1. ORDER: MR. SHAHID MASOOD MANZAR, CHAIRMAN.--(1). The titled appeal has been preferred by the registered person assailing the impugned assessment order dated 27-06-2019 and order in appeal dated 26.09.2019, passed by the learned' Commissioner Inland Revenue, Peshawar .
2. Brief facts leading to the instant case are that the Assistant Commissioner I.R on the basis of audit conducted by the staff of DGRRA vide audit observa tion No. 04 dated 29.08.2018 of the appellant Peshawar Electric Supply Company (PESCO) issued Show-Cause Notice bearing C. No. ST/DGRRAJAudit-09/A.04/ST/CZ/2018/300 dated 05-12-2018 asking to explain as to why the principal amount of Rs. 612,830,752/- for the periods 2016 & 2017 along with default surcharge etc under section 34 should not be recovered under section 11(2) of the Sales Tax Act, 1990. The appellant filed reply to the above mention show-Cause Notice wherein charges levelled in the Show- Cause' Notice were denied. After the proceedings, the Additional Commissioner Inland Revenue decided the case vide Assessment Order No 02/2019 dated 27-06-2019 and the appellant was held to be in default of sales tax mentioned above in terms of sections 11(2) of the Sales Tax Act, 1990 along with the default surcharge under section 34 ibid. Penalty equal to 5% of the amount of tax involved was also imposed under section 33(5) of the Sales Tax Act, 1990.
2. On appeal by the appellant/PESCO, the learned Commissioner Inland Revenue (Appeals) Peshawar rejected the appeal vide. Order-in-Appeal No. 62/2020 dated 26-09-2019. Now the PESCO has filed the instant appeal against the impugned Order .
3. The learned A.R has taken the prelimin ary objection by raising the jurisdictional defect and drawing our attention to the show cause notice bearing C. No. ST/DGRRA/Audit-09/A.04/ST/CZ/2018/300 dated 05-12-2018 and also towards the subsequently passed impugned order on 27-06-2019 for pointing that this case is based on the audit by the staff of the Directorate General of Revenue Receipt Audit and the DRRA has no jurisdiction to audit the record of the registered persons under the Sales Tax Act, 1990. Resultantly , the show cause notice based on the illegal audit is liable to be set aside. He explained that the Chapter VI of the Act deals with the appointments of officers of sales tax and that powers which clearly shows that DGRRA staff has neither been appointed as officers of sales tax under section 30 nor have delegated powers under section 32 of the Act. Section 32- A of the Act provides for special audit by Chartered Accountants or Cost Accountants for conducting special audit of record of the registered persons subject to certain conditions laid down therein. The officers of the DGRRA have not been included in this section nor have been given such mandate by virtue of any other section. He emphasized that the show cause notice based on the audit by the staff of the DGRRA is illegal and the superstructure based on the same is liable to fall flat. In this respect, he placed reliance on the decision reported as:
(i) PTCL 2010 CL. 393=2010 PTD 1355 --Collector of Sales Tax & Central Excise, Peshawar vs. M/s Makk Beverages (Pvt.) Ltd., Peshawar .
(ii) PTCL 2011 CL. 109 --Yousaf Sugar Mills vs. Collector of Sales T ax.
(iii) 2010 PTD (T i ib) 1759--ST Appeal No. K-54 of 2009.
(iii) 2008 PTD (T rib.) 261 --Appeal No. 7 (2150) ST/IB of 2001.
(iv) 201 1 PTD (T rib.) 2459--M/s Flying Cement Company vs. Collector Sales T ax & Federal Excise L TU, Lahore.
(v) PTCL 2020 -CL. 324 --M/s PESCO Vs. Commissioner 1R, R T O Peshawar .
(vi) 2020 PTI3 (T rib.) 328--M/s Huma T extiles, Faisalabad vs. The Cl R (A), R TO, Faisalabad. (viii) MA (AG) No. 15/LB/18, ST A No. 1633/LB/2017-- M/s Fazal Paper Mills (Pvt.) Ltd. vs. The CIR, R TO, Lahore.
3. In all these cases, it has been held that a sales tax case based on the audit by the staff of the Directorate General of Revenue Receipt Audit is unlawful.
4. The learned A.R argued that even the Inland Revenue department cannot condu ct audit without strictly following the relevant provisions of the Act. He explained that the tax regulator monitor self-assessment, system through neutral and impartial tool of audit under section 25 or 72B of the Act. There is no other mechanism under the Act to lift the veil of self-assessment protecting the monthly tax return filed by the taxpayer . Reliance in this regards was placed on a number of cases e.g.
(i) 2020 PTD (Trib.) 666 -- STA No. 991/LB/2018-- (M/s Islam Soap Industries (Pvt.) Vs. The CIR, LTU, Lahore), wherein it is held that:-- "Supervision and monitoring cf the self-assessment regime is through the process of audit provided under sections 25, 38 and 72B of the Sales Tax Act, 1990 Once the taxpayer .is selected through audit and the department is of the view that the taxpayer has an outstanding tax liability the case undergoes assessment of tax through the process of adjudication under section 11 of the Act. Therefore, the self-assessed amount of tax due by the taxpayer in its sales tax return can only be altered through audit."
(ii) 2020 PTD (Trib.) 585--STA No. 1058/LB/2018-- (M/s Islam Soap Industries (Pvt.) Vs. The CIR, Zone-IV LTU, Lahore ), wherein, it is held that:-- "It is crystal clear beyond any shadow of doubt that there are no provisions in section 38 of the Act for conducting an audit of a registered person except empowering an Officer of Inland Revenue by the Board or by the Commissioner to have free access to premises, stocks, accounts and records to examine it and to take into his custody such records to inquire and to investigate cases of tax fraud but after resum ption of record and documents, conduction of its audit and scrutiny thereof can only be made in a way and procedure given under section 25 of the Act therefore, whole exercise of audit carried out under the garb of section 38 of the Act is illegal, ab initio void and without jurisdiction. The Officer of Inland Revenue was not legally empowered by the Commissioner to conduct audit under provisions of section 25(2) of the Act and approval of the Board or the Commissioner under section 38 of the Act was only for free access to business and manufacturing premises of the registered person and its records and documents which never provides powers of conducting of an audit requiring another authority under section 25(2) of the Act providing a mechanism for conclusion of its audit therefore, co-existence and co-invocation of both sections might have any meanings but provisions of section 38 of the Act alone in its sole clad are nothing for conduction of an audit without its counterpart provisions as given under sub-section (2) of section 25 of the Sales T ax Act, 1990."
(iii) PTCL 2014 CL. 726 -- Taj International (Pvt.) Ltd. Vs. The Federal Board of Revenue wherein it is held that:-- "The tax regulators monitor self-assessment system through neutral and impartial tool of audit under section 72B.
5. There is no other mechanism under the Act to lift the veil of self. assessment, protecting the monthly tax return filed by the taxpayer . Once the case of a taxpayer is selected for audit under section 72B, the return is closely scrutinized and on completion of audit if any of the grounds under section 11 are attracted, an assessment order is passed against the taxpayer , adjudicating the actual tax liability -- Inquiry or investigation can be initiated on the basis of "information or sufficient materi al" received by the Commissioner again st a taxpayer under proviso to section 25 (2) of the Act."
(iv) PTCL 2014 CL. 710 - M/s LESCO vs. The Federal Board of Revenue etc, wherein it is decided that:-- "The self-assessed amount of tax due by the taxpayer in its sales tax returns can only be altered through fresh assessment of tax under section 1 1, subject to the process of selection of a taxpayer through audit."
(v) 2015 PTD (Trib.) 1777 - M/s Arif Ehsan Printers vs. Commissioner Inland Revenue Appeals RTO Faisalabad, wherein it is held that:-- "In the present case, Authority had conducted audit of the appellant/registered person under S. 25 of the Sales Tax on its own, without any prior selection from the Federal Board of Revenue, on the basis of random selection from the Federal Board of Revenue, on the basis of random or parametric criteria under S. 72B of the Sales Tax Act, 1990, which was illegal and without lawful authority"
(vi) 2015 PTD (Trib.) 1050 M/s Flame Trend vs. Commissioner Inland Revenue (Appeal-HI), RTO, Lahore, wherein it is observed that:-- "No notice under Ss. 25, 38 & 72-B of Sales Tax Act, 1990 was -issued to registered person as per law to assume jurisdiction of the case -- Impugned Show Cause Notice being coram non judice, and without lawful authority , superstructure built on the same should fall flat Orders of the both the authorities below , being illegal and void ab initio were cancelled"
(vii) 2013 PTD (Trib.) 954 - M/s Decent Textiles, Faisalabad vs. Commissioner (Appeals) Inland Revenue
(RTO) Faisalabad, wherein it is settled that: "Audit exercise carried out by the DCIR not only without prior selection by the Federal Board of Revenue under S. 72B of the Sales Tax Act, 1990 but also without lawful notice for requisition of sales tax record under S. 25(1) of the Sales Tax Act, 1990 and proper authorization of Commissioner for audit under S. 25(2) of the Sales Tax Act, 1990.
6. Whole audit exercise was illegal, unlawful and without legal jurisdiction."
7. The learned A.R also relied upon the judgments reported as 2019 PTD (Trib.) 1108 (Prime Traders, Islamabad vs. The CIR, RTO, Islamabad), 2019 PTD (Trib.) 939 (Karsaz (Pvt.) Ltd., Karachi vs. Additional Commissioner Inland Revenue, Karachi), PTCL 2020 CL. 06, 2020 PTD 297 (Indus Motors Company vs. Pakistan Through Secretary Finance & another), 2019 PTD 1030 (Wateen Telecom Ltd. vs. SINDH through The Secretary), Orders passed in STA No. 833/LB/2018 (M/s Diamond Fabrics, Faisalabad Vs. The CIR, RTO, Faisalabad), STA No. 1506/LB/2014 (M/s Bata Pakistan Ltd., Batapur , Lahore Vs. The CIR., Zone-I, LTU, Lahore and STA No. 489, 490/LB/2017 (M/s Eastern Spinning Mills Ltd., Lahore vs. The CIR R TO-11, Lahore.
8. The learned A.R next submitted that section 25 of the Act was amended vide Finance Act 2018 (which came into force on 01-07-2018) and proviso was added to Section 25(2) which "Provided also that audit under this section shall be conducted only once in every three years". He stressed that this provision was in force on 29-08-2018 when DRRA submitted the audit report and the show cause notice was issued. He clarified that the appellant has been subjected to numerous audits during the last three years which is sheer violation of proviso of Section 25(2) of the Act. In this regard reliance has been placed on 2019 PTD 1780 (FESCO vs. FOP & others ).
9. As regards the merits of the case, the learned A.R emphatically asserted that PESCO only provides services of transmission lines to Tribal Electric Supp ly Company (TESCO) and has not made any taxable supply of goods to TESCO. The tax on services is not within the domain of the Federal Government. He relied upon Article 77 of the Constitution of the Islamic Republic of Pakistan, 1973 which provides that No tax shall be levied for the purposes of the Federation except by or under the authority of Act of [Majlis-e-Shoora (Parliament)]. He further drew our attention to Article 70(4) which explains that: "In this Article and the succeeding provisions of the Constitution "Federal Legislative List" means the Federal Legislative List in the Fourth Schedule." He elaborated that in the Entry 49 of the Federal legislative List in the Fourth Schedule under Article 70(4) of the Constitution of Islamic Republic of Pakistan, 1973, it is provided that: "taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed except sales tax on services". Hence, sales tax cannot be levied by the Federal Government on Services."
10. He emphasized that the definitions of wheeling charges provided under the Advance Law Lexicon, 3rd Edition and National Electric Power Regulatory Authority (Wheeling of Electric Power) Regulatio ns, 2015 are also supported his version and the judgments quoted by the lower fora reported as 2007 PTD 2275 and PLD 2007 SC 517 relate to supply of goods by owners of goods and therefore, are not squarely applicable to the facts and circumstances of his case. He has categorically argued that under section 3(1), 2(33) and 2(41) of the Act only such taxable activity is liable to sales tax which falls within the four corners of the term taxable supply" and the term "Supply" is related to Supply of goods as owner . Therefore, as per above cited provisions of the Act, PESCO is under no obligation to charge sales tax on wheeling charges. It is well settled that manner prescribed by law is to be followed.
11. The learned AR contended that financial statements could not be made basis for adjudging the liability under the Act and in this regard reliance is placed on 2013 PTD (Trib.) 2130 (M/s Siddique Enterprises, Faisalabad vs. CIR (Appeals) R TO, Faisalabad.)
12. He next pleaded that it is a well settled principle of law that in case of dispute as to the exact connotations of a provision of a fiscal statute, interpretation favourable to the taxpayer is to be adopted. Reliance is placed on (1992)
13. 66 Tax 246 (Mehran Associates Ltd. vs. C 1T, Karachi, 2004 STR 369/2003 PTD 760 (M/s Hino Pak Motors Ltd. vs. FOP and 2013 PTD 1332 (M/s Bilal Enterprises vs. FOP).
14. The learned A.R asserted that the appellant is not liable to default surcharge and penalty under section 33(5) of the Act as there is no willful evasion of sales tax. In addition, there cannot be any mensrea in the case of a public sector organization where its functionaries have not stake or benefit in short payment of taxes. In this respect he placed reliance on the following judgments:
(i) 2004 PTD 1 179 (S.C)= PTCL 2004 CL.224 --D.G. Khan Cement. Company Ltd. Vs. Federation of Pakistan.
(ii) 2006 PTD 1 132 (S.C.)--D.C., C.E. & S.T ., Customs House, Lahore vs. M/s ICI, Pakistan Limited, Lahore.
(iii) PTCL 1995 CL 415--M/s Lone China (Pvt.) Ltd. vs. Additional Secretary , Ministry of Finance, C.B.R., Karachi. iv) 2015 PTD 152 (LHC)--United Sugar Mills Ltd. vs. FBR.
15. On the basis of above arguments, the learned AR has requested to allow the appeal.
4. On the other side, the Learned DR is supporting the impugned order of the learned CIR (Appeals) and the Assessment order . He has contended that the wheeling charges are taxable activit y carried on by the appellant for profit, in the form of business, trade and providing of services, to another person. Therefore, chargeable to Sales Tax at standard rate of seventeen percent of the value under section 3 of the Act. It is explained that wheeling charges have neither been specifically exempted under section 13 nor specified in the Sixth Schedule to the Act.
16. Therefore, the same are chargeable to Sales Tax under section 3(1) of the Act.
5. We have perused the impugned Assessment order and the order by the learned CIR (Appeals), the case law referred and the available record of the case. The legality of audit by DRRA and resultant action of issuing show cause notice, assessment order and appellate order have been scrutinized at various fora including the Hon'ble High Court. It is clear that the DRRA staff is alien to hierarchy of officers authorized under the Act. It has been repeatedly decided in reported cases "PTCL 2010 CL. 393 = 2010 PTD 1355 -- Collector of Sales Tax & Central Excise, Peshawar vs M/s Makk Beverages (Pvt.) Ltd., Peshawar PTCL 2011 CL. 109 --Yousaf Sugar Mills vs. Collector of Sales Tax, 2010 PTD (Trib.) 1759--ST Appeal No. K-54 of 2009-- 2008 PTD (Trib.) 261--Appeal No. 7 (2150) ST/IB of 2001, 2011 PTD (Trib.) 2459 (M/s Flying Cement Company vs. Collector Sales Tax & Federal Excise LTU, Lahore), PTCL 2020 CL. 324 (M/s PESCO Vs. Commissioner IR, RTO, Peshawar), 2020 PTD (Trib.) 328 (M/s Huma Textiles, Faisalabad vs. The CIR (A), RTO, Faisalabad) & MA (AG) No. 15/LB/18, STA No. 1633/LB/2017 (M/s Fazal Paper Mills (Pvt.) Ltd. vs. The CIR, RTO, Lahore), that DRRA cannot conduct audit of a person registered under the Act and superstructure built on such audit is quorum non judice. Following these decisions, it is ordered that the show cause notice, assessment order and the impugned Order in Appeal based on the audit by DRRA of financial statement record of the appellant are null and void.
17. We are also inclined to agree to the argument that the tax regulators monitor self-assessment system through neutral and impartial tool of audit under section 25 and 72B of the Act and there is no other mechanism under the Act to lift the veil of self- assessment, protecting the monthly tax return filed by the taxpayer . Reliance has been made in this regard on the judgment reported as: 2020 PTD (Trib.) 666 -- STA No.991/LB/2018 -- (M/s Islam Soap Industries (Pvt.) Vs. The CIR, LTU, Lahore), 2020 PTD (Trib) 585--ST A No. 1058/LB/2018 -- (M/s Islam Soap Industries (Pvt.) Vs. The CIR, Zone-IV LTU, Lahore), PTCL 2014 CL. 726 -- Taj International (Pvt.) Ltd. Vs. The Federal Board of Revenue -- PTCL 2014 CL. 710 -- M/s LESCO vs. The Federal Board of Revenue etc., 2016 PTD (Trib.) 1777 -- M/s Arif Ehsan Printers vs. Commissioner Inland Revenue Appeals RTO Faisalabad.,-- 2015 PTD (Trib.)1050 -- M/s Flame Trend vs. Commissioner Inland Revenue (Appeal III), RTO, Lahore., 2013 PTD (Trib.) 954 -- M/s Decent Textiles, Faisalabad vs. Commissioner (Appeals) Inland Revenue (RTO) Faisalabad, 2019 PTD (Trib.) 1108 (Prime Traders, Islamabad vs. The CIR, RTO, Islamabad). 2019 PTD (Trib.) 939 (Karsaz (Pvt.) Ltd., Karachi vs. Additional Commissioner Inland Revenue. Karachi), PTCL 2020 CL. 6 = 2020 PTD 297 (Indus Motors Company vs. Pakistan Through Secretary Finance & another), 2019 PTD 1030 (Wateen Telecom Ltd vs. SINDH through The Secretary), unreported judgments passed in STA No. 833/LB/2018 (M/s Diamond Fabrics, Faisalabad Vs. The CIR, RTO, Faisalabad) STA No. ,1506/LB/2014 (M/s Bata Pakistan Ltd., Batapur , Lahore Vs. The CIR., Zone-I, LTU, Lahore and STA No. 489, 490/LB/2017 (M/s Eastern Spinning Mills, Ltd., Lahore vs. The CIR R TO-II, Lahore).
18. 6 As regards the merits of the case, it has been argued that M/s Peshawar Electric Supply Company (PESCO) provides only services of transmission lines to Tribal Areas Electric Supply Company (TESCO) and has not made any taxable supply of goods to TESCO and the tax on services is not within the domain of the Federal Government. It is also explained that the goods i.e. the electricity remains the property of the NTDC and its ownership is never transferred to PESCO.
19. To resolve the controversy , It is important to reproduce the relevant provisions of The Constitution of Islamic Republic of Pakistan, 1973 for ease of reference:-- Article 77 of the Constitution:-- "77. Tax to be levied by law only. No tax shall be levied for the purposes of the Federation except by or under the authority of Act of [Majlis-e-Shoora (Parliament)]"
20. Article 70(4) of the Constitution:--
(4) In this Article and the succeeding provisions of the constitution "Federal Legislative List" means the Federal Legislative List in the Fourth Schedule."
21. Entry 49 of the Federal List in the Fourth Schedule of the Constitutions:-- "49. taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed except sales tax on services"
22. [Emphasis Supplied] After perusal of the aforesaid provisions, it is apparent that sales tax cannot be levied on the services rendered by the registered person. Now the questions arises that whether the "wheeling charges" fall under the definition of "services" under the Act.
23. Therefore, It is relevant to quote the definitions which are provided under the law regarding the issue in question:-- 'Wheeling' is defined in Advance Law Lexicon, 3rd Edition Book 4 at Page 4949:-- "Wheeling" means the operation whereby the distribution system and associated facilities of a transmission licensee or distribution licensee, as the case may be, are used by another person for the conveyance of electricity on payment of charges to be determined under Section 62 [Indian Electricity Act (36 of 2003), S. 2(76)]"
24. National Electric Power Regulatory Authority (Wheeling of Electric Power) Regulations, 2015 defines "Wheeling" or "Wheeling Services" and "Wheeling Charges" as follows: "(xix) "Wheeling" or "Wheeling Services" means the use of the distribution system of the DISCO for the transport of [Mr. Shahid Masood Manzar (Chairman)] electric power; (xxi) "Wheeling Charges" means the charges for Wheeling of Power as approved by the Authority;"
25. Section 3(1) of the Act:--
3. Scope of tax: (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of seventeen per cent of the value of:
(a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and Section 2(33) of the Sales Tax Act 1990:-- "(33) "supply" means a sale or other transfer of the right to dispose of goods as OWNER, including such sale or transfer under a hire purchase agreement, and also includes--
(a) putting to private, business or non-business use of goods produced or manufactured in the course of taxable activity for purposes other than those of making a taxable supply;
(b) auction or disposal of goods to satisfy a debt owed by a person;
(c) possession of taxable goods held immediately before a person ceases to be a registered person; and [(d) in case of manufacture of goods belonging to another person, the transfer or delivery of such goods to the owner or to a person nominated by him:] Provided that the Federal Government may, by notification in the official Gazette, Specify such other transactions which shall or shall not constitute supply;]"
26. [Emphasis Supplied] Section 2(41) of the Sales Tax Act, 1990 provides as follows:-- "Taxable supply" means a supply of taxable goods made by an importer , manufacturer , wholesaler (including dealer), distributor or retailer other than a supply which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4."
27. [Emphasis Supplied] Therefore, in view of the afore quoted provisions of law, it is candidly clear that to charge sales tax on supplies, two conditions of making taxable supplies and taxable activity must exist simultaneously under section 3(1) of the Sales Tax Act, 1990. Section 3 of the Act levies sales tax on the taxable supplies made by a registered Person in the course or furtherance of any taxable activity carried on by him and upon goods imported into Pakistan.
28. It is obvious that only such taxable activi ty is liable to sales tax which is undertaken during the course of taxable supply . It is also clear that "supply" of goods in the background of facts of this case can only take place if it is sale or other transfer of the right to dispose of goods as owner . NTDC has never sold or allowed sale of such electricity by PESCO. Rather it is given to PESCO for transportation to TESCO.
29. Therefore, after appraising the facts obtaining on record and also going through the divergent views expressed by the rival parties, we are persuaded to incline with the contentions raised by the learned counsel that the PESCO is under no obligation to charge sales tax on wheeling charges.
30. The foregoing narration and objective analysis on the issues involved in this appeal clearly demonstrate that the impugned Assessment order as well as Order-in-Appeal are palpably illegal and void being based and supportive of audit findings of DRRA which is not recognized under the Sales Tax Regime. As such, we hereby set aside the impugned show cause notice and consequent orders of both the authorities below being illegal, unlawful and void ab initio. Resultantly , instant appeal filed by the registered person is accepted as prayed for .
7. The titled appeal is disposed of f in the manner and to the extent as dilated supra.