FINDINGS /DECISION ' The complaint has been filed against the alleged illegal deduction from the sanctioned refund claims of Rs,25,595,076 without due process of law. The Complainants have stated in the complaint that they are commercial exporters, they made bona fide purchases during the tax periods April- July, 2002 from registered persons and exported the goods. The sales tax paid on purchase of exported goods was refundable to them under section 10(2) of the Sales Tax Act; they filed refund claims for the aforesaid periods on 28-2-2002 complete in all respects containing the legal (supportive) documents. The Department should have refunded the amount of Rs,26,544,319 by 31- 5-2003. The Department issued four Sales Tax Refund Payment Orders on 31-5-2003 making unlawful and unjust deductions of Rs,19,927,483 and deferred the payment of refand of Rs,5,667,638 without affording them the opportunity to explain their position and without assigning any reason for the deductions. They stated that it was not clear who authorized these illegal deductions as no proceedings were initiated in the matter. The Department merely stated that deductions had been made on account of some old recovery that was never intimated to them.
2. The Complainants stated that section 36 of the Sales Tax Act provided that before adjudging any tax liability against any registered person, the Adjudicating Authority was bound to issue a show- cause notice and to hear the objections of the concerned person before passing an adjudication order. They referred to the ruling of the Sindh High Court in the case of United Export Company that "Section 48 has to be read in conjunction with section 36, which clearly lays down that serving of a show-cause notice is mandatory Intimation of audit observation does not constitute a show- cause notice". The only option for the Department was to take action under section 45-A of the Sales Tax Act as the sanction of refund had been made after legal proceedings. The same view has been taken by the Appellate Tribunal in its judgment, dated 18-10-2001 in Appeal No, 2352 of 1999.
3. They argued that sub-rule (1) of Rule 4 of Sales Tax Recovery Rules, 1992 explicitly stated that the recovery of Government dues-should be made after expiry of 30 days from the date the same were adjudged by a competent authority and only then the Sales Tax Department has the power to deduct the amount from refund claim. The Department did not provide any such opportunity to the Complainants while passing a dubious and unlawful order. They further stated that according to the Supreme Court of Pakistan "A thing required by law, is to be done in the manner prescribed by the law, must be done in the same manner as prescribed by the law". The Collector of Sales Tax has followed no law, acted whimsically and with complete disregard of law to harm the Complainants.
4. The Complainants requested that the Collector be directed to pay (i) the illegally deducted refund claim and (ii) additional amount equal to 14% per annum of the amount under section 67 of the Sales Tax Act, 1990 and (iii) the C.B.R. Be directed to take disciplinary action against the Collector and the Assistant Collector (Refund) "for acting beyond the mandated powers under the law and for clear breach of law in harming an eminent exporter of the country".
5. The Collector of Sales Tax (West) Karachi, replied to the complaint that the recovery of Government dues was pointed out as a result of post-refund audit of the unit and the amount was accordingly adjusted/recovered from the Companies' existing refund claim. Prior to the recovery proceedings, an audit observation, dated 25-2-2003 was issued to them with the instructions to deposit the dues failing which the recovery proceedings were initiated. With regard to the application of section 36 of the Sales Tax Act, the Collector stated that according to section 10(3) ibid, if a registered person was liable to pay any tax, additional tax or penalty, the refund of input tax should be made after adjustment of unpaid outstanding amount etc. He stated that in the case of Messrs Zahid Habib, the High Court had held that the charges levied in the post-refund audit shall be responded as (if) the matter was under adjudication.
6. The Collector further stated that the argument about the application of section 45-A of the Sales Tax Act was not justified ) because proper Sales Tax Refund Payment Orders were issued under section 45-B ibid and the Complainants were required to file appeal before the Collector (Appeals). He argued that the President of Pakistan has held that a decision of any agency based on established practice did not amount to maladministration in that a bona fide decision based on valid reasons did not amount to maladministration. He contended that the jurisdiction of this office was barred under, section 9(2) (b)) of the Ordinance XXXV of 2000.
7. At the hearing of the complaint, the Consultant reiterated the arguments already mentioned in the complaint against the allegedly illegal deduction and deferment of refunds. He stated that the claims for refund of sales tax for the period April to July, 2002 with supportive' documents were first filed in August, 2002. Subsequently the same claims were re-filed on a computer diskette, as required by the Department, in March, 2003.
8. He stated that the Complainants received the Audit Observation, dated 25-2-2003 directing them to pay back the amount of Rs,19,927,438 on the grounds that the purchases had been made from suspected units, the proof of payment and bank credit advices were not admissible, zero- rated invoices were also not admissible, and the value addition was highly suspicious. The Complainants rebutted. The points raised in the Audit Observation vide their letter, dated 22-3- 2003. He stated that this was merely an intimation, the procedure laid down was not followed, the opportunity of hearing was not provided and the matter was not adjudicated as clearly provided under subsection (3) of section 36 of the Sales Tax Act. The Repayment Orders were issued on 31- 5-2003 after making the deductions i.e. Approximately about a year after filing of the documentary claims. He stated that the Complainants did not receive any show-cause notice till date and were not aware of any adjudication proceedings for recovery of refunded sales tax.
9. The learned Consultant stated that the Audit Observation had objected to the purchases made from two suppliers i.e. Messrs Amna Textile and Messrs Ali Shan Wool requiring the Complainants to deposit the amount of Rs.19,927,438. However, the subsequent supplies from the same suppliers, which could be verified from the purchase register,. Were accepted by the Department and the Repayment Orders, dated 31-5-2003 issued sanctioning refund. He emphasized the fact that the suppliers who were admitted as genuine in April to July, 2002 were considered suspect for supplies made in December, 2001 to January, 2002.
10. The Deputy Collector replied that in case of commercial exporters some special audits were carried out and it was found that the suppliers in a number of cases were not traceable and their names were placed on the list of suspected units. When post-refund audit was carried out and the supplies by the suspected units were identified, recovery was ordered through the audit observation and subsequently the recovery was made from the sanctioned refund claims of the claimants including the Complainants. He stated that the statement that the suppliers whose invoices relating to sanctioned claims were found suspected and recovery was ordered were the same whose subsequent invoices were found admissible and refund allowed would need investigation because apparently it should not be possible in the operation of the computer.
11. From the facts of the case and the arguments put forward by both the sides during the hearing of the complaint, it is evident that the Department had made deductions from the sanctioned refund claims of the Complainants on the basis of the audit observation without going through the due process of law as explicitly provided under section 36 of the Sales Tax Act. The post-refund audit and the issue of audit observation is the first major aspect of the duties/functions of the Sales Tax Department to ensure that the payment of sales tax and its refund have been made in accordance with the Sales Tax Act and the procedures prescribed by the C.B.R. However, in case any discrepancy is found or any objection is raised about the validity of the proof of payment of sales tax, the bank credit advices, or the admissibility of the value addition etc., it is necessary to issue a show-cause notice, allow the registered person to furnish his explanation and afford him the opportunity of hearing to represent his case before the officer of competent jurisdiction. B The Department has completely ignored the due process of law and made deductions/deferment of refund claims without valid reasons and contrary to law.
12. With regard to the allegation that the invoices of two suppliers were first suspected and recoveries were effected and subsequent invoices of the same suppliers were accepted and refund allowed, the Departmental representative stated in reply that this should not be possible in the operation of computer. This shows that the entire reliance for accepting or rejecting refund claims was being placed on the computerized list of suspected suppliers or some other computer program which has not been elaborated by the Departmental representative. However, if certain invoices were identified as suspect on account of the list of suspected suppliers, the refund claims should not be rejected outright but necessary verification of physical transfer of goods, payment of price of goods inclusive of sales tax through the authorized channel, and shipment of goods should first be verified to decide the admissibility of refund. Computer program should provide an early warning system for the Department and should not be taken as the final basis for arbitrary rejection of the refund claims or recovery of the amounts already paid.
13. In the reply submitted by the Department objection to the jurisdiction of the Federal Tax Ombudsman has been raised by referring to section 9(2)(b) of the Federal Tax Ombudsman Ordinance without. Specifying that the matter relates to assessment, tax liability, valuation or classification of goods. The matter does not relate to any of the category specified under subsection (2)(b) of section 9. It relates to refund which has been withheld in an illegal manner in contravention of the provisions of law as discussed above.
14. A further pleading in this regard. That a decision of any agency based on established practice does not amount to maladministration even if examined judicially is not found strictly to be in accordance with law and also that decision which is bona fide or is based on valid reason does not amount to maladministration. Unfortunately, this statement ignores the provision of subsection (3)
(i)(a) of section 2 of the Federal Tax Ombudsman Ordinance which reads as follows:-- "2(3) Maladministration includes:-
(i) a decision, process, recommendation, act of omission or commission which-
(a) is contrary to law, rules or regulations or is a departure from established practice or procedure, unless it is bona fide and for valid reasons;"
Where any reliance is placed on a practice it should be established that such practice exists which is consistent for a long time, is accepted by both the parties and is accoLding to law. Any conduct, method or procedure adopted by the Department will not amount to practice unless it fulfils the above conditions. Under clause (i)(a) of subsection 3 of section 2 only departure from established practice which is bona fide and for valid reason will not amount to maladministration. It is a distortion D of the above provision to say that any order passed bona fide and for valid reason though illegal will not amount to maladministration. The aforesaid provisions cast a burden on the Department to prove that the departure from established practice or procedure is bona fide and for valid reason. To illustrate it may be explained that any order passed without notice to the party as required by law cannot be justified on the plea that this is the practice of the Department.
15. It is established that the decision of the Sales Tax Authorities is contrary to law, in a manner not in accordance with the established practice and procedure. No valid reason has been given for such illegal order. It is arbitrary, oppressive and discriminatory based on irrelevant grounds, which constitute maladministration under sub-clause (a), (b) and (c) of clause (i) of subsection (3) of section 2 of the Ordinance No, XXXV of 2000. The objection of the Respondent that the jurisdiction of this office is barred is misconceived and overruled.
16. It is recommended that C.B.R. Direct the Collector of Sales Tax to
(i) conduct a thorough investigation with a view to Verifying the admissibility of the supportive documents submitted by the Complainants in respect of refund claims termed inadmissible by the Department;
(ii) carry out verification of the transfer of goods, payment to the supplier inclusive of sales tax through the banking channel, and shipment of goods for export;
(iii) in case of objections, issue to the Complainants a show-cause notice within fifteen days, provide them opportunity to represent their case and afford them the opportunity of hearing;
(iv) decide the refund claims and the claim for compensation under section 67 of the Sales Tax Act within forty-five days; and
(v) compliance be reported within two months.