MUHAMMAD YASIN BUTT VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2012 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 491 (2012)

Sales Tax---

---Allegation of arbitrary demand for payment of Sales Tax---Complainant had claimed illegal input tax credit on the strength of fake Sales Tax invoices---Department, though retained complainant's last five years Sales Tax documentation for more than a year and subjected the same to rigorous scrutiny, but was unable to detect any discrepancy therein---Complainant, as soon as came to know that false invoices had been used by him, he immediately deposited the amount involved therein---Complainant wrote on the CPR that payment was being made under protest and wanted same to be returned to him as soon as recovery was made from the persons who had masterminded theracket---Held, person depositing the amount out of fear could not reasonably be expected to demand its return back to him in the event of recovery of amount from the real perpetrators of the criminal scheme---No meaningful investigation had been carried out to unmask the PRAL's role, if any, in that nefarious scheme to defraud the revenue---Department was unable to establish mens rea and wilful involvement of the complainant in the scheme, which was a condition precedent to levy of 100% penalty---Federal Board of Revenue was recommended to direct the Chief Commissioner to refund the amount deposited by the complainant under protest to cancel the order-in-original; to conduct an enquiry to identify, if any PRAL Officials were involved in the scheme and to proceed against the defaulters, as per law; to launch an investigation into the circumstances, as to why the officials of Directorate of Investigation and Intelligence, did not file an appeal againsttheapparentlylightsentencesawardedtothosewhoseemingly mastermindedthescamandtoreportcompliancewithin30 days.

Muhammad Munir Qureshi, Advisor Dealing Officer.

Waheed Shahzad Butt, Authorized Representative.

Malik Fazal ur Rahman, ACIR Departmental Representative.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE, FEDERAL TAX OMBUDSMAN.---This is a complaint against alleged arbitrary demand for payment of sales tax amounting to Rs.897,417, issuance of illegal order-in-original (O-I-O) No. July, 2011/2003 dated 29-7-2011, and collusion and connivance of FBR/PRAL officials with outside rogue elements in issuance of fake sales tax invoices.

2.The Department filed a reply in which a preliminary objection was made that as the complainant had remedy of appeal available to him he should have availed of the same instead of approaching the Hon'ble Federal Tax Ombudsman. Further, the Department also contested the jurisdiction of the Hon'ble FTO to hear the complaint in terms of the provisions of section 9(2)(b) of the FTO Ordinance. On merits the Department contends that the Directorate of Intelligence and Investigation after a detailed investigation in the matter had found that the complainant claimed illegal input tax credit on the strength of fake sales tax invoices. When confronted, the complainant agreed on his own volition to deposit the amount involved into Government account. A show cause notice was issued, and order-in-original passed on 29-7-2011 to levy penalty. The Department, though skeptical of the complainant's claim to a clean record in the past, was of the opinion that a clean past record was no guarantee for the future. The Department insisted that the complainant deposited the amount of Rs.897,417 as he had colluded with the rogue elements and he knows that serious consequences would follow if he failed to make good the loss to Government exchequer.

3.The complainant deposited the amount of Rs.897,417 through four CPRs in the amount of Rs.160,133, Rs.272,183, Rs.90,005 and Rs.375,096. There was no formal order in the field when he deposited the amounts. Prior authorization, according to law, is a condition precedent for Government to hold amounts deposited by taxpayers. In the present case, as the complainant had not been subjected to any audit and no adjudication order was passed, the retention of the amount deposited by him in Government exchequer was illegal and warranted a refund in case there was no legal order in the field at the time of recovery.

4.The Department's preliminary objection to the Hon'ble FTO's jurisdiction under section 9(2)(b) of the FTO Ordinance has been considered and is found to be misconceived. It is not the assessment of taxable sales for purposes of levy of sales tax per se that is the subject matter of the complaint. Rather, the elaborate scheme involving F.B.R. officials and outside criminal elements to defraud the exchequer of huge sales tax revenues and the alleged unwarranted victimization of the complainant when there was no direct evidence against him are core issues in the complaint. These are all matters that fall well within the definition of maladministration in section 2(3) of the FTO Ordinance.

5.The arguments made by both sides have been considered.

6.The sophistication of the scam is evident from the fact that but for the insider information, the racket may not have been exposed at all. The available evidence does not show that the informant or any other person ever identified the complainant directly as a member of the racket. The fact that the complainant was a one-time user of fake sales tax invoices was the main reason that the Department believed that he was an integral part of the elaborate plan to defraud the revenue. Significantly, though the Department retained his last five years sales tax documentation for more than a year and subjected it to rigorous scrutiny it was unable to detect any discrepancy therein. And as soon as he came to know that fake invoices had been unwittingly used by him, the complainant immediately deposited the amount involved. The Department says that he did so because he had a guilty mind. However the fact that he wrote on the CPR that the payment was being made under protest and wanted it to be returned to him as soon as recovery was made from the persons who had masterminded the racket would appear to exonerate rather than convict the complainant. A person depositing the amount out of fear could not reasonably be expected to demand its return back to him in the event of recovery of the amount from the real perpetrators of the criminal scheme.

7.Coming to the complainant's allegation of complicity of the Departmental and the PRAL officials with the racketeers, the ambient circumstances are certainly indicative of a nexus between them. Otherwise, Messrs Waqar Ali Chaudhry, Imran Qamar, Furqan Ahmad RindandtheircompanionscouldnotpossiblyhavegotholdoftheUser IDs, Passwords and Pin Codes. Nor would they have beenable to set up 39 registered persons profiles to put the scheme into operation. No meaningful investigation has been carried out so far to unmask the PRAL's role, if any, in this nefarious scheme to defraud the revenue.

8.The fact that the culprits in this scheme have been able to get away with very light sentences considering the extent of their crime that involved an estimated Rs.230 million loss to the exchequer is indicative of the conspiracy between the perpetrators of serious financial crimes and their silent patrons within the ranks of F.B.R. officials. The Directorate of Intelligence and Investigation even failed to appeal against the light sentences awarded in the case by the Special Judge Customs. One would expect the Directorate of Intelligence and Investigation to be zealously committed to bringing the perpetrators of such heinous crimes to book.

9.So far as the order-in-original regarding levy of 100% penalty and default surcharge, the Department was unable to establish mens rea and wilful involvement of the complainant in the scheme, which is a condition precedent to levy of 100% penalty.

Findings:--

10.The action of the Department to recover sales tax from the complainant without passing any legal order and thereafter charging 100% penalty without proving his involvement in the tax fraud scheme is tantamount to maladministration in terms of section 2(3) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.

Recommendations:

11.F.B.R. to--

(i)direct the Chief Commissioner to refund the amount deposited by complainant, under protest, as there was no legal order in the field at the relevant time ;

(ii)direct the Commissioner to cancel the Order-in-Original No. July, 2011/2003 dated 29-7-2011;

(iii)conduct an enquiry to identify if any PRAL officials were involved in the scheme and to proceed against the defaulters, as per law;

(iv)to launch an investigation into the circumstances why the officialsoftheDirectorateofInvestigationandIntelligencedid not file an appeal against the apparently light sentences awardedtothosewhoseeminglymastermindedthescam;and

(v)report compliance within 30 days.

H.B.T./13/FTOOrder accordingly.