ZAHID SIKANDAR, JUDICIAL MEMBER. This is an appeal preferred by the registered person against order No. 19 dated 31.08.2023 passed by Commissioner Inland Revenue (Appeals-I), Lahore whereby the CIR(A) upheld the disallowance of input tax claimed in respect of UFG (Un-accounted for Gas) over and above the permissible limit as determined by the OGRA and input tax claimed under section 8 of STA, 1990.
FACTS/BACKGROUND OF THE CASE:
2. M/s Sui Northern Gas Pipe Lines Ltd. (herein after referred as `the registered person' is engaged in transmission and distribution of Natural Gas to domestic, commercial and industrial consumers.
Upon scrutiny of sales tax returns as well as Annual Audited Accounts for tax year 2019 of the appellant for tax periods from July 2018 to June 2019 certain following discrepancies were observed:
(i) Inadmissible Input Tax claimed in violation of Section 8 of STA.
(ii) Inadmissible adjustment of Input Tax in respect of UFG (Un-accounted for Gas) over and above the permissible limit as determined by OGRA.
(iii) Short payment of Sales Tax internally consumed.
(iv) Short payment of Sales Tax on Meter Rental and Repair Charges.
(v) Short payment of Sales Tax on surcharge on Late payment.
(vi) Short payment of Sales Tax on sale of scrap.
Details of the alleged discrepancies observed are enumerated in the show-cause notice as well as order-in-original. The appellant was communicated with the noted discrepancies and notices including show-cause notice dated 13.10.2022 under section 11(2) dated 13.10.2022 were issued to the registered person alleging violation of certain provisions of Sales Tax Act, 1990. Reply was filed in response which was duly examined and the OIR vacated the charges levelled through show- cause notice on many issues except issues pertaining to input tax claimed in violation of section 8 of STA and input tax claimed in respect of UFG. The taxation officer vide order dated 06.06.2023 ordered sales tax recovery of Rs.2,894,260,004/- along with default surcharge and penalty at Rs.144,713,001/-.
3. Aggrieved, the appellant filed appeal before the CIR(A) who upheld the disallowance of input tax adjustment claimed on account of UFG whereas out of disallowed input tax of Rs.1,104,548,454/-, the CIR(A) allowed the input tax to the extent of Rs.872,068,731/- claimed against steel pipes/products and upheld the rest of the disallowance of input tax. The CIR(A) also deleted the default surcharge and penalty imposed on the taxpayer. Still discontented, the appellant has approached the tribunal through this appeal against the first appellate order to the extent of confirmation of disallowance of input tax.
4. Arguments of the learned representatives of the rival parties have been heard at length and impugned orders are also perused with their able assistance. Our issue wise findings are as under: Inadmissible Input Tax under section 8(1) of STA:
5. The department alleged that the appellant/RP claimed input tax adjustment on certain goods/items/services which were not admissible being having no nexus with the taxable activity.
Total input tax claimed/adjusted of Rs.1,104,548,454/- was confronted to the appellant which was intended to be disallowed by the OIR. Details of the items/services along with input tax amounts are duly tabulated in the show-cause notice as well as order-in-original. The company filed reply/explanation against the confronted issue which was regretted. Eventually, sales tax amount of Rs.1,104,548,454/- along with default surcharge and penalty was ordered to be recovered from the appellant. During the first appeal, after being convinced about the usage of steel products for the purpose of construction, repair and maintenance in the taxable supply of the company, allowed input tax of Rs.872,068,731/- whereas upheld the rest of disallowance of input tax of Rs.232,479,723/- claimed/adjusted against the remaining items other than steel products.
6. The learned AR agitated against the impugned confirmation of disallowance of input tax by submitting that SNGPL is a big company having huge amounts involved for taxation purpose and there is a bulk of record which was duly provided against the adjusted input tax in support of the claim but the same was not properly thrashed out. We have examined the impugned order and found that apart from steel products, the company adjusted input tax against security, services, hotel services, vehicle parts/services, workshop services. Paints, furniture, courier services, financial services, cement, office equipment, foot wear etc. The CIR(A) after considering the explanation regarding usage of steel products allowed major chunk of input tax of Rs.872,068,731/- out of Rs.1,104,548,454/-. However, where the appellant failed to satisfy the learned CIR(A) about the usage of the remaining stated items in the taxable activity Or furnish any plausible explanation, the CIR(A) upheld the disallowance. We are not inclined to buy argument made by the learned AR that record was not examined or explanation was not considered as the CIR(A) after duly considering the taxpayer's contentions awarded relief to the company to the extent of major amount involved.
Further, we have noted that many of the disallowed items are building material or those items specifically prohibited through various SROs. As held by the superior courts as well as by the tribunal from time to time in such like issues, the best place to investigate such matters is the department level. The registered person failed to furnish any satisfactory explanation supported by complete documentary evidence in support of the adjusted input tax before the lower forums, further relief was awarded to the company where it was due hence, there exists no reason for us to interfere in the impugned order to the extent of issue agitated before us by the appellant.
Impugned order is confirmed and appellant's ground fails on this issue, Inadmissible adjustment of Input tax claimed in respect of UFG (Un-accounted for Gas) over and above the Permissible Limit as determined by the OGRA.
7. This issue pertains to disallowance of input tax claimed/adjusted by the appellant in respect of UFG (Un-accounted for Gas) over and above the permissible limit as determined by the OGRA, As per note 34.1 of the audited accounts for tax year 2019 it was observed that the appellant had shown figure of Unaccounted for Gas (Gas wasted during transmission) which represents volume difference of gas. purchased and sale amounting to Rs.10,527,715,000/- which is in excess of the UFG bench mark of 6.9238% as determined by the OGRA for the financial year 2018-19. The appellant was found to have already claimed input tax adjustment on such Un-accounted for Gas (UFG). On the basis that the said gas was never supplied to consumer nor sales tax was paid thereon, input tax adjustment on UFG over and above the allowed benchmark by OGRA was calculated and held to be inadmissible as under: UFG disallowance value Rs.10,527,715,000/- Input tax (Inadmissible adjustment)Rs.1,789,711,550/- The CIR(A) upheld the disallowance of input tax on this issue.
8. The learned AR, after describing the concept of Unaccounted for Gas during the transmission/distribution of gas by the company to the consumers submitted that this issue has been decided in favour of the appellant company by larger bench of the tribunal in appeal STA No. 833/LB/2016. He conceded that there are conflicting judgments of the tribunal on the issue in hand pertaining to different tax years against which tax references filed by the company as well as the department are pending adjudication before the Hon'ble High Court. He added that the principle laid down by the tribunal in the above said appeal has been reiterate by the Hon'ble Lahore High Court relating to adjustability of input tax paid on gas blown due to ruptures.
9. During the process of transmission and distribution, significant volume of natural gas remains unaccounted for due to leakage, pilferage, measurement errors or malfunctioning of gas meters which are termed as Unaccounted for Gas (UFG). While determining the appellant's revenue, fine tariff on the basis of guaranteed return OGRA allowed adjustment A of UFG to the extent of certain percentage of gas available for sales as against the actual loss incurred on this account. In this background, the appellant is aggrieved by the disallowance of input tax of Rs.1,789,711,550/- as allegedly the same was in excess of percentage approval by OGRA. Previously, there were some conflicting judgments of the tribunal on the issue hence during the course of hearing of company's Appeal STA No.833/LB/2016, a miscellaneous application was given for the constitution of larger bench to resolve the controversy. Larger bench was constituted on the request of the taxpayer and matter was decided in following terms: "21. In the light of above referred authoritative pronouncements, it can be safely deduced that subsequent loss of goods, owing to taxpayer's inefficiency or otherwise, would not jeopardize the claim of input tax that has been inquired in respect of goods purchased for the purpose of making taxable supplies. It is an admitted position that 'gas' lost in distribution process was purchased by the appellant solely for the purposes of making taxable supplies which stance was neither disputed by taxation officer or learned first appellate authority through their orders nor the learned DR during the course of hearing raised any objection in this respect. Therefore, we are of the candid view the appellant was duly entitled to claim adjustment of input tax incurred in respect of entire amount of UFG.
22. Furthermore, the above position also finds strength from the earlier decisions of the tribunal reported as 2015 PTD 1112 and 2014 PTD 1629 whereby power distributor companies were allowed similar adjustment of input tax incurred in respect of distribution/transmission losses inter alia on the grounds that the electricity was purchased by such companies for the purposes of making taxable supplies. Respectfully following the dictum laid down by our learned brethren, we direct the department to allow adjustment of input tax incurred by appellant in respect of UFG exceeding the threshold prescribed by OGRA. Obviously, the appeal succeeds."
10. When confronted with the above referred decision of the larger bench of the tribunal on the issue, the learned counsel for the respondent department submitted that the said decision is not binding on this bench. Rather he endorsed the impugned order being passed in accordance with law.
11. The question to determine on the basis of learned counsel's argument is the value of a decision of a larger Bench of the Tribunal qua the decisions of smaller Benches of the Tribunal expressing different views. There can be hardly any dispute that the Tribunal is a competent authority to pronounce on question of law arising under the Act, with which we are dealing now, and it functions in a Quasi-judicial manner. It decisions are to be followed by the lower authorities unless these age upset by a higher court. According to a precedence followed by it, the Chairman of the Tribunal can constitute a larger Bench to resolve the conflicting views of various Benches of the Tribunal on the same issue. The decisions of such larger Benches are binding on smaller Benches unless overruled by the High Courts or the Supreme Court or distinguishable on facts. Clearly, therefore, a decision of a larger Bench c of the Tribunal has greater value as a precedent and it has to be preferred to the views expressed by the smaller Benches. Further, as stated earlier, on the smaller Benches the view of larger Bench is binding. Viewed in this background, the learned AR for the appellant has rightly contended that the CIR(A) committed an error prejudicial to the interests of the appellant's rights when he failed to notice the decision of the larger Bench of the Tribunal in the case referred supra. We are, unable to accept the argument of the learned counsel for the department that the decisions of the larger bench of the Tribunal are not binding on smaller bench.
The argument besides being absurd is totally against the law of precedent. "Law of precedent" is an important aspect of legal certainty in rule of law. Previously there were conflicting judgments of the tribunal on the issue and to resolve the anomaly larger bench was specifically constituted. Once a larger bench has expressed its view on the subject, it will be wholly inappropriate for us to do, or to be seen to be doing, a parallel exercise and thus sit, directly or indirectly, in judgment over what a larger bench has already decided. Now if different view is taken again as supported by the learned counsel for the department' this would again create confusion and anomaly especially when the matter is pending adjudication before the Hon'ble High Court. At present, the judgment of the larger bench holds the field which is to be followed.
12. We have also perused the High Court decision given in appeal M/s Mayfair Spinning Mills Limited v. Appellate Tribunal reported in 2002 PTCL CL 115 referred by the learned AR wherein it was unequivocally held that adjustment of input tax paid on gas blown due to ruptures is admissible. Relevant portion of the said judgment is reproduced as under: "According to section 7 a registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the output tax. The learned counsel for the appellant is correct in pointing out that the use of word 'purpose' and 'supplies made or to be made' are indicative of the fact that the payment of input tax is available for adjustment as well as refund not with regard to any specific goods but with regard to input tax paid during a particular tax period. The negatives contained in section 8 were also improperly interpreted by the departmental authorities. According to subsection (1) of the section 8, a registered person is not entitled to reclaim or deduct input tax paid inter alia on the goods used or to be used for any purpose other than for taxable supplies made or to be made by him. The goods on which input tax was paid by the appellant and we subsequently destroyed were not meant for use nor were intended to be used for any purpose other than taxable supplies. The intention of the appellant at the time of receiving and supplies and making and paying (input tax) was apparently to make taxable supply of them. It has never been the case of the department that either the supplies were not received or these goods were covered by the negative list as given in section 8 of the Act. The only objection of the department being that goods for which input tax was paid were no more available for taxable supplies. While holding that opinion, as noted earlier, the department authorities overlooked the use of word 'purpose' and 'supplies made or to be made by him', as used in section 7."
The Hon'ble High Court has also settled the principle that input tax is admissible in respect of gas blown due to ruptures even if gas was not actually supplied as the intention of the appellant at the time of receiving gas was to make taxable supplies. This principle is squarely applicable in the present case.
13. Both the learned counsels have affirmed that various tax references filed at the behest of either the department or the appellant company against different conflicting decisions of the tribunal on the issue are pending adjudication before the Hon'ble High Court however, no final decision has arrived as yet. Both the counsels also stated that there is no stay order available against the judgment passed by larger bench of the tribunal referred above.
14. Having viewed the relevant provisions of Sales Tax Act, case laws on the subject, submissions advanced by the learned counsels, We. by Following the ratio decendi settled by the learned larger bench of the tribunal in STA No.833/LB/2016, have no hesitation to hold that the appellant company/SNGPL is entitled to input tax adjustment/claim incurred in respect of Un-accounted for Gas (UFG). The CIR(A) erred in law while upholding the disallowance of input tax on this account after completely ignoring the decision of the larger bench of the tribunal which is against the lawful rights of the appellant. In such an eventuality, the order passed by CIR(A) is accordingly set aside and the taxpayer's appeal on this issue is accepted.
15. With the above narrated reasons and observations, the instant appeal is disposed of.