1. By this judgment we intend to dispose of appeal No. STA/132/IB/2010. Brief facts of the case are that a team of the DRRA conducted desk audit of revenue receipts of the Collectorate of Sales Tax Multan. The audit of sales tax receipts relating to M/s. Kabirwala Power Company for 2006 & 2007 revealed excessive claim of input adjustment by the company. Following up on audit on the DRRA's audit observation, the audit team of the Collectorate of Sales Tax Multan found that the DRRA's observation was valid.
2. Accordingly the Additional Collector (Adjudication) Collectorate of Sales Tax, Multan issued Show- Cause Notice C. No.30/2008/Adj/ST/Addl/1985, dated 17,01.2008 to M/s. Fauji Kabirwala Power Company stating that, the. Appellant had supplied electricity to WAPDA and received consideration as energy purchase price and capacity purchase price. According to the law governing IPPs, only energy price was liable to sales tax.. Therefore, they could claim input adjustment only for the sales tax paid on energy price. However, the appellant failed to apportion the input *ax credit relating to capacity payments required by he apportionment rules of Sales Tax Act, 1990. This irregularity caused non-payment of sales tax of Rs. 146,480,724 which was recoverable from the appellant alongwith penalty and additional tax/default surcharge under Sections 33 and 34 of the Sales Tax Act, 1990.
2. The appellant's reply to the Show-Cause notice was found untenable. The adjudicating authority vide his Order in-Original 08/2009, dated 13.2.2009, determined that the charges stated in the Show-Cause notice were fully established and sales tax amounting to Rs. 146,480,724 was recoverable from the appellant alongwith default surcharge and penalty under the related provisions of the Act The appellant, filed an appeal before the Commissioner of Inland Revenue (Appeal-1)., Islamabad who after detailed analysis of the case upheld the Order-in-Original for the self- explanatory reasons given in his elaborate Order-in-Appeal No. 57/2010, dated July 15, 2010.
3. Being aggrieved by the Order-in-ApPeal passed by the learned Commissioner Inland Revenue (Appeals-1), Islamabad, the appellant filed the instant appeal on the following grounds:- 3.1 The Order-in-Appeal No. 57/2010, dated July 15, 2010 passed by the learned Commissioner Inland Revenue (Appeals-1), Islamabad is bad in law, and facts of the case.
3. 3.2 The learned Commissioner Inland Revenue (Appeals-1) has erred in not giving any findings on our contention that the staff of Directorate! Of Revenue Receipt Audit (DRRA) is not authorized to conduct the audit of sales tax of the Appellants records as per judgments of Superior Courts, on the issue.
4. 3.3 The learned Commissioner Inland Revenue (Appeals-1) has erred in passing the Order-in- Appeal in a summary manner without considering the legal and factual position of the case and rebutting appellant's submission during hearing proceedings of the case.
5. 3.4 The learned Commissioner Inland Revenue (Appeals-1) has erred in confirming the apportionment of the input sales tax.
6. 3.5 The learned Commissioner Inland Revenue (Appeals-1) has erred in confirming the Order- in- Original No, 08/2009, dated February 13, 2009 passed by the Additional Collector (Adjudication) holding that default surcharge and penalty under Sections 34(1) and 33(5) respectively is recoverable from your Appellant under facts and circumstances of the case.
7. 3.6 Your Appellant craves to, add, amend or alter the above grounds of appeal.
4. Hearing of the case was held on 18.10.2010 and finally on 26.02.2011. The AR on behalf of the appellant and the DR represented respondent pleaded their respective cases.
8. 4.1. Claiming that the initiation of adjudication on the basis of audit observation of DRRA was unlawful, the AR argued that the honourable Peshawar High Court in' a judgment dated September 18, 2008 reported as PTCL 2007 CL 697 and PTCL 2007 CL 366 had categorically held that the DRRA was a branch of Auditor General of Pakistan and was not authorized to audit the record of private enterprises/industrial units licensed/registered under the Act, as such the whole exercise conducted by DRRA or the Sales Tax department including the Show-Cause notice, the O.N:0. And the Order-in-Appeal was coram non-judice. The Sales Tax Act, 1990 does not vest the DRRA with the powers of .Sales lax officer and the Show-Cause notice in the present case on the basis of audit of DRRA is cuoram non-judice and, therefore, requested to withdraw the same. The Appellant drew attention towards Section 12 of the Auditor Generals (Functions, Powers and Terms and Conditions of Service) Ordinance, 2001 (AG Ordinance) which restricts the role of the Auditor General's office to the audit of receipts payable into the Consolidated Fund or Public Accounts of the Federal Government or Provinces or the accounts of each district to satisfy himself that all such receipts have been properly deposited and rules and procedures relating thereto, are being fully observed and the systems are in place for assessment and collection of government receipts. Therefore, the Auditor General is authorized to ensure proper assessment and collection of government receipts but has no jurisdiction to conduct audit of private companies/firms. The Appellant reiterated that powers of the Auditor General in terms of Section 14 of the AG Ordinance are limited to .Audit of receipts as stated in Section 12 of AG Ordinance and are not intended to expand AG's power to audit the records of the tax payer. The charte, of function of Auditor General specified through SRO 1195 (1 )/90, dated 17.12.1990 requires the Auditor General to audit the receipt of the Federal Government and not the records of private enterprises/industrial units licensed/registered under the Act ibid. The appellant relied on the case-law P7CL 2007 CL 697 and PTCL 2007 CL 366. The Appellant in support of her contention further stated that Honourable Peshawar High Court, Peshawar in a judgment dated 18.9.2008, has categorically held that the whole exercise conducted by DRRA was coram non-judice in view of the charter of functions given in SRO 1195(1 )/90, dated 17.12.1990. The Honourable Court also observed that DRRA was a branch of AG and its officers were neither sales tax officers under Section 30 of the Sales Tax Act, 1990 nor authorized under Sales Tax Rules, 2006 to access the premises and accounts of registered units.
9. 4.2. The AR explained that the special procedure for collection and payment of sales tax on electric power provided in Chapter VI of the Sales Tax Special Procedure Rules, 2006, states that in case of IPP, the value of the supply shall be the amount received by such IPP on account of energy purchase price only and "capacity purchase price" shall not form part of value of supply for the purpose of levy of sales tax. He invited attention to sub-rule (3) of Rule 38 of the Sales Tax Special Procedure . Rules, 2006 which reads as follows:- "(3) In case of an I.P.P. HUBCO or KAPCO, the value of supply shall be the amount received by such IPP or, as the case maybe. HUBCO or KAPCO, on account of Energy Purchase Price only and any amount in excess of Energy Purchase Price received on account of Capacity Purchase Price, Energy Price Premium, Excess Bonus, Supplemental Charges, etc., shall not be deemed as a component of the value of supply, notwithstanding anything contained in clause (46) of Section 2 of the Act."
10. It was contended by the learned AR that his position was in accordance with the procedure laid down in Sales Tax General Order No. 3 of 2004, dated June 12, 2004. In the aforesaid General Order, the FBR confirmed that IPPs will be entitled to claim full input tax adjustment of sales tax paid on purchase of furnace oil and any other raw material for making supply of electricity subject to the provision of Section 8 and the notifications issued there under. The A.R/ thus argued that the CCP was excluded from the value of supply defined by Section 2(46) of the Sales Tax Act, 1990. He claimed that the C.C.P. Part of the consideration .Or value received by the appellant from Wapda constituted neither supply, nor value nor consideration and was outride the scope of value received "in furtherance of business". Hence, its apportionment was unlawful.
11. 4.3 The AR pleaded that in the meeting held on December 13. 1999 under the chairmanship of Secretary, Water and Power in which Member (Sales Tax) FBR also participated, it was confirmed by Member FBR that "IPPs will be entitled to claim full input tax adjustment against salep tax paid on purchase of furnace oil, lubricants, spare parts etc., however excluding the items mentioned in the sales tax No. SRO 578 (1)/98, dated 12.06.1998. He stated at a copy of the draft -General Order prepared by FBR on the issue was also circulated among the participants which was later, officially notified by FBR vide Sales Tax General Order No. 1, dated 24.01.2000.
12. 4.4 The AR pressed the argument that the respondent failed to appreciate the basis of calculation of sales tax payable by the appellant as provided in Sales Tax General Order No. 3 of 2004, dated June 12, 2004 which was further explanation of the Sales Tax General Order No. 1 of 2000, dated 24.01.2000 issued by the FBR. Contending that the Respondent failed to understand that C.G.O. No. 3/2004 and Sales Tax Rules, 2006 prohibits the apportionment between the Energy Purchase Price (E.P.P.) and Capacity Purchase Price (C.P.P). The A.R. Explained that the aforesaid C.G.O. Provides as follows:-- "The issue has been examined in the Central Board of Revenue and it is ruled that the value of supply of electricity by IPPs is the amount received on account of Energy Purchase Price only.
13. Therefore, any amount in excess of EPP received on account of Capacity Purchase Price Premium, Excess Bonus, Supplemental Charges etc, is not to be included in the value of supply as defined in clause (46) of Section 2 of the Sales Tax Act., 1990. However, the assessm ent of sales tax is to be done in accordance with the provision of Sections 7, 8 and all other relevant provisions of the Act, rules and notification. The IPPs will be entitled to claim full input tax adjustment against the sales tax paid on purchase of furnace oil and other tax-paid purchase for making supply of electricity subject to the provisions of Section 8 and the notification issued thereunder."
14. He continued to explain that the Sales Tax Rules, 2006 exclude the value of supply from the ambit of Section 2(46) of the Sales Tax Act, 1990 in case of IPPs as follows:- "The A.R. Explained that the special procedure for collection and payment of sales tax on electric power provided in Chapter VI of the Sales Tax Special Procedure Rules, 2006, states that in case of IPPs the value of the supply shall be the amount received by such IPPs on account of "energy purchase price" only and "capacity purchase price" shall not form part' of value of supply for the purpose of levy of sales tax. He invited attention to subrule (3)( of Rule 38 of Sales Tax Special Procedure Rules,2006 which reads as under:-
(3) .... In case of an I.P.P., HUBCO or KAPCO, the value of supply shall be the amount received by such IPP of, as the case may be, HUBCO or KAPCO, on account of Energy Purchase Price only and any amount in excess of Energy Purchase Price received on account of Capacity Purchase Price, Energy Purchase Premium, Excess Bonus, Supplemental Charges, etc. Shall not be deemed as a component of the value of supply, notwithstanding anything contained in clause (46) of Section 2 of the Act".
15. He contended that their position was in accordance with the procedure laid down in Sales Tax General Order No. 03/2004, dated 12.6.2004. In the aforesaid General Order, the FBR confirmed that IPPs will be entitled to claim full input tax adjustment of sales tax paid on purchase of furnace oil and any other raw material for making supply of electricity subject to the provision of Section 8 and the notifications issued, thereunder. Hence the Capacity Purchase, Price was excluded from the value of supply as defined by Section 2(46) of the Sales Tax Act, 1990.
16. On the strength of C.G.O. And Sales Tax Rules, 2006 the A.R. Claimed that apportionment of taxable and non-taxable supplies in respect of Energy Purchase Price (E.P.P.) and Capacity Purchase Price (C.P.P) is unlawful.
17. Co-incidentally, both the AR as well as the DR seem to argue their respective positions based on the same , legal framework comprising STGO: No. 01/2000, STGO No. 3/2004, Section 2(46),'Section 7 Section 8 of the Sales Tax Act, 1991) and Rule 13 of Sales Tax Special Procedure Rules, 2007,' their mainstay being that capacity payment represented a non-taxable supply, i.e., not subject to payment . Of Sales Tax. While, both the parties claim that capacity payment part of the consideration; received by the appellant) represents a non- taxable supply, yet the controversy is about admissibility of input tax adjustment in respect of the capacity payment part of the consideration received by the appellant. The tax authorities believe that the capacity payment being non-taxable supply should be apportioned under Sections 7 & 8 of Sales Tax Act The appellant insists that input adjustment relating to capacity payment is admissible because it is not a supply.
18. 4.5 The AR further contended that input tax credit claimed by the appellant against energy purchase price is not only in accordance with the provisions of law but also as per the industry practice in this respect. The Sales Tax department, in case of other IPPs has conceded to the input adjustment for capacity payment but the appellant was being subjected to discriminatory treatment in violation of Article 25 of the Constitution. He also cited the case- law reported as [(2004) 90 Tax 9 (HC)] and [(2004) 90 Tax 98 (HC)] to support his contention.
19. 4.6 The AR went on the state that the first as well as the second adjudicating authority after reproducing the contentions of the Appellant ' and the DR in the Order, instead of rebutting the contentions of the appellant passed the summary order as follows:- "In the light of above, I have come to the conclusion that the contention of the prosecution is correct and the sales tax Rs. 146,480,724/- is recoverable from the respondents alongwith default surcharge (will be calculated at the time of payment) under Section 34(1) and penalty under Section 33(5) of the Sales Tax Act, 1990."
20. 4.7 The A.R. Concluded his presentation by saying that his stance was reconfirmed by the FBR as well as the F.T.O The Tribunal was under obligation to follow the FBR's directives. He further emphasized that the input adjustment in respect of capacity payment part of the consideration was an established practice of the industry. Denying this facility to the appellant was discriminatory and violated Art, 25 of the Constitution.
5. On his turn the learned DR, defended the impugned Order-in-Original and the Order in Appeal passed by the learned Additional Collector (Adjudication), Multan and the Commissioner Inland Revenue, respectively, stating that according to Section 3 of the Sales Tax Act, 1990, the sales tax was applicable @ 15% on the value of taxable supply. He argued that according to Rule 13(3) of the Sales Tax Special Procedure Rules, 2007, certain receipts (like capacity purchase price, energy price premium etc.,) which are otherwise part of value of supply under Section 2(46) of the Act, 1990, but deemed to be excluded from the value of supply or in other words, have been treated as exempt supplies. Therefore, under Section 8 of the Sales Tax Act, 1990 the appellant is not entitled to input tax adjustment in respect of the capacity payment which falls in the ambit of exempt supplies due to the fact that the capacity payment was not chargeable to sales tax under Section '3 of Act. Thus, the Additional Collector (Adj.) has correctly disallowed the proportionate amount of input tax relating to exempt or non-taxable supplies, i.e., the capacity payment part of the supply. He stated that the order-in-appeal exhaustively discussed each ground of appeal and contained good reasoning for upholding the Order-in-Original under reference.
6. The written and verbal arguments put forth by the A.R. Of the appellant company and the D.R.
21. Heavily contested the meanings of terms like supply, the value of supply, taxable supply, purpose of supply, consideration, business and value received in furtherance of business. The calculation of sales tax liability and appellant's entitlement to the' input tax adjustment was also vehemently contested. The central controversy is two fold, i.e. Firstly whether the capacity purchase price represents a value for supply as defined by Section 2(33), 2(35) and Section 2(46). Secondly, whether the value, consideration or price called the capacity purchase price is subject to apportionment, under Section 8 of the Sales Tax Act, 1990. These two issues involved in this case are of a fundamental nature and very critical to our tax system. In view of the conflicting viens of the parties to the case, and the importance of the issues this Tribunal would like to frame the following questions of law and facts for their threadbare analysis and entering the findings:-
(a) Whether a contravention report, Show-Cause notice and subsequent adjudicatory proceedings triggered from an audit observation made by DRRA are unlawful per se. (Appellant's ground No. 3.2)
(b) Whether the capacity purchase price (QPP) received by the appellant falls in the ambit of value of supply as defined by Section 2(46) of the Sales Tax Act, 1990.
(c) Whether the original and the appellate adjudicatory authorities failed to understand Sections 7 & 8 of the Sales Tax Act, 1990 and unlawfully apportioned the appellant's input tax adjustment claim between the EPP (the taxable component of the value of supply) and the CPP (the non- taxable component of the value of supply) received by the Appellant.
(d) Most fundamental issue of determining whether FBR could lawfully amend statutory provisions contained in Section 2(46) and Sections 7 & 8 of the Sales Tax Act, 1990, through Sales Tax General Order No. 3/2004, and the Sales Tax Rules, 2006.
22. Analysis and findings In this part we attempt to analyze the legal framework relating to this case and enter out finding with regard to each issue farmed above.
23. 7.1 Analysts and finding on ground No. 3.2 and issue framed in Para 6(a).
24. The contention of the appellant that DRRA had no jurisdiction to conduct audit of private enterprises has been examined 'in its right context. We are agree with the appellant that the officers of DRRA have not been vested with powers of Sales Tax Officer and therefore, \ cannot conduct audit of a tax payer directly. We are also aware of the Honourable Peshawar High Court's ratio concerning the audit by officials of the DRRA. However the case before this Tribunal is clearly - distinguishable from the case-law cited by the appellant. In this case neither the officials of the DRRA entered the premises of the appellant nor laid hands on its private record. The DRRA officials in discharge of their lawful functions of revenue receipts audit pertaining to Sales Tax Collectorate, Multan pointed of excessive adjustment of input tax by the appellant. On their pointation, the audit team of the Sales Tax Collectorate Multan conducted audit which confirmed the observation of the DRRA team that lad to issuance of the Show- Cause notice and the consequent adjudication proceedings against the appellant. The Auditor General's (Functions, Powers, Terms and Conditions of Service) Ordinance, 2001, confers upon the officials of this institution certain legal responsibilities which include audit of revenue receipts payable into the consolidated fund or public accounts of the Federal or Provincial Government. The role of the DRRA and the manner of their discharge of functions in relation to the sales tax receipts is envisaged in Auditor General of; Pakistan's Circular No. 1167-Coord(Hq)RRA/35-2007, dated 29.2.2007, the relevant part of which is reproduced as follows:-
(i) DRRA team will visit Sales Tax Collectorate and Collectors will make available all auditable record/ information, including refund files, reward cases, departmental audit report (internal or investigative) alongwith ' supporting files, etc. DRRA offices will also be provided access to the entire computerized data of the sales tax registered persons available centrally with the CBR/Collectorates for desk audit.
(ii) On the basis of desk audit, the DRRA audit teams will select cases which, in their opinion, need examination. The list of such cases would be handed over by the audit team to the concerned Collector who will ensure production of taxpayer's record under Section 25 of the Sales Tax Act, 1990.
(iii) There would be no direct interaction between DRRA audit team and taxpayers.
(iv) The audit will be conduced at the Collectorates premises and in no case DRRA audit team will visit premises of private taxpayers.
(v) Sales Tax Department will not use the name of DRRA for any activity to be performed by them under the Sales Tax Act, 1990 nor will the department relate any Section/cell of the Collectorate to the DRRA.
(vi) The audit observations would be discussed by the leader of the audit teams with the concerned Collectorates, The Collectors would issue contravention reports only if the audit observations are, in their opinion, legally tenable.
(vii) There will be no "stamping" of records of individual registered persons by the audit teams.
25. Audit report issued by audit teams will suffice the requirements of audit.
26. In view of the foregoing, we conclude that initiation of adjudication proceedings based on the pointation or observations of DRRA is perfectly lawful. To say that the DRRA cannot point of any short payment or inadmissible adjustment of input tax is to disable the Constitutional duty of the institution of the Auditor General which has the responsibility of protection of public revenues.
27. Likewise it is also tantamount to denying the Constitutional role of the Public Accounts Committee in safeguarding the public revenue. The DRRA analyses the federal revenue receipts on the basis of tax record of a tax collecting agency. Since the tax collecting agency collects tax from a tax payer, it is quite rational that the tax payer records have to be scrutinized in order to figure of any leakage of revenue. The DRRA can exercise the functions of review of the audit receipts of a federal tax collecting agency only by examining the tax record of a tax payer. "In this case the DRRA pointed of short payment of the tax not to the tax payer, but to the tax collecting agency, which is quite lawful.
28. The Honourable Peshawar High Court's decision with regard to DRRA's role does riot apply to this case because the DRRA did not audit the taxpayer's account directly. Secondly, every citizen of this country has a duty to point of evasion of public money. In case a complaint by a private person leads to recovery of a short paid tax, the complainant has vested right to payment of reward according to the Reward Rules notified by the Federal Board of Revenue from time to time. In the light of the foregoing discussion, the A.R's argument is determined to without the force of law. The case-law cited by him is irrelevant and of of context.
29. 7.2 Analysis of ground No. 4.2 and issue framed in para 6 (b)
30. The arguments of the appellant and the DR were examined in the light of the provisions of law as referred to by the AR and the DR. Both the parties have difference of opinion on meaning of certain expressions like "supply", "taxable supply" value of supply, purpose of business and furtherance of business. Therefore, it seems expedient to discuss what is meant by the phrases discussed in this case and how these expressions have been interpreted by Courts of law.
(I) 'Supply' meaning.-Supply include sale or other disposition of goods in furtherance of business carried of for consideration including putting to private business or non-business use of goods acquired,-produced or manufactured in the course of business. [Sheikhoo Sugar Mills Ltd. v.
31. Government of Pakistan and others (PTCL 2001 CL. 331) (S.C. Pak)] Supply is not confined to sale transaction but extends to other disposition of goods in furtherance of business carried of for consideration, including manufacturing in the course of business. [M/s. Ambar Tobacco Co. (Pvt.) Ltd. Distt. Swabi v. The Additional Collector, Sales Tax and 3 others (PTCL 2003 CL. 330) (H.C Pesh)] In order to constitute" supply", the transaction must be "in furtherance of business". [Collector Customs, Central Excise & Sales Tax, Karachi (West) v. Novartis Pakistan Ltd. (PTCL 2002 CL. 50)
32. (H.C. Kar)]. In order to constitute a "taxable supply", the transaction must first qualify to be a "supply". [Collector Customs, Central Excise & Sales Tax, Karachi (West) v. Novartis Pakistan Ltd.
33. (PTCL 2002 CL. 50) (H.C. Kar)]
(ii) Meaning and scope of the term "supply".-The term "supply" as "defined in Section 2(33) of the Act The said term includes sale, lease or other disposition of goods in furtherance of business carried of for consideration and also includes, inter alia, putting to private business or non- business use of goods acquired, produced or manufactured in the course of business. [M/s. Service Industries Limited v. Federation of Pakistan and 5 others (PTCL 2003 CL. 136) (H.C. Lah)] The definition of term " supply" has excluded the doctrine of mutuality. [M/s. Al-Hailal Motors Store and other v. The Collector, Sales Tax & Central Excises (East) Karachi and others (PTCL 2004 CL. 1)
34. (H.C. Kar)].
(iii) Supply by vendor is covered by words " other disposition of goods".-The Definition of "supply" in Section 2(33) of the Act states that "supply" includes sale, lease or other disposition of goods in the course of furtherance of business carried of for consideration. Supply by such vendor is covered by words "other disposition of goods" and hence is chargeable to sales tax. [Para 13(b) of Sales Tax General Order No. 3 of 2004, dated 12th June, 2004, reported as PTCL 2004 St. 936.]
(IV) Expression "supply" as defined in Section 2(33) & 2(35) can be construed that full effect can be given to the both.-The two provisions can be#so construed in the light of rules of interpretation noted above that full effect can be given to both the provisions. To achieve this object, definition of supply will have to be construed in such a manner, that it does not offend against expression " involves in whole or in part the supply of goods to another person". This can be done, if, instead of giving a very wide and extended meaning to the expression" "putting to private business or non- business use", it is restricted to disposition of goods to any other person, keeping self-use of infuse use or the manufacture of finished exempt goods outside of its purview.. Thus, a person; who supplies taxable goods to his wife or to his son even without consideration would be;,deemed to have made a taxable supply chargeable with Sales Tax. A supply of goods to another person for the purpose of charity, without consideration, would similarly fall within the scope of charging Section. Interpreted in this manner the activity sought to be taxed would remain without Constitutional limits of taxation on 'sale 1, otherwise it would transgress the said limits and would be rendered ultra vires of the Constitution. If, however, restricted meaning is not assigned to the definition of "supply" then either clause (a) of the definition "supply" will have to be treated as absolutely superfluous or phrase 'supply of goods to any other person' in the definition of taxable activity will have to be. Treated as surplus. Therefore, while interpreting the two terms appearing in the charging Section, choice is to be made between:
(1) Treating the phrase 'putting to private business or non-business sue' as surplus, or.
(2) Treating the phrase 'involve in whole or part, the supply of goods to any other person as superfluous, or.
(3) Stretching or restricting the scope of any of the two expressions referred to above' in any or both the definitions, so as to reconcile the two apparently conflicting provisions and harmonize them.
35. While making the choice we should not be oblivious of the principle that no part or word of the statutes is to be held as surplusage as has been held in case of East and West Steamship Co. v.
36. Queensland Insurance Co. (PLD 1963 SC 663). [M/s. Umani Associates Sub-Proprietary Firm v.
37. Central Board of Revenue and another (PTCL 2003 CL. 461) (H.C. Kar.)]
(V) Meaning of "business".-The term "business" has not been defined in the Act, 1990 and the settled meaning of the said expression as found in the aforesaid case-law as also various dictionaries as relied upon in the case of CIT v. Habib Insurance (PLD 1969 Kar. 278) confirms that in order to be construed as "business", the activity must be recurring, for profit motive and must be in the nature of trade, commerce or manufacture. [Collector Custom, Central Excise & Sales Tax, Karachi (West) v. Novartis Pakistan Ltd. (PTCL 2002 CL. 50) (H.C. Kar)] "Business.--Employment occupation, profession, or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood. Union League Club v.
38. Johnson, 18 Cal. 2d 275, 108 P. 2d 487, 490. Enterprise in which person engaged shows willingness to invest time and capital on future outcome. Doggett v. Burnet, 62 App. D.c 103, 65, F. 2d 191,
194. That which habitually business or occupies or engages the time, attention, labor, and effort of persons as a principal serious concern or interest or for livelihood or profit.
(VI) Interestingly, both, the parties to this appeal have heavily relied on Para 13(b) of Sales Tax General Order No. 3 of 2004, dated 12.6.2001. Therefore, in order to understand the quintessence of this General Order, it is imperative to reproduce the same verbatim.
39. "The issue has been examined in the Central Board of Revenue and it is ruled that the value of supply of electricity by iPPs is the amount received on account of Energy Purchase Price only.
40. Therefore, any amount in excess of EPP received on account of Capacity Purchase Price Premium, Excess Bonus, Supplemental Charges etc, is not to be included in the value of supply he Sales Tax- Act. 1990. However, the assessment of sales tax is to be done in accordance with the provision of Sections 7, 8 and all other relevant provisions of the Act, rules and notification. The IPPs will be entitled to claim full input tax adjustment against the 'sales tax paid on purchase of furnace oil and other tax-paid purchase for making supply of electricity subject to the provisions of Section 8 and the notification issued thereunder. "
(VII) In light of the discussion Of the aforesaid Sales Tax General Order by the appellant and the respondent, it is uncontroversial that the appellant has at no stage of its supply of energy, levied or paid amount of sales tax in respect of the capacity purchase price, received from WAP DA for the reason that the energy price premium, excess bonus and supplemental charges were outside the ambit of the definition of "value of supply" under Section 2(46) of the Sales Tax Act, 1990. In other words, any receipt relating to above- mentioned heads (capacity purchase price, energy price premium, ..Excess bonus and supplemental charges) are to be excluded from the sales or receiptor-turnover (/.e., supply); being as exempt or hon-taxable for the purpose of sale., tax.
41. However, the appellant, while taking this position that the capacity purchase price was non- taxable, seems to ignore an important qualification laid down in the said STGO, which stated that i.e., the assessm ent of sales tax is to be done in accordance with the provision of Sections 7, 8 and all other relevant provisions of the Act, rules and notifications.
(VII) Having discussed the concept of supply, value of supply, taxable supply and other expressions now we turn to the analysis of Sections 7 & 8 of the Sales Tax Act, as the outcome of the controversy largely depends on understanding of their true meaning and in the light of the statutory text and judicial interpretations. Therefore, it appears necessary to reproduce the relevant portions of these two Sections. '
42. Section 7 determination of tax liability:
(1) [Subject to the provision of Section 8(b), for] the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall [subject to provision of Section 73,] be entitled to deduct input tax 3[paid 4[or payable] 5[during the tax period] for the purpose of taxable supplies made, or to be made, by him] from the output tax 6[***] that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9 7[ ;] a[Provided that where a registered person did not deduct input tax with in relevant period, he may claim such tax in the return for any of the six succeeding tax periods.]
(2) A registered person shall not be entitled to deduct input tax from output tax unless:
(i) In case of a claim for input tax in respect of a taxable supply made 9[*], he holds a tax invoice 10[in his name and bearing his registration > - number,] in respect of such supply for which a return is furnished; Section 8 Tax credit not allowed. (1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid -- [(a) the goods [or services] used or to be used for any purpose other than 4[*] for taxable supplies made or to be made by him;] The reading of Section 7 (1 & 2) and Section 8(a) clearly shows that no input adjustment is allowable in respect of a supply which is zero rated, non-taxable or the one for which no sales tax has been paid. In order to further explain the import these Sections, we would like to report the judicial analysis of Section 7(1 * & 2) and 8(1) (a) of the Sales Tax Act, 1990 by the Honourable Supreme Judiciary because both the parties i.e. Appellant as well as the respondent press their respective positions on the strength of these Sections.
(IX) Nature of sub-section (2) of Section 7 The provision contained in sub-section (2) of Section 7 is mandatory in nature, it is an enabling provision which prescribes the way in which .The claim for deduction/ adjustment/refund of the input Tax is to be preferred. Sub-section (2) of Section 7 prescribes a particular manner of claiming deduction/adjustment/refund and on plain reading of the provision, it is abundantly clear that the non-compliance disentitles a registered person from deducting input tax from output tax (Collector, Sales Tax and Central Excise (West), Karachi v. M/s. Al-hadi, Industries (Pvt.) Ltd. (PTCL 2003 CL 345 (H.C. Kar).
43. Section 7 provide facility to a registered person to adjust input tax from output tax for avoidance from double taxation.-A registered person is not burdened with liability of double taxation as Section 7 provide facility to a registered person to adjust input tax from output tax. But if no input tax paid on intermediary produce without any adjustment the tax will be paid in terms of Section 3 of the Act on its value. [Sheikhoo Sugar Mills Ltd. v. Government of Pakistan and others (PTCL 2001 CL 331) (S.C Pak)] Admissibility of input tax.-Admissibility of input tax has to be decided keeping in view all the relevant provisions i.e. Sections 7, 8, 10 and S.R.O. No. 698(1)/96, dated 22.8.1996. [M/s. Peoples Concerns (Pvt.) Ltd. Gadoon Amazia, Industrial Estate, Sawabi v. Assistant Collector, Sales Tax, Peshawar (PTCL 2003 CL 428) (CESTAT, Islamabad)]
(X) Sections 7 and 8 are not the charging Sections and these pertains to the domain of payability.-In the scheme of Sales Tax Act, 1990 the provision of Sections 7 & 8 are not the charging Sections. Both the Sections pertains to the domain of payability. Section 7 enunciate the principle for determining the tax liability for particular tax period of a registered person in respect of taxable supplies and it is provided that such registered person shall be entitled to deduct input tax paid during the tax period for purpose of taxable supplies made or to be made by him from the output tax that is due from him in respect of a particular tax period.
44. It is rightly pointed of in the order of the Customs Authorities that the provision of Sections 7 & 8 of the Act are not charging provisions and that these are machinery provisions to crystallize the liability^ to pay the tax as contemplated in sub-section (3) of Section 3 of the Act. [M/s. Mayfair Spinning Mills Ltd Lahore v. Customs, Excise and Sales Tax Appellate Tribunal, Lahore and two others. (PTCL2002CL. 115)H.CLah)] Scope, nature and object of Sections 7 & 8.- Section 7 of the Sales Tax Act, which is a beneficiary Section, entitles a registered person to deduct input tax from output tax, however, Section 8 provides certain eventualities and the power of the Federal ' Government through a notification in the official Gazette specify the goods under which the input tax is not available and in this respect the federal' government while exercising power under; the aforesaid Section has issued notification prescribing the goods on which the adjustment of input tax was disallowed against the procurement of such goods which are not direct constituent/ingredients of the finished goods or which have multiple usage as well and also in line with the provisions of Section 8 that the goods were used not for the purpose of manufacture or production of taxable goods or taxable supplies.
45. [Collector of Customs, Sales Tax and Central Excise, etc. v. M/s. Sanghar Sugar Mills Ltd., Karachi and others (PTCL 2007 CL. 565) (S.C. Pak)]
(XI) Interpretation of the word "Purpose" used in Sections 7 & 8:- A perusal of Section 7 of the Sales Tax Act, shows that a registered person shall be entitled to deduct input tax paid for the purpose of taxable supplies made or to be made, by him from the output tax that is due from him in respect of that tax period. The golden principle of interpretation of statutes is that, until and unless any contrary intention can be inferred expressly or impliedly the words used in a statute are to be given their plain meaning in the ordinary course. The word used by the legislation, "a person shall be entitled to deduct input tax paid for the purpose of taxable supplies made, or to be made by him from the output tax should be taken in their ordinary plain meaning. In the Chamber's 20 Century Dictionary, 1983 Edition, the word "purpose" has been given meaning as follows:- "Idea or aim kept before the mind as the end of effort: power of seeking the end desire: act or fact of purposing: an end desired: as definite intention, purport."
46. If the word purpose is considered in ordinary plain meaning, it would appear that the intention of legislature, apparent from the language in that if any input tax is paid with the intention that the goods on which such input tax is paid shall be used in the end products or taxable supplies made or to be made, then the registered person shall be entitled to deduct the same from the output tax.
47. It is nowhere provided that deduction of input tax on such goods only shall be allowed which are the direct constituent and integral part of taxable goods produced, manufactured or supplied.
48. Now, we came to the provision contained in Section 8 of the Sales Tax Act, which starts with the non-obstante clause, meaning thereby, that even if registered person is entitled for. Deduction of input tax, he shall loose entitlement if the goods on which the input tax has been paid, are excluded under the substantive provisions of Sections or under the notification issued by the Federal Government, in conformity with the provisions in Section 8 of the Sales Tax Act. In other words, the effect of reading the Sections 7 and 8 of the Sales Tax Act, together is that a registered person shall be entitled to deduct input tax paid for the purpose of taxable supplies made or to be made by him from the output tax that is due from him in respect of or that tax period but subject to. The provision contained in Section 8 because of overriding provisions contained therein. On reading of the.
49. Sections 7 and 8, the following position emerges:-
1. A registered person shall be entitled to deduct input tax paid for the purpose of taxable supplies made or to be made by him from the output tax that is due from him in respect of that tax period.
2. The registered person shall not be entitled to re-claim or deduct input tax paid on the goods used or to be used for any purpose other than for taxable supplies made or to be made by him.
3. A registered person otherwise entitled to re-claim or deduct input tax paid for the purpose of taxable supplies made or to be made by him from the output tax, shall not be entitled in respect of any goods, which the Federal Government may by a notification in the official Gazette specify.
(XII) In the realm of tax laws certain exemptions, concessions or exceptions are provided in the statutes either in respect of assessee's, class of assesses, goods or class of goods. From reading of the provisions contained in Sections 7 and 8 of the Sales Tax Act, we find that under Section 7 a formula has been described by the legislature for determination of the tax liability under which as sales of goods have been specified. - This clause comprises the goods on which input tax has been paid by a registered .Person which is acquired for the purpose of being used for producing the taxable supplies. In corollary to the above provisions it is provided in Section 8(1 )(a) that a registered person shall not be entitled to the claim or deduct input tax paid on the goods used or to be used for any purpose other than for taxable supplies made or to be made by him. Thus, this provision is in fact in the nature of further clarification . And for removing the ambiguity. It is clarificatory to the provisions contained in Section 7(1). It does not create any new class of goods disentitling a registered person from claiming or deducting input tax. The provision contained in Section 8(1 )(b) is in the nature of exception to the general rule contained in Section 7 read with Section 8(1 )(b) and Section 10. Under this provision the Federal Government has been delegated the power to specify the goods which otherwise qualify for input tax, thereby excluding them from the admissibility of input tax. However, it does not empower the Federal Government to create a new class of goods in general terms thereby excluding the whole class of such goods from the claim of input tax. [Ghandhara Nissan Diesel Ltd.' v. Collector, Large Tax Payers Unit and 2 others (PTCL 2006 CL:673)(H.C. Kan). Also see PTCL 2007 CL 694],
(XIII) From the forgoing case-law, it follows that Section 8(1) of the Sales Tax Act, 1990, specifically postulates the qualification for reclaiming or deduction of input tax paid. Section 8(2) hypothesizes that if a person deals in taxable and non-taxable supplies at the same time, he can reclaim only such portion of the input lax as is attributed to taxable supplies in such manner as specified by the Board. In order to specify the manner of apportionment of input tax for non-taxable supplies, the Board has issued Notification No. SRO. 555(l)/2006, dated 05.06.2006. Para No. 25 of Chapter-IV of the said notification deals with the determination of input tax which read as under:- Determination of input tax.---(1) Input tax paid on raw materials relating wholly to the taxable supplies shall be admissible under the law.
(2) Input tax paid on raw materials relating wholly, to exempt supplies shall not be admissible.
(3) The amount of input tax incurred for making both exempt and taxable supplies shall be apportioned according to the following formula, namely:- Residual input tax credit on= Value of taxable supplies (Value of taxable + exempt)XResidual input tax taxable supplies
(4) Monthly adjustment of input tax claimed by a registered person under this chapter shall be treated as provisional adjustment and at the end of each financial year, the registered person shall make final adjustment on the basis of taxable and exempt supplies made during the course of that year.
(5) Any input tax adjustment claimed wrongfully on account of incorrect application of formula set of in sub-rule (3) shall be punishable under the respective provisions of law irrespective of the fact that that claim was provisional.
(XIV) Finding on Para 6(b)
50. In view of the explanation of supply, given in Para 8(1) ante and the detailed analysis of the case of the appellant supra, the bottom line is that the expression supply includes capacity purchase price as it was received by the appellant in furtherance or in connection with her business. In view of the A.R's assertions, it is uncontroversial that the capacity purchase price, energy price premium, excess bonus and supplemental charges etc., are part of total sales but are specifically excluded for the purpose of valuation of supply under Section 2(46) of the Sales Tax Act, 1990. If the supply is either non-taxable, or exempt or excluded from the value of supply under Section 46(2) of the Sales Tax Act, 1990, no input adjustment is respect there of is admissible under Section 7 & 8 of the Sales Tax Act. Section 8(1 )(a) specifically provides that no input adjustment or tax credit can be claimed in respect of any goods or services used or to be used for any purpose other than for taxable supplies made or to made. Taxable supply is a sine qua non for claim of input adjustment which is not absolute but contingent upon a supply being taxable. There is thus no doubt that CCP portion of the consideration received by the appellant is not a taxable supply and therefore, a claim of tax credit in respect thereof is prima facie inadmissible.
51. Be that as it may, this position clearly necessitates apportionment of the total input tax for total supplies into two distinct categories, i.e., taxable and non-taxable supplies. In the case at hand energy purchase price is taxable and capacity purchase price, energy price premium, excess purchase supplemental charges etc., is non-taxable or not taxable. Given the statutory position and the reported case-law, the appellant cannot claim input adjustment without fulfilling the criteria laid down in Sections 7 & 8 of Sales Tax Act, 1990 for the purpose. Therefore, we conclude that the appellant is liable to apportionment of the total input tax claim between the taxable (receipt or turnover on account of energy purchase price) and non- taxable (receipt or turnover on account of ' capacity purchase price, energy ^ price premium, excess bonus and supplemental changes etc.). Given the legal position discussed above we cannot subscribe to the view point of the learned AR but fully concur with the Respondent's contention.
52. 7.3. Analysis and finding with respect to ground No. 3.3 and issue framed in Para 6(c).
53. The issue involved is whether the original adjudicating authority and the first Appellant forums Commissioner Appeal were justified in concluding the short payment of sales tax or in- admissibility of input adjustment of Rs. 146,480,724/- claimed by the tax payer. During hearing of the case the learned A.R. Presented Sales Tax Returns of the Appellant and claimed that the tax demanded of Rs. 146,480,724/- created by the Respondents is without the authority of law. We have perused the Sales Tax Returns submitted by the A.R. Which reveal the following position:- Month Value of Taxable supplies (Energy Rev)Out Put Input Credited notes adjusted.Sales Tax payable.
54. July- 2006252,508,743/- 37,876,312/- 30,548,490/- 5,826,362/- Aug- 2006258,159,682/- 38,723,952/- 31,337,652/- 7,386,951/- Sep- 2006239,406,403/- 35,910,961/- 18,977,699/- 16,933,262/- Oct- 2006270,116,528/- 40,517,479/- 51,408,613/- 10.891.134/- Nov- 2006169,635,287/- 25,445,293/-31,484,778/- 6,039,485/- Dec- 2006247,467,407/- 37,120,111/- 20,418,591/- 229,099/- 16,701,520/- Jan- 2007242,622,758/- 36,393,414/- 28,642,648/- 7,521,667/- Feb- 2007178,133,505/- 26,720,026/- 28,279,469/-1,559,443/- Mar- 2007246,308,024/- 36,946,204/-19,930,884/- 15,455,877/- Apr- 2007251,197,930/- 37,679,690/-27,024,609/- 10,655,081/- May- 2007255,866,441/- 38,379,966/-29,948,181/- 8,431,785/- Jun- 2007242,449,199/- 36,367,380/-33,169,187/- 3,198,193/- Total 2,853,871,907/- 428,080,728/351,170,150/ 67,887,511/- 92,110,698/ MonthSales Tax payable.Sales Tax paidSales Tax Carry Forward/Credit NotesRemarks July- 20065,826,362/- Aug- 20067,386,951/- Sep- 200616,933,362/- Oct- 2006Nil Nil 10,891,134/- Adjusted in 12/2006 Nov- 2006Nil Nil 6,039,485/-/- Adjusted in 12/2006 Dec- 200616,701,521/- Nil 229,099/- Jan- 20077,521,667/- Nil Feb- 2007Nil Nil 1,559,443/- Adjusted in 03/2007 Mar- 200715,455,877/- 15,455,877/- Apr- 200710,655,081/- 10,655,081/- May- 20078,431,875/- 8,431,875/- Jun- 20078,431,875/- 8,431,875/- Total 92,110,698/- 67,887,193/- 18,719,161/- The sales tax return does not report the value of the capacity purchase price (CPP) because, it is the contention of the appellant that CPP is not a supply and sales tax law does not obligate them to report this sum in their sales tax return.
55. In the course of another hearing the A.R. Presented the Annual Audit Report of the Appellant for the year 2006-2007. The examination of Annual Audit Report of the Appellant presents the followings position, with regard to the value of taxable supply in this case, i.e., the energy purchase price. The annual audit report, however, does mention the capacity purchase price.. For the moment, we restrict our analysis only to the undisputed energy purchase price.
56. S. No.Description Amount in Rs.S. Tax payable 15% 1 Capacity Revenue1,983,978,372/- Exempt supply 2 Energy Revenue 3,298,779,597/- Taxable supply.
57. 3 Threshold bonus 13,799,084/- Exempt 4 Interest of declared payment29,890,499/- Exempt supply Total 5,326,447,532/- The comparison of the energy purchase price (EPP) reported in the Appellant's sales tax returns and the annual audit report shows the following discrepancy with regard to the value of the taxable supplies i.e. Energy purchase price (E.P.P.). Here we leave aside the issue of capacity purchase price (CPP) which, according to appellant, does not qualify as supply for the purpose of Sales Tax.
58. Description AmountSales Tax @ 1% Energy Purchase Price (value of Taxable Supplies) as per Annual Audit Report3,298,779,597/-494,816,939/ Energy Purchase Price (value of Taxable Supplies)2,853,871,907/- 428,080,786/- as per Sales Tax Returns Difference 444,907,690/- 66,736,153/- Juxta-position of the Appellant's sales tax returns and the annual audit report reveals that the Appellant appears to have understated the value of taxable supplies (Energy Purchase Price) to the tune of Rs. 444,907,690/- involving Sales Tax amounting to Rs. 66,736,153/- in addition to Rs.
59. 146,480,724/- as demanded in the Show-Cause Notice. We are not going to enhance demand but it is for the department to seek elaboration in this context.
60. 7.4 Whether the imposition of additional tax and penalty is justifiable The Order in original as upheld by the order in Appeal has further imposed additional tax and penalty on the appellant Responding to the Appellant's ground No. 3.5, we have carefully examined whether additional tax and penalty is justified in-this case. Generally, the default surcharges and penalty is imposed as punishment or economic sanction against a deliberate attempt to evade. In this case, the appellant simply took advantage of a rule that enabled it to avoid tax. In other words, the tax avoidance in this case is "rule assisted" as discussed in para 8 infra. There being no mens area, or a wilful default on part of the appellant the imposition of default surcharge and penalty is set aside.
61. 7.5 Additional grounds put forth by the A.R. Of the Appellant during the course of hearing
(I) The Appellant put forward some more grounds of appeal, each discussed infra.
62. During hearing of the case the appellant mentioned .That on a complaint No. 111/SD/ST(9)446/2010 filed by the appellant against the Order-in-Original passed by the Additional Collector, which is also the subject- matter of this appeal the Honourable Federal Tax Ombudsman gave a finding of maladministration. The Appellant could not produce any such finding of the learned Tax Ombudsmen. However, the A.R did produce a copy of the FBR's report submitted to the Tax Ombudsmen in response to the complaint. In this regard jt is sufficient to say that the Honourable Federal Tax Ombudsman's jurisdiction in a case which is appealed in any appellate forum is barred by Federal Tax Ombudsman Ordinance, which provides asunder:-
(a) The Federal Tax Ombudsman shall not have jurisdiction to investigate or inquire into matters which:
(b) relate to assessm ent of income or wealth, determination of liability of tax or duty, classification or valuation of goods, interpretation of law, rules and regulations relating to such assessment, determination, classification or valuation in respect of which legal remedies of appeal, review or revision are available under the relevant legislation.
63. We understand that in tandem with filing, the Complaint with the F.T.O., the appellant was legally obligated to testify that no appeal was pending before any appellate authority. It seems that the appellant could not have filed the. Instant complaint .With F.T.O without having suppressed the fact of filing appeal before the C.I.R (Appeals). This shows' that the appellant neither approached the F.T.O. Nor the ATIR with clean hands.
(II) Analysis and finding on ground 4.7.
64. The appellant has further contented no other, IPP has been denied input adjustment on capacity payment part of the consideration received from WAPDA or KESG. Only the appellant has been targeted and a discriminatory treatment has been meted of with him which is violative of the Article 25 of the Constitution of Pakistan.
65. The case before this Tribunal relates only to the appellant. As far as rule of consistency is concerned, it is hard to allow remission of lawful tax liability just because the department did not take action to recover lawful tax from other IPPs. In our view the rule of consistency would require that all other IPP should also be given the same treatment as has been given to this appellant. The Sales Tax Act sufficiently enables the department to invoke demand from others, too on case by case basis but subject to due process of law. The FBR may like to issue necessary instructions to all of its field formation to conduct audit of all such .IPPs within their area of jurisdiction' in order to quantify the illegal and inadmissible input adjustments taken by such IPPs on the strength of illegal rules framed by FBR against the statutory provisions contained in Section 8(1) (a) of the Sales Tax Act 1990, and recover the amount after fulfilling all codal formalities under the law in case it is figured of that there has been loss to the public money.
66. 8 Analysis and finding on 6(d).
67. This part of the analysis attempts at determining whether FBR could lawfully amend a statutory provision in Section 2(46) of the Sales Tax Act and Sections 7 & 8 ibid through GGO 3/2004 or Sales Tax Rules, 2006. All the confusion has arisen from the Federal Board of Revenue, letter C. No. 3(4)
68. ST-L&P/07, dated 02.12.2008 and sub-rule (3) of Rule 38, Chapter VI of erstwhile notification SRT 560(1)2006, dated 05.6.2006 providing that the value of supply in terms of Section 2(46) of the Sales Tax Act, 1990, in case of IPP's HUBCO OR KAPCO shall not include any amount received by an IPP on account of Capacity Purchase Price (CPP), and that Energy Price Premium, Excess Bonus, Supplemental Charges, etc. Shall not be deemed as component of the value of supply. Looking at the contents of the aforesaid rules and the General order, we find, that through this device a statutory provision laid down in Section 2(46) of the Sales Tax Act, 1990 was rendered ineffective to the extent of IPPs. Unfortunately, this is the case in which such a colossal legislative prize was conferred on an influential business group. There are numerous examples of unjust enrichment of private enterprise through the instrument of administrative rule making, this practice throws up several questions-with regard to validity of a rule making of this kind.
69. The fundamental question is whether FBR is the unelected wielder of legislative power and whether a rule framed by F.B.R. Can disable a statutory provision. The body of the law called the administrative law developed by our Constitutional Courts, jurists and foreign Courts provides great insight into the norms governing the legislative and rule makings process. Before analyzing this, it seems important to discuss the rationale and limits of the rule making power conferred on an administrative agency like FBR.
70. The administrative agencies perform a bewildering variety of regulatory and rule-making functions ranging from public services, law enforcement, implementation of the state policy, economic management, resource development, businesses and personal behavior of individuals. The purpose of delegation of rule-making authority to administrative agencies is to serve some kind of "public interest" or promote some "public value." The raison d'etre of delegation of rule-making authority to administrative agencies is countervailing the tendencies of legislative prizes for pressure groups, interest groups, and powerful individuals who compete for privileged treatment.
71. (Administrative Arrangements and the political control of Agencies, 75Vat. Rev. 431 (1989);)
72. The rule making is considered as a device for filtering the reasonable from the unreasonable, the persuasive from the unpersuasive, the right from the wrong and the good from the bad so that over all social welfares will be advanced. (Mathew L). McCubbins, Roger G. No.1& Barry R. Weingast, structure and process, politics and policy. The typical public interest component of delegation stresses such values as efficiency and effectiveness. A specialized agency the argument runs, can better provide "continuous expert supervision, capable of ad hoc development to parallel the development of the subject-matter involved." Walter Gellhorn, Federal Administrative proceedings (1941). The cardinal feature of agency delegation is its expertise and amenability to public good.
73. Apolitical administrative agency is expected to respond to public interest more than the legislature itself whose constituents may have incentive for benefiting private interest. (Peter H. Aranson, Ernest L. Gellhorn & Glen O. Robinson, A Theory of Legislative Delegation, 68 Cornell L.J. 1 (1982).)
74. There is a large number of cases in which the honourable Supreme Court has adopted the public interest or general welfare test for judicial review of Ordinances, agency rules, or administrative rulings or orders. Recent judgments based on public interest doctrine, to name a few, include the NRO, Sharabeel, Mcdonalds, NICL, LNG and several other cases. The subject-matter of thousands of Constitutional writs filed with the High Court of Pakistan is usually an lawful rule, or unfair agency action. Whilst, most case-law developed in Pakistan follows the public interest doctrine, the foreign Courts of law apply a variety of Constitutional law tests: Most frequent test is notice and public comment test. Do our administrative agencies ever bother to make rule-making transparent by following the notice and public comment criterion for rule making.
75. Hampton & Co. v. United States, 276 U.S.394 (1028), for the first time emphasized that an acceptable delegation from the legislature of avowedly discretionary powers could survive Constitutional scrutiny if it were coupled with "an intelligible principle" to guide the delegate's discretion. Id. At
409. That case upheld a statute valorizing the President to revise certain tariff duties whenever he determined revision to be necessary to "equalize the costs of production in the United State and the principle competing country." How intelligible is. This principle? How simple a matter is it to determine costs of production in different nations or to decide what tariff will, mediated through international supply and demand, equalize those costs? Hampton upholds this delegation of broad power largely because the determinations delegated seemed so complex as to defy legislators' competence. The statute deputized an agency- the Tariff Commission, named the United States International Trade Commission - to advise the President what tariff would have the desired effect.
76. In Schechter Poultry Corp. v. United States 295 Vs 495 (1935), the Court found that a broad grant of power to the executive branch would not contravene Art. 1, as a grant of "legislative" powers if "governmental necessity" test was satisfied. The government necessity test embodies public purpose or public welfare.
77. While the "intelligible principle" and "governmental necessity" considerations often have supported delegations, the Court has not always been receptive to these arguments. During the New Deal the Court invoked the non-delegation doctrine on three occasions to strike down congressional delegations. The casualty in two 1935 cases was the National Industrial Recovery Act (NIRA), a centerpiece of President Roosevelt's New Deal legislation enacted in the depths of the Great Depression. The two cases represent the climax in an epoch struggle between a conservative judiciary and the political branches. Cf. Louis L. Jaffe, Judicial Control of Administrative Action 63 (1965); James O. Freedman, Crisis and Legitimacy 15-20 (1978); John H. Ely, Democracy and Distrust 132-133(1980).
78. In Schechter Poultry Corp. y. United States, 295 U.S. 495 (1935), the Court held that no code could be "designed to promote monopolies or to benefit specific industry. The Court faulted the executive rule making process for creating a private good "utterly inconsistent with the Constitutional prerogatives.... Of Congress". In Zemel v. Rusk, 381 U.S 1 (1965) Justice Cardozo laid down a fidelity to the statutory purpose test for judicial review of rule making. It was held that the essentials of the legislative function are the determination of the legislative policy and its formulation and promulgation as a defined and binding rule of conduct which conform to stands and will tend to further the policy which Congress has established. These essentials are preserved when Congress has specified the basic conditions of fact upon whose existence or occurrence, ascertained from relevant data by a designated administrative agency, it directs that its statutory command shall be effective, if the determination of facts and the inferences are be based on statutory standards and declaration of policy. The formulation of subsidiary administrative policy shall be within the prescribed statutory framework. In Arizona v. California, 373 U.S. 546, 626 (1963) it was held that the doctrines of intelligibility and fidelity ensure that Courts charged with reviewing the exercise of delegated legislative discretion will be able to test that exercise against ascertainable standards.
79. See Arizona v. California, supra, at 626 (Harlan, J., Dissenting in part). This principle was also emphasized in wherein "permissible test" was formulated. The permissible test determines the validity of a rule on the touchstone of the logical inference drawn from the legislative intent of a statute. American Power & Light Co. v. SEC [329 U.S 90, 106(1946)].
80. The principal Vice of delegations, according to Professors Peter Aranson, Ernest Gllhorn, and glen Robinson, is their use to create "private goods"--- that is, distribution of governmental.
81. Benefits to special interest-groups. Delegations facilitate the legislative creation of private goods, they claim, in two ways. First, by economizing on scarce legislative time, broad delegations enable legislatures to increase their output. Second, delegation of broad power to an agency likely to be biased in favour of certain special interest conceals from the electorate the use of public power for private gain. For this reason these scholar argue that vigorous judicial enforcement of the non-delegation doctrine will promote the public interest.
82. The foregoing discussion amply answers the question raised by us in the beginning of this para. The scoop of the discussion is that FBR or any other executive agency is not an unelected wielder of legislative power. An agency exercising a delegated legislative power cannot change the purpose of a statute promulgated by the delegator, i.e. The legislature. In this case the effect of Sections 2 (46), 7 and 8 of the Sales Tax Act, 1990 was neutralized in favour of IPPs through Sales Tax Rules, 2006 and STGO 3/2004. It is our considered opinion that F.B.R could not lawfully defy a statutory provision. The exclusion of capacity purchase price from the purview of value given of supply in Section 2 (46) read with Section 7 & 8 of the Sales Tax Act, 1990, through the device of STGO 3/2004 and the Rule 13 of Sales Tax Rules, 2006, cannot survive the test of judicial scrutiny if challenged before superior Courts of Pakistan. We understand that we are not supposed to arrogate ourselves to the power of judicial review of rules framed by FBR, however, we are not expected to become party to something that is not lawful.
83. Now we turn to discussing why the parliamentary determination of tax liability should not be interfered with by the executive agencies. Presentation of budget estimates every June is an annual ritual. But, what does it mean to the people of Pakistan? Year after year they have seen a budget being presented and then soon thereafter forgotten. The revenue as well as expenditure estimates are always revised. The governments change budget allocations. The development allocations are cut down and other non-development allocations increased. For common people it is an exercise in futility and budget acts as an instrument to increase their miseries. For others it may present an opportunity to do some more rent seeking. Even some powerful national institutions get involved in the rent seeking exercise. The big businesses are given overt or covert general or business specific exemptions shifting the entire burden of taxes to poor people.
84. Why do we need to frame a budget if through-of the year budgetary allocations are to be re- defined through SROs or rules? At least in theory, budget is vitally important because the people's representatives determine the likely revenues and expenditures and give their approval for a directed approach to achieve national objectives. What happens soon afterward is another story.
85. National objective are forgotten, directions are lost and allocations are changed. Every year, the promises made to the nation prove to be hollow words without any meanings. By making of budget estimates and getting their approvals from people's representatives, the government basically decides two things. Firstly, from whose pocket money is to be taken of and secondly in whose pocket money is to be put into. In this way, the money is to be re-distributed among the people. Taxes are to be taken from the higher income groups and these are to be spent on lower income groups. But, does this actually happen? We are sure it never does. .
86. We can start by taking a fresh look at the taxation system. Heavy reliance on indirect taxes is even to the extent of collecting income tax (a direct tax) largely in indirect mode. When government is collecting taxes in indirect mode, these take the form of consumption tax. The lower income tax groups fall a victim to it by paying a larger percentage of their incomes as taxes as compared to the higher income groups. On the other hand, very little is shared with lower income groups in expenditure as allocation to health, education and other services in always little and that too falls victim to economy cuts. If a subsidy is announced to appease the hard hit people, it is usually an indirect subsidy and mostly benefits the higher income groups. Those few who cannot escape the direct tax are enabled to escape their tax liability through exaggerated reporting of expenses, losses or depreciation.
87. The above has been happening for more than six decades and has resulted into widening of the income gap. Probably this is getting dangerous as well. This needs to change now. There is no doubt that Pakistan's tax to GDP ratio is low and need to be increased to create additional fiscal space for allocation to health, education and other important sectors. The sad state is that the higher income groups are not prepared to share their tax responsibility. Whenever, the government makes a move in this direction, the higher income groups defeat the effort through exemption notifications. In fact they do not understand that a relatively prosperous lower income groups would in fact benefit their businesses in the shape of increased consumption levels and create a win situation for all. Their desire to not pay taxes is in fact counterproductive for themselves as well..
88. The desire to avoid taxes even defies pare to efficiency. The case before us relates to a relatively small IPP whose share in the windfall profit accrued by virtue of the rules discussed supra is tip of an iceberg, when compared with benefit reaped by other IPPs. Such a practice results into substantial erosion of the public money which explains why our national economy is in tailspin.
9. In view of the foregoing, the appeal before us is found to be without merit, hence dismissed. The adjudication of this case by the original and the first appellate authority is sustained. However, the additional tax and penalty imposed on the appellant is remitted for reasons stated in para 8 supra.
89. We don't find that appellant wilfully defaulted the payment of sales tax. The rule discussed in the para 8 enabled the appellant to claim an otherwise inadmissible input adjustment, hence the appellant does not seem to at fault whilst claiming the input adjustment.
10. The appeal is disposed of accordingly. It consists of 18 pages each singed and bearing the Tribunal's seal.