MANS ENTERPRISES VS SECRETARY REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1757 (2006)

Sales Tax Act (VII of 1990)--

----S.10---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Excess amount to be carried forward or refunded---Import of knitting machinery items---Knitting services---Sales tax was not leviable on such services---Refund was claimed as paid on machinery at import stage---Department did not heed its written and oral requests for more than three years---Validity---Department submitted that supplies of textiles items had been zero-rated since 6-6-2005, department would be prepared to allow refund subject to verification that complainant had not claimed any adjustment of input tax---`Maladministration' had taken place as refund application and subsequent reminder were not responded to be the department leading to delay in payment of refund---Federal Tax Ombudsman recommended that Central Board of Revenue was to direct the competent authority to refund an amount of Rs.252472 to the complainant after verification that the complainant had not claimed any adjustment of input tax during the period March, 2004 onwards, as offered and undertaken by the Departmental Representative during complaint proceedings.

Muhammad Akbar (Advisor) Dealing Officer.

Malik Tabbasum Maqsood Khan for Complainant.

Muhammad Saeed Wattoo, D.C. Sales Tax, Lahore for Respondents.

DECISION/FINDINGS

JUSTICE (RETD.) MUNIR A. SHEIKH, (FEDERAL TAX OMBUDSMAN).---Facts of the complaint are that the complainant had imported knitting machinery items for its unit in 2001. After installing the same at its business premises, it began to provide knitting services to its clients. Although sales tax was not leviable on these services, the complainant was forced by the department' to pay sales tax on the said machinery at the import stage. However, it claimed refund of sales tax so paid but the Sales Tax Department did not heed its written and oral requests for more than three years. Subsequently, however, it was able to get an adjustment invoice of Rs.252472 instead of a refund voucher, as applied. The adjustment invoice was useless for the complainant for it was not liable to pay sales tax. The complainant had been filing its sales tax returns regularly and even though the department had been conducting complainant's audit it had failed to detect any discrepancy. As no sales tax was chargeable on knitting services, the refund of amount paid, as determined by the sales tax department, could not be adjusted towards any demand against the complainant. Respondents may be directed to issue the `determined refund' with the compensation, without further delay.

2. In reply, the Collectorate of Sales Tax and Federal Excise, Lahore has submitted that complainant's contention that no tax was leviable on knitting of yarn was incorrect. It was engaged in knitting of yarn on commercial basis and thus qualified as manufacturer of taxable goods in terms of section 2(17) of the Sales Tax Act, 1990, making taxable supplies in terms of section 2(41) of the Act. Knitting of yarn was leviable to sales tax. Sales Tax General Order No.1 of 1998 dated 17-6-1998 (reported as PTCL 1998 ST. 1484) clarified that such vendors were manufacturers and their supplies were chargeable to sales tax. The complainant had imported old and used knitting machinery vide bills of entry dated 11-10-2000. Sales tax was correctly charged at the import stage. It was entitled to deduct sales tax (input tax) paid at the import stage from its output tax during the period October 2000 in terms of section 7(1) of the Act. The complainant did not claim adjustment of input tax during the relevant tax period. Instead, it filed refund claim amounting to Rs.252472 under section 66 of the Act. The said application was processed and the complainant was allowed to take adjustment of Rs.252472 in the tax period March 2004 vide adjustment order dated 6-4-2004. The complainant was required to charge and pay sales tax levied on taxable supplies as required under section 3(1) of the Act. It had been paying sales tax after deduction of input tax paid by-It. The contention that its activity was not taxable and it could not adjust input tax allowed by the department was incorrect. In case the complainant contended that `knitting' was exempt from levy of tax it would not be able to reclaim or deduct input tax paid by it on the import of machinery in terms of section 8(1)(a) of the Act. As per the provisions of law the complainant being a manufacturer was entitled to deduct input tax paid by it during the relevant tax period from its output tax and even if deduction of input tax exceeded output tax it could be carried forward to the next tax period. The complainant was not entitled to refund of input tax. It is pleaded that the complaint may be filed.

3. During the hearing, the AR reiterated the points advanced in the written complaint, submitting that the complainant had filed application dated 3-9-2001 for payment of refund of sales tax paid at the import stage on the ground that the amount was not claimed in the relevant tax period. On 6-4-2004, the department allowed adjustment of sales tax paid at the import stage against output tax. Instead, it could have allowed refund applied for. The complainant had been paying sales tax on knitting uptil April, 2004; thereafter the unit was closed. The department issued the adjustment order during the same month. The complainant could not utilize adjustment order because of closure of the unit and because supplies of textile items had been zero-rated since 6-6-2005. The AR added that the complainant had reminded the department vide letters dated 14-4-2004 and 7-5-2004 for payment of refund but the department had failed to respond.

4. The DR reiterated the arguments advanced in the parawise comments. He agreed that supplies of textile items had been zero-rated since 6-6-2005. He further added that subject to verification that the complainant had not claimed any adjustment of input tax during the period from March, 2004 onwards, the respondents would be willing to allow refund of Rs.252472 because complainant's future supplies were zero-rated.

5. The arguments of the two sides and records of the case have been considered and examined. The two sides expressed their respective points of view. The DR submitted that in view of the fact that supplies of textiles items had been zero-rated since 6-6-2005, the department would be prepared to allow refund of Rs.252472 subject to verification that the complainant had not claimed any adjustment of input tax during the period March, 2004 onwards. Clearly, there has been 'mal administration' in that complainant's refund application and subsequent reminders' dated 14-4-2004 and 7-5-2004 seeking refund were not responded to by the department leading to delay in payment of refund. It is recommended that the CBR direct the competent authority to:--

(i) Refund an amount of Rs.252472 to the complainant after verification that the complainant not claimed any adjustment of input tax during the period March, 2004 onwards, as offered and undertaken by the departmental representative during complaint proceedings.

(ii) Compliance be reported within 30 days of the receipt of this order.

C.M.A./18/FTOOrder accordingly.