SYED MUDASSER AMEER, J.---Aggrieved of being wrongly treated as "manufacturers-cum-retailer", that too retrospectively and without any notice or due process, applicant, a bakers and sweets shop, has filed this Sales Tax Reference under section 47 of The Sales Tax Act, 1990 against Order dated 01.09.2016 passed by the learned Appellate Tribunal Inland Revenue, Islamabad Bench, Islamabad.

1. Through contravention report No. C.No. 41/I&I/IR/Mir "A" Backers/2015 dated 04.09.2014, submitted by Audit Officer of Directorate General of Intelligence and Investigation, Inland Revenue, [hereinafter referred to as DGI&I(IR)], Peshawar, it was alleged that M/s. Mir "A" Bakers and Sweets, Abbottabad (bearing NTN No. 1316872-0), committed violations of the applicable tax laws during the period spanning July 2009 to March 2014. The core allegation pertained to the misrepresentation of their business status, wherein the entity declared itself as a retailer, whereas in fact, it was operating in the capacity of a manufacturer. This misclassification led to the evasion or short-payment of sales tax amounting to Rs.3,306,883/-
2. The aforementioned allegation was formally brought to the attention of the taxpayer through a show-cause notice issued by the department, bearing reference No. C.No. 41/I&I/IR/Mir "A" Bakers/2014/4398 dated 07.11.2014. In response, the applicant submitted relevant sales tax records; however, the concerned Inland Revenue Officer found the explanation and documentation unsatisfactory. Consequently, a tax demand was raised under Section 11(3) of the Sales Tax Act, 1990, amounting to Rs. 3,306,883/-, along with a penalty equivalent to 100% of the tax liability imposed under Section 33(13), and default surcharge levied under Section 34 of the said Act, as detailed in Assessment Order No. 01/2015 dated 05.03.2015. Aggrieved by Assessment Order, the applicant preferred an appeal before the Commissioner Inland Revenue (Appeals), Peshawar. However, the said appeal was dismissed through order dated 17.09.2015. Dissatisfied with the appellate decision, the applicant challenged it before the Appellate Tribunal Inland Revenue, Islamabad, which too upheld the findings of the lower authority and dismissed the appeal vide Order dated 01.09.2016. Consequently, the applicant has now invoked the jurisdiction of this Court by filing the instant Sales Tax Reference.
3. Arguments of learned counsel for applicant as well as learned counsel appearing on behalf of respondents were heard in considerable detail and record perused with their able assistance.
4. Before proceeding further, it is essential to examine the legal framework relevant to the instant case. The tax period in question is July 2009 to June 2014. During this period, the standard rate of sales tax, as prescribed under Section 3 of the Sales Tax Act, 1990, fluctuated between 16% and 17%. However, reduced or concessionary rates were applicable to retailers under Chapter II of the Sales Tax Special Procedure Rules, 2007 (hereinafter referred to as "the Rules, 2007"). Under these Rules, retailers were required to charge sales tax at rates ranging from 0% to 0.75%, depending on their quarterly turnover, and to file quarterly returns instead of the usual monthly returns. This regime, however, underwent a significant change for "manufacturer-cum-retailers" with effect from 01.01.2011, when SRO 01(I)/2011 amended the Rules, 2007. Through this amendment, "manufacturercum-retailers who sell their products through retail outlets" were excluded from the scope of the Rules, 2007. For clarity, the relevant provisions of the Rules, 2007, as they stood at the material time, and the text of SRO 01(I)/2011 are reproduced below:

THE SALES TAX SPECIAL RULES, 2007.
1. Short title, application and commencement---(1) These rules may be called the Sales Tax Special Procedures Rules, 2007.

1. They shall apply to such persons as are specified in the respective Chapter.
2. These shall come into force with effect from the 1st day of July, 2007.

CHAPTER-II
SPECIAL PROCEDURE FOR PAYMENT OF
SALES TAX BY RETAILERS
3. Application -- The provisions of this Chapter shall apply to the registered persons, including jewelers, who make supplies from retail outlets to final consumers and such shall be deemed to be retailers in respect of such supplies for the purposes of this Chapter:
Provided that the provisions of this Chapter shall not be applicable to dealers of motorcycles and specified electric goods who shall pay sales tax as prescribed in Chapter VIII and XIII, respectively.
********
GOVERNMENT OF PAKISTAN
MINISTRY OF FINANCE ECONOMIC AFFAIRS,
STATISTICS AND REVENUE,
(REVENUE DIVISION)
*****
Islamabad, the 1st January, 2011
NOTIFICATION
(SALES TAX)
S.R.O 01 (I)/2011;- In exercise of the powers conferred by section 71 of the Sales Tax Act, 1990, read with clauses (9) and (46) of section 2, sections 3 and 4, subsection (2) of section 6, sections 7 and 7A, Clause (b) of subsection (1) of section 8, clause (a) of subsection (2) of section 13, subsections (2A) and (3) of section 22, sections 23 and 60 thereof, the Federal Government is pleased to direct that in the Sale Tax Special Procedures Rules, 2007 in rule 3, in the proviso after the word "respectively" the following words and comma shall be inserted, namely:-
", and shall also not be applicable to manufacturer-cum-retailers who sell their products through retail outlets."
-------------------------------------------------------------------------------------------[E.
No.3/(14)ST-L&P/2009]
(Akbar Ahmad Khan)
Additional Secretary

1. It is evident from the foregoing provisions that since 2007, Rule 3 of the Rules, 2007 established a distinct category or class of persons, hereinafter referred to as "deemed retailers". This category included registered persons, including jewelers, who made supplies from retail outlets to final consumers. These deemed retailers were, at all times, subject to the regime prescribed under the Rules, 2007. Through SRO 01(I)/2011, only "'manufacturer-cum-retailers' who sell their products through retail outlets" were excluded from the application of the Rules, 2007. However, the said SRO neither prescribes any criteria or mechanism for determining or establishing whether a person falls within the excluded category, nor does it stipulate any timeline or procedural framework for effecting such a change in the case of a person who was previously treated as a deemed retailer.
2. It is observed that the term "manufacturercum-retailer" has neither been defined in the Act, nor in the Rules, 2007, nor in the Sales Tax Rules, 2006 (hereinafter referred to as "the Rules, 2006"). The Act, however, defines the term "retailer" in Section 2(28) as follows:

(28) Retailer means as person supplying goods to general public for the purpose of consumption:
Provided that any person, who combines the business of import and retail or manufacturer or production with retail, shall notify and advertise wholesale prices and retail prices separately, and declare the address of retail outlets, and his total turnover per annum shall be taken into account for the purposes of registration under section 14
8. Similarly, Section 14 of the Act and certain provisions of the Rules, 2006 address the subject of registration. For ease of reference, the text of Section 14 of the Act and the relevant provisions of the Rules, 2006 are reproduced below:
"14. Registration: Under this Act, registration will be required for such persons and be regulated in such manner and subject to rules as the Board may, by notification in the official Gazette, prescribe .
Sales Tax Rules, 2006:
6. Compulsory registration: (1) if a person, who is required to be registered under the Act, does not apply for registration and the Commissioner Inland Revenue or any other officer, as may be authorized by the Board, after such inquiry as deemed appropriate, is satisfied that such person is required to be registered, he shall issue notice to such person in the Form set out in Form STR-6.
(2) In case the Commissioner receives a written reply from the said person within the time specified in notice under sub-rule (1), contesting his liability to be registered, the Commissioner shall grant such person opportunity of personal hearing, if so desired by the person, and shall thereafter pass an order whether or not such person is liable to be registered compulsorily. Copy of the said order shall invariably be provided to that person. Where the Commissioner passes the order for compulsory registration, he shall cause the said person to be registered through computerized system.
Rule. 7. Changes in the particulars of registration:-
(4). The Commissioner may, based on available information or particulars and after making such inquiry as he may deem necessary and after providing reasonable opportunity of being heard to a person, by an order in writing, make modification in registration of the person
Rule:8. Transfer of registration:
(2). On transfer of registration:
(b) .The LTU or RTO, in whose jurisdiction the registration is so transferred shall exercise the jurisdiction over such person in the manner as if it always had such jurisdiction.
9. Since the entire exercise has been conducted, the liability in question assessed and contravention report has been made by the Audit Officer of DG I&I (IR), Peshawar, it is also relevant to discuss the law governing their powers during the relevant period. Under the Act, the Audit Officers of the DG I&I (IR), Peshawar do not have independent statutory powers to assess, adjudicate, or recover sales tax liabilities. Their powers were limited to detection, investigation, and reporting of cases involving tax evasion, fraud, or non-compliance, preparation of contravention reports, conduct audits and seek information. Section 30E, Powers and Functions of Directorate, etc., provides that the Board may, by notification in the official Gazette, specify the functions, jurisdiction and powers of the Directorates General as specified in the preceding sections. Nevertheless, Part IV of STGO No. 3 of 2004, dated 12.06.2004, which was in force at the relevant time, deals with Sales Tax Audits. Paragraph 39(c) thereof is particularly pertinent to the instant case and reads as follows:
(c) the Staff of the Directorate General of Intelligence and Investigation (Customs, Excise and Sales Tax), and the Directorate General of Inspection, Internal Audit and Training (Internal Audit and Inspection Wing) shall not under-take any audit of any registered person except under specific written authorization by the CBR in each such individual case. However, in case of any information regarding evasion of sales tax or any other illegal activity on the part of any registered person, the respective Directorate will pass on the information to the concerned Collector of Sales Tax who will order for the audit of that particular person by sales tax auditors/special auditors. The representative of the said Directorate/Directorate General may also be associated at the time of conducting such audit .

1. Nonetheless, the following facts are admitted:

i). It is not disputed between the parties that on January, 8th 2008 petitioner was registered compulsorily as a manufacturer but subsequently, applied to the relevant authorities for change of its status from manufacturer to retailer which change was duly made by the relevant Central Registration Office (CRO) w.e.f. 25.10.2008 and petitioner retained the same status throughout the relevant period.
ii). It is also admitted that (regardless of status) petitioner throughout remained a registered person who was making supplies from its retail outlet to final consumers, thus fully falling within the definition of 'deemed retailer'. iii). It is further admitted that throughout the relevant period petitioner regularly filed its returns on quarterly basis under The Rules, 2007 as a retailer and no objection, notice or advisory was ever issued to it by the department.
iv). It is also admitted that during the relevant period yearly Sales Tax and audits of the applicant were conducted by the department and nothing was found to be against the law and rules.

1. There was no provision in the law specifying what percentage of the products sold must be self-manufactured in order to classify a "deemed retailer" as a "manufacturer-cum-retailer." Sales tax, being an indirect tax, is ultimately passed on to the end consumer. Every registered person operating within the supply chain claims adjustment or refund of input tax, as the case may be, based on the monthly returns filed with the department. In the absence of such tax returns, and without a proper determination of the input tax claimed or claimable, it is unclear how an officer of the DG I&I (IR), Peshawar, could independently calculate and assess the sales tax liability of the Applicant situated in Abbottabad.
2. Chapter I of The Rules, 2006 deals with Registration/Compulsory Registration and De-Registration. At the relevant time Rule 5(3) thereof provided; on completion of such verification or inquiry through LRO or otherwise, as the C.R.O deems necessary, it may register the application and issue a certificate or registration containing the registration number of the application in the form as set out in the form STR-5 or reject the application to the applicant . Thus, the registration certificate as retailer was issued to the Applicant by the department after due verification and inquiry.
3. Record further reveals that based on the contravention report dated: 04.09.2014 prepared by the Audit Officer of DG I&I (IR) Peshawar, the Deputy Commissioner, IR, Unit-6, Zone-I issued S.C.N dated: 07.11.2014. Admittedly, no audit or inquiry or even verification of any sort was conducted by the Deputy Commissioner Inland Revenue or any officer of Inland Revenue of the relevant jurisdiction. It is also clear from the Show-Cause Notice that it was based solely on the examination of the data of registered person by the said Audit officer of DG I&I, (IR), Peshawar. For this reason, when in reply to the S.C.N. the taxpayer asserted that it was selling 50% branded and packed items, 25% food items (exempt) and only 25% items are sweets like burfi, cake, gulabjaman etc., the department had no answer. Resultantly the taxpayer s reply was sent to the Directorate of I&I (IR), Peshawar to meet the said assertion. Instead of providing any proof/evidence in support of its stance, the worthy Director I&I (IR), Peshawar in his parawise comments to the written reply , suggested to post a team at their premises under section 40-B of The Sales Tax Act, 1990. The exact reply reads as follows:

The actual % ages of different products sold or being sold could easily be determined through a team to be posted at their premises under section 40-B of The Sales Tax Act, 1990 .
It was also stated by Respondent No. 6 (Commissioner Inland Revenue, Zone-I) in his parawise comments, before this Court, at para 7 that;
the I&I (IR), Peshawar has conducted desk audit of the sales tax returns/declaration made by the appellant ..No formal audit in terms of section 25 of The Sales Tax Act, 1990 was conducted by the I&I (IR), Peshawar .

1. The SRO.776(I)/2011, purportedly conferring powers upon officers of the DG I&I (IR), has itself been the subject of extensive judicial scrutiny. It has been consistently held that, in the absence of a Notification under Section 30A of the Sales Tax Act, 1990 formally constituting the Directorate, powers could not validly be conferred on its officers. In Nestle Pakistan Ltd. v. Federation of Pakistan (2021 PTD 521), the Hon'ble Lahore High Court, relying on F.M. Textile (2017 PTD 1875) and Amanullah Khan (1990 SCMR 1092), observed that specifying the functions and jurisdiction of officers of DG I&I is a necessary prerequisite before conferring any powers. Thus, without such prior specification, any conferment of powers was invalid. Consequently, the Hon ble Court set aside the impugned SRO and notices issued thereunder, directing the Department to first define the jurisdiction and functions of officers of DG I&I before empowering them.
2. Earlier in the case of Waseem Ahmed and another v. Federation of Pakistan and others (2014 PTD 1733), the Hon'ble Sindh High Court had the following to say about the SRO.776(I)/2011:

62. Accordingly, in light of the foregoing discussion and analysis, and subject to the last preceding paragraph, we dispose of these petitions in the following terms:
A. As to the jurisdiction point:
....
d. SRO 776/2011 is declared to be invalid, but its invalidity merely meant that, as before, S.R.O. 48/2008 continued to effectively hold the field.
.....
Even if the reasoning of the Hon ble Sindh High Court in Waseem s case (2014 PTD 1733) is applied and the earlier SRO-48(I)/2008 is considered to be holding the field, the said SRO-48(I)/2008 limits the jurisdiction of each officer to their respective areas , resultantly the Audit Officer of DG I&I (IR), Peshawar, had no jurisdiction over taxpayers located in Abbottabad and registered with Islamabad.

1. Furthermore, under Section 30 of the Act, appointments of Inland Revenue officers must be made specifically "in relation to any area, person, or class of persons". Since SRO-776(I)/2011 neither specifies any area nor any person or class of persons, it is not sustainable in law being beyond the scope of Section 30 of the Sales Tax Act, 1990 as well.
2. It is settled law that an audit must be conducted under Section 25 of the Sales Tax Act, 1990. A desk audit or mere analysis of data is not a substitute for a proper audit under law. While such analysis may generate information that could lead to a proper audit under Section 25, it cannot itself be the basis for imposition of tax liability. In the present case, no notice for audit under Section 25 read with STGO No. 3/2004 was ever issued to the Applicant. Additionally, under Section 14 and Rule 5(3) read with Rule 7 of the Sales Tax Rules, 2006, the Commissioner Inland Revenue could have initiated proceedings to alter the registration status of the Applicant, but the record reveals that no such notice or proceedings were ever undertaken.
3. It is further noted that while the Show-Cause Notice cited the Audit Officer of DG I&I(IR), Peshawar as the reporting authority for the Contravention Report No. 41/I&I/IR/Mir A Bakers/2014 dated 04.09.2014, the Order-in-Original incongruously referred to the designation as Director, without any findings, explanation, or supporting material. In the absence of production of the Contravention Report and its confrontation to the taxpayer, adverse inference must be drawn that its contents, if produced, would not have supported the Department s case. Admittedly, no audit or record examination under Sections 25 or 38 of the Act was ever conducted. Yet, a contravention report based on mere data analysis was used to issue a Show-Cause Notice, culminating in an adverse Order-in-Original. Allegations of the nature in question, involving complex factual verifications, could not have been determined without a thorough, on-ground probe, which is altogether missing.
4. From the foregoing discussion, it is clear that the Department s case suffers from quite a few fundamental and incurable defects. The Audit Officer of DG I&I, Peshawar, unlawfully assumed jurisdiction, prepared a contravention report without conducting an audit under Section 25 or examining records under Section 38, and improperly determined a sales tax liability. These actions were without jurisdiction and void ab initio. The Adjudicating Officer, without conducting any independent inquiry or applying his own mind, simply endorsed the findings of the Audit Officer DG I&I (IR), Peshawar. Similarly, both the Commissioner Inland Revenue (Appeals) and the Appellate Tribunal failed to address these jurisdictional and procedural defects, culminating in an unjustified imposition of huge liability upon the taxpayer. Importantly, the alleged contravention report No. 41/I&I/IR/Mir A Bakers/2014 dated 04.09.2014, the very foundation of the Department's case, was neither confronted to the taxpayer nor made part of the record, nor was its author ever produced.
5. It is therefore concluded that the entire proceedings, from their very inception, being without jurisdiction and without lawful authority, are void and of no legal effect. Consequently, the Reference is answered in positive and the impugned orders passed by the fora below are set aside, along with all consequential proceedings.

MH/43/P Reference allowed.