2007 PLP (Trib (PTD)

MUHAMMAD ANWAR ALI, (MEMBER (TECHNICAL)/CHAIRMAN)).

This appeal has been filed against the sales tax Order- in-Appeal No.225/2005, dated 28-9-2005 passed by the Collector of Customs, Sales Tax and Federal Excise (Appeals), Islamabad and Order-in-Original No.50 of 2005, dated 30-6-2005 passed by the Deputy Collector Customs, Sales Tax and Central Excise (Adjudication), Islamabad.

2. Briefly speaking the facts of the case are that an audit of the sales tax records of Messrs Imam Trading and Contracting, Islamabad was conducted by the auditors of the Collectorate of Sales Tax and Federal Excise, Rawalpindi, for the period March, 1998 to July, 2001 and the following discrepancies/omissions were noted by the auditors in audit report: (i) that the registered person has not charged sales tax amounting to Rs.202,170 on the supply of goods imported before January, 1998, in contravention of the provisions of sections 3, 6, 26 of the Sales Tax Act, 1990; (ii) that the registered person has claimed inadmissible input tax amounting to Rs.45,087 without holding the sales tax invoices, in violation of the provisions of sections 7 and 8 of the Sales Tax Act, 1990.

3. The contravention proceedings initiated against the registered person for violation of the aforesaid provisions of law culminated in passing of the impugned order for the recovery of the amount pointed out in respect of discrepancy/omission No.(i) mentioned above along with additional tax and penalty of 3% under section 33 of the Sales Tax Act, 1990. The amount involved in the discrepancy/omission No.(ii) above was paid by the registered person at the adjudicating stage.

4. Aggrieved by the above-mentioned order, Messrs Imam Trading and Contracting, Islamabad filed appeal to the Collector of Customs, Sales Tax and Federal Excise (Appeals), Islamabad who vide sales tax Order-in-Appeal No.225 of 2005, dated 28-9-2005 rejected the appeal and upheld the Order-in-Original No.50 of 2005, dated 30-6-2005.

5. Dissatisfied from the appeal order passed by the Collector of Customs, Sales Tax and Federal Excise (Appeals), Islamabad, Messrs Imam Trading and Contracting, Islamabad have filed appeal to this forum on 22-1-2005 on the following grounds:-- (a) That the learned Deputy Collector Adjudication was not justified in passing the time-barred order in terms of proviso to section 36(3) of the Sales Tax Act, 1990 as the order under this section is required to be made within forty-five days of issuance of show-cause notice or within such extended period as an officer of the sales tax may, for the reasons to be recorded in writing fix, provided that such extended period shall in no case exceed ninety days. (b) That the orders of both the Adjudicating Officer and the Appellate Authority are silent, about the interpretation of statute which favours the assessee in terms of S.R.O. 674(I)/97 and S.R.O. 675(1)/97 both, dated 29-8-1997 and orders are not in accordance with the basic norms of justice. (c) That no sales tax is payable prior to registration in view of the letter of C.B.R. issued vide No. C. No. 3(2)/M.Audit/2002, dated 12-6-2002 for the purpose of conducting audit prior to 1-7-1998. The auditor has to obtain the specific permission of the Collector, Sales Tax for the purpose. The audit was conducted and show-cause notice was issued on 26-6-2003 after the issuance of CBR letter, dated 12-6-2002 mentioned above. (d) That the assessee at import stage had already paid sales tax along with three per cent fixed tax for seeking the exemption on charge of further supply of goods and thus the supplies of the goods already burdened with the are exempt supplies in terms of case-law as reported in PTCL 2002 CL 115 in the full Court judgment of the Lahore High Court. And thus the application of law of section 3 becomes invalid. The judgment states as under:-- "If the appellant paying input tax on the supply of goods received by him was not entitled to its adjustment or refund then he was not covered by charging provisions of section 3 inasmuch as he never made taxable supplies." (e) That while creating the liabilities the authorities were not justified not to adjust the input tax as held in the case-law 1997 SCMR 1093 by Hon'ble Supreme Court of Pakistan and also reported in 1997 PTD 641 as under:-- "That authorities failed to adjust amount of input tax paid by petitioners; that authorities while making assessment committed arithmetical or clerical error which was brought to notice of authorities and the High Court but to no effect; and that while imposing penalties, petitioners were inequitably discriminated against

Such points raised in petition for leave to appeal required deeper examination-Leave- to appeal was granted in circumstances." (f) That the provisions of sections 7 and 8 of the Act are not charging provisions and these are machinery provisions to crystallize the liability to pay the tax as contemplated in subsection (3) of section 3 of the Act. These are conditional provisions that the levy would be subject to other provisions of the Act.

6. Hearings in this case were fixed on 28-11-2005, 6-12-2005 and 15-12-2005 on which dates Mr. Riffat Hussain Malik, Advocate appeared on behalf of the appellants whereas Dr. Naeem Khan, Additional Collector/DR along with Mr. Zahid-ur-Rehman, Senior Auditor appeared to defend the Department. Both the parties gave arguments in their favour which are discussed below:-- (a) At the very outset the learned counsel for the appellants vehemently stressed that Deputy Collector (Adjudication), Rawalpindi issued the show-cause notice on 26-6-2003 but decided the case on 30-6-2005 almost after a lapse of two years and accordingly this decision is time-barred in terms of proviso to subsection (3) of section 36 of the Sales Tax Act, 1990 according to which a decision or order should be made within 90 days of the issuance of show-cause notice or such extended period as has been allowed by the Collector for the reasons to be recorded in writing but such extended period shall in no case exceed 90 days, so accordingly decision beyond 180 days is illegal and hence may be quashed. In response to this argument of the learned counsel for the appellants, the learned DR produced a copy of CBR letter C. No.5(10)-CEJ 2000, dated 11-6-2005 wherein in exercise of the powers conferred under section 45 of the Sales Tax Act, 1990 the time limit of finalization of adjudication cases including this case at serial number, 255 of the list enclosed to the above-mentioned letter, had been extended upto 30-6-2005. The DR further pointed out that this case was decided within the prescribed extended limit by the C.B.R. He also produced a photocopy of C.B.R.'s letter quoted above which confirmed the contention of the learned DR. in view of the above situation, the argument of learned counsel for the appellants carries no weight. (b) The learned counsel for the appellants raised the argument that their case revolved around the two Notifications S.R.O. 674(I)/97 and S.R.O. 675(I)/97, both dated 29-8-1997 according to which they had discharged their final liability and they are not required to pay sales tax on the local supplies of goods and, therefore, the demand of the Sales Tax Department is not legal. As against this argument the learned DR contended that admittedly the goods were imported prior to 1-1-1998 after payment of sales tax under the above two notifications but the same were supplied after 31-12-1997 when no exemption was available on supply of imported goods by commercial importers as per S.R.O. 674(I)/97, dated 29-8-1997. In this connection both the notifications have been perused and it has been observed that S.R.O. 675(I)/97, dated 29-8-1997 is not relevant to the instant case of the appellants as this notification relates to the commercial importers engaged in making taxable supplies of industrial raw materials, components and sub-components and goods other than consumer goods and consumer durables, who do not register under section 14 of the Sales Tax Act, 1990 and shall pay fixed tax at the rate of three per cent of the value thereof in addition to the sales tax payable thereon under clause (b) of the subsection (1) of section 3 of the Sales Tax Act, 1990, at the time of importation of such goods. The appellants' case is, however, only relevant to S.R.O. 674(I)/97, dated 29-8-1997.wherein the Federal Government exempted the supplies of consumer goods and consumer durables made by commercial importers from the sales tax w.e.f. 13-6-1997 to 31-12-1997. The appellants paid sales tax plus further tax on imports made after date when no exemption was available on supplies of imported consumer goods and consumer durables by commercial importers. The contention of the learned D.R. as well as of Mr. Zahid-ur-Rehman, Senior Auditor on behalf of the Department was that there being no exemption of sales tax available w.e.f. 1-1-1998, the appellants were required to pay the tax on such supplies and while doing so they could adjust the input tax paid at the time of import. On this it was enquired from both the parties that as to whether any audit exercise has been made to ascertain the exact amount of sales tax liable to be paid on the supplies made on and after 1-1-1998 after allowing adjustment of input tax paid at the time of imports. In answer to this query the parties denied having undertaken any such exercise. In view of the above discussion, the argument of the learned counsel for the appellants that both the Adjudicating Officer and the Collector (Appeals) did not discuss the details of both the notifications mentioned above is not correct. The contents of both the notifications were amply discussed in both the impugned orders. (c) The learned counsel for the appellants further argued that they obtained the sales tax registration on 3-4-1998 as importer/exporter/wholesaler and in view of C.B.R:'s letter C. No.3(2)/ M.Audit/2002, dated 12-6-2002 the auditors should have obtained the specific permission of the Collector of Sales Tax to conduct audit prior to 1-7-1998. The learned DR argued that the audit was conducted in March, 2002 for the period from March, 1998 to June, 2001 and the C.B.R. letter giving certain directions as mentioned by the appellants were issued much later on 12-6-2002. The contravention case had already been made before the issuance of C.B.R. letter and as a consequence of the audit report, show-cause notice was issued on 26-6-2003 which did not need Collector's approval. The C.B.R. letter, dated 12-6-2002 had been seen and it appears that Member Audit had in fact conveyed to the Chamber of Trade and Industry that its members should obtain the sales tax registration voluntarily and the sales tax department auditors would not conduct the audit prior to the date of obtaining of registration by a particular registered person without the specific permission of the Collector of Sales Tax. In this case the audit had already been conducted in March, 2002 when the C.B.R. letter was not in place and regarding discrepancies found in the audit observation the procedure for making out the contravention case was already set in motion which culminated the issuance of show-cause notice on 26-6-2003. Even otherwise these are only departmental instructions which do not in any way supersede the substantive provisions of Sales Tax Act, 1990 according to which the sales tax department has the right to conduct the sales tax audit of the registered person and if any discrepancy or any short levy of sales tax had been detected, the provisions of the issuance of show-cause notice to the registered person was mandatory which had been followed in this case. The argument of the learned counsel for the appellant had therefore, no merit. (d) The argument of the learned counsel for the appellant that they had paid the normal rate of sales tax plus 3% further tax at the stage of import for which they have proof in the form of customs bill of entry and thus the supplies of goods already burdened with the tax are exempt supplies and if at all the department is asking for payment of sales tax at the supply stage in the local market then the department is not justified to take away the right of the registered person to make input adjustment of the sales tax paid at the import stage. In support of this argument he quoted certain case-laws. As against the arguments the learned D.R. contended that the appellants have not made payments of sales tax on the supplies of consumer goods and consumer durables being the commercial importers after 31-12-1997. The demand of the department in both the impugned orders is justified and if they make the payment of output sales tax on the supplies of goods imported by them after 31-12-1997 only then they are entitled to make the adjustment of input tax. The contention of the learned D.R. has weight.

7. In the light of above discussion and in order to ascertain the' exact liability of sales tax payable by the appellants, both the parties were directed on 28-11-2005 to sit together and to reconcile the figures of final sales tax liability by charging the sales tax on the supplies of goods after 31-12-1997 and to allow the adjustment of input at the stage of import. The reconciliation statement, dated 10-12-2005 was submitted to the Court on 15-12-2005. This was prepared by both the parties after consulting the sales tax records. It was duly accepted and signed by Mr. Imam-ul-Amin, Chief Executive of the appellants' firm i.e. Messrs Imam Trading and Contracting, Islamabad, Mr. Riffat Hussain Malik, Advocate for the appellants, and Mr. Zahid-ur-Rehman Abbasi, Senior Auditor, Collector of Sales Tax and Federal Excise, Rawalpindi. This statement was duly forwarded by Mian Tauqeer Aslant, Deputy Collector (Law) of the Collector of Sales Tax and Central Excise, Rawalpindi vide his letter C. No. ST/Audit/1622/2001/1875, dated 14-12-2005 through Dr. Naeem Khan, Additional Collector/DR as under: Reconciliation statement of Messrs Imam Trading and Contracting, Off 2, 1st Floor, Ratta Mansion, 69-West, Fazal-e-Haq Road, Blue Area, Islamabad. (Figures in Rs.) Total sales tax liability adjudged in Order-in-Original No. 50 of 2005, dated 30-6-2005 and Order-in-Original No.225/2005 of 28-9-2005. 247,257 Total Output 247,257 Less: 62,513 Deposited principal amount of sales tax against Audit Observation C. No. ST/Audit/2001, dated 21-3-2002. Deposited 15% for grant of stay 27,712 Sales Tax + Further Tax deposited 51,859 on imports against stock as on 31-12-1997. L/C No. 569929, 15-10-1998 (IGM No.8 and Index No.2, dated 9-10-1997) Sales Tax + Further Tax deposited on imports against stock as on 31-12-1997. L/C No. 406383, 8-11-1997 (Bill of Entry No.434/97, dated 5-1 1-1997). 20,986 Sales Tax + Further Tax deposited on imports against stock as on 31-12-1997. L/C No.54116, 24-12-1997 (Bill of Entry No.6188/97, dated 20-12-1997) 39,961 Total 203,031 Reconciled principal amount of sales tax recoverable 44,226 (Sd.) (Sd.) Imam-ul-Amin Chief Executive Mr. Riffat Hussain Imam 'Grading & Contracting Malik, Advocate Law Inn, Islamabad (Sd.) M. Zahid-ur-Rehman Abbasi Sr. Auditor Collectorate of Sales Tax and Federal Excise, Rawalpindi.

8. The case records and arguments of both the sides have been .examined in the light of their verbal and written arguments. In view of the divergent views of both the parties the matter has been considered and it is observed that the plain reading of the provisions of sections 7 and 8 of the Sales Tax Act, 1990 leads to the conclusion that under section 7(1) in juxtaposition to section 8(1)(a) a registered person shall be entitled to deduct input tax in the manner specified in section 7(1) paid on the goods used or to be used for any purpose for the manufacture or production of "taxable goods" or for "taxable supplies" made or to be made by him. Once a registered person establishes that the goods in question of which input tax has been paid were used for taxable supplies made or to be made by him then subject to terms of section 7 he becomes entitled to the deduction of the said input tax paid by him for the said purpose from the output tax that is due from him in respect of the particular tax period as held by the Honourable Lahore High Court, Lahore in case of Messrs Sheikh Spinning Mills Ltd. v. Federation of Pakistan and others 2002 PTD 2959. Section 7 of the Sales Tax Act, 1990 is a beneficial provision of law in nature providing a facility to a registered person to adjusted input tax at the time of making payment of output sales tax has held by Honourable Supreme Court of Pakistan in case of Sheikhoo Sugar Mills Ltd. v. Government of Pakistan and others 2001 SCMR 1376 = 2001 PTD 2097. Relevant portion of section 7 reads "A registered person shall be entitled to deduct input tax". The word used here is "entitled" which according to Jowitt's Dictionary of English Law means "to give a right to" as held by this Tribunal in reported case 2003 PTD (Trib.) 928 (CESTATE, Lah.). From the close scrutiny of provisions of section 7(1) of the Sales Tax Act, 1990 it reveals that a manufacturer of finished goods at the time of their sale has been given the right to adjust against the sales tax payable on such goods which has been described as output tax, the input tax already paid. These provisions of Sales Tax Act, 1990 were enacted with the subject of providing safeguard against double taxation on the same goods, therefore, it is clear that only input tax already paid on the component and constituent part of the sales taxable supplies could be 'adjusted as held in law-case (PTCL 1995 CL 415) (H.C. Lah.). The provisions regarding "input" as well as "output tax" as defined in the definition clause of the Act read with sections 7 and 8 thereof are only modalities prescribed to protect the interest of the exchequer against any pilferage, evasion or fraud as held in law case (PTCL 2002 CL 115) (H.C. Lah.).

9. In the judgment, dated 14-2-2002 of Honourable Lahore High Court, Lahore in case of Messrs Sheikh Spinning Mills Ltd. v. Federation of Pakistan and others 2002 PTD 2959, it has been held as under:-- "A registered person shall be entitled to deduct input tax in the manner specified under section 7(1) paid on the goods used or to be used for any purpose for the manufacture or production of taxable goods or for taxable supplies made or to be made by him." The provisions of sections 7 and 8 of the Act are only machinery provisions to crystallize the liability to pay the sales tax as contemplated in charging provision of section 3 of the Sales Tax Act, 1990. It is, therefore, observed that where the appellants were legally bound to pay sales tax on the supplies of imported goods from 1-1-1998 and onwards when the exemption provided under S.R.O. 674(I)/97, dated 29-8-1997 upto 31-12-1997 was no longer available, the Department is also duty bound to allow adjustment of input tax paid at the import stage. Accordingly a sum of Rs. 44,226 as sales tax payable calculated in the audit exercise culminating in the reconciliation statement, dated 10-12-2005 duly signed and accepted by both the parties as mentioned in paragraph 7 above is the real liability of sales tax payable by the appellants under the Act. The Sales Tax Department can only recover Rs.44,226 along with additional tax chargeable under section 34(1) and 3% penalty under section 33 of the Sales Tax Act, 1990. The appeal is, therefore, partly accepted and both the impugned orders are modified to the above extend only. C.M.A./221/Tax (Trib.) Appeal partly accepted.