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Petitioner: Commissioner Inland Revenue VS Respondent: Tariq Poly Pack (Pvt.) Ltd
Court Name: Lahore High Court Judge(s): Abid Aziz Sheikh, Shahid Karim Title: Commissioner Inland Revenue vs Tariq Poly Pack (Pvt.) Ltd Case No.: S.T.R. No, 98 of 2014 Date of Judgment:2015-03-12 Reported As: PTCL 2016 CL. 449 Result: Questions answered in affirmative
Judgment JUDGEMENT: MR. JUSTICE ABID AZIZ SHEIKH.--(1). Through this judgment, we intend to dispose of instant S.T.R. No, 98/2014 and P.T.R. No, 270/2012 arising out of Appellate Tribunal Inland Revenue, Lahore (Tribunal) orders dated 23-4-2014 and 27-3-2014 (impugned orders) in these references respectively, raising common questions regarding interpretation and applicability of various provisions of Sales Tax Act, 1990 (Act). The form of questions of law framed in these two references are little different, however, in substances the questions are same which pertains to blacklisting of supplier units and claim of input tax credit against invoices issued by those supplier units. 2. The following common questions of law are raised in these references:-- (i) Whether under the facts and in the circumstances of the case, the learned ATIR was justified to pass an order in violation of the Rule 12(5) of the Sales Tax Rules, 2006 which clearly state that "during the period of suspension of registration, the invoices issued by such person shall not be entertained for the purposes of sales tax refund or input tax credit, and once such person is blacklisted, the refund or input tax credit claimed against the invoices issued by him, whether prior or after such blacklisting, shall be rejected through a self-speaking appealable order and after affording an opportunity of being heard to such person? (ii) Whether under the facts and in the circumstances of the case, the learned ATIR was justified to ignore section 8Aof the Sales Tax Act, 1990 which provides that where the registered person receiving supply from other unit is in the knowledge that tax paid by him will go un-deposited both are jointly and severally liable for payment of such unpaid amount of tax? (iii) Whether under the facts and in the circumstances of the case, the learned ATIR was justified to annul the order of the Taxation Officer whereas the credit of input tax was claimed against the
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invoices of black listed unit without any physical transfer of goods from the supplier's account to the account of buyer and knowingly used fake invoices to reduce its sales tax liability? Learned counsel did not argue any other question of law formulated in these references therefore, shall be deemed to have been abandoned and not pressed. 3. That due to commonality of questions of law reproduced above, it is not-necessary to narrate in detail the facts in each of the case separately. However, common facts necessary for expression of our opinion on legal questions are that the respondent taxpayers were issued show-cause notices for the reason that input tax/refund of sales tax was adjusted against invoices issued by blacklisted units, therefore, refund/adjusted input tax was inadmissible. The respondent taxpayers were required to explains to why amount of inadmissible inputs may not be recovered alongwith default surcharge and penalty under the provisions of the Act. The replies of respondent/taxpayers were not found satisfactory and amount of input tax adjusted was found recoverable. The orders of assessing officer was upheld toy the Commissioner (Appeals), however, in further appeals by the taxpayers, the learned tribunal declared the findings of authorities below null and void, hence these references by the applicant department. 4. Mr. Imran Rasool, Advocate, learned counsel for the applicant (in S.T.R. No, /98/2014) argued that FIR Nos. 18/2009 dated 19-12-2009, 04/2010 dated 31-3-2010 and 25/2010 dated 30-11-2010 were lodged and accused namely Muhammad Azam and Mirza Abid Baig were arrested. On pointation of said accused, search was conducted and evidential material including different forms of stamps, blank signed cheque-books, format of fake invoices, sales tax returns, user ID and Pin Codes etc. in respect of dummy/fictitious suppliers were recovered. The said accused were also convicted by the Court of Special Judge Customs, Lahore on the charge of issuance of fake sales tax invoices. Submits that on the basis of said information, the respondent/taxpayers being one of the purchasers were issued show-cause notices and on failure to provide record, it established that claimed input adjustment was on the basis of fake sales tax invoices, hence inadmissible. Further submits that no physical transfer of goods took place rather transaction was only on papers. Adds that respondent/purchaser also failed to establish that tax for which input tax adjustment was paid had been deposited in the Government Treasury by its respective suppliers. He concluded that respondent taxpayer did not hold a valid and genuine tax invoice, hence committed tax fraud and therefore, the adjusted amount was lawfully claimed by the department in view of provisions of sections 7, 8(1)(d) read with Rule 12(5) of Sales Tax Rules, 2006 (Rules). 5. Mr. Muhammad Yahya Johar, Advocate, learned counsel for the applicant (in P.T.R. No, 270/2012) argued that the scheme of self-assessment under Income Tax Ordinance, 2001 (Ordinance) is based on presumption that information supplied by taxpayer alongwith its return is trust worthy but in order to curb the practice for providing inaccurate and false information, law also provides mechanism for subsequent verification of information provided by taxpayers in their returns. Argued that it is a matter of common knowledge that some delinquent, taxpayers, get tax registered numbers and misuse their active and operatives status for carrying on false and sham transactions, based on fake and flying invoices. Once the department found that though the supplier was operative and active on web-e-portal but was involved in fraudulent activities and tax fraud, the department could blacklisted and suspend the. supplier/taxpayer which under Rule 12(5) read with sections 21(3) and 8(1)(d) will automatically result in inadmissibility of the invoices issued by such supplier for the purpose of input tax claim by purchaser/respondent on the goods. He contends that in this case, as suppliers were blacklisted, the respondent taxpayer/ purchaser was not entitled for the input tax adjustment. 6. Conversely, Mr. M.M. Akram, Advocate, learned counsel for the respondent (in S.T.R. No, 98 of 2014) argued that under charging section 3(3) of the Act, liability to pay tax is on the suppliers of goods and section 6 also specify the terms and manner in which the supplier will pay tax. Contends that
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supplier files month wise statement mentioning its registration number as well as name of the purchaser to whom such supplies were made in similar fashion/buyer/purchaser also file his monthly statement through E-filing, Specifying the name and registration number of the supplier and amount of sales tax paid on the goods purchased. In this scheme of law, he submits that person who purchases goods from a registered person is only under legal obligation to check whether the person making taxable supplies is registered with the department and also active/operative under the system at the time of transaction. Whereas it is not the responsibility of purchaser to ascertain whether department has legally registered such person or not. Further submits that this responsibility lies with the supplier or department and not with the purchaser. Contends that payments made to the suppliers were in accordance with the provision of Act, therefore, rejection of input tax adjustment is not sustainable for any default committed by the supplier and not by the purchaser/taxpayer. Adds that department was required to proceed against delinquent suppliers and not to deprive purchasers from input tax adjustment as the purchasers were not supposed to check or scrutinize the record of a person making taxable suppliers, if otherwise, it is registered and active on web-e-portal. 7. Mr. Muhammad Ajmal Khan, Advocate learned counsel for the respondent (in P.T.R. No, 270/2012) supported the above arguments by the respondent counsel and further contends that in his case, allegation is not that invoices were fake but only allegation raised in show-cause notice was that the suppliers were subsequently blacklisted, therefore, the input adjustment against the invoices issued by blacklisted units at the time when units were active were not admissible. Contends that subsequent blacklisting does not retrospectively invalidate the valid invoices previously issued by the suppliers. 8. We have heard the arguments of learned counsel for the parties and perused the record with their able assistance. The controversy in these cases revolves around interpretation and applicability of various provisions including sections 2(37), 3(3), 6(2), 7(2)(1), 8(1)(d), 8A, 11, 21(3) 33(13) of the Act and Rule 12(5) of the Rules, so as to determine the extent of rights and liability of the purchaser regarding claim of refund/Input tax adjustment against fake invoices issued by blacklisted units/suppliers. To facilitate an easy analysis, the aforesaid provisions in extenso are reproduced as under:-- Section 2(37) "Tax fraud" means knowingly, dishonestly or fraudulently and without any lawful excuse (burden of proof of which excuse shall be upon the accused)-- (i) Doing of any act or causing to do any act; or (ii) Omitting to take any action or causing the omission to take any action, [including the making of taxable supplies without getting registration under this Act [;or] (iii) Falsifying [or causing falsification] the sales tax invoices] In contravention of duties or obligations imposed under this Act or rules or instructions issued thereunder with the intention of understating the tax liability [or underpaying the tax liability for two consecutive tax periods] or overstating the entitlement to tax credit or tax refund to cause loss of tax; Section 3. Scope of tax.--(3) The liability to pay the tax shall be,-- (a) In the case of supply of goods [***], of the person making the supply, and (b) In the case of goods imported into Pakistan, of the person importing the goods. Section 6. Time and manner of paym ents.--(1) The tax in respect of taxable supplies made [***] during a tax period shall be paid by the registered person at [the time of filing the return in respect of that period under Chapter-V[:]. Section 7. Determination of tax liability.--[Subject to the provisions of [section 8 and] 8B, for] the purpose of determin in, his tax liability in respect of taxable supplies made during a tax period, a registered person shall [, subject to the provisions of section 73,] be entitled to deduct input tax
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[paid [or payable] during the tax period] for the purpose of taxable supplies made or to be made, by him] from the output tax [excluding the amount of further tax under subsection (1A) of section 3, ] [***] that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9[;] [Provided that where a registered person did not deduct input tax within the relevant period, he may Claim such tax in the return for any of the six succeeding tax periods.]. (2) A registered person shall not be entitled to deduct input tax from output tax unless,-- (i) in case of a claim for input tax in respect of a taxable supply made [***], he holds a tax invoice [in his name and bearing his registration number,] in respect of such supply for which a return is furnished; Section 8. Tax credit not allowed.--(I) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on---(d) fake invoices Section 8A. Joint and several liability of registered persons in supply chain where tax unpaid.-- Where a registered person receiving a taxable supply from another registered person is in the knowledge or has reasonable grounds to suspect that some or all of the tax payable in respect of that supply or any previous or subsequent supply of the goods supplied would go unpaid, such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax [Provided that the Board may be notification in the official gazette exempt any transaction or transactions from the provisions of this section.] Section 11. Assessment of Tax and recovery of tax not levied or short-levied or erroneously refunded (2) Where a person has not paid the tax due on supplies made by him or had made short payment or has claimed input tax credit or refund which is not admissible under this Act for reasons other than those specified in subsection (1), an officer of Inland Revenue shall, after a notice to show cause to such person, make an order for assessment of tax actually payable by that person or determine the amount of tax credit or tax refund which he has unlawfully claimed and shall impose a penalty and charge default surcharge in accordance with sections 33 and 34. Section 21. De-registration, blacklisting and suspension of registration (3) During the period of suspension of registration, the invoices issued by such person shall not be entertained for the purposes of sales tax refund or input tax credit, and once such person is blacklisted, the refund or input tax credit claimed against the invoices issued by him, whether prior or after such blacklisting shall [***] be rejected through a self-speaking appealable order and after affording an opportunity of being heard to such person. Section 33. Offences and penalties.__[***] Whoever commits any offence described in column (1) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under any other law, be liable to the penalty mentioned against that offence in column (2) thereof.-- (13) Any Person who commits, cause to commit or a tempts to commit the tax fraud, or abets or connives in commissioning of tax fraudSuch person shall pay a penalty of twenty five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher. He shall, further be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend to five years, or with fine which may extend to an amount equal to the loss of tax involved, or with both. Rule 12(5). Blacklisting and suspension of registration:-- During the period of suspension of registration, the invoices issued by such person shall not be entertained for the purposes of sales tax refund or input tax credit, and once such person is
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blacklisted, the refund or input tax credit claimed against the invoices issued by him, whether prior or after such blacklisting, shall be rejected through a self-speaking appealable order and after affording an opportunity of being heard to such person. 9. Plain reading of afore-noted provisions shows that under charging provision of Section 3(3) of the Act, the liability to pay tax is on the supplier. To determine and crystallize the tax liability and to avoid double taxation, section 7(1) entitles the registered person to deduct input tax paid or payable for purpose of taxable supplies from the output tax. Section 7(2) prescribes condition that a registered person shall not be entitled to deduct input tax from output tax unless he holds a tax invoice in his name and bearing his registration number in respect of such supply for which a return has been furnished. 10. Now we come to the provisions of sub-clause (d) of subsection (1) of section 8 of the Act, which st Art with the non obstante clause, meaning thereby that even if registered person is entitled for deduction of input tax, he shall lose such entitlement if the input tax paid on fake invoices. However, once input tax adjustment has already made under section 7(1) on the basis .of tax invoices in registered person name bearing his registration number and same was also not denied under non-obstante clause of section 8(1)(d) then a right will accrue in favour of registered person. Subsequently if it is transpired that invOice was fake, then the recourse is not to reject input tax claim already made but to invoke provision of section 11(2) of the Act, for the recovery of tax credited or tax refunded. 11. Bare perusal of section 11(2) of the Act shows that against inadmissible claim of input tax credit or refund, the liability is not determined by the statute itself but it is left to the assessing officer to make an order for assessm ent by determining the amount of tax credit or tax refund which registered person has unlawfully claimed. The assessing officer under this provisions will not pass merely a stereotype recovery order but before making an assessment order under section 11(2) has to apply his mind to the facts and circumstances of each case independently and judiciously so as to determine the liabilities of the registered person including as to whether tax credit and refund was unlawfully claimed. In case, assessing officer comes to a conclusion that no input tax amount was paid at all by the registered person then of course, registered person will be liable to payback the input tax credit and refund paid to him otherwise it will amount to defraud the public exchequer. However, if it is found that registered person has paid the input tax but same was not deposited by the supplier or fake invoice was issued by the supplier, then the primary responsibility to pay the tax due is upon the supplier and the registered person shall only be responsible once it is determined in terms of section 8A of the Act that registered person receiving the taxable supplies was in the knowledge or had reasonable ground to suspect that some or all of the tax payable in respect of that supply would go unpaid. Assessing Officer under section 8A is not required to prove that there was collusion on the part of the buyer but initial burden lies on the department to establish that taxpayer/buyer had prior knowledge and reasonable grounds to suspect that sales tax paid by him to a supplier shall be remained unpaid. 12. Section 2(37) define "tax fraud". For the purpose of controversy in hand "tax fraud" means knowingly, dishonestly or fraudulently and without any lawful excuse making taxable supplies without getting registration under the Act or falsifying or causing falsification of the sales tax invoices. Tax fraud committed has civil as well as criminal consequences. The civil consequences of tax fraud are provided under section 21 of the Act which include suspension and blacklisting of registered person. Whereas criminal consequences of tax fraud are provided under clause 13 of section 33 of the Act. When a tax fraud is dealt as a criminal offence, it must be proved beyond reasonable doubt, as fundamental requirement of criminal law jurisprudence. However, when tax fraud is applied on the civil side in term of section 21 of the Act or Rule 12(5) of the rules, then the
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initial burden on the department is only to the civil standard. Once, it is proved by the department that tax fraud is committed, then to avoid civil consequences, it is for the registered person to show that he was duly registered at the time of making supplies and has not falsified or caused falsification of tax invoices. 13. The provision of Rule 12(5) of the Rules is pan materia with provision of section 21(3) of the Act (inserted through Finance Act, 2011). Plain reading of rule 12(5) shows that under said rule, those invoices which were issued after blacklisting or were issued after suspension but before blacklisting shall be rejected through speaking order. Whereas other valid invoices issued when supplier was active and registered will not be affected by subsequent blacklisting of supplier unless those invoices are specially declared fake through speaking order after hearing parties and have direct nexus with blacklisting. This interpretation is also in consonance with the settled law' that rules being subordinate legislation cannot be applied retrospectively. 14. Having considered the aforesaid provisions holistically, now we examine the facts and circumstances of these cases in the above legal scenario. In PTR No, 98/2014, the case of the applicantdepartment is that the suppliers got themselves registered with sales tax department fraudulently and issued fake invoices, consequently, they were blacklisted. It was in these circumstances, the respondent taxpayer was issued notice under section 11(2) of the Act for recovery of input tax credit. As already discussed above, the provisions of sections 7 and 8 of the Act are not charging provisions and are machinery provisions to crystallize liability to pay tax by the supplier as contemplated in subsection (3) of section 3 of the Act. The primary responsibility to issue genuine invoices after registration and to deposit tax is that of the supplier, who is also responsible to pay tax under section 11(2) of the Act. The purchaser who' paid sales tax against supplies and already availed input tax adjustment against invoices issued can only be held liable for unpaid amount if it proved that purchaser had knowledge and reasonable ground to suspect that tax payable will go unpaid in terms of section 8A of the Act. The learned Tribunal in this case after going through the record came to the following conclusion:-- "9. We have also observed that the allegation of tax fraud and fake invoices is outcome of baseless and hollow assumption and contrary to the record produced by the registered person for examination before the adjudication authorities. The department have also failed to discharge initial burden which lies on them to prove that the registered person has knowingly, dishonestly or fraudulently has caused falsification of sales tax invoices or committed tax fraud within the meaning of section 2(37) of the Act. Therefore, the charge of tax fraud has no legal consequence in the light of a reported judgment of the Hon'ble Sindh High Court reported as PTCL 2004 CL. I, wherein it has been held:-- The learned two forums below have misdirected in placing the burden of proof on the applicants in terms of the provisions contained in section 2(37) defining the expression "tax-fraud" without realizing that in order to attract the above provisions, the initial burden lies on the department to show that an assessee, knowingly, dishonestly or fraudulently and without any lawful excuse has done any act or has caused to be done or has omitted to take any action or has caused the omission to take any action in contravention of duties or obligations imposed under this Act or rules or instructions issued there under with the intention of understanding the tax liability or underpaying the tax liability. Once this burden is discharged by the department then only, the burden is shifted to the assessee to establish that the act done was without any knowledge on his part or without any intention of dishonestly or fraud and was done with any lawful excuse" 10. We further noted that there is not an iota of evidence whatsoever brought on record by the department wherefrom it could be deduced that the appellant has knowingly or dishonestly or fraudulently commuted tax fraud by claiming input tax adjustment against the sales tax invoices issued by the suppliers. On going through the adjudication order, we are convinced that the entire
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edifice has been built on conjectures and surmises and, whimsical inference drawn against the appellant on the so called set of facts. One the other hand, the record proves that there was ample justification with the appellant to claim adjustment of input tax.-- 12. It is further observed that the taxpayer under the prescribed mechanism of VAT, has made payment of the input tax to suppliers and had no access to confirm that the supplier had made the payment in revenue to check as to whether the supplier has made payment of tax due to him especially when he was filing his monthly sales tax returns and summaries with the department. We have also observed that the assessing authority has passed the impugned order under the influence of DII without application of his independent and judicious mind. We have also noted that the department had heavily relied upon the statement of the suppliers but none of suppliers or member of the gang stated that they issued invoices with the prior connivance with the appellant. In the instant case, the show-cause notice was issued and the impugned order was passed on the strength of concocted and fabricated facts, therefore, such notice and the order are not sustainable in the eye of law. We are of the view that after adopting the method of making the payment as is prescribed by the law, the appellant…
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