POLY PACK (PVT.) LTD. VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2012 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 524 (2011)

Sales Tax Act (VIII of 1990)---

----Ss.11, 36 & 45-A(4)---Complaint against illegal adjudication of sales tax demand---Complainant company was subjected to Sales Tax audit for 2001-2006 that carried on for over four years from 2007 to 2011---Show-cause notice was issued to the company under Ss.11 & 36 of Sales Tax Act, 1990 informing that the company was liable to pay sales tax on account of detection of taxable sales made in that period, including sales of excess stock of raw material---Documentation pertaining to stocks of raw material having not been produced by the company, adverse inference was drawn against the company and order-in-original was passed raising sales tax demand---Department had acknowledged that the calculation of sales tax liability was wrongly communicated to the complainant due to clerical error---No comment was made by the department on the protracted audit proceedings---Underfirst proviso to S.36(3) of the Sales Tax Act, 1990 order-in-original was required to be passed within 120 days of the issuance of the show-cause notice, but same was passed after more than four months---Time limitation specified in the statute invariably required that the cut off date should be adhered to strictly---Complainant had acquired a vested right to benefit from expiry of limitation period and avoid incidence of taxation, should the department fail to finalize proceedings on the due date within the limitation period---Department was duty bound to finalize proceedings in time---Apart from the expiry of limitation deadlines and adjudication made in excess of the pecuniary limit laid down in the notification, the sales tax demand raised in the order-in-original attributed to alleged sales and excess stocks of raw material to unregistered person was without any corroborative evidence---Besides said lapse, the format of the order-in-original was almost replication of the earlier format of order-in-original---Departmental actions in year 2005-2006 were tantamount to maladministration under the Establishment of Office of the Federal Ombudsman Ordinance, 2000 for the reasons ofissuance of time-barred show-cause notice; issuance of time-barred order-in-original; violation of ratio of tribunals judgment in Sales Tax Appeal; adjudicating sales tax liability in excess of the limit laid down in notification; protracted audit proceedings spread over four years and incorrect calculation of sales tax liability---Federal Board of Revenue was recommended to direct the Commissioner to cancel the order-in-original which was coram non judice; to warn ACIR, not to exceed the powers conferred under the law in future and to report compliance within 30 days thereafter.

2008 PTD 609; 2006 PTD 219 (Trib.) and 2011 PTD (Trib.) 1943 rel.

Muhammad Munir Qureshi AdviserDealing Officer.

Waseem Ahmad Malik Authorized Representative.

Shabana Aziz, DCIR and Munir Ahmad Chaudhry, ACIR Departmental Representatives.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---This complaint is against illegal adjudication of sales tax demand in 2005-2006.

2.The complainant, a (Pvt.) Ltd., Company, manufactures polypropylene(pp) and polyethylene(pe) sacks/bags, pouches and liners. It was subjected to sales tax audit for 2005-2006 that carried on for over four years from 2007 to 2011. A Show-Cause Notice dated 18-6-2011 under sections 11 and 36 of the Sales Tax Act 1990 (the Act), dated was issued informing the Company that it was liable to pay sales tax aggregating to Rs.88,061,471 on account of detection of taxable sales made in this period including sales ofexcess stocks of raw material(pp, pe and plastic moulding compound) to unregistered persons.

3.A number of hearings were conducted after issuance of show-cause notice. On 10-10-2011, the complainant appeared in the office of the ACIR (Audit), LTU, Lahore, Mr. Munir Ahmad Chaudhry, in compliance to summons issued on 6-10-2011 and was informed that the officer had proceeded on training. The complainant then filed an application requesting that his case be re-fixed later at a suitable date when further documentation would also be filed by him. Mr Munir Ahmad Chaudhry, ACIR, returned back from training on 17-10-2011 and the case was fixed for hearing on 18-10-2011. The complainant accordingly appeared before him and various aspects of the case were discussed. However, the required documentation pertaining to stocks of raw material (pp and pe granules and plastic moulding compound) was not produced. An adverse inference was therefore drawn against the complainant and Order-in-Original (O-I-O) dated 18-10-2011 was passed raising sales tax demand of Rs.88,061,471. The order-in-original was served on 19-11-2011.

4.The complainant contends that the issuance of show-cause notice on 18-6-2011 was hit by limitation of time (5 years) as laid down in section 36(1) of the Act. The complainant further contends that order-in-originaldated 18-10-2011 was also hit by limitation of time (120 days) as provided in section 36(3), 1st proviso, of the Act. Also, Mr. Munir Ahmad Chaudhry, ACIR, who is the author of the order-in-original exceeded the pecuniary limit (Rs.500,000) laid down in S.R.O. 555(I)/1996 read with sections 11(3) and 36 of the Act. Finally, the complainant is aggrieved by the protracted period of more than four years that the audit continued in his case (2007-2011) when F.B.R's. guidelines laid down in Sales Tax General Order No.3 of 2004dated20-4-2004 (Part-IV, paragraph C) stipulate that audit be completed within three or four days.

5.The complainant denies to have sold stocks of raw material in the open market to unregistered persons. He maintains that the Company was the biggest manufacturer of plastic pouches, liners and bags of assorted shapes and sizes, in the country and was obliged to maintain a significant quality of raw material in hand to ensure a smooth flow of output.

6.The complainant further contends that the order-in-original for 2005-2006 was a blind replication of the treatment accorded to the complainant in 2004-2005. Besides, the Departmental carelessness was evident from the fact that the calculation of complainant's aggregate sales tax liability was wrongly communicated at Rs.88,061,471 when it actually amounted to Rs.82,061,471 as per the Department's own methodology.

7.When confronted, the Department filed a reply in which it was contended that the alleged delay in the issuance of show-cause notice for the period 2005-2006 stood condoned by F.B.R. vide F.B.R. letter C.No.TPA-1(2)/2009 dated 30-6-2010. It was denied by the Department. that the show-cause notice dated 18-6-2011 was time-barred. Similarly, in the case of the order-in-original dated 18-10-2011, the Department. asserts that the order-in-original was passed in time. The Department. maintains that the complainant did seek an adjournment on 10-10-2011 as per his handwritten application submitted in the office of the ACIR, which was accordingly allowed for fifteen days. However, the case was fixed for hearing on 18-10-2011 before expiry of the fifteen-day adjournment allowed to the complainant and hearing was concluded on that date and final order of adjudication passed. However, service of the order-in-original on the complainant was delayed till 19-11-2011 as required formalities were to be completed within the Department According to the Departmentafter excluding the time "sought" for adjournment, the order-in-original was passed within the time limitation stipulated under the statute.

8.As regards the Departmental estimate of stocks of pp, pe and plastic moulding compound allegedly sold in the open market to unregistered persons, it was contended in the reply that in the alleged absence of itemized record of stocks of raw material, an estimate of sales deemed to have been made in the open market to unregistered persons was justified and the sales estimates were made on the quantum of stocks reasonably required consistent with the actual production needs based on the installed plant capacity.

9.The Departmenthas also stated in the reply that the amount of unpaid loans obtained interest free from Directors was artificially contrived to justify the injection of funds emanating from sale of stocks in excess of requirements.

10. The Department maintains that the Company had not followed the prescribed procedure in the sales made to PIA, World Food Program and supplies to earthquake affected areas and was liable to pay sales tax on such sales.

11.As regards the pecuniary limits laid down in S.R.O. 555(I)/1996, the DR explained during hearing that with the omission of section 45 from the statute through Finance Act, 2009 separate adjudication Collectorates had been dispensed with and as a result S.R.O. 555 had, statedly, lost its efficacy. The officer issuing the show-cause notice, according to the DR, was empowered to pass the adjudication order without reference to any pecuniary limit.

12.The Department acknowledged that the calculation of sales tax liability was wrongly communicated to the complainant due to 'clerical error.' No comment was however made by the Departmenton the protracted audit proceedings.

13.The submissions made by both sides have been considered.

14.Under section 36(1) of the Act:--

"Where by reason of some collusion or a deliberate act any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay any amount of tax or charge or the amount of refund erroneously made shall be served with a notice, within five years of therelevant date, requiring him to show cause for payment of the amount specified in the notice." (emphasis supplied)

As the five years limitation stipulated in section 36(1) is to be reckoned with reference to the date on which the transactions on which sales tax has been short charged or not charged, as the case may be, the position obtaining in the complainant's case is as follows:--

(i)supply of goods to PIA was made through Invoice No.444 dated 28-7-2005 and time for payment of tax was 15-8-2005. Reckoned from this date, thefiveyearslimitationexpiredon15-8-2010 whereas demand has been raised in the order-in-original on 18-6-2011;

(ii)supplies of goods to UN World Food Program were made through twenty eight invoices during the period November, 2005 to April, 2006 and the due dates for payment of tax were the 15th day of the month following the month in which the supplies were made. By this reckoning, the due dates were 15-12-2005, 15-1-2006, 15-2-2006, 15-3-2006, 15-4-2006 and 15-5-2006. The five year limitation period thus expired ineachcaseon15-1-2010, 15-1-2011, 15-2-2011, 15-3-2011, 15-4-2011 and15-5-2011 respectively, whereas demand of sales tax was raised on 18-6-2011.

(iii)supplies of goods to the earthquake affected areas were made through nine invoices during the period November, 2005 to January 2006 and the due date for payment in each case was the 15th day of the month following the month on which supplies were made. By this reckoning the due dates were 15-12-2005, 15-1-2006 and 15-2-2006 and the five year limitation in each case expired on 15-12-2010, 15-1-2011 and 15-2-2011 respectively, whereas sales tax demand was raised on 18-6-2011.

15.AccordingtotheDepartment, F.B.R.hadexerciseditspowersundersection 74 of the Act,andcondonedanydelayinissuance of show-cause notices in 2004-2005 and 2005-2006videLetterC.No.TPA-1(2)12009 dated 30-6-2010.

16.The Appellate Tribunal Inland Revenue in S.T.A. No.352/LB of 2011 dated 29-7-2011 held that time limitation laid down in a special statute could not be extended through an S.R.O./Notification. Exercise of delegated authority by the F.B.R. through subordinate legislation, such as through issuance of S.R.O., was permissible only so long as it did not conflict with the main statute. The Tribunal's finding that F.B.R. could not extend the limitation period specified in the special statute, that is, the Sales Tax Act, 1990, by recourse to subordinate legislation such as issuing an S.R.O./Notification, must prevail, as the operation of the Tribunal's cited order has not been suspended by any order of the High Court and the said order thus constitutes a binding precedent for the Department.

17.As per the first proviso to subsection (3) of section 36 of the Act, the Order-in-Original No.10 of 2011 dated 18-10-2011 was required to be passed within 120 days of the issuance of the show-cause notice on 18-6-2011, that is, by 15-10-2011. As per order sheet noting made by the ACIR, the order-in-original was passed on 18-10-2011. The said order was served on the complainant on 19-11-2011.

18.The 120-day limitation laid down in section 36(3) of the Act, expired on 15-10-2011. No doubt on 10-10-2011 the complainant had requested that the case be 're-fixed' as the dealing official had gone for training. No specific time frame was specified. However, the Department subsequently informed the complainant that it had allowed a 15 day adjournment in deference to the complainant's desire that the case be re-fixed for hearing. The complainant on the other hand denied that he ever requested for an adjournment for specific number of days.

19.The matter detailed above has been looked into. Examination of the relevant record makes it clear that the complainant's request was only that the case be re-fixed for hearing, as the dealing official was not present. The fact that time limitation laid down in section 36(3) of the Act was due to expire on 15-10-2011 should have been kept in mind and case re-fixed for hearing on 15-10-2011, at the latest. There was no justification to re-fix the case on 18-10-2011. After all, when Mr. Munir Ahmad Chaudhry, ACIR, was away on training, another officer held additional charge of the office and had the authority to finalize the pending adjudication proceedings. Time limitation specified in the statute invariably requires that the cut-off date be adhered to strictly. The complainant acquires a vested right to benefit from any expiry of limitation period and avoid incidence of taxation should the Department fail to finalize proceedings on the due date within the limitation period. The Department was thus duty bound to finalize proceedings in time. In the present case theproceedingswere requiredtobefinalizedby15-10-2011. The fact that on 10-10-2011 the complainant had requested that the proceedings be re-fixed did not mean that the limitation period deadline be exceeded. In any case, as pointed out above, thecomplainant had never requested that an adjournment be allowed for fifteen days. The late service of the order-in-original on the complainant is also not justified. In a case where limitation deadline assumes significance, every effort must be made to ensure that orders are passed and served in time in order to avoid unnecessary controversy. In the present case the complainant does not accept the Departmental contention that the order-in-originalwas passed on 18-10-2011. He insists that the fact that the order was given to the courier service for delivery to the complainant on 18-11-2011 can only mean that adjudication proceedings were finalized on that date. However even if it be accepted that the adjudication proceedings were finalized on 18-10-2011, these were still time-barred as the 120 day limitation period expired on 15-10-2011 The Department having failed to finalize adjudication by 15-10-2011, the complainant'svestedrighttobenefitfromtheDepartmentallapsecannot be denied to him. Here it may be pointed out that the Hon'ble Federal Tax Ombudsmaninacasereportedas2008PTD609heldthat:--

"An order passed on the file but not communicated to the affected party within the prescribed time limits or within the extended period of time cannot be treated as having been passed within the prescribed time limits."

As discussed above, both in terms of the time limitation laid down in sections 36(1) and 36(3), the limits laid down in law were exceeded and resultantly the proceedings became 'time-barred.'

20.Apart from the above lapses, it is also noted that the ACIR did not have the authority to raise sales tax demand against the complainant in excess of Rs.500,000 in terms of the bar laid down in S.R.O. 555(I)/1996. The Department is misconceived in its view that with the omission of section 45 from the statute through Finance Act, 2009, S.R.O. 555(I)/1996 had lost its efficacy. The S.R.O. has not been withdrawn and is still very much in force. Thus the adjudication made by the ACIR on 18-10-2011 was without jurisdiction. It has been held in the case reported as 2006 PTD 219 (Trib.) and 2011 PTD (Trib.) 1943 that "an order without jurisdiction is a fraud on the law and can never be assumed to have been passed under the particular statute."

21.Apart from the expiry of limitation deadlines and adjudication made in excess of the pecuniary limit laid down by S.R.O.(I)/1996, the sales tax demand raised in the order-in-original attributed to alleged sales of excess stocks of raw material to unregistered persons is without any corroborative evidence. The ratio laid down in the Tribunal's judgment S.T.A. No.352/LB/2011 dated 29-7-2011 (2004-2005) disposing of complainant's appeal against the decision of the Commissioner (Appeals) has not been followed. The ratio was equally applicable in 2004-2005 and 2005-2006 because in both periods it has been alleged that the complainant sold excess stocks of raw material in the open market to unregistered persons and the Tribunal had held that without a single concrete instance of a transaction involving sale of excess stocks of raw material in the market to unregistered persons without charging sales tax, the addition could not be upheld. The Department argued during hearing of the case that the cited judgment had been contested in the High Court and was not applicable in 2005-2006. The Departmental contention has been considered and found to be misconceived. It is settled law that in the given circumstances mere filing of a reference has no effect on the operation of the cited ATIR judgment and the ratio of that judgment mandates that the allegation of sale of excess stocks in the open market without any corroborative evidence was not tenable in law. This ratio was a binding precedent for the Department in 2005-2006.

22.Besides the above cited lapses, it is also to be noted that the format of the order-in-original in 2005-2006 is an almost replication of the format of the order-in-originalfor 2004-2005. It appears that in 2005-2006 the Department has made a repeat performance of the treatment accorded in 2004-2005 notwithstanding that the said treatment had been rejected decisively by the Appellate Tribunal.

Findings:

23.Departmental actions in 2005-2006 stipulated hereunder are tantamount to maladministration under the FTO Ordinance:--

(i)issuance of time-barred show-cause notice for 2005-2006 dated 18-6-2011;

(ii)issuance of time-barred order-in-original dated 18-10-2011;

(iii)violation of ratio of Tribunals judgment in S.T.A. No.352/LB/2011 dated 29-7-2011;

(iv)adjudicating sales tax liability in excess of the limit laid down in S.R.O. 555(I)/1996;

(v)protracted audit proceedings spread over four years;

(vi)incorrect calculation of sales tax liability.

Recommendations:--

24.F.B.R. to direct the Commissioner to--

(i)cancel the coram non judice order-in-original dated 18-10-2011 for 2005-2006 by invoking provisions of section 45A(4) of the Sales Tax Act, 1990;

(ii)warn Munir Ahmad Chaudhry, ACIR, not to exceed the powers conferred under the law in future; and

(iii)report compliance within 30 days thereafter.

H.B.T./10/FTOOrder accordingly.