Sindh High Court (SHC) has directed the Large Taxpayer Unit (LTU), Karachi, to explain legal position of past recovery of the Federal Excise Duty (FED) on franchise fee, paid by the franchisee during the last two years without issuance of an adjudication order to the unit.
Sources told Business Recorder on Thursday that the LTU, Karachi, adjusted the amount of the FED against the sales tax refund without passing any order of adjudication. Secondly, it has to be clarified that as per section 3 of the Federal Excise Act, 2005, the FED is to be paid by the service provider, whereas the Rule 43A provided the receiver of the service to pay FED on franchise fee. This was a direct contradiction of Federal Excise Act and Federal Excise Rules.
In the 2008-09 budget, the FBR has amended the Federal Excise Act to remove distortion in the law, which confirmed that there was an anomaly in the law. As the recovery amount is related to the past cases, the previous status of law has been quoted in the case.
Sources said that the anomaly was challenged in writ jurisdiction of the Sindh High Court (SHC) by Hinopak Motors through Syed Naved Andrabi, advocate, Supreme Court, after their payments on account of franchise fee made to Hino Motors, Japan, during July 1, 2006 to June 30, 2008, were arbitrarily charged with the FED.
The advocate informed that the officers of the Federal Excise at the LTU, Karachi, without passing any order of adjudication, recovered the amount of FED by adjusting the same against sales tax refund.
It was informed that the arbitrary action of the officers of the FED at LTU, Karachi, was challenged before the Sindh High Court under Constitutional Jurisdiction on the grounds that the FED, in case of services, were to be paid by the service provider, whereas the same was being recovered from the recipient of the services. "Similarly, no recovery of a tax can be made unless an adjudication order has been passed and that too after giving an opportunity of being heard."
The division bench of Sindh High Court, comprising Justice Allah Sain Deno Matelo and Justice Bin Yamin, issued pre-admission notice to the department to explain the position on the grounds raised in the petition.
It is worth mentioning that the FBR had received a number of complaints from the field formations that some taxpayers evade the payment of duty on the pretext that they do not pay franchise fee rather they pay technical fee or royalty. The technical fee payment comes within the purview of franchise services, the excise duty was not paid due to unclear specification in the excise law.
In view of the situation, definition of "franchise services" has been enlarged by including technical fee in it through Finance Act 2008. The definition of franchise has also been shifted from Federal Excise Rules, 2005 to Federal Excise Act, 2005.
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