2011 PTD (Trib) 1306

INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN
Messrs Fauji Kabirwala Power Company

LTD, Khanewal
Versus
Commissioner of Income Tax, Islamabad
HEAD NOTE
S.T.A. No. 132/IB of 2010
Before: Munsif Khan Minhas, Judicial Member and Ikram Ullarf~raur Accountant Member
Rashid Ibrahim, FCA for Appellant.
Imran Shah, DR/Senior Auditor for Respondent
Decided on: 3rd March, 2011
Citation: 2011 PTD 1306; (2012) 104 TAX 203 (Trib.)
(a)
Sales Tax Act (VII of 1990)

S. 30---Auditor General's Functions, Powers and Terms and Conditions of Service)
Ordinance (XXIII of 2001), S. 12---S.R.O. 1195(1)/90 dated 17-12-1990---Authorities---Audit by
staff of Directorate of Revenue Receipt Audit---Officers of Directorate of Revenue Receipt Audit
had not been vested with powers of Sales Tax Officer and therefore, could not conduct audit of a
tax payer directly.
[p. 1318] A
2007 PTD (Trib.) 1600 and 2008 PTD (Trib.) 261 rel
(b)
Ss. 25 & 30---Auditor General's (Functions, Powers and Terms and Conditions of Service)
Ordinance (XXIII of 2001), S.12---S.R.O. 1195(1)/90 dated 17-12-1990---Auditor General of
Pakistan's Circular No.1167-Coord(Hq)PRA/35-2007 dated 29-2-2007---Access to record,
documents, etc.---Initiation of adjudication proceedings on observations of staff of Directorate of
Revenue Receipt Audit---Validity--Initiation of adjudication proceedings based on the pointation or
observations of Directorate of Revenue Receipt Audit was perfectly lawful---To say that the
Directorate of Revenue Receipt Audit could not point out any short payment or inadmissible
adjustment of input tax was to disable the constitutional duty of the institution of the Auditor
General which had the responsibility of protection of public revenues and tantamounted to denying
the constitutional role of Public Accounts Committee in safeguarding the public revenue--Directorate of Revenue Receipt Audit analyses the federal revenue receipts on the basis of tax
record of a tax collecting agency---Since, .tax collecting agency collects tax from a taxpayer, it was
quite rational that the taxpayer records had to be scrutinized in order to figure out any leakage of r
avenue---Directorate of Revenue Receipt Audit could exercise the functions of review of the audit
receipts of a federal tax collecting agency only by examining the tax record of a taxpayer--Directorate of Revenue Receipt Audit pointed out short payment of the tax not to the taxpayer, but
to the tax collecting agency, which was quite lawful---Directorate of Revenue Receipt Audit did not
audit the taxpayer's account directly---Every citizen of the State had a duty to point out evasion of
public money---If a complaint by a private person leads to recovery of a short paid tax, the
complainant had vested right to payment of reward according to the Reward Rules notified by the
Federal Board of Revenue from time to distinguished.
[p. 1319) B
2007 PTD (Trib.) 1600 and 2008 PTD (Trib.) 261 distinguished
(c)
S.8(1) & (2)---S.R.O. 555(1)/2006 dated 5-6-2006---Tax credit not allowed---Determination

of input tax---Taxable and non-taxable supplies---Apportionment of---Section (1) of the Sales Tax
Act, 1990, specifically postulates the qualification for re-claiming or deduction of input tax paid
Web: http://www.etaxpk.com
and S.8 (2) of the Act hypothesizes that if a person deals in taxable and non-taxable supplies at the
same time, he could reclaim only such portion of the input tax as was attributed to taxable supplies
in such manner as specified by the Board.
[p. 1328] C
(d)
Sales Tax Act (VII of 1990) -- Ss.3, 7, 8, 2(33), 2(35) & 2(46)
STGO No.1 of 2000 dated 24-1-2000---STGO No.3 of 2004 dated 12-6-2004--S.R.0.578(I)/98 dated 12-6-1998---Sales Tax Special Procedure Rules, 2006, R.38 (3)---Sales Tax
Special Procedure Rules, 2007, R.13---Scope of tax---Taxpayer, a power supply company---Energy
purchase price---Capacity purchase- price---Claim of input adjustment---Apportionment of--Contention that input adjustment could only be claimed for the sales tax paid on energy price--Validity---Expression "supply" includes capacity purchase price as it was received by the taxpayer
in furtherance or in connection with her business---Capacity purchase price, energy price
premium, excess bonus and supplemental charges etc., were part of total sales but were specifically
excluded for the purpose of valuation of supply under S.2(46) of the Sales Tax Act, 1990---If the
supply was either non-taxable, or exempt or excluded from the value of supply under S.2(46) of the
Sales Tax Act, 1990, no input adjustment in respect thereof was admissible under Ss.7 and 8 of the
Sales Tax Act, 1990---Section 8(1)(a) of the Sales Tax Act, 1990 specifically provides that no input
adjustment or tax credit could be claimed in respect of any goods or services used or to be used for
any purpose other than for taxable supplies made or to be made---Taxable supply was a sine quo
non for claim of input adjustment which was not absolute but contingent upon a supply being
taxable---Capacity purchase price portion of the consideration received by the taxpayer was not a
taxable supply and claim of tax credit in respect thereof was prima facie inadmissible which
necessitates apportionment of total input tax for total supplies into two distinct categories i.e.
taxable and non-taxable supplies---Energy purchase price was taxable and capacity purchase price,
energy price premium, excess purchase supplemental charges etc., were non-taxable or not taxable--Taxpayer could not claim input adjustment without fulfilling criteria laid down in Ss.7 and 8 of
the Sales Tax Act, 1990---Taxpayer was liable to apportionment of total input tax claimed between
the taxable (receipt or turnover on account of energy purchase price) and non-taxable (receipt or
turnover on account of capacity Purchase price, energy price premium, excess bonus and
supplemental changes etc.)---App was found to be without any merit and the same was dismissed by
the Appellate Tribunal and order of adjudication officer and the First Appellate Authority was
sustained---Additional tax and penalty imposed was remitted for the reason that taxpayer was1not
found to have wilfully defaulted the payment of sales Tax
Sheikhoo Sugar Mills Ltd. v. Government of Pakistan and others 2001 SCMR 1376 = 2001
PTD 2097; Messrs Ambar Tabacco Co. (Pvt.) Ltd. Distt. Swabi v. The Additional Collector, Sales
Tax and 3 others 2003 PTD 800; Collector Customs, Central Excise and Sales Tax, Karachi (West) v.
Navartis Pakistan Ltd. 2002'PTD 976; Messrs Service Industries Ltd. v. Federation of Pakistan and 5
others 2002 PTD 2845; Messrs Al-Hailal Motors Store and others v. The Collector, Sales Tax and
Central Excises (East) Karachi and others 2004 PTD 868; Messrs Umani Associates Sub-Proprietary
Firm v. Central Board of Revenue and another 2001 PTD 2982; Collector Sales Tax and Central
Excise (West), Karachi v. Messrs Al-Hadi Industries (Pvt.) Ltd. 2002 PTD 2457; Messrs Peoples
Concerns (Pvt.) Ltd. Gadoon Amazai, Industries Estate, Sawabi v. Assistant Collector, Sales Tax
Peshawar PTCL 2003 CL 428; Messrs Mayfair Spinning Mills Ltd. Lahore v. Customs, Excise and
Sales Tax Appellate Tribunal, Lahore and 2 others PTCL 2002 CL. 115; Collector of Customs, Sales
Tax and Central Excise and others v. Messrs Sanghar Sugar Mills Ltd., Karachi and others PLD 2007
SC 517 = 2007 PTD 1902; Ghandhara Nissan Diesel Ltd. v. Collector, Large Tax Payers Unit and 2
others 2006 PTD 2066 and 2008 PTD (Trib.) 261rel.
(e)
Ss.33 & 34---Offences and penalties---Default surcharge---Scope---Generally, default

surcharges and penalty was imposed as punishment or economic sanction against a deliberate
attempt to evade---Taxpayer simply took advantage of a rule that enabled him to avoid taxTax
avoidance was "rule assisted". There being no mens rea, or a wilful default on part of taxpayer, the
imposition of default surcharge and penalty was set aside by the Appellate Tribunal.
(f)
S.8 (1)(a)---Constitution of Pakistan, Art.25---Tax credit not allowed---Discrimination--Remission of lawful tax liability could not be allowed just because the department did not take
action to recover lawful tax from other IPPs---Rule of consistency would require that all other IPP
should also be given the same treatment as had been given to the present taxpayer -Sales Tax Act
sufficiently enables the department to invoke demand from others, too on case by case basis but
subject to due process of law---Federal Board of Revenue may like to issue necessary instructions
to all of its field formations to conduct audit of all such IPPs within their area of jurisdiction in
order to quantify the illegal and inadmissible input adjustments taken by such IPPs on the strength
of illegal rules framed by Federal Board of Revenue against the statutory provisions contained in
S.8(1)(a) of the Sales Tax Act, 1990, and recover the amount after fulfilling all codal formalities
under the law in case it was figured out that there had been loss to the public money.
[p. 1332] E
2004 PTD 2294 and 2004 PTD 942 ref
(g)
Sales Tax Act (VII of 1990)--
Ss.2(46), 7 & 8---Sales Tax Rules 2006, R.13---Sales Tax General Order No.3 of 2004 dated
12-6-2004---Federal Board of Revenue letter C.No.3(4) ST-L&P/07 dated 2-12-2008---Value of
supply---Capacity purchase price---Exclusion of capacity purchase price from purview of value of
supply through device of Sales Tax General Order No.3 of 2004 dated 12-6-2004---Validity--Federal Board of Revenue or any other executive agency was not an unelected wielder of legislative
power---Agency exercising a delegated legislative power could not change the purpose of a statute
promulgated by the legislature---Effect of Ss.2(46), 7 & 8 of the Sales Tax Act, 1990 was
neutralized in favour of IPPs through Sales Tax Rules 2006 and STGO No.3 of 2004 dated 12-62004---Federal Board of Revenue could not lawfully defy a statutory provision---Exclusion of
capacity purchase price from the purview of value of supply through the device of STGO No.3 of
2004 dated 12-6-2004 and R.13 of Sales Tax Rules, 2006, could not survive the test of judicial
scrutiny if challenged before superior courts of
Pakistan.
[p. 1333] F
75 Va L. Rev .431 (1989); 68 Cornell L.J. 1 (1982); Hampton and Co. v. United States, 276
U.S.394 (1028); Schechter Poultry Carp v. United States 295 v. 495 (1935); 15-20 (1978); John H.
Ely, Democracy and Distrust 132-133 (1980); Zemel v. Rusk, 381 U.S 1 (1965); Arizona v.
California, 373 U.S. 546, 626 (1963); Arizona v. California, supra, at 626 and American Power and
Light Co. v. SEC 329U.S 90, 106 (1946) rel.
(h)
Sales-Tax-Budget---Taxation---Scope.
ORDER
By this judgment we intend to dispose of Appeal No. STA/132/IB/2010. Brief facts of the
case are that a team of the DRRA conducted desk audit of revenue receipts of the Collectorate of
Sales Tax Multan. The audit of sales tax receipts relating to Messrs Fauji Kabirwala Power Company
for 2006 and 2007 revealed excessive claim of input adjustment by the company. Following up on
audit on the DRRA's audit observation, the audit team of the Collectorate of Sales Tax Multan found
that the DRRA's observation was valid. Accordingly the Additional Collector (Adjudication)
Collectorate of Sales Tax, Multan issued show-cause notice C.No.30/2008/Adj/ST/Addl/ 1985 dated
17-1-2008 to Messrs Fauji Kabirwala Power Company stating that, the appellant had supplied
electricity to WAPDA and received consideration as energy purchase price and capacity purchase
price. According to the law governing IPPs, only energy price was liable to sales tax. Therefore, they
could claim input adjustment only for the sales tax paid on energy price. However, the appellant failed
to apportion the input tax credit relating to capacity payments required by the apportionment rules of
Sales Tax Act, 1990. This irregularity caused non-payment of sales tax of Rs.146, 480,724 which was
recoverable from the appellant along with penalty and additional tax/default surcharge under sections
33 and 34 of the Sales Tax Act, 1990.
2.
The appellant's reply to the show-cause notice was found untenable. The adjudicating
authority vide his Order-in-Original No. 8 of 2009 dated 13-2-2009, determined that the charges
stated in the show-cause notice were fully established and sales tax amounting to Rs.146,480,724 was
recoverable from the appellant along with default surcharge and penalty under the related provisions
of the Act. The appellant, filed an appeal before the Commissioner of Inland Revenue (Appeal-1),
Islamabad who after detailed analysis of the case upheld the order-in-original for the self explanatory
reasons given in his elaborate Order-in-Appeal No 57 of 2010 dated July 15, 2010.
3.
Being aggrieved by the order-in-appeal passed by the learned Commissioner Inland Revenue
(Appeals-1), Islamabad, the appellant filed the instant appeal on the following grounds:
3.1
The Order-in-Appeal No. 57 of 2010 dated July 15, 2010 passed by the learned
Commissioner Inland Revenue (Appeals-1), Islamabad is bad in law, and facts of the
case.
3.2
The learned Commissioner Inland Revenue (Appeals-1) has erred in not giving any
findings on our contention that the staff of Directorate of Revenue Receipt Audit
(DRRA) is not authorized to conduct the audit of sales tax of the Appellant's records
as per judgments of Superior Courts, on the issue.
3.3
The learned Commissioner Inland Revenue (Appeals-1) has erred in passing the
order-in-appeal in a summary manner without considering the legal and factual
position of the case and rebutting appellant's submission during hearing proceedings
of the case.
3.4
The learned Commissioner Inland Revenue (Appeals-1) has erred in confirming the
apportionment of the input sales tax.
3.5
The learned Commissioner Inland Revenue (Apppeals-1) has erred in confirming the
Order-in-Original No. 8 of 2009 date February .13, 2009 passed by the Additional
Collector (Adjudication) holding that default surcharge and penalty under sections
34(1) and 33 (5) respectively is recoverable from your Appellant under facts and
circumstances of the case.
3. 6
Your Appellant craves to, add, amend or alter the above grounds of appeal.
4.
Hearing of the case was held on 18-10-2010 and finally on 26-2-2011. The AR on behalf of
the appellant and the DR represented respondent pleaded their respective cases: --4.1.
Claiming that the initiation of adjudication on the basis of audit observation of DRRA was
unlawful, the AR argued that the honorable Peshawar High Court in a judgment dated
September 18, 2008 reported as and 2008 PTD (Tribe) 261, 2007 PTD (Trib.) 1600 had
categorically held that the DRRA was a branch of Auditor General of Pakistan and was not
authorized to audit the record of private enterprises/industrial units licensed/ registered under
the Act, as such the whole exercise conducted by DRRA or the Sales Tax department
including the show-cause notice the O.N.O and the Order-in-Appeal was quorum non judice.
The Sales Tax Act, 1990 does not vest the DRRA with the powers of sales tax officer and the
show-cause notice in the present case on the basis of audit of DRRA is quorum-non judice
and, therefore, requested to withdraw the same The appellant drew attention towards section
12 of the Auditor General's (Functions, Powers and Terms and Conditions of Service)
Ordinance, 2001 (AG Ordinance) which restricts the role of the Auditor General's office to
the audit of receipts payable into the Consolidated Fund or Public Accounts of the Federal
Government or Provinces or the accounts of each district to satisfy himself that all such
receipts have been properly deposited and rules and procedures relating thereto, are being
fully observed and the systems are in place for assessment and collection of government
receipts. Therefore, the Auditor General is authorized to ensure proper assessment and
collection of government receipts but has no jurisdiction to conduct audit of private
companies/firms. The Appellant reiterated that powers of the Auditor General in terms of
section 14 of the AG Ordinance are limited to audit of receipts as stated in section 12 of AG
Ordinance and are not intended to expand AG's power to audit the records of the taxpayer.
The charter of function Of Auditor General specified through S.R.O. 1195(I)/90, dated 17-121990 requires the Auditor General to audit the receipt of - the Federal Government and not
the records of private enterprises/industrial units licensed/registered under the Act ibid. The
appellant relied on the case-law 2007 PTD (Trib.) 1600 and 2008 PTD (Trib.) 261. The
appellant in support of her contention further stated that honourable Peshawar High Court,
Peshawar in a judgment dated 18-9-2008, has categorically held that the whole exercise
conducted by DRRA was quorum non judice in view of the charter of functions given S.R.O.
1195(I)/90, dated 17-12-1990. The honourable Court also observed that DRRA was a branch
of AG and its officers were neither sales tax officers under section 30 of the Sales Tax Act,
1990 nor authorized under Sales Tax Rules, 2005 to access the premises and accounts of
registered units.
4.2
The AR explained that the special procedure for collection and payment sales tax on electric
gown vided in. Cher VI of the Sales Tax Special Procedure Rules, 2006, states that in case of
IPP, the value of the supply shall be the amount received by such IPP on account of energy
purchase price only and "capacity purchase price" shall not form part of value of supply for
the purpose of levy of sales tax. He invited attention to sub rule (3) of Rule 38 of the Sales
Tax special procedure Rules 2006 which reads as follows:
"(3)
In case of an I.P.P, HUBCO or KAPCO, the value of supply shall be the amount
received by such IPP or, as the case may be, HUBCO or KAPCO, on account ofEnergy Purchase Price only and an amount in excess of Energy Purchase Price
received on account of capacity purchase price, premium Excess Bonus,
Supplemental Charges, etc, shall not be deemed as a component of the value of
supply, notwithstanding anything contained in clause (46) of section 2 of the Act."
It was contended by the learned AR that his position was in accordance with the
procedure laid down in Sales Tax General Order No. 3 of 2004 dated June 12, 2004.
In the aforesaid General Order, the F.B.R. confirmed that IPPs will be entitled to
claim full input tax adjustment of sales tax paid on purchase of furnace oil and any
other raw material for making supply of electricity subject to the provision of section
8 and the notifications issued, thereunder. The A.R, thus argued that the CCP was
excluded from the value of supply defined by section 2(46) of the Sales Tax Act,
1990. He claimed that the C.C.P part of the consideration or valued received by the
appellant from Wapda constituted neither supply, nor value nor consideration and
was outride the scope of value received "in furtherance of business". Hence, its
apportionment was unlawful.
4.3
The AR pleaded that in the meeting held on December 13, 1999 under the chairmanship of
Secretary, Water and Power in which Member (Sales Tax) F.B.R. also participated, it wasconfirmed by Member FBR that "IPPs will be entitled to claimfull input tax adjustment
against sales tax paid on purchase of furnace oil, lubricants, spare parts etc., however
excluding the items mentioned in the sales tax No. S.R.O. 578(I) 198 dated 12-6-1998. He
stated that a copy of the draft. General Order prepared by F.B.R. on the issue was also
circulated among the participants which was later, officially notified by F.B. R. vide Sales
Tax General Order No.01 dated 24-1-2000.
4.4
The AR pressed the argument that the respondent failed to appreciate the basis of calculation
of sales tax payable by the appellant as provided in Sales Tax General Order No. 3 of 2004
dated June 12, 2004 which was further explanation of the Sales Tax General Order No. 1 of
2000 dated 24-1-2000 issued by the F.R.R. Contending that the respondent failed to
understand that C.G.O. No.3 of 2004 and Sales Tax Rules 2006 prohibits The apportionment
between the Energy Purchase Price (E.P.P.) and Capacity Purchase Price (C.P.P). The A.R.
explained that the aforesaid C.G.O. provides as follows:-
"The issue has been examined in the Central Board of Revenue and it is ruled that the value of
supply of electricity by IPPs is the amount received on account of Energy Purchase Price
only. Therefore, any amount in excess of EPP received on account of Capacity Purchase Price
Premium, Excess Bonus, Supplemental Charges etc. is not to be included in the value of
supply as defined in clause (46) of section 2 of the Sales Tax Act, 1990.
However, the assessment of sales tax is to be done in accordance with' the provision of
sections 7, 8 and all other relevant provisions of the Act rules and notification. The IPPs will
be entitled to claim full input tax adjustment against the sales tax paid on purchase of furnace
oil and other tax-paid purchase for making supply of electricity subject to the provisions of
section 8 and the notification issued thereunder."
He continued to explain that the Sales Tax Rules, 2006 exclude the value of supply from the
ambit of section 2(46) of the Sales Tax Act, 1990 in case of IPPs as follows:
"The A.R. explained that the special procedure for collection and payment of sales tax on
electric power provided in Chapter VI of the Sales Tax Special Procedure Rules, 2006, states
that in case of IPPs the value of the supply shall be the amount received by such IPPs on
account of "energy purchase price" only and "capacity purchase price" shall not form part of
value of supply for the purpose of levy of sales tax. He invited attention to sub-rule (3) of
Rule 38 of Sales Tax Special Procedure Rules, 2006 which reads as under:
(3)------ In case of an I.P.P., HUBCO or KAPCO, the value of supply shall be the amount
received by such IPP of, as the case may be,--M or AP "on account of Energy
purchase , Price only and any amount in excess of Energy Purchase Price received on
account of Capacity Purchase Price, Energy . Purchase Premium, Excess Bonus,
Supplemental Charges, etc. shall not be deemed as a component of the value of
supply, notwithstanding anything contained in clause (46) of section 2 of the Act".
He contended that their position was in accordance with the procedure laid down in
Sales Tax General Order No.3 of 2004, mated 12-6-2004. In the aforesaid Genera l
Order, the F.B.R. confirmed that IPPs will be entitled to claim full input tax
adjustment of sales tax paid on purchase of furnace oil and any other taw material for
making supply of electricity subject to the provision of section 8 and the notifications
issued, thereunder. Hence the Capacity Purchase Price was excluded from the value
of supply as defined by section 2(46) of the Sales Tax Act, 1990.
On the strength of C.G.O. and Sales Tax Rules, 2006 the A.R. claimed that
apportionment of taxable and non-taxable supplies in respect of Energy Purchase
Price (E.P.P.) and Capacity Purchase Price (C.P.P) is unlawful.
Co-incidentally, both the AR as well as the DR seem to argue their respective
positions based on the same legal work comprising STGO No. 01/2000, STGO No.3
of frame-work 2(46), section 7 and section 8 of the Sales Tax Act, 20 1990 and Rule
13 of sales tax Special Procedure Rules, 2007, their main stay being that the capacity
payment represented a non-taxable supply, i.e., not subject to payment of Sales Tax.
While both the parties claim that capacity payment consideration received by the
appellant, part of the supply, yet the controversy is about admissibility of input tax
adjustment in respect of the capacity payment part of the consideration received by
the appellant. The tax authorities believe that the capacity payment being non taxable
supply should be apportioned under sections 7 and 8 of Sales Tax Act. The appellant
insists that input adjustment relating to capacity payment is admissible because it is
not a supply.
4.5
The AR further contended that input tax credit claimed by the appellant against energy
purchase price is not only in accordance - with the provisions of law but also as per the
industry practice in this respect. The Sales Tax department, in case of other IPPs has
conceded to the input adjustment for capacity payment but the appellant was being subjected
to discriminatory treatment in violation of Article 25 of the Constitution. He also cited the case-law reported as 2004 PTD 2294 and 2004 PTD 942 to support his contention.
4.6.
The AR went on the state that the first as well as the second adjudicating authority after
reproducing the contentions of the appellant and the DR in the Order, instead of rebutting the
contentions of the appellant passed the summary order as follows: "In the light of above, I have come to the conclusion that the contention of the prosecution is
correct and the sales tax Rs.146,480,724 is recoverable from the respondents along with
default surcharge (will be calculated at the time of payment) under section 34(1) and penalty
under section 33(5) of the Sales Tax Act, 1990."
4.7
The A.R. concluded his presentation by saying that his stance was reconfirmed by the F.B.R.
as well as the F.T.O. The Tribunal was under obligation to follow the F.B.R.'s directives. He
further emphasized that the input adjustment in respect of capacity payment part of the
consideration was an established practice of the industry. Denying this facility to the appellant
was discriminatory and violated Art.25 of the Constitution.
5.
On his turn the learned DR, defended the impugned order in original and the order-in-appeal
passed by the learned Additional Collector (Adjudication), Multan and the Commissioner Inland
Revenue, respectively, stating that according to section 3 of the Sales Tax Act, 1990, the sales tax was
applicable @ 15% on the value of taxable supply. He argued that according to Rule 13(3) of the Sales
Tax Special Procedures Rules, 2007, certain receipts (like capacity purchase price, energy price
premium etc.,) which are otherwise part of value of supply under section 2(46) of the Act, 1990, but
deemed to be excluded from the value of supply or in other words, have been treated as exempt
supplies. Therefore, under section 8 of the Sales Tax Act, 1990 the appellant is not entitled to input
tax adjustment in respect of the capacity payment which falls in the ambit of exempt supplies due to
the fact that the capacity payment was not chargeable to sales tax under section 3 of Act. Thus, the
Additional Collector (Adj.) has correctly disallowed the proportionate amount of input tax relating to
exempt or non-taxable supplies, i.e., the capacity payment part of the supply. He stated that the orderin-appeal exhaustively discussed each ground of appeal and contained good reasoning for upholding
the order-in-original under reference.
6.
The written and verbal arguments put forth by the A.R. of the appellant company and the DR,
heavily contested the meanings of terms like supply, the value of supply, taxable supply, purpose of
supply, consideration, business and value received in furtherance of business. The calculation of sales
tax liability and appellant's entitlement to the input tax adjustment was also vehemently contested.
The central controversy is two fold, i.e. firstly whether the capacity purchase price represents a value
for supply as defined by sections 2(33), 2(35) and section 2(46). Secondly, whether the value,
consideration or price called the capacity purchase price is subject to apportionment under section 8 of
the Sales Tax Act, 1990. These two issues involved in this case are of a fundamental nature and very
critical to our tax system In view of the conflicting views of the parties to the case, and the importance
of the issues this Tribunal would like to frame the following questions of law and facts for their
threadbare analysis and entering the findings:
(a)
Whether a contravention report, show-cause notice and subsequent adjudicatory

proceedings triggered from an ,audit observation made by DRRA are unlawful per se.
(Appellant's ground No. 3.2).
(b)
Whether the capacity purchase price (CPP) received by the appellant falls in the
ambit of value of supply as defined by section 2(46) of the Sales Tax Act, 1990.
(e)
Whether the original and the appellate adjudicatory authorities failed to understand
sections 7 and 8 of the Sales Tax Act, 1990 and unlawfully apportioned the
appellant's input tax adjustment claim between the EPP (the taxable component of the
value of supply) and the CPP (the non taxable component of the value of supply)
received by the appellant.
(d)
7.
Most fundamental issue of determining whether F.B.R. could lawfully amend

statutory provisions contained in section 2(46) and sections 7 and 8 of the Sales Tax
Act, 1990, through Sales tax General Order No. 3/2004; and the Sales Tax Rules,
2006.
Analysis and findings

In this part we attempt to analyze the legal framework relating to this case and enter out
finding with regard to each issue fanned above.
7.1
Analysis and finding on ground No.3.2 and issue framed in Para 6(a). The contention of the
appellant that DRRA had no jurisdiction to conduct audit of private enterprises has been
examined in its right context. We do agree with the appellant that the officers of DRRA have
not been vested with powers of Sales Tax Officer A and therefore, cannot conduct audit of a
tax payer directly. We are also aware of the honourable Peshawar High Court's ratio
concerning the audit by offices of the DRRA. However, the case before this tribunal is clearly
distinguishable from the case-law cited by the appellant. In this case neither the officials of
the DRRA entered the premises of the appellant nor laid hands on its private record. The
DRRA officials in discharge of their lawful functions of revenue of revenue receipts audit
pertaining to sales tax Collectorate, Multan pointed out excessive adjustment of input tax by
the appellant. On their pointation, the audit team of the sales tax Collectorate Multan
conducted audit which confirmed the observation of the DRRA team that led to issuance of
the show-cause notice and the went adjudication proceedings against the appellant. The
Auditor General's (Functions, Powers, Terms and Conditions of Service) Ordinance 2001,
confers upon the officials of this institution certain legal responsibilities which include audit
of revenue receipts payable into the consolidated fund or public accounts of the Federal or
Provincial Government. The role of the DRRA and the manner of their discharge of functions
in relation to the sales tax receipts is envisaged in Auditor General of Pakistans circular
No.1167- Coord (Hq)RRA/35-2007 the relevant part of which is reproduced as follows:
(i)
DRRA team will visit Sales Tax Collectorate and Collectors will make available all
auditable record/information, including refund files, reward cases, departmental audit
report (internal or investigative) along with supporting files, etc. DRRA offices will
also be provided access to the entire computerized data of the sales tax registered
persons available centrally with the C.B.R./Collectorates for desk audit.
(ii)
On the basis of desk audit, the DRRA audit teams will select cases which, in their
opinion, need examination. The list of such cases would be handed over by the audit
team to the concerned Collector who will ensure production of taxpayer's record
under section 25 of the Sales Tax Act, 1990.
-
(iii)
There would be no direct interaction between DRRA audit team and taxpayers.
(iv)
The audit will be conduced at the Collectorates premises and in no case DRRA audit
team will visit premises of private taxpayers.
(v)
Sales Tax Department will not use the name of DRRA for any activity to be
performed by them under the Sales Tax Act, 1990 nor will the department elate any
section/cell of the Collectorate to the DRRA.
(vi)
The audit observations would be discussed by the leader of the audit teams with the
concerned Collectorates. The Collectors would issue contravention reports only if the
audit observations are in their opinion, legally tenable.
(vii)
There will be no "stamping" of records of individual registered persons by the audit

teams. Audit report issued by audit teams will suffice the requirements of audit.
In view of the foregoing, we conclude that initiation of adjudication proceedings
based on the pointation or observations of DRRA is perfectly lawful. To say that the
DRRA cannot point out any short payment or inadmissible adjustment of input tax is
to disable the constitutional duty of the institution of the Auditor General which has
the responsibility of protection of public revenues. Likewise it is also tantamount to
denying the constitutional role of the Public Accounts Committee in safeguarding
the public revenue. The DRRA analyses the federal revenue receipts on the basis of
tax record of a tax collecting agency. Since the tax collecting agency collects tax
from a tax payer, it is quite rational that the taxpayer records have to be scrutinized
in order to figure out any leakage of revenue. The DRRA can exercise the functions
of review of the audit receipts of a federal tax collecting agency only by examining
the tax record of a taxpayer. In this-case the DRRA pointed out short payment of the
tax not to the taxpayer, but to the tax collecting agency, which is quite lawful. The
Honorable Peshawar High Court's decision with regard to DRRA's role does not
apply to this case because the DRRA did not audit the taxpayer's account directly.
Secondly, every citizen of this country has a duty to point out evasion of public
money. In case a complaint by a private person leads to recovery of a short paid tax,
the complainant has vested right to payment of reward according to the Reward
Rules notified by the Federal Board of Revenue from time to time. In the light of the
foregoing discussion, the A.R.'s argument is determined to without the farce of law.
The case-law cited by him is irrelevant and out of context.
7.2
Analysis of ground No. 4.2 and issue framed in para 6 (b).

The arguments of the appellant and the DR were examined in the light of the provisions of
law as referred to by the AR and the DR. Both the parties have difference of opinion on
meaning of certain expressions like "supply", "taxable supply" value of supply, purpose of
business and furtherance of business. Therefore, it seems expedient to discuss what is meant
by the phrases discussed in this case and how these expressions have been interpreted by
Courts of law.
(1)
'Supply' meaning.---Supply includes sale or other disposition of goods in furtherance

of business carried out for consideration including putting to private business or nonbusiness use of goods acquired, produced or manufactured in the course of business.
[Sheikhoo Sugar Mills Ltd v. Government of Pakistan and others 2001 SCMR 1376 =
2001 PTD 2097]
Supply is not confined to sale transaction but extends to other disposition of goods in
furtherance of business carried out for consideration, including manufacturing in the
course of business. [Messrs Ambar Tabacco Co. (Pvt.) Ltd., Distt. Swabi. v. The
Additional Collector, Sales Tax and 3 others 2003 PTD 800]
In order to constitute" supply", the transaction must be "in furtherance of business"
[Collector Customs, Central Excise and Sales Tax, Karachi (West). v. Novartis
Pakistan Ltd. 2002 PTD 976. In order to constitute a "taxable supply" The transaction
must first qualify to be a "supply". [Collector Customs, Central Excise and Sales Tax,
Karachi (West) v. Novartis Pakistan Ltd., 2002 PTD 976].
(II)
Meaning and scope of the term "supply".---The term "supply" as defined in section
2(33) of the Act. The said term includes sale, lease or other disposition of goods in
furtherance of business carried out for consideration and also includes, inter alia,
putting to private business or non-business use of goods acquired, produced or
manufactured in the course of business. [Messrs Service Industries Limited v.
Federation of Pakistan and 5 others 2002 PTD 2845]
The definition of term supply" has excluded the doctrine of mutuality.[Messrs AlHailal Motors Store and other v The Cot-lector, Sales Tax and Central Excises (East)
Karachi other 2004 PTD 868]
(III)
Supply by vendor is covered by words " other disposition of goods".---The definition

of "supply" in section 2(33) of the Act states that "supply" includes sale, lease or
other disposition of goods in the course of furtherance of business carried out for
consideration. Supply by such vendor is covered by words "other disposition of

goods" and hence is chargeable to sales tax. [Para 13(b) of Sales Tax General Order
No. 3 of 2004 dated 12th June, 2004, reported as PTCL 2004 St. 936].
(IV)
Expression "supply" as defined in sections 2(33) and 2(35) can be construed that full
effect can be given to the both.---The two provisions can be so construed in the light
of rules of interpretation noted above that full effect can be given to both the
provisions. To achieve this object, definition of supply will have to be construed in
such a manner, that it does not offend against expression involves in whole or in
part the supply of goods to another person". This can be done, if, instead of giving a
very wide and extended meaning to the expression" "putting to business or nonbusiness use", it is restricted to disposition of goods to any other person, keeping selfuse or in-house use or the manufacture of finished exempt goods outside of its
purview. Thus, a person, who supplies taxable goods to his wife or to his son even
without consideration would be deemed to have made a taxable supply chargeable
with Sales Tax. A supply of goods to another person for the purpose of charity,
without consideration, would similarly fall within the scope of charging section.
Interpreted in this manner the activity sought to be taxed would remain without
Constitutional limits of taxation on' sale', otherwise it would transgress the said limits
and would be rendered ultra vires of the Constitution. If, however, restricted meaning
is not assigned to the definition of "supply" then either clause (a) of the definition
"supply" will have to be treated as absolutely superfluous or phrase 'supply of goods
to any other person' in the definition of taxable activity will have to be treated as
surplus. Therefore, while interpreting the two terms appearing in the charging section,
choice is to be made between:
(1)
Treating the phrase 'putting to private business or non-business sue' as

surplus, or
(2)
Treating the phrase 'involve in whole or part, the supply of goods to any other
person` as superfluous, or
(3)
Stretching or restricting the scope of any of the two expression referred to

above in any or both the definitions, so as to reconcile the two apparently
conflicting provision and harmonize them.
While making the choice we should not be oblivious of the principle that no
part or word of the statutes is to be held as surplusage as has been held in
case of East and West Steamship Co. v. Queens land Insurance Co. (PLD)
1963 SC 663. [Messrs Umani Associates Sub Proprietary Firm v. Central
Board of Revenue), and another 2011 RTD 2982].
(V)
Meaning of "business". ---The term "business" has not been defined in the Act, 1990
and the settled meaning of the said. expression as found in the aforesaid case-law as
also various dictionaries as relied upon in the case of CIT_v. Habib Insurance (PLD
1969 Kar. 278) confirms that in order to be construed as "business", the activity must
be recurring, for profit motive and must be in the nature of trade, commerce or
manufacture. [Collector Custom, Central Excise and Sales Tax, Karachi (West). v.
Novartis Pakistan Ltd., 2002 PTD 976]
"Business.---Employment, occupation, profession, or commercial activity engaged in
for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood.
Union league Club v. Johnson, 18 Cal. -2d 275, 108 P. 2d 487, 490 Enterprise in
which person engaged shows willingness to invest time and capital on future outcome
Doggett v. Burnet, 62 App. D.C 103, 65, F. 2d 191, 194. That which habitually
business or occupies or engages the time, attention, labor, and effort of persons as a
principal serious concern or interest or for livelihood or profit.
(VI)
Interestingly, both the parties to this appeal have heavily relied on Para 13(b) of Sales
Tax General Order No.3 of 2004 dated 12-6-2001.'Therefore, in order to understand
the quintessence of this General Order, it is imperative to reproduce the same
verbatim.
"The issue has been examined in the Central Board of Revenue and it is ruled that the
value of supply of electricity by IPPs is the amount received on account of Energy
Purchase Price only. Therefore, any amount in excess of EPP received on account of
Capacity Purchase Price Premium, Excess Bonus, Supplemental Charges etc. is not to
be included in the value of supply as defined in clause (46) Or section 2 of the Sale
Tax Act, 1990. However, the assessment of sales tax is to be done in accordance
with the provision of sections 7, 8 and all other relevant provisions of the Act, rules
and notification. The IPPs will be entitled to claim full input tax adjustment against
the sales tax paid on purchase of furnace oil and other tax-paid purchase for making
supply of electricity subject to the provisions of section 8 and the notification issued
thereunder."
(VII)
In light of the discussion of the aforesaid Sales Tax General Order by the appellant
and the respondent it is uncontroversial that the appellant has at no stage of its supply
of energy, levied or paid amount of sales tax in respect of the capacity purchase price,
received from WAPDA for the reason that the energy price premium, excess bonus
and supplemental charges were outside the ambit of the definition of "value of
supply" under section 2(46) of the Sales Tax Act, 1990. In other words, any receipt
relating to above mentioned heads (capacity purchase price, energy price premium,
excess bonus and supplemental charges) are to be excluded from the sales or receipts
or turnover ( i-e, supply) being as exempt or non-taxable for the purpose of sale tax.
However, the appellant, while taking tie position that the capacity purchase price was
non-taxable, seems to ignore an important qualification laid down in the said STGO,
which stated that i.e. the assessment of sales tax is to be done in accordance with the
provision of sections 7, 8 and all other relevant provisions of the Act, rules and
notifications.
(VIII) Having discussed the concept of supply, value of supply, taxable supply and other
expressions now we turn to the analysis of sections 7 and 8 of the Sales Tax Act, as
the outcome of the controversy largely depends on understanding of their true
meaning and in the light of the statutory text and judicial interpretations. Therefore, it
appears necessary to reproduce the relevant portions of these two Sections.
Section 7 determination of tax liability:
(1)
[Subject to the provision of section 8(b), for] the purpose of determining his
tax liability in respect of taxable supplies made during a tax period, a
registered person shall [subject to provision of section 73,1 be entitled to
deduct input tax [paid or payable] [during the tax period] for the purpose of
taxable supplies made, or to be made, by him] from the output tax [***] that
is due from him in respect of that tax period and to make such other
adjustments as are specified in section 9 [;] {Provided that where a registered
person did not deduct input tax within relevant period, he may claim such tax
in the return for any of the six succeeding tax periods.]
(2)
A registered person shall not be entitled to deduct input tax from output tax
unless.
(i)
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;
Section 8 Tax credit not allowed.---(l) Notwithstanding anything contained in

this Act, a registered person shall not be entitled to reclaim or deduct input
tax paid - [(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;]
The reading of sections 7(1 and 2) and section 8(a) clearly shows that no
input adjustment is allowable in respect of a supply which is zero rated non
taxable or the one for which no sales tax has been paid. In order to further
explain the import these sections, we would like to report the judicial analysis
of sections 7(1 and 2) and 8(1) (a) of the Sales Tax Act, 1990 by the
honourable Supreme Judiciary because both the parties i.e. appellant as well
as the respondent press their respective positions on the strength of these
sections.
(IX)
Nature of subsection (2) of section 7

The provision contained in sub-section (2) of section 7 is mandatory in nature it is an
enabling provision which prescribes the way in which the claim for
deduction/adjustment/refund of the input tax is to be preferred. Subsection (2) of
section 7 prescribes a particular manner of claiming deduction/adjustment/ .refund
and on plain reading of the provision, it is abundantly clear that the non-compliance
disentitles a registered person from deducting input tax from output tax. (Collector,
Sales Tax and Central Excise (West), Karachi v. Messrs Al-Hadi Industries (Pvt.)
Ltd. 2002 PTD 2457)
Section 7 Provide facility to a registered person to adjust input tax from output tax for
avoidance from double taxation.-A registered person is not burdened with liability of
double taxation as section 7 provide facility to a registered person to adjust input tax
from output tax. But if no input tax is paid on intermediary produce without any
adjustment the tax will be paid in terms of section 3 of the Act on its value. [Sheikhoo
Sugar Mills Ltd. v. Government of Pakistan and others (PTCL 2001 CL 331) (SC
Pak)]
Admissibility of input tax:--Admissibility of input tax has to be decided keeping in
view all the relevant provisions i.e. sections 7, 8, 10 and S.R.O. No. 698(I)/96, dated
22-8-1996. [Messrs Peoples Concerns (Pvt.) Ltd., Gadoon Amazai, Industries Estate,
Sawabi v. Assistant Collector, Sales Tax Peshawar. (PTCL 2003 CL.A28) (CESTAT,
IslamabadA.
(X)
Sections 7 and 8 are not the charging sections and these pertains to the domain of
payability.---In the scheme of Sales Tax Act, 1990, the provision of sections 7 and 8
are not the charging sections. Both the sections pertains to the domain of pay ability.
Section 7 enunciate the principle for determining the tax liability for particular tax
period of a registered person in respect of taxable supplies and it is provided that such
registered person shall be entitled to deduct input tax paid during the tax period for
purpose of taxable supplies made or to be made by him from the output tax that is
'due- from him in respect of a particular tax period.
It is rightly pointed out in the order of the Customs Authorities that the provision of
sections land 8 of the Act are not charging provisions and that these are machinery
provisions to crystallize the liability to pay the tax as contemplated in subsection (3)
of section 3 of the Act. [M/s Mayfair Spinning Mills Ltd. Lahore v. Customs Excise
and Sales Tax Appellate Tribunal, Lahore and 2 others (PTCL 2002 CL 115) H.C.
Lah.)]
Scope, nature and object of sections 7 and 8.---Section 7 of the Sales Tax Act, which
is a beneficiary section, entitles a registered person to deduct input tax from output
tax, however, section 8 provides certain eventualities and the power of the federal
government through a notification in the official gazette specify the goods under
which the input tax is not available and in this respect the federal government while
exercising power under the aforesaid section has issued notification prescribing the
goods on which the adjustment of input tax was disallowed against the procurement
of such goods which are not direct constituent/ingredients of the finished goods or
which have multiple usage as well and also in line with the provisions of Section 8
that the goods were used not for the purpose of manufacture or production of taxable
goods or taxable supplies. [Collector of Customs, Sales Tax and Central Excise and
others PLD 2007 SCMR 517 = 2007 PTD 1902]
(XI)
Interpretation of the word "Purpose" use in sections 7 and 8 .---A perusal of section 7
of the Sales Tax Act, shows that a registered person shall be entitled to deduct input
tax paid for the purpose of taxable supplies made, or to be made, by him from the
output tax that is due from him in respect of that tax period. The golden principle of
interpretation of statues is that, until and unless any contrary intention can be inferred
expressly or impliedly the words used in a statute are to be given their plain meaning
in the ordinary course. The word used by the legislation, "a person shall be entitled to
deduct input tax paid for the purpose of taxable supplies made, or to be made by him
front the output tax" should be taken in their ordinary pain meaning. In the Chambers
20th Century Dictionary, 1983 Edition, the word "purpose" has been given meaning
as follows:"Idea or aim kept before the mind as the end of effort: power of seeking the end
desire; act or fact of purposing; an end desired; as definite intention, purport."
If the word purpose is considered in ordinary plain meaning, it would appear that theintention of legislature, apparent from the language in that if any input tax is paid
with the intention that the goods on which such input tax is paid shall be used in the
end products or taxable supplies made or to be made, then the registered person shall
be entitled to deduct the same from the output tax. It is nowhere provided that
deduction of input tax on such goods only shall be allowed which re the direct
constituent and integral part of taxable goods produced, supplied. Now, we came to
the provision contained in section 8 of the Sales Tax Act, which starts with the non
obstante clause, meaning thereby, that even if registered person is entitled for
deduction of input tax, he shall loose entitlement if the goods on which the input tax
has been paid, are excluded under the substantive provisions of section 8 or under the
notification issued by the Federal Government, in conformity with the provisions in
section 8 of the Sales Tax Act. In other words, the effect of reading the sections 7 and
8 of the Sales Tax Act, together is that a registered person shall be entitled to deduct
input tax paid for the purpose of taxable supplies made or to be made by him from the
output tax that is due from him in respect of or that tax period but subject to the
provision contained in section 8 because of overriding provisions contained therein.
On reading of the sections 7 and 8, the following position emerges:
(1)
A registered person shall be entitled to deduct input tax paid for the purpose
of taxable supplies made or to be made by him from the output tax that is due
from him in respect of that tax period.
(2)
The registered person shallot be entitled to re-claim or deduct input tax paid
on the goods used or to be used for any purpose other than for taxable
supplies made or to be made by him.
(3)
A registered person otherwise entitled to re-claim or deduct input tax paid for
the purpose of taxable supplies made or to be made by him from the output
tax, shall not be entitled in respect of "any goods, which the Federal
Government may by a notification in the official Gazette specify.
(XII)
In the realm of tax laws certain exemptions, concessions or exceptions are provided
in the statutes either in respect of assesses, class of assesses, goods or class of goods.
From reading of the provisions contained in sections 7 and 8 of the Sales Tax Act, we
find that , under section 7 a formula has been described by the legislature for
determination of the tax liability under which as sales of goods have been specified.
This clause comprises the goods on which input tax has been paid by a registered
person which is acquired for the purpose of being used for producing the taxable
supplies. In corollary to the above provisions it is provided in section 8(1)(a) that a
registered person shall not be entitled to the claim or deduct input tax paid on the
goods used or to be used for any purpose other than for taxable supplies made or to be
made by him Thus, this provision is in fact in the nature of further clarification and
for removing the ambiguity. It is clarificatory to the provisions contained in section
7(1). It does not create any new class of goods disentitling a registered person from
claiming or deducting input tax. The provision contained in section 8(1) (b) is in the
nature of exception to the general rule contained in section 7 read with section 8(1)
(b) and section 10. Under this provision the Federal Government has been delegated
the power to specify the goods which otherwise qualify for input tax, thereby
excluding them from the admissibility of input tax. However, it does not empower the
Federal Government to create a new class of goods in general terms there by
excluding the whole class of such goods from the claim of input tax. [Ghandhara
Nissan Diesel Ltd. v. Collector, Large Tax Payers Unit and 2 others 2006 PTD
2006.Also see 2008 PTD (Trib.) 261].
(XIII) From the forgoing ease-law, it follows that section a (l) of the Sales Tax Act, 1990,
specifically postulates the qualification for re-claiming or deduction of input tax paid.
Section 8(2) hypothesizes that if a person deals in taxable and non-taxable supplies at
the same time, he can reclaim only such portion of the input tax is attributed to
taxable supplies in such manner as specified by the Board. In order to specify the
manner of apportionment of input tax for non taxable supplies, the Board has issued
Notification No. S.R.O. 555 (I)/2006 dated 5-6-2006. Para No. 25 of Chapter-IV of
the said notification deals with the Determination of input tax which read as under:-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 credit tax
On taxable supplies
= Value of taxable supplies x Residual

Input tax (Value of taxable + exempt)
(4)
Monthly adjustment of input tax claimed by a registered person under this

chapter shall be treated as provisional adjustment and at the end of each
financial year, the registered person shall make final adjustment on the basis
of taxable and exempt supplies made during the course of that year.
(5)
Any input tax adjustment claimed wrongfully on account of incorrect
application of formula set out in sub-rule (3) shall be punishable under the
respective provisions of law irrespective of the fact that that claim was
provisional.
(XIV) Finding on Para 6(b)
In view of the explanation of supply, given in Para 8(1) ante and the detailed analysis
of the case of the appellant supra, the bottom line is that the expression Supply
includes capacity purchase price as it was received by the appellant in furtherance or
in connection with her business. In view of the A.R.'s assertions, it is uncontroversial
that the capacity purchase price, energy price premium, excess bonus and
supplemental charges etc., are part of total sales but are specifically excluded for the
purpose of Valuation of supply under section 2(46) of the Sales Tax Act 1990. If the
supply is either non taxable, or exempt or excluded from the value of supply under
section 46 (2) of the Sales Tax Act, 1990, no input adjustment is respect there of is
admissible under sections 7 and 8 of the Sales Tax Act. section 8(1) (a)specifically
provides that no in put adjustment or tax credit can be claimed in respect of any
goods or services used or to be used for any purpose other than for taxable supplies
made or to be made. Taxable supply is a sine quo non for claim of input adjustment
which is not absolute but contingent upon a supply being taxable .There is thus-no
doubt that CCP portion of the consideration received by the appellant is not a taxable
supply and therefore, a claim of tax credit in respect thereof is prima facie
inadmissible.
Be that as it may, this position clearly necessitates apportionment of the total input tax
for total supplies into two distinct categories, i.e., taxable and non-taxable supplies. In
the case at hand energy purchase price is taxable and capacity purchase price, energy
price premium, excess purchase supplemental charges etc., is non-taxable or not
taxable. Given the statutory position and the reported case-law the appellant cannot
claim input adjustment without fulfilling the criteria laid down in sections 7 and 8 of
Sales Tax Act, 1990 for the purpose. Therefore, we conclude that the appellant is liable
to apportionment of the total input tax claim between the taxable (receipt or turnover on
account of energy purchase price) and non-taxable (receipt or turnover on account of
capacity purchase price, energy price and promium, excess bonus and supplemental
changes etc.,) Given the legal position discussed above we can not subscribe to the view
point of the learned AR but fully concur with the respondent's contention.
7.3.
Analysis and finding with respect to ground No.3.3 and issue framed in para 6 (c)
The issue involved is whether the original adjudicating authority and the first appellant
forums Commissioner Appeals were justified in concluding the short payment of sales tax or
in-admissibility of input adjustment of Rs.146, 480,724 claimed by the tax payer. During
hearing of the case the learned A.R presented Sales Tax Returns of the appellant and claimed
that the tax demanded of Rs.146, 480,724 created by the respondents is without the authority
of law. We have perused the Sales Tax Returns submitted by the A.R. which reveal the
following position:TABLE -I
Month
Value of Taxable
supplies. (Energy)
Rev)
July-2006
252,508,743
Aug-2006
258,159,682
Sep-2006
239,406,403
Out put
Input
37,876,312
30,548,490
5,826,362
31,337,00
7,386,951
38,723,952
35,910,961
18,977,699
Credited notes
adjusted
Shies Tax
Payable
16.933,262
Oct-2006
Nov-2006
270,116,528
169,635 287
40,517,479
25,445 293
51,408,613
10,891,134
31,484,778
6,039,485
Dec-2006
247,467,407
37,120,111
20,418,591
229,099
Jan-2007
Feb-2007
Mar-2007
242,622,758
178,133,505
246,308,024
36,393,414
26,720,026
36,946,204
Apr-2007
251,197,930
37,679,690. 27,024,609
10,655,081
May-2007
255,866,441
38,379,966
29,948,181
8,431,785
June-2007
242,449,199
6,367,380
33,169,187
398,193
Total
2,853,871,907
428,080,728 351,170,150
28,642,648
28,279,469
19,930,884
16,701,520
7,521,667
1,559,443
15.455,877
67,887,511
92,110,698
TABLE -I
Month
Sales Tax
Payable
Sales Tax Paid
Sales Tax Carry

forward/Credit
Notes
Remarks
July-2006
Aug-2006
Sept-2006
5,826,362
7,38 6,951
16,933,262
Oct-2006
Nil
Nil
10,891,134
Nov-2006
Nil
Nil
6,039,485
Adjusted in
12/2006
Adjusted in
12/2006
Dec-2006
Jan-2007
16,701.667
7,521,667
Nil
Nil
229,099
Feb-2007
Nil
Nil
1,559,443
Mar-2007
5,455,877
15,455,877
Apr-2007
10,655,081
10,655,081
May-2007
8,431,875
8,431,875
June-2007
8,431,875
8431875
Total
92,110,698
67,887,193
Adjusted
3/2007
in
18,719,161
The sales tax return does not report the value of the capacity purchase price (CPP) because, it
is the contention of the appellant that CPP is not a supply and sales Tax law does not obligate
them to report this sum in their sales tax return.
In the course of another hearing the A.R. presented the Annual Audit Report of the appellant
for the year 2006-2007. The examination of Annual Audit Report of the Tenant presents the following
position, with regard to the value of taxable supply in this case, i.e., the energy purchase price. The
annual audit report, however, does mention the capacity purchase price. For the moment, we restrict our
analysis only to the undisputed energy purchase price.
Description
Amount
1.
Capacity Revenue.
1,983,978,372
2.
Energy Revenue.
3,298,779,597
Taxable Supply
3.
Threshold bonus
13,799,084
Exempt Supply.
4.
Interest of declared payment
29,890,499
Exempt Supply
Total:
in Rs.
Sales Tax payable @

15%
Exempt supply.
S.NO.
5,326,447,532
The comparison of the energy purchase price (EPP) reported in the appellant's sales tax
returns and the annual audit report shows the following discrepancy with regard to the value of the
taxable supplies i.e. energy purchase price (E.P.P.). Here _we - leave aside the issue of capacity
purchase price (CPP) which, according to appellant, does not qualify as supply for the purpose of Sales
Tax.
Description
Amount
Energy purchase
Price (Value of
298,779,
Taxable supplies) as per Annual Audit
Energy Purchase Price (Value of Taxable- 2,853,871,907
`supplies) as per Sales Tax Returns.
Difference:
444,907,690
Sales Tax @ 15%

,816,939
428,080,786
66,736,153
Juxtaposition of the appellant's sales tax x returns and the annual audit report reveals that the appellant
appears to have understated the value of taxable supplies (Energy Purchase Price) to the tune of
Rs.444,907,690 involving Sales Tax amounting to Rs.66,736,153 in addition to Rs.146,480,724 as
demanded in the Show-Cause Notice. We are not going to enhance demand but it is for the
department to seek elaboration in this context.
7.4
Whether the imposition of additional tax and penalty
is justifiable
The Order in original as upheld by the order in Appeal has further imposed additional tax and
penalty on the appellant responding to the appellant's ground No.3.5, we have carefully
examined whether additional tax and penalty is justified in this case. Generally, the default
surcharges and penalty is imposed as punishment or economic sanction against a deliberate
attempt to evade. In this case, the appellant simply took advantage of a rule that enabled it to
avoid tax. In Other words, the tax avoidance in E this case is "rule assisted" as discussed in
para 8 infra. There being no means area, or a willful on part of default on art of the appellant,
the imposition of default of default surcharge and penalty is set aside.
7.5
Additional grounds put forth by the A.R. of the appellant during the course of hearing
(I)
The Appellant put forward some more grounds of appeal, each discussed infra.
During hearing of the case the appellant mentioned that on. a Complaint No.
111/SD/ST(9)446/2010 tiled by the appellant against the Order-in-Original passed by
the Additional Collector, which is also the subject matter of this appeal the
honourable Federal Tax Ombudsman gave a finding of maladministration. The
appellant could not produce any such finding of the learned Tax Ombudsmen.
However, the A.R did produce a copy of the F.B.R.'s report submitted to the Tax
Ombudsmen in response to the complaint. In this regard it is sufficient to say that the
honourable Federal Tax Ombudsman's jurisdiction in a case which is appealed in ally
appellate forum is barred by Federal Tax Ombudsman Ordinance, which provides as
under:
(a)
The Federal TA-Ombudsman shall not have jurisdiction to investigate or

inquire into matters which:
(b)
relate to assessment of income or wealth, determination of liability of tax or

duty, classification or valuation of goods, 4nterpretation of aw, rules and r
regulations relating to such assessment, determination, classification or
valuation in respect of which legal remedies of appeal, review or revision are
available under the relevant legislation.
We understand that in tandem with filing, the complaint with the F.T.O, the
appellant was legally obligated to testify that no appeal was pending before
any appellate authority. It seems that the appellant could not have tiled the
instant complaint with F.T.O. without having suppressed the fact of filing
appeal before the CIR (Appeals). This shows that the appellant neither
approached the F.T.O. nor the ATI with clean handy
(II)
Analysis and finding on ground 4.7.

The appellant has further contented no other IPP has been denied input adjustment on
capacity payment part of the consideration received from WAPDA or KESC. my the
appellate--has been targeted and a discriminatory treatment has been meted out with
him which is violative of the Article 25 of the Constitution of Pakistan.
The case before his tribunal relates only to the appellant. As far as rule of consistency
is concerned, it is hard to allow remission of lawful tax liability just because the
department did not take action to recover lawful tax from other IPPs. In our view the
rule of consistency would require that all other IPP should also be given the same
treatment as has been given to this appellant. The Sales Tax Act sufficiently enables
the department to invoke demand from others, too on case by case basis but subject to
due process of law. The F.B.R. may like to issue necessary instructions to all of its
field formation to conduct audit of all such IPPs within their area of jurisdiction in
order to quantify the illegal and inadmissible input adjustments taken by such IPPs on
the strength of illegal rules framed by F.B.R. against the statutory provisions
contained in section 8(1)(a) of the Sales Tax Act, 1990, and recover the amount after
fulfilling all codal formalities under the law in case it is figured out that there has
been loss to the public money.
8.
Analysis and finding on 6(d).
This part of the analysis attempts at determining whether FBR could lawfully amend a
statutory provision in section 2(46) of the Sales Tax Act and sections 7 and 8 ibid through CGO
3/2004 or Sales Tax Rules, 2006. All the confusion has arisen from the Federal Board of Revenue,
letter C.No.3 (4) ST-L&P/07, dated 2-12-2008 and sub-rule 3 of rule 38, Chapter VI of erstwhile
notification SRT 560(1)2006 dated 5-6-2006 providing that the value of supply in terms of section
2(46) of the Sales Tax Act, 1990, in case of IPP's HUBCO OR KAPCO shall not include any amount
received by an IPP on account of Capacity Purchase Price (CPP), and that Energy Price Premium,
Excess Bonus Supplemental Charges, etc. shall not be deemed as component of the value of Supply.
Looking at the contents of the aforesaid rules and the General order, we find That through this device
a statutory provision laid down in Section 2 (46) of the Sales Tax Act, 1990 was rendered ineffective
to the extent of IPPs. Unfortunately, this is the case in which such a colossal legislative prize was
conferred on an influential business group. There are numerous examples of unjust enrichment of
private enterprise through the instrument of administrative rule making. This practice throws up
several questions with regard to validity of a rule making of this kind.
The fundamental question is whether FBR is the unelected wielder of legislative power and
whether a rule framed by F.B.R. can disable a statutory provision. The body of the law called the
administrative law developed by our constitutional courts, jurists and foreign courts provides great
insight in to the norms governing the legislative and rule makings process. Before analyzing this, it
seems important to discuss the rationale and limits of the rule making power conferred on an
administrative agency like F.B.R.
The administrative agencies perform a bewildering variety of regulatory and rule making
functions ranging from public services, law enforcement, implementation of the state policy,
economic management, resource development, businesses and personal behavior of individuals. The
purpose of delegation of rule making authority to administrative agencies is to serve some kind of
"public interest" or promote some "public value." The raison d'etre of delegation of rule making
authority to administrative agencies is countervailing the tendencies of legislative prizes for pressure
groups, interest groups, and powerful individuals who compete for privileged treatment.
(Administrative Arrangements and the political control of Agencies, 75 Va L. Rev .431 (1989);
The rule making is considered as a device for filtering the reasonable from the unreasonable,
the persuasive from the unpersuasive, the right from the wrong and the good from the bad so that over
all social welfares will be advanced. (Mathew D. McCubbins, Roger G.Noll and Barry R. Weingast,
structure and process, politics and policy The typical public interest component of delegation stresses
such values as efficiency and effectiveness. A specialized agency the argument runs can better
provide "continuous expert supervision, capable of ad hoc development to parallel the development of
the subject matter involved." Walter Gellhorn, Federal Administrative proceedings (1941). The
cardinal feature of agency delegation is its expertise and amenability to public good. Apolitical
administrative agency is expected to respond to public interest more than the legislature itself whose
constituents may have incentive for benefiting private interest. (Peter H. Aranson, Ernest L. Gellhorn
and Glen O. Robinson, A Theory of legislative Delegation, 68 Cornell L.J. 1 (1982)
There is a large number of cases in which the honourable Supreme Court has adopted the
public interest or general welfare test for judicial review of ordinances; agency rules, or administrative
rulings or orders . Recent judgments based on public interest doctrine, to name a few, include the
NRO, Sharabeel, Mcdonalds, NICL, LNG and several other cases. The subject matter of thousands of
constitutional writs filed with the High Court of Pakistan is usually an lawful rule, or unfair agency
action. Whilst. most case-law developed in Pakistan follows the public interest doctrine, the foreign
courts of law apply a variety of constitutional law tests .Most frequent test is notice and public
comment test. Do our administrative agencies ever bother to make rule making transparent by
following the notice and public comment criterion for rule making,
Hampton and Co .v. United States, 276 U.S.394 (1028), for the first time emphasized that an
acceptable delegation from the legislature of avowedly discretionary powers could survive
constitutional scrutiny if it were coupled with "an intelligible principle" to guide the delegate's
discretion. Id. at 409 That case upheld a statute authorizing the President to revise certain tariff duties
whenever he determined revision to be necessary to "equalize the costs of production in the United
State and the principle competing country." How intelligible is this principle? How simple a matter is
it to determine costs of production in different nations or to decide what tariff will, mediated through
international supply and demand, equalize those costs? Hampton upholds this delegation of broad
power largely because the determinations delegated seemed so as to defy legislators' competence. The
statute deputized an agency the Tariff Commission, named the United States International Trade
Commission -- to advise the President what tariff would have the desired effect. In Schechter Poultry
Carp v. United States 295 v. 495 (1935), the Court found that a broad grant of power to the executive
branch would not contravene Art. I 1, as a grant of "legislative" powers if "governmental necessity"
test was satisfied The government necessity test embodies public purpose or public welfare.
While the "intelligible principle" and "governmental necessity" considerations often have
supported delegations, the Court has not always been receptive to these arguments. During the New
Deal the Court invoked the non-delegation doctrine on three occasions to strike down congressional
delegations. The casualty in two 1935 cases was the National Industrial Recovery Act (NIRA), a
centerpiece of President Roosevelt's New Deal legislation enacted in the depths of the Great
Depression. The two cases represent the climax in an epoch struggle
between a conservative
judiciary and the political branches. Cf. Louis L. Jaffe, Judicial Control of Administrative Action 63
(1965); James 0. Freedman, Grisic, and Legitimacy 15-20 (1978); John H. Ely, Democracy and
Distrust 132 - 133 (1980)
In Schechter Poultry Gorp. v.-United-States, 295 U.S 495 (1935), the Court held that no code
could be "designed to promote monopolies or to benefit specific industry. The Court faulted the
executive rule making process for creating a private good "utterly inconsistent with the constitutional
prerogatives.... of Congress". In Zemel v. Musk, `81 U.S -l (1965) Justice-Cardozo laid down a
fidelity to the statutory purpose test for judicial review of rule making. It was held that the essentials
of the legislative function are the determination of the legislative policy and its formulation and
promulgation as a defined and binding rule of conduct which conform to standards and will tend to
further the policy which congress has established. These essentials are - preserved when Congress has
specified the basic conditions of fact upon whose existence or occurrence, ascertained from relevant
data by a designated administrative agency, it directs that its statutory command shall be effective, if
the determination of facts and the inferences are be based on statutory standards and declaration of
policy. The formulation of subsidiary administrative policy shall be within the prescribed statutory
framework. In Arizona v. California, 373 U.S. 546, 626 (1963) it was held that the doctrines of
intelligibility and fidelity ensure that courts char the exercise of delegated legislative discretion will
be able to test that exercise against ascertainable standards: See Arizona v. California, supra, at
626
(Harlan, J. Dissenting in part). This principle was also emphasized in wherein "permissible
test" was formulated. The permissible test determines the validity of a rule on the touchstone of the
logical inference drawn from the legislative intent of a statute. American Power & Light Co. v. SEC
The principal Vice of delegations, according to Professors Peter Aranson, Ernest Gllhorn, and
glen Robinson, is their use to create "private goods" -- that is, distribution of governmental benefits to
special interest groups. Delegations facilitate the legislative creation of private goods, they claim, in
two ways. First, by economizing on scarce legislative time, broad delegations enable legislatures to
increase their output. Second, delegation of broad power to an agency likely to be biased in favor of
certain special interest conceals from the electorate the use of public power for private gain. For this
reason these scholar argue that vigorous judicial enforcement of the non-delegation doctrine will
promote the public interest.
The foregoing discussion amply answers the question raised by us in the beginning of this
para. The scope of the discussion is that FBR or any other executive agency is not an unelected
wielder of legislative power. An agency exercising a delegated legislative power cannot change the
purpose of a statute promulgated by the delegator, i.e. the legislature. In this case the effect of sections
2 (46), 7 and 8 of the Sales Tax Act, 1990 was neutralized in favour of IPPs through Sales Tax Rules
2006 and STGO 3/2004. It is our considered opinion that F.B.R. could not lawfully defy a statutory
provision. The exclusion of capacity purchase price from the purview of value of supply given in
section 2(46) read with sections 7 and 8 of the Sales Tax Act, 1990, through the device of ST_GO
3/2004 and the Rule 13 of Sales Tax Rules, 2006, cannot survive the test of judicial scrutiny if
challenged before superior Courts of Pakistan. We understand that we are not supposed to arrogate
ourselves to the power of judicial review of rules framed by F.B.R., however, we are not expected to
become party to something that is not lawful.
Now we turn to discussing why the parliamentary determination of tax liability should not be
interfered with by the executive agencies. Presentation of budget estimates every June is an annual
ritual. But, what does it mean to the people of Pakistan? Year after year they have seen a budget being
presented and then soon thereafter forgotten. The revenue as well as expenditure estimates are always
revised. The governments change budget allocations. The development allocations are cut down and
other non-development allocations increased. For common people it is an exercise in futility and
budget acts as an instrument to increase their miseries. For others it may present an opportunity to do
some more rent seeking. Even some powerful national institutions get involved in the rent seeking
exercise. The big businesses are given overt or covert general or business specific exemptions shifting
the entire burden of taxes to poor people.
Why do we need to frame a budget if through out the year budgetary allocations are to be
redefined through S.R.Os. or rules? At least in theory, budget is vitally important because the people's
representatives determine the likely revenues and expenditures and give their approval for a directed
approach to achieve national objectives: What happens soon afterward is another story. National
objective are forgotten, directions are lost and allocations are changed. Every year, the promises made
to the nation prove to be hollow words without any meanings. By making out budget estimates and
getting their approvals from peoples representatives, the government basically decides two things.
Firstly, from whose pocket money is to be taken cut and secondly in whose pocket money is to be put
into. In this way, the money is to be re-distributed among the people. Taxes are to be taken from the
higher income groups and these are to be spent on lower income groups. But, does this actually
happen? We are sure it never does.
We can start by taking a fresh look at the taxation system. Heavy reliance on indirect taxes is
even to the extent of collecting income tax (a direct tax) largely in indirect mode. When government
is collecting taxes in indirect mode, these take the form of consumption -tax. The lower income tax
groups fall a victim to it by paying a larger percentage of their incomes as taxes as compared to the
higher. Income groups. On the other hand, very little is shared with lower income groups in
expenditure as allocation to health, education and other services in always little and that too falls
victim to economy cuts. If a subsidy is announced to appease the hard hit people, it is usually an
indirect subsidy and mostly benefits the higher income groups. Those few who cannot escape the
direct tax are enabled to escape their tax liability through exaggerated reporting of expenses, losses or
depreciations.
The above has been happening for more than six decades and has resulted into widening of
the income gap. Probably this is getting dangerous as well. This needs to change now. There is no
doubt that Pakistan's tax to GDP ratio is low and need to be increased to create additional fiscal space
for allocation to health, education and other important sectors. The sad state is that the higher income
groups are not prepared to share their tax responsibility. Whenever, the government makes a move in
this direction, the higher income groups defeat the effort through exemption notifications. In fact they
do not understand that a relatively prosperous lower income groups would in fact benefit their
businesses in the shape of increased consumption taxes levels and create a win situation for all. Their
desire to not pay counterproductive for themselves as well The desire to avoid taxes even defies pare
to efficiency.. The case before us relates to a relatively small IPP whose share in the windfall profit
accrued by virtue of the rules discussed supra is tip of an iceberg, when compared with benefit reaped
by other IPPs. Such a practice results in to substantial erosion of the public money which explains
why our national economy is in tailspin.
9.
In view of the foregoing, the appeal before us is found to be without merit, hence dismissed.
The adjudication of this case by the original and the first appellate authority is sustained. However,
the additional tax and penalty imposed on the appellant is remitted for reasons stated in para. =8
supra. We don't find that appellant wilfully defaulted the payment of sales tax. The rule discussed in
the para. 8 enabled the appellant to claim an otherwise inadmissible input adjustment, hence the
appellant does not seem to at fault whilst claiming the input adjustment.
10.
The appeal is disposed of accordingly. It consists of 18 pages each singed and bearing the
Tribunal's seal
Appeal dismissed

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INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN

Messrs Fauji Kabirwala Power Company

Sales Tax Act (VII of 1990)

Sales Tax Act (VII of 1990)

Sales Tax Act (VII of 1990)

S.8(1) & (2)---S.R.O. 555(1)/2006 dated 5-6-2006---Tax credit not allowed---Determination

Sales Tax Act (VII of 1990)

Ss.33 & 34---Offences and penalties---Default surcharge---Scope---Generally, default

Sales Tax Act (VII of 1990)

Sales Tax Act (VII of 1990)--

Whether a contravention report, show-cause notice and subsequent adjudicatory

Most fundamental issue of determining whether F.B.R. could lawfully amend

Analysis and findings

There will be no "stamping" of records of individual registered persons by the audit

Analysis of ground No. 4.2 and issue framed in para 6 (b).

'Supply' meaning.---Supply includes sale or other disposition of goods in furtherance

Supply by vendor is covered by words " other disposition of goods".---The definition

consideration. Supply by such vendor is covered by words "other disposition of

Treating the phrase 'putting to private business or non-business sue' as

Stretching or restricting the scope of any of the two expression referred to

In case of a claim for input tax in respect of a taxable supply made

Section 8 Tax credit not allowed.---(l) Notwithstanding anything contained in

Nature of subsection (2) of section 7

= Value of taxable supplies x Residual

Monthly adjustment of input tax claimed by a registered person under this

Sales Tax Paid

Sales Tax Carry

Interest of declared payment

Sales Tax payable @

Sales Tax @ 15%

Whether the imposition of additional tax and penalty

The Federal TA-Ombudsman shall not have jurisdiction to investigate or

relate to assessment of income or wealth, determination of liability of tax or

Analysis and finding on ground 4.7.

Analysis and finding on 6(d).

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