Full Judgment Text & Judicial Ruling

2018 P T D (Trib.) 2287 [Inland Revenue Appellate Tribunal] Before Shahid Masood Manzar, Judicial Member and Muhammad Riaz, Accountant Member AIRBLUE LIMITED Versus COMMISSIONER INLAND REVENUE, ZONE-I, ISLAMABAD Sales Tax Appeal No.190/IB of 2016, decided on 1st March, 2017. (a) Sales Tax Act (VII of 1990)--- ----Ss. 2(35), 3, 4(b), 7, 11, 33 & 34---Federal Excise Act (VII of 2005), Ss.14 & 42-B---SRO No.490(I)/2004, dated 12-6-2004---SRO No.478(I)/ 2009, dated 13-6-2009---SRO No.550(I)/2006, dated 5-6-2006---Taxable activity---Scope of tax---Determination of tax liability---Assessment of tax---Appellant, an Airline, was subject to Federal Excise Duty---Appellant filed monthly sales tax returns for relevant tax period---Case of appellant was selected for audit under S.42-B of the Federal Excise Act, 2005 and Assessing Officer, proceeded to pass the assessment order along with default surcharge and penalty against the appellant---Appeal filed by the appellant, was partially rejected by the Appellate Authority---Validity---Main issue involved in the appeal was; whether the appellant was liable to adjust input tax on food, beverages and other services in terms of S.7 of the Sales Tax Act, 1990, or it would hit by Notification No. SRO 490(I)/2004, dated 12-6-2004---Appellant, being an Airline, under Sales Tax Act, 1990, was entitled for the adjustments of input tax in terms of S.7 of the Act and Notification S.R.O. No.550(I)/2006, dated 5-6-2006 on food, beverages and other services---Provisions of Sales Tax Act, 1990, were applicable on the services rendered in respect of travel by air of passengers within the territorial jurisdiction of Pakistan---Collection of Federal Excise Duty on services rendered by Airline within territorial jurisdiction of Pakistan, was deemed to be like the output tax payable on supplies (Supply of Services) under Sales Tax Act, 1990---Passengers were offered meals/eatables and drinks etc. during the flight; which had direct nexus and was integral part of travel service to passengers---Flight crew/staff, between the period of returning from one flight to another flight, was entitled to stay in designated hotels arranged by the Airline---Any input tax incurred with reference to crew, was directly attributed to the taxable activity of the Airline---Any sales tax paid/incurred on the crew/staff of the Airline and the input tax paid on the refreshment of passengers, was having direct attribution on the furtherance of taxable activity---Any input tax paid on said activity, was admissible in terms of S.7 of the Sales Tax Act, 1990---Input tax suffered on account of receiving services from different vendors/suppliers was admissible---Assessing Officer, had failed to point out a single instance of misuse of personal usage on part of the management of Airline in respect of input tax incurred---Notification SRO No.490(I)/2004, dated 12-6-2004, provided exception to items on which the input tax was not admissible---Exemption was for the 'goods', otherwise than 'stock in trade'---Input tax claimed by the Airline, was allowed and demand raised in that respect, was deleted and appeal was accepted accordingly. [Case law referred]. (b) Limitation--- ----Provision of Limitation in a statute---Object---Object of providing limitation in any statute was to finalize the transaction within the period specified therein; so that there could not be any adverse financial implication after the expiry of the period mentioned therein---Object of provision for limitation was to regulate the course and manner for providing relief or remedy; where substantive rights were pressed in the limitation---Policy behind the provisions for limitation was to encourage promptitude in the remedies---Doctrine of limitation, was based on legal maxim that "delay defects equity, time and tide wait for none and law helps the vigilant and not the indolent"---Bar of limitation created valuable rights in favour of parties. (c) Words and phrases--- ----"Stock-in-trade"---Meanings explained. [Case law referred]. Tahir Razzaque Khan, FCA, Authorised Representative and Shaheer Bin Tahir for Appellants. Imran Shah, FCMA, Departmental Representative for Respondent. Date of hearing: 1st December, 2016. ORDER SHAHID MASOOD MANZAR (JUDICIAL MEMBER).---The titled appeal has been preferred at the instance of appellant against impugned appellate order passed by the learned Commissioner Inland Revenue (Appeals-I), Islamabad under section 14 of the Federal Excise Act, 2005 vide Federal Excise Order-in-Appeal No. 116 of 2016 dated 09-05-2016. The said order was passed in consequence of the appeal preferred by the appellant against the impugned Order-in-Original No. 02/100 of 2015 dated 30-09-2015 passed by the learned Deputy Commissioner Inland Revenue, Audit-1, Large Taxpayers Unit, Islamabad. 2. Facts for the purpose of disposal of this appeal, in brief, are that the appellant is a public limited company engaged in the business of airline and is subject to Federal Excise Duty. The registered person filed the monthly sales tax returns for the tax periods of 01/2010 to 12/2010. Subsequently the case was selected for Audit under section 42B of the Federal Excise Act, 2005 and on the conclusion of audit proceedings a show-cause notice was issued vide C. No. DCIR1/LTU/Audit-I/FED/ Airblue/TY2010/2015 dated 16-09-2015 whereby the appellant was required to explain its position vis-a-vis issued cropped up during the course of audit. The DCIR not feeling convinced by the reply filed by the appellant proceeded to pass the assessment order under section 14 of Federal Excise Act, 2005 read with the relevant provisions of the Sales Tax Act, 1990 and raised a demand of Rs. 32,792,634 along with default surcharge and penalty under sections 34 and 33 of the Act, 1990 against the appellant. The impugned Order-in-Original was contested by the registered person in appeal before the first appellate authority where the appeal was partially rejected and on two issues the matter was remanded for de novo consideration. The appellant felt dissatisfied with the Order of first appellate authority come up in further appeal before this Tribunal. 3. This Appeal is being contested on the following grounds:-- (i) That the Order-in-Appeal No. 115/2016, passed by learned Commissioner Inland Revenue (Appeals-I), (hereinafter referred as CIR(A), Islamabad is bad in law and opposite to the facts and circumstances of the case; (ii) That the learned CIR(A) has ignore the fact that the show-cause notice is barred for 9 months in terms of section 11(5) of the Sales Tax Act, 1990. (iii) That the learned CIR(A) was not justified in confirming default surcharge for delayed payment for the tax period 08/10 and 09/10 as the period is barred by limitation of time and the matter on the instant stood settled in ATIR in S.T.A. No. 217/IB/2012 dated 21-05-2015. The CIR(A) also ignored the fact that refunds more than the principal amount were due with the department which were withheld by the department. (iv) That the CIR (A) has erroneously confirmed disallowance of invoked S.R.O. 490(I)/2004 dated 12-06-2004 and treating it as input tax on food and beverages and consumption on entertainment. Input tax incurred on food and beverage is incurred on passenger during the course of journey within the territorial limits of Pakistan and is incurred in the course of business and is admissible under section 7 of Sales Tax Act, 1990. Thus, the learned DCIR has erroneously invoked the provisions of section 8 read with S.R.O. 490(I)/2004 dated 12-06-2004; (v) That transactions till 30-09-2010 are barred by limitation on input tax incurred on food and beverages and consumption on entertainment; (vi) That the CIR(A) was not justified to confirm the order of DCIR to disallow input tax incurred on insurance charges of Rs.12,667,969 paid under Table-II of the First Schedule of Federal Excise Act, 2005. Section 6 of the Federal Excise Act, 2005 squarely allow adjustment, thus, the apportionment in terms of S.R.O. 478(I)/2009 dated 13-06-2009 was not justified, thus, illegal and arbitrary. The transaction of insurance is barred by limitation of time; (vii) That the CIR(A) erred in confirming the disallowing of the input tax amounting to Rs. 15,174,634 on account of non-verifiability despite of production of evidence. Section 8(1)(ca) does not allow rejection of input merely on the basis of conjunctures. Once the appellant has submitted documents for verification the department has no jurisdiction to disallow input tax after counter-verification from the other party. Transactions for disallowance of input tax are barred by limitation of time for first 9 months; and (viii) That appellant craves to amend, withdraw, add and substitute any grounds of appeal before or at the time of hearing of appeal. 4. The learned AR of the appellant Mr. Tahir Razzaque Khan, FCA submitted that the time barred for at least 9 months and last three months in the Order-in-Original can be adjudicated because the matters under consideration pertains to the tax period starting from January 2010 to December 2010. He submitted that the show-cause notice was issued on 16-09-2015 and adjudged on 30-09-2015. Under both the fiscal statutes the period of limitation has been postulated for five years under section 11 of the Act, 1990 and section 14 of Act, 2005. Therefore, first nine months from January 2010 to September 2010 are barred by limitation of time. Learned AR in this regard has placed reliance on the various judgments of Hon'ble Supreme Court and High Courts which are listed below reported on various law journals:-- 1. Pakistan International Airlines Corporation v. Central Board of Revenue, 1990 CLC 868 (H.C. Karachi) 2. Federation of Pakistan v. Messrs Ibrahim Textile Mills Ltd. and others 1992 SCMR 1898; 3. Assistant Collector Customs and others v. Khyber Electric Lamps and others 2001 SCMR 838; 4. Rose Colour Laboratories Nayab No. 1 (Pvt.) Ltd. v. C.B.R. and others 2003 PTD 1047; 5. Collector of Customs and ST v. K and A Industries, 2006 PTD 537 (SC Pak); 6. (sic) Collector of Customs, Sales Tax (West), Karachi v. K and A Industries, Karachi 2006 PTD 537; 7. Abdul Sattar v. Federation of Pakistan and others 2006 PTD 1171; 8. West Pakistan Tanks Terminal (Pvt.) Ltd. v. Collector (Appraisement) 2007 SCMR 1318; 9. Deputy Commissioner Income Tax v. Punjab Beverage Co., (Pvt.) Ltd. 2007 PTD 1347; 10. XEN Shahpur Division v. Collector Sales Tax (Appeals), 2008 PTD 1973; 11. Dewan Cement Limited v. Federation of Pakistan, 2009 SCMR 1126; 12. Gulistan Textile Mills Ltd. v. Collector (Appeals) Customs CE&ST, 2010 PTD 251; 13. Collector of ST&CE v. Zamindara Paper and Board Mills, 2008 SCMR 615; 14. Mughal-e-Azam Banquet Complex v. Federation of Pakistan, 2011 PTD 2260; 15. J. K Brothers Pakistan (Pvt) Ltd v. Additional Commissioner Inland Revenue, 2016 PTD 461 (H.C. Lah.); 16. Collector Sales Tax & CE v. Army Welfare Trust, 2016 PTD 1188 (H.C. Pesh.). He submitted that when the point of limitation is raised before the appellate authority, it is mandatory upon the authority to decide the matter of limitation first before proceeding to the merits of the case. In all the above cases the Hon'ble Supreme Court and High Courts have held that where the matter barred by limitation, it is without lawful authority and no legal effect. 5. Coming to the merits of the case, learned AR vehemently raised objection on the chargeability of penalty default surcharge amounting to Rs. 4,950,197 for the tax periods 08/2010 and 09/2010 and stated that these are time barred in terms of reasons stated above. He further submitted the details of refunds assessed but not paid by the department as at the end of Tax Year 2011 (Tax periods ending on 12/2010) available to the appellant amounting to Rs. 148.635 million. This amount includes Rs. 23.960 million of refund on account of RPO relating to refund arisen from the Order of the Appellate Tribunal, Rs. 80.541 million and Rs. 44.134 million had arisen on account of assessment under section 122(5A) for the Tax year 2009 and 2010 respectively. He stated that these refunds were not paid by the department. He has submitted the copies of the numbers of emails sent by the appellant to FBR during the month of October and November 2010 (when the tax returns for August and September 2010 were due) could not be filed due to the glitches of portal without any fault of the appellant. So the delay in filing was due to the problems in the e-portal of the FBR when the tax returns cloud not be filed without fault of appellant. He, further, submitted that additional tax and penalty could not be charged by the department until the department pays the assessed refunds to the taxpayer. He also drawn our attention toward the dictum laid by the Lahore High Court in the case of Garibwal Cement Limited v. ITAT reported as 2005 PTD 1 relating to levy of additional tax and penalty which is reproduced as under:-- 11. As for the merits of the case are concerned, again we will hold that imposition of penalty and its maintenance by CIT (Appeals) as well as the Tribunal was unjustified for the following reasons:-- firstly, the Revenue never succeeded in establishing the existence of mens rea in this case. Admittedly the impugned expense was claimed in bold words and the assessee attempted to support the same from the books, of accounts which were being maintained during the period of the project was with the Federal Government. The basis on which the Assessing Officer rejected the explanation in response to the show-cause notice, as reproduced above are not open to exception as far the principles of accounting are concerned. However the fact remains that before imposition of penalty, the Assessing Officer must have brought home that the claim of expense was a deliberate and wilful attempt on the part of the assessee to conceal the income. That having not been done the imposition was unjustified; secondly, it is by now well-settled that in fiscal matters a penalty should not be imposed only for the reason that it is legal to do so. Particularly where the statute vest a discretion in the Revenue Authority; thirdly, it is also established that in cases where imposition of penalty is discretionary, the power so vested may not be exercised unless the defaulter is found contumacious. In the case in hand in our opinion though the claimed expense was unjustified in view of the basic principles of accounting, yet mere claim of an expense did not make the assessee contumacious unless it was born out from the record that the assessee had persistently been cheating the Revenue in the previous years and was also bent upon to go away with it in the year under review. Apart from the above submission, he, also, relied upon on plethora of case law of Supreme Court of Pakistan, High Court and this Tribunal on the principles of levy of additional tax and penalty to support his contention. The case law relied upon by him are listed as follows: 1. Humayun Limited v. Pakistan reported as PLD 1991 SC 963 (S.C. Pak.); 2. Mamy Beverages v. Naseem reported as 1995 PTD 91 (H.C. Lah.); 3. Millat Tractors Limited v. Collector of ST&CE reported as 2003 PTD 1445 (H.C. Lab.); 4. D.G. Khan Cement Company Limited v. Federation of Pakistan reported as 2004 SCMR 456 = 2004 PTD 1179 (S.C. Pak.); 5. Collector of ST&CE v. Baba Farid Sugar Mills Limited reported as 2004 PTD 823 (H.C. Lah.); 6. Shamroz Khan v. Muhammad Amin reported as PLD 1978 SC 89 (S.C. Pak.); 7. Addl. Collector Sales Tax v. Rupali Polyester Limited reported as 2005 PTD 2412 (H.C. Lah.); 8. Pakistan State Oil Limited v. Collector of Customs, ST&CE reported as 2006 PTD 397 (H.C. Kar.); 9. Deputy Collector Central Excise and Sales Tax v. I.C.I. Pakistan Limited reported as 2006 SCMR 626 (S.C. Pak.); 10. Airblue Ltd. v. Commissioner Inland Revenue, LTU, Islamabad in Sales Tax Appeal No. 217/IB/2011, Order dated 21-05-2012 (Appellate Tribunal Inland Revenue); 11. Airblue Limited v. Commissioner Inland Revenue, LTU, Islamabad in Sales Tax Appeal No. 375/IB/2012 Order dated 01-06-2013 (ATIR); 12. Airblue Limited v. Commissioner Inland Revenue, LTU, Islamabad in Federal Excise Appeal No. 275/IB/2013 Order dated 24-12-2013 (ATIR); 13. Airblue Limited v. Commissioner Inland Revenue, LTU, Islamabad in Federal Excise Appeals Nos. 276/IB/2013 Order dated 24-12-2013 (ATIR); 14. Airblue Limited v. Commissioner Inland Revenue, LTU, Islamabad in Sales Tax Appeals Nos. 74 and 75/IB/2014 Order dated 10-12-2014 (ATIR); 15. Airblue Limited v. Commissioner Inland Revenue, LTU, Islamabad in Sales Tax Appeals Nos. 240 to 242/IB/2014 Order dated 10-12-2014 (ATIR); The learned AR of the appellant submitted that owing to non-existence of non-compliance of show-cause notice or lack of presence of mens rea or wilful default and presence of refunds of Rs. 148.635 million due to the appellant by the Revenue which are almost double to the principal amount of impugned default, no additional tax or penalty can be imposed. 6. Adverting to the next matter in appeal is with reference to admissibility of input tax on the adjustment of input tax on account of food, beverages and services in violation of Notification S.R.O. 490(I)/ 2004 dated 12-06-2004 he submitted that the input tax paid on the amount was patently admissible on the following grounds:-- (i) that the Federal Excise Duty is levied and collected under section 3 read with Entry No. 3 of Table - II of the First Schedule to the Federal Excise Act, 2005. These services include travel by air of passengers within the territorial jurisdiction in Pakistan as well as travel by air of passengers embarking on international journey from Pakistan. Such services enjoy constitutional backing under Entry No. 53 of Fourth Schedule to the Constitution of Pakistan, 1973 which deals with the "...Terminal taxes on goods or passengers carried by air; taxes on their fares and freights". He explained that travel by air of passengers within the territorial jurisdiction of Pakistan is classified under PCT heading 9803.1000 under category (a) to Entry No. 3 of the Table - II to the First Schedule to Federal Excise Act, 2005 and FED thereon is levied and collected as if it were a tax payable under section 3 of the Sales Tax Act, 1990 vide Notification S.R.O. 550(I)/2006 dated 05-06-2006. The above notification was issued by the Federal Government in exercise of powers conferred by section 7 of the Federal Excise Act, 2005; (ii) that PCT heading 9803.1000 is covered under Notification S.R.O. 550(I)/2006 dated 05-06-2006 wherein Federal Excise Duty is transformed into sales tax and be collected under section 3 of the Act, all the provision of the Act, rules made, notifications, orders and instructions issued shall apply. He submitted that food, beverages and other services were used in furtherance of the taxable activity and are integral part of the travel services (which is taxable activity under section 2(35) of the Act) and this cannot be declared inadmissible with any stretch of imagination. So far as the input tax on services is concerned he submitted that it was incurred in the furtherance of business and has direct nexus to the services rendered in the course of taxable activity. The services include the stay of the designated crew at the designated stop over hotels during the flight operations. He, further, drew our attention that airlines are under obligation to follow international conventions and regulations issued by the Civil Aviation Authority. In order to ensure the compliance the airline take care the flight crew, attendants, cabin crew and other staff to ensure that each member should be fatigue free. The airline has made such arrangements with different hotels in different cities for the crew to take rest for fresh embarkation of onward duties. Such arrangements had direct nexus with performance of duties and was in the furtherance of business as well as taxable activity. Therefore, such an activity is direct ingredient of input tax without any question mark; (iii) that the input tax used in international journey from Pakistan is concerned, FED is collected and deposited in national exchequer. So far as the items like food, supply of stores and provisions are concerned, these are specifically zero-rated in terms of section 4(b) of the Act, therefore, it is very clear that these input tax credits are directly relating to services against which the output tax (under sales tax mode) has been paid by the appellant. He also produced a letter C. No. 2(6)Audit-II/ Tax.Inform/ST&CE-W/2002 dated 25-01-2002 issued by Additional Collector of the erstwhile Collectorate of Sales Tax and Central Excise (West), Karachi to Pakistan International Airline Limited which states that:- " Supply of stores and provision for consumption abroad a conveyance proceeding to destination outside Pakistan can be made zero rated in terms of clause (h) of Section 4 of the Sales Tax Act, 1990 provided they are distinguished from the goods consumed on domestic flights by the Airline." Since the entire supply of stores and conveyance for consumption abroad enjoys zero-rating, therefore, any element of inclusion of input tax incurred on travel of passengers on international journey is out of question; (iv) that Notification SRO No. 490(I)/2004 dated 12-06-2004 states that "... the Federal Government is pleased to specify the following goods, acquired otherwise than as stock in trade by registered person, to be the goods in respect of which input tax shall not be claimed, namely...... ". This Notification squarely allows input admissibility as far as it is stock in trade and is used in taxable activity. He submitted that a similar issue was raised before the Hon'able Supreme Court of Pakistan while interpreting Notification SRO. 1111(I)/90 dated 01-11-1990 (one of the predecessor to Notification SRO. 490(I)/2004 dated 12-06-2004) in the case of Attack Cement v. Federal of Pakistan reported as 2005 PTD (Trib.) 779 and Hon'able Apex Court held that stock in trade has to be given dictionary meaning; and (v) that the judgments reported as 2001 PTD 2097 (S.C. Pak) and 2014 PTD 1285 (H.C. Lah.) also supports the contention of admissibility of input tax under section 7 of the Act. He submitted that the department was not justified in holding the input tax inadmissible and is due the lack of understanding of the industry practices and knowledge. He prayed that the demand should be deleted. 7. The learned AR submitted that the department was not justified to invoke the apportionment provisions on account of Federal Excise and Sales Tax paid on account insurance charges amounting to Rs. 22,896,819 because the aforesaid transactions under consideration is barred subject to limitation of time limit of five years under both the fiscal statutes. He produced the copies of sales tax cum federal excise monthly tax return for March and June 2010 where Rs.320,884 and Rs.22,575,935 respectively was claimed under the input tax column as regard particulars of supply. Thus, the tax liability of Rs.12,667,969 is totally unjustified on the pretext of limitation. 8. On the last point, the learned AR of appellant submitted that the learned CIR(A) was not justified in invoking section 8(i)(ca) of the Sales Tax Act, 1990 {section 8(1)(caa) of the Sales Tax Act, 1990 was invoked in show-cause notice as well as Order-in-Original) on account of mis-match of input tax with output tax amounting to Rs. 15,174,634 {the amount mentioned in show-cause notice and Order-in-Original is Rs. 13,991,608} because at forums below the record for verification was provided, whereas the CIR(A) has not applied his independent mind and preferred to remand back the case in a slipshod manner. He submitted that so far as section 8(1)(ca) is concerned, the Hon'ble Lahore High Court has already held as 'unconstitutional' in the Judgment reported as PLD 2013 Lah. 693. Even otherwise, learned AR of the appellant submitted, CREST was introduced through section 2(5AC) in Sales Tax Act, 1990 by Finance Act, 2013 and were found missing in section 8 of the Sales Tax Act, 1990. Therefore, it cannot be create any liability on the appellant. He argued that this Tribunal has already held, the show-cause notices, Order-in-Original and Order-in-Appeal on the basis of CREST, as illegal, void, without lawful authority and legal impropriety in the case reported as 2014 PTD (Trib) 992; 2015 PTD (Trib.) 360 and 2015 PTD (Trib.) 919. 10. The learned DR, on his turn vehemently opposed the submission of the learned AR. He submitted that the issue of limitation of time cannot be raised before the Appellate Tribunal because the registered person has not properly addressed the issue of limitation before the first appellate authority and such time limitation should have been raised at the adjudication level, therefore, this point may…

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