With the assistance of Approved by the HIGH COURT OF SINDH SEMINARON EXPERIENCE OF ADRC Adjudication, Appeals & Mediation Justice Mushir Alam Director - Karachi Centre for Dispute Resolution At Regional Tax Office, Karachi, February9th, 2009

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 2 Existing Judicial Landscape Pakistan follow Common Law system. Adversarial mode of dispute resolution. Commercial disputes are formally resolved through conventional Judicial/Court processes.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 3 Judicial Landscape and ADR Quite a few commercial disputes go to Arbitration (mostly of contractual and statutory nature). Arbitration is also adversarial dispute resolution mechanism but in private setting. Finality of Arbitration is reached only when court sanctify it.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 4 Kinds of ADR prevalent in Pakistan Customary or traditional ADR, i.e. - PUNCHAIYAT (Punjab) - JIRGA (Sindh,Baluchistan,NWFP & Federally Administered Tribal areas Bordering Afghanistan Public Bodies based ADR -Arbitration Council, -ADRC, -Union Councils; and -Conciliation Courts.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 5 Why Public Bodies ADR initiatives ineffective in Pakistan Introduced without research, need assessment and awareness campaign and confidence building measures. Lack of concerted efforts. Bureaucratic/political motives and interventions. Lack of institutionalization and training. Want of neutrality and independence. General lack of faith/trust in public bodies.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 6 Why adversarial system not effective in Pakistan Heavy Backlog: 1.5 Million Cases pending in Courts. Heavy Backlog: 1.5 Million Cases pending in Courts. Shortage of Judges: SC 17, LHC 50,SHC 28,PHC 15,BHC 6District Judiciary Punjab 649,Sindh 390,NWFP 177 & Balochistan 123. Shortage of Judges: SC 17, LHC 50,SHC 28,PHC 15,BHC 6District Judiciary Punjab 649,Sindh 390,NWFP 177 & Balochistan 123. Taxing: Financial & emotional (per doing Business Report 2009 Cost of Contract Enforcement in Pakistan involves 23.80% of the total claim).Taxing: Financial & emotional (per doing Business Report 2009 Cost of Contract Enforcement in Pakistan involves 23.80% of the total claim). Time delays: Per Doing Business report days (i.e 5-10 years) consumed to enforce a contract. Time delays: Per Doing Business report days (i.e 5-10 years) consumed to enforce a contract. Cumbersome Procedures (per doing Business Report 2009 Contract Enforcement in Pakistan involves 47 procedures) Cumbersome Procedures (per doing Business Report 2009 Contract Enforcement in Pakistan involves 47 procedures) Domino effect Real issue over shadowed by legal complexities, strained & diminished future relationship Domino effect Real issue over shadowed by legal complexities, strained & diminished future relationship

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 7 ADR-Pakistan-Global perspective Bilateral, Regional and International landscape Signatories and members of bilateral, Regional and International Treaties that entrench ADR mechanism in one or the other form. Signatory to 36 bilateral Investment treaties. ECO, SAARC, WTO, UNITRAL,WIPO, New York Convention of 1958, MIGA and ICSID. Agreement for Avoidance of Double Taxation. Pakistan has such agreements with 55 countries introducing concept of advance ruling;...

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 8 Constitution of Pakistan, 1973 ADR silver lining Article 153 and 154 ( Council of Common Interest). Article 156 ( National Economic Council) Article 160 ( National Finance Commission) Article 184 ( SC original jurisdiction to resolve any dispute between two or more Governments)

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 9 ADR friendly legislation in Pakistan Small Claims and Minor Offenses Court Ordinance Small Claims and Minor Offenses Court Ordinance Section of the Local Government Ordinance 2001 Section of the Local Government Ordinance 2001 Section 10 & 12 of Family Courts Act 1964 Section 10 & 12 of Family Courts Act 1964 Section 345 of Code of Criminal Procedure Section 345 of Code of Criminal Procedure Through Finance Bill ADR drafted in following Tax Laws Through Finance Bill ADR drafted in following Tax Laws - Sec. 134-A of I. T Ord R/w Rule 231-C of the I. T Rules-02 - Sec. 47 of the Sales Tax Act 1990 and Ch. X of the S.T Rules-04 - Sec. 195-C of the Customs Act 1969, Ch.XVII of Cust. Rules Sec. 38 of the Fed.Excise Act 2005 R/w Rule 53 of FE Rules Section 23 of Industrial Relation Ordinance.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 10 i. Show Cause Notice is necessarily issued before making assessment/ adjudication i. Show Cause Notice is necessarily issued before making assessment/ adjudication ii. Revision of the assessment order by the Commissioner/ Collector. ii. Revision of the assessment order by the Commissioner/ Collector. B)Formal Appeals B)Formal Appeals With the department : With the department : i. Commissioner of Appeals or the Collector of Appeals by the taxpayers ii. Income Tax Appellate Tribunals (functions under the Law & Justice Ministry) ii. Income Tax Appellate Tribunals (functions under the Law & Justice Ministry) (it is a Final forum to decide the question of fact - By either Party). (it is a Final forum to decide the question of fact - By either Party). Superior Courts iii. A reference on the question of law before the High Courts, raised by either Party iii. A reference on the question of law before the High Courts, raised by either Party iv.On the issue of public importance, a constitution petition for leave to appeal iv.On the issue of public importance, a constitution petition for leave to appeal CPLA before the Supreme Court. CPLA before the Supreme Court. REDRESSING GRIEVANCES OF THE TAX PAYERS

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 11 Exploring options other than Appeals for resolving tax disputes C)Alternative Dispute Resolution Mechanism C)Alternative Dispute Resolution Mechanism A taxpayer, during pendency of appeal, can make an application to the FBR to constitute ADR Committee for resolution of his dispute. The Chairman as well as a Member of the Committee are appointed from private sector, while a Member also represent the department. The recommendations of the Committee are submitted to the Board for its appropriate order. The Board may or may not accept the said recommendations. D)Federal Tax Ombudsman D)Federal Tax Ombudsman Indirectly controls the mal-administration of the departments officers and grants relief to the taxpayers where instances of the mal-administration are pointed out. Representation against the decision of FTO lies with the President of Pakistan (through Law & Justice Ministry). E)Representation to the Chairman, FBR. E)Representation to the Chairman, FBR. A taxpayer may submit a representation under section 7 of the FBR Act, 2007 to the Chairman, FBR who may issue appropriate order. A taxpayer may submit a representation under section 7 of the FBR Act, 2007 to the Chairman, FBR who may issue appropriate order. * For foreign investment/N.R companies: * For foreign investment/N.R companies: * Concept of advance ruling; implementation of the provisions of the agreement for avoidance of double taxation is faithfully done. Pakistan has such agreements with 55 countries. * Concept of advance ruling; implementation of the provisions of the agreement for avoidance of double taxation is faithfully done. Pakistan has such agreements with 55 countries.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 12 STATEMENT OF DISPOSAL AND PENDENCY OF APPEALS (DIRECT TAXES) PERIOD TO AUGUST, 2008 First Appeal (DT) = First appeal IDT = First appeal decided = 106,345 Period Opening Balance 1 st July Addition During the year Total available DisposalBalance as on 30 th June No. of CIT (Appeals) ,75321,78257,53554,4043, ,13111,93615,06714, ,5148,3577, ,8266,6224,9521,67005 July to August, 08 1,670 1,4213, , ,479 81,64 9

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 13 MPRs OF COMMISSIONERS (APPEALS) FOR THE PERIOD FROM JULY,08 TO AUGUST, 08 * During August, 08 three (03) more CsIT (A) offices established in Islamabad, Lahore & Karachi

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 14 POSITION OF CASES PENDING IN HIGH COURTS Direct TaxesIndirect TaxesTotal Opening Added: Added in & : Appeals filed by us Appeals filed by us and papers examined Disposal in 2 years: Pending August, Major Issues: (i) Income Tax (a) 122(5A) (b) 170(4) (ii)Valuation Customs (iii)Vehicles tampered (iv)Sales – Basis of production/sale value.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 15 POSITION OF CASES PENDING IN SUPREME COURT OF PAKISTAN DIRECT TAXESINDIRECT TAXTOTAL Opening Addition & (Addition of Appeals during the two years ) Decided during the period Pending on

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 16 FIRST APPEALS POSITION OF DISPOSAL & PENDENCY OF APPEALS CASES (CUSTOMS, SALES TAX & FEDERAL EXCISE) FOR THE PERIOD TO AUGUST, 2008 YearOpening Balance as on 1 st July Fresh Institution Available for disposal Cases decided Closing Balance * July to Aug * 1923 Total (decided cases) / 12 = 791 appeals per month 725 (monthly decisions) / 06 = 132 appeals per Collector 132 / 25 (days) = 05 appeals decided per day per Collector *Due to a general extension of time-limitation in adjudication cases, accorded vide Finance Act , in the relevant provisions of the Laws and the strict monitoring of the time-limitations, the disposal of adjudication cases has increased which resulted in increase in pendency of appeal cases of this period. However since September 2007 (3894 cases) the pendency position has come down to 1521 cases, at the end of June, 2008.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 17 FEDRAL BOARD OF REVENUE

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 18 POSITION OF PENDENCY OF INCOME TAX CASES IN APPEALS AS ON PendencyRevenue Involved (Rs. In Billion) CIT (A) (B) ITAT45007 (B) High Courts (B) Supreme Court4903 (B) Total50 B (approx) Balance 40% of tax would be involved. Rs.5 to 7 Billion net can come in

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 19 POSITION OF PENDENCY OF APPEALS (CUSTOMS, SALES TAX AND FEDERAL EXCISE) AS ON ) Pendency (Nos)Revenue involved (Rs. in Billion) Collector (Appeals) Approx Appellate Tribunal Approx High Courts Approx Supreme Court Approx Total 22.8 B Balance 40% of tax involved. 2% or about Rs.4 Billion would be recoverable

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 20 Main Issues pending before Supreme Court Sr.NoIssueNo. of cases 1Amended order u/s 122(5A)387 2Tax credit u/s Limitation for order u/s 80D & 52/8642 4Section 80C & 80D29 5FATA / PATA income tax15 6Pak Saudi- 800 M + PakArab 2400 M and other cases Total 496 D

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 21 S.NO.IssueDecision 1.WAPDA/VOITH Hydro Kraft & other German Companies Decided in our favor (ADRC related controversy) 2.Sindh Energy LtdDecided in our favor 3.Suo moto 15 cases of Poultry Feeds-do- 4.Diamond Industry (inadmissible refund claim -do- of Rs.200 million) 5.General Tyre rubber co.-do- (ADRC controversy) 6.S-Tax Extension to FATA/PATAThrough Cabinet decision, Rs.1.3 billion realized from 9 companies 7.Fecto BelarusS.C refund case of Rs.493 million 8.M/s Ashraf/Bilour Ghee Units (taxes & duties on manufacture settled in bond) 9.Procter & Gamble Issue of sales tax on retail price where the item was not covered by the third schedule of Sales Tax Act, 1990– settled SYNOPSIS OF MAJOR ISSUES SETTLED THROUGH THE ASSISTANCE OF THE LEGAL WING – FOLLOW UP OF THE ADRC / SECTION 7 OF THE FBR ACT.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 22 POSITION OF DISPOSAL & PENDENCY OF ADJUDICATION CASES YearOpening Balance Fresh Institution Availabl e for disposal Cases decided Closing Balance * Jul & Aug, Total * 6935 (decided cases) / 12 = 578 cases decided per month 578 (per month cases) / 20 = 29 cases per month per Collectorate 29 / 25 (days) = 1.1 cases per day per Collectorate IDT

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 23 STATEMENT SHOWING TOTAL INSTITUTION AND DISPOSAL OF COMPLAINTS BY FEDERAL TAX OMBUDSMAN YEARINSTITUTIO N DISPOSALBALANCE Since 2000 to

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 24 SUMMARIZED POSITION OF THE DECISIONS RECEIVED FROM THE PRESIDENT ON REPRESENTATIONS FILED UPTO (FTO CASES) DIRECT TAXES INDIRECT TAXES TOTAL ACCEPTED REJECTED TOTAL Representations to the President are about 30 per month.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 25 TAX WISE PROGRESS ADRC (AS ON ) No. of total Applications Received so far Applications Rejected or withdrawn No. in which Committee Formed No. in which Recommend- ations Received Recommend- ations not Accepted Recommendati ons Implemented Cases Pending with ADR Committees Custom Judicial/A DRC Sales Tax Judicial/A DRC Income Tax Total 1501* *It was 835 as on This shows interest in the system.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 26 ADRC regime is a hybrid. Combination of negotiation, mediation and arbitration. Final decision is given by the party to the dispute i.e, FBR. A feature that raises more question than answer.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 27 FBR Dependent System- ADRC recommendations not binding but have to be approved by FBR. FBR a revenue collecting agency or Judicial Apparatus. FBRs rejection of ADRC recommendations adversely affects the neutrality of subordinate formation.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 28 Ensuring Neutrality and Transparency-HOW? ADRC-Secretariat to be made Independent Institutionalized and autonomous. Minimum and standardized ADRC members qualification and disqualification criteria to be prescribed. Both for Department+3 rd party neutral. Accreditation of qualified professional mediators protocol be introduced. Periodic performance evaluations-Research+ Development component be added.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 29 ………HOW? Time limit to be prescribed and followed. Flexibility in the process- mediation-expert evaluation-mediation-settlement Made part of departmental and educational curriculum Training, skill development, capacity building Promote/sponsor ADR institutes and centers

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 30 Commercial Mediation: Legal Implications No special Law for Mediation in Pakistan. Section 89-A of Civil Procedure Code 1908 contains clause for referral of a dispute pending adjudication for mediation/conciliation. Law Reform Act 2007 contained amendment to Section 89-A of CPC The Law was not approved by Senate of Pakistan and lapsed as a result. Mediation clauses have recently been started to be drafted in commercial contracts. Unless there is a special law on mediation or a detailed clause in existing procedural law on mediation, it is difficult to see positive legal implication of commercial mediation. Court ADR rules detailing mediation is ready to be issued in official Government gazette. With a settlement agreement, mediation brings end to a dispute with restricted opportunities for appeals. It brings litigation to an end.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 31 Commercial Mediation: Practical Implication Judiciary lacks formal sensitization on ADR/Mediation and Case Management. Lawyers stay away from requesting courts to refer disputes for mediation. Clauses mentioning mediation are hardly used. Few Judges offer mediation option to parties as this may develop suspicion on part of litigants and their legal counsels. Cost saving. Time saving. Reduction of caseload in courts. Continued business relationship. Creation of trust and sustained communication. Release of business assets and economic growth. Supports SMEs.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 32 Post IFC Intervention in Pakistan – Legal & Practical Implication of Commercial Mediation MoU signed between Ministry of Law and IFC in MoU signed between Sindh High Court and IFC in Referral and Enforcement system at Sindh High Court developed with reference to institutionalized mediations at Karachi Centre for Dispute Resolution (KCDR). KCDR established as first mediation centre in the country and having a complete apparatus for itself, mediations & mediators. ADR rules of Sindh High Court developed and finalized. Section 89-A of Civil Procedure Code started to being used for referral of disputes to KCDR for mediation. Judges and Lawyers being sensitized to ADR and mediation. Businesses attend presentations and awareness events organized on mediation. Commercial mediation has taken off but a sustained awareness program is required for greater buy in of mediation and referral of disputes. Culture of litigation is being challenged and success stories reflect resolution of disputes through mediation in a short span of time.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 33 Post IFC Intervention in Pakistan – Major Achievements IFC ADR Project trained 72 professionals of diverse fields in commercial mediation. 49 professionals belonging to legal, banking, accounting and other professions attained accreditation in mediation from CEDR (UK ). 12 Accredited Mediators attain status of Master Trainer. Mediators and Master Trainers registered at KCDR. Disputes worth US$ 17m resolved including trans-boundary disputes. Bulk Cases from banking sector referred to KCDR. Training for lawyers to be held in December Specialised Trainings delivered through Master Trainers: - 1 Conflict Resolution Course for Corporate Sector. - 2 Training Workshops for Judicial Officers in Sindh Province of Pakistan.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 34 Post IFC Intervention in Pakistan – Development Impact IFC ADR Project has made progress in a very challenging environment. With a reputable Board of Governors, KCDR is becoming a well recognised entity. IFC ADR Project has been building capacity of lawyers and other professionals which was either ignored or not a priority for other stakeholders. With continued intervention and support of stakeholders, sustainability could be achieved in another 2-3 years. KCDR is marketing its Corporate Membership for increasing its revenue. KCDR plans to establish a research and development unit so that it can contribute to developing field of Mediation in Karachi and Pakistan. Beneficiaries will be able to save time and cost of litigation which is urgently required in current economic situation.

Justice Mushir Alam Director KCDR dated Application of ADRC, Adjudication,Appeals & Mediation at Regional Tax Office,Karachi 35 Thank You Q & A