SYED ANEES BADSHAH BUKHARI, CHAIRMAN/JUDICIAL MEMBER.----The Messieurs Schlumberger Seaco Incorporated is basically a tax payer, who was appellant in the court of learned Collector (Appeals) and now is respondent in this Tribunal, therefore to avoid any inconvenience he is to be termed as Messieurs Schlumberger Seaco Incorporated and in short M/s. SS1 or Schlumberger.
2. It is adjudication upon the above mentioned 'second appeal' filed against the order and judgment passed by the learned Collector (Appeals) in C (A)-71/2020 wherein the first appeal has been partially accepted. In the first appeal the Assessment Order No. 13-20/2019-20, dated 21.05.2020, passed by the Additional Collector, Khyber Pakhtunkhwa Revenue Authority (KPRA/Authority) against the Messrs SSI, was impugned: the Assessment Order directed for recovery of Rs.12,925,722/- along with penalty and default surcharge.
The Messrs SSI is a registered person providing services falling under the classification code 9873.0000 having description of "services provided in respect of mining of minerals, oil and gas including related surveys and allied activities" as per the First Schedule. The said services have been declared to be chargeable to sales tax under the S.No.35 of the Second Schedule at the rate of 15%.
3. Relevant facts a) Intimation/ Notice for "Provision of Information/ Record/ Documents under section 73 Read with section and 49 of the KP [Khyber Pakhtunkhwa] Finance Act, 2013": The KPRA/ Authority informed MIS SSI through letter No. KPRA/AC-III/KP/2019/12179 dated 01-03-2019 to the effect that analysis of the monthly sales tax returns filed by the M/S SSI/ tax payer transpired the services were provided to various persons, registered with the authority as withholding agents.
Comparing the monthly sales tax returns of the M/S SSI with the withholding agents, certain 'discrepancies were noted, the same were required to be clarified by the M/S SSI. The discrepancies were numbered as under: i. Credit Notes Claim: The desk review analysis of annexurc-C of the monthly sales tax return of M/S SSI revealed that certain (tabulated in the letter) credit notes amounting to Rs.272,042,828/- were claimed which resulted in the decrease of tax liability to the extent of Rs.40,806,426/-. Most of the credit notes claimed were not declared in any preceding monthly sales tax return. The tax payer was required to furnish the following documents: a. Copy of all the relevant/ mentioned sales invoices and credit notes issued to service recipient along with the debit notes received (from recipients) against each credit note. b. Documentary evidence of payments received against the aforementioned sale invoices, which must include the copy of the cheques received and the bank statement showing the payments credited to bank account of M/S SSI. ii. Sales Tax Claimed by M/S SSI as Withheld: The monthly sales tax return transpired that M/S SSI provided taxable services to M/S MOL Pakistan (M/S MOL) for the periods March 2016 to December 2018. The service recipient withheld a sum of Rs.11,262,103/-. The details were tabulated in the letter. The M/s. SSI was required to justify the declarations so documentary evidence along with 'Withholding Tax Certificates' issued by the M/S MOL were required. iii. Tax Withheld by M/S MOL Once, but Claimed/ Adjusted by M/S SSI Twice: The disk review analysis of the monthly sales tax returns filed by the M/S SSI and withholding statements filed by the MIS MOL transpired that the later (M/S MOL) withheld 1/5th in terms of Rule 4 of the Khyber Pakhtunkhwa Sales Tax on Services Special Procedure (Withholding) Regulation, 2015 (Regulation, 2015 or Regulation 2015). Details were tabulated. The data revealed that the M/S SSI adjusted/ decreased the total tax liability for a sum of Rs.4,507,272/- whereas in fact the entitlement was adjustment to the tune of Rs.2,245,890/- only. Documentary evidence including withholding tax certificates was demanded. iv. Undeclared Sale Invoices: The M/S SSI claimed/ adjusted the tax liability against the tax withheld by various recipients/ withholding agents, but sale invoices were not available. The tabulated details were provided.
Documentary proof including invoices and withholding tax certificates were demanded. v. Services Provided to M/S. Pakistan Petroleum Limited (M/S. PPL): The tax return for the period of July 2016 revealed that the M/S. SSI rendered taxable services to M/S PPL amounting to Rs.25,914,787/- which resulted into tax liability of Rs.3,887,218/-. The scrutiny of withholding statements of M/S PPL clarified that the taxable services rendered were to the tune of Rs.37,813,767/-and the resultant tax liability was Rs.5,672,065/- the details were tabulated. Thus the M/S SSI reduced the actual tax liability of Rs.5,672,065/- to the amount of Rs.3,887,218/-. The M/S SSI was required to justify the same. b) Show-Cause Notice: The Authority issued a SCN to M/S SSI through letter No.19(3- 1)/KPRA/SCN/AC-111-2019/12550 dated 03-05-2019 to the effect that a notice, bearing No. KPRA/AC-III/KP/2019/5842 dated 01-02-2019, under Section 73 read with Section 49 of the Act was served (upon the M/S SSI) for providing information but the M/S SSI requested for extension of time. Despite the M/S SSI's commitment in terms of his letter IT/2734/2019 dated 15-03-2019 the record was not produced resulting into contravention of provision of Section 73 read with Section 49 of the Act. The table under Section 64 of the Act provides at Serial No. 6 for penalty of Rs.10,000/- in case of such contraventions. Further Serial No.5 makes the person liable to pay the penalty. The M/S SSI was Show-Caused for penal action under Section 64 in context of violation of Section 73 read with Section 49 of the Act. c) Provision of Information/ Record/ Documents under section 73 read with Section and 49 ("Section and 49" is wrong but the Authority has written so) of the KP [Khyber Pakhtunkhwa] Finance Act, 2013-(Intimation of findings regarding discrepancies observed in the monthly sales tax returns filed with KPRA): The Authority issued the above captioned letter bearing No. K PRA/AC-III/KP/2019/12639, dated 24- 05-2019 in continuation of previous letter No. 12179 to the effect that the M/S SSI claimed tax credit to the tune of Rs.7,956,445/- on the basis of tax withheld by the service recipient/Messieurs MOL (details tabulated). The scrutiny of withholding statement of M/s MOL transpired that withholding to the extent of Rs.3,978,223/- was made (by the MOL). Thus the M/S SSI decreased his tax liability for the sum of Rs.7,956,445/- while the MIS SSI was entitled. for Rs.3,978,223/-. He (M/S SSI) was directed to deposit the due amount of Rs.3,978,223/- along with penalty and default surcharge under Sections 64 and 65. It was directed if the M/S SSI was not in agreement with the findings then withholding tax certificates were required. d) Partial Findings and Intimation Regarding Non-paym ent/Short Payment of Tax and Inadmissible Adjustments: The Authority issued the above captioned letter bearing No. KPRA/DC(Mardan)/2019/181-183, dated 08-10-2019 to inform the M/s SSI that examination of the documents provided by the authorized representative vide letter No. IT/3482/2019, IT/3562/2019, IT/0018/2019 and IT/0786/2019 and comparing it with the monthly sales tax returns filed by the M/S SSI [comparison has also been made with returns of M/s SSI] revealed certain discrepancies. i. Credit Notes Claim: a. The M/S SSI was informed to provide' evidence for claiming credit notes bearing No. K700000853 and K700000854 along with invoices against which the credit notes were claimed. The M/s SSI indicated the relevant invoices as N724448 and N724105 as declared in annexure-C of the monthly sales tax returns filed for July 2016. The data of monthly sales tax returns was tabulated. The M/S MOL deducted 1/5th and acknowledged the same. So there was no justification for the M/s SSI claimed the same. The M/S SSI was required to deposit sum of Rs.8,164,904 along with penalty and default surcharge as per Sections 64 and 65, respectively. b. The M/S SSI was required to reconcile the credit notes for justifying the declarations but the, following credit notes were not addressed.
Tax periodNTN Doc No. Document typeSale valueTax 201606 1938929-9K7 7880 Credit Note 529,973 79,496 201708 1938929-9K7973 Credit Note 8,125,3001.218.795 201807 1938929-9CN-N727478Credit Note 3.104.180465.627 Total 11,759,4531,763,918 So the M/s SSI wag declared unjustified in claiming the same. He was directed to deposit Rs.1,763,918 along with penalty and default surcharge as per Sections 64 and 65, respectively. ii. Services Provided to M/S PPL: The scrutiny of the withholding statements of the M/S PPL for the period April and August 2016 transpired that the MIS SSI provided taxable services amount to Rs.37,813,767/- resulting into tax liability of Rs.5,672,065/- (details tabulated). But the M/S SSI declared his tax liability of Rs.3,887,218/-. The M/s. SSI was required to deposit the tax amount of Rs.650,434/- along with penalty and default surcharge. iii. So the M/S SSI is required to deposit the tax amounting of Rs.10,654,905/- (including Rs.75,469/- agreed as per M/S SSI's letter dated 30-09-2019) along with penalty and default surcharge. e) Show-Cause Notice: The Authority issued a SCN under section 40 read with Sections 68 and 76 of the Act to M/S SSI through letter No. 103/KPRA/ADC (Mardan)/ 2019/241, dated 07-11-2019 to the effect that the following discrepancies were found during the desk review analysis: i. Inadmissible Credit Notes Claimed/ Adjusted Against Output Tax Liability: a. The M/S SSI was informed to provide evidence for claiming credit notes bearing No. K700000853 and K700000854 along with invoices against which the credit notes were claimed. The M/S SSI indicated the relevant invoices as N724448 and N724105 as declared in annexure-C of the monthly sales tax returns (table chalked out in the letter). The M/S MOL (service recipient from the M/S SSI) deducted 1/5th and acknowledged the same. The M/S SSI claimed credit on the basis of invoices bearing No. N724448 and N724105. Despite opportunity the M/S SSI did not reconcile the credit notes. b. The M/S SSI was required to reconcile the credit notes for justifying the declarations but the following credit notes were not addressed.
Tax periodNTN Doc No. Document typeSale valueTax 201606 1938929-9K7 7880 Credit Note 529,973 79,496 201708 1938929-9K7973 Credit Note 8,125,3001.218.795 201807 1938929-9CN-N727478Credit Note 3.104.180465.627 Total 11,759,4531,763,918 So the M/s SSI was declared unjustified in claiming adjustment to the extent of Rs.9,928,822/- (figure of Rs.9,928,822/- does not seem matching with the above table), the same is in violation of Sections 19, 27, 34 and 52 of the Act. ii. Tax credit claimed on account of tax withheld by the service recipient: The M/S SSI was informed by the authority to provide documentary evidence for claiming credit on account of tax withheld by M/S MOL. The M/S SSI did not provide documents in support of the tax claimed as withheld by M/S MOL 'amounting to Rs.1,972,704/- (table provided).
It was added that the statements submitted by M/S MOL to the authority did not support claim of the M/S SSI thus the provision of Sections 19, 27, 34 and 52 of the Act were violated. iii. Non-paym ent of the due tax/ undeclared sales tax invoices: a. Services provided to M/S MOL Pakistan: The M/S SSI provided taxable services to M/S MOL, involving sales tax amount to Rs.3,995,519/-. The recipient (M/S MOL) withheld sum of Rs.799104/- as 1/5th in the capacity of withholding agent in terms of Regulation, 2015. The counter part of Rs.3,196,415/- as 4/5th was short paid (table provided). The M/S SSI was required to deposit the monthly sales tax amount to the tune of Rs.3,196.415/- But M/S SSI not complied resulting into violation of Sections 19, 26, 27, 34, 52 and (30 read with clause 8 of Regulation, 2015). b. Services provided to Pakistan Petroleum Limited (M/S PPL): The withholding statements of M/S PPL for the period April and August 2016 transpired that the M/S SSI provided taxable services amounting to Rs.37,813,767/- creating tax liability to the tune of Rs.5,672,065/- (table provided). The M/S SSI declared tax liability to the tune of Rs.3,887,218/-. While the M/S SSI was required to deposit tax of Rs.4537652/, in terms of Section 52 of the Act. But the M/S SSI declared invoices of Rs.3,887,218/and the deficiency remained to the tune of Rs.650434/- thus the provision Sections 19, 26, 27, 34, 52 and (30 read with clause 8 of the Regulation, 2015) were violated. The M/S SSI was Show-Caused for recovery of principal amount of tax on services amounting to Rs.15,748,375/- in terms of Section 40 read with Section 68 of the Act. He was also intimated about penalty and default surcharge. f. Reply/response of through letter No, IT/0018/2019, dated 03-07-2019 to SCN No.19(3- 1)/KPRA/SCN/AC-III-2019/12550. dated 03-05-2019: The M/S SSI/ tax payer replied the captioned SCN read with Notice No. KPRA/AC-III/KP/2019/12179, dated 01-03-2019 and M/S SSI's letters No. 11/3482/2019, dated 20-05-2019 and 11/3562/2019, dated 27-05-2019, to the effect that the M/s SSI provided sales tax withholding certificates making it 81 % of the total withholding tax claimed by the company. The tax to the tune of Rs.1,557,039/- was without support and the same was surrendered.
About claim of credit notes the M/S SSI initially provided the same (credit notes) to the tune of Rs.26,804,089/- in the backdrop of Rs.40,806,426/-, thus addressed the 66%; further credit notes were provided to the tune of Rs.9,096,638/- covering 22% and totaling to 88%. g) Reply/response of the M/S SSI through letter No.IT/1820/2020 dated 16-01-2020 to SCN No.103/KPRA/ADC (Mardan)/2019/241 dated 07-1-2019: The M/S SSI/tax payer replied the captioned SCN read with M/S SSI's letter No. IT/1332/2019, dated 03-12-2019, in the following manner: Claim of credit notes amounting to Rs.1,763,918/-: The sales tax invoices were provided as per the following table: Tax PeriodCredit Note No.Original Sale Invoice No.Tax Period of Original Sale Invoice No. June-16 K7 780 N721986 Jul-15 Aug-17 K7 973 N726134 Mar-17 Jul-18 CN-N727478 CN-N727478 Dec-17 It justified the claim in too, as per the M/S SSI.
Provision of Sales Tax withholding certificates issued by MOL Pakistan amounting to Rs.1,972,704/-: The respondent/ Taxpayer replied in the tabular form as under: Invoice No.Sale Tax Withholding Claimed by RespondentComments of the Respondent/Taxpayer N721965450,624 Already surrendered and communicated to Authority vide our letter No.IT/0018/2019 dated 03 July, 2019.N721966281,950 N721985431,798 N722230198,843Sales tax withholding certificate submitted to Authority vide our letter No.IT/3562/2019 dated 27th May, 2019.
N728504169,678Sales tax withholding certificate Submitted to Authority vide our letter No.IT/3482/2019 dated 20th May, 2019.
Total 1,532,893 Total The total sales tax withholding to the tune of Rs.1,532,893/- was 78%. The remaining 22% comprised of invoice No. N721995 and N728166; the later had already been provided with reference to certificate No. 323 issued to the M/S SSI by M/S MOL. The evidence for 89% of the amount as confronted in the SCN had already been provided.
Non Declaration and Non Paym ent of Tax Amounting to Rs.3,197,415/- on Account of Invoices Issued to M/S MOL Pakistan: This amount was not mentioned in the already notices. The invoices bearing number N7-201782, N7201783 and N7- 201784 did not belong to the company and might be traced by, the Authority; the other invoices were in process of tracing.
Difference in the Amount of Services Provided to Pakistan Petroleum Limited Amounting to Rs.650,434/-: The M/S SSI's output sales tax of Rs.3,887,218/- as per return for the period of July 2016 was compared with the statement of service provider (withholding agent) for the period of April and August 2016 therefore the hypothetical difference of Rs.650,434/- had been created; which was not correct. h) The authority has started order sheet/ note sheets from '05-03-2020. ''The first order sheet has been initiated by Deputy Collector (M&M) on the above mentioned date of 05-03-2020.
(NB. The sub-numbering is from h) to j); and i) has been skipped for avoiding any numbering confusion) j) Assessm ent Order No.13-20/2019-20: The Additional Collector/Authority passed the Assessment Order bearing No. 1003/KPRA/ADC-M&W2020/719, dated 28-05-2020 under Section 40 read with Sections 68 and 76 of the Act. The background facts were elaborated as mentioned in the intimation letter (s), SCN, and reply (s) of the respondent had been reproduced. The allegation- wise findings were/are as under: i. Inadmissible credit notes claimed/ adjusted against output tax liability: a. The M/S SSI claimed tax credit on account of credit notes bearing No.K700000853 and K700000854 for Rs.5,996,120/- and Rs.2,168,784/- in context of tax period of October 2016. It reduced tax liability for a sum of Rs.8,164,904/-. The above mentioned credit notes were linked with invoices Nos.N724448 and N724105; but the office found that these invoices were declared in sales tax returns of July and May 2016, at the rate of 15% amounting to Rs.6,786,036/- and Rs.2,517,553/-. The M/S SSI's claimed withholding tax on such sales tax invoices was self-admission that withholding agent had properly acknowledged the invoices. So the provisions of sections 19, 27, 34 and 52 of the Act were violated and the principal amount of Rs.8,164,904/- along with penalty and default surcharge were due against the respondent. b. The respondent, claimed tax credit by issuing credit notes bearing No.K7780, 107973 and CN- N727478 for tax of Rs.79,496/-, Rs.1,218,795/- and Rs.465,627/- respectively "....the registered person [M/S SSI was found justified for claiming tax credit on account of issuance of credit notes bearing No. K7973 and CN-727478 amounting to a sum of Rs.1,684,422/-. Hence no adverse action is to be initiated to that extent." c. The claim on the basis of credit note No. K7780 was not found justified as it was duplicated for a subsequent tax credit. d. The respondent violated the provision of sections 19, 27, 34 and 52 of the Act and the principal amount of Rs.79,496/- along with penalty and default surcharge were declared recoverable. ii. Tax Credit Claimed on Account of Tax Withheld by Service Recipient: The respondent was confronted with the tax liability of Rs.1,972,704/-. "in this regard relevant documents were provided and found justified to the extent of Rs.1,753,742/- only..." in context of invoice No.N721995 amounting to Rs.218,962/- the respondent failed.
The respondent was found guilty of violation of provisions of sections 19, 27, 34 and 52 of the Act.
The principal amount of Rs.218,962/- along with penalty and default surcharge were declared as recoverable. iii. Non-paym ent of the Due Tax/ Undeclared Sales Tax invoices: a. Services provided to M/S MOL Pakistan: The respondent provided taxable services to M/S MOL Pakistan creating tax liability for the respondent in context of 4/5th of the total amounting to Rs.3,196,415/-. Despite repeated opportunities the same was not justified. Resultantly provisions of sections 19, 26, 27, 34 and 52 of the Act were violated. The principal amount of Rs.3,196,415/- along with penalty and default surcharge were declared recoverable. b. Services provided to M/S Pakistan Petroleum Limited: The background was narrated and it was concluded that respondent was/is liable for depositing remaining tax of Rs.650,434/-, but he failed. The provisions of sections 19, 26, 27, 34, 52 and 30 (of the Act) read with clause 8 of the Regulation 2015 were violated. So the principal amount of Rs.650,434/, along with penalty and default surcharge were declared recoverable.
The overall conclusion of the Assessing Officer was that the provisions of sections 19, 26, 27, 34,52 and 30 of the Act, read with clause 8 of the Regulation, 2015.were violated. The sum of Rs. was assessed under section 40 of the Act. The powers conferred on the officer as per section 40 read with sections 68 and 76 of the Act was invoked; and the recovery of principal amount along with penalty under section 64(4) and default surcharge under section 65 (to be calculated at the time of payment) were directed. k) Aggrieved of the Assessm ent Order M/S SSI filed first appeal in the Court of Learned Collector (Appeals).
I) Appeal Before the Collector (Appeals) Contents: The M/S SSI stated that the authority had erred in imposing penalty to the extent of Rs.615,511/- and default surcharge without considering that the element of mens rea was missing. The authority passed the order without taking into consideration the factum of busyness of the M/S SSI in collecting the relevant information; the Covid-19 pandemic was a hurdle to the M/s SSI. It was prayed that the assessment order be declared annulled along with any other relief. m) Comments of the KPRA in the Court of Learned Collector (Appeals): The M/S SSI was extended several opportunities but failed. "Failure to often proper explanation in itself contemplates towards mens rea." Even before the Covid-19 the M/S SSI were provided several opportunities but in vain.
The authority prayed for dismissal-of appeal. n) Decision of the Collector (Appeals): The learned Collector (Appeals) decided that imposition of penalty and default surcharge was not according to law because the element of mens rea was lacking. Similarly criminal intention was missing. The appeal of M/S SSI was partially accepted to the extent of setting aside penalty and default surcharge while the M/S SSI declared at the very outset (in the court of learned Collector-Appeals) that principal amount was deposited; the authority admitted the same.
4. Aggrieved of the order and judgment passed by the Collector (Appeals) the KPRA/Additional Collector, Headquarters/ Authority filed the subjudice appeal/second appeal.
5. Appeal was scrutinized; and admitted after preliminary arguments.
6. Second Appeal before the Appellate Tribunal: The KPRA stated in the grounds, after narrating the background facts, the M/S SSI deliberately violated the law by defying his legal obligations. The M/S SSI brought no evidence for establishing his innocence context of criminal intention. Penalty and default surcharge were/are consequential and mandatory reliefs. The admission and resultant depositing the principal amount transpired the intention of M/S SSI.
7. It was replied by the M/s SSI through his written para-wise comments.
8. Para-wise Comments of M/S SSI before this Tribunal: The M/S SSI stated that a tax almost of Rs.300 million was paid from 2014 to 2018 (relevant documents not annexed). The amount (principal amount of tax) was paid voluntary and the same was admitted by the authority. M/S SSI got voluntary registration and was/ is a regular filer. The payment of principal amount did not reflect on the negative intention of M/S SSI.
9. Arguments by Appellant/KPRA: He repeated the grounds of his appeal. Requested for acceptance.
10. Arguments or the M/S SSI: The M/S SSI mainly repeated his stance taken in the comments and added that appeal be dismissed.
11. Record of the appeal, including the relevant files of the courts of Additional Collector KPRA and Collector (Appeals), had thoroughly been pursued.
12. The subjudice appeal has two points for determination the levy of default surcharge and the imposition of penalty. The cross-cutting concept of distinction between the default surcharge and penalty would also be discussed under both the points of default surcharge and penalty; it may be stated at the very outset that one (default surcharge/penalty) does not prejudice the other.
Moreover, the nature, process, procedure, repercussion of both is different from each other. The points for determination are: a) Whether the Authority rightly added default surcharge to the principal amount and similarly the learned Additional Collector declared the same (default surcharge) as not maintainable in the purview of facts and circumstances of the first appeal; moreover whether default surcharge is required to be added to the principal amount. b) Whether the Authority rightly imposed penalty on the M/S SSI and similarly the learned Additional Collector declared the same (penalty) as not maintainable in the purview of facts and circumstances of the first appeal; moreover whether penalty is required to be imposed. And what is the procedure.
13. Whether the Authority rightly added default surcharge to the principal amount and similarly the learned Additional Collector declared the same (default surcharge) as not maintainable in the purview of facts and circumstances of the first appeal; moreover whether default surcharge is required to be added to the principal amount.
Default surcharge has been defined under subsection (15) of section 2 of the Act. But the substantial part of the process of levy of default surcharge has been elaborated in section 65 of the Act. Under this section (S. 65) the calculation of rate, period to be taken into consideration and the exclusion of penalty from default surcharge has been elaborated. The rate of default surcharge shows that it is directly linked with delay in payment of due tax coupled with inter-bank rate.
The Black's Law Dictionary defines default as the omission or failure to perform a legal or contractual duty especially the failure to pay a debt when due. Similarly surcharge is an additional tax or charge.
The concept of default surcharge may be considered as equivalent to interest because: i. In the relevant sales tax law of the Province of Khyber Pakhtunkhwa there is no provision about the imposition of interest. ii. Default surcharge is linked with delay and interest rate i.e. inter-bank rate. If there is no delay no default surcharge can be imposed ; similarly the interbank rate is determinative of the amount of default surcharge iii. The default surcharge has been treated by other /foreign jurisdictions in the fashion of interest.
To clarify guidance may be taken from Subsection (1A) of Section 201 of the Finance Act of 1996 (of India), wherein it has been stated that if any taxpayer (person, principle officer or company) does not deduct the whole or any pan of the tax or after deducting fails to pay the tax as required under the law, he shall be liable to pay simple interest; along with tax, at one percent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Moreover, the amount of unpaid tax together with the amount of simple interest thereon shall be a charge upon all the assets of the taxpayer.
The judgment of Supreme Court of India in the ease titled as "Commissioner of Income Tax, New Delhi v. M/S Eli Lilly and Company (India) Private Limited" in Civil Appeal No.5114/2007, in fact 104 appeals were clubbed together, announced on 25-03-2009 is relevant, wherein it has been held that the interest under section 201(IA), referred supra, is compensatory measure for withholding [withholding used in a sense of retaining the tax while the legal requirement was is to deposit the same in the treasury of the Government] the tax which ought to have gone to the exchequer. The levy of interest is mandatory ... A bare reading of Section 201(1) shows that interest under Section 201(IA) read with Section 201(1) can only be levied when a person is declared as an assessee-in- default. For ready reference Section 201(1) is quoted below [Subsection (IA) of Section 201 of the Finance Act of 1996 (of India) already referred above):
201. (1) Where any person, including the principal officer of a company,(a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in subsection (IA) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that no penalty shall be charged under Section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.
The parameters for computation of interest have also been elucidated by mentioning the three elements. One is the quantum on which interest has to be levied. Second is the rate at which interest has to be charged. Third is the period for which interest has to be charged.
So the amount of tax along with interest is independent of any other charge, default or proceedings, particularly penalty has different perspective. As already stated the concept of interest of foreign jurisdiction is tantamount to concept to the default surcharge in the jurisdiction of Khyber Pakhtunkhwa.
In the Assessm ent Order as well as in the judgment of learned Collector (Appeals), 'default surcharge and penalty' have been treated as joint concept. The Assessing Officer has imposed both while the learned Collector (Appeals) has set aside the same. In light of the above findings the default surcharge is required to be paid for retaining the tax for the period (the time when it was due till actual payment) inter alia it covers the devaluation of the amount which should have reached the exchequer in due time; it has no nexus with fraud or criminal liability of the taxpayer and as such mens rea is not required. So in context of default surcharge the appeal is accepted.
14. Whether the Authority rightly imposed penalty on the M/S SSI and similarly the learned Additional Collector declared the same (penalty) as not maintainable in the purview of facts and circumstances of the first appeal; moreover whether penalty is required to be imposed. And what is the procedure. i. Penalties, to be more specific 'offences and penalties, have been defined in Section 64 of the Act. The section lists various offences and prescribes the relevant penalties. The penalties involve the imprisonment, penalty and fine (penalty and fine in term of money). The M/S SSI was noticed through various letters in context of provisions of various sections of the Act, some of which (provisions of sections) also entail offences as listed in Section 64 of the Act.
Before further discussion on this aspect, for the purpose of clarity the relevant regime of foreign jurisdiction. is taken into consideration. In the United States, tax evasion constitutes a crime that may give rise to substantial monetary penalties, imprisonment, or both. Section 7201(sic) of the Internal Revenue Code reads, Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition, to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution." (The Reference /Source: https://www.law.cornelled u/wex/tax - _evasion)
The tax evasion or tax fraud etcetera is offence(s) and penalty (ies) is imposed, under the Khyber Pakhtunkhwa sales tax law; for criminal proceedings two aspects:,(a) ingredients of offence and
(b) procedure are essentially considered. a) The presence of ingredients of offence entailing penalty (also imprisonment, but not relevant with the subjudice appeal), and b) Procedure for imposing penalty, provided in the Act. a. Ingredients: It is a settled law that the imposition of penalty is in the ambit of criminal liability governed by the Latin Principle, "actus reus non facit reum nisi mens sit rea". It means "the act is not culpable unless the mind is guilty:" It is clear that for offence and resultant imposition of penalty the two essential ingredients are actus reus and mess rea.
Actus reus: The actus reus is the criminal act defined per law to be criminal. Ordinarily the criminal act is proved to be there that is in existence: but 'who' and 'to what extent' that person/accused is responsible require proof. It is pertinent to mention that establishing the charge under the criminal law is based on "Principle of proof beyond reasonable doubt.
Miens rea: It denotes a criminal intent. It is a Latin word and the literal translation is "guilty mind".
According to Black's Law Dictionary, the condition or capacity of a person's mind; loosely, a person's reasons or motives for committing an act, especially a criminal act. According to Staples v. United States, 511 US 600 (1994), mens rea refers to the state of mind statutorily required in order to convict a particular defendant of a particular crime. Establishing the mens rea of an offender is usually necessary to prove guilt in a criminal trial. The prosecution typically must prove beyond reasonable doubt that the defendant committed the offense with a culpable state of mind. Justice Holmes famously illustrated the concept of intent when he said "even a dog knows the difference between being stumbled over and being kicked."
The mens rea requirement is premised upon the idea that one must possess a guilty state of mind and be aware of his or her misconduct; however, a defendant need not know that their conduct is illegal to be guilty of a crime. Rather, the defendant must be conscious of the "facts, that make his conduct fit into the definition of the offence."
Moreover, even if a statute refrains from mentioning a mental state, courts will usually require that the legislature still provides that the defendant possessed a guilty state of mind during the commission of the crime. For example, the Supreme Court of the United States instructed that federal criminal statutes without a requisite mental state "should be read to include only that areas rea which is necessary to separate "wrongful from innocent conduct.'"
Guilty mind (of the offenders) are usually organized hierarchically by the offender's state of culpability. Generally, the culpability of an actor's mental state corresponds to the seriousness of the crime. Higher levels of culpability or blameworthiness typically correlate with more severe liability, and harsher sentencing. Historically, mental states were categorized into crimes which required "general intent" and "specific intent. However, due to the confusion that ensued over how to describe "intent," most jurisdictions now use the four-tiered hierarchical classification: i. acting purposely - the defendant had an underlying conscious object to act; ii. acting knowingly - the defendant is practically certain the conduct will cause a particular result; iii. acting recklessly - the defendant consciously disregarded a substantial and unjustified risk; iv. Jacting negligently - the defendant was not aware of the risk, but should have been aware of the risk.
Thus, a crime committed purposefully would carry a more severe punishment than if the offender acted knowingly, recklessly, or negligently.
In some jurisdictions the classification has been expanding to include a fifth state of mind: "strict liability." Strict liability crimes do not require a guilty state of mind. The mere fact that a defendant committed the crime is sufficient to satisfy any inquiry into the defendant's menial state. This lack of a guilty mind would act as the fifth, and least blameworthy, of the possible mental states. For a strict liability crime, it is sufficient for the prosecution to prove that the defendant committed the wrongful act regardless of the defendant's mental state. Therefore, a guilty state of mind is irrelevant to a strict liability offense. Examples of strict liability offenses in criminal law often include possession and statutory rape. In some jurisdictions economic or money related offences are also included; but in most of the jurisdiction, including Pakistan, mens rea is considered as an essential requirement of such offences. Many commentators criticize convicting defendants under strict liability because of the lack of mens rea. In other words mens rea is sine qua non for tax offences and the degree/category of mens rea determines the quantum of penalty.
The Supreme Court of India held in Gujarat Travancore Agency v. CIT MANU/SC/0332/1989 (1989)
77 CTR (SC) 174: (1989) 3 SCC 52, in context, of Section 276C of the IT Act as under: There can be no dispute that having regard to the provisions of section 276C, which speaks of willful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established.
The expression "willful" has been explained as follows in P. Ramanatha Aiyar's The Law Lexicon. Second Edition, 1977: "The question whether an act or omission is willful arises oftener in criminal cases than in civil causes; since in the former the general principle requiring the presence of mens rea excludes from criminality acts done accidentally and unintentionally and even acts done intentionally under honest but mistaken belief in the existence of facts which, if true, would have made the acts lawful or excusable,"
Therefore, in any prosecution, the element of mens rea i.e willful evasion of tax, is quite important which needs to be established by the prosecution. In the absence of mens rea, the case would not sustain.
In the subjudice appeal the presence of mens rea has not been asserted in unequivocal terms and probably the authority was not intending to proceed in that manner because no intention (of the KPRA) was communicated to M/S SSI that the information sort (from M/s SSI) through letter No. 12179 (followed by others) to be used in criminal proceedings. The criminal charge or initiation of criminal proceedings through report under the Khyber Pakhtunkhwa Tax Law requires that the charge should be specific, particularly in context of mens rea; if part of the due tax can be justifiable, per justification of the taxpayer, then the rest--the unjustifiable portion--may be taken as a mistake without the presence of mens rea, stricto sensu. In the subjudice appeal, consequent upon the reply of M/S SSI, the authority dropped some of the amount on the basis of being justified by the M/S SSI, as quoted under: "... the registered person [MIS SSI] was found justified for claiming tax credit on account of issuance of credit notes bearing No. K7973 and CN-N727478 amounting to a sum of Rs.1,684,422/-. Hence no adverse action is to be initiated to that extent."(3 (j) (i) (b.)" supra) "in this regard relevant documents were provided and found justified to the extent of Rs.1,753,7421. only..." (3 (j) (ii.) supra)
It transpires that the specific element of mens rea for particular offence was not observed in strict sense by the authority. When some part of the charge of tax was found justifiable then mistake or miscalculation on the part of MIS SSI cannot be ruled out; thus allegation of offences is out of place.
The Assessm ent Order has not brought home the presence of element of mens rea. The order and judgment of Collector (Appeals) has declared that the same (penalty) cannot be maintained, as criminal intention is essential ingredient for applying penal provisions;10 and penalty was set aside for lack of mens rea. At this Tribunal what to say of confidence inspired evidence in support of element of mens rea, no proof was provided. b. Procedure: i. It was argued that the criminal procedure and role of the Special Judge and/ or Magistrate are for the purpose of arrest within meaning of Section 70, and similarly for searches as per Section 74 of the Act. But there is no provision to limit the criminal prosecution to arrest or search rather all offences and penalties are within the ambit criminal proceedings. It is important to mention that even in the US taxation system tax evasion is treated as an offense and prosecution is conducted according to the criminal procedure. ii. It was further argued that Section 40 of the Act states about imposing penalty by the officer of the authority; but the same is conditioned with the legal requirement that penalty to be imposed according to Section 64 of the Act. As already stated that Section 64 of the Act deals with offences and penalties and Special Judge is having jurisdiction to take cognizance of the same, definitely on the report of officer of the competent officer of the authority. iii. In the subjudice appeal the authority 'initially issued a letter/ notice bearing No.12179 for acquiring certain information/ documents from the M/S SSI. It was followed by SCN No.5842, letter No. 12639, letter about partial findings bearing Nos.181- 183 and finally SCN No.241. The procedure is appropriate in context of ascertaining the tax liability and realizing the same as a civil liability; but the procedure for criminal liability or even initiating the criminal process requires compliance with the Code of Criminal Procedure, 1898 because Section 59 of the Act makes applicable the Code for all the proceedings in the court of Special Judge, so initiation should also be in the same manner otherwise a different proceedings cannot be precasted in the court of Special Judge conducting the criminal proceedings within meaning of the Code. To collect the evidence (in the subjudice appeal the nomenclature, of information has been used, but for criminal proceedings that is in essence a part of evidence) the defendant / accused. / Messieurs SSI must be informed that the evidence/ information (provided by the defendant /accused / Messieurs SST) to be used in criminal proceedings against him (defendant accused / Messieurs SSI).
And then the M/S SSI is having the legal right to withhold/ refuse providing self-incriminating evidence, per law. On the other hand the authority/ Collector or Assistant Collector/ prosecutor is legally required to collect incriminating evidence (against the accused) of his own. In the subjudice appeal the accused has not been informed in context of this legal requirement. iv. The basic law about the sales tax is Khyber Pakhtunkhwa Finance Act, 2013 coupled with relevant Notifications, Regulations and Circulars etcetera. Under this law the sales tax has two main streams or aspects: (i) the civil and (ii) the criminal. The civil process. procedure and hierarchy are distinguishable from the criminal. It is pertinent to mention that the point of initiation of both civil and criminal proceedings is the same that is the Authority/ KPRA. According to the overall scheme of law the authority can issue a SCN containing the elements of criminal complaint in format of a report--within meaning of Subsection (a) of Section 58 of the Act; the criminal complaint contents should indicate that penalty to be imposed for the offense(s) as per the law. It would be more appropriate if a separate criminal Report/ complaint is issued. v. The civil tax liability process terminates with Assessment Order at the level of authority. Needless to say that in case the taxpayer comply with the SCN in letter and spirit then the process abate at that point, because the civil liability remains to that extent. When an Assessment Order is passed and taxpayer is aggrieved of the same he may file an appeal in the court of learned Collector (Appeals), followed by the one at Appellate Tribunal. The order and judgment of the Appellate Tribunal can be impugned in Reference at august High Court. vi. The criminal liability has mainly been mentioned in Section 64 of the Act wherein offences and relevant penalties have been provided. Section 76 of the Act empowers the relevant officer of the authority to initiate the criminal proceedings. vii. The authority initiates the criminal proceedings within meaning of Section 76 of the Act and then for cognizance of the offence within meaning of Section 58 particularly Subsection (1) (a) of Section 58 of the Act, the same (allegations) is submitted before the Special Judge in a form of report in writing by an officer of the authority not below the rank of Assistant Collector but with the approval of the Collector or by an officer especially authorized in this behalf by the authority. The criminal proceedings are distinct from civil as Section 58 of the Act makes applicable the Code of Criminal Proceedings, 1898; the very next section provides for exclusive jurisdiction of Special Judge --mentioned in Section 57 of the Act. Similarly the authority has to conduct the prosecution through an officer not below the rank of Assistant Collector as envisaged in Section 62 of the Act. In the same sequence the offences and penalties have been tabulated under Section 64 of the Act.
Appeal, against the order of the Special Judge, lies to the august High Court within meaning of Section 63 of the Act. Guidance may be taken from the US system where proof of the crime requires first proving the attendant circumstance that an unpaid tax liability exists. Second the prosecution must prove some affirmative act by the defendant to evade or attempt to evade a tax.
Third, prosecutors must show that the defendant possessed the specific intent to evade a known legal duty to pay. To convict, the jury (in American system; but in our system the court; and under the Act the Special Judge) must find the defendant guilty of each of these elements beyond a reasonable doubt. viii. In the subjudice appeal bypassing the whole portion governing the criminal proceedings of taxation tantamount to making redundant that portion. The principle of surplusage requires that no portion or even a provision of a statute to be treated as surplus or redundant. In was held in Muhammadi Steamship Co. Ltd. v. The, Commissioner of Income-Tax (Central) Karachi (1966)
14 TAX 281 (S.C. Pak.), that "it is a well established rule of interpretation of statutes that no words in a statute are to be treated as surplusage or redundant". The august Supreme Court elaborated in Messrs Hirjina & Co. (Pakistan) Ltd, Karachi v. Commissioner of Sales' Tax Central, Karachi (1971) 23 TAX 230 (S.C. Pak.), the time tested principle of interpreting taxing enactments, (only relevant portion is reproduced) as: "while interpreting the taxing statute the Courts must look to the words of the statute and interpret it in the light of what is clearly expressed and not imply anything which is not expressed and provisions to support assumed deficiencies."
If the portion related to the criminal proceedings and the Special Judge is ignored that would mean to declare it surplus or redundant, which is against the settled principle/ canon of surplusage. According to the surplusage canon, --Every word! and every provision is to be given effect. Verba cum effectu sunt accipienda (words are to be taken as having an effect). According to "The Interpretation of Legal Texts" by Antonin Scalia and Bryan A. Garner, no word should be ignored. None should needlessly be given an interpretation that causes it to duplicate another provision or to have no consequence. It further holds that it is no more the courts' function to revise by subtraction than by addition. A provision that seems to the court unjust or unfortunate (creating the so-called ca-sus male inclusus) must nonetheless be given effect. As Chief Justice John Marshal explained, it would be dangerous in the extreme, to infer from extrinsic circumstances, that a case for which the y words of an instrument expressly provide, shall be exempted from its operation. Or in the words of Thomas M. Cooley, the courts must...lean in favor of a construction which will render every word operative, rather than one which may make some idle and nugatory.
This is true not just of legal texts but of all sensible writing. Whenever a reading arbitrarily ignores linguistic components or inadequately accounts for them, the reading may be presumed improbable. In the below quoted example (of Fortec Constructors v. United States) even the clause of a contract was not allowed be taken as redundant.
For example, in Fortec Constructors v. United States, the quality control paragraph of a construction contract with the Army read as follows: All work...shall be subject to inspection and test by the government at all reasonable times and at all places prior to acceptance. Any such inspection and test is for the sole benefit of the government and shall not relieve the Contractor of the responsibility of providing quality control measures to assure that the work strictly compiles with the contract requirements. No inspection or test by the Government shall be construed as constituting or implying acceptance. When the Army demanded that the contractor demolish and reconstruct non-compliant work, the contractor protested that the on-site Army inspector had failed to notify Fortec of the defects and that this silence constituted an acceptance of the original work. The court correctly rejected this argument. To agree with Fortec's contention would render clause 10 Meaningless. This court must be guided by the well accepted and basic principle that an interpretation that gives a reasonable meaning to all parts of the contract will be preferred to one that leaves portions of the contract meaningless. Therefore, Fortec's contention is rejected for being inconsistent with contract clause 10. The Corps quality assurance inspections did not constitute an acceptance of the work. (Fortec Constructors v. United States, 8 Cl. Ct. 490, 490-91 (Fed. Cl. 1985), No.547-82C, United State Court of Claims; Decided on July 15, 1985). ix. It is clear that in context of penalty the jurisdiction lies with the Special Judge as defined in Section 57 of the Act and the authority has to submit a written report for his cognizance, but the authority cannot pass an order of its own. There is no option with the Authority/KPRA to conclude the criminal proceedings--impose even a penalty--without taking into consideration the functions of the Special Judge and the application of the Code of Criminal Procedure. Similarly offence of the taxpayer cannot be treated either under the civil law or in the mixed manner particularly when the mechanism (for criminal proceedings) has been provided. For clarification the role of the authority in criminal proceedings is that of prosecution in the court of Special Judge; the appeal lies to the august High Court. So neither this Tribunal nor the lower fora has the jurisdiction to proceed with the criminal aspect of taxation: at the. cost of repetition authority has only to initiate and prosecute.
It is pertinent to mention that the above discussion about the penalty and/ or offence for guidance and appreciation of the relevant facts and law: otherwise this Tribunal is coram non judice (about the penalty and/ or offence).
15. The appeal is hereby accepted in context of imposing/realizing the default surcharge as per law and procedures; but the appeal is considered as returned within meaning of Order X, Rule 7, read with Section 151 of the Code of Civil Procedure in context of imposition of penalty, keeping in view the holistic appreciation of the fact and circumstances of the appeal in light of the applicable law.
Resultantly the order (merged order, the order of the Authority get merged with Order of the learned Collector-Appeals) of learned Collector (Appeals) is modified in the above terms. Parties to bear their own cost. Requisitioned files/record be returned immediately. File of this court be consigned to the Record Room after necessary compilation and completion. Copies of order/judgment be placed on' file of learned Collector (Appeals) and Additional Collector. KPRA for their communication; similarly each appellant and respondent (s) be provided with a copy of judgment through registered post: also be sent via email/whatsapp etcetera. Copies are provided, in light of requirement of subsection (5) of Section 85 of the Act.