Government of Pakistan,
Dealing officer: …Mr.Asad Arif, Advisor.
Mr. Kamal Hassan Siddiqui, Advocate : for the Complainant.
Mr. Muhammad Ibrahim Vighio, Additional Collector, Sales Tax : for the Respondent.
The complainant is working as a contractor and is aggrieved by deduction of sales tax at source from his security deposit.
2. Brief facts of the case are that the complainant, duly registered with the Sales Tax Department, executed a contract in 2003 with the Irrigation Division, Quetta for construction of tube wells purely for agriculture purposes in the draught affected area under DIMRC program funded by Asian Development Bank. As per the terms of the contract, the complainant had made some deposit with the Irrigation Division as security for due performance of undertaking and obligations of the tender under which the contract was awarded. It is stated that during the year 2005, the Irrigation Department asked the complainant to produce sales tax invoices for pipes installed in the construction of tube wells failing which it threatened to deduct the sales tax at source from running bill amount payment. Then, all of a sudden, without prior intimation, the Irrigation Department deducted sales tax amounting to Rs.2,422,367 at source from his security deposit and issued a deduction certificate in this behalf. Feeling aggrieved by such action of the Irrigation Department, the complainant approached the Deputy Collector, Sales Tax, Quetta through letter dated 18.11.2005 but in response thereto, the Deputy Collector issued a letter dated 29.11.2005 to the Irrigation Department to deposit the entire amount so deducted in the Government exchequer. The complainant then approached the Central Board of Revenue (CBR) for reimbursement of the tax so deducted on the grounds that such deduction of sales tax at source was illegal as the Board itself had already clarified vide letter No.4(47)STB/98(Vol-I) dated 09.04.2002 that no deduction of sales tax at source is to be made because such sales tax deduction at source is not in line with the present Vat-Mode invoice-based sales tax scheme. It was further represented that the Irrigation Department wrongly asked the complainant to provide sales tax invoices for pipes as the complainant never made any kind of supply/sale of pipes to the Irrigation Department nor is the complainant registered as supplier with the Department. It was stated that the words “supply and placement of MS pipes” used in the tender document clearly showed that the contractor himself will arrange the pipes and the Department would not provide the same and that this does not mean that the contractor had supplied MS pipes or gravel to the Irrigation Department. The complainant further argued that the MS pipes consumed in the tube well become an integral part of the tube well and that the work done by the contractor is not taxable because it does not constitute supply of movable goods. It was further contended that the fact that the complainant worked as a contractor and not as a supplier is also evident from the income tax deducted on payment made to him by the Irrigation Department which was @ 6% while the income tax deduction rate in the case of supplier is 3.5% under the Income Tax Law. It was further urged that the work done by the complainant is not taxable as it does not constitute supply of movable goods as tube well is not like goods to supply but it is an immovable property like building and roads etc and that by their letter No.4(47)STB/98(PT-2) dated 02.04.2002, the Board has already held that there is no sales tax on immovable property such as building and roads etc since these are excluded from the definition of goods under the Sales Tax Act, 1990. The complainant, accordingly, prayed that since there is no sales tax on execution of construction contractor nor the complainant charged any such sales tax and that the sales tax cannot also be deducted at source, therefore, he requested the Board to issue instructions to the Collectorate and Irrigation Department to reimburse the security deposit amounting to Rs.2,422,367 which was withheld by the Irrigation Department on behalf of the Sales Tax Department. The CBR vide its letter dated 11.07.2006, however, rejected the above representation of the complainant in the following words:
“I am directed to refer to M/s. Hassan & Company, Quetta’s letters vide C.No. Nil dated 05.04.2006 and 19.02.2006 on the subject above and to state that since the request made therein is not tenable under the law therefore, the same cannot be acceded to by the Board”.
3. The complainant has felt aggrieved by such summary dismissal of his representation and hence the present complaint.
4. During the course of hearing, the learned A.R of the complainant reiterated the same arguments as he gave in the representation made to the CBR to establish that the activity carried on by the complainant was not liable to sales tax. He, therefore, prayed to order for reimbursement of the amount withheld and deposited in the Government Treasury by the Irrigation Department on the instructions of the Sales Tax Department.
5. Replying to the allegations in the complaint, the Additional Collector in his written report has stated that the deduction of sales tax was made in compliance of the directives of the Audit Department as the complainant made taxable supply in placement of MS pipes for the installation of tube well. It is further stated that words “supply and placement of MS pipes” used in the tender document indicate that the supply of pipes was also made by the contractor. It is contended that the supply and subsequent installation of tube well is a taxable activity under section 3 of the Sales Tax Act, 1990 regardless of the terms of individual contract. It is further urged that the Board, vide letter dated 02.04.2002, has already clarified that the installation of tube well is a taxable activity and that such installation of tube well does not come within the ambit of construction work and hence is taxable. It is further stated that the complainant claimed an amount of Rs.917,385 as input tax during the tax period of May, 2003 paid in June, 2003 and failed to deposit sales tax (out put tax) and that tube well are not constructed but are always installed. In view of this, it is stated that the complainant made taxable supplies to the Irrigation Department and carried out a taxable activity and was thus bound to pay sales tax under the law.
6. Responding to the above, the learned A.R of the complainant has stated that so far as the claim of input tax of Rs.917,385 is concerned, this was claimed on import of dumping trucks and not on purchase of pipes and, therefore, the contention of the Department in this behalf is incorrect. It is further stated that the Department’s assertion that in their letter dated 02.04.2002, the CBR has already held the installation of tube well as a taxable activity is also incorrect because nowhere in this letter, the CBR has given any such opinion. On the other hand, it is clearly provided thereon that “no sales tax is payable when a contractor constructs a building or a road for a Government Organization. However, any subsequent supply and installation of Air-Conditioners, Fire Fighting Equipments etc for such buildings is taxable as such goods are not immovable property”.
7. Parties have been heard and the record produced has been examined.
8. The question as to whether the activity carried on by the complainant is taxable or not would fall outside the jurisdiction of this office as it relates to assessment and determination of liability of tax and, therefore, this office would refrain from giving any finding on this issue in view of the bar placed by clause (b) of sub section (2) of section 9 of the establishment of the Office of FTO Ordinance, 2000. However, the manner and method under which the sales tax has been withheld from the security deposit of the complainant reeks of arbitrary exercise of power as the tax has been collected in a manner which ignores the provisions of law and circular instructions of the Board. It involves the exercise of power which shows administrative excess which tantamounts to maladministration.
9. Under section 11 of the Sales Tax, 1990, if a person is found not to have paid tax due on supplies made by him or has made short payment, then assessment of sales tax payable by that person has to be made but no order under the said section can be made unless a show cause notice is given to the person in default specifying grounds on which it is intended to proceed against him and the Sales Tax Department shall take into consideration the representation made by such person in this behalf and provide him with an opportunity of being heard. During the course of hearing, the D.R was asked as to whether before the Irrigation Department was directed to deduct the sales tax from the security deposit of the complainant any show cause notice was issued and any assessment order was passed raising the tax demand in question. The D.R, however, stated that neither any show cause notice was issued nor any Order-in-Original was passed in this case. Thus, in the absence of such an order, the complainant was denied even of an option to approach the appropriate forum for redressal of his grievances if he had felt dissatisfied by such an order.
10. Admittedly no show cause notice was issued to the complainant and he has been condemned as a defaulter without allowing him an opportunity of hearing. It is an old maxim of law that no one should be condemned unheard. The principle of natural justice requires that hearing be granted to a person being condemned unless the relevant statute specifically excludes such an opportunity of hearing. In cases like this on the other hand, the relevant provisions of law specifically require issuance of show cause notice and grant of opportunity of hearing. Since such an opportunity was denied to the complainant, therefore, the action of withholding the sales tax being contrary to law and principles of natural justice is not sustainable and tantamounts to maladministration. In the circumstances, it is recommended that:
i). CBR to withdraw their letter C.No.1(13)S.T.T/2005-PE dated 11.07.2006 addressed to M/s. Hassan & Company, the authorized representative of the complainant and
ii) CBR to direct the concerned authority to examine the matter afresh and process and settle the same on its merits within 60 days of the receipt of this order in accordance with law and facts of the case after providing a reasonable opportunity of hearing to the complainant.
iii). Compliance be reported within seven days after doing the needful in terms of (i) & (ii) above.
(Justice (R) Munir A. Sheikh)
Federal Tax Ombudsman
BEFORE THE FEDERAL TAX OMBUDSMAN
M/s Al-Vera Enterprises (Pvt) Limited
15-KM, Sheikhupura Faisalabad Road,