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Petitioner: M.M.T.I. PAKISTAN (PVT.) LTD. VS Respondent: SECRETARY, REVENUE DIVISION, ISLAMABAD
Court Name: Federal Tax Ombudsman Judge(s): Saleem Akhtar Title: M.M.T.I. PAKISTAN (PVT.) LTD. vs SECRETARY, REVENUE DIVISION, ISLAMABAD Case No.: Complaint No, 951 of 2002 Date of Judgment:2003-04-24 Reported As: 2004 PTD 1267 Result: Order accordingly
Judgment DECISION/FINDINGS Maladministration is alleged in the instant complaint on the part of Collector (Adjudication) Sales Tax, Rawalpindi for arbitrarily upholding the following allegations made in the show-cause notice issued to the complainant on 4th May, 2001: (a) That the annual accounts of the company for the period ended on 30-6-1999, 30-6-2000 and 28-2-2001 shows more sales as compared to sales declared in the sales tax returns. Total suppressed sales come to Rs,64,793,066 and the amount of allegedly evaded sales tax comes to Rs,9,634,939; (b) that the company issued the invoices during the months but failed to deposit sales tax in the relevant tax period. The total late deposited amount is Rs,19,933,333 on which Rs,6,550,312 is payable on account of additional tax; (c) that the company claimed adjustment of tax on imports input in irrelevant period which amounts to Rs,1,807,743. 2. It is alleged that the disregard shown by the Collector (Adjudication) in his Order-in-Original No, 35 of 2002, dated 4-7-2002 to the exhaustive explanation offered on behalf of the complainant, by the Authorised Representatives namely KPMG and to various legal, Constitutional and factual objections raised in the reply to the show-cause notice, amounts to maladministration because it is contrary to law and based on irrelevant grounds. 3. The complainant is a private limited company incorporated in Pakistan on 3rd October, 1997. The major share holders of the Company are: (a) MMT Marketing Inc. (of USA); holding 74.50% share capital and (b) MMT Asean Inc. (of Australia); holding 25.50% share capital.
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4. The Company, specializing in preparation of computer painted colour images for outdoor advertising, has three offices in Islamabad, Lahore and Karachi. Its operations are carried out on the basis of procuring purchase orders from customers that are forwarded to offices of parent company abroad for preparation of computer painted colour images for outdoor advertising. Images so prepared abroad are shipped in the Company's name and on arrival in Pakistan are cleared from Customs on the basis of bills of entry after paying custom duty and sales tax. The images, thereafter, are sold to customers and the amount received from them goes directly in the Company's bank account. 5. The first ground to allege that the Order-in-Original is contrary to law is that the contravention report which forms the basis of the show-cause notice is, ab initio, void in law because it is based on the audit conducted without jurisdiction by officers of the Sales Tax Department. It is alleged in the complaint that according to sections 32A and 32AA of the Sales Tax. Act, 1990, there are two kinds of statutory A audit which can he conducted by the Sales Tax Authorities. The special audit, according to complainants counsel, is to be conducted under section 32A in the case of a registered importer and wholesaler by a Chartered Accountant or cost Accountants on the basis of notification in the official Gazette by the Central Board of Revenue and audit under section 32AA can be conducted in the case of a Retailer by an officer of the sales tax not below the rank of an Auditor or Deputy Superintendent. 6. The next allegation is that the Order-in-Original is time-barred because the show-cause notice having been issued on 4th May, 2001 the Collector (Adjudication), Rawalpindi was required to pass an order under section 45 of the Sales Tax Act, 1990 within a period of 45 days of the issuance of show-cause notice or within such extended period as an officer of sales tax may for reasons to be recorded in writing, fix provided that such extended period shall in no case exceed 90 days. Thus it is alleged that the order of the Collector (Adjudication) is hit by limitation as laid down in proviso 1 to subsection 4 of section 11 of the Sales Tax Act, 1990. The Collector (Adjudication) has not recorded any reason for not passing the Order-in-Original within 45 days of the date of show- cause notice. 7. Further, according to the complainant, the Collector (Adjudication) was required to deal with the reply to show-cause notice on parawise basis in respect of each point of law and fact and since it was avoided the order passed by him is an arbitrary non-speaking order liable to be struck down on the ratio of decision in (1989) 180 LIR 21 (Calcutta) and (1990) 1 ITR 149 (Jammu and Kashmir- India). 8. Regarding merits of the case it was submitted in response to show-cause notice that staff strength of the company, from April, 1998 to April, 2001 i,e, the period of audit by the Sales Tax Authorities, apart from the marketing personnel at Lahore and Karachi only, was a country manager based in Islamabad, two receptionists-one in Lahore and the other in Karachi, two peons (one each at Lahore and Karachi and two an administrative officers, one each based in Islamabad and Karachi). 9. As the accounting functions of the Company had been handled all along by the parent company abroad, the complainant did not have a professional accountant. The Administrative officer was assigned the task of maintaining details of expenditure vouchers and to send such details abroad periodically, alongwith the bank statements for book-keeping functions. Even the bank reconciliation functions were being carried out abroad. The books of account and the supporting vouchers etc. Were sent to Pakistan only at the time of annual statutory audit. Sales proceeds were received directly in bank and drawnin Pakistan only for payments of routine nature like salary, utilities, etc. Prior approval of the parent company was required for other payments. 10. Pursuant to the registration campaign initiated by the sales tax Authorities, the Administrative officer approached the sales tax office during June, 1998 and got the Company registered as an
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importer and wholesaler vide Sales Tax Registration No, 7-1-3920001-19, dated 4th June, 1998 under the provisions of the Sales Tax Act, 1990. The Administrative Officer was advised by the then sales tax officials to file monthly returns without fail. He was also informed that sales tax return was a simple document that anybody could fill up. 11. The Adminiscative Officer did not have figures for actual sales and purchases being made as accounting functions were being carried out abroad. He, however, kept on filing monthly sales tax returns as a matter of routine without seeking professional advice till the complainant was confronted with following instances of errors in sales tax returns: Out of sales tax returns from July 1998 to February, 2001 only -four returns for tax periods December 1998, May, 1999, July, 1999 and March, 2000 reflect payment of output tax amounting to Rs,45,154, Rs,38,218, Rs,6,68,311 and Rs,4,49,262 respectively. Only nine returns for tax periods July, 1998, August, 1998, November, 1998, December, 1998, February, 1999, May, 1999, July, 1999, August, 1999 and March, 2000, show figures of purchases. Sales and purchases reported in the monthly returns do not reconcile with the actual sale/purchase transactions during corresponding months. Sales purchases reported in the monthly returns also do not tally with cash received and paid on account of sales/purchase made during corresponding months and Incorrect amounts of input tax were carried forward in the monthly returns for December 1998. February, 1999 and May, 1999. 2. It was submitted on behalf of MMTI, in response to the show-cause notice that it was evident even on a cursory view of the sales tax returns that there were glaring factual, legal and calculation errors in the foregoing allegations. This assertion was exemplified as under:-- Return for the month of December, 1998 showed brought forward input tax of Rs,7.017. Output tax on sales during the period had been calculated at Rs,160,429. Input tax suffered against this, during the period had been shown at Rs,114,005. A simple mathematics would show that the Company should have paid Rs,39,407 alongwith the return as sales tax payable; instead, the return reflected that a payment of Rs,45,154 was made with the return. Thus excess payment of sales tax was made. Instead of adjusting input tax of Rs,5,747 the amount was incorrectly carried forward to the next period. Thus input tax of Rs,5,747 was being carried forward since August, 1998. Return for the month of February, 1999 showed input tax of Rs,5,747 brought forward from the month of January, 1999. The return for February, 1999 showed that input tax of Rs,21,841 was suffered on purchases with nil output tax. Once again a simple mathematical exercise would require carry forward of Rs,27,588 while actually an amounts to Rs,5,747 only was carried forward, as evident from the return for March, 1999. By doing so, the Company, never claimed input tax of Rs .21 , 841 . Thus the instances where the Company erroneously made excess payments and did not carry forward the input claimed were never identified by the Sales Tax Authorities. The primary reasons behind these very obvious errors and mistakes, that were also apparent from the background facts narrated above, were summarized as under. The Sales Tax Authorities did not properly brief of company's representatives on negative implications for committing errors in the monthly returns. The Company's officer did not default on monthly returns as he was advised the sales tax officials to file sales tax returns without fail even with nil sales and/or purchases. As the books of account were being maintained abroad, the Company's officer did not have the exact amounts of sales and purchases made from month to month. Based on his understanding of filing returns without fail, most of the returns filed show nil sales and purchases. Whenever the officer had some information related to sales and purchases the information was disclosed in the periodic returns.
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As the sales and purchases disclosed in the periodic returns were based on information available with the Company's officer at that time, the information did not tie cup with actual sales and purchases made during those periods and or with the actual cash received and paid on sales and purchases made. The Sales Tax Authorities never raised an issue regarding errors apparent from these periodic returns. 13. It was submitted before the Collector (Adjudication) that the errors enumerated above amply clarified that all that was done in good faith and that there was no wilful default or wilful evasion involved in any of those discrepancies. As a matter of fact, the Sales Tax Authorities neither educated the complainant's staff nor, during all that time, pointed out the discrepancies. 14. It was submitted that had there been any negative intent on the part of the Company, input tax suffered on imports would have been claimed. The Company had made purchases of approximately Rs,35 million during the period from July, 1998 to February, 2001. Against those purchases, input tax was claimed approximately at Rs,02 million only against actual input tax suffered at approximately over Rs,5 million. According to company's A.R. The actual cumulative position for the relevant period was as under:-- Output sales tax on sales up to 28th Feb., 2001: Rs,11,055,368 Less Input sales tax and sales tax payments Input sales tax claim upto 28th Feb., 2001: (5,962,600.00) Sales tax payment up to 28th Feb., 2001: (1,200,943.00) Sales tax payment on 11th July, 2001: (5,116,436.00) Rs,12,224,979 Sales tax refund/payable by the Department For the period under consideration Rs,1,224,611 15. The A, R., therefore, submitted that the foregoing fact demonstrated that it was all due to innocent and inadvertent errors and that the Company had no intention to commit any tax evasion. The facts according to A.R. Did not justify putting entire blame for the situation or the Company; it partly due to casual attitude of the Department as well. 16. Attention bad also been invited to the provisions of section 36(2) of the Act wherein it was provided that where, by reason of any inadvertence, error or misconstruction, any tax or charge had not been levied or made or had been short-levied or had been erroneously refunded the person liable to pay the amount of tax or charge or the amount of refund erroneously made shall be served with a notice within three years of the relevant date requiring him to show cause for payment of the amount specified in the notice, Provided that where a tax or charge had not been levied under this subsection, the amount of tax shall be recovered as tax fraction of the value of supply. 17. According to the A.R., the words inadvertence, error or misconstruction used by the legislature indicated that the case attracted the provisions of section 36(2) ibid because the alleged discrepancies were primarily inadvertent on all fours. Judicial pronouncements as well as the Dictionary meanings had been referred to in support of the foregoing contention: In the case reported as (1923) 1 KB 280, it was held that ignorance of law may fall within the conception of the word `inadvertence'. Inadvertence has been defined on page 759 of the 6th Edition of the Black's Law Dictionary as under:-- "Heedlessness; lack of attention; want of care; carelessness, failure of a person to pay careful and prudent ct,tention to the progress of a negotiation or a proceeding in Court by which his rights may be affected. Used chiefly in statutory and rule enumerations of the grounds on which a judgment or a decree may be vacated or set aside as, "mistake, inadvertence, surprise or excusable neglect".
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Fed. R. Civil P. 60(b). State ex rel. Regis v. District Court of Second Judicial Dist. In and for Silver Bow County. 102 Mont. 74.55 p. 2d 1295. 1298". At page 715 of the Tenth Edition of the Concise Oxford Dictionary meanings of the word reads as:-- "not resulting from or achieved through a deliberate planning". The words 'inadvertentand 'inadvertentlyhave been defined on page 627 of the Oxford Advance Learners Dictionary as under:- - Inadvertent: Done without thinking or not deliberately. Inadvertently: by accident; unintentionally. In Merriam Webster's Dictionary the word 'inadvertencehas been defined as: "a result of inattention; OVERSIGHT" It, therefore, had been submitted that the foregoing interpretations read with the facts of the case led to the unavoidable conclusion that the alleged discrepancies in complainant's case were inadvertent and caused due to 'ignorance of law'. The A.R. Of the Company had asserted that 'heedlessness, lack of attention, carelessness and oversightcould be attributed as contributory to the state of affairs but there was, by no means, any 'deliberate planning'. 19, Further the complainant company made a commitment to pay the amounts of sales tax actually due within the next few days. It was submitted that necessary funds would be arranged not later than Tuesday the 10ty July, 2001. The Collector (Adj.) was requested not to hold that the Company 'evaded taxand to direct the learned ACST to drop this allegation. 20. It was submitted that there was no basis to allege that the total amount of sales tax that the Company failed to deposit in the tax. Periods covered by audit, against invoices issued, amounted to Rs,,19,933,333 and the additional tax payable amounted to Rs,6,550,312. It was submitted that as a matter of fact Rs,19,933,333 was the amount of sales declared in the sales tax returns and not the defaulted amount of sales tax. The ACST, therefore, had wrongly calculated the amount of additional tax the amount of sales declared in the sales tax returns instead of charging it on the defaulted amount of sales tax. 21. The counsel explained that in the periodic returns, sales had been declared at Rs,19,933,333. Output tax due on such sales was Rs,2,990,000 whereas after claiming input tax of Rs,1,811,671 net payment due was Rs,1,178,329 while the actual payment made amounted to Rs,1,200,943 which in fact exceeded by Rs,22,614. 22. Without prejudice to the above, it had been submitted that no additional tax should be levied as there was no wilful default. Additional tax was leviable under the provisions of section 34 of the Act. Attention was invited to subsection (3) being relevant to facts of the case which provided:-- "Notwithstanding the provisions of section 11 if a registered person or enrolled person does not pay the tax due or any part thereof in time or in manner specified under this Act, rules or notification issued thereunder or claims a tax credit, refund or makes an adjustment which is not admissible to him or incorrectly applies the rate of zero per cent to supplies made by him, he shall, in addition to the tax due, and the prescribed penalties, pay additional tax at the rate of two per cent of the tax due per month or any part thereof." 23. It was submitted that the above provisions of section 34 were penal in nature and could not be applied on the case as it had been held by superior Courts tha penal provisions could be invoked in mens rea cases only. The A.R. Was of the view that the word "shall" as used in the above section was directory in nature and not mandatory; it would be read as "may". The words "may" and "shall", according to A.F. Were interchangeable and their interpretation varied with reference to. Context. The A.R. Submitted that section 34 was substituted through Finance Act, 1996. Following relevant provisions of section 34 before substitution were also referred to: "Notwithstanding the provision of section 11 if a registered person fails to pay the tax within the time specified in section 6, he shall, in addition to the tax due, be liable to pay additional tax and
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surcharge at the following rates." 24. The counsel submitted that there was a clear contrast in the original and the amended versions of section 34 of the Act. Before substitution, the words used were "shall...Be liable to pay" while after substitution, the new section contains the word "shall....Pay" only. Deletion of the words "liable to" could note be without purpose, according to A.R. 25. The obvious reason, according to the A.R. Wat,that before the change through the Finance Act, 1996 while the word "shall" used before the words "be liable to pay" was to be construed as mandatory but the word "shall" before the word 'payas used by the legislature in the substituted provision would be construed to be directory in nature as the liability had been abolished through this change in law. 26. Responding to the notice under section 10(3) of the Ordinance XXXV of 2000, the Collector of Sales Tax as well as the Collector Adjudication, Rawalpindi raised a preliminary objection that the complaint was unwarranted, premature and uncalled for, as it was directed against an Order-in- Original passed under section 45 of the Sales Tax Act, 1990 read with sections 11(2) and 36 ibid, which was appealable under section 46 ibid before the Customs, Central Excise and Sales Tax Appellate Tribunal, Islamabad. As the complainant had not exhausted all the channels available under the law, the complaint was premature and not in 'accordance with the Scheme of the Sales Tax Act, 1990. 27. The complainant submitted in rebuttal that a complaint vide Diary No, 4655 was filed in the office of Federal Tax Ombudsman on 29th July, 2002 alleging maladministration as defined under subsection (3) of section 2 of Ordinance XXXV of 2000. Thereafter an appeal under section 46 of the Sales Tax Act, 1990 was filed vide Diary No,680 in the Central Excise and Sales Tax Appellate Tribunal, Islamabad on 10th August, 2002. However complaint of MMTI, (Pakistan) (Private Limited) was heard on 15th October, 2002 and reserved for decision before appeal pending in the Tribunal was taken up for hearing. 28. Regarding merits of the allegations made in the complaint it was submitted by the respondents that no maladministration was committed either in the conduct of audit or in framing the issues in the show-cause notice or in the order-in-original passed by the Collector (Adjudication). Firstly the allegation about absence of jurisdiction for audit was misleading. The contention that the Sales Tax Collectorate could conduct audit of retailers only had no basis in law. In fact, Sales Tax Act, 1990 provided for universal self-assessme nt scheme for persons making taxable supplies and bound them to maintain certain records and pay sales tax on taxable supplies made by them. In order to ensure that the liberal scheme of things envisaged under the Act was not misused, the law, right from day one, empowered officers of the Sales Tax Department to examine record maintained by registered persons, to summon people, to take records into custody, to detect evasion of tax, to adjudge evaded amounts, to adjudge additional tax, impose penalties prescribed under the Act, and recover the adjudged amounts. In this connection, attention was invited to sections 11, 22, 25, 31, 33, 34, 36, 37, 38, 45 and 48 of the Sales Tax Act. The objectives of the law could not be achieved unless the Department undercook periodical audit of the records maintained by registered persons. Hence it was absurd to suggest that the Sales Tax Department was not empowered to conduct audit of registered persons. As for section 32-A, the same was inserted through the Finance Act, 1998 when the Department, due to shortage of audit personnel, decided to out source audit to special Auditors i,e, Chartered Accountants and Cost and Management Accountants. Even this later provision, through its subsection (2), acknowledged the Sales Tax Department's powers to conduct audit by itself. Subsection (2) of section 32-A is reproduced below:-- "Notwithstanding that records of a registered person have been audited by an officer appointed under section 30, the Board or a Collector may direct an auditor appointed under subsection (1) to audit the records of any registered person."
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29. Thus, according to respondent, all registered/enrolled persons were liable to audit by the Sales Tax Department. The suggestion that section 32AA, by providing for audit of retailers, excludes other categories from the purview, of audit, therefore, was simply preposterous. In fact, this separate provision for audit of retailer was inserted into the Sales Tax Act, 1990 through the Sales Tax . Laws Amendment Ordinance, 2000 in order to justify audit of persons registered as retail taxpayers under section 32AA, as the said tax was a subsequent levy. Sections 25, 37 and 38 of the Sales Tax Act, 1990 empowers the Sales Tax Officer to take into custody the relevant records for the purposes of examination and detection of irregularities/evasion. Audit was the administrative mechanism devised by the Department to exercise the aforesaid powers. 30. The Collectors, therefore, submitted that all subsequent actions viz. Issuance of show-cause notice, hearing of case and assessme nt of evaded amounts alongwith penalties/additional tax were fully covered under the provisions of sections 11, 33 34, 36 and 45 of the sales Tax Act, 1990. 31. Regarding the limitation period provided under the proviso to subsection (3) of section 36 it was submitted that it was directory rather than mandatory. The mandatory limitations had been provided under subsections (1) and (2) of section 36, which had not been violated by the Adjudicating Authority in this case. Moreover, the delay had been caused by the attitude of the complainant. Contrary to the allegation that the show-cause notice was deficient and that the Order-in-Original was passed without giving any consideration to the various legal, Constitutional and factual objections raised by Messrs MMTI several hearings were given to the party on 6-2- 2002,. 21-2-2002 and 8-5-2002. However, no one appeared on behalf of the respondent. On 13-6- 2002 the counsel of the unit requested adjournment of the case on the ground that no notices were received from the office of the Collector (Adjudication) regarding hearing of the Company's case as the Company had shifted its office premises. The request was acceded to, in order to grant a last opportunity to the unit to defend their case rather than to decide the case ex parte on the basis of available record. Meanwhile the reasons for delay in the finalization of case were duly reported to the Competent Authority vide C. No, Ext/Coll(Adj) 01/2002/801, dated 10-7-2002 and the competent authority had since granted extension c time for finalization of the case vide order No,5(10)/CEJ/2000, dated 13th August, 2002. 32. Regarding the discrepancies alleged in the…
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