AMBREEN ASLAM, JUDICIAL MEMBER--- These are two cross appeals, one filed by appellant company other by department against the order or learned Commissioner Inland Revenue (Appeals-III) Karachi bearing order No, 15/2013, dated 18-01-2013, instituted on 28-06-2012.
2. Brief facts leading to these cross appeals are that the registered person is a Public Sector.
Company listed on stock exchanges in Pakistan, which is engaged in the essential business of gas transmission and distribution to industrial, commercial and domestic consumers in the areas of Sindh and Baluchistan. The Company is also engaged in manufacturing of gas meters.
3. During the Sales Tax Audit for the period from July 2009 to June 2010, the department confronted its observations on various matters including adjustment of input tax against invoices of blocked/non-active suppliers, short payment of sales tax on disposal of fixed assets and vehicles, non-charging of sales tax on transportation charges and service connection charges, adjustment of input tax paid against line losses, supply of internally manufactured meters. The registered person was charged with violation of the provisions of Sales Tax Act, 1990 and rates made thereunder. Therefore, show-cause notice was issued. The adjudicating proceedings resulted in passing of Order-in--Original No, 02 of 2012, dated May 24, 2012 (010).
4. Being aggrieved with the 010 meted out by the department, tax-payer preferred appeal before the first appellate authority CIR(A) who passed order by deleting certain demands raised in the 010, However, being dissatisfied with the decision of the authority, both the tax-payer and the department preferred appeals before this forum.
5. The case was finally heard on 21-10-2016. During the course of hearing both the learned AR and DR reiterated the contentions already made in the written grounds and submission provided in earlier hearings. They opposed the appeals of each other and the 010 passed by the CTR(A).
M/s. Sui Southern Gas Company Ltd. being aggrieved by the order of CIR(A) has challenged the same by way of Appeal No, STA No, 34/KB/2013 through its AR on the following grounds incorporated in the memo of appeal:---
1. That the learned CIR Appeals erred in holding that short payment of sales tax of Rs. 614,720 has been made on disposal of various operating fixed assets.
2. That the learned CIR Appeals erred in holding that the transportation charges incurred and recovered for supplying Condensate are separately chargeable to sales tax notwithstanding that the recovery of transportation charges are of the nature of service income and cannot be taxed separately under Sates Tax Act, 1990. It is also submitted that transportation charges are also not taxable under the Federal Excise Act, 2005 and Sindh Sales Tax Ordinance. 2000 (as was then applicable the year under reference). Further since the main supply of Condensate is zero-rated under the law, therefore transportation charges recovered on the supply of condensate will also be zero-rated.
3. That the learned CIR Appeals erred in holding and maintaining the action of charging sales tax on 'services connection charges' which are separately recoverable from the consumers. It is submitted that the connection charges are essentially part of service income and are not taxable under the Sales Tax Act, 1990. Federal Excise Act, 2005 and Sindh Sales Tax Ordinance, 2u00 (as was then applicable in the year under reference).
4. That the learned CIR Appeal erred in restricting the availability of input tax on UFG to the extent of UFG allowed by OGRA whereas input tax or purchaser is allowable to SSGC in totality -without any disallowance in the light of Sections 7 and 8 of the Sales Tax Act. 1990.
4.1That the learned CIR Appeals erred is not considering and disregarding the judgment of superior Courts which clearly provide that no disallowance of input tax can be made where the purchase are made with an intention to make taxable supplies.
4.2That the learned CIR Appeals' decision of allowing input tax on UPG to SSGC to the extent of limit allowed by OGRA is discriminatory and not consistent with the case of KESC and other electric distribution companies who are allowed line losses fully without any disallowance.
5. That the learned CIR Appeals erred in maintaining the levy of default surcharge/additional tax on the demands confirmed by him whereas there was no deliberate and male fide intention of non-payment of tax.
Whereas the department being the Appellant has challenged the order of the CIR(A) by way of Cross Appeal No, STA 66/KB/2013 and reiterated the grounds raised in the memo of appeal.
6. That the order of learned Commissioner Inland Revenue (Appeal-III) is not on merits of the case.
7. That the Commissioner Inland Revenue (Appeal-Ill) has erred in restricting disallowance of input tax adjustment in respect of line losses to the extent those are confirmed by OGRA despite that fact that law holds otherwise.
8. The Commissioner Inland Revenue (Appeal-Ill) has erred - hi allowing input adjustment in respect of in-house manufacturing gas meter because simultaneous claim of input tax for its raw material/parts result in duplication of input claim.
9. The Commissioner Inland Revenue Appeals ill has erred in deleting penalty under Section 33 despite the fad most of defaults such as related to service charges and transportation charges etc. are visible well intended.
Each of the above, issues is discussed below in light of the comments argued, and forwarded by both the parties during the heaving.
6. Non-payment of Sales tax on Disposal of Fixed Assets (Rs. 0.615 million)
6.1 The A.R. of the Appellant (SSGC) argued that the Department's contention regarding non- charging of Sales Tax on disposal of fixed assets, which was further upheld by CIR(A), is contrary so the facts since SSGC has properly charged and deposited sales tax in respect of fixed assets. In support of his claim, he also produced copies of some Sales Tax Invoices on sample basis with the written submissions.
6.2 The DR on the other hand argued that during the Audit and subsequent proceeding before the CIR(A), appellant could not have produced any convincing evidence in support of its contention.
6.3 Having heard both the parties' arguments, we believe that the issue concerned is of a factual nature which can be resolved after the reconciliation of facts and examining the documents submitted by the Appellant. Hence the matter is remanded back to the department for detailed verification of sales tax paid on fixed assets and the Appellant is directed to fully co-operate and provide necessary documents to the department during such verification process.
7. Non-charging of sales tax on transportation charges (Rs. 7.8 million)
7.1 The AR of the Appellant argued that the CIR(A) has erred m confirming the action of DCIR regarding chargeability of Sales Tax on transportation charges received in respect of supply of zero rated goods (condensate) to Attock Refinery Limited (ARL). It was submitted that Condensate (crude oil) is a zero rated supply under SRO 1164(1)/2007, dated November 30, 2007, accordingly, the charging rate of sales tax is zero for said item. He stated that under charging Section 3 of the Sales Tax Act, 1990, the sales tax is chargeable on value of supply of goods, accordingly, even if the Department's contention is accepted that transportation service charges are part of value of the supply of the condensate the resultant sales tax would remain zero as per following example (taking hypothetical values):--- Description Value of condensate without transportationValue of condensate with transportation charges Value of condensate 990 990 Transportation charges 10 Total value of supply 990 1000 Sales tax rate 0% 0% Amount of sales tax 990*0%=Zero 1000*0%=Zero 7.2 The AR further argued that Sales Tax Act, 1990 applies on supply of goods only while the domain of charging sales tax on services rests with the provinces w,e,f, July 01, 2011. Therefore, Department has no Constitutional and legal authority to charge sales tax on transportation services.
7.3 The DR on the other hand argued that the Appellant had shown the amount of transportation charges to be received from ARL in the sales tax invoice and for the very reason sales tax should be charged thereon. The DR also argued that for the purpose of taxability of a transaction, the value of supply as whole should be considered.
7.4 After giving due consideration to the arguments of both the parties in the light of the provisions of the Sales Tax Act. 1990 and conspiring the hypothetical computation, of sales tax on value of condensate referred by AR of the Appellant, we fully agree with the AR that sales tax under the Sales Tax Act, 1990 is chargeable on value of supplies and not on the value of services which is a domain of provinces, hence, even if the transportation charges are added as a value of supply in the value of condensate which is chargeable at the rate of zero percent, the resultant sales tax would remain zero.
7.5 Accordingly, the demand created by the department of Rs. 7.8 million which further upheld by the CIR(A), is hereby ordered to be deleted.
8. Sales tax on service connection charges (Rs. 72,453,000)
8.1 The AR submitted that the issue of chargeability of sale tax on service connection charges received by the appellant has already been decided by the full bench of this Tribunal in Appellant's favour through order STA No, 117/KB/2014, dated November 2, 2015, accordingly, the Division Bench of the Tribunal should follow this decision as there is no change in facts and circumstances of the case.
8.2. The DR on the other hand argued that the department has already filed a reference before the Honourable High Court in respect of the decision of the full bench of the Tribunal.
8.3 We have gone through the judgment of the Full Bench of the Tribunal, the relevant findings of which are reproduced as under:--- "We have heard the arguments of the parties along-with submissions made before us and are inclined to agree with views of the A.R. It has wrongly been presumed that gas connection charges received are against supply of gas and these, therefore, should be included in the value of supply of gas. The activity of providing gas connection is separate process and supplying of gas is separate process. Service charges is a medium for supply of gas and it cannot be termed as value of supply of gas. These services charges represent activity for establishing the connection like fixation of pipeline etc. prior to actual supply of ges. It is also clear' from note 36 of the Financial Statement that income from new service connections is shown in other operating income. The main revenue is generated from sates which represent supply of gas to consumer.
The sales tax is leviable on this amount of sales. Furthermore the definition of gas bill elaborated by the learned Division Bench of this Tribunal in its order dated 05-12-2014 show that it is the natural gas supplied by transmission and distribution companies to their consumers. The definition elaborated in Rule 2(xi) reads as under:--
(xi) "gas bill" means the bill of charges issued by the gas transmission and distribution companies to their consumers pertaining to a tax period for natural gas supplied by them; The perusal of notes 18, 18.1 and 18.3 show that the materials used are the property of the appellant and reflected in the balance sheet as plant and equipment and gas system, related facilities and equipment. The A.R. provided copy of relevant financial settlement which are placed on record.
This fact also mentioned in para 5(1) of gas contract; it is mentioned material used in the gas connection shall remain the property of the appellant. The insistence of the respondent to charge sales tax on assets owned is not based on legal basis. There appears no element of supply involved on these assets, sales tax cannot be charged on assets owned by the appellant, the same can only be charged at time of disposal of these assets. The case-laws cited by the learned A.R. of Honourable High Court also leads support to the arguments.
10. We also agree with the view of the learned A.R. that services are not taxable Constitutionally by the Federal Government. The services since said item is excluded from the Federal Legislative List through Article 101(1)(v) (Eighteenth Amendment) Act, 2010 cannot be charged by Federal Government. Entry No, 49 of the Federal. Legislative List is reproduced as under:-- "49. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed except sales tax on services."
2. We therefore concur with the views of the learned Division Bench which has earlier passed order bearing STA No, 28/KB/2014 and differ with the findings of learned Division Bench which has passed later order bearing STA No, 117/KB/2012, dated 2610-2015."
8.4 Since Full Bench has already decided above matter in favour of the Appellant and the High Court has not yet reversed this judgment, we are bound to follow the same judgment of Full Bench.
Accordingly, the demand raised by the department is hereby ordered to be deleted.
9. Non-admissibility of Input Sales Tax against Unaccounted for Gas (UFG)/Line losses 9.1 The facts of this issue are that the Appellant Company incurred line losses/UFG to the extent of 7.9% during the year under reference while the Oil and Gas Regulatory Authority (OGRA) allowed UFG to the Company at 7%. During audit proceedings, the Department had raised an objection regarding claim of input tax on UFG by the Company and had disallowed input tax on ' entire UFG/line losses suffered by the Company in the course of transmission and distribution of gas. The order of the Department was challenged before the Commissioner Appeals who directed to allow the input tax on UFG to the extent of OGRA allowed benchmark i,e, 7% while disallowance of input tax on UFG in excess of OGRA limit was maintained.
9.2 Now, both the Appellant Company and the Department have assailed the judgment of the Commissioner Appeals before this Tribunal. The Appellant has claimed that it is entitled to credit of input tax on entire purchases of gas including UFG under Section 7 of the Sales Tax Act 1990 since the gas was purchased with an intention of making taxable supplies. He added that the gas is lost in the normal course of business during distribution process due to technical reasons, theft, pilferage, etc. which are beyond the control of the Company. 'He claimed that FBR has already allowed input tax on full line losses to K-Electric, which are similar in nature to UFG suffered by gas companies, accordingly, non-allow ability of input tax on UFG to the gas companies is a discrimination in terms of Article-25 of the Constitution. He also stated that UFG limit sets by OGRA is an efficiency bench mark which is fixed for the purpose of determination of revenue requirement/price fixation and such benchmark has no nexus with the allow ability of input tax under the sales tax law. On the other hand, the Department pressed his ground regarding non- admissibility of input tax on UFG taking the premise that no related output tax has been paid on lost gas. The DR further stated that the case of the Appellant is distinguishable from that of the power distribution companies on the ground that in the Appellant's case, transmission and distribution lines are under ground and concealed and not in the same nature as that of KESC. He further argued that the losses claimed by the appellant are unusual and show abnormal variances from one station to another losses in most of the areas are excessive and beyond normal wastage, hence, the Department was justified in disallowing the input tax on UFG claimed by the appellant.
9.3 We have noted that Appellate Tribunal Lahore Bench has already decided same issue of disallowance of UFG in case of Sui Northern Gas Co. Ltd. (SNGPL) vide STA ,No, 439/LB/2011 and STA No, 440/LB/2011, dated 06- 10-2015 by holding in para 8 of the order that input tax claimed by the Appellant in excess to the limit determined by OGRA is not permissible. Said concluding para is reproduced as under:---
8. As regards the unaccounted for gas, FBR outs field formations are professionally not competent enough to determine correctness losses. They are, therefore, left with no other- option but to rely on the findings and working of professional bodies like OGRA which periodically determines UFG limit after carrying not necessary exercises and conducting technical studies in consultation with experts, professional and gas registered distribution companies. We are, therefore, of the considered opinion that unaccounted for as losses claimed by the appellant in excess to the limit determined by OGRA is not permissible. Accordingly, we uphold and maintain the decision of the lower fora on this account.
9.4 The Division Bench of the Lahore Tribunal has properly thrashed out the matter of admissibility of UFG in he case of another gas distribution company, SNGPL, accordingly, we find no reason to interfere with the above decision. We have no hesitation to hold that said order squared applies in Appellant's case, as the business facts are same. Accordingly, we uphold the decision of the commissioner Appeals, whereby the appellant has been Wowed input tax on 'UFG to the extent of limit determined by he OGRA.
10. Excess Input Sales tax claimed on internally manufactured Gas Meters (Rs. 7.625 million)
10.1 The department preferred appeal against the IR(A)'s findings whereby input tax claimed on internally manufactured gas meters has been allowed to the respondent. The DR argued that the respondent has teen claiming input tax twice and has been depositing output tax only once into the government exchequer. Hence, he argued hat the respondent is claiming additional input tax, thus making a loss to the government treasury.
10.2 However, the AR of the respondent on the other hand argued that the Department had failed to Understand the nature of transactions taking place in respect. Meter manufacturing. He further explained that as a result transaction taking place, there are two outputs of sales jiving rise to two corresponding inputs, the respondent lot claimed any behalf nor made any additional input tax adjustment in addition to what it was entitled to. He clarified that Company has paid two output taxes i,e, firstly on internal transfer of manufactured meters from manufacturing department to gas distribution department while secondly on meter rent being monthly charged to the consumers, hence, the contention of the Department is wrong that the Company has claimed two input taxes while it has output tax once only.
We are of the view that above matter needs to be properly thrashed out by the Department and it is required to ascertain that whether the Company has paid output taxes twice i,e, both on the internal transfer of meters and on the meter rent charged to the customers and after examining this aspect, the appropriate order should be passed. Accordingly, this matter is remanded back for reexamination.
11. Default Surcharge and Penalty 11.1 The Commissioner Appeals deleted the penalty levied by the Department holding that no mans rea and wilful default could have been established by the Department while the action of levying default surcharge was upheld on the ground that default surcharge is a markup/interest in common words which is charged on the time value of money.
11.2 Both Appellant and Department has challenged the findings of the Commissioner Appeals through cross appeals.
11.3 The AR of the Appellant argued .that the imposition of default surcharge and penalty, is illegal and not justified as there was no deliberate and mala fide intention of non-payment of taxes on the part of the Appellant. He added that the due tax had already been discharged by the Appellant while the. additional demands were raised by the Department adopting illegal interpretation of laws, hence, non-payment of tax involved should not be construed as a wilful default. The AR placed reliance on the judgment of High Court in the case of Additional Collector ST v. Nestle Milk Pack Limited reported as 92 TAX 128 = 2005 PTD 1850 and some other case-laws.
11.4 On the other hand, the Department argued that it is not necessary to first establish mens rea or wilful default in order to impose default surcharge and penalty. Accordingly. the order of the Department is legally justified.
11.5 We have carefully considered the matter of levy of default surcharge and penalty in the light of the arguments submitted with respect to different aspects of the case and have found that there was no any mala fide intention or willfulness found leading to non-payment of tax on part of the appellant. Hence, in this context. the levy of default surcharge imposed by the DCIR, is hereby ordered to be deleted. As far as the penalty is concerned, we have found the same to have been rightfully deleted by the CIR(A) for the reasons mentioned in supra.
12. The cross appeals filed by the department and the tax-payer are disposed of in the manner indicated above.