SYED NADEEM SAQLAIN CHAIRPERSON.---Titled Sales Tax Appeal has been filed by the appellant- registered person under section 46 of the Sales Tax Act, 1990 and assailed the order of the learned Commissioner Inland Revenue, (Appeals-II) Lahore vide Order in-Appeal No . 1 dated 4-11-2010.
2. Facts leading for disposal of the instant case are that the appellant is engaged in the manufacturing and supplies of welded steel pipes having Sales Tax Registration No.03.09.7307-018-
55. During the audit proceedings, it was observed by the authorities that the appellant had illegally claimed input tax of Rs.95,89,587 on the strength of fake invoices issued by fraudster gang. Thus, contravened sections 3,6,7,8, 8A, 14,22,23, 25,26, 28 & 73 of the Sales Tax Act, 1990.
3. On the basis of the aforesaid facts, the appellant-registered person was called upon to show cause as to why the evaded amount of Sales Tax amounting to Rs.95,89,582 and Special Excise Duty of Rs.518,356 may not be recovered under section 36(1) of the Sales Tax Act, 1990 and Under Section 14 of the Federal Excise Act, 2005 respectively along with default of surcharge and as to why penal action may not be initiated under sections 24, 33 and 19 of the Sales Tax Act, 1990. In response thereto a detailed reply was submitted, rebutting all the allegations levelled in the impugned notice besides legal lacunas and the factual controversies were pointed out. However, the reply tendered by the appellant could not convince the Assistant Commissioner and he, therefore, remarked that the detecting agency has rightly noticed the illegalities and the discrepancies in the instant case. It was also noted that the applicant had already deposited a sum of Rs.10,00000 out of total principal amount of Rs.85,89,582. Thus, charges to the extent of Rs.85,89,582 and the Special Excise Duty of Rs.518,356 under section 36(1) stand established.
Besides, penalty equal to 100% of the amount of tax involved has also been imposed under section 33(11)(c)(13) of the Sales Tax Act, 1990. Against this treatment, appeal was filed before the leaned Commissioner Inland Revenue (Appeals-II), Lahore, who by virtue his order dated supra rejected the appeal of the appellant being devoid of any merits. Now, the appellant has come up in further appeal this fora.
4. The learned counsel appearing on behalf of the appellant vociferously contended that the show cause notice dated 24-11-2009 has been issued by the Deputy Director Inland Revenue on the basis of contravention report of the Deputy Director Investigating Officer, Alama Iqbal Town, Lahore on assumption, surmises, whims and on illegal basis which is liable to be set aside/struck down. Other contention was that section 2(37) has wrongly been invoked in the impugned notice and upholding the same by the first appellate authority is not sustainable in the eye of law because this section has been totally misread by the said authorities. To invoke this section, pre-requisite to allege the registered person that he has committed tax fraud, is that he has acted knowingly, dishonestly or fraudulently and without any lawful excuse. To refute this allegation, the learned counsel pointed out that all the raw materials was purchased by the appellant from the registered person's and the invoices issued under the provisions of section 23 of the Act were also obtained.
Moreover, status of those suppliers was also checked and verified from the website of the F.B.R.
(www.Cbr.Gov.Pk) and it was reported by it to be active. Further, all the payments were made by the appellant, after adhering to the provisions of section 73 of the Act. Besides, the suppliers were also submitting copies of their monthly Sales Tax returns and the summaries of the relevant period to the Department. It was also added by the learned counsel, that the appellant did all the possible precautions and endeavors as well as used all the official resources to verify status A and genuineness of the suppliers. Such acts clearly speak for themselves that the appellant discharged all his legal and the ethical responsibilities to bring the truth at the door in a good faith. Further all the requisite conditions as are laid down in sections 7 and 73 of Act for claiming input tax and paid the tax to the supplier were fulfilled bona fide. Also stressed that in the given situation the entire liability of depositing the tax in terms of section 3(3) of the Act, was the exclusive responsibility of the suppliers who are or were duly registered at the relevant time and were regularly filing their monthly returns and summaries with sales tax department. In fact, it was the sole duty of the Sales Tax Department to check and find out as to whether the suppliers are depositing their sales tax in the government exchequer or not. As the Department has failed to fulfil its official obligations rather shifting its responsibilities on the appellant's shoulder which is highly unwarranted and uncalled for.
Also vehemently contended that the appellant has been alleged to contravene the provisions of subsections (1)(ca) and (1)(d) of section 8. This allegation is not only contrary to the facts but is also against the normal business practice. When the appellant, under the prescribed mechanism of VAT, has made payment of input tax to the supplier, he in no way can force or compel the supplier to deposit the tax in the exchequer. It is imperative to state here that the appellant does not have any source to verify that the supplier has actually made payment in the Government treasury. Moreover, when status of the suppliers has been checked from the website of the department, which indicated to be active, in such eventuality how it can come into one's mind that the supplier is issuing fake or un-genuine invoices. In this backdrop, provisions of subsectibns (1)
(ca) and (1)(d) of section 8 are not attracted on the transactions made by the appellant. Further stressed that how could the appellant be held to be jointly liable under section 8A of the Act particularly when the suppliers were registered with the Department and were submitting their monthly sales tax returns and the summaries regularly. Thus, in the given circumstances, the impugned show cause notice has illegally been issued and the order passed thereunder is also liable to be set aside. Conversely, none has prosecuted on behalf of the department to defend the instant case, consequently hearing of the case is completed on the basis of the available record.
5. The learned counsel for the appellant has been heard at a great length and perused the relevant record. We have observed that the appellant is engaged in the business of manufacturing of engineering products -and supply thereof to the verified purchasers since long and also enjoys a very good reputation amongst the business circle. Nevertheless main allegation levelled by the audit authorities is that the appellant is involved in a sales tax fraud by claiming illegal input tax adjustment of Rs.95,89,587 and the Special Excise Duty of Rs.518,356 and in this manner the provisions of sections 3, 6, 7, 8, 8A, 14, 22, 23, 25, 26, 28, and 73 of Sales Tax Act, 1990 have been violated. During the court proceedings, the learned counsel for the appellant pressed all the grounds, as are enumerated in the paper book, out of which some are legal while the others are factual. We would like to reproduce section 2(37) which defines "tax fraud" is being reproduced hereunder for consumption:--
(37) 'tax fraud means knowingly, dishonestly or fraudulently and without any lawful excuse (burden of proof of which excuse shall be upon the accused)-
(i) doing of any act or causing to do any act; or
(ii) omitting to take any action or causing the omission to take any action, including the making of taxable supplies without getting registration under this act; or (i.e) falsifying or causing falsification the sales tax invoices, in contravention of duties or obligations imposed under this Act or rules or
(iv) instructions issued thereunder with the intention of understanding the tax liability or underpaying the tax liability for two consecutive tax periods or overstating the entitlement to tax credit or tax refund to cause loss of tax.
It is abundantly clear from reading definition of "tax fraud" that the mandatory condition put forth for committing tax fraud. Is that the alleged person should have done any act knowingly, dishonestly or fraudulently and without any lawful excuse. Reverting to the facts, of the instant case, there is not an iota of evidence whatsoever wherefrom it could be deduced that the appellant has knowingly or dishonestly or fraudulently committed tax fraud by claiming input tax adjustment against the sales tax , invoices issued by the alleged fraudster gang. Even the audit/ contravention report could not establish with any concrete reasoning that the appellant was involved in tax fraud by claiming illegal sales tax input tax of Rs.95.89587, special excise duty of Rs.518356 and have violated the provision of section 2(37). In fact the department has miserably failed to fasten blame at the appellant's door. On going through the audit/contravention report, we are convinced that the entire edifice has been built, to hold the appellant as fraudulent, on conjectures and surmises and whimsical inference has been drawn against the appellant on the so called set of facts. On the other hand, the record proves that there was ample justification with the appellant to claim adjustment of input tax. Such as all the suppliers were registered persons and their status was active as per F.B.R. Website. They were regularly submitting their stales tax returns and summary thereof. All the payments were made by the appellant in accordance with the provisions of section 73 of the Sales Tax Act, 1990. The appellant did not have any prior knowledge about fakeness of the sales tax invoices issued by the suppliers. We also deem it appropriate to reproduce section 36(1) which reads as under:- "Where the 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 the relevant date, requiring him to show cause notice for payment of the amount specified in the notice."
6. Premises of this section is that show-cause notice can only be issued where non levy, short levy or erroneous refund has been caused by the reason of some collusion or a deliberate act. On going through the facts available on record, the department could not prove its allegation of collusion of the appellant with the supplier nor could bring on record any evidence that the appellant has done fake transaction with deliberate act. The Honourable High Court in a case reported as 2007 PTD 2265 while interpreting section 36 observed as under:-- "10. To put it succinctly, show cause notice can only be served under section 36 ibid if;
(a) Any tax or charge has not been levied or has been short-levied or has been erroneously refunded.
(b) Such non-levy, short-levy, or erroneous refund has been caused by the reason(s) of "some collusion or a deliberate act" under subsection (1) of section 36 of the Sales Tax Act or owing to inadvertence or error or misconstruction per subsection (2) thereof and
(c) Within the period of five years under subsection (1) and three years under subsection (2) of section 36.
The unarguable conclusion thereto is that mere no-levy, short levy, or erroneous refund of tax or charge cannot be basis for a show cause notice. It has to be founded upon non-levy, short levy, or erroneous. Refund caused by any of the above reason which being the dominant factor also determine the period of limitation thereto, in the absence of any of the three conditions or the jurisdiction facts, the taxing authorities shall have no power or jurisdiction to serve a show-cause notice under section 36(1) ibid".
7. Coming to the next issue which relates to section 73 of the Sales Tax Act, 1990. We have noted that the appellant uses high quality raw material i.e. HR coils which are only locally manufactured by Pakistan Steel Mills or are being imported and to support this assertion monthly electricity bills for the months 11-2008, 12-2008, 03-009 and 04-2009 and the sales tax returns for the corresponding months showing supplies made to verified purchasers, were submitted to prove that the manufacturing, unit was operative and consumed the raw material. Now, it is imperative to state here that the appellant purchased the raw material and consumed the same and supplied the manufactured goods to other verified purchasers and in all this eventuality there hardly seems any fraud and dishonesty. Also noted that the appellant made all the payments against the said purchases after fulfilling all the legal requirements of provisions of section 73 of the Act, 1990.
8. Coming to the last issue which relates to section 8A, the joint and several liabilities of registered persons in supply chain where tax is unpaid. During the court proceedings, the learned counsel for the appellant contended that this fact was never in the knowledge of the appellant that the supplier is not making payment of the tax due to him since. November, 2009 and even the department was unaware that the supplier are not making payment of tax whereas the alleged fake suppliers were duly registered with the department and were regularly submitting their monthly sales tax returns and summaries. Therefore, the appellant cannot be evolved as a joint liable and induction of contravention does not qualify. Such non-speaking order has been declared null and void by the superior court in re: GST-2004-CL-71, GST-2003-C1-562 and GST- 2004-79.
9. We have heard the arguments of the learned counsel and found that the appellant under the prescribed mechanism of VAT, made payment of the input tax to the suppliers and the appellant had no access to confirm that the supplier had made the payment in the Government treasury or not?. In fact, this was the duty of the Revenue to check as to whether the supplier has made payment of tax due to him especially when he was filing his monthly sales tax returns and summaries with the department. We have also observed that the learned Commissioner Inland Revenue had passed the impugned order under the influence of DII without application of his independent and judicious mind. It is astonishing to state here that the department has heavily relied upon the statements of the suppliers but none of the suppliers or member of the gang stated that they issued the invoices with prior connivance with the appellant. Even the confessional statement of member of gang namely, Mr. Azam Muhammad Khan neither confessed that he was involved issuing fake invoices nor have any connivance with the appellant. Actually, the department has totally misread the confessional statements and interpreted the same without application of mind. Since the show-cause notice was issued and the impugned order passed there under or the strength of concocted and fabricated facts, therefore, such notice and the order are not sustainable in the eye of law. We are of the considered view that after adopting the method for making the payment as is prescribed by the law, the appellant has discharged his onus, so no responsibility lies on the appellant's shoulders to haunt his suppliers for depositing his liability in the government exchequer or not.
10. We also find a lot of force in the contention put forth by the learned counsel and found that the appellant has clean tax history which clearly depicts that huge payments of tax is being made towards the national exchequer. There is no evidence on record wherefrom it could be determined that appellant has violated section 73.
11. Having taken regard to the facts of the case in its entirety and after respectfully following the ratio decided in the referred judgments we have no option except to reach the conclusion that proper show-cause notice as. Envisaged under section 36 has not been issued, consequently, the proceedings conducted in pursuance thereof could not have any legal consequences in the eye of law. As a result, we are of the considered opinion that the Revenue has failed to prove the charges levelled in the show cause notice and which are enforced by the lower forums. Consequently, the orders of the authorities below are hereby annulled and the appeal of the appellant-registered person stands accepted. .