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Official Citation: 2023 LHC 6532
Court / Jurisdiction: Lahore High Court
Year of Decision: 2023
Decision Date: 2023-10-31
Parties: Agritech Limited vs Federation of Pakistan, etc
Ruling Summary: This decision was rendered by the Lahore High Court on 2023-10-31, officially reported as 2023 LHC 6532. In this matter between Agritech Limited and Federation of Pakistan, etc, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2023LHC6532
Court Name: Lahore High Court Judge(s): Anwaar Hussain Title: Agritech Limited vs Federation of Pakistan, etc Case No.: Writ Petition No.41067/2023 Date of Judgment:2023-10-31 Reported As: 2023 LHC 6532, PTCL 2024 CL. 81 Result: Petition Disposed of
JUDGMENT
JUDGMENT Anwaar Hussain, J. Through the present petition, under Article 199 of the Constitution of the Islamic Republic of Pakistan, 1973 ("the Constitution"), challenge has been laid to the pre-refund audit proceedings and the consequent show-cause notice dated 09.06.2023 issued by the respondent- FBR, with the averments that the same be declared illegal, unlawful and violative of the provisions of Section 10 of the Sales Tax Act, 1990 ("the Act"). Prayer has also been made that respondent No.3 be directed to refund the excess amount of input tax paid by the petitioner amounting to Rs.2,214,825,246/-. 2. By way of factual background, it has been noted that the petitioner is a Public Limited Company, registered under the law, and is engaged in manufacturing of fertilizers, prominent of which being Urea and Granulated Single Super Phosphate (GSSP). It is the case of the petitioner that the petitioner pays input tax applicable at 17% whereas the output tax is charged, on the goods (fertilizers), at the reduced rate of 2% by virtue of Eighth Schedule to the Act and hence, the petitioner is entitled to the above referred amount of tax refund for the period of January, 2021 to June, 2022; however, the refund claims remained pending for payment with the respondent-FBR despite timely filing of the same along with the requisite documents that constrained the petitioner to file constitutional petition, bearing W.P. No.21823/2023, before this Court for the payment of differential amount of input tax paid by the petitioner, which was disposed of, vide order dated 03.04.2023, with the direction to respondent No.2 to treat the said constitutional petition as a representation of the petitioner and decide the issue in hand, after providing proper hearing to the petitioner, strictly in accordance with the relevant provisions of the Act read with the Sales Tax
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Rules, 2006 ("the Rules"), through a speaking order, within a period of three weeks from the receipt of certified copy of the order. 3. Mr. Sarfraz Ahmad Cheema, Advocate, learned counsel for the petitioner submits that an application was submitted on 05.04.2023, with respondent No.2 along with the order of this Court dated 03.04.2023, for the decision in the matter, in accordance with law, and particularly by following the provisions of Section 10 of the Act read with Chapter V of the Rules, however, respondent No.2 neither decided the representation of the petitioner nor issued the refund claim and the petitioner was again constrained to file Crl. Org. No.39078/2023 before this Court in which notices were issued by this Court but in the meanwhile, the respondents had initiated pre-refund audit proceedings in terms of Rule 30(3) of the Rules, 2006, which was objected to by the petitioner by way of filing objections. Adds that instead of deciding the objections, respondent No.3 issued show-cause notice dated 09.06.2023, which has been impugned through the present petition. Further contends that the respondent-FBR has failed to decide the refund application of the petitioner within time stipulated in Section 10 of the Act, which in the first place has been fixed as 45 days and only in case of any discrepancy, the same is required to be decided within a period of 60-days or within a period of 120-days as contemplated under Section 10(3) of the Act that never happened despite direction of this Court dated 03.04.2023. Further adds that filing of contempt petition bearing Crl. Org No.39078/2023 has sparked hostility and antagonistic approach on the part of the respondent-FBR towards the petitioner, as a consequence whereof the respondent-FBR has initiated multiple proceedings against the petitioner in order to frustrate the lawful refund claims of the petitioner and the impugned show-cause notice is part thereof to delay and frustrate the same. Concludes that the manner in which the refund application of the petitioner company has been dealt with violates the true import of Section 10 of the Act and is also violative of the dicta laid down by the Supreme Court of Pakistan in the cases reported as "The Collector of Sales Tax, Gujranwala and others v. Messrs Super Asia Mohammad Din and sons and others" (2017 SCMR 1427) and "Province of Punjab through Conservator of Forest, Faisalabad and others v. Javed Iqbal" (2021 SCMR 328). 4. Conversely, Mr. Ahmed Pervaiz, Advocate, learned counsel for the respondent-FBR objects to the maintainability of the present petition, on the ground that the department has merely initiated pre- refund audit proceedings and issued show cause notice and at present, no adverse order has been passed against the petitioner and hence, the petition is pre-mature. Adds that even otherwise, petition is not maintainable against a show-cause notice. Places reliance upon case reported as "Commissioner of Inland Revenue, Zone-III, Reginal Tax Office, Islamabad v. Messrs Pearl Security (Pvt.) Limited" (2022 PTD 1876) in support of his contentions. On merits, contends that the time frame envisaged under the provisions regarding refund in general and Section 10 of the Act in particular, are not mandatory in nature as no consequences thereof have been contemplated under the law and it cannot be interpreted in a manner that after lapse of 45-days or such other period, under the Act, the refund claim automatically stands approved. Avers that even otherwise, the case of the petitioner does not fall under Section 10(1) as the supplies of the petitioner are neither zero rated nor exports made during the relevant tax period, rather, the case of the petitioner is covered under the first proviso of Section 10(1) of the Act since admittedly the supplies are on reduced rate, which brings the case under the clutches of the Rules framed thereunder where no such time period of 45-days has been contemplated by the legislature. 5. Learned Additional Attorney General while responding in terms of notice issued by this Court, under Order XXVII-A of the Code of Civil Procedure, 1908, also submits that the case of the petitioner does not fall under Section 10(1) of the Act and is to be dealt with by first proviso thereunder and no time frame is given under the Act for deciding the claim of those taxpayers who do not fall under the zero-rated and within the purview of Section 10(1) of the Act, however, states that the needful is
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required to be done expeditiously, within a reasonable time. He further contends that the law envisages the consequences of the delay occurring in deciding the refund claims of the taxpayers like the petitioner and a taxpayer whose claim is not timely decided is to be conferred benefit envisaged under Section 67 of the Act. 6. In rebuttal, learned counsel for the petitioner submits that the manner in which the department has dealt with the matter makes the mandatory provisions of Section 10 in general and sub- Sections (1) and (3) thereof in particular redundant, which is not permissible under the law. Responding to the second objection on merits of the case submits that even though the supplies of the petitioner do not fall under zero-rated local supplies or export, however, the same fall under the Third Category which pertains to supplies on the reduced rates, and the proviso to Section 10(1) of the Act is being misinterpreted inasmuch as the said proviso benefits the petitioner enabling the petitioner to carry forward the claim to the following month, which is not possible as the petitioner is charging output tax on reduced rate and refund claim of the petitioner merits expeditious decision. Concludes that a constitutional petition is maintainable against a show-cause notices where important question of law is required to be interpreted and/or the department has acted with illegality and places reliance on cases reported as "Messrs Karachi Golf Club (Private) Limited through Manager Accounts and Finance and others v. Province of Sindh through Director Sindh Revenue Board and others" (2021 PTD 558), "Commissioner of Income Tax v. Messrs Eli Lilly Pakistan (Pvt.) Ltd." (2009 SCMR 1279) and "Commissioner Income Tax Companies II and another v. Hamdard Dawakhana (waqf) Karachi" (PLD 1992 SC 847). 7. Arguments heard. Record perused. 8. The following legal questions arise out of the factual layout of the case and call for the opinion of this Court: i) What is the scope of Section 10 of the Act and whether the elapse of time stipulated thereunder ipso facto renders the refund claim admissible and due? ii) What are the consequences of delay in deciding the refund claim? iii) Whether in the facts and circumstances of the case and the scope of Section 10 of the Act, the present petition having been filed against a show-cause notice issued, premised on pre-refund audit proceedings against the petitioner, is maintainable? 9. Before answering the above formulated questions, it would be advantageous to reproduce Section 10 of the Act that reads as under: "10. Refund of input tax.- (1) If the input tax paid by a registered person on taxable purchases made during a tax period exceeds the output tax on account of zero rated local supplies or export made during that tax period, the excess amount of input tax shall be refunded to the registered person not later than forty-five days of filing of refund claim in such manner and subject to such conditions as the Board may, by notification in the official Gazette specify: Provided that in case of excess input tax against supplies other than zero-rated or exports, such excess input tax may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B, and shall be treated as input tax for that period and the Board may, subject to such conditions and restrictions as it may impose, by notification in the official Gazette, prescribe the procedure for refund of such excess input tax. Provided further that the Board may, from such date and subject to such conditions and restrictions as it may impose, by notification in the official Gazette, direct that refund of input tax against exports shall be paid at the fixed rates and in the manner as notified in such notification. (2) If a registered person is liable to pay any tax, default surcharge or penalty payable under any law administered by the Board, the refund of input tax shall be made after adjustment of unpaid outstanding amount of tax or, as the case may, default surcharge and penalty.
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(3) Where there is reason to believe that a person has claimed input tax credit or refund which was not admissible to him, the proceedings against him shall be completed within sixty days. For the purposes of enquiry or audit or investigation regarding admissibility of the refund claim, the period of sixty days may be extended up to one hundred and twenty days by an officer not below the rank of an Additional Commissioner Inland Revenue and the Board may, for reasons to be recorded in writing, extend the aforesaid period which shall in no case exceed nine months." (Emphasis supplied) For the purpose of carrying out the mandate of Section 10 of the Act, it is Chapter V of the Rules, which have been formulated. The relevant rules are reproduced as under: 28. Filing and processing of refund claims.(1) For all the refund claims under section 10 and 8B of the Act, for the tax period July, 2019 and onwards, the data provided in the monthly return shall be treated as data in support of refund claim and no separate electronic data shall be required. The amount specified in column 29 of the return, as prescribed in the form STR-7, shall be considered as amount claimed for the purposes of claim under section 10 of the Act, once the return has been submitted along with all prescribed annexures thereof: Provided that, in case of claims arising from zero-rated supplies including exports, the claimant shall be able to submit his return without Annex-H and the same may be filed separately at any time but not later than one hundred and twenty days of submission of the return without Annex-H. The date of submission of Annex-H shall be considered as the date of filing of refund claim. In other cases of refund, the date of submission of form STR-7A shall be considered as date of submission of refund claim and the same shall be filed within one hundred and twenty days of submission of relevant return: ........ (2) The registered person claiming refund in the aforesaid manner shall maintain and keep all the paper documents relating to the refund claim, such as invoices, credit notes, debit notes, goods declarations, bank credit advice, banking instruments etc. in his office and may not submit the same along with the refund to the concerned Regional Tax Office or Large Taxpayers' Unit. The same shall be presented to the said offices if so required by the officer-in-charge for processing of the refund claim or post-refund scrutiny. 29. Risk management system (RMS).(1) After submission of refund claim, in the aforesaid manner, the same shall be processed by Risk Management System (RMS) of FBR's Computerized System. Based on the parameters in RMS, a refund claim shall be routed to any of the following three channels as described below, namely: (a) ... (b) ... (c) ... 30. Processing through STARR channel. (1) For the claims or part of claims, as routed to STARR channel, the Computerized System shall cross match the data on soft copy with the data available in the system and process the claim by applying the risk parameters and generate analysis report indicating the admissible amount as well as the amount not validated along-with the objections raised by the system. (2) The processing officer shall forward the claim file along-with the analysis report referred to in sub-rule (2) to the officer-in-charge for further necessary action along with his recommendations. (3) Where the Processing Officer or the officer-in-charge is of the opinion that any further inquiry or audit is required in respect of amount not cleared by the STARR channel or for any other reason to establish genuineness and admissibility of the claim, he may make or cause to
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be made such inquiry or audit as deemed appropriate, after seeking approval from the concerned Additional Commissioner and inform the refund claimant accordingly. (4) On receipt of analysis Report and refund payment order for the amount verified by the system and found admissible by the processing officer, the officer in-charge shall sanction the amount so determined and issue the Refund Payment Order (RPO) electronically as well as a paper copy thereof to be signed and kept on record. (5) The RPO shall be electronically forwarded to CSTRO for payment. 31. Paym ent by CSTRO... 32. Omitted. 33. Extent of paym ent of refund claim... 34. Refund of excess input tax not relating to zero-rated supplies.--(1) The refund of excess unadjusted input tax relating to supplies other than zero-rated shall be claimed and sanctioned in the cases mentioned below, namely:-- (a) the[***] [gas transmission and distribution companies,] manufacturers of fertilizers [, cotton ginners], electric power producers and electric power distribution companies may claim refund of excess input tax over output tax in any tax period; [(b) ***] (c) ..... (i) ..... (ii) ..... (d) ..... Provided that the amount of refund claim in all such cases shall not exceed the excess of total input tax over the total output tax, as declared in the relevant returns, for the period in respect of which the claim has been filed and shall not include any excess input tax declared prior to the said period. (2) The registered person, after submission of return in which refund is claimed, shall file refund claim electronically in the form STR-7A, within the period as specified in rule 28: Provided that, if applicable, a statement along with annual audited accounts as envisaged in clause (i) of sub-section of (2) of section 8B of the Act shall also be uploaded. (3) The refund of excess input tax under this [rule] shall be [processed, sanctioned and paid] in the manner as provided in rules 29 and 30. (4) The refund of excess input tax provided in clauses (c) and (d) of sub-rule (1), excluding the cases of claims by registered persons, whose accounts are subject to audit under the [Companies Act, 2017 (XIX of 2017)], as referred to in section (2) of section 8B of the Act, shall be sanctioned as found admissible after a departmental audit of records maintained by the registered person and after a certificate is recorded by the [Inland Revenue officers] auditing the records that actual value addition during the period involved was not found sufficient to require a net payment of tax for the reasons mentioned in the audit report: (Emphasis supplied) 10. Section 10(1) of the Act relates to refund claim of taxpayers who fall under the category of zero- rated local supplies or the exports. The claim of such taxpayers is to be decided in 45 days. However, if the respondent-FBR has reason to believe that the refund claim was not admissible, then audit and/or inquiry proceedings can be initiated and are to be concluded within sixty days that can be extended up to one hundred and twenty days by the Additional Commissioner and by the Board up to nine months. Meaning thereby that pre-refund audit proceedings can be initiated even in case of taxpayers of all categories whether falling under Section 10(1) and/or the first proviso thereof. However, the time frame after initiation of the audit proceeding is to be regulated in terms of Section 10(3). The initial time period within which refund claim of taxpayers falling under
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proviso to Section 10(1) of the Act is to be decided is not provided, however, it has to be carried out within reasonable time. 11. Insofar as the first legal question formulated hereinabove is concerned, it is evident from bare reading that Section 10(1) of the Act deals with the refund claim of zero-rated local supplies and/or the exports. Proviso to Section 10(1) deals with category of cases other than those provided under Section 10(1). It is also imperative to note that there is no second opinion to the legal position that the case of the petitioner does not fall within the purview of Section 10(1) of the Act, rather, the same is covered by the proviso to Section 10(1). While the time period envisaged under Section 10(1) pertains to the excess input tax adjustment emanating out of zero-rated local supplies or exports, proviso to Section 10(1), deals with claim of the other taxpayers. It is the case of the petitioner that in any claim for refund under the Act, once no objection is raised by the respondent-FBR, within the stipulated time period provided under the law (i.e., Section 10 of the Act), the claim of the claimant/tax-payer (the petitioner in the instant case) crystalizes into verified and approved claim and cannot be retracted from or denied subsequently by the department and only post refund audit proceedings can be initiated. By this, the petitioner wants this Court to construe Section 10 as a self-containing and executory provision and failure to object to the claim of the petitioner within the stipulated time to operate as a deeming provision. Argument is misconceived to say the least. Section 10(3) of the Act empowers the respondent-FBR to initiate and carry out enquiry, audit and/or investigation into any claim for input tax credit or refund in cases where the tax authorities have reason to believe that the claim for input tax credit or refund is not admissible to the claimant. It will be imperative to mention that the Rules have been promulgated to actualize and operationalize the provisions of law contained in Section 10 of the Act and Chapter V contains the relevant provisions. This in itself connotes that Section 10 is not a self-containing and self-executory provision rather the admissibility of the refund claim is required to be determined before approving the same. It is further fortified by the words used in Section 10(1) i.e., "in such manner and subject to such conditions as the Board may, by notification in the official Gazette specify", shows that the provision is not self-executory rather the same is to be actualized in such manner and subject to such conditions as the Board may specify. 12. This brings the Court to examine the point as to whether the departmental functionaries can sit over the rights of taxpayers [falling under first proviso to Section 10(1)] for indefinite period firstly by their inactions and subsequently by initiating pre-refund audit proceedings to determine the admissibility of the claim and not concluding the same within reasonable time and what are consequences of delay in deciding the tax refund claim. It is admitted feature of the case that the petitioner cannot carry forward the input tax refund to the next tax period as the petitioner is charging the output tax at a reduced rate. Hence, refund claim of the petitioner merits expeditious decision. Moreover, it is evident that the legislature has provided a specific time-period under Section 10(3) of the Act which is sixty (60) days extendable to one hundred and twenty (120) days by an officer not below the rank of Additional Commissioner and thereafter, extendable to a maximum period of nine (9) months by the Board by setting out the reasons in writing as to the extension of time period to conclude pre-audit proceedings. Nothing has been stated as to whether such extension was obtained in the present case and if the same has not been sought, such a practice on the part of the department is deprecated as this clearly amounts to blatant, if not wilful, disregard for the legislative and statutory ordains. This, on the one hand, amounts to depriving the taxpayers form their money and, on the other hand, amounts to unjust enrichment of the State, albeit temporarily, and concomitant unjust impoverishment of the taxpayers. Therefore, it is imperative for the respondent-FBR to ensure that all the proceedings to determine the admissibility of the tax refund envisaged in terms of Section 10(3) of the Act are not only initiated promptly but also run through within the stipulated time in order to nurture confidence of the
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taxpayers and citizens in the fairness on the taxing system of the State. Question arises as to what are the consequences of the delay in allowing the tax-refund whether falling under Section 10(1) or the first proviso thereto. In this regard, learned Additional Attorney General has referred to Section 67 of the Act, which is reproduced as under: "Delayed Refund.- Where a refund due under section 10 is not made within the time specified in section 10 from the date of filling of refund claim, there shall be paid to the claimant in addition to the amount of refund due to him, a further sum equal to KIBOR per annum of the amount of refund due, from the date following the expiry of the time specified as aforesaid, to the day preceding the day of payment of refund: Provided that where there is reason to believe that a person has claimed the refund which is not admissible to him, the provision regarding the payment of such additional amount shall not apply till the investigation of the claim is completed and the claim is either accepted or rejected. Provided further that where a refund due in the consequence of any order passed under section 66 is not made within forty five days of date of such order, there shall be paid to the claimant in addition to the amount of the refund due to him, a further sum equal to KIBOR per annum of the amount of refund, due from the date of the refund order." (Emphasis supplied) Perusal of Section 67 indicates that while an additional sum equal to KIBOR per annum has been provided on the delayed refund, the same is also circumscribed by the first proviso thereto that where there is "reason to believe" that a person has claimed the refund which is not admissible to him, the penal consequences under Section 67 would not come into play till the investigation of the claim is completed and the claim is either accepted or rejected. This further accentuates and explicates the legislative intention that the refund claim on the lapse of period provided under Section 10 would ipso facto not crystalize into undisputed and payable as there is no express deeming provision to this extent and the department is vested with the power to determine the admissibility or otherwise of the claim. 13. As a matter of fact, there is no consequence for the non-adherence to the time-limit provided for…
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