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Petitioner: WATEEN TELECOM LTD. through Authorized Attorney VS Respondent: SINDH through The Secretary of Ministry of Finance Government of Sindh, Karachi and 2 others
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar Title:WATEEN TELECOM LTD. through Authorized Attorney vs SINDH through The
Secretary of Ministry of Finance Government of Sindh, Karachi and 2 others Case No.: Suit No,1458 and C.M.A. No,10327 of 2018 Date of Judgment:2018-11-09 Reported As: 2019 PTD 1030 Result: Application allowed Judgment ORDER MUHAMMAD JUNAID GHAFF AR, J.---This is a Suit for Declaration and Permanent Injunction and the Plaintif f is primarily aggrieved by its selection for audit for the tax year 2014 and the notice issued thereon. Through listed application, the Plaintif f seeks a restraining order against the Defendants from proceeding any further on the basis of impugned Notice dated 25.06.2018. 2. Precisely the facts, as stated, are that Plaintif f is a Company having its business at Lahore, Karachi and Islamabad and is engaged in providing services in telecommunication, including but not limited to, Internet Services, Data Services, Voice Services, VPN Services, Optical Fiber Cable Servic es, LDI Services, Gpon (Internet Services), Hosted Data Centre (HDC) Services and Managed Capacity Services. It is the case of the Plaintif f that being registered with Sindh Revenue Board since 05.07.2012 under the head of telecommunication services satellite based (HS Code: 9812.2500), the Plaintif f has been charging tax on these services and depositing it with the Defendants under the Sindh Sales Tax on Service Act, 2011 (Sindh Act); whereas, in terms of the Sindh Act, the impugned Notice dated 25.06.2018 has been issued whereby the Plaintif f has been selected for audit and for which Defendant has no authority to issue such notice without assigning proper reasons. 3. Learned Counsel for the Plaintif f has read out the provisions of Section 28 of the Sindh Act and has contended that it does not confer any unfettered discretion or powers to the officer concerned for selecting any taxpayer to conduct audit without assigning proper reasons for doing so. According to the learned Counsel the Commissioner concerned is bound to, and must give reasons for selecting a taxpayer for conducting audit. He has next contended that if this is permitted, then this would lead to pure harassment at the hands of the officials concerned, as then in every other case, a taxpayer will be selected for audit, and this cannot be permitted under the Act. He has further contended that subsection (1) of Section 28 (ibid) itself provides that an audit can only be conducted on the basis
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of Return submitted by a registered person; or the record obtained under Section 27(2), and therefore, it is provided in the Sindh Act within itself, that selection can only be based once the officer has plausible reasons after going through the record, that audit is needed. According to him in terms of the provisions of Section 28 (ibid), the Officer must review the tax returns on record, apply his mind and then decide whether or not a taxpayer is to be selected for an audit. According to him there must be a conscious decision after applying an independent mind to the effect that the record requires and he has sufficient reasons to conduct audit proceedings, and these reasons must be recorded in the Notice itself, whereby, a taxpayer is being selected. Learned Counsel has submitted that it cannot be done whimsically or arbitrarily , by the Officer concerned without providing any justification to that effect. Learned Counsel has also referred to various other Federal Tax Laws including Section 25 of the Sales Tax Act, 1990, Section 46 of the Federal Excise Act, 2005 and Section 177 of the Income Ordinance, 2001 and has contended that though these provisions of the Federal Tax Laws are not verbatim or identical to the Sindh Act; but are similar and serve the same purpose and that it seeks to balance the rights of the tax authority to ensure compliance with all Tax Laws. According to him while Section 177 of the Income Tax Ordinance specifically requires the Commissioner to provide reasons for selecting a taxpayer for audit; however , Section 25 of the Sales Tax Act, 1990 and. Section 46 of the Federal Excise Act, 2005 do not explicitly provide for such a requirement but the Courts have interpreted both these Sections to the effect that any notice for selection of audit without assigning reasons is invalid. In support of his conten tion he has relied upon the cases of Muneer Bhimjee v. Islamic Republic of Pakistan (2005 PTD 1974 ), Pakistan Telecommunication Company Limited v. Federation of Pakistan (2016 PTD 1484 ), Kohinoor Sugar Mills v. Federation of Pakistan (2018 PTD 821), Commissioner of Inland Revenue v. Allah Din Steel and Rolling Mills (2018 SCMR 1328 ), Pakistan Petroleum Limited v. Pakistan (2016 PTD 2664 ) and Airport Support Services v . The Airport Manager , Quaid-e-Azam International Airport (1998 SCMR 2268 ). 4. On the other hand, Mr. Naeem Iqbal, learned Counsel for the Defendants has contended that reliance placed on the judgments rendered pursuant to the provisions of Federal Tax Laws is misconceived inasmuch as Section 28 of the Sindh Act is independent as well as differently worded; hence the ratio of these Judgments is of no help. Learned Counsel has contended that Section 28 of the Sindh Act does not require that a Commissioner , before issuing notice for selecting a taxpayer to conduct audit, must assign reasons; whereas, the provisions itself provides a complete mechanism to proceed further . Per learned Counsel since the provision is not only independent; but caters to the grievance now being agitated; hence instant Suit appears to be premature in nature as no adverse proceedings have commenced. According to the learned Counsel, in terms of subsections (3) and (4) of Section 28 of the Sindh Act, once a Preliminary audit has been conducted , an audit observation is to be issued for which a proper notice is given and the registered person has the right to respond to such audit observations and it is only after the failure of the taxpayer to satisfy that further proceedings take place; therefore, according to the learned Counsel since the provision is independent with further procedure, the Plaintif f may respond to the audit notice and appear before the department. 5. I have heard both the learned Counsel and perused the record. The plain tiff is a registered person with Defendant No,2 and is filing its Tax Returns in respect of rendering services. The filing of Returns and payment of Sales Tax on such services is not in dispute, whereas, the Plaintif f is aggrieved by issuance of Notice dated 25.06.2018 for conducting audit under Section 28 (2) of the Sindh Act, which reads as under:-- "Principal Officer/Chief Financial Officer, M/s. Wateen Telecom Limited, S2397565, Main Walton Road, Opp. Bab- e-Pakistan, Lahore City. SUBJECT : NOTICE FOR AUDIT UNDER SECTION 28(2) OF THE SINDH SALES TAX ON SERVICES ACT, 2011. As you are aware Sindh Sales Tax on Services (SSTS) is levied, charged and collected from the SRB Registered Person in self-assessment mode, under the Sindh Sales Tax on Services Act, 2011 (`Act') read with Sindh Sales Tax on Services Rules, 2011 (`Rules'). Under Section 28(1) of the Act, an officer of the Sindh Revenue Board, not below the rank of an Assistant Commissioner , is empowered to conduct Audit of a registered person's records, once in a year, Objective of the audit i to ascertain/verify the tax liability of the R.P during the year, and further to
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evaluate R.P's general adherence to other attending provisions of law such as those concerning invoicing and book-keeping, maintenance of record, return-filing, deduction/ payment of withholding tax (where applicable) etc. 2. Messrs Wateen Telecom Limited- SNTN S2397565 (`R.P') is a valued taxpayer of SRB , rendering taxable Services of `Telecom' falling under tariff-heading 9812.2500 of the Second Schedule to the Act. Therefore, in exercise of the powers conferred under section 28(1) ibid, the R.P has been selected for audit for the tax-periods July-13 to June-14. Accordingly , R.P is required in terms of Section 28(2) ibid, to produce the documents/record for audit purposes as prescribed vide Rule 29 of the Sindh Sale Tax on Services Rules, 2011 (list attached herewith as Annexure-A ) which forms an integral part of this notice. 3. It may be noted that requisite records listed vide Annexure-A is the bare minimum/general records for audit. Additional/sector specific records, if any, shall be required from you later on, on reed basis. It is further clarified that the record called up herein includes and covers all records whether in printed / soft-data form or available in any other electromagnetic medium. 4. Accordingly , are requested to make the requisite record available at your registered business premises latest by 20/07/2018 and intimate the undersigned accordingly , upon which the designated audit team shall visit your premises to conduct the audit on 23.07.2018 . 5. You may also appoint a suitable liaison officer / focal person to coordinate with the undersigned in this regard, and intimate his name/contact detail to the undersigned at the earliest. 6. Please note that no request for extension to the above-noted dates shall be entertained under any circumstances and defiance in this regard shall be dealt appropriately with under law . 7. Please expedite response. In case of any query , please feel free to contact the undersigned on the contact details given below . Enc: (a.a.) (Sunil Kumar) Deputy Commissioner/Head of Audit" 6. Perusal of the aforesaid notice reflects that the same has been issued in terms of Section 28(2) of the Sindh Act, whereas, it further provides that after making the requisite record available, the same is to be intimated to the Deputy Commissioner , upon which a designated Audit Team will visit the premises of the Plaintif f to conduct such audit. There are two aspects of this notic e, which are to be considered by this Court. Firstly , as to whether it is a valid notice within the contemplation of the Sindh Act read with the precedents of the Courts on this subject and could be sustained permitting audit of the Plaintif f without assigning any reasons thereof. The second aspect is that whether such an audit, if any, can be conducted at the very premises of the Plaintiff through a designated Audit Team deputed by the Deputy Commissio ner. It would be advantageous to refer to the provisions of Section 28 of the Sindh Act and so also similar provisio ns of audit under the Income Tax Ordin ance 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005, in a comparative manner and they read as under:-- Sindh Sales Tax on Services Act 201 1Income Tax Ordinance 2001Sales Tax Act 1990 Federal Excise Act 2005 28.Audit Proceedings --(1) An of ficer of the SRB, not below the rank of Assistant Commissioner SRB, may, on the basis of the return submitted by a registered person or the records obtained under subsection (2) of section 27 conduct an audit of such person177.Audit--(1) The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit of the income tax affairs of the person and where such record25. Access to record, documents, etc.-(1) A person who is required to maintain any record or documents under this Act or any other law shall, as and when required by Commissioner , produce record or documents which are in his possession or46. Audit-- (1) The officer of Inland Revenue authorized by the Board 1 or Chief Commissioner by designation may , once in a year , after giving advance notice in writing, conduct audit of the records and documents of any
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once in a year . Provided that in case the Commissioner SRB has any information showing that such registered person is involved in tax fraud or evasion of tax, he may authorize an of ficer of the SRB, not below the rank of Assistant Commissioner SRB, to conduct an inquiry or investigation under section 48 which may or may not be in addition to any audit carried out for the same period. (2) Where the of ficer of the SRB decides to conduct an audit under subsection (1), he shall issue a notice of audit to the person informing him of the audit proceedings and direct him to produce any records or documents which such of ficer may require for conducting the audit.or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the of ficer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that-- (a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and (b) the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall not call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate.control or in the possession or control of his agent; and where such record or documents have been kept on electronic data, he shall allow access to the of ficer of Inland Revenue authorized by the Commissioner and use of any machine on which such data is kept. (2) The of ficer of Inland Revenue authorized by the Commissioner , on the basis of the record, obtained under subsection (1), may , once in a year , conduct audit: Provided that in case the Commissioner has information or sufficient evidence showing that such registered person is involved in tax fraud or evasion of tax, he may authorize an of ficer of Inland Revenue, not below the rank of Assistant Commissioner , to conduct an inquiry or investigation under section 38: Provided further that nothing in this subsection, shall bar the of ficer of Inland Revenue from conducting audit of the records of the registered person if the same were earlier audited by the of fice ofperson registered under this Act (2) In case the Commissioner has information or sufficient evidence showing that such registered person is involved in fraud or evasion of duty , he may authorize a Federal Excise Of ficer, not below the rank of Assistant Commissioner to conduct audit at any time in a year . (2A) After completion of the audit under this section or any other provision of law , the officer of Inland Revenue may , after obtaining the registered person's explanation on all the issues raised in the audit shall pass an order under section 14, imposing the amount of duty as per law , charging default surcharge, imposing penalty and recovery of any amount erroneously refunded.
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the Auditor-General of Pakistan. 7. Perusal of Section 28 ibid, reflects that this empowers an Officer of Sindh Reve nue Board not below the rank of Assistant Commissioner , who may on the basis of the Return submitted by a registered person; or the records obtained under Subsection (2) of Section 27 conduct an audit of such taxpayer once in a year. This subsection has two parts. One is that an audit can be conducted on the basis of the Tax Return submitted by the Taxpayer . The second is, that an audit could also be conducted on the basis of records obtained under Subsection (2) of Section 27. Insofar as the present notice is concerned, it does not discloses that any record was obtained under Section 27 (ibid), therefore, this matter is only confined to the first part i,e, conduct of audit on the basis of Return submitted by the Plaintif f. Insofar as the Proviso to Subsection (1) is concerned that is not relevant for the present purposes. Coming to Subsection (2), it reflects that when the Officer of Sindh Revenue Board has decided to conduct an audit under Subsection (1), he shall issue a notice of audit to the person informing him of the audit proceedings and direct him to produce any records or docu ments, which such officer may require for conducting the audit. When the aforesaid provisions are read together with the impugned notice, it appears that the Deputy Commissioner has issued the same under Subsection (2) of Section 28 (ibid). This resultantly means that the Deputy Commissioner has decided to conduct an audit under subsection (1) of Section 28 and through impugned notice, he has asked for relevant record to be made available. Therefore, firstly it is to be examined that his decision for deciding to conduct audit is in line with the provisions of Subsection (1) of Section 28 or not. And as noted earlier , it is only on (and must be based on) the basis of the Return furnished by the Taxpayer , as admittedly no documents have been obtained under Section 27(2) ibid. Now the pivotal question is, that whether without assigning any reasons, the Deputy Commissioner on mere examination of the Return, can make a decision for such audit. Admittedly , the impugned notice does not discloses any reasons of whatsoever nature (rather it not even the case of the defendants that any such reasons are required), and it only states that he is empowered under Subsection (1) to conduct audit, whereas, the objective of the audit is to ascertain/verify the tax liability of the registered person during the year and further to evaluate registered persons general adherence to other attending provisions of law, such as those concerning Invoices and Book keeping, maintenance of record, Return filing, deduction/payment of withholding tax where applicable etc. This observation in the impugned notice does not amounts to giving any reasons for selecting the Plaintif f for audit. Though as contended on behalf of the Defendants, the very provision itself does not provide that specific reasons are to be assigned; however , otherwise it clearly provides that the audit can only be conducted on the basis of the Return submitted by the registered person, which is relevant in this matter . And secondly , he has to decide to conduct an audit, and how could he decide without forming an opinion to that effect is what is to be seen and examined. It is not clear that after examining the Returns (presumably) what transpired in the mind of the Deputy Commissioner to conduct such an audit. This has not been stated so in the impugned notice. And this is the crux of the matter , that on mere examination of the Return (it is also not clear that whether such Return were even otherw ise examined as the notice is silent on this as well), can an audit be conducted without giving reasons. As per the mandate of law, the Deputy Commissioner has to examine the Return at least tentatively and then to make a decision that for such and such reasons there is some defect or lacuna in filing of the Returns and payment of the taxes accordingly , which requires conduct of an audit. The reasons are more so mandatory , as in terms of sub-section (2) of Section 28 ibid, a decision of audit is to be taken, and a decision without reasons is in fact no decision in the eyes of law. This apparently is lacking in this case and appears to be a case of exercising discr etionary powers. Now it is settled law that while exercising discretionary powers, it is not that an officer is conferred with unfettered discretion. It has to be guided by objective and workable standards with some level-headedness. It must not be based on short-sightedness or carelessness. It is always to be exercised in a judicious manner and keeping in mind the attending circumstances thereto. If this is not, then the Officer would be permitted to pick and choose the person for conducting audit and resultantly would lead to harassment as well. It is settled law that while exercising discretion the authority should not act arbitrarily , unreasonably and in complete disregard of the rules and regulations. The discretion to be exercised has to be judged and considered in the background of the facts and circumstances of each case. It must not be exercised on
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whims, caprices and mood of authorities. It is circumscribed by principles of justice and fairness and while exercising such discretion, the authority must take into consideration and advance aim and object of the enactment, rule or regulation under which it was authorized to act. It should not act in complete negation of the object of such law, whereas, pre-conditions imposed for exercise of discretion should be honored and respected as well. (See Walayat Ali Amir v. Pakistan International Airlines Corporation 1995 SCMR 650). Coming to the notice in this case, it appears that it is not even disclosing or saying that on examination of Return a need for conducting an audit has arisen. It is but natural that the legislature while enacting this provision has in clear words said that audit can be conducted on the basis of Return. Now it is circumscribed within the provision itself that for this at least some explanation has to be given to the Plaintif f. And this is what is meant by reasons , if differently worded so to say. The selection is not to be made only, by and with the discretion of the Officer. He must have some reasons to justify his selection and issuance of notice for this. And for this reason alone in the other Federal Tax Laws, an inbuilt mechanism of computer ballot has been provided, and that is only to curtail such whimsical exercise of powers while selecting a tax-payer for audit. This can never be the intent of the Legislature specially in tax matters that a taxpayer is left to whims and desire of the tax collecting authority . It has been the consistent view of the Courts that in such matters, no discretion is left with the tax collecting agency , whereas, at the same time the tax payer is also required to be a compliant tax person. These two go together; however , this will not entail that if any officer while examining any record has come to a conclusion that some tax is short levied or not paid, he without any recourse to assigning any justifiable reasons, would be permitted to seek and call the entire record and conduct audit of such allegedly delinquent tax payer . This amounts to a fishing and roving expedition which was deprecated by the Hon'ble Supreme Court way back in the year 1992 in the famous case reported as Assistant Director Intelligence and Investigation v. B.R.Herman (PLD 1992 SC 485) while interpreting section 26 of the Customs Act, 1969, which in more or less similar terms, empowered the officer to call for and examine the record, in the following terms:-- It cannot make a roving inquiry or issue a notice by merely shooting in the dark in the hope that it will be able to find out some material out of those documents and then charge the party of irregularity or illegality . The authority has to state and disclose in the notice, the purpose for which the party is required to produce those documents or supply information. Unless such purpose is specified in the notice, it will be a matter of anybody's guess and the accused party will be put to inquiry without any specific allegation or fact disclosed to him. It does not permit any authority to employ the provisions of section 26 to make indiscriminate, roving and fishing inquiry irrespective of the fact whether any determination of legality or illegality in import, export or funds with which the goods were acquired is to be determined. Even in cases of suspicion of commission of illegality , details should be provided to the party-to enable him to have an opportunity to produce all the relevant documents and disclose information. Depending on the facts and circumstances of a case any notice without disclosing any fact or particulars, for which information or document are required will be in violation of the principles of natural justice and may be struck down as illegal and without jurisdiction. 8. It is also important to note that under the Sales Tax Act, 1990 and the Federal Excise Act, 2005, though there is no specific requirement for recording reasons while selecting a person for audit; but it has been the consistent view of the Courts that even in such situations, the Officer concerned cannot be conferred with unfettered discretion. The concerned officer has to and must apply his mind before issuing any notice or selecting a person for audit. He does not have unguided powers to call anybody for conducting audit. His powers are circumscribed with the doctrine of acting reasonably , justly and fairly and not whimsically , and these doctrines are well known in our jurisprudence. The comparative chart reproduced hereinabove gives a clear picture as to the provisions of audit under the…
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