GLAXO SMITH KLINE PAKISTAN LIMITED VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 89 (2007)

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

----S.9(2)(b)---Sales Tax Act (VII of 1990) Ss. 7 & 9---Sales Tax Rules, 2006, Rr. 19 & 23---Complaint---Jurisdiction of Federal Ombudsman---Scope---Collector of Sales Tax in her written report had raised objection regarding jurisdiction of office of Ombudsman on the ground that since the issue involved interpretation of law, rules and regulations, Ombudsman office had no jurisdiction to investigate the complaint in view of provisions of S.9(2)(b) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000---Validity---Said objection was invalid because whenever maladministration was alleged independent of the controversy in the matter, there would be no bar to jurisdiction of the Federal Tax Ombudsman to look into the allegation of mal administration---Wherever maladministration was alleged and proved, then Federal Tax Ombudsman could give recommendations and findings which could even affect the merits of case---Question involved in the present complaint did not require any interpretation of law and rules, but it was alleged that the Department was refusing to follow the legal principle settled by the High Court---Such conduct being contrary to law, tantamount maladministration which office of Ombudsman was competent to investigate or inquire into.

Mayfair Spinning Mills v. Customs, Excise and Sales Tax Appellate Tribunal, Lahore PTCL 2002 CL 115 ref.

(b) Constitution of Pakistan (1973)---

----Art.189---Decision of Supreme Court, binding force of---Only that decision of the Supreme Court would be binding which would decide a question of law or was based upon a principle of law or enunciated a principle of law---Decision should be final and after that nothing should remain pending before Supreme Court regarding that point---None of the conditions enumerated in Art.189 of the Constitution being applicable to the order of the Supreme Court, order suspending the operation of the judgment of the High Court which was not covered by Art.189 of the Constitution, was not binding on the courts of Pakistan, except on the parties in that case.

Dr. Farogh Naseem, Messrs Asif Haroon and Samiullah for Petitioners.

Chartered Accountants for the Complainant.

Badaruddin Ahmed Qureshi, Deputy Collector, Sales Tax for Respondent.

DECISION/FINDINGS

JUSTICE (RETD.) MUNIR A. SHAIKH, (FEDERAL TAX OMBUDSMAN).---The complainant, a limited company engaged in the business of manufacture and sale of pharmaceutical goods and consumer items such as toothpaste, mouth wash etc; is aggrieved by non-issuance of refund by the Sales Tax Department and also by its demand to surrender the input tax suffered on goods destroyed/damaged/expired/ returned.

2. Brief facts of the case are that the complainant purchases raw material from the local market and also through import on which it suffers/pays input tax. It is stated that the intention of the complainant all along is to utilize the raw material in the process of manufacture and then sell out the end product and thus adjust the input tax suffered by it on the purchase/import of raw material with final output tax on supplies. The goods manufactured are effected through a distribution of network and the modality of sales is that the complainant supplies the goods and pays output sales tax thereon after necessary adjustment of input tax. In case, the goods get damaged or expired, the distributors/purchasers return the goods and consequently the supplies/sales made to them are reversed. As such, the incidence of output sales tax is reversed since no supplies take effect. This process of adjustment of input tax with the output tax has been prescribed by section 7 of the Sales Tax Act, 1990 (hereinafter referred as the Act), and the procedure of return of goods is regulated by section 9 of the Act read with Rules 19 to 23 of the Sales Tax Rules, 2006 (hereinafter referred as the Rules). In terms of rule 20, upon cancellation/return of the goods, the buyer/recipient issues a debit note which indicates the quantity of goods being returned or the supplies which are being cancelled. It is stated that sometime goods on which although input tax is suffered, get expired or damaged/destroyed even before they are supplied. In such an eventuality. Rule 23 requires permission from the Department to destroy such goods but there is no precondition to surrender the input tax first suffered on such goods.

3. It is stated that sometimes in September, 2006, certain expired goods were returned by the complainant's distributor who issued debit notes thereafter. Consequently, the complainant sought on approval/permission for the issuance of credit notes and the destruction of the goods which was granted by the Collector LTU but subject to the condition that the input tax already adjusted on these goods had to be surrendered first. It is stated that the complainant attempted to submit to the Deputy Collector that the requirement to surrender input tax was against settled law but the said Deputy Collector refused to accede to the complainant's request and since the matter was emergent in nature, the complainant had no other option but to surrender the relevant input tax of Rs.501,506 under protest. Thereafter, it moved an application for refund of this amount but the request of the complainant in this regard has remained unheeded.

4. It is urged that apart from the above, the complainant has also other stocks which are either returned by the distributor or are expired and which are to be destroyed. Although the respondent has granted the permission for destruction of such goods but subject to the condition for first surrendering the input tax adjustment. It is contended that under the law, the complainant is under no obligation to surrender input tax already suffered by it. In this regard, it is argued that the matter has already been settled by the Lahore High Court in a case reported as Mayfair Spinning Mills v. Customs, Excise and Sales Tax Appellate Tribunal Lahore, PTCL 2002 CL 115 in which, the appellant engaged in manufacture of cotton yarn, claimed refund of excess amount of input tax paid on purchase of ginned cotton after adjusting the output tax from the total input tax. While processing the claim, the Department found that a portion of stock had been damaged as a result of fire which broke out and consequently, the input tax deduction cannot be made under section 7 of the Act in respect of goods which got destroyed by fire as these were not available for making taxable supplies. When the matter reached the High Court, it allowed the input tax where underlying goods were destroyed by fire by holding, through a majority decision, as under: --

"According to section 7 a registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the output tax. The learned counsel for the appellant is correct in pointing out that the use of word "purpose" and "supplies mad or to be made" are indicative of the fact that the payment of input tax is available for adjustment as well as refund not with regard to any specific goods but with regard to the input tax paid during a particular tax period. The negatives contained in section 8 were also improperly interpreted by the Departmental Authorities. According to subsection (1) of 8, a registered person is not entitled to reclaim or deduct input tax paid inter alia on the goods used or to be used for any purpose other than for taxable supplies made or to be made by him. The goods on which input tax was paid by the appellant and were subsequently destroyed were not meant for use nor were intended to be used for any purpose other than taxable supplies. The intention of the appellant at the time of receiving the supplies and making and paying (input tax) was apparently to make taxable supply of them. It has never been the case of the Department that either the supplies were not received or that these supplies were covered by the negative list as given in section 8 of the Act. The only objection of the Department being that the goods for which input tax was paid were no more available for taxable supplies. While holding that opinion, as noted earlier, the Departmental Authorities overlooked the use of word purpose "and" supplies made or to be made, as used in section 7."

5. It is contended that in spite of the above judgment of the Lahore High Court, the respondent is insisting upon surrender of input tax suffered on goods destroyed hence the present complaint with the prayer to direct the respondent to refund the sum of Rs.501.506 and also to direct the respondent to issue permission for the destruction of goods and issuance of credit notes in respect of the expired, cancelled and returned goods without insisted upon the surrender of input sales tax suffered on such goods.

6. Replying to the allegation in the complaint, the Collector in her written report has first raised an objection regarding jurisdiction of this office on the ground that since the issue involves interpretation of law, rules and regulations, therefore, this office has no jurisdiction to investigate the complaint in view of the provisions of section 9(2)(b) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.

7. On merits, it is stated that in terms of clause (a) of sub-section (1) of section 8 read with section 7 of the Act, a registered person shall not be entitled to reclaim or deduct input tax paid on goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him. Thus, it is contended that input tax can be allowed only against taxable supplies including zero-rated supplies while destruction of goods is not a taxable supply. It is further stated that C.B.R. vide letter C. No.2(10)STP/97, dated 13-11-2001 has also clarified that destruction of goods is not taxable supply as defined under section 2(41) of the Act and, therefore, credit against input tax on goods destroyed cannot be allowed. It is further contended that if the amount of sales tax involved has already been adjusted in the monthly return, it should be repaid to recovered by the Government as by virtue of sections 7 and 8 of the Act, adjustment is only allowed where the inputs are used in making taxable supplies.

8. So far as the complainant's request for refund of Rs.501,506 is concerned, it is stated that the complainant moved a formal application for refund of this amount under section 66 of the Act but after examination of the claim, a show-cause notice was issued pursuant to which, an Order-in-Original No.1 of 2007 has already been passed on 9-7-2007 rejecting the claim for reasons stated therein.

9. As far as the judgment of the Lahore High Court in the case of Mayfair Spinning Mills which is relied upon by the complainant, it is stated that while granting leave to appeal in that case, the Supreme Court has suspended the operation of that judgment vide order, dated 29-5-2002 and thus the principle laid down in that judgment is no longer available for application. It is, therefore, contended that the complaint is without merit and needs to be dismissed.

10. Responding to the above, the learned A.R. of the complainant has stated that in spite of the suspension of the judgment of Lahore High Court in the case of Mayfair Spinning Mills, the principles enunciated therein are still applicable in all cases till that decision is reversed by the Supreme Court and the stay granted will apply inter parties only as held in a case decided by the Sindh High Court and reported as PLD 1980 Kar. 492.

11. Replying to the above, the D.R. has stated that under Article 201 of the Constitution of Islamic Republic of Pakistan, the decision of High Court is binding on subordinate Courts and since the Federal Tax Ombudsman is not subordinate to the High Court, therefore, the judgment of Sindh High Court relied upon by the learned A.R. of the complainant is not binding on the Federal Tax Ombudsman. It is further contended that under Article 189 of the Constitution, a decision of the Supreme Court is binding on all Courts in Pakistan and since the operation of the judgment of Lahore High Court in the case of Messrs. Mayfair Spinning Mills has been suspended by the Supreme" Court, therefore, even the High Court of Lahore cannot follow the law laid down in its judgment in view of the suspension thereof. It is contended that if the judgment of Lahore High Court is followed in spite of its suspension by the Supreme Court, it will tantamount to violation of the provisions of Article 189 of the Constitution and would be a contempt of the Supreme Court of Pakistan.

12. Parties have been heard and the record produced has been examined.

13. The objection raised by the respondent in regard to jurisdiction of this office in the matter is not valid. It has time and again been explained that whenever maladministration is alleged independent of the controversy in the matter there will be no bar to jurisdiction of the Federal Tax Ombudsman to look into the allegation of oral-administration. Wherever maladministration is alleged and proved, then the F.T.O can give recommendations and findings which may even affect the merits of case. The question involved in this complaint does not concern any interpretation of law and rule but what is alleged is that the Department is refusing to follow the legal principle settled by the Lahore High Court which, being contrary to law, tantamounts to maladministration which this office is competent to investigate or inquire.

14. So far as the prayer for refund of Rs.501,506 is concerned, it is observed that during the pendency of this complaint, the Department has already passed an order-in-original on this issue and, therefore, this prayer has become infructuous which, during the course of hearing, the learned A.R. of the complainant has agreed to withdraw.

15. It is difficult to agree with the proposition of the respondent that since the operation of the judgment of Lahore High Court in the case of Messrs Mayfair .Spinning Mills has been stayed, therefore, the principle laid down therein cannot be followed in other cases in view of the provisions of Article 189 of the Constitution of Pakistan. Article 189 read as whole makes it clear that only that decision of the Supreme Court will be binding which decides a question of law or is based upon a principle of law or enunciates a principle of law. Thus, the decision should be final and after that nothing should remain pending before the Supreme Court regarding that point. None of the conditions enumerated in Article 189 is applicable to the order of the Supreme Court and thus the order suspending the operation of the judgment of the Lahore High Court in Mayfair Spinning Mills is not covered by Article 189 of the Constitution and consequently, is not binding on the Courts in Pakistan except, of course, on the parties in that case. This being the position, the judgment of the Lahore High Court in the case of Mayfair Spinning Mills remains in the field so long as it is not reversed by the Supreme Court and refusal to follow the principle laid down therein is contrary to law which tantamounts to maladministration. As such, considering the principles enunciated in the case of Mayfair Spinning Mills, in the circumstances of this case it is recommended that:--

(i) C.B.R. to direct the concerned Collector to issue permission to the complainant within 30 days of the receipt of this order for destruction of the goods and issuance of credit notes in respect of the expired, cancelled and returned goods without insisting upon the surrender of input sales tax suffered on these goods. However, such permission may be granted subject to obtaining an undertaking/guarantee from the complainant that in case, the judgment of the Lahore High Court in Mayfair Spinning Mills v. Customs, Excise and Sales Tax Appellate Tribunal, Lahore reported as PTCL 2002 CL 115 is set aside by the Supreme Court, the complainant shall surrender the input sales tax suffered on such goods.

(ii) Compliance be reported within 7 days after doing the needful in terms of (i) above.

H.B.T./142/F.T.O.Order accordingly.