2012 PLP (Trib (PTD)

This order shall decide captioned appeals, having same background and common facts.

2. For better understanding of facts, author of order-in-original and Deputy Director (Directorate of Intelligence and Investigation) were also summoned. Mr. Muhammad Nayyar Shafiq (Deputy Director) and Mr. Imran Hayee Khan, DCIR (Taxation Officer) appeared in court along with DR and assisted on facts.

3. Facts, as presented before us and gathered from record are that one Mirza Arif Baig, an ex-employee of the department, in connivance with Muhammad Azam, Asif Hanif and few other persons, established a set up at Rakhshanda Plaza, Allama Iqbal Town, Lahore with intention to issue fake and flying invoices. Besides getting some fictitious companies registered, they also utilized Users IDs and Pin Codes of some dormant companies to manipulate FBR web porter. This fraudster gang was caught by Directorate of Intelligence in the year 2009 and different F.I.Rs. were registered against them along with the persons who used fake invoices issued by this gang. The appellants before us were charged for using invoices issued by this fraudster gang in the relevant period.

4. The fact of using fake invoices issued by the fraudster gang is neither found denied by appellants in proceedings below nor learned counsel, representing them before us, has denied this fact. Main thrust of the argument by learned counsel for the appellants is that appellants were not confronted, in show cause notice, about using the fake invoices "knowingly dishonestly and fraudulently", which are main ingredients of section 2(37) of Sales Tax Act, 1990. Learned counsel further argues that it all happened due to inefficient administration on the part of FBR. He explains that flying invoices are being used as practice in most of business sectors because some times the person selling raw material does not provide sales tax invoices. He pleaded, that due to this practice the appellants were themselvesdefrauded. He adds that both the forums below have failed to establish `mens rea' against the appellants. Mr. Muhammad Nayyar Shafiq, Dy. Director Intelligence explained that these units were actively involved with fraudster gang even compliance to section 73 was managed by them. He has also apprised that criminal charges have already been framed against the appellants and they are being prosecuted. He also submits that all the information and direct allegation against these appellants were pleaded before adjudicating officer in form of reply, which is part of the order?in-original. Mr. Imran Hayee -Khan, author of the order-in-original in two cases, explains that the show cause notice had been issued before his posting. He asserts to have confronted the appellants on all the issues during adjudication. When asked, he could not show from the show cause notice and order that the ingredients of fraud or compliance of section 8-A was ever confronted. DR has adopted the arguments made by both the officers. We have also examined record, which shows that on getting hold of the fraudster gang, an investigative audit of the appellants was conducted with approval of FBR. The appellants were found to have used the fake invoices issued by fraudster gang. Partial amount of the evaded tax was deposited by the appellants, apparently to avoid criminal prosecution. However, in reply to Show Cause Notices, appellants had pleaded innocence and responsibility of the fraud was placed on the department. It was specifically pleaded that FBR's website was showing the suppliers as active registered persons. Department, however, termed the deposit of partial evaded tax as admission and accordingly confronted the appellants in respective Show Cause Notices.

5. Heard both sides and record perused. After perusal of record, in light of argument of both parties, we have noticed that ingredients of tax fraud i.e. "knowledge, dishonesty and fraud" was not specifically confronted. Even negligence, as envisaged under section 8A of the Act of 1990 was not confronted. Yet, in our opinion, the appellants cannot be absolved from the serious allegation on the basis of technicalities particularly in presence of the facts narrated supra. Admitted fact of using fake invoices was sufficient to shift burden of proof on the appellants. Plea about practice of using flying invoices shall also not help appellants. Though, in case of flying invoices, tax is paid in National Exchequer against the invoice, even then this is prohibited under the law and its consequence is inadmissibility of adjusted input tax in addition to other penal consequences. We, therefore, hold that despite absence of specific allegations in terms of section 2(37), there is sufficient material on record to shift burden of proof on the appellants.

6. Nevertheless we are constrained to observer that main reason of such incidents is inefficient administration by the department. This fact needs serious deliberation by FBR that an ex-employee of the department had conceived the fraudulent plan and exploited the loop holes in FBR's system. Possibility of connivance by some serving officials of department can also not be ruled out. But no investigations or probe was reportedly undertaken by any authority or agency. The authorities in the department while passing the impugned orders, could not meet the essentials of adjudication. Precondition of any adjudicating proceedings is to confront the taxpayer with specific allegations on the basis of available material. Mere mentioning of section in Show Cause Notice was not sufficient. An amount received as defaulted tax on threat of prosecution can also not be termed an admission by appellants.

7. We have already decided similar matter in appeal bearing S.T.A. No.104/LB/2011 (Messrs Mi-Tech v. CIR), relevant part is reproduced for facility: We cannot over look the provisions of section 8A which cast joint and several liability on registered persons where tax remains unpaid. The provisions of section 8A of the Sales Tax Act are reproduced hereunder for facility:- S. 8A. Joint and several liability of registered persons in supply chain where tax unpaid:- Where a registered person receiving a taxable supply from another registered person is in the knowledge or has reasonable grounds to suspect that some or all of the tax payable in respect of that supply or any previous or subsequent supply of the goods supplied would go unpaid, such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax. (Underlining and bold is for emphasis) Careful examination of the above quoted provisions disclose the legislative wisdom that a registered person receiving taxable supplies from another registered person should be careful about genuineness of the supplier, beyond apparent indicator like status of the supplier on web side of FBR. A prudent businessman receiving supplies from another registered person has to keep in mind the reputation of the supplier in market and is also required to ascertain about his physical existence as registered person making bona fide business transactions. After taking these precautions, a registered person can absolve him from the statutory obligation under section 8A and can prove that he had no reasonable suspicion about non deposit of tax in national exchequer. We do not agree with the assertion of the taxpayer, in their reply, that the provisions of section 8A were not applicable on them. On the other hand, to fix responsibility under section 8A, department has to ascertain facts, through investigative audit or otherwise, as initial proof of registered person's negligence. Such proof or contravention is required to be confronted through Show Cause notice. Department has failed to establish in their orders that the appellant had reasonable ground to suspect that the suppliers of transaction in question were fraudsters. So far admission by the fraudster gang before the Director General of Investigation and Intelligent is concerned, in our opinion, the same would attain finality only after their conviction as a consequence of criminal trial. Depositing a portion of evaded tax by the appellant can also not be construed as admission of the appellant because the same was ostensibly under threat of criminal prosecution and arrest. Such mode of recovery by department, without recourse of relevant provisions of Sales Tax Act, 1990, can only be termed as extortion. Department has failed to make out a case of fraud against the appellant. It is not established from the orders below that the appellant/registered person was involved with the fraudster gang knowingly and intentionally. Under these circumstances, it cannot be ruled out that the appellant was also victim of the same fraudster gang. We have already observed that the provisions of section 8A were applicable to the appellant while making input adjustment against the alleged fake and flying invoices, therefore, the department had to make out a case under these provisions. Issuance of fake/flying invoices and adjustment of tax against the same is a serious issue which should not have been tackled casually by the department. The appellant could also not prove that he had taken care as required under section 8A particularly when he had not denied, in reply, to have use the invoices issued by fraudsters gang. Under these circumstances, we vacate both the orders below and remand the case to adjudicating officer with directions to re-adjudicate the matter and find out:

(i) Whether the appellant had taken benefit of the alleged fake and flying invoices knowingly and dishonestly; or (ii) Whether the appellant had reasonable ground to suspect that some or all tax payable in respect of the supplies in question would go unpaid. Without establishing the above noted omission or commission by registered person, the evaded tax cannot be recovered from the appellant."

8. In captioned appeals also, we have already observed that department could not establish the invoices issued by fraudsters gang were used knowingly and dishonestly. Mr. Muhammad Nayyer Shafiq, (Deputy Director Intelligence) was specifically asked, whether possibility of appellants being defrauded by the fraudster gang was ruled out completely, his answer was in negative. He however, submitted that in most of the cases it was ruled out. We are unable to find any material on record that department had endeavoured to consider this aspect. The principle of law that no innocent person should be penalized, was totally ignored. Therefore, we cannot endorse the adjudication made in slipshod manner, based merely on the fact that invoices issued by fraudsters gang were used by appellants and evaded tax was partially paid by them.

9. Orders passed by authorities below are vacated and cases are remanded to adjudicating officers to re-adjudicate and find out the answers to question framed in earlier order (reproduced supra). Since we have held that available material is sufficient to shift burden of proof on the appellants, therefore, appellants shall "be obliged to prove their innocence through evidence. In discharging the burden, appellants may produce the evidence about transportation of supplies in question. But if, they plead to have used flying invoices, they will face the legal consequences as per applicable law.

10. We are also of the opinion that a copy of this order should be dispatched to Chairman, Federal Board of Revenue, who is suggested to appoint some specialized officers for adjudication of such cases. We are informed, during proceedings, that main culprit Mirza Arif Baig has been convicted only for one year and that too was undergone. The department though has filed appeal against the sentence yet it smacks that the issue was not properly pursued for unknown reasons. Be that as it may, this suggestion to Chairman FBR, is made in national interest. Appeals are disposed of. CMA/134/Tax(Trib.)??????????????????????????????????????????????????????????????????????????? Order accordingly.