ART WEAVERS, ATTOCK VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2011 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 2197 (2011)

Sales Tax Act (VII of 1990)---

----S. 36---Refund Rules, 2002, R.7(3)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.2(3), 8, 9, 10 & 11---Recovery of tax---Refund claim---Maladministration---Complainant filed eight complaints alleging maladministration due to illegality involved in issuing show-cause notice and order-in-original without reference to relevant provisions of Sales Tax Act, 1990; excessive delay; time bar of show-cause notice; and double taxation---Main issues involved in the complaints were; whether the Federal Tax Ombudsman had the jurisdiction in the matter; whether show-cause notices were time-barred and were null and void in the eyes of law; whether delay was involved in deciding the refund claim---As complaints involved serious allegations constituting maladministration as defined in S.2(3)(i)(a)(b) & (ii) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000, Federal Tax Ombudsman had the jurisdiction in the matter---Deliberate act of claiming refund against fake/filing invoices, was not based on proper inquiry/audit as required under R.7(3) of Refund Rules, 2002---No justification existed for attributing any deliberate act to the complainant---Such inquiry was all the more necessary because S.36 of Sales Tax Act, 1990 contained two categories of violations i.e. deliberate and inadvertent---Facts in the complaints under reference had revealed gross inefficiency, in-competence, oppressiveness, highhandedness and unreasonable attitude on the part of Tax Officials, which constituted maladministration as defined by S.2(3)(i)(a) and (b) and (ii) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000---Show-cause notices were not maintainable being time-barred---Recommendations were made to Federal Board of Revenue to the effect; to set aside the orders-in- original and orders-in-appeal in complaints as same were based on time-barred show-cause notices; to provide opportunity to the complainant to produce documentary evidence of genuineness of supplies; to ensure that, after satisfactory proof, the deferred amounts were paid and already paid amounts regularized as per law; to identify the staff responsible for excessive delay and non-observance of time limitations in those cases and take/initiate deterrent action against the defaulters; to include present complaints as case study in the training modules for capacity building of Sales Tax Officials; and report compliance within 30 days.

Yasin Tahir, Senior Advisor, Dealing Officer.

Faraz Fazal, Consultant Authorized Representative.

Nazia Zeb, Dy. Commissioner, Said Munaf, Dy. Commissioner, Amir Sultan, Law Officer and Faisal Shehzad, Auditor Departmental Representatives.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---Mr. Jamshed Kamal Mir, Chief Executive of Messrs Art Weavers, filed eight complaints before Hon'ble FTO alleging maladministration due to (i) illegality involved in issuing show cause notices (SCNs) and Orders-in-Original (O-in-O) without reference to relevant provisions of Sales Tax Act, 1990 (the Act) (ii) excessive delay; (iii) time bar of show cause notices, and (iv) double taxation involved in the Department's demand of payment of sales tax already paid in accordance with the provisions of section 73 of the Act.

2. The complaints were referred for comments to the Secretary Revenue Division as required under section 10(4) of the FTO Ordinance, 2000. In response, the FTO Rawalpindi filed parawise comments in which preliminary objection was raised on the ground that legal remedy of appeal was available under the relevant legislation which the Complainant had availed by filing appeals under section 45B of the Act before Commissioner (Appeals). The jurisdiction of Hon'ble FTO was therefore, considered barred by the Department in terms of section 9(2)(b) of the FTO Ordinance, 2000 as remedy of appeal was available under the Act. In support of this contention, the Department placed reliance on the Hon'ble President's decision No.37 of 2006-Law(FTO) dated 22-12-2006 in Complaint No.1380 of 2005.

3. On merits, the Department stated that SCNs were properly drafted with reference to relevant provisions of the Act and the Refund Rules. It was also stated that the SCNs were not time-barred as the adjudication was finalized within the prescribed time limit. It was further contended that the Complainant being constantly in touch with the Department, was well aware of the issues arising out of blacklisting of the supplier. While objection memos. dated 29-7-2008 were issued to the complainant, he neither submitted any written reply nor provided the supporting documents required for overruling the STARR objections. As the deferred amount had become liable for rejection for want of evidentiary documents, the complainant was provided opportunity to prove the admissibility of refund vide the SCNs. As the complainant did not provide the requisite documents even after issuance of SCNs, therefore, the refund claims were rejected being inadmissible vide Orders-in-Original which were later upheld by Commissioner (Appeals).

4. The AR filed rejoinder to the Department's parawise comments and the Department also filed counter comments on that rejoinder. During the hearing, the parties agreed that all complaints except Complaint No.48 of 2011, being almost identical could be treated on the basis of discussion of the merits of Complaint No.42 of 2011. However, facts of Complaint No.48 of 2011 being different should be dealt on its own merits.

5. The DR contended that initial deferment and subsequent rejection of refund claims on account of blacklisting of the supplier was lawful and justified as the complainant did not provide documentary evidence to prove that the supplier's invoices were genuine and that the supply of the goods had actually taken place. The DR further stated that the SCNs had been upheld both by the adjudicating authority as also the Commissioner (Appeals). She stated that no double taxation was involved rejecting the refund claims. As the complainant had made second appeal before the Appellate Tribunal, she contended that the matter being sub judice, it fell out the jurisdiction of Hon'ble FTO.

6. Explaining the facts, the AR stated that the complainant was engaged in the manufacturing and export of carpets etc. for which they sourced their inputs during tax periods of January 2003 to May 2004 from many suppliers including Messrs Image Corporation, Gujranwala, who were then registered with the Sales Tax authorities and had remained so till blocking of their registration in 2008 and blacklisting in 2009. The complainant did not source any supplies from the aforesaid supplier after their blocking and blacklisting. Payment for the supplies during 2003 and 2004 were regularly made through bank instruments i.e.crossed cheques as required under section 73 of the Act. Thus the complainant duly discharged his Sales Tax liability in accordance, with the provisions of law and lawfully procured his inputs from a registered person, who was duly registered at the relevant point in time. As such, rejection of his refund claims relating to the tax periods of January, 2003 to May, 2004 on account of subsequent blacklisting of the supplier in the year 2009 i.e. over five years from the period of supplies, was neither justified nor lawful. As subsections (ca) and (d) of section 8 were added to the Act subsequent to the tax periods involved in these complaints, therefore, provisions of these subsections were not applicable retrospectively.

7. The AR also contended that the Hon'ble FTO's jurisdiction was not barred as the appeals were filed after filing of the complaints. Moreover, these complaints were against maladministration which constituted the jurisdiction proper of Hon'ble FTO under the FTO Ordinance, 2000. As regards the genuineness of invoices, the AR stated that the complainant had paid the cost of supplies, including sales tax, by crossed cheques through regular banking channels as required under section 73 of the Act. This constituted sufficient evidence of genuineness of these transactions as the Department had not produced any evidence to the contrary. If there was any doubt about the genuineness of these supplies, the Department could have held the inquiry in 2004 when the supplier was available on his registered address. 'If the supplier disappeared after over five years of the supplies made in 2003 and 2004, it was the responsibility of the Department to trace him out and proceed against him under the law instead of denying refund to the complainant who according to the AR, was a reputable manufacturer-cum-exporter. He also objected to demanding evidentiary documents after five years as section 24 of the Act required maintaining of Sales Tax records only for five years. He therefore, expressed his inability to produce the same at this belated stage. He also informed that the factory of the complainant had been closed and the complainant was also out of the country.

8. The AR further contended that the SCNs were time-barred as these were not issued within the prescribed time limit of five years. He also stated that the refund claims were required to be settled under section 10(1) within 45 days. This time limitation was also not observed by the Department. As an example, he referred to the partial refund payment order (RPO) in Complaint No.42 of 2011 which was issued on 1-7-2004 whereas the refund claim related to tax period of August, 2003. According to the AR, this showed a clear violation of the mandatory time limit of 45 days prescribed under section 10(1) of the Act. Besides, the proceedings in respect of deferred amount were also not completed within 60 days as required under section 10(3) of the Act. Moreover, the SCNs were issued after the time limit of 05 years prescribed under section 11(4). Therefore, the SCNs and Orders-in-Original, according to the AR, were nullity in the eye of law.

9. The DR controverted these averments by stating that the time limit of 45 days and 60 days under Refund Rules, 2006, was not applicable to cases that pertained to Refund Rules, 2002, as also clarified by Rule 39(4) of Refund Rules, 2006. According to the DR, no time limit was applicable under Refund Rules, 2002 if any claim or part thereof required further inquiry to prove its admissibility. As regards maintenance of record, both the Department and the taxpayer, in their own interest, needed to keep record live in respect of disputed transactions. Whereas, issuance of SCN after the lapse of five years from refund claims was not contested by the DR, it was contended that the time limit of five years incorporated in section 11(4) of the Act with effect from 1-7-2008 was not applicable as it could not be applied retrospectively.

10. The complaints have been examined in the light of written and oral submissions of the parties. The main issues involved in these complaints are broadly as follows:

(i)Whether the jurisdiction of Hon'ble FTO is competent in these complaints;

(ii)Whether the SCNs were time-barred and therefore null and void in the eye of law;

(iii)Whether delay was involved in deciding the refund claims.

11. As the complaints involve serious allegations constituting maladministration as defined by section 2(3)(i)(a)(b) and (ii) of the FTO Ordinance, 2000 the jurisdiction of the FTO is competent. The Hon'ble President has decided vide his Order No.64 of 2009-Law-1(FTO) dated 7-4-2010 in Complaint No.36-K/2009 that Hon'ble FTO's jurisdiction would be competent in cases involving maladministration. The following extract from the decision of Hon'ble President is sufficient to settle this issue:--

"When a question relates to assessment simplicitor the efficacious remedy is through adjudicatory process/appeal. But when the Agency does not follow the due process and the complainant spells out the failure on the part of the Agency in this connection, the FTO can entertain the complaint to the extent of the latter question."

12. The facts and circumstances of Hon'ble FTO's Findings in Complaint No.1380 of 2005 were substantially different. Therefore, Hon'ble President's Order in respect of that complaint cannot be invoked in the present complaints in which the complainant has clearly spelt out maladministration in terms of delay, neglect and inefficiency etc. as defined by section 2(3) of the FTO Ordinance, 2000. The filing of appeals also does not debar Hon'ble FTO's jurisdiction under section 9(1) of the FTO Ordinance, 2000 to investigate allegations of maladministration as the appeals had not been filed on the day complaints were filed before the Hon'ble FTO. Subsection 2(a) of section 9 clearly stipulates that FTO shall not entertain the complaints which are sub judice on the date of receipt of complaints. As the subject matter of these complaints was not subjudice on the date 'of their receipt, therefore, these were rightly and lawfully entertained for investigation under the FTO Ordinance, 2000.

13. As regards the allegation by the AR that SCNs do not make mention of the sections and subsections, it is belied by the fact that section 11(2) has been clearly and specifically mentioned in the SCNs in Complaints Nos.42/2011, 43/2011, 45/2011, 46/2011 and 49/2011. However, in Complaints Nos.44/2011 and 47/2011 instead" of mention of Section 11(2) a reference has been made to the violation of Refund Rules, 2006, notwithstanding the fact that the relevant Refund Rules were of 2002 and not the Refund Rules, 2006. Complaint No.48/2011 relates to section 36 and its subsections have also been duly mentioned. The AR's contention that subsections have not been mentioned is not therefore maintainable.

14. The next question is whether or not the SCNs issued after 05 years are time-barred? Placing reliance on Hon'ble Sindh High Court, Karachi, judgment reported as 2010 PTD 251 dated 5-5-2009 (Messrs Gulistan Textile Mills Ltd. v. Collector Appeals), the AR contended that ' the 05 year time limit introduced in section 11(4) of the Act was applicable retrospectively, being remedial and' curative in nature. The Hon'ble Sindh High Court held it applicable retrospectively to all cases pending upto 30-6-2008 excluding the cases which were past and closed transactions. The Department, however, controverted the AR's plea by stating that Hon'ble Sindh High Court's judgment was not relevant as it did not hold that the 05 year time limit as provided under section 11(4) of the Act was applicable retrospectively. The DR also placed reliance on section 6 of the General Clauses Act, 1897, to substantiate that the amendment carried out in section 11(4) in the year, 2008 was not effective retrospectively unless specifically so provided. Reliance was also placed by the DR on judgment reported as 1997 PCr.LJ 1837 upholding the principle that "amendment which affects substantive rights of the parties cannot operate retrospectively". However, according to the AR, the provisions of general statutes were not applicable on special statutes. As the Sales Tax Act, 1990, was a special law section 6 of the General Clauses Act, 1897, was not applicable. He also placed reliance on judgment of Lahore High Court in case of Messrs Data Steel Pipe Industries (Pvt.) Ltd., S.T.A. No.11 of 2006.

15. The DR's contention that Hon'ble Sindh High Court Judgment reported as 2010 PTD 251, was not relevant to the case under reference is factually incorrect as the said judgment is not only specific to section 11, of the Sales Tax Act, 1990, but it also specifically holds that the 05 year time limit under section 11(4), being curative and remedial in nature, is effective retrospectively excluding those transactions which were past and closed by 30-6-2008. The DR was asked whether the Department had filed any appeal against this judgment and if so what was the outcome. He could not produce any such evidence. The position was also checked from the legal side of F.B.R. and the Sales Tax authorities Karachi. They confirmed that the aforesaid Sindh High Court Judgment was not appealed in the Hon'ble Supreme Court of Pakistan. The F.B.R. letter No.2(3)S(L-IDT)/2011 dated 6-5-2011 read with Commissioner LTU Karachi letter No.CIR/Zone-II/LTU/2010-11 dated 23-4-2011 reconfirmed the above position. Thus the Hon'ble Sindh High Court Judgment had attained finality. Therefore, the SCNs of Complaints Nos.42/2011, 43/2011, 44/2011, 45/2011, 46/2011, 47/2011 and 49/2011 being time barred, the Orders-in-Original and Orders-in-Appeal based on these unlawful SCNs could not be held to have been validly issued.

16. As regards Complaint No.48 of 2011, the SCN dated 19-6-2009 was issued under section 36(1) read with Refund Rules, 2002, attributing a deliberate act of claiming refund against fake/flying invoices. As this charge was not based on proper inquiry/audit as required under Rule 7(3) of the Refund Rules, 2002, there was no justification for attributing any deliberate act to the complainant. Such inquiry was all the more necessary because section 36 contains two categories of violations (i) deliberate and (ii) inadvertent. The period for issuance of SCN in case of deliberate offence is five years and for inadvertent errors, it is three years. It appears that deliberate act has been attributed to justify issuance of SCN to circumvent the time limitation a three years. The fact of the matter in Complaint No.48 of 2011 is that the complainant filed refund claim with required supporting documents. The Sales Tax authorities processed it; 'found it admissible and sanctioned the refund. The Department cannot now turn around after so many years and say that the claim of refund in Complaint No.48 of 2011 was based on fake/flying invoices without any evidence whatsoever. Calling the duly sanctioned refund into question at such a belated stage, that too without proper inquiry and reliable evidence, would be tantamount to being discriminatory besides being highhanded as the officers responsible for sanctioning the refund have not been proceeded against for sanctioning it on alleged fake/flying invoices. Only the complainant is being penalized by holding the refund claim inadmissible. Therefore, attributing deliberate offence of claiming refund on fake/flying invoices without sufficient evidence to support, such a charge is tantamount to being unreasonable, oppressive and highhanded besides being unlawful. In such view of the facts, the SCN and the orders based on this SCN are not maintainable.

17. As regards delay, the law as prescribed in section 10 of the Act in 2003-2004 required refund to be made not later than 30 days of filing of return (reference subsection (2) of section 10 as it stood during the period 2003-2004). Rule 7 of the Sales Tax Rules, 2002 also required sanction and payment of admissible refund within 15 days of the submission of supportive documents by a manufacturer-cum-exporter. Rule 8 of the aforesaid Rules, 2002 obliged the Department to serve a notice to the claimant requiring him to show cause in writing within 14 days as to why the claim or as the case may be, part thereof should not be rejected. Despite these time limitations neither the admissible part of refund claims was sanctioned within the prescribed time limits nor any inquiries were conducted. Nor were SCNs issued for years on end. On 29-7-2008, however, i.e. 4 to 5 years after the tax period 2003-2004, objection memos. were issued. The SCNs were issued still later in the year 2010 which was over 5 to 6 years after receipt of supporting documents. Thus the SCNs were time-barred in terms of the Hon'ble Sindh High Court Judgment cited in para 14 supra. This kind of abnormal delay of over 5 to 6 years in cases where the law and the procedure required settlement of refund claims within weeks is indicative of the systemic inefficiency obtaining in the Sales Tax Department. Issuing of SCNs and rejection of refund claims without proper inquiry to substantiate whether or not the transactions had actually taken place during the period when the supplier was in existence at Gujranwala, the place of his registration, and the complainant had sourced his supplies against payments made through normal banking channels as required under, section 73 of the Act was tantamount to oppressive and unjust handling by the Department.

Findings:-

18. The facts in the complaints under reference reveal gross inefficiency, incompetence, oppressiveness, highhandedness and unreasonable attitude on the part of tax officials, which constitutes maladministration as defined by sections 2(3)(i)(a) and (b) and (ii) of the FTO Ordinance, 2000. The SCNs are not maintainable being time-barred. So are the decisions and orders based on these SCNs.

Recommendations:

19. F.B.R. to-

(i)set-aside the Orders-in-Original and Orders-in-Appeal in Complaints Nos.42 of 2011 to 49 of 2011 as these are based on time-barred show cause notices;

(ii)provide opportunity to the complainant to produce documentary evidence of genuineness of supplies;

(iii)ensure that, after satisfactory proof, the deferred amounts are paid and already paid amounts regularized as per law;

(iv)identify the staff responsible, for excessive delay and non-observance of time limitations in these cases and take/initiate deterrent action against the defaulters;

(v)include these complaints as a case study in the training modules for capacity building of Sales Tax officials; and

(vi)report compliance within 30 days.

H.B.T./151/FTOOrder accordingly.