2007 PLP (Trib (PTD)

MEHMOOD ALAM, MEMBER (TECHNICAL).

This judgment disposes of the above listed eight appeals together. Four of the appeals were lodged respectively by Messrs Naseem Plastic, Messrs Mughal Polypropylene Messrs Kohistan Poly Packages and Messrs Mian Sharif Sons. These appellants are located at Faisalabad and are engaged in the manufacture of polypropylene. Their appeals are directed against Order-in-Original Nos.4 to 7 of 2003 all dated 20-1-2003 passed by Additional Collector (Adjudication), Faisalabad. Under the aforesaid impugned orders, these appellants were directed to pay the following short recovered amounts of sales tax besides the additional tax and 3% penalties as indicated against each of them as follows:

(i) Messrs Naseem Plastic, Faisalabad Rs. 517269 (ii) Messrs Mughal Polypropylene, Faisalabad Rs. 445706 (iii) Messrs Kohistan Poly Packages, Faisalabad Rs. 564998 (iv) Messrs Mian Sharif Sons, Faisalabad Rs. 719519 Four cross-appeals, against the same impugned orders were lodged by the Collector Sales Tax, Faisalabad challenging that the amounts adjudged by the learned Adjudicating. Officer in each case were on the lower side compared to what was actually due from the manufacturers.

2. Background of the impugned matter dates back to the year 2002 when the C.B.R. issued instructions to the sales tax formations for audit of the manufacturers of polypropylene for the period July, 2000 to 2002. These instructions were issued by C.B.R. on receipt of complaints to the effect that the manufacturers of polypropylene were indulging in massive evasion of sales tax by misdeclaring and suppressing their actual production. The C.B.R. also laid down a formula relating to the production profile of polypropylene units for guidance of the audit staff. The exercise was accordingly undertaken by the sales tax auditors who observed that the manufacturing units under reference had paid almost negligible amounts of sales tax during the period from 7/2000 to 5/2002. The audit of the manufacturing units was completed by the auditors using the guidelines that had been issued by C.B.R. During the course of audit, the assumptive values of various factors as provided in C.B.R.'s formula were replaced by the actual values of the respective factors. Consequently it was observed that the manufacturers of polypropylene had evaded substantial amounts of sales tax in violation of the respective provisions of the Sales Tax Act, 1990. Accordingly contravention reports were made out and forwarded to the Adjudicating Officer for further proceedings. The Adjudicating Officer issued show-cause notices and completed the adjudication proceedings in the due course. Liabilities of sales tax were thus worked out against each of the party on the assumption that each of them had worked on a single shift basis whereas the parties were initially alleged to have worked round the clock on three shifts basis. Consequently the liabilities worked out by the Adjudicating Officer were less compared to what had been alleged in the contravention reports and the show-cause notices.

3. The contesting appellants were heard by us on 11-5-2005 and 13-5-2005. They were advised to submit written arguments in support of their contentions which have since been perused by us. A summary of their arguments is given in the foregoing text. Learned counsel appearing on behalf of the manufacturers of polypropylene, inter alia, asserted that:

(a) There is no concept of a formula under the Sales Tax Act, 1990 which could possibly be used for calculating the sales tax liabilities for determination of the evaded amounts. The use of such formula is not authorized in any of the provisions of the Sales Tax Statutes. (b) The impugned orders do not specify as to under which of the provisions of the Sales Tax Act, the recovery was adjudged. It is a settled principle of law that where the respective provisions of the statutes are not invoked the order will be illegal. As such the impugned orders were not sustainable in the eyes of law. (c) It was the responsibility of the prosecuting agency to prove the illegal and clandestine removal of alleged products without payment of duty and taxes. As no evidence had been produced to that effect, the impugned orders are liable to be set aside. (d) The audits forming basis for the impugned orders were conducted without associating the appellants as they were not issued any of the notices under section 25 or 37 or 38 of the Sales Tax Act to produce their records for the purpose of audit. As such the impugned orders were based merely on presumption. (e) Production of a manufacturing unit otherwise depends upon several factors i.e. raw materials, condition of the machinery used, financial status, quality and quantity of the manufactured product etc., but theses variables were not taken into consideration by the auditors. (f) It is settled law that no formula can be made basis for the levy of sales tax. Besides this formula was not applied in the country unanimously. The sales tax under the respective statutes is payable on the taxable supplies only. Therefore, the allegations of evasion of tax was baseless and void.

4. Representative of the Collectorate of Sales Tax, Faisalabad reiterated the grounds of appeal and particularly emphasized the following points:

(i) The large scale evasion of sales tax on part of the polypropylene manufacturers is simply proved from their sales tax payment profiles during the period under reference. Each one of them had paid only nominal amount of the tax at the end of each tax period. These amounts were almost negligible. (ii) The Adjudicating Officer had taken into consideration all relevant aspects of the episodes and rightly reached the conclusion that the manufacturers of polypropylene were guilty of substantial evasion. (iii) However, while passing the impugned orders, he unduly reduced the tax liabilities by assuming that the appellant manufacturers had only worked on a single shift. The assumption that the manufacturers were working on a single shift basis was erroneous because the manufacturers were operating their units round the clock. That being so, the respective liabilities should have been worked out on the basis of three shift operations. (iv) To that extent, the learned Adjudicating Officer had made an error of judgment which may be rectified at the appeal stage.

5. We have looked into the records of appeals and arguments of the contending appellants. Perusal and scrutiny of the impugned orders vividly suggests that tax compliance, on part of the appellant manufacturers during the years 2000 and 2001, was too poor. To quote one example, Messrs Mughal Polypropylene paid a total sales tax of Rs.70,756 during the period of 23 months (7/2000 to 5/2002). This figure works out to the average payment of Rs.3000 per month. Sales tax contribution of the remaining three appellants was still lower. Having looked on these tax compliance profiles, we agree that the sales tax payments on part of the appellants during the period under reference were ridiculously low whereas the level of suppression of their taxable supplies was self-evident.

6. It was in this background that the Sales Tax Auditors of Faisalabad Collectorate initiated action pursuant to some of the guidelines issued by the C.B.R. Production profiles of the appellant manufacturers were consequently worked out. We have looked into the criteria that was adopted for such calculations. We feel that the criteria used for purposes of the exercise are objective, lodgical and comprehensive.

7. Some of the obvious conclusions which follow from the sales tax payment profiles of the appellant manufacturers are that:

(a) they were not maintaining either of prescribed records; (b) if at all they were maintaining some records for an eye wash, the same were totally unreflective of their actual supplies and had no relevance to the quantity of polypropylene manufactured; and (c) the unrecorded supplies were made over an extended period with a motive to evade heavy amounts of sales tax. In the given situation their sales tax records, if any, had no legal value or even practical utility for assessment or determination of the evaded amounts. Such "records" ought to be ignored which has been rightly done in the impugned orders. Sales Tax Audit staff and the Adjudicating Officer have relied upon the alternate method of assessment which, in the given circumstances, is justified.

8. Addressing the question of legality of the method used, we are inclined to observed that the sales tax law does not bar either of the methods for detection of the evaded revenues provided that the amounts so assessed are based on convincing reasons and sound logic. Perusal of the impugned orders show fair and unbiased application of mind by the Adjudicating Officer. The liabilities have been calculated on sound merits and logical reasons. Arithmetical errors of the audit staff have been duly rectified. The period of actual production in each case has been properly accounted for. Tolerance in calculations, where so warranted, was liberally allowed. Therefore, in our candid observation, the grounds agitated by the appellant manufacturers are devoid of merits. Consequently their appeals are rejected.

9. The appellant-Department, on the other hand, has a grievance that the assessment was made by the Adjudicating Officer on the sole assumption that manufacturing units were working on single shift operations whereas these units had actually been working round the clock. As such the assessment should have been made on the basis of three-shift operations. We cannot accept this assertion of the department for a simple reason that no evidence was adduced by the Department in support of this contention either at the original stage or before the appellate forum. The Adjudicating Officer has dealt. with this issue at considerable length and has recorded adequate reasons in this behalf. We are, therefore, not inclined to accept the appeals of the appellant Collectorate either.

10. In consequence of these observations, the impugned orders are upheld. Accordingly the appeals are disposed of. C.M.A./54/Tax(Trib.) Order accordingly.