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Official Citation: 2007 SCMR 517
Court / Jurisdiction: Appellate Tribunal Inland Revenue
Year of Decision: 2011
Decision Date: 2011-03-03
Parties: Messrs FAUJI KABIRWALA POWER COMPANY LTD, KHANEWAL vs COMMISSIONER OF INCOME TAX, ISLAMABAD
This judicial decision was delivered by the Appellate Tribunal Inland Revenue on 2011-03-03. The matter involves proceedings between Messrs FAUJI KABIRWALA POWER COMPANY LTD, KHANEWAL and COMMISSIONER OF INCOME TAX, ISLAMABAD, officially reported as 2007 SCMR 517. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.
Case cited as 2007 SCMR 517
Court Name: Appellate Tribunal Inland Revenue Judge(s): Munsif Khan Minhas, Ikram Ullah Ghauri Title:Messrs FAUJI KABIRWALA POWER COMPANY LTD, KHANEWAL vs
COMMISSIONER OF INCOME TAX, ISLAMABAD Case No.: S.T.A. No,132/IB of 2010 Date of Judgment:2011-03-03 Reported As: 2011 PTD (Trib.) 1306 Result: Appeal dismissed Judgment ORDER By this judgment we intend to dispose of Appeal No STA/132/IB/2010. Brief facts of the case are that a team of the DRRA conducted desk audit of revenue receipts of the Collectorate of Sales Tax Multan. The audit of sales tax receipts relating to Messrs Fauji Kabirwala Power Company for 2006 and 2007 revealed excessive claim of input adjustment by the company. Following up on audit on the DRRA's audit observation, the audit team of the Collectorate of Sales Tax Multan found that the DRRA's observation was valid. Accordingly the Additional Collector (Adjudication) Collectorate of Sales Tax, Multan issued show-cause notice C.No,30/2008/Adj/ST/Addl/ 1985 dated 17-1-2008 to Messrs Fauji Kabirwala Power Company stating that, the appellant had supplied electricity to WAPDA and received consideration as energy purchase price and capacity purchase price. According to the law governing IPPs, only energy price was liable to sales tax. Therefore, they could claim input adjustment only for the sales tax paid on energy price. However, the appellant failed to apportion the input tax credit relating to capacity payments required by the apportionment rules of Sales Tax Act, 1990. This irregularity caused non-payment of sales tax of Rs,146,480,724 which was recoverable from the appellant along with penalty and additional tax/default surcharge under sections 33 and 34 of the Sales Fax Act, 1990. 2. The appellant's reply to the show-cause notice was found untenable. The adjudicating authority vide his Order-in-Original No, 8 of 2009 dated 13-2-2009, determined that the charges stated in the show-cause notice were fully established and sales tax amounting to Rs,146,480,724 was recoverable from the appellant along with default surcharge and penalty under the related provisions of the Act. The appellant, filed an appeal before the Commissioner of Inland Revenue
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(Appeal-1), Islamabad who after detailed analysis of the case upheld the order-in-original for the self-explanatory reasons given in his elaborate Order-in-Appeal No 57 of 2010 dated July 15, 2010. 3. Being aggrieved by the order-in-appeal passed by the learned Commissioner Inland Revenue (Appeals-1), Islamabad, the appellant filed the instant appeal on the following grounds:-- 3.1 The Order-in-Appeal No, 57 of 2010 dated July 15, 2010 passed by the learned Commissioner Inland Revenue (Appeals-1), Islamabad is bad in law, and facts of the case. 3.2 The learned Commissioner Inland Revenue (Appeals-1) has erred in not giving any findings on our contention that the staff of Directorate of Revenue Receipt Audit (DRRA) is not authorized to conduct the audit of sales tax of the Appellant's records as per judgments of Superior Courts, on the issue. 3.3 The learned Commissioner Inland Revenue (Appeals-1) has erred in passing the order-in- appeal in a summary manner without considering the legal and factual position of the case and rebutting appellant's submission during hearing proceedings of the case. 3.4 The learned Commissioner Inland Revenue (Appeals-1) has erred in confirming the apportionment of the input sales tax. 3.5 The learned Commissioner Inland Revenue (Apppeals-1) has erred in confirming the Order-in- Original No, 8 of 2009 date February 13, 2009 passed by the Additional Collector (Adjudication) holding that default surcharge and penalty under sections 34(1) and 33 (5) respectively is recoverable from your Appellant under facts and circumstances of the case. 3.6 Your Appellant craves to, add, amend or alter the above grounds of appeal. 4. Hearing of the case was held on 18-10-2010 and finally on 26-2-2011. The AR on behalf of the appellant and the DR represented respondent pleaded their respective cases:-- 4.1. Claiming that the initiation of adjudication on the basis of audit observation of DRRA was unlawful, the AR argued that the honorable Peshawar High Court in a judgment dated September 18, 2008 reported as and 2008 PTD (Trib.) 261, 2007 PTD (Trib.) 1600 had categorically held that the DRRA was a branch of Auditor General of Pakistan and was not authorized to audit the record of private enterprises/industrial units licensed/ registered under the Act, as such the whole exercise conducted by DRRA or the Sales Tax department including the show-cause notice the O.N.O and the Order-in-Appeal was quorum non-judice. The Sales Tax Act, 1990 does not vest the DRRA with the powers of sales tax officer and the show-cause notice in the present case on the basis of audit of DRRA is quorum-nonjudice and, therefore, requested to withdraw the same. The appellant drew attention towards section 12 of the Auditor General's (Functions, Powers and Terms and Conditions of Service) Ordinance, 2001 (AG Ordinance) which restricts the role of the Auditor General's office to the audit of receipts payable into the Consolidated Fund or Public Accounts of the Federal Government or Provinces or the accounts of each district to satisfy himself that all such receipts have been properly deposited and rules and procedures relating thereto, are being fully observed and the systems are in place for assessment and collection of government receipts. Therefore, the Auditor General is authorized to ensure proper assessment and collection of government receipts but has no jurisdiction to conduct audit of private companies/firms. The Appellant reiterated that powers of the Auditor General in terms of section 14 of the AG Ordinance are limited to audit of receipts as stated in section 12 of AG Ordinance and are not intended to expand AG's power to audit the records of the taxpayer. The charter of function of Auditor General specified through S.R.O. 1195(I)/90, dated 17-12-1990 requires the Auditor General to audit the receipt of the Federal Government and not the records of private enterprises/industrial units licensed/registered under the Act ibid. The appellant relied on the case-law 2007 PTD (Trib.) 1600 and 2008 PTD (Trib.) 261. The appellant in support of her contention further stated that honorable Peshawar High Court, Peshawar in a judgment dated 18-9-2008, has categorically held that the whole exercise conducted by DRRA was quorum non-judice in view of the charter of functions given in S.R.O.
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1195(I)/90, dated 17-12-1990. The honorable Court also observed that DRRA was a branch of AG and its officers were neither sales tax officers under section 30 of the. Sales Tax Act, 1990 nor authorized under Sales Tax Rules, 2005 to access the premises and accounts of registered units. 4.2 The AR explained that the special procedure for collection and payment of sales tax on electric power provided in Chapter VI of the Sales Tax Special Procedure Rules, 2006, states that in case of IPP, the value of the supply shall be the amount received by such IPP on account of energy purchase price only and "capacity purchase price" shall not form part of value of supply for the purpose of levy of sales tax. He invited attention to sub-rule (3) of Rule 38 of the Sales Tax special procedure Rules 2006 which reads as follows:-- "(3) In case of an I.P.P, HUBCO or KAPCO, the value of supply shall be the amount received by such IPP or, as the case may be, HUBCO or KAPCO, on account of Energy Purchase Price only and any amount in excess of Energy Purchase Price received on account of Capacity Purchase Price, Energy Price Premium, Excess Bonus, Supplemental Charges, etc., shall not be deemed as a component of the value of supply, notwithstanding anything contained in clause (46) of section 2 of the Act." It was contended by the learned AR that his position was in accordance with the procedure laid down in Sales Tax General Order No, 3 of 2004 dated June 12, 2004. In the aforesaid General Order, the F.B.R. Confirmed thatIPPs will be entitled to claim full input tax adjustment of sales tax paid on purchase of furnace oil and any other raw material for making supply of electricity subject to the provision of section 8 and the notifications issued, thereunder. The A.R, thus argued that the CCP was excluded from the value of supply defined by section 2(46) of the Sales Tax Act, 1990. He claimed that the C.C.P part of the consideration or valued received by the appellant from Wapda constituted neither supply, nor value nor consideration and was out-ride the scope of value received "in furtherance of business". Hence, its apportionment was unlawful, 4.3. The AR pleaded that in the meeting held on December 13, 1999 under the chairmanship of Secretary, Water and Power in which Member (Sales Tax) F.B.R. Also participated, it was confirmed by Member FBR that"IPPs will be entitled to claim full input tax adjustment against sales tax paid on purchase of furnace oil, lubricants, scare arts etc., however excluding the items mentioned in the sales tax No, S.R.O. 578(1)198 dated 12-6-1998. He stated that a copy of the draft General Order prepared by F.B.R. On the issue was also circulated among the participants which was later, officially notified by F.B.R. Vide Sales Tax General Order No,01 dated 24-1-2000. 4.4 =The AR pressed the argument that the respondent failed to appreciate the basis of calculation of sales tax payable by the appellant as provided in Sales Tax General Order No, 3 of 2004 dated June 12, 2004 which was further explanation of the Sales Tax General Order No, 1 of 2000 dated 24- 1-2000 issued by the F.B.R. Contending that the respondent failed to understand that C.G.O. No,3 of 2004 and Sales Tax Rules 2006 prohibits The apportionment between the Energy Purchase Price (E.P.P.) and Capacity Purchase Price (C.P.P). The A.R. Explained that the aforesaid C.G.O. Provides as follows:-- "The issue has been examined in the Central Board of Revenue and it is ruled that the value of supply of electricity by IPPs is the amount received on account of Energy Purchase Price only. Therefore, any amount in excess of EPP received on account of Capacity Purchase Price Premium, Excess Bonus, Supplemental Charges etc. Is not to be included in the value of supply as defined in clause (46) of section 2 of the Sales Tax Act, 1990. However, the assessm ent of sales tax is to be donein accordance with the provision of sections 7, 8 and all other relevant provisions of the Act, rules and notification. The IPPs will be entitled to claim full input tax adjustment against the sales tax paid on purchase of furnace oil and other tax-paid purchase for making supply of electricity subject to the provisions of section 8 and the notification issued thereunder.
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He continued to explain that the Sales Tax Rules, 2006 exclude the value of supply from the ambit of section 2(46) of the Sales Tax Act, 1990 in case of IPPs as follows:- "The A.R. Explained that the special procedure for collection and payment of sales tax on electric power provided in Chapter VI of the Sales Tax Special Procedure Rules, 2006, states that in case of IPPs the value of the supply shall be the amount received by such IPPs on account of "energy purchase price" only and "capacity purchase price" shall not form part of value of supply for the purpose of levy of sales tax. He invited attention to sub-rule (3) of Rule 38 of Sales Tax Special Procedure Rules, 2006 which reads as under: (3) In case of an I.P.P., HUBCO or KAPCO, the value of supply shall be the amount received by such IPP of, as the case may be, HUBCO or KAPCO, on account of Energy Purchase Price only and any amount in excess of Energy Purchase Price received on account of Capacity Purchase Price, Energy Purchase Premium, Excess Bonus, Supplemental Charges, etc. Shall not be deemed as a component of the value of supply, notwithstanding anything contained in clause (46) of section 2 of the Act". He contended that their position was in accordance with the procedure laid down in Sales Tax General Order No,3 of 2004, dated 12-6-2004. In the aforesaid General Order, the F.B.R. Confirmed that IPPs will be entitled to claim full input tax adjustment of sales tax paid on purchase of furnace oil and any other law material for making supply of electricity subject to the provision of section 8 and the notifications issued, thereunder. Hence the Capacity Purchase Price was excluded from the value of supply as defined by section 2(46) of the Sales Tax Act, 1990. On the strength of C.G.O. And Sales Tax Rules, 2006 the A.R. Claimed that apportionment of taxable and non-taxable supplies in respect of Energy Purchase Price (E.P.P.) and Capacity Purchase Price (C.P.P) is unlawful. Co-incidentally, both the AR as well as the DR seem to argue their respective positions based on the same legal framework comprising. STGO No, 01/2000, STGO No,3 of 2004, section 2(46), section 7 and section 8 of the Sales Tax Act, 1990 and Rule 13 of sales tax Special Procedure Rules, 2007, their mainstay being that the capacity payment represented a nontaxable supply, i,e,, not subject to payment of Sales Tax. While, both the parties claim that capacity payment part of the consideration received by the appellant, represents a non-taxable supply, yet the controversy is about admissibility of input tax adjustment in respect of the capacity payment part of the consideration received by the appellant. The tax authorities believe that the capacity payment being non-taxable supply should be apportioned under sections 7 and 8 of Sales Tax Act. The appellant insists that input adjustment relating to capacity payment is admissible because it is not a supply. 4.5 The AR further contended that input tax credit claimed by the appellant against energy purchase price is not only in accordance with the provisions of law but also as per the industry practice in this respect. The Sales Tax department, in case of other IPPs has conceded to the input adjustment for capacity payment but the appellant was being subjected to discriminatory treatment in violation of Article 25 of the Constitution. He also cited the case-law reported as 2004 PTD 2294 and 2004 PTD 942 to support his contention. 4.6. The AR went on the state that the first as well as the second adjudicating authority after reproducing the contentions of the appellant and the DR in the Order, instead of rebutting the contentions of the appellant passed the summary order as follows: - "In the light of above, I have come to the conclusion that the contention of the prosecution is correct and the sales tax Rs,146,480,724 is recoverable from the respondents along with default surcharge (will be calculated at the time of payment) under section 34(1) and penalty under section 33(5) of the Sales Tax Act, 1990."
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4.7 The A.R. Concluded his presentation by saying that his stance was reconfirmed by the F.B.R. As well as the F.T.O. The Tribunal was under obligation to follow the F.B.R.'s directives. He further emphasized that the input adjustment in respect of capacity payment part of the consideration was an established practice of the industry. Denying this facility to the appellant was discriminatory and violated Art.25 of the Constitution. 5. On his turn the learned DR, defended the impugned order-in-original and the order-in-appeal passed by the learned Additional Collector (Adjudication), Multan and the Commissioner Inland Revenue, respectively, stating that according to section 3 of the Sales Tax Act, 1990, the sales tax was applicable @ 15% on the value of taxable supply. He argued that according to Rule 13(3) of the Sales Tax Special Procedures Rules, 2007, certain receipts (like capacity purchase price, energy price premium etc.,) which are otherwise part of value of supply under section 2(46) of the Act, 1990, but deemed to be excluded from the value of supply or in other words, have been treated as exempt supplies. Therefore, under section 8 of the Sales Tax Act, 1990 the appellant is not entitled to input tax adjustment in respect of the capacity payment which falls in the ambit of exempt supplies due to the fact that the capacity payment was not chargeable to sales tax under section 3 of Act. Thus, the Additional Collector (Adj.) has correctly disallowed the proportionate amount of input tax relating to exempt or non-taxable supplies, i,e,, the capacity payment part of the supply. He stated that the order-in-appeal exhaustively discussed each ground of appeal and contained good reasoning for upholding the order-in-original under reference. 6. The written and verbal arguments put forth by the A.R. Of the appellant company and the DR, heavily contested the meanings of terms like supply, the value of supply, taxable supply, purpose of supply, consideration, business and value received in furtherance of business. The calculation of sales tax liability and appellant's entitlement to the input tax adjustment was also vehemently contested. The central controversy is two fold, i,e, firstly whether the capacity purchase price represents a value for supply as defined by sections 2(33), 2(35) and section 2(46). Secondly, whether the value, consideration or price called the capacity purchase price is subject to apportionment under section 8 of the Sales Tax Act, 1990. These two issues involved in this case are of a fundamental nature and very critical to our tax system. In view of the conflicting views of the parties to the case, and the importance of the issues this Tribunal would like to frame the following questions of law and facts for their threadbare analysis and entering the findings:- (a) Whether a contravention report, show-cause notice and subsequent adjudicatory proceedings triggered from an audit observation made by DRRA are unlawful per se. (Appellant's ground No, 3.2). (b) Whether the capacity purchase price (CPP) received by the appellant falls in the ambit of value of supply as defined by section 2(46) of the Sales Tax Act, 1990. (c) Whether the original and the appellate adjudicatory authorities failed to understand sections 7 and 8 of the Sales Tax Act, 1990 and unlawfully apportioned the appellant's input tax adjustment claim between the EPP (the taxable component of the value of supply) and the CPP (the non- taxable component of the value of supply) received by the appellant. (d) Most fundamental issue of determining whether F.B.R. Could lawfully amend statutory provisions contained in section 2(46) and sections 7 and 8 of the Sales Tax Act, 1990, through Sales tax General Order No, 3/2004, and the Sales Tax Rules, 2006. 7 Analysis and findings In this part we attempt to analyze the legal framework relating to this case and enter out finding with regard to each issue farmed above. 7.1 Analysis and finding on ground No,3.2 and issue framed in Para 6(a). The contention of the appellant that DRRA had no jurisdiction to conduct audit of private enterprises has been examined in its right context. We do agree with the appellant that the officers
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of DRRA have not been vested with powers of Sales Tax Officer and therefore, cannot conduct audit of a tax payer directly. We are also aware of the honorable Peshawar High Court's ratio concerning the audit by officials of the DRRA. However, the case before this tribunal is clearly distinguishable from the case-law cited by the appellant. In this case neither the officials of the DRRA entered the premises of the appellant nor laid hands on its private record. The DRRA officials in discharge of their lawful functions of revenue receipts audit pertaining to sales tax Collectorate, Multan pointed out excessive adjustment of input tax by the appellant. On their potation the audit team of the sales tax Collectorate Multan conducted audit which confirmed the observation of the DRRA team that led to issuance of the show-cause notice and the consequent adjudication proceedings against the appellant. The Auditor General's (Functions, Powers, Terms and Conditions of Service) Ordinance 2001, confers upon the officials of this institution certain legal responsibilities which include audit of revenue receipts payable into the consolidated fund or public accounts of the Federal or Provincial Government. The role of the DRRA and the manner of their discharge of functions in relation to the sales tax receipts is envisaged in Auditor General of Pakistan's Circular No,1167- Coord(Hq)RRA/35-2007 dated 29-2-2007, the relevant part of which is reproduced as follows:-- (i) DRRA team will visit Sales Tax Collectorate and Collectors will make available all auditable record/information, including refund files, reward cases, departmental audit report (internal or investigative) along with supporting files, etc. DRRA offices will also be provided access to the entire computerized data of the sales tax registered persons available centrally with the C.B.R./Collectorates for desk audit. (ii) On the basis of desk audit, the DRRA audit teams will select cases which, in their opinion, need examination. The list of such cases would be handed over by the audit team to the concerned Collector who will ensure production of taxpayer's record under section 25 of the Sales Tax Act, 1990. (iii) There would be no direct interaction between DRRA audit team and taxpayers. (iv) The audit will be conducted at the Collectorates premises and in no case DRRA audit team will visit premises of private taxpayers. (v) Sales Tax Department will not use the name of DRRA for any activity to be performed by them under the Sales Tax Act, 1990 nor will the department elate any section/cell of the Collectorate to the DRRA. (vi) The audit observations would be discussed by the leader of the audit teams with the concerned Collectorates. The Collectors would issue contravention reports only if the audit observations are, in their opinion, legally tenable. (vii) There will be no "stamping" of records of individual registered persons by the audit teams. Audit report issued by audit teams will suffice the requirements of audit. In view of the foregoing, we conclude that initiation of adjudication proceedings based on the pointation or observations of DRRA is perfectly lawful. To say that the DRRA cannot point out any short payment or inadmissible adjustment of input tax is to disable the constitutional duty of the institution of the Auditor General which has the responsibility of protection of public revenues. Likewise it is also tantamount to denying the constitutional role of the Public Accounts Committee in safeguarding the public revenue. The DRRA analyses the federal revenue receipts on the basis of tax record of a tax collecting agency. Since the tax collecting agency collects tax from a tax payer, it is quite rational that the taxpayer records have to be scrutinized in order to figure out any leakage of revenue. The DRRA'can exercise the functions of review of the audit receipts of a federal tax collecting agency only by examining the tax record of a taxpayer. In this case the DRRA pointed out short payment of the tax not to the taxpayer, but to the tax collecting agency, which is quite lawful. The Honorable Peshawar High Court's decision with regard to DRRA 's role does not apply to
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this case because the DRRA did not audit the taxpayer's account directly. Secondly, every citizen of this country has a duty to point out evasion of public money. In case a complaint by a private person leads to recovery of a short paid tax, the complainant has vested right to payment of reward according to the Reward Rules notified by the Federal Board of Revenue from time to time. In the light of the foregoing discussion, the A.R.'s argument is determined to without the force of law. The case-law cited by him is irrelevant and out of context. 7.2Analysis of ground No, 4.2 and issue framed in para 6 (b). The arguments of the appellant and the DR were examined in the light of the provisions of law as referred to by the AR and the DR. Both the parties have difference of opinion on meaning of certain expressions like "supply", "taxable supply" value of supply, purpose of business and furtherance of business. Therefore, it seems expedient to discuss what is Meant by the phrases discussed in this case and how these expressions have been interpreted by Courts of law. (I) 'Supplymeaning. ---Supply includes sale or other disposition of goods in furtherance of business carried out for consideration including putting to private business or non-business use of goods acquired, produced or manufactured in the course of business. [Sheikhoo Sugar Mills Ltd. v. Government of Pakistan and others 2001 SCMR 1376 = 2001 PTD 2097]. Supply is not confined to sale transaction but extends to other disposition of goods in furtherance of business carried out for…
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