Professional Documents
Culture Documents
) 1629
Before Nazir Ahmad, Judicial Member and Fiza Muzaffar, Accountant Member
Versus
S.T.As. Nos. 874/LB and 950/LB of 2013, decided on 19th May, 2014.
2011 PTD 808 (Trib.); PLD 1976 Lah. 703 = 1976 PTD 347; 2011 PTD (Trib.) 773;
2004 PTD 868; 1999 PTD 1892 and 1996 SCMR 1470 ref.
(c) Jurisdiction---
----Question of jurisdiction may be raised at any stage---Such question being very important and
fundamental in nature, if a forum had no jurisdiction, the same could not be conferred upon it by
consent of parties---Court had to consider the question of jurisdiction even though not raised by
the parties---Point of jurisdiction is one which is not barred even at the ultimate stage before
Supreme Court.
Pir Sabir Shah v. Shad Muhammad Khan and another PLD 1995 SC 66 and Messrs Sutlej
Cotton Mills Ltd. Okara v. The Commissioner of Income Tax PLD 1965 SC 443 rel.
----Ss.7(1) & 26(5)---Sales Tax Special Procedure Rules, 2007---Determination of tax liability---
Adjustment of input tax---Disallowance of---Input tax was held inadmissible on the ground that
supplier (WAPDA) had not shown/declared sales to the registered person (a power distribution
company) in their summaries---Taxpayer contended that input tax could be claimed in the return
for any of the six succeeding tax periods; that comparison based on the returns of the suppliers
and the registered person for one month was misconceived as comparison of 7 (seven) months
returns would be required to reconcile the amounts declared by the suppliers and the taxpayer;
that allegation was self-destructive because, having no generation capacity, company could not
supply electricity to its consumers if the said purchases were not made; and purchases were made
by the taxpayer from National Transmission and Despatch Company and necessary certificate,
issued by WAPDA in support of such purchases along with reconciliation statements was also
filed with the taxation officer; and that certificate was rejected without verification and such
rejection of the certificate along with reconciliation statement was arbitrary and capricious---
Revenue contended that declaration of sales in the returns of WAPDA was missing which meant
that company was not eligible for said input tax; and that valid document was the return filed by
WAPDA instead of any certificate---Validity---Taxpayer could not be burdened with tax
liability---Some procedural or technical lapses had taken place by the supplier---Default made
out by the revenue was all the more absurd and illogical in a sense that if the taxpayer had not
purchased electricity how come company (taxpayer) it so engaged in the business of sale of
electricity on which the revenue undoubtedly had collected sales tax---Discrepancy between the
sales declared by the suppliers and the purchases made by the registered person, investigation
had to be undertaken which of the two parties was at fault---Such investigation should precede
the issuance of show-cause notice---Revenue unlawfully disregarded the irrefutable documentary
evidence submitted in form of certificates issued by WAPDA, reconciliation statements and
audited financial statements---Taxpayer had made bulk of purchases from WAPDA---If such
purchases were not made, the sales on which output tax had been received by the Department,
were not possible as the taxpayer had no generation capacity as it was just a Power Distribution
Company---Disregard of documentary evidence was not only capricious, arbitrary but also
unreasonable and self destructive proposition---Taxpayer could not be penalized for any act of
omission or commission by the WAPDA/supplier---Certificate issued by the supplier and its
financial statements constituted irrefutable evidence that these were bona fide purchases in
respect of which the registered person was lawfully entitled to claim the input tax adjustment---
Supplier, in the present case, was a Government entity which could not be treated to be involved
in issuing fake certificates---Revenue had failed to make out valid case for input tax
disallowance---Input tax was admissible to the taxpayer, however, the matter was remanded to
the taxation officer with directions to obtain necessary evidence from the taxpayer in respect of
input tax adjustment---In the event the taxpayer could not prove from its record that amount
constituted bona fide adjustment only then the adjustment shall be denied---No amount shall be
held to be inadmissible if proper evidence and compliance existed with the registered person.
2011 PTD (Trib.) 773 and D.G. Khan Cement Company Ltd. v. The Federation of
Pakistan and others PLD 2013 Lah. 93 ref.
----S.3---Scope of tax---Charge of sales on PTV fees; repair; testing and inspection; non utility
operations; reconnection fee; amounts received for deposit works; deposit works in progress and
on consideration for new connections---Taxpayer contended that such amounts constituted
consideration for services which, being a Provincial subject, were not conceived in the statute to
be liable to levy of sales tax---Validity---As the subject of services and immovable property was
unambiguously excluded from the purview of sales tax by the Federation, such subjects could
not be taxed and was contrary to S.3 of the Sales Tax Act, 1990 itself---Orders of the authorities
below on the point were vacated being unlawful and unsustainable.
----S.3---Sales Tax Special Procedure Rules, 2007, R.13 (2)(b)---Scope of tax---Sales tax on
services---Revenue contended that levy of sales tax on service charges and on receipts for
immoveable infrastructure was justified on the basis of R.13(2)(b) of the Sales Tax Special
Procedure Rules, 2007; and all charges and surcharges, rent commissions and all duties and taxes
were chargeable to tax, if there was no specific exemption available under the law---Validity---
Contention was not out of context, misplaced and irrelevant---Expression "all charges…" could
not be read in isolation or for that matter divorced, detached, or de-linked with basic scope
provided for in body of the Act and/or Rule i.e. supply of electric power---Consideration,
including all charges etc. had to be in respect of supply of electric power---In case the
consideration/ amount had no nexus with supply of electric power that did not fall in the scope of
tax---While constructing provisions of fiscal statutes one had to adhere to what was expressly
provided in the statute and one could not be allowed to go beyond what was stated therein---
Benefit of doubt, if any, had to be resolved in favour of taxpayer---No lawful mandate existed for
putting a charge of sales tax on subject service charges and receipts for immoveable
infrastructure as these did not, even remotely, had any nexus with the supply of electric power.
----Ss.3 & 13---Scope of tax---Exemption---Item not coming under the ambit of taxation
specified in the statute could not be brought through implication etc. or indirectly---Averment
that unless there was specific provision under the law granting exemption, every supply was
taxable was contrary to established law that exemption was the waiver of the charge and came
into play only if a transaction was chargeable to tax---If a transaction was not chargeable to tax,
question of exemption would not arise and the liability to pay tax arises by charging section
alone.
1992 SCMR 250 and PLD 1990 SC 1156 = 1990 PTD 768 rel.
----Ss.3 & 2(46)---Income Tax Ordinance (XLIX of 2001), S.235---Sales Tax Special Procedure
Rules, 2007, R.13 (2)(b)---Scope of tax---Collection of Income Tax under S.235 of the Income
Tax Ordinance, 2001---Charge of sales tax thereon---Taxpayer contended that S.2(46) of the
Sales Tax Act, 1990 defined the value of supply which included all federal and provincial duties
and taxes which the supplier received from the recipient for that supply; that Income Tax being
personal tax was not received from the supplier and it was an independent charge on the income
of the consumer and adjustable against his assessment; that duties and taxes "for that supply"
included only trading taxes which were included in the price of the supply and were passed onto
the consumer; that income tax was not included in the price of the supply but it was collected on
behalf of Federal Government in the independent capacity as withholding agent and such Income
Tax was deposited in the Government Exchequers against which credit was independently
claimed by the consumer; that there was no nexus between the value of supply and the Advance
Income Tax adjustable in the personal assessment of the consumer as independent liability; and
that R.13(2)(b) of the Sales Tax Special Procedure Rules, 2007 laid down that sales tax was
leviable on the price of electric power; and since income tax was not includable in the price of
electric power, the allegation of short payment of sales tax on advance income tax collected from
the customers on behalf of the Federal Government was ex-facie contrary to law and liable to be
deleted---Revenue contended that R.13(2)(b) of the Sales Tax Special Procedure Rules, 2007 for
Collection and payment of Sales Tax on Electric Power was very clear that all Federal taxes
(including Income Tax) were included in the value of supply---Validity---Default adjudged was
based on misreading and mis-appreciation of provisions of R.13(2)(b) of the Sales Tax Special
Procedure Rules, 2007---Income tax was not covered in the definition of "value of supply" under
S.2(46) of the Sales Tax Act, 1990 as it had no nexus with the supply---Such was personal tax of
the consumer which was collected on behlf of the Federal Government by the Registered Person
as withholding agent and was not hit by the charging provisions of Sales Tax Law, including
R.13 of the Sales Tax Special Procedure Rules, 2007---Similarly, reference to subsection (4) of
S.22 of the Sales Tax Act, 1990 had no relevance to the present case as annual audited accounts
were not available at the time of submission of month-wise tax returns which were based on the
prescribed record under S.22(1) of the Sales Tax Act, 1990---Amount of income tax, collected as
withholding agent, was not required to be considered/ included while determining the incidence
of sales tax under the provisions of the Sales Tax Act, 1990 as well as the Sales Tax Special
Procedure Rules, 2007---Orders of the authorities below were vacated by the Appellate Tribunal.
----Ss. 7, 8 & 2(3)---Sales Tax Special Procedure Rules, 2007, R.13(2)(b)---Determination of tax
liability---Transmission and distribution losses---Adjustment of input tax---Disallowance of---
Registered Person a power distribution company contended that neither S.7 nor S.8 of the Sales
Tax Act, 1990 placed any embargo on the admissibility of input tax which was paid for the
purposes of taxable supplies; and that purpose of supply was the crucial test; that transmission
and distribution losses were integral part of supplies of electric power in terms of R.13(2)(b) of
the Sales Tax Special Procedure Rules, 2007; that since charging provisions charge tax on actual
supplies and losses were unavoidable for making such supplies, the adjudication officer lacked
lawful authority to indirectly levy tax, through curtailment/disallowance of input tax, principally
on the basis of capacity i.e. actual supplies + the line losses and distribution losses; and that
demand raised on the allegation of inadmissibility of input tax claimed/adjusted against
transmission and distribution losses was liable to be deleted as such losses were admitted and
allowed by NEPRA as part of natural process of transmission and distribution---Revenue
contended that line losses had not been taxed but the input tax claimed against units lost was
disallowed mainly due to theft and bad infrastructure of distribution; that difference between
charging the losses and disallowing the input tax which was not used in taxable supplies, were
two different things; that the registered person was a distributor carrying on production activities;
and that its distribution losses were due to weak transmission lines and theft etc. i.e. due to bad
administration instead of technical reasons, hence disallowed---Validity---Electricity was
purchased by the registered person exclusively for onward taxable supply to consumers---
Registered person was lawfully entitled to claim the adjustment under S.7 read with S.8 of the
Sales Tax Act, 1990---Transmission and distribution losses did not affect such adjustment, which
remained fully allowable under the law---Very design and structure of the tariff approved by
NEPRA was such that it in-builds such losses, did not cause any loss to the exchequer vis-a-vis
taxes, because the output tax collected on tariff duly accounted for such losses---Authorities
below erred in law in disallowing/restricting the input tax adjustment---Orders of the authorities
below were vacated by the Tribunal and input tax adjustment claimed by the taxpayer was held
to be in accordance with law.
PLD 1997 SC 582 (683) and Messrs Peshawar Electric Supply Company (Pvt.) Ltd.
(PESCO) in Complaint No.170/ISD of 2010 ref.
Sales Tax Appeal No.K84 of 2002, decided on 20-5-2002 and Mayfair Spinning Mills
Ltd. v. Customs, Excise and Sales Tax Appellate Tribunal and 2 others PTCL 2002 Cl. 115 rel.
Mayfair Spinning Mills Ltd. v. Customs, Excise and Sales Tax Appellate Tribunal and 2
others PTCL 2002 Cl. 115 rel.
(n) Sales Tax Act (VII of 1990)---
----Ss.3, 2(11), 8(2) & 13---Sales Tax Special Procedure Rules, 2007, R.14---Scope of tax---
Subsidy---Exemption---Tax was imposed on amount which the taxpayer received from
Government of Pakistan in the form of subsidy---Taxpayer a power supply company contended
that sales tax was chargeable under R.14 of the Sales Tax Special Procedure Rules, 2007 on the
amount of sales tax actually billed to the consumers; that subsidy was not billed to the consumers
and was not covered in the charge of sales tax under charging provisions; that tax on subsidy
clearly fell out of the purview of the charging provisions; that under S.3 of the Sales Tax Act,
1990, existence of two ingredients, taxable supply in the furtherance of taxable activity, were
must to attract the charge of sales tax; that subsidy was neither a supply to the Federal
Government nor it was allowed in the furtherance of taxable activity; and that subsidy was
provided by the Federal Government as welfare activity which was not taxable---Revenue
contended that subsidy came under the "value of supply" in terms of S.2(46) of the Sales Tax
Act, 1990 read with R.13(2) of Chapter-III of Sales Tax Special Procedures Rules, 2007 which
was received by the registered person against the supply of electricity (goods) and was actually
the part of price fixed by NEPRA and was properly booked under the head of "sales in audited
financial statements of the taxpayer"---Validity---Disallowance of proportionate input tax to
subsidy was misplaced---Concessional charge of Sales Tax did not mean that supplies were
exempt from sales tax---Provision of S.2(11) of the Sales Tax Act, 1990 defines "exempt supply"
as supply which was exempt from tax under S.13"---Supplies in the taxpayer's case were not
exempt under S.13 of the Sales Tax Act, 1990---Under S.2(11) of the Sales Tax Act, 1990, even
zero rated supplies were taxable supplies---Mere concession in the charge did not make supply as
exempt supply---Section 8(2) of the Sales Tax Act, 1990 was not attracted to disallow purported
proportionate input tax---Revenue was reading imaginary things in the legal provisions which
were contrary to their plain and explicit meanings---Input tax was allowed with reference to the
purpose of the supply and the revenue was inserting their view in S.7 of the Sales Tax Act, 1990
that input tax should correspond to the actual supply instead of the "purpose of supply"---
Revenue had erred in law in subjecting to tax the subsidy received from the Government which
was not consideration for supply electricity and not chargeable to tax---Orders of the authorities
below, on this point, were vacated by the Appellate Tribunal being unlawful.
1996 SCMR 1470 (1475); 2001 PTD 2097 = 2001 SCMR 1376; Tax Law Design and
Drafting Volume-I Page-197; Messrs PIALC v. CIT PLD 1975 Kar. 924; I.T.As. Nos.39 and
40/1B of 1992-93 dated 30-10-1995 and I.T.As. Nos.354/LB of 2006 and 355/LB of 2006 ref.
---Ss.3 & 23---Sales Tax Special Procedure Rules, 2007, R.14---Scope of tax---Subsidy---
Federal government granted subsidy to the consumers and not to the taxpayer, an electric supply
company---Differential tariff subsidy was directly passed on to the consumers as it was not made
part of Bill (invoice in terms of S.23 of the Sales Tax Act, 1990) and charge of Sales Tax was
curtailed to the "Sales Tax actually billed to the consumer or purchasers" under R.14 of the Sales
Tax Special Procedure Rules, 2007.
----Ss.3 & 13---Regulation of Generation Transmission and Distribution of Electric Power Act
(XL of 1997), S.31 (1)---Scope of tax---Concession policy---Exemption---Concession to the
consumers such as social policy of the Federal Government meant concessional charge of sales
tax to the consumers and concessional charge including zero rated charge was not tantamount to
exemptions under S.13 of the Sales Tax Act, 1990.
----Ss. 23 & 3---Sales Tax Special Procedure Rules, 2007, R.14---Tax invoice---Charge of sales
tax---Subsidy---Under S.23 of the Sales Tax Act, 1990, a registered person was required to issue
invoice in the name of the recipient---Such invoices were issued in the form of electricity bills
and under R.14 of the Sales Tax Special Procedure Rules, 2007, tax was "to be deposited on
accrual basis i.e. the amount of sales tax actually billed to the consumer or purchasers for that tax
period'---Charge of sales tax was confined to the amount of price of electricity billed to the
consumer---Subsidy was not part of that price billed to the consumer and fell out of the purview
of the charge of Sales Tax.
Galaxy Textile Mills Ltd., v. Federation of Pakistan and others Writ Petition No.17185 of
2013 ref.
ORDER
These cross appeals impugn the Order-in-Appeal No. 583/2013 dated 16-8-2013 passed
by the learned Commissioner-Inland Revenue (Appeals), Faisalabad (hereinafter 'impugned
order'). The said impugned order was passed by the learned first appellate authority while
disposing of the appeal, filed by the registered person, against the Order-in-Original No. 14/2013
dated 25-4-2013 issued by the learned Deputy Commissioner-Inland Revenue, Zone-I, RTO,
Faisalabad whereby the registered person was held to be in default of principal sales tax
amounting to Rs.6,874,377,469 together with applicable default surcharge and penalty leviable
in terms of provisions contained in the Sales Tax Act, 1990 (hereinafter 'the Act').
2. The relevant facts in brief, are that registered person, is a public limited company
incorporated under the provisions of Companies Ordinance, 1984, 100% owned by the
Government of Pakistan, engaged in the business of distribution and supply of electricity in eight
different districts falling in Faisalabad region. This is the second round of litigation. The original
Show-Cause Notice No. 7, dated 31-12-2011, was issued under section 36(1) of the Sales Tax
Act, 1990 on the basis of audited annual financial statements for the year 2008-2009 pertaining
to period 1-7-2008 to 30-6-2009. In consequence to usual adjudication and appellate
proceedings, the matter was finally assailed before this tribunal. In terms of appellate order dated
25-6-2012, issued by this tribunal in S.T.As. Nos. 628/LB/2012 and 822/LB/2012, the cross
appeals were disposed of, with the consent of the parties, in a manner that the matter was
remanded to the concerned taxation officer, having jurisdiction of the case, with following
observations:--
"4. Heard both the parties' record perused. We have carefully examined the provisions of
section 36(1) & (2) and we agree with the submission of learned counsel that it carries some pre-
conditions. The relevant provisions are reproduced hereunder for convenience:-
(2) Where, by reason of any inadvertence, error or misconstruction, any tax or charge has not
been levied or made or has been short-levied or has been erroneously refunded, the person liable
to pay the amount of tax or charge or the amount of refund erroneously made shall be served
with a notice within three years of the relevant date, requiring him to show cause for payment of
the amount specified in the notice:-
Provided that, where a tax or charge has not been levied under this subsection, the
amount of tax shall be recoverable as tax fraction of the value of supply.
Subsection (1) of section 36, if compared with subsection (2), shows that legislature has
addressed two different situations in both the subsections; one where the registered person makes
any evasion deliberately and in collusion with any fraudulent element and the second where the
tax was not paid due to any fraudulent element and the second where the tax was not paid due to
any inadvertence. For this reason, under subsection (1) the limitation is five years whereas under
subsection (2) the limitation is there years.
5. Language of the show-cause notice confirms the plea taken by appellant's counsel that
collusion or deliberate act of tax evasion was never confronted. We agree that the show-cause
notice can at the most be taken to have been issued under subsection (2) of section 36 and we
hold accordingly. In view of this, both the orders below are vacated. Case is remanded to
Taxation Officer having jurisdiction of the case now and direct to treat the show-cause notice as
issued under section 36(2) and proceed de novo keeping in view the limitation provided therein.
The Taxation Officer shall also decide the objection about the chargeability of sales tax on
certain invoices. He shall pass a speaking order after considering all legal objections."
3. In purported pursuance of the above said directions of this tribunal, the Deputy
Commissioner Inland Revenue issued amended show-cause notice dated 2-4-2013 treating five
tax periods: from July 2008 to November, 2008 as time barred and the remaining seven tax
periods from December, 2008 to June, 2009 as within limitation provided. It was in this
backdrop that the Order-in-Original No. 14/2013 was passed by the Deputy Commissioner
Inland Revenue on 25-4-2013, raising the Sales Tax Demand of Rs.6,888,265,303 and after
adjustment of refund payable to the registered person at Rs.1,459,602,984, the balance
recoverable demand was raised at Rs.5,428,662,819 along with default surcharge and penalty.
The learned Commissioner Inland Revenue (Appeals), vide Sales Tax Order-in-Appeal No.
583/2013 dated 16-8-2013, broadly confirmed/upheld the order-in-original on all points, except
the demand created at Rs.13,887,834 on account of free supply to employees, which was deleted,
holding the same to unsustainable in law. It is these findings of the first appellate authority that
have compelled, both the registered person and the revenue, to pursue remedy through filing of
subject appeals.
4. In the memo. of appeal, as well as during the course of hearing, the registered person has
argued the taxation officer passed the impugned Order-in-Original No. 14/2013 dated: 25-4-2013
in utter disregard to directions of this tribunal, contained in earlier order dated 25-6-2012 and as
such did not provide proper opportunity of being heard. It was emphatically argued the taxation
officer (i) did not decide the objection of `chargeability of Sales Tax on certain items (tax against
services and other than supply of goods); (ii) did not redress the legal objections raised by the
taxpayer; and (iii) also did not pass a speaking order. Following grounds of appeal have been
raised by the taxpayer/registered person:--
(1) The issue of chargeability to Sales Tax of subjects other than supply of goods was not
considered by the respondents while initial burden to prove chargeability of amounts mentioned
in the show-cause notice was on the Revenue.
(2) The adjustment of admitted refund of Rs. 1,459,602,484 against unlawful demand was
mala fide.
(3) The amounts taken from the financial statements in the show-cause notice for the full
year were admittedly not servable between the time barred tax periods and the rest of the tax
periods; hence, the Adjudication Authority proceeded on averages, assumptions and
presumptions unsustainable under the law. The impugned order is, therefore, liable to be
annulled.
(4) The respondents were not justified to shift the burden of proof regarding chargeability of
the amounts mentioned in the show-cause notice from the Revenue to the taxpayer/appellant.
(5) The respondents failed to apply mind to section 25(3) of Sales Tax Act, 1990 and the
issue of chargeability other basis of prescribed record: the prescribed record pertains to Sales Tax
taxable transactions while non prescribed record pertains to both the taxable and non taxable
transactions; hence, non prescribed record, might be used from verification of prescribed record
but it could not be made basis for assessment of Sales tax.
(6) The rejection of claim of input tax amounting to Rs.150,734 against the invoices of
alleged black listed/non-filer units is based on unfounded assumptions and despite several
request and reminders allegations not confronted in the show-cause notice.
(7) The levy of Sales Tax on the allegation of 'Short payment of Sales Tax amounting to
Rs.712,779,000 is illegal:
(i) Sales Tax levied on the amount of Advance Income Tax collected at source from the
consumers, is unlawful.
(ii) Sales Tax levied on zero rated supplies is illegal.
(iii) The show-cause notice was based on casual perusal of financial statements instead of the
audit of prescribed record under section 25(3) of the Act; hence, it is vague and void as amounts
not chargeable to tax under section 13(2)(b) of the Special Procedure Rules, 2007; Section 3 of
the Act read with section 2(46) of the Act were illegally subjected to tax.
(iv) The notifications in support of zero rated supplies: were illegal sidetracked.
(8) The impugned demand of Sales Tax amount of Rs.1,549,484,903 on the subsidy received
from the government of Pakistan is illegal and liable to be deleted.
(i) No supply is made to the Government of Pakistan against the value of Tariff differential
subsidy; hence, subsidy is not chargeable to Sales Tax.
(ii) The judgments relied up by the learned CIR (Appeals); are clearly distinguishable as the
judgments pertain to Income Tax.
(iii) The CIR(A) was not justified to disregard the Sales Tax Order in Appeal No. 46/ST/2010
dated 29-12-2010 passed by the CIR(Appeals) Gujranwala.
(iv) Subsidy given by the Government to consumers, being welfare activity, is not taxable
activity under section 2(35) of the Act; hence, it lacks the second ingredient of chargeability as
well
(v) Subsidy was granted by the Federal Government in view of its 'economic and social
policy objectives in terms of section 31(2)C of the Regulation of Generation, Transmission and
Distribution of Electric Power Act, 1997; hence, it was Government activity and not taxable
activity.
(vi) Under Rule-14(1) of the Rules, Sales Tax is leviable on "the amount of Sales Tax
actually billed to the consumer" as subsidy is not actually billed to the consumer, it stands
excluded from the charge of Sales Tax.
(9) The impugned demand of Sales Tax amounting to Rs.266,041,728 and Rs.352,407 in
'new connections and Reconnections' is unlawful:
(i) Vague allegation was levelled without ascertaining the nature of receipts against 'new
connections and reconnections'.
(ii) Capital cost contribution for the installation of transformers, poles, transmission lines etc
in connection with the new connections and service charges for reconnections are not covered by
any charging provisions under the Act.
(iii) Even otherwise, such installations remain the property of the appellant and no supply is
involved.
(iv) The receipts include services charges and development of immovable infrastructure
which is beyond the charge of Sales Tax under the Act.
(10) The impugned demand of Sales Tax amount to Rs.84,663,352 due to alleged mismatch of
Sales (excluding subsidy) declared in audited financial statements and Sales Tax returns is
contrary to law and fact of the case. (the sales value (excluding subsidy) in Audited Financial
Statements allegedly exceeds by an amount of Rs.613,809,302):
(i) The respondents failed to consider that Audited Financial Statements/Income Tax
Returns and Sales Tax Returns are governed by different laws and considerations; hence, the
allegation of mismatch is misconceived.
(ii) The respondents failed to apply mind that the difference resulted from timing difference.
Units consumed by the consumers in June are accounted for in June in Financial Statements
while bills pertaining to such units are issued in different batches in July. Sales Tax under Rule-
14 of the Sales tax Special Procedure Rules, 2007, is workable on the amounts actually billed.
(iii) The respondents acted illegally in relying upon Income Tax Record instead of prescribed
record under the Act.
(i) Sales Tax not charged on repair, testing and inspection fee Rs.32,769,968.
(iii) Sales Tax not charged on collection of PTV fees etc. Rs.13,476,264 are illegal. The
respondents failed to consider the distinction between charge, exemption and taxability.
(i) The respondents misconstrued sections 7 and 8 of the Act, as the input tax claimed was
incurred for the purpose of making supplies.
(ii) The transmission and distribution losses are integral part of taxable supply.
(iii) The respondents disregarded the cited judgment which was on all facts with the
appellant's case.
(iv) Without prejudice, the transmission and distribution losses were miscalculated.
(13) The impugned demand of Sales Tax on 'deposit works' and deposit work in progress at
Rs.46,563,903 and Rs.335,435,340 are illegal:
(i) The development of immovable infrastructure and service charges are beyond the
purview of Sales Tax by the Federation.
(ii) The respondent illegally disregarded judgment of this Hon'ble Tribunal cited as 2011
PTD (Trib.) 808 which is on all facts with the appellant's case.
(iii) The respondents failed to apply mind to the arguments advanced on behalf of the
appellant.
(14) The impugned demand of Rs.2,683,04,091 on account of alleged input tax claimed is
contrary to law and facts of the case:
(i) The certificate issued by Messrs WAPDA/NTDC, in support of the supplies made to the
appellant and output tax charged by WAPDA/NTDC thereon, was rejected without verification.
The rejection of the document without verification is arbitrary and capricious; hence, not a legal
determination PLD 1976 Lah. 703 = 1976 PTD 347
(ii) The comparison of returns through STARR system is one month is misconceived, as
adjustments under the proviso to section 7(1) of the Act remain open with six succeeding months
as well.
(iii) The practical cases, in support of the application of the aforesaid provision of law, were
capriciously sidetracked.
(iv) Even otherwise, adverse action against a registered person on account of defect or default
of someone else is illegal. 2011 PTD (Trib.) 773.
(v) The statements made by third parties, without their cross-examination and comparative
verification of record, are not legally admissible evidence. 2011 PTD (Trib.) 808.
(vi) The Financial Statements of NTDC for the year ending on 30-6-2009 bear out the facts of
purchases made by FESCO from NTDC/WAPDA demolish the allegation to the ground.
(vii) The impugned demand is based on assumptions and presumptions unwarranted under the
law; hence, liable to be annulled. 2004 PTD 868.
(viii) Even otherwise, the registered person fulfilled the requirements of section 7(2)(i); the
documentary evidence cannot be rejected without verification.
(ix) The impugned demand is based on the grounds not confronted in the show-cause notice;
hence, it is void.
(x) The case-law cited by the appellant was not considered; hence, illegal demand was
created to meet collection targets which is mala fide 1999 PTD 1892.
5. The revenue, on the other hand, has adopted following grounds of appeal in the appeal
memo. while feeling aggrieved by the order-in-appeal to the extent the relief was allowed to the
registered person in the impugned order.
(1) That the order of the Commissioner Inland Revenue (Appeals), Faisalabad is bad in law
and contrary to the facts of the case.
(2) That the learned Commissioner Inland Revenue, (Appeals) was not justified in upholding
the contention of the registered person that output tax on free supplies to employee was
accounted for in CP-41.
(3) That the learned Commissioner Inland Revenue, (Appeals) was not justified in holding
that month wise detail of free supply and other than free supply was provided whereas the
annexure-C of the returns furnished show a consolidated figure of supplies to un-registered
persons only.
6. We have heard the opposing counsel at length, examined the case record minutely, given
earnest consideration to rival averments and have also taken into account the material, including
decisions of higher appellate authorities, relied upon before us during the course of the
arguments. The matters raised in the subject appeals are disposed of in following paragraphs.
TAXPAYER'S APPEAL
JURISDICTIONAL OBJECTIONS
7. Before us, the learned counsel for the taxpayer argued that the amended show-cause
notice, too, was unlawful as the same failed to meet the essential pre-requisites under section
36(2) of the act; hence, the consequent Sales Tax Order-in-Original and Sales Tax Order-in-
Appeal remained also without lawful authority and liable to be annulled. It was argued that an
essential pre-condition of the show-cause notice under section 36(2) of the Act is that the amount
allegedly not levied or short levied has to be specified in the notice and in this respect, the initial
burden to show that such specified amount was chargeable to sales tax, under the charging
provisions, remains heavily on the revenue/tax authorities. In this regard, reliance was placed on
the following judgments:--
"It is well settled rule of law that all charges upon the subject must be imposed by clear
and unambiguous language, because in some degree they operate as penalties: the subject is not
to be taxed unless the language of the Statute clearly imposes the obligation and language must
not be strained in order to tax a transaction which had the legislature thought of it would have
been covered by appropriate words."
(ii) 2013 PTD 1536 (Lahore High Court)
"The totals of various service receipt and income items, having no nexus with the charge
of Sale Tax, were subjected to Sales Tax on the basis of unwarranted presumptions. Service
receipts and income items like commission on T.V. License fee, tender fee, liquidation charges
are ex-facie not chargeable to Sales Tax. The Sales Tax Officers are allowed access to record
other than prescribed record under section 25(1) of the Act, only to discover omission of any
item chargeable to Sales Tax in the prescribed record; otherwise as a rule the audit is to be based
on the prescribed record in terms of section 25(3) of the act (as it was in force at the material
time), since initial burden to show that taxpayer suppressed items chargeable to tax is on the
Revenue, this burden cannot be shifted on the taxpayer to prove that every thing it did was not
chargeable to tax. Such an exercise is also violative of the case-law referred to supra.
Respectfully following the judicial pronouncement of the Hon'ble Karachi, High Court in the
case reported as 2004 PTD 868 the demand is set aside under all the aforesaid five heads (i.e.
Sales Tax on miscellaneous income, other electric revenue, overhead recovery; repair, testing
and inspection fee and other income -energy tariffs)."
8. In addition to above, further reliance was placed by the learned counsel for the registered
person on decisions in (i) PLD 1990 Supreme Court 399; (ii) 2013 PTD (Trib.) 2344; and (iii)
2004 PTD 868 (Sindh High Court) while arguing that the show-cause notice by the taxation
officer was in utter violation of law, as enunciated by the superior judiciary. It was submitted that
the amended show-cause notice was merely a replica of the original show-cause notice and
constituted a casual correspondence, based on assumptions and speculations without spelling out
definitive factual and legal position of the department. It was submitted that the notice was based
on repetition of alleged amounts recoverable in Para-V to XIII of the original show-cause notice
for the whole of the financial year 2008-2009, including five admittedly time barred tax periods.
The taxation officer, it was emphatically argued, admitted at Page-20 of the Sales Tax order-in-
original: "the adjudication authority is short of month-wise working of amounts recoverable" in
the nine paras i.e. paras VI to XIII. In the remaining five paras of the amended show-cause
notice, proportionate amounts for seven months were adopted, without reference to actual
period-wise and transaction-wise amount while charge of sales tax under section 3 of the Act
read with Rule 13 of the Sales Tax Special Procedure Rules, 2007 (hereinafter 'Rules'),
envisaged period-wise, supply-wise, bill-wise determination of transactions. Thus, the amended
show-cause notice, it was argued, failed to spell out the, amount chargeable to sales tax regarding
which allegation of non levy or short levy could be ascertained. The show-cause notice, it was
submitted, was not a lawful notice; hence, the entire impugned proceedings, and consequent
orders were void ab-initio.
9. In the context of arguing on lawful jurisdiction, it was further submitted that the
impugned show-cause notice was based on the audit of annual financial statements instead of the
records prescribed under section 22 of the Act read with Rule-17 of the Rules. Resultantly,
according to learned counsel, the transactions not chargeable to sales tax were presumed to be
chargeable and stupendous imaginary demand was raised on such transactions. The charging
provisions of Sales Tax Act, 1990, the learned counsel added, are confined to the supply of
taxable goods in the furtherance of taxable activity, while supply of services and immovable
property are Provincial subjects and the Federation has no authority to charge tax on both the
subjects. On this aspect, it was submitted that this tribunal had directed the taxation officer to
consider the chargeability of invoices but he failed to consider this fundamental legal
requirement and direction of this tribunal. The taxation officer, it was further submitted,
proceeded on the same material which included transactions of supply of goods as well as
services and receipts against development of immovable infrastructure of the distribution system
and hence the entire exercise conducted by the taxation officer lacked lawful jurisdiction. It was
the assertion of the learned counsel that in the present case, the taxation officer failed to spell out
or support chargeability of the amounts alleged to be taxable in the show-cause notice, and
therefore, the amended show-cause notice and the consequent orders were, thus, based on
unwarranted assumptions and peculations; hence, liable to be annulled.
10. Challenging on jurisdictional plane, the learned counsel also submitted that the order-in-
original, creating colossal demand of Rs.6,888,265,303, was passed without any fact finding
enquiry/ investigation and without ascertaining the correct facts, with a view to meeting
collection targets. It was submitted that the impugned order, passed with mala fide intent, was by
its nature an act without jurisdiction; hence, liable to be annulled. In this connection, reliance
was placed (i) PLD 1965 Supreme Court 671 tilted Abdul Rauf and others v. Abdul Hanif Khan
and others and (ii) 1999 PTD 1892 Attock Cement Pakistan Ltd. v. The Collector of Customs.
The Hon'ble Court, wherein has settled the following principles:--
"The perusal of these facts and circumstances also leads us to believe that the
extraordinary zeal was being shown by the respondents to somehow charge the appellant
company with the amount of deductions made along with the additional tax and penalty. In our
view, such demand is otherwise than in accordance with law and we cannot also help to observe
that such demand was being made by an impatient department with a view to achieving the target
of recovery of revenue and, therefore, in our view the demand was mala fide as well".
11. The learned legal advisor for the revenue/department on the other hand, strongly opposed
the legal objections raised on behalf of the registered person. It was submitted that the learned
counsel for the taxpayer erred in ignoring the fact that the show-cause notice, earlier under
section 36(1) of the Act by the taxation officer, was held by this tribunal to have been treated as
show-cause notice issued under section 36(2) of the Act and as such there was no further need to
issue any new or amended show-cause notice. It was submitted that if this judgment was not
acceptable to the appellant, the best course available to the taxpayer was to file reference before
the Honourable High Court, instead of agitating against the judgment which has attained finality.
The learned counsel also argued that the impugned order in original dated 25-4-2013 was passed
on the basis of Show-Cause Notice No. 7 dated 13-12-2011 and ample opportunities i.e. six
hearing dates, were, provided to appellants for presenting their case. According to learned
counsel, the show-cause notice was issued on 31-12-2011 and according to section 36(2) the
limitation for tax periods for which the sale tax returns were filed before 31-12-2008 were barred
by time. In fact the show-cause notice was rightly restricted to 7 months.
12. Responding to the argument of the registered person vis-a-vis proportionately reducing
recoverable amount through the process of averaging etc., the Legal Advisor for the revenue
vociferously submitted that the taxpayer was given six hearing opportunities, during the course
of de novo proceedings, to furnish his version but he failed to do so. Moreover, the adjudication
authority vide their letters confronted the summary of recoverable amount under section 36(2)
ibid and categorically discussed the basis for reduction in tax liability. The registered person, the
learned counsel contended, was informed that there was no month wise break up available with
the revenue and when asked to provide, the AR of the registered person also showed his inability
to produce the same. It was obligatory on the part of the taxpayer, according to the learned L A,
to provide all the documentary evidence particularly prescribed record including month-wise
break up etc. On the basis of these averments, it was contended that the learned counsel for the
taxpayer has totally ignored this aspect and, therefore, no illegality was committed by the
taxation officer both in the show-cause notice and the order-in-original.
13. We have given serious consideration to the rival arguments and find considerable force in
the contentions raised on behalf of the registered person. Based on principles settled by the
higher appellate authorities in various judgments, including few relied upon by the learned
counsel for the taxpayer, there is no cavil to the proposition that show-cause notice is a
foundational document, which is to comprehensively describe the case made out against the
taxpayer by making reference to the evidence collected in support of the same. It is the narration
of acts in the show-cause notice along with the supporting evidence which determines the
offence attracted in a particular case. The show-cause notice is not a casual correspondence or a
tool or license to commence a roving inquiry into the affair of the taxpayer based on assumptions
and speculations but is a fundamental document that carries definitive legal and factual position
of the revenue against the taxpayer. Indeed, in this case, the revenue grossly erred by
proportionately working out the alleged defaults on the basis of averaging. Considering the legal
position on the proposition, we have no hesitation to conclude that no lawful life could be given
to such a show-cause notice which violates all norms of justice and fair play. The revenue, could
not be allowed to take refuge under technical defense taken by the learned counsel for the
department.
14. The revenue's contention that the remand order dated 25-6-2012 passed by this Tribunal
attained finality, as no reference in the High Court was filed against it, has no legal force. It was
an open ended remand order subject to limitation and "all legal objections" including the legal
objection regarding chargeability of sales tax on certain invoices. The treatment of show-cause
notice under section 36(2) of the Act thereof brought the proceedings to Square 1 as no final
finding of fact or law was recorded by this Tribunal. Since the re-adjudication proceedings were
subject to all legal and jurisdictional objections, the treatment of show-cause notice under section
36(2) of the Act instead of under section 36(1) thereof was beneficial to the appellant; hence,
there was no occasion to file a reference in the High Court. Even otherwise, question of
jurisdiction may be raised at any stage. If any authority, in this regard, is required one could refer
to PLD 1995 SC 66: Pir Sabir Shah v. Shad Muhammad Khan and another. The Hon'ble Court
held "Question of jurisdiction being very important and fundamental in nature, if a forum had no
jurisdiction, the same could not be conferred upon it by consent of parties. Court has to consider
the question of jurisdiction even though not raised by the parties." Similar principle was laid
down by the Hon'ble Supreme Court of Pakistan in the case of Messrs Sutlej Cotton Mills Ltd.
Okara v. The Commissioner of Income Tax cited as PLD 1965 SC 443 holding "a point of
jurisdiction is one which is not barred even at the ultimate stage before this (Supreme) Court".
15. In this case, after remand, in the manner as aforesaid, the matter was to be reassessed in
its entirety with the only legal presumption that the show-cause notice was issued under section
36(2) of the Act subject to all legal requirements for issuance of such notice as assumption of
jurisdiction cannot be conferred by the consent of the parties. Reference may also be made to the
judgment of the Hon'ble Supreme Court of Pakistan cited as 1999 PTD 4158 holding "relying on
general principles after remand the cause becomes wide open to entertain relevant grievances
germane to final adjudication of real controversy."
16. The revenue, in this case, undoubtedly failed to discharge the initial burden to spell out
chargeability of transactions with reference to 7 out of 12 tax periods. The stand of the revenue
that such working should have been provided by the taxpayer as the adjudication officer had no
material on the subject on record is self-destructive. The said admission evidently proves that the
show-cause notice was nothing but a casual correspondence and a roving enquiry which is
prohibited by law as held in the judgment cited as 2013 PTD 1536 (Lahore High Court). The
adjudication officer also failed to specify transactions for determination of chargeability of such
transactions as charge under section 3 of the Act is with reference to transactions covered under
it and not on guess estimates and averages. The Adjudication Officer, clearly, resorted to guess
work and inferences instead of evidence, which is not sustainable under the law.
17. We are mindful of the fact that this is second round of litigation, hence, notwithstanding
the observations above vis-a-vis the lawfulness of the subject show-cause notice, it shall not
serve the purpose if the matter is again remanded to the taxation officer, for de-novo
proceedings, as the legal position of the respective parties, on the matters involved in these
appeals, have already surfaced. Thus, it shall be an exercise in futility if the matter is remanded
to the taxation officer because the registered person shall bear same fate. Accordingly, it shall be
in the interest of justice if the fundamental issues are also taken up and decided. Nevertheless,
our findings on each issue shall include remand directions in a manner that the taxation officer
while implementing the findings shall determine actual amounts pertaining to periods involved in
these appeals for which the registered person shall participate in the proceedings and provide
necessary assistance to the taxation officer.
18. In the order-in-original, the input tax amounting to Rs.2,683,158,865 has been held
inadmissible to the registered person on the grounds that the supplier had not shown/declared
sales to the registered person in their summaries filed under section 26(5) Act. The allegation,
the learned counsel argued, was levelled without application of mind to the proviso to subsection
(1) of section 7 of the act. The proviso, according to learned counsel, lays down where a
registered person did not deduct input tax within the relevant tax period; he may claim such tax
in the return for any of the six succeeding tax periods. Thus, it was added, the comparison based
on the returns of the suppliers and the registered person for the one month was, evidently,
misconceived as a comparison of 7 months Returns would be required to reconcile the amounts
declared by the suppliers and the taxpayer. It was further submitted that the allegation was self-
destructive because, the taxpayer, having no generation capacity, could not supply electricity to
its consumers if the said purchases were not made.
19. Explaining the facts, the learned counsel submitted that the main purchases were made by
the taxpayer from National Transmission and Despatch Company Ltd. (NTDC)/WAPDA and
necessary certificate, issued by WAPDA in support of such purchases along with reconciliation
statements was also filed with the taxation officer, as admitted by the learned first appellate
authority at Page No. 40 of the impugned order. The certificate, it was argued, was rejected
without verification and such rejection of the certificate along with reconciliation statement was
arbitrary and capricious. Reliance in this regard was placed on the judgment of the Hon'ble
Lahore High Court, Lahore cited as PLD 1976 Lah. 703 = 1976 PTD 347.
20. The copies of audited financial statements of NTDC for the Tax year ending on 30-6-
2009 were also submitted which support that the main purchases were made from NTDC alone.
In order to lend credence to the argument, the learned counsel relied upon the decision of this
Tribunal in 2011 PTD (Trib.) 808 whereby following principles were settled on the proposition:-
-
"The statements made by the third parties, without their cross-examination by the
appellant, were not admissible evidence. The assertion on behalf of the appellant that payments
were made through crossed cheques to the concerned parties and, had opportunity been given to
cross-examine them, the Department would have uncovered concealment in the cases of the third
party. Since the statements of the third patties were accepted without providing the appellant an
opportunity to cross-examine them, these statements were not admissible as evidence. Reliance
in this behalf were placed on the judgments cited as 1990 PTD 747 (Trib.). The demand was thus
not raised in accordance with law and remand thereof by the appellate Authority was also illegal
and unjustified. The demand is accordingly set aside."
21. The learned counsel further relied upon decision of this Tribunal in 2011 PTD (Trib.) 773
wherein it was held as under:--
"If for any reason, the registered person fails to file his tax return under section 26 of the
Act, ibid or his record of purchases vis-à-vis sales are not entered in STAR System by the PRAL,
the registered buyer should not suffer for the fault of the delinquent supplier."
22. Further reliance was placed on the judgment of the Hon'ble Lahore High Court in its
judgment dated 22-11-2012 in W.P. No.3515 of 2012 titled D.G. Khan Cement Company Ltd. v.
The Federation of Pakistan etc. PLD 2013 Lah. 93 wherein the following principles have been
laid down:--
"Every person has a separate legal character enjoying distinct rights and liabilities under
the law. To impose the liability of one over the other is opposed to basic fundamentals of law
and offends due process, logic and rationality."
23. Based on the aforesaid decisions vis-à-vis the facts of the present case, the learned
counsel prayed that the impugned demand of Rs.2,683,158,865 raised on the allegation of
inadmissible input tax claimed was, therefore, unlawful, arbitrary and capricious; hence, liable to
be deleted.
24. The learned Legal advisor for the revenue, responding to the arguments of the registered
person, submitted that the registered person was entitled to claim input tax in any of six
succeeding tax periods, however, in this case, the registered person was given ample
opportunities to prove this fact at adjudication and appeal stage but it failed to do so. The major
concern of registered person remained with regard to purchases from NTDC/WAPDA, perusal of
whose returns revealed that it had not declared any sales to registered person during the period
under consideration and, therefore, the taxation officer rightly and lawfully determined the
default.
25. The transactions with WAPDA, the learned LA submitted, start with declaration of sales
to LESCO by WAPDA in its return and then FESCO is eligible for claiming input tax against
said transaction. In the instant case, the starting point, i.e., declaration of sales in the returns of
WAPDA, is missing which means that FESCO is not eligible for said input tax. In the eyes of the
law the valid document is the return filed by WAPDA instead of any certificate.
26. The learned LA further argued that the decision in 2011 PTD (Trib.) 773 was irrelevant
as the same contained discussions in respect of cases where tax returns had not been filed,
whereas, in the instant case, both the supplier and buyer have filed their returns but the buyer
claimed such purchase which was not declared by seller in its return. Likewise, the decision in
W.P. No.3515 of 2012 was also argued to be irrelevant and out of context.
27. In our view this is a straight forward issue. The taxpayer could not be burdened with tax
liability if, even for arguments sake, there was some procedural or technical lapse on the part of
the supplier. In this case, the default made out by the revenue is all the more absurd and illogical
in a sense that if the taxpayer had not purchased electricity how come it so engaged in the
business of sale of electricity on which the revenue undoubtedly had collected sales tax. The
respondents, in their submissions, have not addressed the contentions raised on behalf of the
appellant. The case-law cited, particularly the judgment passed by this in 2011 PTD (Trib.) 808
has not been distinguished properly, except for general remarks. There is no provision in the Act
or the Sale Tax Special Procedure Rules, 2007 which empowers the respondents to reject
overwhelming documentary evidence and to use the clerical mistakes of the suppliers against the
claimant.
28. In the event of any alleged discrepancy between the sales declared by the suppliers and
the purchasers made by the registered person, investigation had to be undertaken which of the
two parties was at fault. Such investigation should precede the issuance of show-cause notice.
The revenue, however, unlawfully disregarded the irrefutable documentary evidence submitted
in form of certificates issued by WAPDA, the reconciliation statements and audited financial
statements. The appellant had made bulk of purchases from WAPDA/NTDC. If it is alleged that
such purchases were not made, the sales on which output tax has been received by the
Department, were not possible as the appellant has no generation capacity and it is just a Power
Distribution company. The disregard of documentary evidence is not only capricious, arbitrary
but also unreasonable and self-destructive proposition.
29. The principles emanating from the decisions relied upon by the taxpayer are clear enough
for us to hold that the taxpayer could not be penalized for any act of omission or commission by
NTDC/WAPDA. The certificate issued by the supplier and its financial statements constitute
irrefutable evidence that these were bona fide purchases in respect of which the registered person
was lawfully entitled to claim the input tax adjustment. It is all the more important to note that
the supplier, in this case i.e. NTDC, again is a Government entity which could not be treated to
be involved in issuing fake certificates. The revenue has failed to make out valid case for input
tax disallowance. The amount is held to be admissible to the taxpayer, however, the matter is
remanded back to the taxation officer with directions that he shall obtain necessary evidence
from the taxpayer in respect of input tax adjustment. In the event the taxpayer could not prove
from its record that amount constituted bona fide adjustment only then the adjustment shall be
denied. No amount shall be held to be inadmissible if proper evidence and compliance exists
with the registered person.
30. The following service charges vide respective paras of the show-cause notice were
alleged to be liable to sales tax, however, it was the contention of the learned counsel for the
registered person that amounts constituted consideration for services which, being a Provincial
subject, are not conceived in the statute to be liable to levy of sales tax:--
31. Likewise, the learned counsel for the registered person also vehemently objected to the
action of the taxation officer of subjecting to tax the following amounts received from customers
and the Government towards the cost of extension of distribution network and for providing
service connections:
32. In the course of disputing the treatment meted out by the authorities below, the learned
counsel for the taxpayer argued that the same issue has already been decided in favour of the
registered person in the case of WAPDA by this tribunal in the judgment cited as 2011 PTD
(Trib.) 808. In this regard, the learned counsel relied upon following excerpts from the
judgment:---
"We are inclined to agree with the proposition advanced by the learned representative of
the appellant that supply of immovable property is expressly excluded from the domain of
taxation by the Federation of Pakistan hence it cannot be subjected to tax on far fetched
interpretations made by the learned Collector (A). Reference in this regard may be made to the
law laid down by the Hon'ble Supreme Court of Pakistan cited as 1993 SCMR 1523 wherein it
was ruled that:
The Hon'ble Lahore High Court in the judgment cited as 2006 PTD 162 (Lahore High
Court) held that/construction of immovable property even for its supply is not a taxable activity
under the Act and the charge of Sales Tax is confined to supply of goods only."
---By relying upon the above, it was submitted that matter having been already decided favorably
by this forum, proprietary demands that similar relief is allowed in this case also.
33. The learned legal advisor while disputing the position of the taxpayer and in the course of
supporting the orders of the authorities below, argued that the provisions of Rule 13(2)(b) of
Special Procedures for Collection and Payment of Sales Tax on Electric Power notified vide
Chapter III of S.R.O. 480(I)/2007 dated 9-6-2007 support the imposition of tax. Following
specific provisions were relied upon by the learned counsel for the revenue:--
"The value shall be the price of Electric Power including all charges and surcharges
excluding the amount of the late payment surcharge, rent, commissions and all duties and taxes
whether local, Provincial or Federal but excluding the amount of Sales Tax, as provided in clause
46 of section 2 of the Act."
34. By reference to the above provisions, it was argued that the revenue earned by FESCO
from charges received for any activity carried out in connection with the instant or prospective
distribution and supply of electric power remained also liable to sales tax because supply of
electricity remained the sole business of the taxpayer. It was further submitted that the contention
of the taxpayer that it was providing services was incorrect and grossly misconceived as FESCO
is registered in sales tax records for supply of electricity and all the revenue generated have
nexus with this supply. The revenue in respect of repair/testing/ inspection etc., receipt against
non-utility operations and reconnection, it was argued, are squarely covered in the definition of
taxable activity. According to learned counsel, reliance on 2011 PTD (Trib.) 808 was based on
misreading of the law.
"taxable activity", means any economic activity carried on by a person whether or not for
profit and includes: -
(b) An activity that involves the supply of goods, the rendering or providing of services, or
both to another person;
(d) Anything done or undertaken during the commencement or termination of the economic
activity,
36. It was submitted that during the de novo proceedings under section 36(2) ibid, the
registered person failed to raise any objection on point of facts. Non submission of any comment
by registered person leads to the conclusion that he has nothing to say in addition to the
arguments given at the time of earlier adjudication and appellate forum. The AR requested to
account for tax fraction for calculation of recoverable amount under section 36(2). The plea
regarding tax fraction was accepted. The-registered person recovered cost of its infrastructural
development and works from its beneficiaries; however control of the property in these
scheme/works continued to vest with registered person, who is also responsible for operation and
maintenance of these infrastructural facilities. In these schemes/works, the registered person used
tax paid goods, the adjustment of which was taken against the output tax of power supplies in the
course of furtherance of a taxable activity carried on by him. The clause (b) of sub-rule (2) of
Rule 13 of Special Procedure Rules for collection and Payment of sales tax on Electric Power
clearly states that the responsibility to collect sales tax shall be of the person making the supply,
and the value shall be the price of electric power including all charges, surcharges, excluding the
amount of late payment surcharge, rents, commission and duties whether local, provincial or
federal, but excluding the amount of Sales Tax. The perusal of said clause, the learned counsel
added, reveals that all other charges, rents and commission received by the registered person for
the purpose of distribution and supply of electricity are chargeable to sales tax regardless of the
fact whether or not the so-called ownership and operation/maintenance of such schemes continue
to stay with registered person. As, the cost incurred, on such infrastructure were incidental to
cost of electricity and the amount so received from the consumers was used for the furtherance of
business activity, it cannot be excluded from payment of sales tax as per law especially when
input tax against these items has duly been claimed by the registered person. By availing input
tax adjustment and by avoiding payment of output tax, the registered person caused loss to the
national exchequer and on the other hand recovered its own investment costs from the public.
Hence, the plea of the registered person, it was argued, was not acceptable.
37. We have given our dispassionate consideration to the rival arguments and material
referred to by opposing counsel. We observe that the learned counsel for the revenue has
primarily, attempted to justify sales tax on service charges and on receipts for immoveable
infrastructure on the basis of Rule 13(2)(b) of the Sales Tax Special Procedure Rules, 2007 with
emphasis that 'all charges and surcharges, rent commissions, and all duties and taxes are
chargeable to tax' if there is no specific exemption available under the law. However, in our
considered opinion, the reference is out of context, misplaced and irrelevant. The expression "all
charges..." could not be read in isolation or for that matter divorced, detached, or de-linked with
basic scope provided for in body of the Act and/or Rule i.e. supply of electric power. The
consideration, including all charges etc. has to be in respect of supply of electric power. In case
the consideration/amount has no nexus with supply of electric power that does not fall in the
scope of tax. It is settled law that while constructing provisions of fiscal statutes one has to
adhere to what is expressly provided in the statute and one cannot be allowed to go beyond what
is stated therein. Further, it is also a trite law that benefit of doubt, if any, has to be resolved in
the favour of taxpayer. In our view no lawful mandate exists for putting a charge of sales tax on
subject services charges and receipts for immoveable infrastructure as these do not, even
remotely, has any nexus with the supply of electric power.
38. We also readily agree with the submissions of the learned counsel for the registered
person that the Special Procedure Rules are to be read as subordinate to the substantive
provisions of the parent Act. Following this principle, we are of a considered opinion that since
the primary law prescribes charge exclusively in relation to supply of goods, therefore, the
secondary legislation has to, be construed and constructed accordingly. Section 3 charges sales
tax on the supply of goods only as the supply of services and immovable property are excluded
from the purview of the sales tax by Federation under entry No. 49 of the Federal Legislative
List. Thus levy of tax on services and immovable property is beyond the taxing power of the
Federation.
39. We have no hesitation to conclude that what does not come in the ambit of taxation
specified in the statute could not be brought through implication etc. or indirectly. The averment
of the learned counsel that unless there is specific provision under the law granting exemption,
every supply is taxable is contrary to established law that exemption is the waiver of the charge
and comes into play only if a transaction is chargeable to tax. If a transaction is not chargeable to
tax, question of exemption would not arise and the liability to pay tax arises by charging section
alone. Reliance in this regard is placed on the judgments of the Hon'ble Supreme Court of
Pakistan cited as 1992 SCMR 250 and PLD 1990 1156 = 1990 PTD 768. As the subject of
services and immovable property is unambiguously excluded from the purview of Sales Tax by
Federation, such subjects cannot be taxed on the purported interpretation is even contrary to
Section 3 of the Act itself. The decision of this tribunal in 2011 PTD (Trib.) 808 unequivocally
decides the matter in the favour of the taxpayer and following the same the orders of the
authorities below on this point are vacated being unlawful and unsustainable.
40. The learned counsel for the taxpayer submitted that the allegation under the head and
impugned demand of Rs.826,820,600 under the head is misconceived as sales tax is not
chargeable on the amount of Income Tax collected from the consumers under section 235 of the
Income Tax Ordinance, 2001. Sales Tax, the learned counsel added, is chargeable under section
3 of the Act on the value of supply. Section 2(46) of the Act defines the value of supply which
includes all federal and provincial duties and taxes which the supplier receives from the recipient
for that supply. The Income Tax being personal tax is not received from the supply and it is an
independent charge on the income of the consumer and adjustable against his assessment. Duties
and taxes "for that supply" include only trading taxes which are included in the price of the
supply and are passed onto the consumer. Income tax is not included in the price of the supply by
the supplier but it is collected on behalf of the Federal, government in the independent capacity
as withholding agent and such Income Tax is deposited in the Government Exchequers against
which credit is independently claimed by the consumer.
41. The learned counsel, while supplementing the arguments, submitted that there is no nexus
between the value of supply and the Advance Income Tax adjustable in the personal assessment
of the consumer as independent liability. Rule 13(2)(b) of the Sales Tax Special Procedure Rules,
2007, according to learned counsel, lays down that Sales Tax is leviable on the price of electric
power. Since the Income Tax is not includable in the price of electric power, the allegation of
short payment of Sales Tax on the Advance Income Tax collected from the customers on behalf
of the Federal Government is ex-facie contrary to law and liable to be deleted. Besides, the
allegation was made in oblivion of S.R.O. 72(I)/2005 dated 10-8-2005 which provided zero rate
for certain supplies against the consumers of the sectors mentioned in the S.R.O. The
adjudicating officer, the learned counsel stated, disregarded the record of such zero rated
supplies in the prescribed record and jumped at imaginary allegations on the basis of the
consolidated Financial Statements. The learned counsel of the taxpayer, while supporting his
contentions, also relied upon following excerpts from the decision of this Tribunal in the
judgment cited as 2004 PTD (Trib.) 2026:--
"Within the frame work of law, the scrutiny of record was only restricted to the
prescribed records, whereas the visiting team in this matter altogether disregarded the prescribed
records."
42. The learned LA for the revenue, on the other hand, forcefully defended the orders of the
authorities below, and argued that the registered person had wrongly contended that only trading
taxes are includible in value of supply. The language of the Rule 13(2)b of the Special
Procedures for Collection and Payment of Sales Tax on Electric Power notified vide Chapter III
of S.R.O. 480(I)/2007 dated 9-6-2007, it was submitted, is very clear that all Federal taxes
(including Income Tax) are included in the value of supply. The relevant portion is reproduced as
under: The taxpayer, according to learned counsel for the revenue, had misconceived the issue.
43. The learned LA further argued that the value of income tax in the instant case is Rs.1,020
million whereas the difference in actual and declared value of supply is Rs.5,167 million,
meaning thereby that the exclusion of income tax is a partial issue not the whole. The instant
charge, the learned LA added, was framed on the basis of statement of units sold and revenue
billed for the year 2008-2009. As per show-cause notice the total billed amount, as declared by
the registered person, was Rs.44,640.68 million including fixed charges, variable charges, LPF
Penalty, Seasonable Charges, Meter Rent, Service Rent, Electricity duty and Income Tax. The
registered person at the time of adjudication under section 36(1), agreed with calculation except
addition of Income Tax.
44. It was further contended by the learned LA that the Department does not deny the aspect
of zero rated sales under S.R.O. 792(I)/2005 dated 10-8-2005, however, the registered person has
not produced any detail along with documentary evidence for such sales. As far as, the issue of
prescribed record is concerned, the registered person's view point according to learned LA was
wrong. In this regard, it was submitted that the audited accounts are prescribed record under
following provisions of section 22(4) of the Act:--
"(4) The registered persons, whose accounts are subject to audit under the Companies
Ordinance, 1984 (XLVII of 1984) shall be required to submit a copy of the annual audited
accounts, along with a certificate by the auditors certifying the payment of due tax by the
registered person."
45. The learned LA, in the end, submitted that the judgment of the Tribunal i.e. 2004 PTD
2026 relied upon by the learned counsel for the taxpayer had no nexus with instant case in the
light of legal provision quoted above.
46. We have heard both the sides at length. As also noted above, the default adjudged by the
taxation officer with regard to issue at hand is clearly based on misreading and mis-appreciation
of provisions of Rule 13(2)(b) of the Sales Tax Special Procedure Rules, 2007. Income Tax is
not covered in the definition of value of supply under section 2(46) of the Act as it has no nexus
with supply. It is personal tax of the consumers which is collected on behalf of the Federal
Government by the registered person as withholding agent. It is not hit by the charging
provisions of Sales Tax Law, including Rule 13 of the Special Procedure Rules, 2007. Similarly,
the reference to (4) of Section 22 of the Act, in our considered opinion, has no relevance to the
present discussion as annual audited accounts are not available at the time of submission of
month-wise tax returns which are based on the prescribed record under Section 22(1) of the Act.
Accordingly, we have no hesitation in vacating the orders of the authorities below by holding
that amount of income tax, collected as withholding agent, is not required to be
considered/included while determining the incidence of sales tax under the provisions of the Act
as well as the Special Procedure Rules.
(iv) SUPPRESSION OF SALES
47. The learned counsel for the registered person argued that the allegation is wholly
misconceived as the alleged mismatch between the consolidated Financial Statements prepared
for Income Tax/Company matters and the Sales Tax Returns results from the different scheme of
charge of tax under the Income Tax Law and the Sales Tax Law. The Financial Statements, the
learned counsel argued, treat all the units consumed upto the year end i.e. 30th June, 2009 as
sales but Sales Tax Returns based on the charge of Sales Tax under Rule-14 of the Sales Tax
Special Procedure Rules, 2007, reflect the Sales Tax actually billed. Since the bills are issued for
June in different batches in the month of July, the figures cannot possibly match. In order to
support the proposition, the learned counsel relied upon following observations recorded in
judgment cited as 2008 PTD (Trib.) 541:--
"it is consistently held by the superior courts of the country that the Income Tax record
cannot be made basis for adjudging the liability under the Sales Tax Act, 1990."
48. The learned counsel for the revenue argued that the referred judgment, cited as 2008 PTD
(Trib.) 541, was irrelevant as annual audited accounts are not the Income Tax record. The
registered person is required to provide audited accounts under section 22(4) of the Act. It was
further argued that the registered person was given ample opportunities, during the adjudication
stage, to prove its contention and reconcile the difference between sales declared in Sales Tax
returns and Audited accounts but he failed to do so.
49. After hearing both the parties, we conclude that this matter requires mere reconciliation
and re-examination of records. Accordingly, the matter is remanded back to the taxation officer
to examine the matter afresh in the light of legal framework, referred to be the taxpayer vis-à-vis
the mechanism of taxation. He shall afford adequate opportunity to the taxpayer during remand
proceedings and shall pass a speaking order in this respect.
50. In the course of arguments on this issue, the learned counsel for the registered person
submitted that in the show-cause notice it was alleged that "there is no provision in the Act
which allows input tax credit against these losses", however, the same is without application of
mind as such losses are admissible under section 7 of the Act. It was argued that neither section 7
nor section 8 of the Act place any embargo on the admissibility of input tax which is paid for the
purposes of taxable supplies, in any manner whatsoever. The purpose of supply, the learned
counsel argued, is the crucial test. It was submitted that the transmission and distribution losses
were integral part of supplies of electric power in terms of section 13(2)(b); hence, charges
cannot be extended on the basis of capacity of production.
51. In this respect it was argued that the Hon'ble Supreme Court of Pakistan held in the
judgment cited as PLD 1997 SC 582 (683) that capacity tax and tax on actual transaction are
mutually exclusive. According to learned counsel, since the charging provisions charge tax on
actual supplies and losses are unavoidable for making such supplies, therefore, the adjudication
officer lacked lawful authority to indirectly levy tax, through curtailment/disallowance of input
tax, principally on the basis of capacity i.e. actual supplies + the line losses and distribution
losses.
52. The learned counsel further relied upon decision of the Tribunal, in Sales Tax Appeal No.
K-84 of 2002, decided on 20-5-2002 wherein it was held, in following words, that input tax
adjustment pertaining to wastage is admissible:--
"The losses claimed are usual losses and are part of production activity and if input tax is
available, there is no reason why the benefit of total input tax could not be adjusted against the
total output tax in terms of section 7---there is no limitation on claiming the input tax paid, the
assumption of wastages is not supported by law."
53. Further, the learned counsel referred to the recommendations of Federal Tax Ombudsman
delivered vide order dated 28-3-2011 in case of M/s. Peshawar Electric Supply Company (Pvt.)
Ltd., (PESCO) in Complaint No. 170/ISD of 2010 wherein inadmissibility of input tax against
Transmission and Distribution, Losses was held to be null and void as "disallowing line
losses/distribution losses to the extent of 33.20% as determined by NEPRA being manifestly
discriminatory and unlawful is tantamount to maladministration as defined under section 2(3) of
the Ordinance". The learned counsel argued that the illegal demand raised on the allegation of
inadmissibility of input tax claimed/adjusted against transmission and distribution losses was
liable to be deleted as such losses were admitted and allowed by NEPRA as part of the natural
process of transmission and distribution.
54. In the course of responding to the contentions of the taxpayer, the learned LA for the
revenue conceded that section 7 or section 8 of the Act do not place any bar on the admissibility
of input tax which is paid for the purpose of taxable supplies, however, vehemently contended
that the contention that transmission and distribution losses are integral part of supplies of
electric power in terms of Rule 13(2)(b), is incorrect.
55. It was contended by the learned LA that the registered person, in this case, is a distributor
of electric power and he is not entitled to claim such input tax which was never used in supply of
electricity. It was argued that reliance on the two decisions was absolutely irrelevant judgments.
By reference to argument of the taxpayer vis-a-vis taxing the capacity which lacked jurisdiction,
it was argued that the adjudication officer did not tax the line losses but disallowed the input tax
claimed against units lost mainly due to theft and bad infrastructure of distribution. The
difference between charging the losses and disallowing the input tax which was not used in
taxable supplies, it was argued, are two different things considering which it would transpire that
the referred judgment was irrelevant.
56. In connection with the judgment of the Tribunal, it was contended that the same discusses
the losses in production and since the registered person, in this case, is a distributor carrying no
production activities, therefore the decision is not a valid precedent. Its distribution losses were
due to weak transmission lines and theft etc. i.e. due to bad administration instead of technical
reasons and hence permit disallowance.
57. In the context of the submission of the taxpayer that transmission and distribution losses
were natural as NEPRA duly allow these losses while fixing tariff etc. it was argued by the
learned counsel for the revenue that the registered person failed to quote any provision of the Act
which allowed input tax against such losses. It was thus prayed that the orders of the authorities
below are not disturbed and keeping in view the nature of commodity and the fact that registered
person was registered as distributor, the registered person is held entitled to claim input tax only
on those units that were sold to end consumers.
58. We have given our serious consideration to the rival averments as well as decisions relied
upon before us. In the context of the issue, the facts of which are unambiguous and admitted, we
have managed to lay our hands on an elaborative and exhaustive decision of the honourable
Lahore High Court reported as PTCL 2002 CL. 115 titled Mayfair Spinning Mills Limited v.
Customs, Excise and Sales Tax Appellate Tribunal and 2 others wherein almost a similar issue
was discussed, at length, by their lordships of Lahore High Court. In the decision, their lordships
observed, in unequivocal and clears words, the allowability/ adjustment of input tax remains
exclusively dependent upon the intention of the taxpayer at the time of acquisition of, tax paid
goods and if the acquisition was for the "purpose" of taxable supplies made, or to be made, by
the registered person, the said registered person would be lawfully justified to claim the
adjustment even if due to some unfortunate event or otherwise, he does not actually make taxable
supplies.
59. In this case, there is no ambiguity or confusion that electricity, in respect of which the
registered person claimed the disputed input tax adjustment, was purchased exclusively for
onward taxable supply to consumer, therefore, in the light of ratio settled by the Lahore High
Court, the registered person was lawfully entitled to claim the adjustment under section 7 read
with section 8 of the Act. The transmission and distribution losses do not affect the said
adjustment, which remains fully allowable under the law. Besides, the decision of the Tribunal,
in Sales Tax Appeal K84 of 2002, decided on 20-5-2002, relied upon by the learned counsel for
the taxpayer, also supports the case of the taxpayer. The argument of the learned counsel of the
registered person that very design and structure of the tariff approved by NEPRA is such that it
in-builds such losses, thus does not cause any loss to the exchequer vis-à-vis taxes, is also quite
forceful because the output tax collected on tariff duly accounts for such losses. Thus, we have
no hesitation in agreeing with the contentions of the learned counsel for the registered person
that the authorities below erred in law in disallowing/restricting the input tax adjustment.
Accordingly, the orders of the authorities below are vacated and input tax adjustment claimed by
the taxpayer is held to be in accordance with law.
60. The taxation officer, in the order-in-original dated 25-4-2013, imposed sales tax on
amount which the taxpayer/ registered person received from Government of Pakistan in the form
of subsidy. The treatment meted out by the taxation officer was upheld by the first appellate
authority. In this connection, it was argued by the learned counsel for the registered person that
in the case distribution companies, sales tax is chargeable under Rule 14 of the Special Procedure
Rules on the amount of sales tax actually billed to the consumers/purchasers of the tax periods. It
was argued that subsidy is not billed to the consumers/ purchasers; hence, it is not covered in the
charge of Sales Tax under charging provisions. In this regard, reliance was placed on (i) 1996
SCMR 1470 (1475) also referred supra and (ii) PLD 1990 SC 68.
61. In the course of relying on decision of the Hon'ble Supreme Court of Pakistan in the
judgment PLD 1990 Supreme Court 68, the learned counsel emphatically referred to following
observations:--
"In taxing Act one has to look newly at which is clearly said. There is no room for any
intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be
read in, nothing is to be implied. One can only look fairly at the language used."
62. By reference to above, it was submitted that the tax on subsidy clearly falls out of the
purview the charging provisions. It was contended that under section 3 of the Act, existence of
two ingredients, taxable supply in the furtherance of taxable activity, are must to attract the
charge of sales Tax. In this regard, reliance was placed on the judgment cited as 2001 PTD 2097
= 2001 SCMR 1376. It was further submitted that in the case of subsidy, it is neither a supply to
the Federal Government nor it is allowed in the furtherance of taxable activity. Subsidy, it was
stated, is provided by the Federal Government as welfare activity which is not taxable activity. In
this regard, reference was made to the IMF publication: "Tax Law Design and Drafting volume-
1, Page-197" wherein following has been discussed on the proposition:--
"Government activity, charitable activity and personal non business activity should,
therefore, be excluded (from economic activity)."
63. It was elaborated by the learned counsel that tariff rates are determined in accordance
with directions issued by the Federal Government under section 31(1) of the Regulations of
Generation, Transmission and Distribution of Electric Power Act, 1997 and in terms of section
31(2)(e) thereof the rates are determined, keeping in view the economic and social policy
objectives of the Federal Government which is not taxable activity. The learned counsel for the
taxpayer, without prejudice to the foregoing submissions, argued that the adjudication authority
picked up incorrect figures under the head of subsidy at Rs.20,751,780,894 instead of the correct
figure of subsidy allowed by the Government at Rs.15,645,684,825. The copy of the audited
Financial Statements bearing out the aforesaid correct figure was also submitted for perusal,
during the hearing.
64. The learned LA for the revenue forcefully disagreed with the contentions of the taxpayer
and submitted that the assertion of the taxpayer that the subsidy was not received against supply
of goods i.e. electricity was misconceived. It was contended that total price of energy is the value
of sales declared in Audited Accounts of appellant. One portion of the same is received from the
consumers and the remaining from the Federal Government on behalf of the consumers. The
provisions of S.R.O. 208(I)/2008, according to learned counsel for the revenue, clearly states that
the rates as per Schedule-I will be charged by the FESCO for provision of electric services. One
part of the sales supply is recovered from the consumers as per rate in Schedule-II and the
balance is paid by GOP. According to learned LA, the taxpayer had received payments from its
consumers and from GOP, in shape of subsidy, against supply of electric power. It was argued
that it is in this background that the taxpayer booked sum of these two receipts, as reflected in
the Note No. 22 to the audited accounts, as Sales and it is proved that subsidy is given against
supply of electricity and not for other purpose as relied by the learned counsel for the taxpayer.
65. According to learned LA for the revenue, the registered person was required to declare
the value of supply at rates in Schedule-I and charge output tax on same, however, it did not
charge sales tax on that part of supplies against which payments were received from GOP in the
form of subsidy. It was explained that the taxpayer is operating under Distribution License No.
02/DI/2002 granted by NEPRA; in pursuance to section 21 of the Regulation of Generation,
Transmission and Distribution of Electric Power Act (XL of 1997). Under Article 6 of above
said license, the taxpayer is required to charge only such tariff as approved by NEPRA from time
to time. In the instant case, the taxpayer is charging a Tariff which is lower than the NEPRA
tariff on the directions of Government of Pakistan. The Federal Government pays out the tariff
differential amount as subsidy. Moreover, taxpayer receives subsidy from Provincial and Federal
Government on discounted tariff from agricultural consumers. The perusal of Note 22.1 to the
audited financial statements for the year 2008-09 reveals that taxpayer has shown these subsidies
as a part of its sales and on the other side it has not charged and paid sales tax on that part of
their sale, which, according to learned counsel, was not lawful.
66. The learned LA argued that the subsidy comes under the value of supply in terms of
section 2(46) of the Act ibid read with Rule 13(2) of Chapter-III of Sales Tax Special Procedures
Rules, 2007 which is received by the appellant against the supply of electricity (goods) and is
actually the part of price fixed by NEPRA and is properly booked under the head of sales in
audited financial statements of the taxpayer. Furthermore, the learned LA added, it is an admitted
fact that the Federal Government has not changed the rates approved by NEPRA. It only changed
the modus of collection of money against those determined/ prescribed rates. The only issue
upon which the taxpayer has been insisting is that tax will be charged only upon the portion
received from the consumer and the amount received from Government is not taxable. This
viewpoint, according to learned counsel, is wrong on the grounds that it received total price of
energy supplied to consumer, one portion directly from consumers and remaining from
Government on behalf of the consumers. The following points, the learned LA supplemented,
validate this viewpoint;
FESCO had not reduced the input tax claimed with the same ratio.
68. In the course of supplementing the arguments vis-a-vis lawful subjection of subsidy to the
incidence of sales tax, the learned counsel for the revenue also relied upon decision in PLD 1975
Kar. 924 Messrs PIALC v. CIT, wherein it is held that if the payment is made from time to time
toward running expenses, that would be revenue receipt in the nature of income receipt liable to
Tax. The learned counsel, in particular, referred to following excerpts of the decision:--
"There would be little doubt that if the payment had been made from time to time
towards running expenses that would be revenue receipts, the fact that the payment was made
after the loss had been ascertained will make no material difference. In the instant case the
working expenses were more than the receipts earned by the Corporation and that is the reason
why the corporation suffered a loss. In effect the payment by Government was made to
supplement the receipt so that the loss may be wiped out. Any receipt which has the effect of
increasing the capital need not be of capital nature. In the present case reimbursement has been
made of revenue loss the paid up capital remains the same. The object of the Government in
carrying on its business without a loss, and this has been the nature of the payment.
……
The view canvassed by the learned counsel for the assessee cannot be sustained upon
consideration of the facts of this case and the interpretation of section 26 of the P.I.A.C. Act and
in the result, the amount of Rs.1,05,13,609 paid by the Government to the assessee for making
good of the loss sustained by the assessee is found to be in the nature of income receipts liable to
tax
……"
68. Drawing analogy from the above, it was contended by the" learned LA that in the instant
case, taxpayer received the Tariff Subsidy on behalf of the consumers from the government in
pursuance of NEPRA Tariff Notification dated 1-3-2008 against the sales of electricity. This,
according to him, is actually the difference between NEPRA rates and rates charged to the
consumers as approved by the government of Pakistan. Messrs FESCO received consideration
against the supply of energy to compensate loss or guaranteed percentage of profit i.e. the part of
the value of the supply. Even otherwise, the learned counsel stated, no exemption of sales tax is
available to subsidy in the provisions of the Act and subsidy being clearly taxable was not
expressly exempted in the Sales Tax law, therefore, the subsidy received from the Government
has nexus with the business activity of the taxpayer, hence it is definitely a revenue receipt,
rightly charged to sales tax. Reliance in this regard was also placed on the ratio decidendi of the
judgment of Tribunal in I.T.As. Nos. 39 and 40/1B of 1992-93 dated 30-10-1995 wherein it was
held that;
"In our view the assessee's practice to add the shortfall in, and to deduct the surplus profit
from, its sale receipts are not two identical situations. When the assessee added the shortfall in its
income it did, what it was required to do on the principle enunciated in Pakistan International
Airlines Corporation v. CIT PLD 1975 Kar. 924 approved by the Supreme Court of Pakistan in
CIT v. Smith Kline and French authorities lay down that when an assessee receives any money
which has nexus with the business of the assessee the money whether call grant, subsidy, or and,
is the income of the assessee. Thus while adding the shortfall to its income the assessee did what
it was required to do under the law but when it was seeking to deduct the surplus profit from its
sale receipts it was entirely a different situation."
69. The learned LA further relied upon the decision of Tribunal in I.T.As. Nos. 354/LB/2006
and 355/LB/2006 for the assessment years 2001-2002 and 2002-2003 wherein it was held that:--
"As far as the nature of SGR as "capital receipt" is concerned, we do not subscribe to the
contention on the strength of the judgments of the Pakistan and Indian Superior courts dilated
upon at length with the half of relevant paras quoted therefrom at the appropriate places in the
earlier part of the order, wherein such receipt having nexus with business of the respondent
taxpayer has been held as "revenue receipt" chargeable to tax as part of business profit."
70. It was further contended by the learned LA that the provisions of clause (102A) of Part-I
of the Second Schedule to the Income Tax Ordinance, 2001 also validates that subsidy is income
and declares it exempt under the statute. This exemption further proves that subsidy as income
can be counted towards the value of sales as defined in section 2(46) of the Sales Tax Act, 1990
unless specially exempted in the statute. There being no exemption provided to subsidy in
section 13 of the Act shows the intention of the legislature i.e. not to exempt it. Otherwise it
could have been exempted under the Act as it as been exempted under Income Tax Ordinance.
Reliance, in this respect, was placed on PLD 2007 Supreme Court 517 wherein it was held as
under:-
"……
Since the assess while furnishing accounts have to mention the income from the sale of
the goods, machinery, may be vehicles used in the business and the consideration/price of which
is still to be used in the taxable activity/in the business, may be by purchasing a new item in
place of the old one by using the assets in enhancing, promoting, advancing in development of
the business/taxable activity. It follows that sales tax would be applicable in respect of taxable
supply made during the course of a business activity. It also follows that it is immaterial whether
the supplier is in the business of the relevant goods or not so involved but the sale of these items
and the utilization of these sale consideration in the business activity is definitely to be
considered in the course of or in furtherance of the business/taxable activity.
……..
Looking it from a different angle whenever there is taxable supply made by a registered
person in the course of a taxable activity sales tax will have to be levied and if any exemption
i.e., the supply is not liable to the levy of the sales tax, is claimed then it is for the person so
pleads to show that the same is covered under the exemption clauses. There is no legal provision
excluding the sale of old plant and machinery, vehicles or scrap from the purviews of taxable
supply. These goods were purchased by the respondents in the course of their taxable activity,
their sale cannot be considered as a transaction which is divorced from their normal business and
that the said goods are business assets of the respondents and both their purchase and sale is a
part of their normal business activity. The act makes no distinction between the goods supplied
by a registered person in the normal and continuous course of business activity as frequent and
constant supply or otherwise and there can be no exemption on presumptions. The disposal of
fixed assets, scrip by a registered person, being not exempted under section 13 or being not
specified in the 6th Schedule to the Sales Tax Act chargeable to Sales Tax and supply thereof,
are taxable supply. The consideration/sale proceeds received against disposal of fixed assets as
well as scrip/waste are their income and therefore, it had been taken as income and accounted for
as such in their financial accounts. Such income being a part of business and investing activity
done during the course of business is an act of furtherance of business. It is statutory authority
under subsection (2) of section 13 of the Sales Tax Act, 1990, which vests in the Federal
government the power to exempt any taxable supply made in Pakistan or any goods or class of
goods from the whole or any part of the tax chargeable under the said Act, subject to the
conditions and limitations so specified. No exemption has since been notified by the Federal
government in relation to the sale, auction or otherwise disposal of goods, moveable fixed assets
including plant/machinery equipment having no value addition to the goods and for which the
input tax was not allowed.
The conclusion of the above discussion is that the fixed assets as have been referred in
the cases are goods or taxable goods and comes within the ambit of taxable supply and liable to
the levy of sale tax. The High Courts have proceeded on the wrong premises and have wrongly
interpreted the legal provisions and have drawn a wrong conclusion thereto. Resultantly, while
accepting these appeals, the judgments impugned herein are set aside and it is held that the
respondents/assets are liable to the levy of tax on the sale of the assets subject matter of the
cases.
…."
71. It was concluded by the learned LA that notwithstanding any other aspect, non-
availability of specific exemption clause in the Act leads to an irrefutable conclusion that subsidy
is liable to sales tax as rightly upheld by the taxation officer and learned first appellate authority.
The learned LA also raised an alternate argument contending that if the amount, representing
subsidy, is held to be exempt, the input tax adjustment, claimed by the taxpayer, needs to be
curtailed/ apportioned in terms of provisions of section 8(2) of the Act read with Chapter IV of
the Sales Tax Rules, 2006. Accordingly, it was prayed that either the orders of the authorities
below are not disturbed on this point and are upheld or at least directions are issued for
curtailment/ apportionment of input tax adjustment.
72. We have heard both the sides, examined the record and given serious consideration to the
material as well as the decisions relied upon the opposing counsels. In our considered opinion,
the averment raised on behalf of the revenue that there is no specific provision of law giving
exemption to subsidy granted by the Federal Government, in the form of tariff differential, is
grossly misplaced. The specification of exemption in law is necessary where the amount is
otherwise chargeable to tax under the law. If the amount is not chargeable to tax there is no point
in providing for exemption in the statute. Here, the fundamental question is whether the subsidy
otherwise is covered by the charging provisions of the statute, which the learned counsel for the
taxpayer has argued not to be the case. In our opinion the Federal Government granted subsidy to
the consumers and not to the taxpayer. The differential tariff subsidy is directly passed on to the
consumers as it is not made part of Bill (invoice in term of Section 23 of the Act) and charge of
Sales Tax is curtailed to the "Sales Tax actually billed to the consumer or purchasers" under Rule
14 of the Sales Tax Special Procedure Rules, 2007. Where the language of law is clear and
explicit, nothing further is to be implied and in this respect, reliance of the taxpayer on the
judgment of the Hon'ble Supreme Court of Pakistan cited as PLD 1990 SC 68 is quite well
placed.
73. The direct concession to the consumers such as social policy of the Federal Government
in terms of section 31(1) of the Regulation of Generation Transmission and Distribution of
Electric Power Act, 1997, means concessional charge of Sales tax to the consumers and
concessional charge including zero rated charge is not tantamount to exemptions under section
13 of the Act. The reliance by the revenue on PLD 2007 Supreme Court 517 is, therefore, not
apt. Under section 23 of the Act, a registered person is required to issue invoice in the name of
the recipient (buyer). In the present case, such invoice is issued in the form of the electricity bills
and under rule-14 of the Sales Tax Special Procedure Rules, 2007, tax is "to be deposited on
accrual basis i.e. the amount of Sales tax actually billed to the consumer or purchasers for that
tax period'. Thus the charge of Sales Tax is confined to the amount of price of electricity billed to
the consumer. Subsidy is not part of that price billed to the consumer so, in our considered
opinion, it falls out of the purview of the charge of Sales Tax.
74. The revenue's assertion that subsidy is taxable as it is not exempt in the same manner as it is
exempted under clause 102A of the 1st Part of the Second Schedule of the Income Tax
Ordinance, 2001, has no legal basis. The respondents have heavily relied upon case-law from
Income Tax Law to show that subsidy is revenue receipt; hence, taxable until it is exempted.
Such reliance is misplaced as the charge of Income tax is on income and every revenue receipt
has to be treated as income. In the case-law relied upon by the revenue, subsidy was granted to
the persons to off set their personal losses. But in the present case subsidy is directly passed on to
the consumers in the form of tariff differential and the taxpayer is in no way beneficiary of such
subsidy. In this case, the amount of subsidy was reimbursed to the taxpayer by the Federal
Government and the treatment in accounts was just contra entries. Reference to the treatment of
subsidy as Sales in the accounts of the taxpayer, we agree with the learned counsel for the
taxpayer, is irrelevant as the Hon'ble Supreme Court of Pakistan held in the judgment cited as
PLD 1985 SC 109 has clearly ruled that "In Revenue cases one must look at the substance of the
thing and not the manner in which the account is stated."
75. The objection of the revenue that input tax proportionate to subsidy should have been
disallowed is also misplaced. Firstly, this issue was never raised at the initial stage and secondly,
and more importantly, the concessional charge of Sales Tax does not mean that supplies were
exempt from sales tax. The provisions of section 2(11) of the Act defines "exempt supply" as
supply which is exempt from tax under section 13". But the supplies in the taxpayer's case are
not exempt under section 13 of the Act. Under section 2(11) of the Act, even zero rated supplies
are taxable supplies. Thus, mere concession in the charge does not make supply as exempt
supply. Section 8(2) of the Act is, thus, not attracted to disallow purported proportionate input
tax. We are constrained to observe that the revenue is reading imaginary things in the legal
provisions which are contrary to their plain and explicit meanings. Besides, input tax is allowed
with reference to the purpose of the supply and the revenue is inserting their view in Section 7
that input tax should correspond to the actual supply instead of the "purpose of supply". In
arriving at this conclusion, we are fortified with the ratio settled in the judgment of the Hon'ble
Supreme Court of Pakistan, cited as PLD 1990 Supreme Court 68, ruling "Where the statute's
meaning is clear and explicit, words cannot be interpolated. In the first place, in such a case, they
are not needed. If they should be interpolated, the statute would more than likely fail to express
the legislative intent, as the thought intended to be conveyed might be altered by the addition of
new words.". The upshot of the above discussion is that we hold that the revenue, in this case,
erred in law in subjecting to tax the subsidy received from the Government which was not
consideration for supply of electricity and thus not chargeable to tax. The orders of the
authorities below, on this point, are vacated being unlawful.
76. In the order-in-original, the taxation officer disallowed the claim regarding input tax
adjustment of the taxpayer as was found to be attributable to invoices issued by suppliers having
suspended registration, black-listed registration and non-filers status. It was argued by the
learned counsel for the taxpayer that the impugned show-cause notice was since vague, therefore
not unsustainable. In this respect, it was contended that party-wise and transaction-wise detail
was not confronted to the taxpayer and accordingly, the orders of the authorities below were
liable to be annulled, being contrary to well-settled principles of law.
77. The learned counsel for the registered person, with regard to the merits, argued that the
action of the authorities below was even otherwise not lawful as at the time when transactions
were executed with the respective suppliers they were fully compliant and active, therefore, any
subsequent status assigned to such suppliers by the revenue could not disturb past and closed
transactions. In this regard, reference was made to the judgment of the Hon'ble Lahore High
Court in Writ Petition No. 17185/13: Galaxy Textile Mills Ltd. v. Federation of Pakistan etc.
wherein the following principles were settled:-
"The status of the buyer existing at the time of supply of the goods by the petitioner shall
be considered while deciding the show-cause notice and not the status attained by the buyer
subsequently."
---It was contended that since the decision in the aforesaid order of the Lahore High Court was a
'consent order', therefore, no contrary view could be taken by the revenue authorities once they
consented to the same.
78. The learned LA for the revenue, on the other hand, argued that a registered person is
entitled to deduct input tax from output tax if he holds a valid and genuine sales tax invoice
against which goods have been physically transferred in terms of section 2(4) of the Sales Tax
Act, 1990. In the instant case, no such incidence has been established. It was contended that
since, the taxpayer had claimed input tax adjustment on invoices of such suppliers who were
found involved in carrying out unlawful activity in terms of section 2(37) of the Act and they
defrauded the National Exchequer, therefore, the taxpayer could not be exonerated from the
charges levelled in the show-cause notice.
79. The learned LA further submitted that the Tribunal, in a number of judgments, has held
that no input tax adjustment/refund is admissible against fake/non-genuine invoices. It was also
argued that section 8A sets the joint and several liability of registered person in supply chain
where tax remains unpaid. A plain reading of the provision of sections 2(14), 7 and 8 of the Act,
according to learned counsel, would make it clear that supply is not completed if transfer of
goods does not take place and that adjustment/refund is admissible with reference to goods. In
order to complete the supply and to claim adjustment/refund, the issuance of invoices and
payment of input tax must be followed by a taxable supply. If under section 3(3) the person
making the supply is liable to pay the tax, the purchaser is also obliged under section 8 to reclaim
or deduct input tax only on those goods which have been used or to be used for the manufacturer
or production of taxable goods or for taxable supplies made or to be made.
80. According to learned LA for the revenue, the invoices (i) against which no goods are
received would be treated as fake/flying invoices; and (ii) against which the taxpayer could not
produce any convincing evidence to prove that the goods were actually transferred from the
supplier's account to buyer's account; the input tax adjustment could not be allowed merely on
the point that the suppliers were operative at the time of transaction. The validity of such
purchases is to be proved by the registered person which the appellant failed to do so. In this
regard, the learned LA, made a reference to the judgment of Tribunal, reported as 2010 PTD
(Trib.) 2248, wherein it was held that:--
"After hearing respective contention of the parties; I feel no hesitation to say the basic
ingredients of refund is that if any amount is deposited in government exchequer that can only be
refunded, if the taxpayer has taken the refund and authority issuing refund has lost sight of this
aspect. It is gains recoverable. Now question arises that registered person has no fault if supplier
has not paid sales tax or he is blacklisted. The blacklisted units' registrations were suspended by
the Board. Therefore, as per the provision of subsection (2) of section 21 of the Sales Tax Act,
1990 in put tax/refund cannot be allowed against fake invoices, even if the requirements of
section 73 of the Sales Tax Act are fulfilled."
81. After hearing the rival parties and after giving due consideration to respective
submissions, we observe that the assertion of the learned counsel for the revenue vis-a-vis fake
invoices could not be endorsed as the show-cause notice fell short of this allegation. Further
reliance of the revenue on 2010 PTD (Trib.) 4248 is also not relevant to the facts of this case as
the tribunal, in the said decision, also dealt with case involving fake invoices. The ratio in the
decision of Lahore High Court, cited supra, especially when the same is in the nature of a
consent order, clinches the matter in the favour of the registered person. Any subsequent event
clearly cannot disturb a transaction that was admittedly completed fully in compliance with law
at the relevant time.
82. If we were to agree with the contention of the revenue it would not only create a chaos
but would lead to end-less controversy. The taxpayer negotiating a transaction is expected to
comply with law at the time of executing the transaction and cannot possibly forecast what
would be the fate of the supplier in future. Accordingly, we vacate the orders of the authorities
below on this point and remand the matter back to the taxation officer to re-examine the matter
in the light of principles agreed in the consent order of the High Court. In the event the suppliers
were active at the time of execution of the transaction no adverse inference shall be drawn
against the subject taxpayer/registered person.
REVENUE'S APPEAL
83. The revenue feels aggrieved by the order dated 16-8-2013 of the learned first appellate
authority to the extent that he annulled the imposition of sales tax by the learned taxation officer
in respect of free supply of electricity to employees.
84. Both the rival parties reiterated the submissions as have already been captured by the
learned first appellate authority in the impugned order. In our view the learned first appellate
authority's decision is well reasoned and addresses all the relevant aspects of the matter. The
learned counsel for the revenue could not make out any case for interference. Accordingly, for
the reasons recorded by the first appellate authority in the impugned order, we dismiss the
revenue's appeal on this point and uphold the impugned order.
85. The appeal of the registered person stands dispose of in the manner and to the extent
stated above, whereas appeal filed by the Revenue is dismissed.