Sales Tax Appeal No.K-108 of 2000, decided on 17th October, 2005. Versus Sales Tax Appeal No.K-108 of 2000, decided on 17th October, 2005.
ZAFAR IQBAL (MEMBER TECHNICAL).--- This appeal challenges the vires of the order, dated 9-5-2000 passed by the Collector of Customs, Sales Tax and Central Excise Appeals, Karachi and order, dated 18-12-1999 passed by the Additional Collector of Sales Tax East, Karachi.
2. The facts of the case are that during the course of audit of appellant's financial accounts for the financial years 1996-97 and 1997-98, it has been gathered that the appellant had suppressed their sales to the extent of Rs.20,166,702 resultantly paying the sales tax shore to the tune of Rs.2,016,670 during the financial year, 1996-97. The appellant also suppressed his sales to the extent of Rs.16,309,420 thereby reducing their tax liability to the tune of Rs.2038,678 during the financial year, 1997-98.
3. The respondent accordingly alleged than the variation in sales accrued due to failing to add the sales factors in their value of supply thereby resulting in variation due to substraction of direct expenses to the tune or 34.72% and 32.26% during 1996-97 and 1997-98 respectively.
4. It was also alleged that the appellant reduced their gross profit with substractions of direct expenses i.e. insurance, freight and forwarding, packing charges, cartage, repair and maintenance and depreciation of machinery resulting in suppression of Rs.14,969,347 during the year 1996-97 and Rs.12,331,332 during the year, 1997-98 as tax liability.
5. The respondent thus alleged that the appellant failed to pay sales tax due and the Government was deprived of its revenue in sales tax to the tune of rupees four million. And since, the same stood recoverable from the appellant within the framework of section 36 of the Sales Tax Act, 1990 along with additional tax, therefore, the appellant through a show-cause notice was asked to explain the cause that as to why tax due along with additional tax and penalty be not recovered.
6. The appellant vide its reply to the show-cause notice stated that the "tax" as defined under the Sales Tax Act, 1990 is essentially a tax clue on taxable supplies unlike income tax and the same is not required to be charged on gains or profits arising from business activities including supply of goods. As per the provisions of section 3 of the Sales Tax Act, 1990, the general scheme of taxation stands defined under which sales tax is levied at the rate of 15% on "value of supplies" made by a "registered person" or in respect of goods imported into Pakistan. Accordingly, sales tax becomes leviable when taxable goods are supplied, and sales tax is assessed or collected on the value of supplies and the profits from business has no relevance whatsoever in the process of levy and charge of sales tax.
7. The appellant further stated that the sales tax auditors did travel beyond their jurisdiction by adopting the accounting method of determination of profits. The appellant also stated that since its inception, the appellant had always charged disputed expenses to the profit and loss account and there had been no attempt whatsoever to defeat the provisions of the Sales Tax Act, 1990 in any manner.
8. The respondent, however, did not agree with the point of view of the appellant and passed the impugned order by stating that:--
" I have gone through the records of the case as well as the written and verbal arguments of both the parties and come to the conclusion that the respondents have tried to suppress their domestic sales by including direct expenses like insurance of labours, packing expenses, sales and depreciation of plant and machinery etc. in the cost of goods sold. The average cost of finished goods comes to Rs. 339.44 per kg. and Rs.373.09 per kg. for the years 1996-97 and 1997-98 respectively whereas average sale price of domestic sales, calculated vide para. 5 of this order comes to Rs.23.27 and Rs.44.64 per kg. for the years, 1996-97 and 1997-98 respectively. Resultantly there is a big difference of Rs.315.47 and Rs.328.45 respectively between the average cost of finished goods and average sales price of goods sold in the local market value. By multiplying the difference of cost and sales price mentioned above with the quantity of goods sold in local value market the respondent have suppressed sales in local value market comes to Rs.84 1 ,075 and Rs.455,724 for the years 1996-97 and 1997-98 respectively."
I, therefore, order payment of Rs. 1,296.799 along with additional tax of Rs.3,694,465 under sections 36 and 34 of the Sales Tax Act, 1990. I also impose a penalty of Rs.64,840 and Rs.648,399 under sections 33(7) and 33(4)(c) for contravening of sections 3, 6 and 26 of the Sales Tax Act, 1990..."
9. An appeal against the said order too failed, hence the present appeal.
10. The learned counsel for the appellant states that a contravention case was made out against his client by stating that certain expenditure incurred by the appellant were not included in the total value of sale. He stated that the value of supply stands defined in subsection (46) of section 2 wherein it has been provided that value of supply is the consideration in money received. It was his point of view that charges framed against his client are misconceived.
11. On the other hand, the departmental representative contends that the annual accounts analyzed by the department did prove the charges alleged.
12. Rival parts have been heard case records examined. A reading of the show-cause notice reveals that the main charge levelled against the appellant is that he subtracted direct expenses including insurance, freight and forwarding, packing charges, cartage, repair and maintenance and depreciation of machinery from the gross profit. In other words, the respondent is stating that the tax paid by the appellant was not on the actual value of supply as defined vide subsection (46) of section 2 of the Sales Tax Act, 1990. It would, therefore, be appropriate to reproduce the said subsection for case of reference. The same reacts as under:--
"....(46) "value of supply" means,---
(a) in respect of taxable supply, the consideration in money including all Federal and Provincial duties (and taxes), if any, which the supplier receives from the recipient for that supply but excluding the amount of' tax.
Provided that-
(i) in case the consideration for a supply is in kind or is partly in kind and partly in money, the value of the supply shall mean the open market price of the supply excluding the amount of tax; [**]
(ii) in case the supplier and recipient are associated persons and the supply is made for no consideration or for a consideration which is lower than the open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax; (and)
(iii) in case a taxable supply is made to a consumer from general public on instalment basis on a price inclusive of mark-up or surcharge rendering it higher than open market price, the value of supply shall mean the open market price of the supply excluding the amount of' tax;
(b) in case of trade discounts, the discounted price excluding the amount of tax; provided that the tax invoice shows the discounted price and the related tax and the discount allowed is in conformity with the normal business practices;
(c) in case where for any special nature of a transaction it is difficult to ascertain the value of a supply, the open market price;
(d) in case of imported goods, the value determined under section 25 or 25B of the Customs Act, including the amount of customs duties and central excise duty levied thereon; [**]
(e) in case where there is sufficient reason to believe that the value of a supply has not been correctly declared in the invoice, the value determined by the Valuation Committee comprising representatives of Trade and the Sales Tax Department constituted by the Collector [ and]
[(f) in case the goods other than taxable goods are supplied to a registered person for processing, the value of supply of such processed goods shall mean the price excluding the amount of sales tax which such goods will fetch on sale in the market;]
[(g) in case of a taxable supply, with reference to retail tax, the price of taxable goods excluding the amount of retail tax, which a supplier will charge at the time of marketing taxable supply by him, or such other price as the Board may, by a notification in the official Gazette, specify:]
Provided that, where the Central Board, of Revenue deems it necessary, it may by notification in the official Gazette, fix the value of any taxable supplies or class of supplies and for that purpose fix different values for different classes or description of same type of supplies:
Provided further that where the value at which the supply is made is higher than the value fixed by the Central Board of Revenue, the value of goods shall [, unless otherwise directed by the Board] be the value at which the supply is made;..."
13. In the light of said provisions of law and in order to decide the matter, the following issue is relevant for consideration:--
(a) Whether or not determination of value by the respondent was in accordance with law?
14. According to the provisions of statute "value of' supply" is the consideration in money including all Federal and Provincial duties and taxes, if any, which the supplier receives from the recipient for that supply excluding the amount of tax. The important factors in this regard are the words `consideration in money' excluding the official taxes and that consideration in money must have been received by the suppliers from the recipients of goods. In other words to doubt a value it must be shown that escaped amount had been received by the supplier from the recipient of tax. The examination of show-cause notice, dated 25-2-1999 shows that no such charge has been agitated or levelled against the appellant. The relevant portion of the show-cause notice states that the direct expenses namely, insurance, freight and forwarding, packing charges, cartage, repair and maintenance including the depreciation of value of machinery were deducted. from their gross profit; and on that finding, the auditor thought that under valuation has taken place forgetting the fact that in order to doubt a value of supply, the necessary ingredients namely, the consideration in money and that too received from the recipient of goods are to be present. On the contrary there is no such allegation in the show-cause notice nor there is' any allegation of fraud or misrepresentation.
15. The perusal of the impugned order reveals that the sale value of supplies declared by the appellant in tax invoices were rejected by the respondent by stating that the average cost of finished goods comes to Rs.339.44 per kg: to Rs.373.09 per kg', whereas the average sales price comes to Rs.23.27 to Rs.44.64 per kg and he accordingly enhanced the value of supply. The question for determination arises whether in terms of the procedure laid down vide the above-quoted provisions of law, the respondent was competent to determine the value of supply in this manner. Clause (c) of subsection (46) of section 2 of the Sales Tax Act, 1990 states that where for any special nature of transaction, it is difficult to ascertain ''me value of a supply, the supplies made will be assessed on the open market price, and the law further provides vide clause (e) of subsection (46) of section 2 that where there is sufficient reason to believe that the value of a supply has not been correctly declared in the C invoices, the value will be determined by a Valuation Committee comprising representative of Trade and the Sales Tax Department constituted by the Collector. No such steps as provided by the provisions of the statute were ever taken by the respondent. Unfortunately, the procedure adopted by the Adjudicating Officer to revise the value declared in the sales invoices was contrary to the legal provisions on the subject, since there is no evidence to show that either a Valuation Committee for determining the fair value was constituted by the Collector or the goods were assessed on the open market value. In these circumstances, the impugned order is violative of the statutory provisions and hence not warranted by law.
16. The foregoing discussion reveals that the determination of value by the respondent was not in accordance with law; there is no evidence on record to substantiate that consideration in money received from the recipient of goods was to extent of value determined by the respondent; there is no allegation of fraud and misrepresentation in the show-cause notice; there procedure provided vide clause (c) of subsection (46) of section 2 .was not adopted.
17. Having said that, it is concluded that the impugned order passed by the respondent are not in accordance with law and hence not warranted by law. The appeal accordingly succeeds and the impugned orders are set aside.
18. However, before parting with the case, it is observed that if the respondent is in possession of materials on the basis of which sale invoices issued by the appellant can be doubted, they will be at liberty to proceed against them in accordance with law.
H.B.T./191/Tax (Trib.) Appeal allowed.