2012 P T D (Trib.) 359

[Inland Revenue Appellate Tribunal of Pakistan]

Before Munsif Khan Minhas, Judicial Member and Ikram Ullah Ghauri, Accountant Member

Messrs WISE COMMUNICATION SYSTEMS (PVT) LTD., ISLAMABAD

Versus

COMMISSIONER INLAND REVENUE (LEGAL), ISLAMABAD

S.T.A. No.107/IB of 2010, decided on 22nd June, 2011.

Hafiz Muhammad Idris for Appellant

Imran Shah, D.R. for Respondent.

Date of hearing: 22nd June, 2011.

ORDER

IKRAM ULLAH GHAURI (ACCOUNTANT MEMBER).—The appeal has been filed by the appellant against the Order-in-Appeal No.S-123 of 2011, dated 30-5-2011 passed by the respondent No.2 on the following grounds:–

Grounds of Appeal

(1) That both the orders of the learned Commissioner, inland revenue (Appeals-II), CIR(A) Islamabad as well as Deputy Commissioner, inland revenue, (Audit-IV) (D.C.) Large Taxpayer Unit, Islamabad are bad in law and contrary to the facts and circumstances of the case.

(2) That the learned CIR(A) was not justified in confirming the assessment order passed by the D.C. which is illegal and un warranted.

(3) That the learned CIR(A) has failed to pass a speaking order and not given any cogent reasons or ground for confirmation of order of D.C. which is highly unjustified and is against the norm of natural justice.

(4) That both the orders of the authorities below are illegal, void ab-initio, without jurisdiction and is not acceptable in the eye of law.

(5) That passing of order under Sales Tax Act, 1990 in respect of Federal Excise Duty is illegal and is without jurisdiction and confirmation of the same by the CIR(A) is not understand-able

(6) That said CIR(A) has not appreciated the arguments of the appellant that the FED is leviable upon the telecommunication services provided by the appellant as such passing of any order under the Sales Tax Act read with Sales Tax Rules is illegal and without any jurisdiction.

(7) That the appellant is providing services and services are taxable vide, Serial No.2(iii) table 2 of First Schedule to Federal Excise Act, 2005 whereas the tax was charged keeping in view of the section 8(2) of the Sales Tax Act, 1990, which is illegal and unwarranted.

(8) That no concept of apportionate is provided in the Federal Excise Act, 2005 as such the application of the same is illegal and without jurisdiction.

(9) That the section 6 of the Federal Excise Act, 2005 applied only to supplies of goods and not services as such the levy of tax on services of appellant is illegal.

(10) That as per section 2(41) of the Sales Tax Act, 1990 the word services was not added and even up till today the services are not taxable, so the order is without jurisdiction and is void ab-initio.

(ii) That the rule 25(3) of the Sales Tax Act Rules 2005 and 2006 only deals with taxable and exempt supplies and has no concern whatsoever with the services as such application of same in case of the appellant is illegal.

(12) That the order under appeal was passed within three and a half months and huge liability was created without appreciating the facts and legal aspect of the case, as such the order is not acceptable in the eye of law.

(13) That the charge of tax, default surcharge and penalty is illegal and un-warranted accordingly the confirmation of CIR(A) is illegal.

(14) Without prejudice to the above if at all the services of appellant are taxable due to the amendment in the section 8(1) of Sales Tax Act, 1990 then only tax can be charged w.e.f. 1-7-2008 onward in which the share was passed on to PTA to be excluded.

(15) That the impugned assessment order raised demand on the basis of S.R.O. 648(I)/2005 dated 1-7-2005 and S.R.O. 550(I)/2006, dated 5-6-2006 of Federal Excise Act, 2005 read with section 8(2) of Sales Tax Act, 1990 as such same is illegal and not understandable.

(16) That the application of section 8 of Sales Tax Act, 1990 regarding tax credit and its proportionate retrospectively is illegal and baseless.

(17) The passing of order other than the grounds taken in show-cause notice is illegal and unwarranted.

(18) That telecommunication services are taxable as per Table-11 of First Schedule to the Federal Excise Act, 2005 as such passing of order under the Sales Tax Act, 1990 and levy of tax is out scope of Sales Tax Act, 1990 as such both the orders are illegal.

(19) That the said CIR(A) has also not give his findings on the case-law cited at the time hearing which is illegal and is against the norm of natural justice.

(20) That apportionment of input tax adjustment of Rs.132, 755,321 made basis of show cause notice against gross revenue receipt of Rs.3, 382,540,860 without taking into consideration our reply dated 31-5-2010 to the Deputy Director of the detecting agency.

(21) That your appellant be leave, to add, to amend or alter the above said grounds.

Brief facts:

3. Brief facts of the case are that audit of the appellant was conducted by the staff of the Directorate General of Intelligence and Investigation, F.B.R., Islamabad for the period July, 2005 to June, 2009 which resulted in detection of excess input adjustment of Rs.90,433,799 on account of non-apportionment of input tax adjustment between taxable supplies and exempt supplies as provided under sub-rule (3) of rule 25 of the Sales Tax Rules, 2005 read with subsection (2) of section 8 of the Sales Tax Act, 1990. Accordingly a show-cause notice dated 5-8-2010 was issued to the appellant and the respondent No.3 passed an Order-in-Original No.9 of 2010, dated 30-11-2010 after having been established charges levelled in the show cause notice. Feeling aggrieved by the order dated 30-11-2010 the appellant filed an appeal before respondent No.2 against which was also decided against him vide Order-in-Appeal No.S-123 of 2011 dated 30-5-2011 hence the instant appeal on the grounds as mentioned in para (2) above.

4. Accordingly the date of hearing was fixed on 14-6-2011 and finally heard on 22-6-2011. During the course of hearing the appellant reiterated his grounds of appeal and also raised certain law points and facts of the case taking support from the reported judgments of the Honorable Apex Court and High Court and requested for vacation of the orders of the respondents Nos.2 and 3. We will first discuss and address the law points raised by the appellant particularly on account of limitation and then conclude the case on facts and circumstances. The arguments on law points of the appellant and respondents are summarized below:–

5(a). INCORRECT RETROSPECTIVE APPLICATION OF FINANCE ACT, 2008 IN CORRECT DETERMINATION OF THE DATE OF APPLICATION OF TAX PAYABLE ON SERVICES

The appellant at the very outset raised legal objection regarding unlawful retrospective application of clauses (a), (b) and (ca) of section 8 of the Sales Tax Act, 1990 amended through Finance Act, 2008 by the respondents. The contention of the appellant is that the words “or services” were inserted vide Finance Act, 2008 effective from 1-7-2008 and cannot be made applicable to the entire impugned period of audit (July, 2005 to June, 2009) retrospectively. The appellant has relied on the judgment of the Honorable Lahore High Court in the case reported 1983 PTD 713 HC. It would be useful to reproduce the relevant portion of the judgment as under:–

“Demand for payment of fixed tax retrospectively—Validity—Fixed amount of sales tax (processed fabric) Rules 1991, were promulgated and came into force on 17-8-1990. Demand for payment of fixed amount of fixed tax for the period from 1-7-1991 to 17-8-1991 (period prior to enforcement of rules) were declared to be without lawful authority and of no legal effect.”

(ii) The appellant also relied on the Appellate Tribunal Lahore’s full bench judgment dilated upon in Sales Tax Appeal No.236/LB/2009, F-Ex-No.100/LB/2009 which is identical and similar business of nature. The relevant portion provides as under:–

“The upshot of above discussion is obvious. Neither the explanation dated 24-12-2004 is not prospective nor the F.B.R. have any authority to hold an interpretation to be as prospective. F.B.R. does interpretation re: Central Insurance Company (supra). Similar is the position of the interpretation of the Law Ministry is also not a court of law. Its opinion whichever otherwise is generally unilateral without hearing the parties concerned cannot be adopted. Further, is also does not figure anywhere in judicial hierarchy of this country. In fact it is not even an administrative authority in the revenue department. F.B.R. instructions are bindings on its sub-ordinates while opinion of Law Ministry is not binding on the officers of the revenue department.”

The upshot of the above discussion is obvious that we have decided two main issues one that in the upper part of our order whether the law amended in 2001 would take effect from the explanation of F.B.R. dated 24-12-2004 or from the date of its promulgation. Both the questions were answered in favour of the tax payer and against the revenue department.

5(b) SERVICES ARE OUT SIDE THE SCOPE OF APPORTIONMENT OF SALES TAX RULES, 2006 READ WITH SUBSECTION (2) OF SECTION 8 OF THE SALES TAX ACT, 1990.

The second legal objection raised by the appellant was that “services” are ousted from the purview of apportionment of “taxable supplies” and “non-taxable supplies”. The appellant contended that in terms of subsection (2) of section 8 of the Sales Tax Act, 1990 the facility of apportionment of tax is available only with respect to “taxable” and “non-taxable supplies”. The definition of “taxable supplies” as contained in subsection (2) of section 41 of Sales Tax Act, 1990 is as under:–

“2 (41)…. “taxable supplies”—means a supply of taxable goods made by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 of the Sales Tax Act, 1990 and includes a supply of goods chargeable to tax at the rate of zero percent under section 4 of the Act ibid.”

(ii) Similarly, it is imperative to reproduce sections 8(1) and (2) of the Sales Tax Act, 1990 regulating the scheme of apportionment of tax as under:–

(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to re-claim or deduct input tax paid on:

(a) the goods or Services used or to be used for any purpose other than for taxable supplies made or to be made by him.

(b) any other goods or services which the Federal Government by a notification in the official Gazette specify,

(ca) the goods or services in respect of which sales tax has not been deposited in the Government treasury by the respective supplier

(d) fake invoices, and

(e) purchases made by such registered person, in case he fails to furnish the information required by the Board through a notification issued under subsection (5) of section 26

(2) If a registered person deals in taxable and non-taxable supplies he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board.

(iii) In view of the above clauses (a), (b) and (ca) of subsection (1) of section 8 did not include “services” and, therefore, the said section does not apply to the case of the appellant. It is equally important to refer that definition of taxable supplies reproduced above only deals with the supply of “goods” and not “services”. Hence the orders of the respondent are violative of law needs to be set aside.

6(a) ARGUMENTS OF THE D.R./L.A. ON LAW POINT NO. 5(a).

The D.R. L.A. while arguing his case fully supported the orders passed by the respondents. In rebuttal of the above contention of the appellant the D.R./L.A. argued that scheme for payment of Federal Excise Duty on telecommunication services of P.C.T. Heading No.9812-0000 (levied and collected on sales tax mode) was introduced through Finance Act, 2005 vide S.R.O. 550(I)/2006, dated 5-6-2006 and apportionment of input tax were promulgated under Chapter-IV of Sales Tax Rules, 2006 issued vide S.R.O. 648(I)/2005, dated 1-7-2005. Similarly, section 7 of the Federal Excise Act, 2005 provides application of provision of Sales Tax Act, 1990 relating to excisable goods and services. “Excisable goods” are specified in second schedule to the Federal Excise Act, 2005 and “excisable services” are notified under S.R.O. 550(I)/2006, dated 5-6-2006. The apportionment of input tax rules were framed under Chapter-IV, Rule 25(3) of Sales Tax Rules, 2006 and section 6 of the Federal Excise Act, 2005 and section 8(2) of the Sales Tax Act, 1990 regulates adjustment of input tax to that extent which is attributable to output tax. The D.R./L.A. contended that as per record the appellant has deliberately claimed input adjustment without apportionment towards both taxable and non-taxable supplies that resulted into short payment of sales tax of Rs.90,433,799 as rightly held by the respondents.

6(b). ARGUMENTS OF THE D.R./L.A. ON LAW POINT No. 5(b).

The D.R./L.A. contended that as per provisions of section 8(2) of the Sales Tax Act, 1990 it is very clear in terms of S.R.O.648 (I)/2005, dated 1-7-2005 and S.R.O. 550(I)/2006, dated 5-6-2006 the Federal Excise Duty on telecommunication services shall be levied and collected as if it were a tax payable under section 3 of the Sales Tax Act, 1990 and all the provisions of the said Act and the rules made and notifications, orders and instructions issued thereunder shall, so far as may be necessary modification apply. Hence for the purpose of apportionment of input tax adjustment there is no provision in the conditional exemption granted vide Serial No.2 (iii) of Table-II of the third schedule to the Federal Excise Act, 2005 to exclude any component received against international incoming calls. The D.R./L.A. produced a copy of the said Table which is reproduced below:–

“2(iii)…Such amount received by the long distance international license holders including P.T.C.L. on international incoming calls under agreement with the foreign telecommunication companies.”

(ii) The D.R./L.A. further contended that the claim of the appellant that international incoming calls are zero rated under section 4 of the Sales Tax Act, 1990 is not correct. Fifth schedule to the Sales Tax Act, 1990 deals with goods chargeable to tax @ zero percent and the telecommunication services are not included therein. It is quite clear that the appellant being a telecommunication service provider should have abide by the provisions of the Act ibid which they failed to comply with and grossly violated the provisions of section 8(2) of the Sales Tax Act, 1990.

7. FINDINGS ON 5(a).

We may first refer to S.R.O. 550(I)/2006, dated 5-6-2006 which prescribes the levy and collection of federal excise duty on services against VAT mode and does not provide the method for apportionment of tax. The telecommunication services of PCT Heading No.98.12 were included therein. The said S.R.O. is effective from 5-6-2006 and the tax liability adjudged by the respondents covers the period July, 2005 to June, 2009 which is not desirable. The case of the appellant is of excess input adjustment, therefore, the said S.R.O. has wrongly been relied upon by the D.R./L.A in so far the excess claim of input tax adjustment is concerned and is not relevant to the issue under dispute. The rules regulating apportionment of tax has been prescribed under section (8) of the Sales Tax Act, 1990 which are discussed below.

(ii) Now we may refer to section (8) of the Sales Tax Act, 1990 inserted through Finance Act, 2008 reproduced hereinabove in Para 5-b which deals with method of claiming input tax adjustment. We have carefully perused the said S.R.O. which is effective from 1-8-2008 and has no retrospective effect. The respondents while deciding the case against the appellant have badly erred to focus on this legal issue of vital importance. We are of the candid view that, with all legal exceptions, if at all the apportionment of tax adjustment was to be applied by the respondents in terms of subsection (2) of section 8 of the Sales Tax Act, 1990 its effective date was 1-7-2008 as against the tax liability created from 1-7-2005 to 30-6-2009 which is against the norms of principle of natural justice. The contention of the appellant has legal force and is accepted. Accordingly we are not inclined to persuade with the order of the respondent No.02 and is, therefore set aside.

8. FINDINGS ON 5(B).

On the second legal issue raised by the appellant this Tribunal is of the view that it is a settled principle of law that a substantive law shall always has an overriding effect over the primary law and any amendment made through subsequent legislation shall not adversely affect the rights of the taxpayer. The appellant while arguing his case had a valid point to argue that “services” not included till issuance of amendments made in Finance Act, 2008 had to be dealt with as if the “services” were not included in the Sales Tax Act, 1990. The submission with regard to prospectivity of Finance Act, 2008 is fully supported by the view expressed by the Honorable Lahore High Court in case reported 1983-OTD-713 HC (supra). This Tribunal has addressed the issue in Para “findings on Para (5-b) above with regard to applicability of section (8) of the Sales Tax Act, 1990 inserted through Finance Act, 2008 and, therefore, need not to be discussed again.

(ii) We have also heard the arguments advanced by the rival parties, case-law relied upon and referring to the enactment provisions of Sales Tax Act, 1990 and its application to the case of the appellant in terms of Rule 25(3) of Sales Tax Act, 1990 and subsection (2) of section 41 of the Act ibid. Let us examine each issue one by one. The first contention of the appellant is that Rule 25(3) of the Sales Tax Rules, 2006 only deal with taxable and exempt supplies and has no nexus whatsoever, with the services. Therefore, it is necessary to examine the stance of the appellant by reproducing Rule 25(3) of Sales Tax Rules, 2006 came into force from 1-7-2006 as under:–

(25). Determination of input tax.—(1) Input tax paid on raw materials relating wholly to the taxable supplies shall be admissible under the law.

(2) Input tax paid on raw materials relating wholly to exempt supplies shall not be admissible.

(3) The amount of input tax incurred for making both exempt and taxable supplies shall be apportioned according to the following formula, namely:–

Residual Input Tax Credit	Value of taxable supplies x Residual Input Tax
On taxable supplies	=(Value of taxable + exempt supplies).

(iii) From bare perusal of above it is ascertained that the intent of the legislature is very clear and supports the contention of the appellant that it deal only with “taxable supplies” and “exempt supplies” and “services” had never been included in the above provisions of law. Now we turn to examine “taxable supply”. Subsection (2) of section 41 of the Sales Tax Act, 1990 is reproduced.

“2 (41)…”taxable supplies” means a supply of “taxable goods” made by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 of the Sales Tax Act, 1990 and includes a supply of goods chargeable to tax at the rate of zero percent under section 4 of the Act ibid.”

(iv) “Taxable supplies” means “taxable goods” and not “services” which were never included in the definition of “taxable supplies”. The law requires that tax must be levied or charged in clear, unambiguous and specific terms. Tax cannot be levied on presumption or importing something which the legislature has not provided therein. In view of the above clear provisions of law we are not persuaded with the arguments of the learned D.R./L.A. The contention of the appellant that the services rendered by a taxpayer in relation to telecommunication services of PCT Heading 9812.0000 are outside of the scope of Rule 25(3) of the Sales Tax Rules, 2006 is valid. The appellant has rightly taken benefit of such legal lacuna and escaped from payment of due tax because apportionment of tax is contingent upon the taxable supplies of “goods” and not “services”. We, therefore, set aside the orders passed by both the adjudicatory and first appellate authorities being inconsistent with law.

9. Thus the appeal succeeds. Other grounds on facts and merits don’t need to be discussed.

10. This order consists of (08) pages each bears my signature and seal.

C.M.A./254/Tax(Trib.) Appeal allowed.

Federal Excise Act 2005 (7) 2012 PTD 359 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN

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