KASHIF CHEMICAL CORPORATION, LAHORE VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 731 (2003)

(a) Sales Tax Act (VII of 1990)---

----S.47A, 2(46)(e) & 32A-Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Indirect Taxes Settlement Commission---Value of supplies---Sulphonic Acid---Evasion of tax by suppression of value of supplies of Sulphonic Acid---Complainant proposed that instead of appointing independent auditors the disputes may be resolved in term of S.47A of the Sales Tax Act, 1990 under which the Central Board of Revenue could appoint a committee for resolution of any hardship relating to levy or payment of taxes---Departmental representative agreed to the proposal and it was mutually agreed that cases be referred to Dispute Resolution Committee---Committee so constituted shall examine the record of the cases and after hearing both the parties submit its report/recommendations to the Central Board of Revenue within a reasonable period for resolution of the disputes which will be acceptable to both the parties---Agreement between the parties was recorded and the proceedings were closed by the Federal Tax Ombudsman.

1981 STC 290 ref.

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

----S.33---Informal resolution of disputes---Jurisdiction---Under S.33 of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000, the Federal Tax Ombudsman may exercise jurisdiction for bringing about consensus between the parties to arrive at an amicable settlement.

Muhammad Akbar, Advisor, Dealing Officer.

Akhtar Javed, for the Complainant.

Mazhar Waseem, D.C. (Audit) and Najeeb Qadir, Cost Accountant for Respondents.

FINDINGS

&

MEMORANDUM OF AGREEMENT

JUSTICE (RETD.) SALEEM AKHTAR (FEDERAL TAX OMBUDSMAN).---These complaints together with applications under section 33 of the Establishment of Office of the Federal Tax Ombudsman Ordinance, 2000 involving substantially similar points of law and fact are being disposed of together by this order.

2. Brief facts as stated in the complaints are that the special auditors appointed by the C.B.R. under section 32A of the Sales Tax Act, 1990 conducted audit of the complainant's records for the period January, 1999 to December, 2000. It was observed in the audit reports that the complainants had evaded sales tax amounting to Rs.35,852,618 (Kashif Chemical Corporation) and Rs.51,691,043 (Messrs Shahid Brothers, Lahofe) on the basis of alleged suppression of value of supplies of Sulphonic Acid and other products. The average rate at which the complainant sold Sulphonic Acid was alleged to be unjustly compared with the average rate taken from Daily Business Recorder. The auditors also overestimated the sales during the period vis-a-vis those declared by the complainant. Out of many products the auditors took Sulphonic Acid as the base for calculating the liability because according to them Sulphonic Acid constituted 86% of total sales. As the rates for verification of all the items were not available the percentage calculated i.e. 54.77% for Sulphonic Acid was added to all items over the period. In the case of Messrs Shahid Brothers (Complaint No.335-L of 2003) it was observed in the audit report that the complainant had been evading tax on the basis of suppression of values of Sulphonic Acid as in the case of Kashif Chemicals and also in respect of complainant's product Maize Starch. Once again the calculation in respect of Sulphonic Acid was based on the average rate taken from the Business Recorder and was base in respect of Maize Starch on the basis of comparison with the invoice issued by Rafhan Maize Company. It is alleged that the values of sales of locally purchased and imported items were illegally unjustly inflated. The two complainants were asked to deposit huge amounts of tax, additional tax and penalty.

3. On receipt of audit reports the tax authorities asked the complainants to deposit the tax amounts and to discuss the cases or else the cases would be sent up for adjudication. The complainants submitted replies denying all charges. Meetings were also held with the respondents including the Special Auditors. In the meetings the complainants explained to respondents the concept of value of supplies as defined under section 2(46) of the Sales Tax Act, 1990 and that the taxes had been paid according to law. Since the C.B.R. had not fixed any value the value as stipulated under section 2(46) of the Act should be accepted. Where values are not correctly declared a Valuation Committee could be set up under section 2(46)(e) of the Sales Tax Act, 1990 to determine correct values. It has been pleaded that neither any committee was set up during the period nor were the values fixed, therefore, the declared values should have been accepted. The Collectorate gave the complainants to understand that the Valuation Committee would be set up to determine the values during the period under audit. The Collector constituted the Valuation Committee to resolve the issue of valuation. The complainants asked the respondents to disclose the evidence on the basis of which the values of supplies were calculated but they did not supply the same. The Valuation Committee did not make any progress. These are cases of alleged undue harassment. It has been prayed that the respondents may be directed to drop unlawful proceedings. The complainants have claimed damages for harassment.

4. In their reply, the respondents have challenged the jurisdiction of the Federal Tax Ombudsman on the grounds that (i) the cases relate to assessment and determination of tax liability (ii) the cases once decided by the department will enable the complainants to file appeal before the appropriate appellate authority. The liabilities have been created on account of under-valuation of sales for the period from January, 1999 to 31st December, 2000. Sulphonic Acid was used as the criteria to calculate under-valuation for other items also because it represented major bulk of the goods involved. The average rates appearing in Business Recorder represented an independent source. In the case of Shahid Brothers the rate of Maize Starch was compared with the purchase invoice of Messrs Zamindara Paper Mills. The Valuation Committee was set up on the request of the complainants. The difference in grade and quality of the products is only marginal. The Valuation Committee did not arbitrarily adopt the price of the newspaper. Although external auditors had conducted the audit yet a Valuation Committee was formed for impartial determination of values. The complainants were not members of the committee but they were invited to attend all the meetings and the issues were discussed. Number of objections raised by the complainants were met. The issue could not be resolved because of the attitude of the complainants. The complainants asked for newspaper clippings, which were provided. The complainants were given the opportunity to produce the evidence and the genuineness of prices both before external auditors and Valuation Committee. The Committee has issued its findings. In pursuance of the decision of the Valuation Committee the liabilities of taxpayers will be recalculated. Show-cause notices would be issued before deciding the cases.

5. Subsequent to the filing of the complaints the complainants filed applications under section 33 of the Establishment of the Office of the Federal Tax Ombudsman Ordinance, 2000 in which the complainants reiterated the arguments as advanced in the complaints requesting that the issues in question may be resolved in terms of section 33 of the F.T.O. Ordinance or else the respondents would decide the cases ex parte to complainants' disadvantage.

6. The case were heard. The Advocate of the complainants objected to the manner in which the audit was conducted on a selective basis, selecting three months out of which a record of 20 days was audited. He also objected to the rates published in the newspaper and to the proceedings of the Valuation Committee. On the other hand, the respondents justified the random audit and the proper appointment of the Valuation Committee at the request of the complainants. He stated that before adjudicating the cases the complainants would be given proper opportunity of defence and hearing.

7. These complaints relate to process of auditing in which auditors were appointed under section 32A of the Sales Tax Act, 1990 for auditing the accounts and record for the period January, 1999 to December, 2000. It is an admitted position that the auditor had selected three months out of which record of a period of 20 days was audited. The reports of daily newspaper Business Recorder were also made the basis of findings. After that the Valuation Committee was constituted, the learned counsel also objected to the Committee and proceedings taken by it. The Valuation Committee submitted its report on 24-4-2003. During these proceedings Mr. Najeeb Qadir, Cost Accountant was also present. The learned representative for the Department justified selected random audit and contended that it is permissible and has referred to the decision reported in 1981 STC 290.

8. During the course of hearing the complainants filed application under section 33 of the F.T.O. Ordinance for amicable settlement of dispute through conciliation and mediation. Before proceedings further it is appropriate to deal with the objection to jurisdiction. It may be observed that it has consistently been observed that where maladministration is found the F.T.O. has jurisdiction in the matter. However by filing application under section 33 the complexion of the case has changed. Section 33 opens with a non-obstante clause and therefore for argument sake if respondent's objection to jurisdiction is accepted it will not apply to exercise of jurisdiction under section 33. In such matters the bar under section 9(2)(a) & (b) as contended by the respondents will not apply. Under section 33 the F.T.O. may exercise jurisdiction for bringing about consensus between the parties to arrive at an amicable settlement. On the offer for cancellation being made, the learned representative for the department sought time to seek instructions.

9. Thereafter again a meeting of the parties was arranged in which the learned representative of the Department consented for amicable settlement under section 33 of the F.T.O. Ordinance. The parties discussed the circumstances of the cases and the objections taken by the complainants. During discussion the learned Advocate for the complainant proposed that instead of appointing independent auditors the disputes may be resolved in terms of section 47A of the Sales Tax Act, 1990 (Alternate Dispute Resolution) under which the C.B.R. can appoint a committee for resolution of any hardship relating to levy or payment of taxes. The departmental representative Mr. Mazhar Waseem, DC (Audit) agreed to proposal. It was, therefore, mutually agreed that the two cases be referred to the Dispute Resolution Committee appointed by the C.B.R. under the aforesaid section with Mr. Shabbar Hussain Zaidi of A.F. Ferguson & Co., Chartered Accountants, as the accounting member. The Committee so constituted shall examine the record of the cases and after hearing both the parties submit its report/recom mendations to the C.B.R. within a reasonable period for resolution of the disputes which will be acceptable to both the parties.

10. Accordingly the agreement between the parties in both the cases as contained in paragraph 9 is recorded and the proceedings are closed.

C.M.A./14/F.T.O.Order accordingl