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S.T.A. 425/PB of 2008, decided on 1st June, 2009.

----Ss.10(2), 8(1)(a), 8(1)(d), 8A, 10(4), 11(2), 26(5), 33(11), 34(1), 36(1) & 73---Sales Tax Refund Rules, 2002, Chapter-V, R.8---Sales Tax Rules, 2006 , Chapter-V, R.37---S.R.O.525(I)/2005, dated 6-6-2005---Excess amount to be refunded---Refund claim was sanctioned---Subsequently, input tax invoices were sent for verification, D.C. (verification), reported that input tax invoices may not be verified due to the reasons that the registered person had no manufacturing facilities and was registered as wholesaler of polypropylene bags with their Collectorate---Description of the purchases by the claimant was PVC Pipe, whereas the supplier was registered as wholesaler and having no manufacturing facilities---Deputy Collector concluded that the claimant claimed refund against the goods in which neither the supplier was registered nor they had any manufacturing facilities---Refund claim was rejected being inadmissible and penalty equal to refund claim was also imposed---Appellant contended that replies of Collectorate to adjudicating authority and Collector (Appeals), were self-contradictory and inconsistent and, they had changed their stance and had intimated that the input tax invoices issued by the said supplier had been verified and the proof of payment in terms of S.73 of the Sales Tax Act, 1990 had also been verified from the concerned bank---Supplier had also provided the relevant record to the audit party of the Collectorate and supplier"s unit was clearly traceable---Validity---Refund claim was declined as a consequence of non-verifiability and non-traceability of the supplier---Refund sanctioning authority was empowered to reject a refund claim, which remained unverified---While sanctioning a refund claim, the refund sanctioning authority exercised the executive powers conferred on him under the statute and he was under obligation to follow the prescribed rules for sanctioning the refund claim---When show-cause notice was issued to the refund claimant on the basis of an objection and the refund claim was declined purely on the basis thereof, then the State functionary exercises quasi judicial authority and he was under obligation to apply his mind judiciously and with due diligence and also to consider the pros and cons of the case including physical verification of the supporting documents and any such action as warranted under the law---Some basic verifications were required to be done by the department from different quarters including feeding/ upholding of the appellant"s suppliers data in the Starr"s System, enabling the appellant to get his legitimate refund, if otherwise admissible and the same verifications were accordingly carried out by the department---Starr system was a mechanical process in which there was no involvement of human interaction regarding processing of refund claim---Procedure laid down had to be followed for processing and sanctioning of refund claim-Appellant"s contention was supported by the proof of payment as required under S.73 of the Sales Tax Act, 1990 and other supporting documents---Had such evidence been examined/verified by the department at the very outset, the controversy involved therein could have been amicably resolved much earlier---Appellant"s contention was accepted to the extent of rejection of his refund claim, however, the order was set aside, case was remanded to Deputy/Assistant Collector (Refund), for de novo consideration, with the direction to obtain the report of the investigative audit being conducted by the Collectorate and then in the light of supporting documents of the appellant, he should decide the refund claim of the appellant by providing him an ample opportunity of hearing as well as production of any additional material evidence in support of his contention---Appeal was disposed of by Appellate Tribunal accordingly.Messrs Superior Textile Mills Ltd. v. Federation of Pakistan; 2001 PTD 2600; Messrs Sajid Textile Industries (Pvt.) Ltd. v. The Collector of Sales Tax and Central Excise, West Karachi K-09/2003/4011 and Complaint No.1025/2006 ref.

----Ss.8 & 8A---Responsibilities of the buyer of invoices and Officer-incharge (Refund)---Tax credit not allowed---Refund rules had to be read with the non-obstante clause of S.8 of the Sales Tax Act, 1990, which had overriding effect and forbids the inadmissible refunds or adjustments---Since the very insertion of Cl. (ca) "the goods in respect of which sales tax has not been. deposited in the government treasury by the respective supplier)" to Subsection (1) of S.8 of the Sales Tax Act, 1990, by virtue of Finance Act, 2006 and the enactment of newly added statute i.e. S.8A of the Sales Tax Act, 1990, the buyer could now be held responsible for the deposit of tax involved in the transactions between the parties (buyer and seller)---According to the legal position, the buyer is now equally responsible for the act done on the part of his supplier---In the matter of refund from public exchequer, verification report which was not in affirmative dis-entitles the appellant/buyer of invoices to the inadmissible refund---Under the Refund Rules, 2006, the Officer-in-charge (Refund) shall satisfy himself about the genuineness and admissibility of the refund claim on the basis of verification/investigative report and supportive documents and then reject the claim if found inadmissible. Messrs Superior Textile Mills Ltd. v. Federation of Pakistan and 2001 PTD 2600 rel.

----S.10---Excess amount to be refunded---Invoices---Recovery of due tax, responsibilities of---Was not possible for the recipient of invoices to investigate the moral character of the supplier whether he discharged his legal obligation or otherwise, rather it was the foremost obligation of the department to unearth such unscrupulous elements, who either did not comply with the rules and procedures issued thereunder or even did not pay the due tax, to recover the due tax which had been paid by the recipient of invoices, .and did not penalize the honest tax payer by denying its right vested in him by the Sales Tax Act, 1990. Messrs Sajid Textile Industries (Pvt.) Ltd v. The Collector of Sales Tax and Central Excise, West Karachi in appeal No.K-09/2003/4011 and Federal Tax Ombudsman while deciding Complaint No. 1025 of 2006 rel.

----Ss.23 & 73---Sales. Tax Rules, 2005, Chapter-I, R.5---Sales Tax Refund Rules, 2006, R.37---Tax invoices---Untraceable supplier---Refund claimed against unverifiable supplies by untraceable supplier had rightly been declined by the adjudicating authority under the relevant provisions of law---Claimant was not entitled to claim refund on the invoice of untraceable supplier---Refund claim of the appellant/claimant had been declined and in order to have a valid refund claim, the appellant"s supplier was required under the law and rules made there-under to issue valid sales tax invoices arising out of supplies---Wisdom behind a valid sales tax invoice was to ascertain the genuineness and admissibility of the refund claim pertaining to purchases and to ensure that the input tax invoice in its chain had reached its lawful destination (Govt. Exchequer)---To such extent, there was no legal impropriety, illegality, infirmity or material irregularity in the order-in-original. Complaint No. 1025 of 2006 rel. Ijaz Zareen Proprietor for Appellant. Muhammad Haroon Khattak Sr. Auditor for Respondent. Dates of hearing: 11th March, 9th April, 14th and 26th May, 2009.

This appeal has been filed by Messrs Sunrize Enterprises, 27-Basharat Market, Phase-III, Hayatabad, Peshawar (hereinafter called as the appellant) against the Order-in-Appeal No. 483-88 of 2008, dated 27-8-2008; passed by the Collector of Customs, Sales Tax and Federal Excise (Appeals), Peshawar. 2. Precisely, the stated facts of the case as recapitulated from the available case record are that the appellants filed a refund claim for the tax period of November, 2006 under section 10(2) of the Sales Tax Act, 1990. The details of input tax invoices is given as hereinabove:--

3. The refund claim was consequently sanctioned vide RPO No.1880 of 2007, dated 26-3-2007. The above input tax invoices were subsequently sent for verification to D.C. (Verification), Collectorate of Sales Tax and Federal Excise, Faisalabad on 19-7-2007 and 5-9-2007 respectively. The aforesaid D.C. (Verification), vide his letter, dated 26-10-2007 reported that the above input tax invoices may not be verified due to the reasons that the said registered person has no manufacturing facilities and is registered as wholesaler of polypropylene bags with their Collectorate. It was, thus, observed that the description of the purchases by the claimant is PVC Pipe, whereas the supplier is registered as wholesaler and having no manufacturing facilities. 4. Hence, the appellant was alleged to have claimed inadmissible input tax/refund of Rs.93,714 and also alleged to have violated the provisions of sections 8(1)(a), 8(1)(d), 10(4) read with Rule 8 of S.R.O. 575(I)/2002, dated 31-8-2002, section 11(2), section 26(5) read with S.R.O. No.525(I)/2005, dated 6-6-2005, 34(1) and 36 of the Sales Tax Act, 1990. Accordingly, a show-cause notice was issued to the appellant and after hearing the parties, the Deputy Collector, Regional Tax Office (RTO), Sales Tax and Federal Excise Wing, Peshawar vide his Order-in-Original No.563-564 of 2008, dated 15-3-2008, ordered as under:--

"I have gone through the case record, verbal as well as written submission of the respondent and verification report of the Deputy Collector, Sales Tax and Federal Excise, Faisalabad and concluded that the claimant claimed refund against the goods in which neither the supplier Messrs Ghulam Mustafa and Company, Faisalabad is registered nor they have any manufacturing facilities. Thus, the refund claim amounting to Rs.97,714 is inadmissible under sections 8(1)(d), 8A,10(4), 11(2) and 36(1) of the Sales Tax Act, 1990, read with rule 8 of Chapter V of Sales Tax Refund Rules, 2002, notified vide S.R.O. 575(I)/2002, dated 3-8-2002 and is hereby rejected. The show-cause notice referred above is hereby established. Penalty equal to the refund claim is also imposed under section 33(11) of the Sales Tax Act, 1990." 5. Being aggrieved by the impugned Order-in-Original, the appellant filed an appeal before the Collector of Customs, Sales Tax and Federal Excise (Appeals), Peshawar, who vide his Order-in-Appeal No.483-88 of 2008, dated 27-8-2008, ordered as under:--

"(9) I have examined the case record and also considered the written as well as verbal submissions of both the parties. On perusal of the case record, it has been observed that the appellant filed refund claim amounting to Rs.93,714 under section 10(2) of the Sales Tax Act, 1990 for the tax period April, 2006 which being inadmissible was rejected. During the course of hearing, the departmental representative was directed to verify the documents provided by the appellant. A report, dated 26-7-2008 was received from the Collectorate, according to which the Assistant Collector (Ver) Faisalabad vide order C. C. No.RTO/INV/03/2007/32397, dated 25-6-2008 reported that the invoices were entered in the supply register and Sales Tax Return of the respective period has been filed, but the registration is suspended. The objection raised, therefore, stays.

(10) The Collectorate has also reported that cross check of the transactions made under section 73 of the Sales Tax Act, 1990 at the end of the appellant will be completed after the completion of the investigative audit by the Collectorate of Sales Tax and Federal Excise, Faisalabad. Keeping in view the above facts and over all circumstances of the case, the appeal is rejected and the Order-in-Original No.568 of 2008, dated 15-3-2008 is upheld. " 6. Being further aggrieved by the impugned Order-in-Appeal, the appellant has filed the instant appeal to this Tribunal, inter alia, on the following grounds:-

(i) that the impugned order is erred both in law and facts;

(ii) that the impugned order is mala fide and based on the conjecture;

(iii) that neither the facts nor the statutory/trite law has been considered nor acted upon by learned respondent;

(iv) that the Faisalabad Collectorate is not consistent in their replies placed as;

(v) that the earlier reply of the Faisalabad Collectorate based on dishonesty and not sure regarding unverified as they used the language;

(vi) that on the directives of the worthy Collector appeals the input tax invoice issued by Messrs Ghulam Mustafa and Co. Faisalabad were verified by the Assistant Collector Verification Faisalabad vide C. No. RTO/INV/03/2007/32397, dated 25-6-2008 whereas the payment proof in terms of section 73 of the Sales Tax Act, 1990 relating to the instant case has been verified from the Habib Bank Limited, City Branch Chowk Yadgar Peshawar;

(vii) that the contents of both replies of the Faisalabad Collectorate are different in meanings and do not match with each other;

(viii) that the show-cause notice was issued in violation of sections 8(1)(a), 8(1)(d) whereas both the input tax invoices and payment proof have been verified as mentioned above;

(ix) that the appellant carrying out the business according to the Sales Tax Law and procedures;

(x) that the supplier Messrs Ghulam Mustafa and Company are suspended on the grounds of not traceable;

(xi) that the supplier has provided all the record to the Audit department of the Faisalabad Collectorate. Hence the unit is traceable and suspension does not sustain;

(xii) that both the replies of Faisalabad Collectorate are based on misinterpretation of law and mismatch to each other;

(xiii) that the appellant craves the indulgence to add or modify the arguments at the time of hearing. 7. On the last date of hearing fixed for 26-8-2009, the appellant appeared in person and almost reiterated the same arguments as advanced by him in the memo. of appeal. He contended that the replies of Faisalabad Collectorate to the Adjudicating Authority and the learned Collector (Appeals), Peshawar are contradictory and inconsistent. In response to the queries raised by the worthy Collector (Appeals), Peshawar, they have now changed their stance and have intimated that the input tax invoices issued by the said supplier have been verified and the proof of payment in terms of section 73 of the Act has also been verified from the concerned bank. He further contended that the said supplier has also provided the relevant record to the audit party of the Collectorate of Faisalabad and the supplier"s unit is clearly traceable. He asserted that his refund claim has been sanctioned by the competent authority vide RPO No.1880 of 2007, dated 26-3-2007, being genuine and admissible under the law. 8. On the other hand, the Departmental Representative stated that the impugned Order-in-Appeal has been passed by the appellate authority keeping in view the factual as well as legal issues involved in this case. He stated that the appellants filed its refund claim under section 10 of the Sales Tax Act, 1990 and each refund claim of the respective claimant/ appellant is processed under the relevant procedure specified by the Board under section 10 of the Sales Tax Act, 1990. Registered persons have to abide by the applicable rules made under the sales tax law and in the instant case, the same procedure was properly followed. He further stated that the refund rules have to be read with section 8 of the Act, which have overriding effect and forbids the inadmissible refunds and adjustments. He pleaded that the instant appeal may be decided on merit. 9. I have carefully perused the available case record and have also anxiously considered the written as well as the oral submissions made by the appellant-in-person and the Departmental Representative. I would like to make the following observations so as to arrive at the fair, just and proper decision of the instant appeal:--

(a) I notice that according to section 3(3) of the Act, the responsibility to pay sales tax lies on the supplier and not on recipient of the supply. Section 3(3) ibid is reproduced herein below in extenso for sake of convenience:--

"The Liability to pay the tax shall be:-

(i) in case of supply of goods, of the person making the supply; and

(ii) in case of goods imported into Pakistan, of the person importing the goods."

(b) I would like to revert to the judgment of the Honourable Lahore High Court, Lahore in the case of Messrs Superior Textile Mills Ltd. v. Federation of Pakistan, wherein it has been held that the liability to pay sales tax lies on the supplier of the taxable goods and not on the "buyer. The Supreme Court of Pakistan has also confirmed the aforesaid decision of the Lahore High Court, Lahore;

(c) I also notice that section 7(2)(i) of the "Act, clearly postulates that a registered person shall not be entitled to deduct input tax from output tax unless in case of a claim for input tax in respect of a taxable supply made, he holds a tax invoice in his name and bearing his registration number in respect of such supply for which a return is furnished. Similarly, section 73 of the Act provides that certain transactions are inadmissible if payment whereof is being made otherwise than crossed cheque or through crossed banking instruments. The plain reading of section 7 and section 73 of the Act reveals that a registered person is entitled for input tax credit if he holds sales tax invoice issues under section 23 of the Act and payment thereof is being made through crossed banking instrument to the supplier;

(d) I also find that the appellants/claimants filed the instant refund claim under section 10 of the Sales Tax Act, 1990. Each refund claim of the respective claimant/appellant is required to be processed under the relevant procedure specified by the Federal Board of Revenue under section 10 ibid. A mechanism for filing of refund claim with the department under the provisions of the Sales Tax Act, 1990 has been devised whereunder every claim is processed and scrutinize in the light of the said procedure/system. Registered persons have to abide by the applicable rules made under the sales tax law. In this behalf, I gain support from the judgment of the Appellate Tribunal, Lahore Bench, reported in 2001 PTD 2600, wherein it has been held that:

"Once a person is registered under the provisions of the Sales Tax Act, 1990, he becomes a registered person in terms of section 2(25) and is treated accordingly for the purpose of the Act. He has the same rights and liabilities, as any other taxpayer has, with regard to payment of sales tax under section 3, admission of input tax credit under section 7, filing of monthly tax return under section 26, maintenance of relevant record under section 22 and other tax-related matters."

(e) I, however, observe that the refund rules have to be read with the non-obstante clause of section 8 of the Act, which have overriding effect and forbids the inadmissible refunds or adjustments. Since the very insertion of clause [(ca) "the goods in respect of which sales tax has not been deposited in the government treasury by the respective supplier]" to sub-section (1) of section 8 of the Sales Tax Act, 1990, by virtue of Finance Act, 2006 and the enactment of newly added statute i.e., section 8A in the Act, the buyer can now be held responsible for the deposit of tax involved in the transactions between the parties (buyer and seller). Keeping in view the afore-stated legal position, the appellant is now equally responsible for the act done on the part of his supplier. Therefore, in the matters of refund from the public exchequer, verification report which is not in affirmative dis-entitles the appellant to the inadmissible refund. Moreover, under the Refund Rules, 2002, the Officer-in-charge Refund shall satisfy himself about the genuineness and admissibility of the refund claim on the basis of verification/investigative report and supportive documents and then reject the claim if found inadmissible.

(f) Now, I would like to revert to the case of Messrs Sajid Textile Industries (Pvt.) Ltd v. The Collector of Sales Tax and Central Excise, West Karachi in Appeal No.K-09/2003/4011, decided on 12-5-2003, wherein it has been held that;

"Charge levelled against him of inadmissible input tax claim is incorrect as the input tax whatever has been claimed by him was against valid GST paid invoices and the amount of those goods received by appellant too has been paid through cross cheques which can be verified from the banks and in such circumstances, to allege them that input tax claim is on the basis of fake invoices issued by the respective units mentioned in show-cause notice is based on no evidence as all units to whom department has alleged to be non existing at the address shown in record, if for sake of argument is taken as correct, then also it is not the responsibility of the appellant to prove their existence because the department itself has given sales tax registration number to those units. Even otherwise, just for the sake of argument, it is assumed that these units are non existing then no reason has been given by department that why no action has been taken against them till the time. On the contrary, instead of supplier, the purchaser who had paid the amount of the goods has been victimized and this act of department is neither logical nor legal."

(g) Undoubtedly, it is not possible for the recipient to investigate the moral character of the supplier whether he discharged his legal obligation or otherwise, rather it is the foremost obligation of the department to unearth such unscrupulous elements, who either did not comply with the rules and procedures issued there-under or even did not pay the due tax, to recover the due tax which has been paid by the recipient, and did not penalize the honest tax payer by denying its right vested in him by the Act. In this context, the Honourable Federal Tax Ombudsman while deciding Complaint No.1025 of 2006 has also given his findings in the following manner:--

"Whether the liability to pay the tax to the Government lay on the supplier or the recipient. If the responsibility to pay the tax to the Government lay with the supplier and the tax charged by the supplier should be credited by him to the government, would the purchaser be required to audit the supplier"s account to confirm the payment And, If summary of sales and purchases was not submitted by the supplier, it should not be treated as violation of the law by the complainant. The sanctioning authority was not justified to withhold the legitimate refund claim on the frivolous grounds/objections raised by the STARR and CRRAS. Once the objections were raised by the computer system, no inquiry or verification is conducted by the Collectorate, there is no mechanism for rectification of human error by the functionary of the department while feeding the data in the system and nothing seems to have been done to upgrade the software after recognizing the general problems of the taxpayers. It is also not the responsibility of the buyer to obtain sale and purchase summary of the supplier and get the same authenticated by the concerned Collectorate and if all this action has to be taken by the purchaser, then what is the role of the Collectorate for administration of the Sales Tax Law "

(h) I observe that the basic controversy in such cases is whether the statutory liability on the part of the refund claimant has been discharged as per law by way of making payment of tax in accordance with section 73 of the Act, and supply of goods against valid sales tax invoices issued under section 23 ibid. In the present case, I find that the refund claimed against unverifiable supplies by untraceable supplier had rightly been declined by the adjudicating authority under the relevant provisions of law as under Rule 5 of Chapter-I of the Sales Tax Rules, 2006, notified vide S.R.O. 555(I)/2006, dated 5-6-2006, the appellant/claimant was not entitled to claim refund on the invoice of untraceable supplier. I also observe that the refund claim of the appellant/claimant has been declined under Rule 37 of the Refund Rules, 2006, notified vide S.R.O. 555(I)/2006, dated 5-6-2006 and in order to have a valid refund claim, the appellant"s supplier is required under the law and rules made thereunder to issue valid sales tax invoices arising out of supplies. The wisdom behind a, valid sales tax invoice is to ascertain the genuineness and admissibility of the refund claim pertaining to purchases and to ensure that the input tax invoice in its chain has reached its lawful destination (Govt. Exchequer). Therefore, to such extent, I do not find any legal impropriety, illegality, infirmity or material irregularity in the impugned Order-in-Original. 10. The upshot of the above discussions is that the appellants" refund claim was declined as consequence of non-verifiability and non-traceability of the supplier in the wake of Rule 37 of Chapter-V of the Sales Tax Rules, 2006, notified vide S.R.O.555(I)/2006, dated 5-6-2006. Undoubtedly, refund sanctioning authority is empowered thereunder to reject a refund claim, which remained unverified. In fact, while sanctioning a refund claim, the refund sanctioning authority exercises the executive powers conferred by him under the statute and he is, thus, under obligation to follow the prescribed rules for sanctioning the refund claim. However, when the show-cause notice is issued to the refund claimant on the basis of an objection and the refund claim is declined purely on the basis thereof, then he exercises quasi judicial authority and he is, thus, under obligation to apply his mind judiciously and with due diligence and also to consider the pros and cons of the case including physical verification of the supporting documents and any such action as warranted under the law. It is, however, abundantly clear upon the deep appreciation of the facts of the instant case that some basic verifications were required to be done by the respondent department from different quarters including feeding/upholding of the appellants" suppliers data in the STARR"s System, enabling the appellant to get his legitimate refund, if otherwise admissible and the same verifications were accordingly carried out by the respondent department in the instant case. I find that the arguments of the Departmental Representative on this issue to the extent that STARR System is a mechanical process in which there is no involvement of human interaction regarding processing of refund claim and thus, the laid down procedure has to be followed for processing and sanctioning of refund claim, is quite convincing; however, it is apparent from the available record .of the case that the appellants contention is supported by the proof of payment as required under section 73 of the Sales Tax Act, 1990 and other supporting documents thereof. Had such evidence been examined/verified by the respondent department at the very outset, the controversy involved therein could have been amicably resolved much earlier. 11 In view of the above stated legal position, extenuating circumstances of the case and dicta of the Superior Courts, I am inclined to accept the contention of the appellant to the extent of rejection of his refund claim on the basis of the reasons outlined in the impugned Order-in-Appeal and I am, therefore, inclined to set aside the impugned orders by the lower forums and remand the instant case to the Deputy/Assistant Collector (Refund), Refund Division, Regional Tax Office, Peshawar for de novo consideration, with the direction to obtain the report of the investigative audit being conducted by Faisalabad Collectorate and then in the light of supporting documents of the appellant, he should decide the refund claim of the appellant by providing him an ample opportunity of hearing as well as production of any additional material evidence, etc., in support of his contention. The aforesaid exercise be completed within 120 days of the receipt of this order. The instant appeal is thus, disposed of in the aforesaid manner. 12. This judgment shall also apply mutatis mutandis to the following appeals, being identical in nature and circumstances, also having common points of facts and law.

13. This judgment consists of Seven (7) pages and each page bears my official seal and signature. 14. Announced on 1-6-2009. 15. Attested copy of this judgment be dispatched to the concerned parties within ten (10) days of passing of the same. C.M.A./78/Tax (Trib.) Order accordingly.

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