by Indigenization Committee of EDB was correct.

(iii) The letter, dated 29-1-2003 was misconceived; in subsequent letters, dated 26-8-2003, 11-7-2003, 11-10-2003, 31-12-2003, 27-1-2004 etc., the complainants repeatedly requested for issuance of provisional/final certificate under S.R.O. 436(I)/2001.

(iv) The so-called case of "circumvention of deletion programme" detected by the Directorate of Customs Intelligence has no relationship with this complaint. That case has already been decided by the Sindh High Court in favour of the complainants against which the Department has filed an appeal in the Supreme Court.

(v) Sales Tax Authorities have confirmed that the complainants have the assembling capacity of 30000 motorcycles. However, C.B.R. issued a Provisional Certificate effective prospectively under the order of the High Court whereas C.B.R. was under a legal obligation to issue final certificate for 30000 motorcycles.

(vi) The question of shortfall in the deletion achievement reported by EDB Technical Audit Team would arise only when the final certificate for 30000 motorcycles was issued. The present complaint was against the non-release of bank guarantees despite the fact that all conditions of S.R.O. 436(1)/2001 had been complied with.

11. During the hearing of the complaint, the learned Counsel for the complainants submitted further arguments to explain the circumstances surrounding their grievance and emphasized the following points:---

(i) Out of 17 bank guarantees, 8 guarantees related to the import of component parts of trucks in respect of which final certificate was issued by C.B.R. on 17-1-2005 but the same have not been released by the Department so far.

(ii) The in house facility for assembly of trucks and motorcycles was set up with a view to providing low value vehicles to the public which has been achieved as verifiable from the production and price statistics. C.B.R. had no right to refuse issuing a survey certificate despite about ten reminders sent to them. On High Court's directive, C.B.R. issued a provisional certificate with mala fide motive by making it effective prospectively and denying benefit to past imports.

(iii) If the C.B.R. did not intend to allow the facility of concessionary imports for local assembly as provided to a number of other assemblers, it should have declined the request in the first instance. Collector had allowed provisional release genuinely in anticipation of the admissibility of the concessionary rate of duty.

(iv) Component parts have been used exclusively for assembly of motorcycles as verifiable from the sales tax records. It is established that motorcycles have been assembled and sold on payment of sales tax and there is no justification for the Department not to allow concessionary rate of duty on import of components parts. Higher rate of duty of CBU in any ease is not leviable on the imports and the complainants are genuinely entitled to the duty concession allowed to a large number of assemblers of motorcycles and trucks.

(v) The statutory rate of duty on components at the time of import was 25% and if the complainants had not opted to the regime of S.R.O. 436(I)/2001 they would have been obliged to pay only 25% duty instead of 30% _ they originally paid. 90% duty on CBU was not applicable to them because they had not imported motorcycles in CBU condition but only as component parts, a fact which was verified at the time of release and can be confirmed even at the present stage.

(vi) The case reported by Directorate-General of Intelligence and EDB's decision was not subject-matter of this complaint and therefore not relevant. (Secretary C.B.R. agreed to this view).

(vii) While C.B.R. issued survey certificate for 7500 motorcycles, verifiable in-house facility for assembly of 30,000 motorcycles is in place. They have already assembled and disposed of 16000' motorcycles and requested for the facility of S.R.O. 436(I)/2001 for the entire quantity.

(viii) There was no reason to suspect that any part of the imports has been illegally disposed of as spare-parts of motorcycles; the production figures can be verified, the request is genuine, and C.B.R. be asked to re-consider their decision.

(ix) Goods were released under section 81 of the Customs Act and the period during 'which it was incumbent for the Customs Authorities to finalize the assessment has expired, the guarantees were no longer valid and should be returned to the importer.

(x) C.B.R. be directed to issue final survey certificate for 30,000 motorcycles instead of 7500, allow concession of S.R.O. 436(I)/2001 to all 17 consignments for trucks and motorcycles against consumption certificates after issuance of the final certificate as all the components imported in these 17 consignments have been used in assembling of motorcycles and trucks which can be verified from the sales tax records.

12. Deputy Collector of Customs (Appraisement) stated that the imported component parts for motorcycles were not covered by the survey certificate and were therefore assessable as complete motorcycles under PCT Heading 87.11 @ 90% customs duty chargeable on CBU motorcycles. With regard to the bank guarantees of the import of kits of trucks, if the request of the importer was in order, action would be taken to release the bank guarantees without delay. Secretary C.B.R. informed that the final survey certificates were now issued by the Collectors and not the C.B.R. In this case the survey report including the production capacity was communicated by the Department to C.B.R.

13. The submissions made by the complainants, the reply of the Department, the comments furnished by the Secretary (I.I&T-III) C.B.R., and the arguments put forward by both the sides have been examined. The complainants have requested for issue of a final survey certificate for manufacture of 30,000 motorcycles under S.R.O. 436(I)/2001 with retrospective effect covering the 16000 motorcycles already assembled by them and release of the bank guarantees against which provisional release was allowed by the Collector of Customs. They had first applied to Secretary (Survey) C.B.R. vide letter, dated 29-1-2003 with reference to the EDB letter, dated 9-1-2002 addressed to C.B.R. and sent with the Product Specific Deletion Programme for STAR 7000 motorcycle. It was requested that survey be carried out and provisional/final certificate be issued for the benefit of concessionary S.R.O. 357(I)/2002 or S.R.O. 436(I)/2001. It seems they inadvertently showed disinterest in S.R.O. 436(I)/2001 and requested for issue of survey certificates under S.R.O. 357(I)/2002.

14. Since no action was taken by the C.B.R., they addressed a letter, dated 26-8-2003 to the Member (Customs) for issue of provisional/survey certificate under S.R.O. 436(I)/2001 stating the EDB had already approved the deletion programme and sent it to C.B.R. on 9-1-2002. This letter was followed by letters, dated 11-9-2003, 11-10-2003, 31-12-2003 and 27-1-2004 addressed to the Member (Customs) for issue of provisional/final certificate for assembling motorcycles. It seems that the first letter, dated 29-1-2003 concerning the benefit of S.R.O. 357(I)/2002 was not processed in the C.B.R. and no action was taken on subsequent letters which repeatedly referred to the concession under S.R.O. 436(I)/2001.

15. Under paragraph 14 of Chapter-7 of the CGO 12/2002, it has been laid down that Chief (Survey), C.B.R., would issue provisional certificate allowing release of up to 25% of the installed capacity for raw materials/components wherever necessary. According to paragraph 16 the manufacturer should approach the Chief (Survey), C.B.R., at least three months before the import of fabrication materials. In this case the first application was made on 29-1-2003 followed by several applications addressed to the Member (Customs) but no action was taken. Collectorate of Sales Tax (Enforcement) submitted survey report, dated 18-12-2003 to C.B.R. confirming the in-house facility for assembly of motorcycle and the existence of MOU for technical collaboration with a Chinese Motorcycle Company for annual production of 15000 units. It was stated that during 2002-2003 the unit had assembled 5795 STAR brand motorcycles and during July, 2003 to October,' 2003 it had assembled 7656 motorcycles. The report pointed out that as required under S.R.O. 436(I)/2001 the unit was required to work under a deletion programme and an EDB approved deletion programme had been issued. However, C.B.R: did not issue a provisional certificate while they imported engines of motorcycles and obtained release against bank guarantees for the amount of duty in excess of 30%.

16. During the hearing of the complaint Mr. S.M. Shoaib, former Deputy Collector of Sales Tax (who signed the survey report, dated 18-12-2003) now Secretary (Survey) C.B.R., admitted there was misunderstanding not only about the concessionary S.R.O. under which the survey certificate was sought but also about a case which was made out by the Directorate-General of Customs Intelligence which had no relationship with the present complaint and has been decided by the High Court in favour of the complainants.

17. The issues central to the complaint are the date of applicability of the provisional certificate issued under the directive of the High Court, the issuance of final certificate and causal of the Department to release 17 bank guarantees against which the CKD kits were imported. C.B.R. has not given any reason/justification (i) why on the application made in January, 2003 the (abnormally delayed) survey was conducted in December, 2003, (ii) why a provisional certificate was not issued till ordered by the High Court, (iii) why it has been specifically mentioned in the provisional certificate that it would have only prospective effect, thus in effect, depriving the assemblers the benefit of tax concession apparently genuinely due to him, and (iv) why C.B.R. has not issued a final certificate despite the fact that more than two years have elapsed since the date of survey and issue of the provisional certificate. Clearly the complainants have been the victim of neglect, inattention, unnecessary delay, manifest departure from established practice without valid reasons and, surprisingly for the C.B.R., an arbitrary and unjust approach to decide the issues of this unit. Maladministration is established.

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

(i) Allow the benefit of S.R.O. 436(I)/2001 effective from October, 2003 when the first consignment was cleared against bank C guarantee under the order of the Collector of Customs;

(ii) issue a final certificate for 15000 units of motorcycles as mentioned in the survey report and the MOU between Messrs Delta Innovation Limited and a Chinese motorcycle company to establish a motorcycles manufacturing assembly plant with annual production of 15000 units; and

(iii) re-examine the declaration in the Form-S survey application about the production capacity of 30,000 motorcycles per annum on double shift basis, get the unit resurveyed, and taking into consideration its past performance, may consider revising the capacity.

(iv) The 17 bank guarantees out of which 8 relate to trucks which reportedly are not disputed' and 9 guarantees for CKD kits of motorcycles be released.

(v) Above action be completed within thirty days; and

(vi) compliance be reported to this office within forty-five days.

C.M.A./169/FTO???????????????????????????????????????????????????????????????????????????????? Order accordingly.