1. Through these five appeals, the appellant registered person has objected against the impugned consolidated Order-in-Appeals Nos. 2 to 6-A-II/2014 dated 7-11-2014 passed by the learned Commissioner Inland Revenue (Appeals-II) Lahore. Since in all the appeals, the facts and grounds are the same, therefore, through this order all the appeals have been disposed off.
2. The brief facts of the case are that the appellant Company is an authorized agent of Messrs Honda Atlas Cars Pakistan Limited (the "HACPL") and is engaged in the business of delivery of Honda cars manufactured by HACPL. The appellant also provides various services to its customers including servicing of vehicles, tuning of cars, repair/ change of any faulty parts, denting and painting of cars. For conducting the aforesaid activities, the appellant is duly registered as retailer under the Sales Tax Act, 1990. As per the orders-in-originals the Commissioner Inland Revenue received information that allegedly the appellant was involved in tax fraud and had evaded huge sales tax in respect of tax periods under review i.e. 2010 to 2014. In consequence thereof the Commissioner Inland Revenue, Zone-Ill, RTO, Lahore directed the DCIR, E&C Unit-03, Zone-III, RTO, Lahore to scrutinize the record of the appellant. Accordingly the staff of DCIR scrutinized the record and it was observed that the appellant had evaded the sales tax during the tax periods under consideration. On the basis of the said report the DCIR issued separate show-cause notices to the appellant for each of aforesaid tax periods, requiring them to explain the following discrepancies:--
(i) Short payments of sales tax on supplies of spare parts on the ground that the appellant got himself registered as a Retailer under the Sales Tax Act, 1990 instead of Dealer as defined under section 2(47) of the Sales Tax Act, 1990. Thus, the appellant continued filing sales tax returns as a retailer and paid a meager amount of sales tax under Chapter-II of Special Procedure of Sales Tax for Retailers, 2007 instead of filing of sales tax returns as Dealer and paying sales tax at normal/standard rate under section 3 of the Sales Tax Act, 1990.
(ii) Non-payment of sales tax (supplies difference between sales tax returns and financial statements).
(iii) Non-payment of sales tax on receipts from denting painting.
2. The appellant duly responded to the show cause notices and filed explanations/documents on merits inter alia raised legal objections to the very issuances of show cause notices. The learned DCIR did not appreciate the submissions of the appellant on legal as well as factual controversies and passed the orders against the appellant directing him to deposit the sales tax adjudged therein along with default surcharge and penalty. Feeling aggrieved of the treatment accorded by the DCIR, the appellant preferred the appeals before the learned Commissioner Inland Revenue (Appeals-II), Lahore who also did not accept the submissions of the appellant on the legal objections. On merits with respect to short payment of sales tax on spare parts the learned CIR(A) had confirmed the finding of the DCIR. Regarding the issue of non-payment of sales tax on receipts from denting painting, the submission of the appellant was accepted by the learned CIR(A) on the ground that the said issue relates to services which falls under the domain of provincial government against which the Punjab Government had not levied the tax during the tax periods under consideration. On the issue with respect to non payment of sales tax (supplies difference between sales tax returns and financial statements) the learned CIR(A) had remanded the case to the DCIR with the direction to reconcile the issue with the appellant vide consolidated order dated 07-11-2014 which has now been assailed by the appellant before this forum on a number of grounds.
3. It is submitted by the learned AR of the appellant that the orders passed by the authorities below are contrary to law and facts of the case.
3. It is asserted the appellant that whole proceedings in the case were initiated on the basis of the report prepared by the staff of the DCIR who was not empowered under section 25(2) of the Sales Tax Act, 1990. No inquiry or investigation under section 38 of the Sales Tax Act, 1990 was conducted by the DCIR as required under first proviso to subsection (2) of section 25 of the Sales Tax Act, 1990.
4. Therefore, proceedings initiated by the DCIR are void ab-initio, the super structure based thereon in the shape of assessm ent order as well as impugned appellate order automatically falls to ground.
5. In this behalf, the learned AR for the appellant placed reliance on the reported judgments cited as 2005 PTD 1933 (S.C.), 2004 PTD 2952 (H.C.), 2009 PTD 1083 (H.C.). It is argued by the learned AR of the appellant that the learned CIR(A) had misdirected himself in law and facts while maintaining the order of the DCIR on the point of short payments of sales tax on supplies of spare parts by observing that the appellant had evaded sales tax on supply of spare parts contrary to the Sales Tax Special Procedure for collection and payment of sales tax by vehicle dealers prescribed in Sales Tax Special Procedures Rules, 2007. It is contented that the appellant is being illegally considered to fall within the definition of Wholesaler (including Dealer) on the strength of Motor Car Dealer, as defined in Chapter VIII (Special Procedure for Collecting and Payment of Sales Tax by (Vehicle Dealers) whereas the said Chapter only deals with the persons through whom cars whether imported or locally manufactured are being brought or sold on commission basis. The appellant company is an agent of Messrs Honda Atlas Cars Pakistan Ltd and takes orders of locally manufactured cars from customers and the same is delivered through them after executing/performing certain services like pre-delivery inspection. The sales invoices of such cars are issued directly by the principal in the name of customers inclusive of sales tax. As per Rule 50 of the Sales Tax Special Procedures Rules, 2007 (Chapter-VIII) the appellant company is not required to pay sales tax on the amount of commission or raise any invoice under the Sales Tax Act, 1990.
6. Further argued that the sales of spare parts is not covered under Chapter-VIII of the Sales Tax Special Procedures Rules, 2007, therefore, under the law the appellant has rightly been paying the sales tax as retailer on the goods sold to end consumer. The sales made to corporate sector are however, being shown separately as per Rule 5(3) of Chapter-II of the Sales Tax Special Procedures Rules, 2007 and charged to sales tax as per section 3 of the Sales Tax Act, 1990 after adjustment of input tax paid on purchases of the goods so supplied. It is also the appellant's contention before us that Rule 3 of Chapter-II of Sales Tax Special Procedures Rules, 2007 for payment of sales tax by retailers inter alia only excludes the dealers of Motorcycles, which prima facie shows that car dealers may opt to pay the tax under the said rules if the supplies are made to the end consumer.
7. It is further submitted that through S.R.O. No. 608(1)/2014 dated 2nd July, 2014 the proviso of Rule 3 was amended by excluding that the said chapter shall not be applicable to the registered person who are vehicle dealers paying sales tax in the manner prescribed in Chapter VIII of Sales Tax Special Procedures Rules, 2007 and registered retailers exclusively making supplies of goods specified in Chapter XIII of the Sales Tax Special Procedures Rules, 2007, on which extra tax has already been paid in the manner prescribed therein. The appellant is inter alia engaged in supplies of spare parts to end consumers and the said goods has specifically been excluded through General Order No. 27 of 2014 dated 18th March, 2014 from the list of the goods specified in Chapter XIII. Therefore, the appellant squarely falls within the ambit of Chapter-II even after amendments in Chapter-II with effect from 2-7-2014.
8. With respect to services of denting and painting, it is pointed out by the learned AR that the matter has already been resolved by the FBR vide clarification letter bearing No.C.No.3(72)STP/97(Pt) dated 2nd July, 2004 issued by the FBR in pursuance of the letter dated 6th May, 2004 written by the appellant. In the Clarification, it is specifically stated that services or repair of vehicles as such are not liable to tax. The copy of letter was placed on file.
9. As far as the third issue is concerned the learned AR submitted that the difference worked out between the declared sales as per Audited accounts and those shown in sales tax returns is incorrect and without proper appreciation /reconciliation of the facts. To substantiate the submission the AR submitted the reconciliation statement which shows that there is no difference in sales declared in the audited accounts and those in the sales tax returns. Reconciliation submitted by the AR is as under:- Table 1.1 Reconciliation between sales tax return and financial statements. Reconciliation of sales Tax Return with Financial Statements Tax Year Retail SuppliesOther SuppliesSales Tax @16% 17%Gross Sales as per ReturnSales ReturnGross Sales As per Accounts 2010 68,565,997 67,470,267- 136,036,264(28,870) 136,007,394 2011 114,073,040 45,247,3657,692,52 167,012,457 (110,617) 166,901,840 2012 118,561,724 54,928,8018,788,608 18,279,133 (73,072) 182,206,061 2013 119,542,500 63,331,59710,152,022 193,026,199(21,659) 19,300,460 Difference reported by DCIR Value of supplies as per ReturnsDifference as per DCIRSales Return Difference Reconciled with Sales Tax 91,182,722 44,824,672 N/A Table 1.2 159,320,405 7,581,435 (110,617) 7,692,052 173,490,525 8,715,536 (73,072) 8,788,608 182,874,097 10,130,363 (21,659) 10,152,022 For tax year 2010: The learned DCIR has ignored sales tax return for the months of January, February, April, May of tax year, 2010. The reconciliation is as under in Table 1.2.
10. As Per Sales Tax Return of the Company Return for Quarter/MonthNet Sales as per ReturnSales Tax on Retail BasisGross Sales Sept-09 34,360,037 245,200 34,605,237 Dec-09 34,205,960 233,120 34,439,080 Jan-10 12,353,415 403,020 12,756,435 Feb-10 9,763,879 412,967 10,176,846 Mar-10 11,004,813 350,399 11,355,212 Apr-10 11,092,820 383,279 11476,099 May-10 11,643,428 442,023 12,085,451 June-10 11,611,912 375,382 11,987,294 Total 136,036,264 2,845,390 138,881,654 As Reported by Learned DCIR in order Sep-09 34,360,037 245,200 34,605,237 Dec-09 34,205,960 233,120 34,439,080 Jan-10 Altogether ignored 12,353,415 Feb-10 Altogether ignored 9,763,879 Mar-10 11,004,813 350,399 11,355212 Apr-10 Altogether ignored 11,092,820 May-10 Altogether ignored 11,643,428 Jun-10 11,611,912 375,382 11,987,294 91,182,722 1,204,101 92,386,823 44,853,542 Less: Sales Return (28,870) 44,824,672 On the basis of above arguments, the learned A.R. Has contended that appeal may please be allowed.
4. On the contrary, the learned DR representing the Revenue/Department supported the impugned orders passed by the authorities below and submitted that the discrepancies pointed out by the learned DCIR and confirmed by the learned CIR(A) are in accordance with law and prays for rejection of appeals of the appellant.
5. We have heard the arguments put forth by the learned representative of both the sides and have carefully gone through the available record including the case-law cited by the learned AR at the bar. After due consideration, we find that the submissions made by the learned AR carry substantial weight. Admittedly, proceedings in the case were initiated on the basis of information that the appellant is involved in tax fraud and in consequence thereof the learned Commissioner Inland Revenue directed the DCIR to initiate the proceedings against the appellant who instead of conducting inquiry or investigating the matter under section 38 of the Sales Tax Act, 1990 directly issued the show cause notice on the basis of the report prepared by his staff who were not empowered by the concerned authority under section 25(2) of the Sales Tax Act, 1990. The learned DR was specifically questioned as to B whether any inquiry or investigation was conducted by the DCIR before issuance of show-cause notice under section 11 of the Sales Tax Act, 1990, he could not produce before us any inquiry report conducted by the learned DCIR under section 38 of the Sales Tax Act, 1990. The bare reading of section 25(2) clearly establishes that in case of a fraud or evasion of tax it is the requirement of law that the Commissioner shall authorize the Inland Revenue Officer not below the rank of Assistant Commissioner to conduct inquiry or investigation under section 38 which has not been done in the instant case. Any action on the part of the departmental official in contravention of the provisions of law is obviously illegal and void. The case-law cited supra relied upon by the learned AR in this behalf strengthened our observation as the same are strictly applicable in the instant case.
11. The reasons assigned by the department for charging of sales tax on spare parts at the normal rate are misconceived and against the law. We find that the submissions made by the learned AR carry substantial weight. There is no bar under the Sales Tax Act, 1990 that a registered person cannot do multiple activities or if registered under one category cannot make sales/supplies under another category. The definition of Retailer and Wholesaler as given in sections 2(28) and 2(47) of the Sales Tax Act, 1990 respectively are reproduced hereunder for proper appreciation:-- "Section 2(28): "retailer" means a person supplying goods to general public for the purpose of consumption [Provided that any person, who combines the business of import and retail or manufacture or production with retail, shall notify and advertise wholesale prices and retail prices separately, and declare the address of retail outlets, and his total turnover per annum shall be taken into account for the purposes of registration under section.
12. Section 2(47) Wholesaler [includes a dealer and] means any person who carries on, whether regularly or otherwise, the business of buying and selling goods by wholesale or of supplying or distributing goods, directly or indirectly, by wholesale for cash or deferred payment or for commission or other valuable consideration or stores such as goods belonging to others as an agent for the purpose of sale; and includes [a person supplying taxable goods to [a person [who deducts income tax at source under the Income Tax Ordinance, 2001 (XLIX OF 2001)]] and The above definitions clarify that any person can do the activity of retailer as well as wholesaler but nowhere there is a bar that a wholesaler cannot indulge into other activities including retail or vice versa. In fact Rule 5(3) of Chapter-II of the Sales Tax Special Procedures Rules, 2007 categorically allow a retailer to make sales to a person who is to withhold income tax on such sales, however, the said sales would be excluded from Chapter-II and will be charged to sales tax at normal rates. This means that a retailer can do business as a wholesaler but in no way the two categories of sales can be mixed and treated as one and that too at the discretion of the DCIR. Further we have observed that if it is assumed that the appellant is a car dealer then for the purposes of sales of spare parts the procedure applicable to retailer shall apply as envisaged under Chapter-II of the Sales Tax Special Procedures Rules, 2007 if the supplies are made to the end consumer. The proviso of Rule 3 of Chapter-II of Sales Tax Special Procedures Rules, 2007 further supports the arguments of the learned AR which inter alia only excludes the dealers of Motorcycles, therefore, the car dealers may opt to pay the tax under the said rules if the supplies are made to the end consumer.
13. We have also noted that the supplies of spare parts are not covered under Chapter VIII of the Sales Tax Special Procedures Rules, 2007, therefore, under the law the appellant has rightly paid the sales tax as retailer on the goods sold (spare parts) to end consumer and has not contravened any of the provisions of the Sales Tax Act, 1990. Therefore, we deem it appropriate to vacate the orders of the authorities below on this issue.
14. As for as the issue of levy of sales tax on services i.e. Denting and painting is concerned, the FBR itself has clarified the matter in favour of the appellant. Therefore, charging of sales tax on this issue is also contrary to the said clarification. Thus, the orders of the authorities below are vacated on this issue also.
15. As regarding the last issue, the learned AR submitted that the difference worked out between the declared sales as per Audited accounts and those shown in sales tax returns is incorrect and without proper appreciation / reconciliation of the facts. To substantiate the submission the learned AR submitted the reconciliation statement which has been reproduced above shows that there is no difference in sales declared in the audited accounts and those in the sales tax returns.
16. During the hearing the reconciliation statement was confronted to the learned DR who could not rebut the same. Therefore, we deem it appropriate to accept the reconciliation of the appellant.
17. Thus, the orders of the authorities below are vacated on this issue also. However, if the department even after decision of appeals has any evidence/proof that the said reconciliation statement is incorrect and against the record, it may file rectification application under section 57 of the Sales Tax Act, 1990. Penalties imposed being consequential are also deleted.
18. In view of what has been stated above, all the five appeals of the appellant are accepted in the manner indicated above.