MR. RIZWAN AHMAD URFI (ACCOUNTANT MEMBER). (1). Titled appeal has been filed at instance of the registered person/appellant, calling in question the impugned order-in-appeal No. 140/2021 dated 27-08-2021 passed by learned CIR(Appeals-I), Faisalabad.
2. Briefly stated, the relevant facts are that Inland Revenue Officer, on selection of audit by the FBR, under section 72B of the Act, has conducted audit of appellant's sales tax records for the financial year commencing from 1st July, 2015 ending on 30th June, 2016 which resulted into certain discrepancies on basis of which a show cause notice dated 09-11-2020 was issued as to why an amount of sales tax worth Rs. 37,074,985/- may not be recovered under section 11(2) of the Act and as to penalty under section 33 ibid may not be imposed in violation of sections 2(9), 2(44), 2(46), 3, 3(1A), 6, 7, 8(1)(a)(b)(c)(f)(h), 22, 23, 26 and 73 of the Act alongwith default surcharge under section 34(1) ibid. The contravention proceedings initiated against the appellant culminated in passing an assessm ent order dated 15-02-2021 whereby the alleged demand was adjudged against the appellant. Being discontented and aggrieved by the said order, the appellant went in appeal before the learned CIR(A) and assailed the treatment meted out at assessment stage but the learned CIR(A) vide impugned order dated 27-08-2021 dismissed the appeal and upheld recovery of sales tax to the extent of Rs. 9,448,841/- and remanded back the issue of suppression of sales on the basis of production capacity hence this second appeal filed before this Appellate Tribunal wherein the appellant has challenged certain audit observations which are reproduced hereunder:--
(i) Penalty for non-production of record (Rs. 65,000/-).
(ii) Violation of section 8 of the Act. (Rs. 1,588,903/-).
(iii) Suppression of sales due to difference in stocks (Rs. 849,284/-).
(iv) Non-payment of sales tax on disposal of wastage (Rs. 457,389/-).
(v) Disposal of fixed assets. (Rs. 418,000/-).
(vi) Non-payment of sales tax withheld against advances to suppliers (Rs. 156,757/-).
(vii) Suppression of sales on the basis of production capacity (Rs. 26,225,639/-).
(viii) Non-compliance of section 73 of the Act (Rs. 5,793,508/-).
(ix) Penalty for non-filing of Annex-J (Rs. 120;000/-).
3. At the very outset of his arguments, learned counsel raised legal objection assailing very basis of instant case that the discrepancies found in audit were neither communicated/ confronted to the appellant before finalizing the audit nor even the audit report was issued to him. Learned counsel emphatically argued that the appellant has to be afforded a reasonable and adequate opportunity of going through the audit report and to point out flaws, if any, in such report with the object of rebutting the basis or authenticity of such report and in its absence; whole audit exercise carried out by the department is illegal and ab initio void.
4. While arguing on merits of the case, learned counsel appearing on behalf of the registered person has termed the actions of both the authorities below to be illegal, void, arbitrary and contrary to the facts of the case. Learned counsel contended that the appellant has enclosed all the relevant record/documents with the appeal booklet inter alia including balance sheet, profit & loss account statement of comprehensive income, cash flow statement, statement of changes in equity for the tax year ended on 30th June, 2016, letter dated 15-04-2019 showing production of sales tax record, list of machinery, party wise ledger, detail of scrape sales, copies sales tax invoices, cheques and bank statements, copy of form of application for registration of motor vehicles, etc but the same were deliberately ignored and were not discussed while passing the impugned appellate order which rendered whole exercise of adjudication illegal and ab initio void.
In support of his contention, he placed reliance on a judgment reported as (2015 PTD (Trib.) 1363).
5. Initiating the arguments, learned counsel asserted that all the requisite information and records was provided to the Audit Division on 15-04-2019 which remained unattended more than one year and not a single letter for production of record was issued by the concerned authority therefore, penalty imposed against the appellant on the charge of non-production of sales tax record is illegal and unjustified. It was forcefully urged on behalf of appellant that the department has disallowed adjustment of input tax on purchase of compressor oil, generator oil and high speed diesel used for generation of electricity through diesel generators which was subsequently used for furtherance of taxable activities hence, input tax cannot be rejected against the goods used for the progress, promotion, advancement and enhancement of business activity. To strengthen his stance, reliance was placed on the judgments of the higher Courts reported as (PTCL 2007 CL 565), (PTCL 2006 CL 673) & (2005 PTD 2012). On next audit observation, learned counsel argued that stock of Rs. 34,666,032/-as declared in the Annex-F consists upon local purchases, imported goods and fixed assets whereas in the income tax return, only stock of raw materials has been mentioned.
Learned counsel further submitted that the appellant has already made payment of sales tax worth Rs. 119,103/- alongwith further tax of Rs. 14,198/- against disposal of wastes of alleged items i.e. empty drums and bags in his monthly sales tax return for June-2019 therefore, nothing remains payable on this account and no more recovery of Government dues--in terms of impugned adjudication order is outstanding against the appellant hence, the instant observation may kindly be vacated. Learned AR on account of disposal of operating fixed assets contested that the appellant has sold vehicle (Car) No. LEC-888 during the financial year 2015-16 and received Rs.
2,200,000/- as sale proceeds through banking channel and no input tax was claimed/adjusted on purchase of such goods therefore, charging of sales tax on its subsequent disposal is not just and fair in terms of Serial No. 6 of Table-2 given under the Sixth Scheduled annexed with the Sales tax Act, 1990. Reliance in this regard was placed on (PTCL 2001 CL 627). Learned AR against audit observation No. 6 has stated that the department has charged withholding sales tax @ 1/5th to appellant under the Sales Tax Special Procedure (Withholding) Rules, 2007 read with Notification No. SRO 897(I)/2013 dated 14-10-2013 however, the said SRO was declared "to be without lawful authority and of no legal effect" by the Hon'ble High Court, Lahore vide W.P. No. 28149 of 2014 dated 02-06-2017 in ref: "M/s. Qarshi Industries (Pvt) Limited vs. The Federation of Pakistan and others".
While arguing on the audit observation of suppression of sales on the basis of production capacity, it was view point of learned counsel that under section 3(1B) of the Sales Tax Act, 1990, the FBR could by a notification duly published in the Official Gazette, in lieu of levying and collecting sales tax under section 3(1) of the Act, levy and collect sales tax on the production capacity of plants, machinery or installation producing on manufacturing such goods but no such notification was issued in case of the present appellant therefore, demand of sales tax adjudged merely on the basis of "production capacity" is illegal and without lawful authority. To strengthen his contention, learned counsel placed reliance on the judgments reported as (2013 PTD (Trib.) 843), (PTCL 2016 CL 701), (PLD 2005 SC 605) & (PLD 2011 SC 347). Learned AR on the issue of non-compliance of section 73 of the Act has contended that all the payments 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. In support of his contention, he produced copies of Party wise ledger, cheques and bank statements. On the last issue, it was the contention of the learned AR before us that the department has imposed a penalty of Rs. 120,000/- on account of non-filing of Annex-J whereas under section 33(10) of the Act, any person who fails to furnish the information required by the Board through a notification issued under sub-section (5) of section 26, such person shall pay a lump sum penalty of rupees ten thousand instead of a separate penalty against each tax period.
On the strength of these assertions, learned counsel seeks vacation of the impugned orders passed by the authorities below.
6. On the other hand, the learned DR appearing on behalf of department opposed the contentions of the learned AR and supported the impugned orders of the authorities below.
7. We have carefully considered written as well as verbal arguments of both the rival parties. Legal issue is taken at the first, assailing that neither audit observations were issued and confronted to the appellant nor any audit report was given to him. In the present case, the appellant had been selected for audit and the department had every right to conduct such an exercise, within the ambit of the law. It is observed that no audit report was issued to the appellant containing audit observations and that no reasonable opportunity of a hearing was provided. The department without confronting the appellant with audit observations and without issuing any audit report, served the show cause notice after expiry of more than one and a half year, rendering their whole exercise of audit illegal and unlawful under section 25 of the Act read with sub-rule (4) & (5) of Rule 44A of the Sales Tax Rules, 2006. The discrepancies found in the audit were neither communicated and confronted to the appellant before finalizing the audit nor the audit report was issued. It is a statutory requirement that an audit report is required to be issued and thereafter the taxpayer is to be afforded an opportunity of being heard. Issuance of "Audit Report" is sine qua non for completion of audit proceedings under the provisions of the Sales Tax Act, 1990 and in its absence; whole audit exercise carried out by the department is illegal. It has also been seen that in the adjudication proceedings, the adjudicating authority completely ignored the binding instructions and decisions of the higher appellate fora and has passed the assessment order on supposition/assumption. The Hon'ble High Court, Lahore in case of "M/s. Nestle Pakistan Ltd vs. The Federal Board of Revenue, etc." reported as (PTCL 2017 CL. 412) was relied upon which was subsequently upheld by the Hon'ble Division Bench of Lahore High Court in ICA No. 338 of 2017 through an order dated 18-07-2017. The ratio decidendi in the said judgment is reproduced as under:-- "18. Role of audit officer is to dig out the instances of tax evasion and non-compliance to the statutory provisions causing tax evasion. His role finishes on issuance of Audit Report, after seeking explanation, based on which further action is to be taken by an officer having quasi-judicial power of adjudication. The audit proceedings, being inquisitorial and administrative in nature are akin to function of prosecution in criminal cases, which finishes by preparation and submission of 'Challan'. Under the Federal Taxing Statutes, the unsatisfactory reply to the explanation sought by audit officer becomes an 'information' or 'definite information' based on which show cause notice is issued to initiate quasi-judicial proceedings. Taxpayer has option, either to accept confronted discrepancies/allegations and pay tax with concessionary penalty rates or to contest by filing reply to show cause notice. Thereafter, process of adjudication starts, which is to be followed by a speaking and reasoned order. Asking an audit officer to raise demand and making monthly collection through qualitative indicator is alien to the scope and concept of audit. Any plea bargain to drop audit proceedings, if certain percentage of extra tax is paid, is against the provisions, in Federal Taxing Statutes, dealing with audit. Selection for audit cannot and should not allowed to be used for raising revenue simpliciter without conducting any audit and preparation of Audit Report".
8. The above judgments were subsequently upheld by the Hon'ble Supreme Court of Pakistan in case of "The CIR vs. Allah Din Steel & Rolling Mills and others" reported (PTCL 2018 CL. 678) wherein it was laid down as under:-- "16. A perusal of the statutory landscape makes it clear that the provisions of sections 177 and 214 of the Ordinance; section 25 of the Act, 1990 and section 46 of the Act, 2005 provide a mechanism and roadmap which is required to be followed by the Taxation Officer/Auditor.- In terms of section 177 of the Ordinance, the Commissioner can call for the record or documents for conducting the audit of the tax affairs of a person, provided he furnishes reasons to do so. Such reasons must be communicated to the Taxpayer. He can also seek explanations from the Taxpayer on issues raised during the audit in terms of section 177 of the Ordinance. It is only if he is convinced that the explanation furnished by the Taxpayer is not satisfactory, he may proceed to amend the assessment under section 122 of the Ordinance, after giving the Taxpayer an opportunity to defend him. We are therefore of the view that the statutory framework together with the overarching umbrella of constitutional guarantees furnish adequate and sufficient safeguards to the Taxpayer where there is a possibility of overstepping by the Tax authorities."
9. Coming up to the merits of the case, the records provided by the appellant to the Audit Division on 15-04-2019 remained unattended more than one and a half year and not a single letter for any further specific record required for the audit purposes was issued by the concerned officer. The DCIR, on account of non-production of record call for audit has imposed a penalty of Rs. 65,000/- under section 33(9)(a), 33(9)(b) & 33(9)(c) of the Act, without any lawful authority as punitive action under section 33(9)(c) of the Act, is provided in the cases where record was requisitioned under section 25 of the Act and in violation thereof, the person not complying with its provisions was liable to be penalized but no such penalty is provided in case of non-compliance of provisions of section 72B of the Act hence, penalty imposed against the appellant is illegal and unjustified.
10. On the second issue of violation of section 8(1) of the Act, we are of the considered view that compressor oil, generator oil and high speed diesel procured by the appellant were wholly used to generate electricity through diesel generators which was subsequently used having direct nexus with the production of taxable goods. It is well settled proposition of law that once a registered person establish that the goods in question on which input tax has been paid were used or to be used "directly, indirectly or even remotely" for the purpose of 'taxable activity' or for the purpose of 'taxable supplies' made or to be made by that person, then the person becomes entitled to the deduction of the said input tax paid by the person for the said purpose from the output tax that is due from the person in respect of a particular tax period in terms of section 7 of the Act.
Accordingly, the appellant adjusted input tax paid on the alleged goods as much as the same were used for the purpose of making of taxable supplies. Under section 8(1)(b) of the Act; the Federal Government through a delegated authority had restricted & prohibited the claim of input tax adjustment by `notifiing items' which do not relate to taxable supplies however, the alleged goods have not been included in the list of negative items notified under Notification No. S.R.O.
490(I)/2004 dated 12th June, 2004 as amended vide Notification No. S.R.O. 450(I)/2013 dated 27th May, 2013 hence, input tax paid against purchase of compressor oil, generator oil and high speed diesel cannot be denied to the appellant.
11. Such denial of input tax credit not only defeats "the purpose" of the Act but it is also found contrary to the law already laid down by the Hon'ble Supreme Court of Pakistan in case of "Collector of Customs Sales Tax and Central Excise, etc vs. M/s. Sanghar Sugar Mills Ltd, Karachi" reported as (PTCL 2007 CL. 565) which undoubtedly makes it clear that the goods which are used for the progress, promotion, advancement of the business activity are part of a taxable supply. The relevant paragraph of the said judgment is reproduced hereunder:- "It is abundantly clear that the taxable supply has not been confined or limited to the one which is the product or the goods manufactured but also including those goods which involve in some way with the progress, promotion, advancement of business activity/taxable activity."
12. Further, the ratio decidendi by the Hon'ble Sindh High Court, Karachi in case of "M/s. Ghandhara Nissan Diesel Ltd. vs. Collector, Large Taxpayers Unit and 2 others" reported as (PTCL 2006 CL 673) is the most relevant in all fours to the case at instance of the registered person. The relevant extract of the said judgment is reproduced hereunder:- "If the word purpose is considered in ordinary plain meaning, it would appear that the intention of legislature, apparent from the language is that if any input tax is paid with the intention that the goods on which such input tax is paid shall be used in the end products or taxable supplies made or to be made, then the registered person shall be entitled to deduct the same from the output tax. It is nowhere provided that deduction of input tax on such goods only, shall be allowed which are the direct constituent and integral part of taxable goods produced, manufactured or supplied."
13. In similar situation and identical circumstances, Hon'ble High Court, Peshawar in a case of "Collector of Sales tax vs. M/s. Dhan Fibre Limited" reported as (2005 PTD 2012) has held as under:-- "The machinery spare parts and lubricants are used to facilitate the production/manufacturing of the end product, therefore, the appellant could claim input tax credit on the machinery spare parts and lubricants, even if they are not direct constituent and integral part of the Textile yarn/end product".
14. As far as, issue of suppression of sales due to difference in closing stocks as per financial accounts and sales tax return is concerned, we have found that the difference of Rs. 21,998,923/-as alleged in the impugned show cause notice is not materially correct due to the reasons that the stock position as declared in Annex-F consist of local purchases, imported goods and fixed assets whereas in the income tax return, only stock of raw materials have been mentioned therein. The charge of suppression of sales is not proved through any documentary corroborating evidence regarding clandestine removal of goods or receipts of money consideration in excess to that of shown in sales tax invoice and in turn sales tax returns hence, it remains unsubstantiated without which the whole exercise is nullity in the eyes of law therefore, liability created on this account is deleted accordingly.
15. With regard to next issue of non-payment of sales tax on disposal of wastage, we have noted that the appellant has already made payment of sales tax worth Rs. 119,103/- alongwith further tax of Rs. 14,198/- against disposal of wastes of alleged items i.e. empty drums and bags in his monthly sales tax return for June-2019. Nothing remains payable on this account and no more recovery in terms of impugned order is outstanding against the appellant as not a single item out of alleged waste have been disposed off without payment of sales tax. The sales tax has been paid at the fair market value of alleged goods and nothing has been supplied without payment of sales tax. The department has assigned a hypothetical sale rate and has assessed sales tax liability on presumptive and assumptive values. Nothing has been concealed and supplied without payment of sales tax.
16. As far as, next audit observation of disposal of fixed assets is concerned, we hold that the instant observation is baseless and unfounded because the appellant has sold vehicle (Car) No. LEC-888 during the financial year 2015-16 and received Rs. 2,200,000/- as sale proceeds through banking channel. No input lax was claimed/adjusted on purchase of such goods therefore, charging of sales tax on its subsequent disposal is not just and fair in terms of Serial No. 6 of Table-2 given under the Sixth Scheduled annexed with the Sales tax Act, 1990 resulting in double taxation which not permissible under law is deleted as held by the Appellate Tribunal, Lahore in case of M/s. Nestle Milk Pak Ltd reported as (PTCL 2001 CL 627).
17. With regard to issue of non-payment of sales tax withheld against advances to suppliers, we have found that the assessing officer has charged withholding sales tax @ 1/5th to appellant under the Sales Tax Special Procedure (Withholding) Rules, 2007 read with Notification No. SRO 897(I)/2013 dated 14-10-2013. However, the said SRO was declared "to be without lawful authority and of no legal effect" by the Hon'ble High Court, Lahore vide W.P. No. 28149 of 2014 dated 02-06-2017 in ref: "M/s. Qarshi Industries (Pvt) Limited vs. The Federation of Pakistan and others". Since Notification No. SRO 897(I)/2013 dated 14-10-2013 has already been declared unconstitutional by the Hon'ble High Court, Lahore therefore, there was no justification to charge and demand amount of withholding sales tax @ 1/5th from the appellant.
18. There is considerable merit in the contentions raised by the learned counsel of appellant regarding suppression of sales on the basis of production capacity. After carefully examining the relevant provisions of law, we feel no hesitation in holding that under section 3(1B) of the Sales Tax Act, 1990, the FBR could by a notification duly published in the Official Gazette, in lieu of levying and collecting sales tax under section 3(1) of the Act, levy and collect sales tax on the production capacity of plants, machinery or installation producing on manufacturing such goods but no such notification was issued in case of the present appellant therefore, demand of sales tax calculated merely on the basis of "production capacity" is illegal and without lawful authority. Reliance is placed on the judgments reported as (2013 PTD (Trib.) 843), (PTCL 2016 CL 701), (PLD 2005 SC 605) & (PLD 2011 SC 347).
19. Furthermore, demand of sales tax calculated on the basis of production capacity is presumptuous and imaginative in character which is not permissible under law. The production capacity and actual production are two different concepts. It is only in ideal condition that actual production is in accordance with the production capacity of any unit. The dispossession and actual transfer of goods by the manufacturer to the other party is a basic requirement to bring the goods within the charge. Unless, the department is in a position to establish that the assessee did more production and the same has been transferred to another party, sales tax cannot be charged. The estimate, however, strong it may be, unless is based upon some corroborating and solid evidences and reasons to believe cannot lead to creation of huge demand of sales tax. The departmental case is totally based upon hypothetical calculations without any proof which established beyond any shadow of doubt that impugned liability of sales tax is based on the figures and calculations, which are imaginary and presumptive hence, no tax could be levied on the basis of assumption and presumption. Under section 2(35) of Sales Tax Act, 1990, the yard stick to charge and levy sales tax is the sale constituting a taxable activity for a taxable supply. In order to create a charge of sales tax, two conditions must exist independently i.e. transaction of sale to constitute a taxable activity and taxable supply. If anyone is missing, the sales tax would not be leviable. The judgments of this Appellate Tribunal reported as (2010 PTD (Trib.) 1112), (PTCL 2014 CL 194), (PTCL 2016 CL 615), (2016 PTD (Trib.) 485) & (PTCL 2019 CL 152) are the most relevant in all fours to the case at instance of the registered person, therefore, the demand of sales tax against the appellant is deleted accordingly.
20. On issue of non-compliance of section 73 of the Act, there is no iota of doubt that in the instant case, all the payments to the alleged suppliers have been made through banking channel from the business bank account of the appellant as provided 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 adjusted thereon cannot be recovered and hence, recovery of sales tax created against the appellant is vacated.
21. It is further held that the department has imposed a penalty of Rs. 120,000/- on account of non- filing of Annex-J whereas under section 33(10) of the Act that any person who fails to furnish the information required by the Board through a notification issued under sub-section (5) of section 26, such person shall pay a lump sum penalty of rupees ten thousand instead of a separate penalty against the each tax period. This being so, penalty on account of non-filing of Annex-J is reduced to the extent of rupees ten thousand. For the ease of reference, provisions of section 33(10) of the Act are reproduced hereunder:-- Offences PenaltiesSection of the Act to which offence has reference 1 2 3 Any person who fails to furnish the information required by the Board through a notification issued under sub-section (5) of section 26.Such person shall pay a penalty of ten thousand rupees.26
22. In view of what has been stated and particularly in the light of legal propositions discussed above, the titled appeal is accepted and impugned show cause notice and consequent orders of both the authorities below are hereby set aside.
23. The instant appeal filed by the registered person is disposed of in the manners as indicated above.