1. SHAHID MASOOD MANZAR, CHAIRMAN. Titled appeal has been filed under section 46 of the Sales Tax Act, 1990 at the instance of registered person/taxpayer calling in question the impugned Order-in- Appeal No. 39 of 2019 dated 20-02-2019 passed by the learned CIR(A), Faisalabad On the following grounds:-
1. Collection of excess sales tax wrongly collected.
2. 1.1 That the appellant is engaged in business of storage batteries falling at Sr.No.7 of the Table provided in Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 896(1)/2013 and conduct his business as an authorized distributor of M/s. Century Engineering Industries (Pvt.)
3. Ltd., (formerly Phoenix Batteries) and M/s Exide Pakistan Ltd., and pay sales tax at the rate of 17% along with 2% extra sales tax at the time of purchases and its Subsequent supplies are exempt from paym ent of sales tax under sub-rule (5) of Rule 58T of the Chapter-XIII (Special Procedure for Payment of Extra Sales Tax on Specified Good).
4. 1.2 That it is pertinent to point out here that appellant has paid 'extra tax' on these items therefore, subsequent supplies made by him are exempt form 'payment' of, sales under Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 525(1)/2008 as payment of extra tax should be considered as his final discharge of tax liability.
5. 1.3 that since the appellant has duly fulfilled all prescribed requirements by discharging his sales tax liability on account of extra tax as a final discharge in terms of the Special Procedure Rules, 2007 therefore, the appellant was not legally required to pay sales tax on supply of these items enough ground to declare impugned show-cause notice as well as the assessment order illegal, void ab initio and without lawful authority hence, provisions of section 3(B) of the Act are not attracted at all in the instant case.
6. 1.4 That the provisions of Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure, 2007 are very much clear in its tone and tanner because the words "exempt from payment of sales tax" has been mentioned therein instead of the words "Exempt from payment of sales tax" has been mentioned therein instead of the words "exempt from charging, levying and collection of sales tax" therefore; impugned observation to this effect is not legally sustainable.
7. 1.5 That the allegation of excess collection of sales tax is unjustified, unfounded and illegal as no excess sales tax was levied, charged and collected on subsequent supplies of these items hence, the department has wrongly applied the provisions of section 3(B) of the Act. It may be applied when rate of sales tax was chargeable @ 17% but the appellant charged 20% then it may be said that 3% excess sales tax was collected. The appellant has not charged and collected a single rupee in excess of 17% on his subsequent supplies but has charged and collected standard rate of sales tax as prescribed under section 3 of the Act.
8. 1.6 That, intention of law is otherwise clear from the provisions of section 7 of the Act existing at the relevant time and even those as exist today that a registered person shall claim input tax adjustment against output tax in accordance with the provision of section 7 read with section 73 of the Sales Tax Act, 1990. In case, the interpretation of the department is accepted then the provisions of section 7 of the Act as presently existing would become redundant. That can hardly be the intention of the law.
9. 1.7 That nevertheless, Federal Government may specify the goods to be exempted from levy of sales tax under section 13 of the Act read with the Sixth Schedule but the alleged goods have never been provided in the list of exempted goods as available in the Sixth Schedule hence, disposal of the alleged goods by the appellant, being not exempted under section 13 of the Act or being not specified in the Sixth Schedule were chargeable to sales tax thus, the appellant has rightly charged and collected sales tax on supply of the said goods. Reliance is placed on the judgment of the Hon'ble Supreme Court of Pakistan in case of "Collector of Customs Sales Tax and Central Excise and others v. M/s Sanghar Sugar Mills Ltd., Karachi and others" reported as (PLD 2007 SC 517 = 2007 PTD 1902)
10. 1.8 That, whole exercise of creating huge demand of sales tax has been carried out under Notification No. S.R.O. 896(1)/2013 dated 04.10.2013 which has already been declared without lawful authority and of no legal effect by the Hon'ble Lahore High Court in W.P. No.5186/2014 in case of "M/s Siddique Brothers (Pvt.) Ltd. v. Federation of Pakistan and others".
2. Inadmissible input tax against fake suppliers (suspended/blacklisted).
11. 1.1 That the allegations against the appellant are frivolous and baseless because the appellant procured the alleged goods under coverage of proper sales tax invoices issued under section 23 of the Act as duly incorporated in suppliers' sales registers, sales tax returns, sales tax returns, summary statements and due tax was also paid in its monthly sales tax returns for periods in question therefore, appellant was legally entitled for input tax adjustment under section 7 of the Act.
12. 1.2 That all the payments (where required) to the alleged suppliers have also been made through banking channel from the business bank account of the appellant as requisitioned under section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against invoices of such suppliers cannot be denied and sales tax refunded thereon cannot be recovered.
13. 1.3 That suspension of registration of M/s Tayyab Enterprises on 30.06.2013 has never been converted into a blacklisting order within 90 days of basic hearing notice as per sub-rule b(iii) of Rule 12 of the Sales Tax Rules, 2006 therefore; order for its suspension has become illegal and ab initio void having no effect of enforcement therefore, recovery of sales tax against their invoices has also become illegal and unlawful and all the subsequent proceedings carried out on its basis are also void ab initio, and unlawful. Reliance is placed on the judgment of a Division Bench of Hon'ble ATIR, Lahore reported as (2019 PTD (Trib.) 120).
14. 1.4 That it is now well- settled law that subsequent blacklisting will not disentitle the buyer from his lawful right of input tax in respect of invoices issued when the supplier was a registered and active person 'unless, those invoices are specifically declared fake through speaking order and have direct nexus with blacklisting and admittedly, invoices in question had no direct nexus with the subsequent blacklisting of the alleged supplier. Reliance is placed on the judgments of Hon'ble Lahore High Court reported as (2015 PTD 2256), (2016 PTD 467), (2018 PTD 986), (2019 PTD 257) and (2019 PTD 298).
3. Inadmissibe input tax claimed/adjusted.
15. 3.1 That beyond any doubt, appellant has made transactions with the alleged registered suppliers under the coverage of proper sales tax invoices issued under section 23 of the Act and accordingly declared sales vis--vis output tax thereon in his respective monthly sales tax returns for the periods in question and all the payments (where required ) to the alleged suppliers have also been made through banking channel as requisitioned under section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against invoices of such suppliers cannot be denied.
4. Late filing of sales tax returns.
16. 4.1 that the 'alleged late filing of sales tax returns for tax periods in question is not intentional and contumacious but is due to certain financial problems which are beyond human control and respondent, being constrained by these liquidity hardships, could not file sales tax returns within time which cannot be termed as 'deliberate and intentional failure' particularly in instant case where no mala fide and willful default is attributed at his part therefore; imposition of penalty under section 33(1) of the Act is not justified as also held by superior Courts in different identical cases.
17. Reliance is placed on the judgment of Hon'ble Sindh High Court, Karachi in case of M/s Nizam Impex (Pvt.) Ltd., reported as (PTCL 2014 CL 426), judgment of Supreme Court of Pakistan in case of M/s D.G. Khan Cement Factory Ltd., reported as (2004 SCMR 456 = 2004 PTD 1179) and judgment of ATIR, Lahore in case of M/s K.B. Enterprises, Faisalabad reported as (2019 PTD (Trib.)
18. 56).
19. Nevertheless, the appellant carves his right to add any fresh ground (s) at the time of hearing besides placing any valid incriminating evidence/document.
2. Succinctly stated, facts of the instant case are that appellant is a registered person running its business as an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd. (formerly Phoenix Batteries) and M/s. Exide Pakistan Ltd dealing with storage batteries. During scrutiny of Annex-A of sales tax return for the tax period of January-2017 filed by the appellant, certain discrepancies were pointed out which were duly communicated to the registered person through a show-cause notice dated 25-10-2017. Detail is as under:-
(i) Collection of excess sales tax wrongly collected.
(ii) Inadmissible input tax against fake suppliers.
(iii) Inadmissible input tax claimed/adjusted.
(iv) Late filing of sales tax returns.
20. In response to show-cause notice, appellant filed written reply on 26-03-2018 supported with documentary evidences but upon culmination of adjudication proceedings, the DCIR (Lyallpur Zone) uphold the charges and adjudged recovery of Rs. 4,918,323/- along with default surcharge and penalty vide Order-in-Original No. 02/2018 dated 18-04-2018 without considering the documents and without appreciating the facts and law on the subject matter. Being discontented and aggrieved by the said order, appellant filed the first appeal before learned CIR(A), Faisalabad who dismissed the appeal vide order dated 30-10-2019. Now, the appellant has filed the second appeal before this Tribunal.
3. At the very outset of his arguments, learned AR for the appellant assailed that impugned show cause notice issued by the Inland Revenue Officer (Unit-4, Chenab Zone) RTO, Faisalabad is illegal and without lawful jurisdiction as jurisdiction over the case of appellant vests with (Lyallpur Zone), RTO, Faisalabad as per Jurisdiction Order No. 05 dated 06-09-2016. Learned counsel vociferously contented that the appellant is an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd and M/s. Exide Pakistan Ltd and sales tax at the rate of 17% along with 2% extra sales tax is paid at the time of purchases and its subsequent supplies are exempt from 'payment' of sales tax under sub-rule (5) of Rule 58T of the Chapter-XIII (Special Procedure for Payment of Extra Sales Tax on Specified Good) and the principal companies have also verified all the purchases through certificates dated 01-08-2016 and 08-09-2017 therefore, charge of tax evasion is illegal and unfounded when amount of sales tax along with extra sales tax have already been deposited in the national exchequer by the respective suppliers. Learned counsel further argued that the provisions of Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure, 2007 are very much clear in its tone and tanner because the words "exempt from payment of sales tax" has been used therein instead of the words "exempt from charging, levying and collection of sales tax" therefore; impugned observation to this effect is not legally sustainable. It is further contended by the learned AR that appellant has procured the alleged goods under the coverage of proper sales tax invoices issued in terms of section 23 of the Sales Tax Act, 1990 duly incorporated in suppliers' sales registers and summary statements and his suppliers have duly discharged their sales tax liabilities under section 7 of the Act in their monthly sales tax returns for periods in question, hence, appellant was legally entitled for adjustment of input tax under section 7 of the Act and too the alleged suppliers at the time of making transactions were operative/active and all the payments against those transactions were also made through banking channel as required under section 73 of the Act. In support of his contention, he placed reliance on the judgments of Hon'ble Lahore High Court reported as (2015 PTD 2256), (2016 PTD 467), (2018 PTD 986), (2019 PTD 257) and (2019 PTD 298). It is submitted by the learned AR that appellant has made transactions with the alleged registered suppliers under the coverage of proper sales tax invoices issued under section 23 of the Act and accordingly declared sales vis--vis output tax thereon in his respective monthly sales tax returns for the periods in question and all the payments to the alleged suppliers have also been made through banking channel as requisitioned under section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against invoices of such suppliers cannot be denied. Lastly, learned AR stated that alleged late-filing of sales tax returns for tax periods in question is not intentional and contumacious but is due to certain financial problems which are beyond human control and respondent, being constrained by these liquidity hardships, could not file sales tax returns within time which cannot be termed as 'deliberate and intentional failure' particularly in instant case where no mala fide and willful default is attributed at his part therefore; imposition of penalty under section 33(1) of the Act is not justified as also held by superior Courts in different identical cases.
4. Conversely, when the learned DR was confronted with the situation cited supra, in counter arguments, he has assailed the case on similar grounds and charges as levelled earlier in the impugned orders and has failed to put forth any explanation to justify any deviation from the arguments advanced by the learned AR and has fully supported the orders of both the authorities below, simply re-endorsing the basis evolved therein and nothing newel is put forth except to reiterated earlier set of contentions.
5. The arguments of the learned representatives of both the rival parties have been heard, the orders of the authorities below as well as relevant record and provisions of law and the case laws cited by the learned AR of the taxpayer have also been perused carefully.
21. It is an admitted fact that the show-cause notice issued by the Inland Revenue Officer of Chenab Zone, RTO, Faisalabad for assessme nt and recovery of sales tax is illegal and without lawful jurisdiction as jurisdiction over the case of the appellant vests with the Lyallpur Zone, RTO, Faisalabad as per Jurisdiction Order No. 05 dated 06-09-2016 assigning jurisdiction for assessment and recovery of sales tax as conferred under the Sales Tax Act, 1990 falling under respective territorial and legal jurisdiction. The jurisdictional order clearly reveals that all cases or classes of cases, persons or classes of persons of non-corporate whose place of business is situated within the limit of "Maher Sadiq Market" shall be the jurisdiction of Lyallpur Zone. Learned counsel for the appellant has invited our attention towards online application for change in the business address of the appellant duly accepted/approved by the FBR on 08-12-2015, showing new business address of appellant "Shop No. 6, Khan Plaza, Maher Sadiq Market, Railway Road, Lyallpur Town, Faisalabad" and resultantly, this new business address was also updated by the FBR on 'Taxpayer Online Verification'. Learned counsel, in support of his stance, has placed on record, the copies of jurisdictional order dated 06-09-2016, application for change in particulars of registration along with online approval of FBR as well as latest. computer profile of the appellant showing current business address of the appellant. While confronted with such factual and legal position, learned DR has candidly conceded to the legal position as stated hereinabove. We are of the considered view that it is the officer of Lyallpur Zone who was legally empowered to proceed under section 11 of the Act for recovery of sales tax therefore; whole proceedings for recovery of sales tax being illegal and without jurisdiction are infested with inherent legal infirmities and substantive illegalities. It is a well-settled principle of law that power vested in any authority can only be exercised by that authority, in default whereof, the entire action would be without jurisdiction, void ab initio and of no legal effect. Reliance is placed on the judgments of ATIR, Lahore ref: (2018 PTD (Trib.) 787) and (2014 PTD 104). In this regard, reliance is also placed on the judgment of Apex Court of Pakistan reported as (PLD 2005 SC 482) while observing the issue of jurisdiction, it was observed that the question of jurisdiction in forum is always considered to be very important and any order passed by a Court or a forum having no jurisdiction, even if it is found to be correct on merits, is not sustainable under law.
22. There is nothing to defy with the earlier judgment of this Appellate Tribunal propounded in case of the same appellant ref: "M/s. Ayan Battery Traders, Faisalabad v. The CIR (Chenab Zone), RTO, Faisalabad" reported as (2018 PTD (Trib.) 787) wherein it was held as under:- "In view of the foregoing facts and law, we have no hesitation to hold that suspension and consequent blacklisting of the appellant has been passed by the CIR (Chenab Zone) without lawful jurisdiction as its jurisdiction vests with the CIR (Lyallpur Zone), hence, the impugned order as annulled. Since, the appeal is accepted on point of jurisdiction, other grounds need not to be dilated upon."
23. We also derive strength from the ratio settled by the Hon'ble Supreme Court of Pakistan in case of "Izhar Alam Farooqi v. Sheikh Abdul Sattar" reported as (2008 SCMR 240). The relevant excerpt of the said judgment is reproduced as under:- "If a mandatory condition for the exercise of a jurisdiction before Court. Tribunal or Authority is not fulfilled. then the entire proceedings which follow become illegal and suffer from want of jurisdiction. Any order passed in continuation of these proceedings in appeal or revision equally suffers from illegality and is without jurisdiction."
24. We are of the considered view that since basic show-cause notice issued by officer of Chenab Zone is illegal and without lawful jurisdiction therefore, any subsequent proceeding and superstructure based on such illegal or void notice has no legs to stand and has to fall on the ground automatically along with the order on which it is based. In this regard, we are supported by the judgments of Hon'ble Supreme Court of Pakistan in ref: "Muhammad Tariq Khan v.
25. Khawaja Muhammad Jawad Asami and others" (2007 SCMR 818), "Moulana Atta-ur-Rehman v.
26. Al-Hajj Sardar Umar Farooq and others" (PLD 2008 SC 663) and "Rehmatullah and others v.
27. Saleh Khan and others" (2007 SCMR 729) wherein it has been laid down that when the basic order is void ab initio and without lawful authority, then the entire superstructure raised thereon falls to the ground automatically.
28. On merits of the case, the learned AR has also very strong case although we have already declared very initiation of assessm ent proceedings ab initio void and without lawful jurisdiction. There is no denying the fact that the appellant is engaged in business of Storage Batteries falling at Sr. No. 7 of the Table provided in Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 896(1)/2013 and conduct his business as an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd. and M/s. Exide Pakistan Ltd and pay sales tax at the rate of 17% along with 2% extra sales tax at the time of purchases and its subsequent supplies are exempt from 'payment' of sales tax under sub-rule (5) of Rule 58T of the Chapter-XIII (Special Procedure for Payment of Extra Sales Tax on Specified Good). The appellant has paid extra tax on these items therefore, subsequent supplies made by him are exempt from 'payment' of sales tax under Rule 58T(S) of Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 525(I)/2008 as payment of extra tax should be considered his final discharge of tax liability. Since, the appellant has duly fulfilled all prescribed requirements by discharging his sales tax liability on account of extra tax as a final discharge in terms of the Special Procedure Rules, 2007 therefore, the appellant was not legally required to pay sales tax on `supply' of these items. The allegation of excess collection of sales tax is unjustified, unfounded and illegal as no excess sales tax was levied, charged and collected on subsequent supplies of these items hence; the department has wrongly applied the provisions of section 3(B) of the Act. It may be applied when rate of sales tax was chargeable @ 17% but the appellant charged 20% then it may be said that 3% excess sales tax was collected. The appellant has not charged and collected a single rupee in excess of 17% on his subsequent supplies but has charged and collected standard rate of sales tax as prescribed under section 3 of the Act.
29. The interpretation of the department cannot be accepted that the subsequent supplies of storage batteries made by appellant were exempted from "levy" of sales tax because it is statutory authority under subsection (1) of section 13 of. the Sales Tax Act, 1990, which vests in the Federal Government the power to 'exempt' any taxable supply made in Pakistan or any goods or class of goods from the whole or any part of the tax chargeable under the said Act, subject to the conditions and limitations so specified but the alleged goods have never been provided in the list of "exempted goods" as available in the Sixth Schedule hence, supply of the alleged goods by the appellant, being not exempted under section 13 of the Act or being not specified in the Sixth Schedule were chargeable to sales tax thus, the appellant has rightly levied, charged and collected sales tax on 'supply' of the said goods. Reliance can safely be placed on the judgment of Hon'ble Supreme Court of Pakistan in case of "Collector of Customs Sales Tax and Central Excise and others v. M/s. Sanghar Sugar Mills Ltd., Karachi and others" reported as (PLD 2007 SC 517 = 2007 PTD 1902) where in it has been laid down as under:- "The disposal of fixed assets, scrap by a registered person, being not exempted under section 13 or being not specified in the 6th Schedule to the Sales Tax Act are chargeable to sales tax and supply thereof, are taxable supply."
30. The intention of law is otherwise clear from the provisions of section 7 of the Act existing at the relevant time and even those as exist today that a registered person shall claim 'input tax adjustment' against 'output tax' in accordance with the provisions of section 7 read with section 73 of the Sales Tax Act, 1990. In case, the interpretation of the department is accepted that subsequent supplies of the alleged goods were exempted from 'levy' of sales tax and no sales tax was chargeable thereon then the provisions of section 7 of the Act as presently existing would become redundant. That can hardly be the intention of the law.
31. There is no doubt that the appellant in the instant case has transacted all payments to his suppliers through banking channel by complying with the mandatory provisions of section 73 of the Act which is the sole obligation on the buyer to ensure veracity of transactions in addition to verifying normal and operative status of his suppliers. Both, the necessary condition of verifying genuineness of suppliers from e-portal of FBR for its operative status and sufficient condition of making payments through banking channel to ascertain the varsity of such transactions was also complied with by appellant therefore, the legislature has consciously given a right to a buyer in such cases to reclaim input tax so paid, where registration of the supplier has been suspended or has been declared blacklisted, either as a refund or by way of adjustment. There is no dispute between the parties that input tax adjustment of the assessee was denied only for the reason that the suppliers of the appellant were declared blacklisted subsequently. Learned AR, in support his stance, has placed on record the computer profiles all dated 13-03-2021 in case of M/s. Usman Packages (blacklisted on 26-04-2017), M/s. Paramount Industries (blacklisted on 26-04-2011) and M/s Tayyab Enterprises (suspended on 30-06-2013). We are therefore of the firm opinion that subsequent blacklisting will not disentitle the buyer from his lawful right of input tax in respect of invoices issued when the supplier was a registered and active person unless those invoices are specifically declared fake and have direct nexus with blacklisting and admittedly, the invoices in question had no direct nexus with the subsequent blacklisting of the alleged suppliers. The ratio decidendi by the Hon'ble Lahore, High Court in case of "Commissioner Inland Revenue v. Tariq Poly Pack (Pvt.) Ltd." reported as (2015 PTD 2256) is the most relevant in all fours to the case at instance of the assessee. The relevant extract of the said judgment is reproduced as under:-- "In our view, it will be a fallacy to hold that mere blacklisting will automatically reject claims of input tax and refund against all validly issued previous invoices, when the supplier was not blacklisted rather was duly registered and active on FBR website and said invoices having not been declared fake specifically, have no nexus with blacklisting. No doubt ambiguity abounds rule 12(5) but it will be unreasonable to hold that merely because supplier has become blacklisted, the entire series of invoices issued by him before blacklisting will be rejected. It will also infringe the accrued vested rights of the registered person/purchaser who held valid invoices when the supplier was not blacklisted rather active and duly registered."
32. We have also observed that appellant has made transactions with the alleged registered suppliers M/s. Saleem Battery Center, M/s. Anas Traders, M/s. WLIGSPRO, M/s. M.H. Dynamics and M/s. F.M.
33. Corporation under the coverage of proper sales tax invoices issued under section 23 of the Act and accordingly declared sales vis--vis output tax thereon in his respective monthly sales tax returns for the periods in question and the payments to the alleged suppliers have also been made through banking channel as requisitioned under section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against invoices of such suppliers cannot be denied.
34. In the context of penalty for late filing of returns, the initial onus of proving of mens rea is on the department. The imposing of penalties in case of committing default in payment of tax or late filing of sales tax returns is not automatic and some determination which regard to element of mens rea is required and the presence of mens rea is essential for imposition of any penalty under the law.
35. Mens rea in short denotes the state of mind that would compel a person to deviate from the law or to commit an offence which also encompasses recklessness within its ambit. Concept of mens rea basically resolves around the state of mind and the conduct of the person. It is necessary to establish mens rea before levying penalty and imposition of penalty is a quasi criminal and the presence of mens rea is mandatory however, no material is available on record to the effect that the late filing of sales tax returns was mala fide or willful act on part of registered person. The Assessing Officer has failed to establish mens rea and male fide on the part of the appellant, which is a necessary ingredient for imposing penalty therefore, imposition of penalty for late filing of sales tax returns under section 33(1) of the Act is illegal and not sustainable under law.
36. In view of what has been stated and particularly in the light of legal propositions discussed hereinabove, the titled appeal is accepted and impugned show cause notice and consequent orders of both the authorities below being illegal and unlawful are hereby set aside.
6. The instant appeal filed by the taxpayer is disposed of in the manners as indicated above.