Thursday, September 9, 2021

M/s MOL Pakistan Oil & Gas Company B.V. International Vs Commissioner Inland Revenue (Zone-III), LTU, Islamabad.

 APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I,

ISLAMABAD

 STA No.251/IB/2014
MA (AG) No.15/IB/2021

*******

M/s MOL Pakistan Oil & Gas Company B.V. International Business Center, Plot No.28 & 29, Mauve Area, G-10/4, Islamabad.

 

Appellant

 

Vs

 

Commissioner Inland Revenue (Zone-III), LTU, Islamabad.

 

Respondent

 

 

 

Appellant By

 

Mr. Taqi ud Din, FCA

Respondent By

 

Mr. Imran Shah, DR

 

 

 

Date of Hearing

 

08.09.2021

Date of Order

 

08.09.2021

STA No.252/IB/2019

*******

Commissioner Inland Revenue (Zone-III), LTU, Islamabad.

 

Appellant

 

Vs

 

M/s MOL Pakistan Oil & Gas Company B.V. International Business Center, Plot No.28 & 29, Mauve Area, G-10/4, Islamabad.

 

Respondent

 

 

 

Appellant By

 

Mr. Imran Shah, DR

Respondent By

 

Mr. Taqi ud Din, FCA

 

 

 

Date of Hearing

 

08.09.2021

Date of Order

 

08.09.2021

O R D E R 

M. M. AKRAM (Judicial Member):  We intend to dispose of through this common order the titled cross-appeals which have been filed by the appellant registered person as well as the department against the impugned Order No.66/2019 dated 12.02.2019 passed by the learned Commissioner Inland Revenue (Appeals-I), Islamabad on the grounds as outlined in their respective memos of appeals. Subsequently, the registered person also filed the additional grounds as well in its appeal.

2.      Brief facts culled out from the record are that the appellant is a petroleum exploration and production company having a permanent establishment in Pakistan of a non-resident company. Its principal activity is to extract from the wellheads the three main products i.e crude oil, condensate, and natural gas. Both crude oil and condensate are in liquid forms which are sold to oil refineries in Pakistan whereas natural gas is shifted to the processing plant and after some processing is directly transmitted to its sole customer i.e Sui Northern Gas Company Limited (SNGPL). The case of the appellant was selected by the Federal Board of Revenue (FBR) under section 72B of the Sales Tax Act, 1990 (“the Act, 1990”) for the tax periods from July 2013 to June 2014. Initially, the appellant challenged the selection of their case for audit by the FBR through Writ Petition No.570/2016 before the Hon’ble Islamabad High Court (IHC) whereby vide order dated 17.02.2016 the interim relief was granted by directing the assessing officer not to pass the final order till final disposal of the petition. However, the aforesaid writ petition was finally disposed of on 18.05.2018 on the same terms as the law articulated and annunciated by the Hon’ble Supreme Court in the case titled CIR Vs Allah Din Steel & Re-rolling Mills, (2018 PTD 1444). After disposal of the appellant’s writ petition and keeping in view the law laid down by the Supreme Court in the aforesaid judgment, the assessing officer immediately sent a request to the FBR for extension in time for finalization of audit proceedings contemplated in section 25 of the Act, 1990. The said request was acceded to by the FBR and accordingly, the time was further extended up to 31.12.2018 vide FBR’s letter dated 18.10.2018. Thereafter, the audit observations were communicated to the appellant vide audit report No.120, followed by a show-cause notice bearing No.123 dated 23.10.2018. In the said show-cause notice, the following discrepancies were pointed out to the appellant and asked them to explain their position: -

i)     Non-payment of Sales Tax on taxable supplies (Condensate).

ii)   Short payment of Sales Tax & FED on sale of Natural Gas.

iii)  Non-payment of sales tax on disposal of fixed assets.

iv)  Inadmissible Input Tax.

v)   Non-filing of sales tax returns on the due date.

In response to the show-cause notice, the appellant submitted its detailed reply which was considered and adjudicated upon by the assessing officer through a speaking order dated 29.12.2018. However, the assessing officer confirmed the charges enumerated above at serial Nos. (i), (ii), and (iv) and the rest of mentioned at serial Nos. (iii) and (v) were dropped/vacated vide order in original No.09/130 dated 29.12.2018. Being aggrieved, the registered person preferred the appeal before the learned CIR(A) who decided the appeal vide order No.66/2019 dated 12.02.2019 whereby the issues relating to the non-payment of sales tax on taxable supplies of condensate and short payment of Sales Tax & FED on sale of Natural Gas were decided in favour of the appellant registered person. However, the third issue relating to the inadmissible input tax was decided against the appellant. Being aggrieved of the said impugned order, the registered person as well as the department have now come up before this forum and have assailed the impugned order on several grounds raised in their respective appeals.

3.      This case came up for hearing on 08.09.2021. We have heard both the parties in detail and perused the record with their able assistance. In this respect, we first take up and decide the appeal of the appellant registered person in the following manner: -

STA No.251/IB/2014 (APPELLANT REGISTERED PERSON APPEAL)

A single issue is involved in the appellant’s appeal which relates to the disallowance of inadmissible input tax amounting to Rs.3,122,298/- allegedly claimed by the appellant in contravention of the provisions of section 8(1)(a) read with SRO.490(I)/2004 dated 12.06.2004. The learned CIR(A) confirmed the treatment accorded by the assessing officer. The appellant challenged the impugned order on three grounds i.e (i) limitation for conducting of an audit, (ii) inadmissible input tax, and (iii) levy of penalty and default surcharge thereon. The learned AR for the appellant contended that the order in original was passed by the DCIR in contravention of the judgments of the Hon’ble High Court and Supreme Court of Pakistan. He explained that the appellant-Company had filed writ petition No.570/2016 before IHL against the selection of audit concerning sales tax affairs under section 72B of the Act, 1990. The High Court initially passed the interim order dated 17.02.2016, whereby the Department was allowed to conduct an audit and prepare an audit report but was barred from taking any further steps after confronting the audit report till the next date of hearing. The aforesaid writ petition was ultimately disposed of by the Hon’ble High Court in terms of the judgment of the Supreme Court reported as 2018 PTD 1444. It has been stated that the assessing officer mentioned in the order in original that he had obtained condonation of time limit for the delay in conclusion of audit proceedings from FBR which was granted by FBR vide letter C.No.5(1)SO-M(TPA-I)/2015-Pt dated 18.10.2018 on page 2 of the order in original without providing a copy of the same to the appellant-Company to enable it to assess that whether the extension granted by FBR is after due application of mind as was required to be done by the aforesaid judgment of apex Court. Further contended that the assessing officer did not serve the appellant with the audit report therefore, the whole of the proceedings are illegal and void ab-initio. On merits, the learned AR for the appellant submitted that all input tax was paid on valid sales tax invoices and accordingly, it is admissible if it is used directly, indirectly, or even remotely in making taxable supplies for the appellant-Company. It is further contended that the appellant-Company had claimed the aforesaid input tax against valid sales tax invoices and vendor wise details along with copies of sales tax invoices and evidence of payment through banking channel in compliance with section 73 of the Act, 1990 were provided to the assessing officer. To substantiate its claim, the appellant placed on record the invoice-wise summary of input tax disallowed containing description/purpose of purchase. Further stated that the assessing officer had also disallowed input tax amounting to Rs.1,831,671/- out of total input tax disallowed of Rs.3,122,298/- which were paid on account of purchase of cable directly relevant to rendering taxable supply. It has also been stated that the learned CIR(A) has erred in holding that input tax can only be claimed against items that are direct constituents and integral part of taxable supplies which is against the scheme of sales tax as provided in sections 7 and 8 of the Act, 1990. Input sales tax is allowed to be claimed on these goods if the same has been used in making taxable supplies. Since the appellant is engaged in making taxable supplies only; and as all the goods have been used in the taxable activity of the appellant, input sales, tax should be allowed. Reliance is placed on 2012 PTD 1638, 2019 PTD 1166, 94 TAX 222 and 2017 PTD 2380. Notwithstanding the aforesaid, the learned AR contended that SRO 490(I)/2004 and its further amended through SRO.450(I)/2013 dated 27.05.2013 were challenged before the Hon’ble High Court, Lahore through W.P No.4231 of 2015 titled as M/s JDW Sugar Mills Ltd Vs Deputy Commissioner Inland Revenue and others whereby his lordship vides order dated 10.11.2016 declared the said SROs illegal and void ab-initio. Thus, he, therefore, contended that input tax could not be disallowed based on the SRO.490(I)/2004. On the other hand, the learned DR opposed the submissions made by the appellant and contended that the order passed by learned CIR(A) on this issue is a speaking order and there is no infirmity in the impugned order.

4.      We have heard the arguments advanced by both the parties, perused the record, and the case laws placed on record by the learned AR for the appellant registered person. We are not persuaded with the contention of the learned AR for the appellant that order in original was passed by the assessing officer in contravention of the judgment of the Hon’ble Supreme Court of Pakistan reported as 2018 PTD 1444. For ease of reference, the relevant observations of the Apex Court are reproduced hereunder: -

“22. By the same token, ………………………….. We, therefore find that the timeframe mentioned in the policy guidelines namely completion of the audit within the same financial year in which a taxpayer is selected for audit is fair and reasonable. It must as far as possible be adhered to. However, if delays are inevitable, beyond the control of the Department and do not occur on account of any act or omission on the part of the Taxation Officers and happen on account of litigation and grant of stay orders, the Audit Officer may seek an extension of time from the Federal Board of Revenue for completion of the audit after recording reasons in writing for seeking such extension explaining reasons for his inability to complete the audit within the stipulated time. The Board may on consideration of such reasons grant reasonable extension in order to enable completion of the audit. It is however emphasized that extension if granted should be supported by due application of mind and appropriate reasoning on the part of the Board. It should not be granted casually, repeatedly, and as a matter of routine. Adherence to guidelines and timeframes would enhance the confidence of the Taxpayers in the system and at the same time act as a check on lethargy and inefficiency on the part of the departmental functionaries.” (Emphasis supplied)

 

The record shows that in pursuance of the above judgment, the assessing officer immediately sent a request to the FBR for extension in time for finalization of audit proceedings contemplated in section 25 of the Act, 1990 after disposal of the appellant’s writ petition on 18.05.2018 by IHC. The said request was acceded to by the FBR and accordingly, the time was further extended up to 31.12.2018 vide FBR’s letter dated 18.10.2018. Thereafter, the audit observations were communicated to the appellant vide audit report No.120, followed by a show-cause notice bearing No.123 dated 23.10.2018. As such, prima facie there is no fault on the part of the assessing officer. Further, we have noted that even the appellant could not establish with material evidence either before the learned CIR(A) or before us that the delay in conducting of an audit by the assessing officer within the stipulated time prescribed in Audit Policy is not on the part of the appellant which is a condition precedent for discarding the action of the assessing officer. We also find that no prejudice has been caused to the appellant as sufficient opportunity of being heard was given to the appellant by the assessing officer to explain its case. Under these circumstances, the contention of the appellant is overruled.    

5.      Now, we come to the merit of the case, the learned CIR(A) confirmed the disallowance of input tax amounting to Rs.3,122,298/- mainly on the touchstone of the SRO.490(I)/2004 dated 12.06.2004. The said SRO was declared ultra vires by the Hon’ble Lahore High Court, Lahore in W.P No. 4231 of 2015 titled as M/s JDW Sugar Mills Ltd Vs Deputy Commissioner Inland Revenue and others. The relevant extract of the judgment is reproduced hereunder: -

“4. Quite clearly, the impugned Notification has been issued by the Federal Government in the delegated exercise of the power conferred upon it under section 8(I)(b) of the Sales Tax Act, 1990. By the holding of the Supreme Court of Pakistan in Messrs Mustafa Impex, the Federal Government is the collective entity described as the Federal Government constituting the Prime Minister and Federal Ministers and, therefore, neither a secretary nor a minister nor even the prime minister are the Federal Government taken individually and the exercise of statutory power by any of them on behalf of the Federal Government is constitutionally invalid. This Court in W.P. No. 26772 of 2016 has held under similar circumstances a Notification to be non-est and ultra vires on this ground alone. The impugned Notification under challenging in these petitions has been issued by the Additional Secretary of the Ministry of Finance, Economic Affairs, Statistics, and Revenue Division. However, the Notification does not spell out the procedural formalities which were required to be taken as held in Messrs Mustafa Impex in order to lend competence to the notification.

5. In view of the above, these petitions are accepted and the amendment brought about in SRO 490(I)/2004 by way of the impugned Notification SRO 450(I)/2013 is set aside.”

   

By respectfully following the above judgment of the Hon’ble High Court, the orders passed by the lower authorities are vacated on this issue, and accordingly, the appeal of the appellant is accepted. 

STA No.252/IB/2019 (DEPARTMENT APPEAL)

6.      The department challenged the impugned order of the learned CIR(A) on the following two issues; -

i)     Non-payment of Sales Tax on taxable supplies (Condensate).

ii)   Short payment of Sales Tax & FED on sale of Natural Gas. 

The learned DR states that the first issue relates to the non-payment of sales tax on the supply of condensate claiming as zero-rated by the respondent registered person in terms of Serial No. XVII of SRO 549(I)/2008, dated 11.06.2008. It has been stated that the learned CIR(A) has decided the issue in favor of the respondent registered person by observing that: -

"I find myself in agreement with learned AR that the "Condensate" supplied by the appellant during the period under consideration is to be treated as " Petroleum Crude Oil (PCT heading 2709.0000) which is to be treated @ Zero percent in terms of Serial No. "10" of the Table of the 5th schedule to the Sales Tax Act, 1990."

According to the learned DR that the learned CIR (Appeals) has drawn a wrong conclusion as the Serial No.10 of the Table of the 5th Schedule to the Act, 1990 was inserted through Finance Act, 2014 effective from 01.07.2014, while the tax period under consideration is started from July 2013 to June 2014. Further states that SRO 549(I)/2008 has been issued by the Federal Government in the delegated exercise of the power conferred upon it under clause (c) of section 4 of the Act, 1990 which provides that the benefit of zero-rating would be available only on such goods which the Federal Government specify through Notification. Under Serial No.4(XVII) of SRO 549(I)/2008, only the product petroleum crude oil (PCT Heading 2709.0000) has been specified as a zero-rated good subject to the conditions and restrictions enumerated therein. Therefore, the benefit of zero-rating cannot be extended to condensate which is an independent marketable good having a different value of supply than crude oil. He further explained that the benefit under the said SRO is extended only subject to the certain conditions and restrictions specified in column (3) of the Table of the said SRO which provides that only goods imported and supplies thereof would be zero-rated whereas undisputedly, the appellant has only supplied locally produced condensate during the period under consideration. Thus, condensate does not come within the ambit of the said SRO, and therefore, it is liable to be charged tax at the rate of seventeen percent under section 3 of the Act, 1990. It has also been contended that the chemical composition of the crude oil and condensate clearly suggest that the condensate belongs to the family of natural gas and therefore, squarely falls within the definition of natural gas as defined in Rule 2(XIX) of Sales Tax Special Procedure and Rules, 2007. The learned CIR(A) has erred in law in observing that the condensate is a part of crude oil (PCT Heading 2709.0000). To reach the aforesaid conclusion, the learned DR had drawn the attention of the Bench on para 4.3, 4.7, and 4.8 of the respondent’s registered person reply to the show cause notice duly incorporated in order in original. 

7.      As far as the second issue which relates to short payment of sales tax on sales of natural gas is concerned, the learned DR apprised that the learned CIR(A) has decided the issue in favor of the respondent registered person by observing that no material evidence brought on record that the actual amount of taxable supplies made by the registered person is more than the amount declared in sales tax returns. In this regard, DR submitted that the respondent in para No 5.5 & 5.6 in their reply has itself stated that the difference of quantity of gas produced and gas sold substantially to reflect the quantity of gas which is self-consumed which is clearly established that the actual quantity of gas produced as per Energy Book 2014 is correct. However, the contention of the respondent that the substantial quantity in dispute is self-consumed is not correct in the light of the decision of Honorable ATIR in similar nature of the case in STA No. 260/IB/2016 dated, 16/11/206 of M/S Hycarbex American Energy, Islamabad. In the above-referred case, the appellant has admitted that the difference in the quantity of gas produced as per Energy Book and actual supply is less due to impurities such as H2S, Nitrogen, and CO2 which are taxable under the Act, 1990, this Tribunal has upheld the issue of short payment of Sales Tax in favor of the department on the difference of quantity of gas produced as per Energy Book and actual supply of gas. He placed on record the copy of the judgment.

8.      On the contrary, the learned AR for the respondent registered person states that the assessing officer asserted in the impugned order in original that the facility of zero-rating of sales tax in the notification SRO 549(1)/2008 dated 11.06.2008 is available only to supplies of ‘Crude Oil’ having Pakistan Custom Tariff (PCT) Heading No.2709.0000 whereas, neither the condensate has been classified in the customs tariff nor included in the said Notification. The assessing officer further stated in his order that the Petroleum Crude Oil and Condensate are two distinguishable items with both having a different definition. It is stated that the Appellant Company had made supplies of locally produced ‘Condensate’ to the refineries in Pakistan at zero-rated sales tax in terms of section 4 of the Act, 1990 read with SRO 549(1)/2008 dated June 11. 2008.

Further, the term ‘Condensate’ has not been defined in the Act or the rules made thereunder. Accordingly, under the established rules of construction, either the dictionary meanings of the term or the definition provided in any similar/related statute need to be considered. As per the Oil and Gas Regulatory Authority Ordinance, 2002, the ‘Condensate’ is included in the definition of the term ”Crude oil”. Clause (v) of section 2 of the said Ordinance defines the expression “Crude oil” which includes condensate. Further, reliance was also placed on the definition of crude oil provided in Pakistan Petroleum (Exploration and Production) Rules, 1986, and Pakistan Onshore Petroleum (Exploration and Production) Rules, 2013. Since the aforesaid definitions are provided in statutes/ rules about petroleum companies, they will prevail over the general definitions given in dictionaries and therefore, should be considered.

It has also been stated that Condensate, by nature, is a low-density mixture at hydrocarbon ‘liquids’ coming from the wells. It is recovered from the gas wellheads since both condensate and gas come from the same well. Condensate is a liquid hydrocarbon at standard atmospheric conditions of temperature and pressure and its generic name is ‘petrolet’. It is sold to the refineries and yields products like petrol, LPT, Kerosene, etc, and is also priced per barrel just as crude oil whereas natural gas is priced differently. Therefore, there is no difference between crude oil and condensate. Gas is entirely different and can only be sold to the SNGPL. Condensate is a mixture of light liquid hydrocarbons and is categorized as crude oil similar to light (high API) crude oil having similar compositions and characteristics. Further condensate is just another term used to describe one end of a spectrum of over 100 grades of crude oil which are processed in refineries to yield common petroleum products.

Further argued that there are three main products of the appellant-Company extracted from wellheads which are oil, condensate, and natural gas. Both oil and condensates are in liquid form which is sold to oil refineries whereas natural gas is shifted to the processing plant and after some processing is directly transmitted to sole customer i.e Sui Northern Gas Company Limited (SNGPL) under gas supply agreement through pipelines connected with wellheads. It is also emphasized that under the Gas Sale Purchase Agreement, the appellant-Company is bound to sell all its natural gas only to SNGPL, and therefore, it would not have been able to sell condensates to oil refineries if it was natural gas as alleged by the assessing officer. It is further argued that even for the sake of discussion if condensate is excluded from the ambit of “crude oil”, it would still be treated as “Petroleum oils and oils obtained from bituminous minerals,---“ under PCT heading 2709.0000.

         Further asserted that as per explanatory notes to the Harmonized Commodity Description and Coding System as approved by World Customs Organization (WCO) and constitute an official interpretation of the Harmonized System at the international level and are also relevant in Pakistan since the same harmonized coding system is adopted in Pakistan as Pakistan Custom Tariffs as Pakistan is also a member of WCO. The Explanatory Notes provide a commentary on the scope of each heading, giving a list of the main products included and excluded, together with technical descriptions of the goods concerned (their appearance, properties, method of production and uses) and practical guidance for their identification. Where appropriate, Explanatory Notes also clarify the scope of particular subheadings. The relevant explanatory note for HS code 27.09 dealing with petroleum oils and oils obtained from bituminous minerals, crude clearly states that the heading covers gas condensates i.e. crude oils obtained during the stabilization of natural gas immediately upon its extraction. Since the aforesaid explanatory notes are internationally recognized and since Courts in Pakistan have given acceptance for taking guidance from international guidelines in various cases (such as in respect of international guidelines issued by the Organization for Economic Cooperation and Development for Model tax conventions in cases reported as 1985 PTD 1877, 2011 PTD 438, 2011 PTD 1460, 2007 PTD 2549, etc), the aforesaid explanatory note in respect of HS Code 27.09 (equivalent to PCT heading 2709.0000) includes gas condensates within the same heading. In support thereof, the learned AR refer to Note No. 2 to Sixth Schedule to the Act, 1990 as per which to determine the classification of any goods, the general rules for the interpretation of the First Schedule to the Customs Act, 1969 (IV of 1969) and Explanatory Notes to the Harmonized Commodity Description and Coding System (relevant version) as amended from time to time shall be considered an authentic source of interpretation. The Appellate Tribunal Inland Revenue, Karachi (ATIR) in a judgment reported as 2018 PTD (Trib.) 1522 has also confirmed non-charging of sales tax on transportation charges of condensates on the basis that since condensates are chargeable at the rate of zero percent, transportation charges added in the value of condensates would also result in zero sales tax. It is also submitted that the Department itself has accepted the position that supply of condensate being crude oil is subject to zero-rating in other cases. Reliance is placed on the cases titled M/s BP Pakistan (Badin) Inc and M/s ENI Pakistan (M) Ltd whereby the department itself vacated the show cause notice on account of supply of condensate by declaring that the same is a zero-rated taxable supply. Reliance is also placed on the Indian High Court judgment wherein it has been declared that there is no difference between crude oil and condensate. It is therefore contended that because of the foregoing, it is established that the Department has already accepted the stance that condensate sales are also subject to zero-rating being crude oil, and therefore the CIR (A) was completely correct in deleting the levy of sales tax by the assessing officer on such supply.

On account of the conditions and restrictions specified in column (3) of the Table of the SRO.549(I)/2008, the learned AR vehemently contended that the issue of eligibility of zero-rating in terms of the said SRO on account of the condition and restriction of import and supply thereof was never raised in the instant proceedings at any stage by the Department. Therefore, any matter which is not part of the proceedings/appeal cannot be raised at this stage as the appeal cannot go beyond the proceedings. A Tribunal is required to judiciously decide all questions of law and facts raised before it. Since the aforesaid issue was neither raised in the show cause notice nor on the grounds of appeal by the department. Therefore, this tribunal cannot go beyond the show cause notice. Reliance is placed on 1987 SCMR 1840. Notwithstanding the aforesaid, the learned AR argued that in SRO 549(1)/2008 dated June 11, 2008, in column (3) specifying the conditions and restrictions, three different types of terminologies are used in respect of goods chargeable to tax at the rate of zero percent.

-        Supplies thereof used for goods referred in serial No. 2 (i), (ii), and 3(ii)

-        Import thereof used for goods referred in serial No. 3 (i)

-        Import and supplies thereof used for goods referred in serial No. 4 (i) to (xxxvii) 

The words “thereof” used in all cases in the SRO refers to goods specified in column (2) of the SRO. In other words, where the words “supplies thereof” and “import thereof” are used, it signifies that only supplies or imports of the goods as specified in column 2 of the SRO are chargeable to tax at the rate of zero percent. On the other hand, where the words “import and supplies thereof” are used in the SRO, it refers that both import as well as supply of the goods as specified in column (2) of the SRO which are chargeable to tax at the rate of zero percent. In support, his reliance was different SROs where similar words import and supply or conversely supply and import are used with the words “thereof” or “of” to show that these words refer to goods specified in the SRO. If the contention raised by the learned DR that such supplies are zero-rated which took place out of the imports since the SRO refers to the words “import and supply thereof”, in that event it will result in absurdity if converse words “supply and import thereof” used in certain SROs are interpreted on the same analogy as above. The words “thereof” used in the SRO for zero-rated goods refer to goods specified in SRO for zero-rated purposes (which includes Petroleum Crude Oil) and not to the “imports” as contended by the DR.

The interpretation of the word “and” used between “supply and import” in the SRO 549(1)/2008 dated June 11, 2008, whether used conjunctive or disjunctive arises only when plain meanings of the words are not clear which is not the position in the present case. The construction of the word “and” to be read as “Or” and vice versa is permissible only when particular words in the statute are either meaningless or lead to absurdity. Reference was placed on the judgment of the Hon’ble Supreme Court reported as (2014) 110 Tax 145 (SC). It is stated that considering the interpretation of the phrase ‘imports and supplies thereof’ for Petroleum Crude Oil to mean supplies of imported crude oil would lead to absurdity since the only parties which are given licenses to import crude oil in Pakistan are oil refineries that utilize crude oil only for internal use and not for further sale and local suppliers of crude oil (such as the Appellant) would also be ineligible for such benefit of zero-rating on account of not being an importer of such crude oil supplied. According to the learned AR such a benefit in such a way so that no one can avail it will lead to absurdity and could not be considered as the intention of the legislature. The AR further has drawn the attention of the Bench to SRO 551(I)/2008 dated June 11, 2008, through which exemption from sales tax was granted to various items including ‘Raw materials for the basic manufacture of pharmaceutical active ingredients and manufacture of pharmaceutical products’ vide Serial No 11 of the Table therein. The related condition was Import and supplies thereof provided that where such raw materials are imported then only those raw materials shall be entitled to exemption under this notification which is liable to customs duty not exceeding ten percent ad-valorem, either under the First Schedule to the Customs Act, 1969 (IV of 1969) or under a notification issued under section 19 thereof. In this respect, it is stated that if the same meaning is assigned to the phrase ‘imports and supplies thereof’ i.e. supplies to be linked with imported items then it would not hold ground since the proviso added to the above condition mentions the word ‘where such raw materials are imported…….’ leads to the conclusion that the additional condition is only applicable in case of import of raw materials thereby implying that there is also a case of local supply of such raw materials on which such additional condition is not applicable. Also, Department raised an issue in respect of a pharmaceutical company where the main issue pertained to whether the word ‘and’ used in serial No 11 above in ‘Raw materials for the basic manufacture of pharmaceutical active ingredients and manufacture of pharmaceutical products is to be read conjunctively or disjunctively as ‘or’. The Hon’ble Sindh High Court (SHC) vide judgment reported as 2015 PTD 1532 decided the issue that the word “and” is to be read as “or” since the other way leads to absurdity. Reliance was also placed on 2013 PTD 420 (Trib).

9.      On account of the other issue regarding short payment of Sales Tax and FED on sale of natural gas, the learned AR for the respondent registered person stated that the assessing officer completely ignored the appellant Company’s explanation regarding alleged short gas produced but not declared in returns calculated based on figures taken from Pakistan Energy Year Book 2014. It is clarified that quantities reported in Pakistan Energy Year Books indicate raw gas volumes produced at Wellhead whereas sales tax has to be levied on the volume of gas actually supplied, rather than produced. To make it a sellable gas (good or product) as per customer's i.e. Sui Northern Gas Pipelines Limited (SNGPL) requirement, it is treated at the processing plant. In the process, primarily liquid phase components comprising of condensate and water are separated followed by a technological process to bring the gas to desirable specifications governed by the Gas Sales Agreement. Hence the volume of gas, which is ready and capable of being sold to the customer as a good product, is always less than the raw gas volumes and resultantly, the figures stated in Pakistan Energy Year Book cannot be used as the basis for estimating sale of natural gas. In support, the AR placed on record a month-wise reconciliation of natural gas produced and sold.

Further contended that sales tax is also not leviable on natural gas utilized in self-consumption since the same does not fall within the definition of “supply” and “taxable supply” as provided in sections 2(33) and 2(41) of the Act, 1990 as the self-consumption is for purpose of the taxable activity and final product is not exempt from sales tax. Even otherwise, any sales tax charged on such consumption will also be admissible as an input tax to the Appellant being incurred for purpose of taxable supply and therefore will still result in no tax liability as the output tax and input tax would be set off with each other. It is also stated that section 3 of the Act, 1990 clearly states that sales tax at applicable rate is to be paid on taxable supplies made during the tax period and not on taxable goods produced or manufactured. Accordingly, no sales tax can be levied on the difference between raw gas produced at wellheads and final gas sold to SNGPL. It has also been stated that the gas production reported in “Pakistan Energy Year Book” cannot be used for calculation of Respondent’s annual sales volume of natural gas without considering the sales reported in Respondent’s audited financial statements, without pointing any defect in the books of accounts and is based on presumption, not warranted under law. The Hon’ble Supreme Court of Pakistan in the judgment reported as 2014 PTD 215 has held that the assessing officer cannot reject accounts without pointing any defect in the books of accounts.

There is no chance of any short reporting of gas produced/sold due to the process being followed. The appellant Company’s producing fields are located in Khyber-Pakhtunkhwa and its plant is connected with supply lines of SNGPL at the delivery point as defined under the Gas Supply Purchase Agreement (GSPA) and thereby the possibility of selling gas to any other party is impossible. A mechanism exists whereby Joint Metering Calibration (JMC) is done every month with representatives of SNGPL available in the field. The sales gas quantities and heating values are also verified by SNGPL at its end before any payment is released. Accordingly, the question of any short declaration of sales does not arise. He, therefore, contended that the learned the CIR(A) correctly deleted the demand that since the shortfall considered by the assessing officer based on the order in original No.13/132 dated April 4, 2017, under section 14 of the Federal Excise Act, 2005 has also been remanded by the CIR (A).

10.    We have heard both the parties, perused the record and the case laws relied upon by the learned AR for the respondent registered person. The issue involved in this case is regarding the levy of sales tax under the Act, 1990 on the supply of the good "Condensate" which emerges out of the processing of natural gas from the wellheads. According to the assessing officer “Crude oil” and “Condensate” are two distinct products therefore, the sales tax must be charged under section 3 of the Act, 1990 at the rate of seventeen percent (17%) on the supply of condensate. On the other hand, the respondent registered person is of the view that “Condensate” falls within the definition of crude oil and is classifiable under Pakistan Customs Tariff Heading (PCT 2709.0000) therefore, liable to sales tax at the rate of zero percent in terms of SRO 549(I)/2008 dated 11th June 2008 (hereinafter referred to SRO.549). Thus, the following questions emerge from the record, grounds of appeal, and arguments advanced by both the parties for determination: -

i.       Whether the expression “crude oil” as mentioned in Serial No. (4)(xvii) of the Table of S.R.O. 549 includes “condensate” and is subject to zero-rating under Section 4 of the Act, 1990 or “condensate” is an independent marketable good liable to sales tax under section 3 of the Act, 1990?

ii.      Whether the benefit of charging of tax at the rate of zero percent on supply of the good “Petroleum crude oil (PCT Heading 2709.0000)” given in SRO 549 would be extended to the good “Condensate” that is not specifically mentioned in the said SRO?

iii.     Whether the conditions and restrictions prescribed in column No. (3) of SRO 549 i.e “Import and supplies” is to be read disjunctively as “import or supply”?

Before dilating upon the questions, we have to understand that how the products “condensate” and “crude oil” come into existence. There are two types of wells. The first category of wells is oil-bearing, while the other category of wells is only gas bearing. The process of extracting natural gas from such gas-bearing wells is that from the depth of the soil gas is extracted by depressurization at or up to the stage of the surface of the earth. The gas is stored in a reservoir whereby depressurization of some impurities is separated. The gas being lighter in weight collects at the top of the reservoir and would be transmitted therefrom to another reservoir from the top. The impurities remaining in the original reservoir would be the residue retained after the gas is being transmitted. During the depressurization and while separating impurities from the natural gas after it has come out of the soil, the liquid is found which would be transmitted to a separate reservoir by a different channel leaving in the original reservoir other impurities like mud, pebbles, etc. The liquid so taken and separated is stored in a separate reservoir. This liquid is brown in colour. It is popularly known as condensate and is similar in appearance to kerosene. Thus, from the gas wells either gas in its natural form of petroleum known as condensate is obtained. Similarly, from the oil wells crude oil in its unpurified form along with traces of gas is obtained. The crude oil so obtained is subjected to the process of separation and de-emulsification. This process of separation and de-emulsification is applied after the oil extracted from the well is taken to the gathering plant. The gas is thereafter separated from the oil with the help of a separator. The water and the mud contents are taken out from the impure oil, which process is known as the process of de-emulsification. This impure oil is known as crude oil. It is in other words in unrefined form. This unrefined crude oil is sold to the refinery where various petroleum products are manufactured out of this unrefined crude oil.

It is clear from the above that from the gas wells, a major portion of the gas is mixed with some portion of liquid, which after separation from the gas and other impurities, is known as "condensate", i.e. a substance produced by condensation. From the oil wells, for obtaining crude oil also, a process of separating gas is required to be performed. Hence, it is apparent that from the oil wells as well as gas wells, crude oil or condensate would come out from the gas wells main substance would be gas and residuary substance would be condensate while from the oil wells, crude oil would be the main substance and gas would be the minor substance. In both cases, for separating oil from the gas, some process is required to be performed. But after separating crude oil or condensate from the gas, it is pointed out that no treatment or process is required to be performed.

11.    Now, we come to question No. (i). Learned assessing officer through various sources has found the composition and nature of condensate and crude whereby he observed that crude oil different from condensate. Crude is found in liquid form naturally whereas condensate is concerted from the gas into liquid by a process of lowering the temperature and maintaining specific pressure in a natural gas reservoir. After great deliberation, the assessing officer has pointed out certain major differences in both the products and highlighted in the body of the order in original which is reproduced as below: -

Point of Difference

Condensate

Crude

Nature

Found in Gaseous State. Converted in liquid by maintaining pressure and dropping the temperature to the dew point

Found in yellow-to-black liquid from. (PCT 2709.0000)

Presence

Only available from the reservoirs of Natural Gas (PCT 2711.2100)

Present in associated as well as non-associated reservoirs

Production

It is produced separated from natural gas by cooling temperature or lowering Natural Gas temperature below the dew point

Naturally found

Composition

Mainly consist of propane, butane, pentane, hexane, etc.

Mainly consist of carbon, hydrogen, nitrogen, oxygen, etc.

Usage

High-octane petrol, as well as jet, diesel, and boiler fuels, are produced from gas condensate. Petrochemical processing of gas condensate involves obtaining aromatics, olefins, and other monomers (small molecules) that are used in the production of plastics, synthetic rubbers, fibers, and resins.

Used as a diluent in heavy oil production because condensate is typically liquid in ambient conditions and also has very low viscosity, condensate is often used to dilute highly viscous heavier oils that cannot otherwise be efficiently transported via pipelines.

Also used in the feedstock in Oil Refineries.

Generally, crude is used for energy carriers that can be combined into gasoline, jet fuel, diesel, and heating oils. Heavier products are used to make tar, asphalt, paraffin wax, and lubricating oils.

The expression “condensate” and “crude oil” has not been defined in the Sales Tax Act, 1990. The definition of crude oil contained in the Oil and Gas Regulatory Authority Ordinance, 2002 and the Pakistan Petroleum (Exploration and Production) Rules, 1986 has a limited application. Such a definition is confined to the scope and purpose of the said statutes, which is related to the specific purpose. The same are special statutes and have no general application. Therefore, the definition given therein cannot be borrowed for the levy of sales tax under the Sales Tax Act, 1990. It is settled law that in the absence of any statutory definition in the Act, the ordinary meaning to the expression used in the Act has to be applied. Thus, we have to apply the ordinary meaning of the expression “crude oil” and “condensate”.  The definitions are given from the "Glossary of Terms used in the Petroleum Industry", which are as under:

" 'Condensate': A liquid produced from vapours that come from a well in the form of gas. A hydrocarbon is gaseous in the ground but becomes fluid when produced.

'Crude Petroleum': A naturally occurring mixture of hydrocarbons and/or sulphurs, nitrogen, and/or oxygen derivates of hydrocarbons that occur in the earth in a liquid state. The term is derived from Latin 'petra' which means rock and 'oleum' which means oil. The broad categories are Paraffin base, asphaltic base, and mixed base. Some of the important properties considered in evaluating a crude are Gravity (API) sulphur content, nitrogen content, carbon residue, and salt content."

As per "Hand Book of Oil Industry Terms and Phrases" the definitions of the words "condensate" and "crude oil", which are as under:

"Condensate"- "Liquid hydrocarbons produced with natural gas which are separated from the gas by cooling and various other means. Condensate generally has an A.P.I. gravity of 50 Degree and 120 Degree and is water-white straw or bluish in colour."

"Crude-Oil"- "Oil as it comes from the well; refined petroleum."

Similarly, as per the book "Petroleum process Hand Book" by Brand and Davidson, wherein "condensate" is given the following meaning:

" 'Condensate'-

1. The liquid product coming from the condenser.

2. A light hydrocarbon mixture product as a liquid product in a gas recycling plant through expansion and cooling of the gas. Condenser ordinarily, a water-cooled heat exchanger used for cooling and liquefying oil vapors. Where the cooling medium used is air, the condenser is called an air condenser. (See also specific condensers under alphabetical listing). Condenser box- a large box-shaped structure in which the condenser, which may consist of coils or 'works' is submerged in a heat-absorbing medium, usually water."

The definition of "condensate" given in the book "Petroleum Products Hand-Book" by Vigil B. Guthrie, which is as under: -

"Condensate: (1) a highly gaseous liquid coming from gas condensate wells, from which the gas is separated, the liquid remaining being shipped with crude oil in pipelines to refineries. (2) Any liquid material coming from the condenser in the refinery."

From the aforesaid definitions, it would be apparent that, from the gas well, some liquid in gaseous form is coming out of the earth. The liquid is separated from the gas and is known as "condensate". The process is of separation of the gas from the liquid. It is a treatment given to the gas for obtaining gas from the wet gas. Thus, the term "condensate" refers to those low vapour pressure hydrocarbons in the form of liquid at the normal surface temperature and pressure conditions, obtained from natural gas through condensation of extraction. It is pertinent to mention that the condensation so received in the Natural Gas Processing Plant is first and foremost received while processing the Natural Gas in the Gas Processing Plant. It is vehemently submitted that no condensation is formed at the stage of production or separation at the wellhead. The condensation is generated from the gas while processing the gas at surface production facilities (away from wellhead) due to change in pressure and temperature thus amounting to condensation of natural gas.

12.    A detailed comparison of the internationally accepted characteristic of condensate with crude oil would reveal that the condensate could not be termed as crude oil for levy of sales tax under the Act, 1990. The table comparison condensate and crude oil are detailed as follows: -

Sr. No.

Characteristic

Condensate

Crude oil

1

API Gravity

Above 40(47.66)

Below 40(30.9)

2

Specific Gravity at 60/60°C

0.78

0.8358

3

Density at 15° C

0.78

0.87

4

Kinematic Viscosity at 20°C

1.21

15.2

5

Sulfur, by wt %

0.00817

1.83

6

Water Content, ppm

66.15

16.6

7

Flash Point, °C

More than 11

38

8

Ash Content, wt%

0.06

0.4340

9

Wax content by wt %

NIL

23.6

The abovementioned characteristic would indicate and establish that both the products are independent of each other. 

In view of the above, it is evident that under the SRO 549 there is only one entry on which zero-rated tax is imposed which is crude oil. The learned CIR(A) has set aside the order of the assessing officer only based on the definition of “Crude oil” given in The Pakistan Onshore Petroleum (Exploration and Production) Rules, 2013 and has wrongly relied upon the Serial No.10 of Table of the Fifth Schedule to the Sales Tax Act, 1990 which was inserted through Finance Act, 2014 applicable w.e.f 01.07.2014. It is also pertinent to mention that "condensate" so obtained from the natural gas processing plant is obtained while processing the natural gas as a by-product and not formed at the stage of production or separation of the wellhead. These "condensate" generally emerges from the gas, while processing the gas wellhead surface production facilities away from the oil head. It has been inferred in the impugned appellate order that the crude oil includes condensate, even though the same has not been specifically mentioned in the aforesaid SRO. The learned CIR(A) has erred in concluding that condensate is crude oil and as such consequently the appellant is liable to pay zero-rate tax on the supply of condensate. We find that SRO 549 imposes zero rate tax only on a product namely crude oil as referred to above. The term petroleum product is very wide and within its ambit covers all the hydrocarbons. If the conclusion of the CIR(A), is accepted it will create a lot of anomaly and imposition of zero rate tax even on other products specified in PCT Heading 2709.0000. It is an established principle of law that words gain colors from the context in which they are used. In our opinion, therefore, the term Petroleum is to be seen in the context of the suffix the “crude oil”. Moreover, had there been any intention of the legislature to tax "condensate" arising out of the processing of the natural gas, the same would have been specifically mentioned in the SRO 549. We find that the assessing officer has clearly given the distinction between the characters of crude oil and that of "condensate" in his order in original tabulated above. In view of different and physical and chemical parameters of the two products, it was necessary on the part of the Department to get the expert opinion to find the exact chemical nature of "condensate" and as to whether the same could qualify to call as crude oil. We find that no such attempt has been made by the Revenue to obtain the test report to that effect. Having not done so, the learned CIR(A) has wrongly concluded that "condensate" is nothing but crude oil.

For what has been discussed above, the answer to question No. (i) is in the negative against the respondent registered person. The product condensate is an independent marketable good and liable to sales tax under section 3 of the Act, 1990. It is pertinent to mention that it is an admitted fact that the respondent registered person has declared the products i.e crude oil, condensate, and natural gas extracted from the wellheads in its books of accounts independently and has also supplied the same to its customers with a different sale value of the said products.

13.    Reverting to the question Nos. (ii) and (iii), the taxpayer argues that the expression “import and supplies” as appearing in column (3), entitled “conditions and restrictions” of Serial No. 4 (xvii) [Petroleum crude oil] of the Table incorporated in SRO. 549(I)/2008 dated 11th June 2008 issued by Revenue Division of Government of Pakistan must be read also as “import or supply”. However, we do not find any force in this submission and reject the same for the following reasons. In our opinion, zero-rating, as envisaged under the above notification issued under clause (c) of section 4 of the Act, 1990, applies only to the petroleum crude oil which is imported (not locally produced) and supplied but not consumed by such importer. In this respect, it is pertinent to point out that local supplies of petroleum crude oil are specifically inserted through the Finance Act, 2014 in Fifth Schedule to the Act, 1990 for levy of sales tax at the rate of zero percent w.e.f 01.07.2014.

Firstly, the interpretation of the term “import and supplies”, as “import or supplies” would lead to absurd results within the Act, 1990. In this respect, a perusal of the Act, 1990 reveals that the legislature has been conscious of using both the above-mentioned expressions in the said legislation. (See Annexure “A”: for “import and supply” and Annexure “B”: for “import or supply”). Hence, we find that the use of a specific term “import and supplies” is intentional and is used by the Government in consonance with the scheme of the statute.

Secondly, we note that Section 4 of the Act, 1990, under clause (c) of which the SRO 549 is issued, provides for a charge of Sales Tax on specified goods at zero percent; whereas, section 13 of the Act, 1990 deals with the supply or import of stated goods which are exempt from tax. It would not be out of place to mention here that in the case of the former, input tax can be claimed whereas, in the case of the latter no such tax can be claimed. In this respect, we also note that there are several products as mentioned in sub-clauses (in the roman enumeration) of serial No.4 of the SRO 549 and are chargeable to Sales Tax at zero rates, which are as such as duplicated in Table-1 of the Sixth Schedule arranged under Section 13 of the Sales Tax Act, 1990. (Examples are set out in Annexure “C” of this judgment). Now the question that arises is that how the legislature can subject the same goods to an exemption under Table-1 of the Sixth Schedule arranged under Section 13 of the Act, 1990 and render the same goods to zero-rating under sub-clauses of serial No.4 of the SRO 549? However, the answer lies in the legislative text of section 13 (Exemptions), which specifically implies that the said exemptions apply to the “supply of goods or import of goods specified in the Sixth Schedule”. Hence, when the legislature itself has expressly provided for disjunctive application of “supply or import” of certain goods and made them the subject of exemption, the same expression cannot be implied to “zero-rating” in disguise of interpretation of “import or supply” of goods as enumerating in column (3), of Serial No. 4 (xvii) [Petroleum crude oil] of the Table incorporated in SRO 549. In our opinion, if we interpret “and”, as enumerated in the term “import and supply” as expressed in the above-mentioned column (3) of serial No.4(xvii) of the SRO 549, disjunctively and read the same as “or”, it will lead to partial redundancy of the Sixth Schedule (Table-1) to the extent of the similar goods as listed in Annexure “C” to this judgment. As a result, zero-rating, as envisaged under the above notification issued under clause (c) of section 4 of the Act, 1990, applies only to the petroleum crude oil which is imported (not locally produced) and also supplied but not consumed by such importer. 

It is established that petroleum crude oil and condensate are two different expressions but as such, are covered under PCT Heading 2709.000 (Petroleum oils and oils obtained from coal tar or other mineral tars). We note that in column (2), entitled “Description of goods” of Serial No. 4 (xvii) [Petroleum crude oil] of the Table incorporated in SRO 549, the type of goods that are subject to zero-rating is mentioned as “Petroleum crude oil (PCT Heading 2709.0000)”.

We take this opportunity to clarify that the mention of (PCT Heading 2709.0000) as a suffix to the expression “Petroleum crude oil” does not enlarge the scope of the “Petroleum crude oil”. In this respect, we note that the SRO 549 is issued under clause (c) of section 4 of the Act, 1990, which unlike section 13, authorizes the Federal Government to specify only the “goods” (not a class of goods) to levy of sales tax at zero rates by notification in the Official Gazette. The relevant provision of section 4 of the Act, 1990 when SRO 549 was issued is reproduced hereunder: -

“4.     Zero ratings: -    Notwithstanding the provisions of section 3, the following goods shall be charged to tax at the rate of zero percent:- 

(a) ------

(b) -----

(c) such other goods as the Federal Government may, by notification in the Official Gazette, specify:

(d) ……………….”

[underlined for emphasis only]

On the other hand, in sub-clause (a) of sub-section (2) of section 13, which like clause (c) of section 4 of the Act, 1990 also deal with delegated legislation, the Federal Government is authorized to exempt the “class of goods” in addition to “goods”. The relevant provision of section 13 of the Act, 1990 when SRO 549 was issued is reproduced hereunder: -

“13.   Exemption: -       (1) Notwithstanding the provisions of section 3, supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the Federal Government, be exempt from tax under this Act.

 (2) Notwithstanding the provisions of sub-section (1)–

(a)     the Federal Government may, by notification in the Official Gazette, exempt any taxable supplies made or import or supply of any goods or class of goods, from the whole or any part of the tax chargeable under this Act, subject to the conditions and limitations specified therein; and

(b)     ……………….

………………………”

[underlined for emphasis only]

In view of the above, it is evident that the delegated authority of the Federal Government to apply zero-rating is limited only to “goods” and not “class of goods”. Moreover, the SRO 549 is beneficial in nature and entails restrictive interpretation as well. Hence, the mentioning of (PCT Heading 2709.000) cannot be read as an internal aid to construction of the column (2), entitled “Description of goods” of Serial No.4 (xvii) [Petroleum crude oil] of the Table incorporated in SRO 549 to include all the class of goods covered under the above said PCT Heading. In other words, under column (2), entitled “Description of goods” of Serial No.4 (xvii) [Petroleum crude oil] of the Table incorporated in SRO 549, zero raring does not apply to petroleum oils and oils obtained from coal tar or other mineral tars except petroleum crude oil.

         Furthermore, a proper reading of clause (c) of section 4 of the Act, 1990 would ineluctably show that the provision confers the powers to the Federal Government to specify the goods by notification in the Official Gazette whereupon the zero percent tax would be charged under the Act, 1990. According to the learned DR for the department, the Federal Government is empowered to specify goods on which tax has to be charged at the rate of zero percent and cannot be construed to mean that the class of goods on which the tax would be charged at the rate of zero percent without actually specifying the goods in respect of which the tax was paid. There is considerable force in the contention raised by the learned DR for the department. For instance, in the present case, since only goods have been specified in the SRO 549 in respect of which the tax has been paid at the rate of zero percent, the consequence is that the appellant has been denied to pay tax at the rate of zero percent on all kinds of goods which were enumerated in PCT Heading 2709.0000. For instance, according to the learned DR, there is a wide array of goods that are specified in the aforesaid PCT Heading. Except for the good petroleum crude oil from the said PCT Heading all of the other goods have been ousted by SRO 549 and the effect is that the appellant has been denied to pay zero percent tax on supply of condensate without properly specifying in the said SRO. Further by way of illustration, the learned DR for the department has referred to SRO 462(I)/2007 which was issued by the exercise of powers conferred by section 4(c) and which clearly specified the goods in respect of which the tax has to be charged at the rate of zero percent. Historical consideration of clause (c) of section 4 clearly shows that the delegation has been made on the Federal Government to specify goods on which tax has been paid at the rate of zero percent in terms of section 4 of the Act, 1990. It cannot be deemed that the Federal Government under the delegated authority conferred by section 4(c) can merely specify the class of goods in the general term about taxable supplies being made by the registered person without identifying the goods on which the tax is to be paid. This is the proper procedure it seems that the power under Section 4(c) has to be exercised by the Federal Government. A somewhat similar question had dilated upon by Hon’ble Sindh High Court reported as Ghandhara Nissan Diesel Ltd. v. Collector, Large Tax Payers Unit and 2 others, (PTCL 2006 CL. 673) and the following observations made by the Division Bench: -

“17. We further find that the legislature has itself given entitlement to a class of goods in respect whereof input tax can be reclaimed or deducted and has further specified a class of goods, the payment of tax whereon, shall not be allowed to be reclaimed or deducted from the output tax. The legislature has not empowered the Federal Government to create any other class of goods in general terms excluding the same from the purview of reclaim or deduction of input tax. It has merely empowered the Federal Government to specify meaning thereby, to mention particularly or determine the specific goods which otherwise entitle the registered person for re-claiming or deducting input tax, to exclude from such concession. Thus, the creation of a new class of goods in general terms disentitling the registered person from reclaiming or deducting input tax paid on such goods is not in consonance with the substantive provision contained in section 8(1)(b) of the Sales Tax Act. It is manifestly beyond the authority delegated to the Federal Government by the legislature. A perusal of the S.R.O 556(I)/96 dated 1.7.1996 which was superseded by S.R.O. 1307(I)/97 and Notification No. S.R.O 578(I)/98, dated 12.06.1998 which superseded Notification No. S.R.O 1307(I)/97 shows that the Federal Government specified goods in respect of which a registered person was not entitled to claim input tax. A reading of the two notifications further shows that the Federal Government itself held the view that the goods acquired by a registered person for the purpose of taxable supplies made or to be made though they are not a direct constituent and integral part of the taxable goods produced, manufactured or supplied were entitled to claim of deduction of input tax and therefore a necessity was felt for the exercise of delegated authority to specifically exclude them from the benefit of this provision. Under these two notifications no new class of goods as purported to be invented under S.R.O 1307(I) 97 was created.” (Emphasis supplied)

The above observations regarding proper construction of section 8(1)(b) of the Act, 1990 are supportive of the stance taken by the department for interpretation of pari materia provision of section 4(c) ibid. As a result, we find that zero-rating applies to Petroleum crude oil only and which does not include condensate.

         The legislative history of SRO 549 further fortifies our opinion as initially SRO 462(I)/2007 dated 9th June 2007 was issued by the Federal Government in the exercise of the powers conferred by clause (c) of section 4 of the Act which specify the goods that would be charged to tax at the rate of zero percent without any conditions and restrictions. The said SRO was subsequently amended through SRO 1164(I)/2007 dated 30th November 2007 whereby after S.No.8 in the first column and the entries relating thereto in the second and third columns, the new serial number and the entries relating thereto without any conditions and restrictions was added namely “9. Petroleum crude oil (PCT heading 2709:0000)”. However, on 11th June 2008 a new SRO 549(I)/2008 was issued by the Federal Government in the exercise of the same powers conferred under clause (c) of section 4 wherein for the first time the conditions and restrictions inter alia “import and supplies thereof” on the good “Petroleum crude oil (PCT Heading 2709.0000)” were imposed for availing the benefit of zero-rating tax. It is pertinent to mention here that in the existence of the said SRO 549, a serial No.10 for supplies of locally produce petroleum crude oil without any condition was specifically inserted through Finance Act, 2014 in Fifth Schedule to the Act, 1990 for levy of sales tax at the rate of zero percent with effect from 01.07.2014 whereas the tax period under consideration in the instant case is July 2013 to June 2014.

         In view of the above, the answers to the question Nos. (ii) and (iii) are in the negative against the respondent registered person.  

14.    As far as the second issue concerning allegedly short payment of sales tax and FED on sale of natural gas is concerned, the submissions made on behalf of the respondent registered person has substance. The learned Commissioner Inland Revenue (Appeals) has aptly discussed all aspects of the subject issue in detail. The appellant department has failed to point out any legal or factual infirmity in the impugned appellate order and has not put forth any documentary or material evidence to rebut the observations and findings of the learned Commissioner (Appeals). We find no infirmity in the impugned order of the learned Commissioner (Appeals) to this extent and do not feel persuaded to interfere with the treatment meted out by the first appellate authority. Accordingly, the impugned order is maintained and the appeal of the department under reference on this score is dismissed being devoid of merit.

14.    Both the appeals are disposed of in the above terms. Let this order be sent to the learned Chairman, FBR and Member (Legal) for information. This order consists of (34) pages and each page bears my signature.


 

Sd/-
(M. M. AKRAM)
JUDICIAL MEMBER

Sd/-
 (IMTIAZ AHMED)
 ACCOUNTANT MEMBER
 

 

Annexure “A”

(Import and Supply)

Sr. No.

Section of Sales Tax Act, 1990

1.

Section 2(43A)(d)

2.

Section 3(3B)

3.

Serial No. (103) of the Sixth Schedule

4.

Serial No. (107) of the Sixth Schedule

5.

Serial No. (45) of the Eighth Schedule

6.

Serial No. (56) of the Eighth Schedule

 

Annexure “B”

(Import or Supply)

Sr. No.

Section of Sales Tax Act, 1990

1.

Section 2(46)(h) last proviso

  

Annexure “C”

Comparative chart of similar items in Sixth Schedule as of 30.06.2020 and S.R.O. 549(I)/2008

Sr. No.

Description of Product

Serial number of the Sixth Schedule to the Sales Tax Act, 1990

Serial No of S.R.O. 549(I)/2008

1.

Uncooked poultry Meat (PCT Heading 02.07)

72

4(i)

2.

MILK (PCT Heading 04.01)

73

4(ii)

3.

Flavored Milk (PCT Heading 0402.9900)

74

4(iii)

4.

Cream (PCT Heading 04.01 and 04.02)

73A

4(iv)

5.

Milk and cream concentrated or containing added sugar or other sweetening matter (PCT headings 0402.1000, ………

14, 74

4(v)

6.

Yogurt (PCT Heading 0403.1000)

75

4(vi)

7.

Whey (PCT Heading 04.04)

76

4(vii)

8.

Butter (PCT Heading 0405.1000)

77

4(viii)

9.

Desi ghee (PCT Heading 0405.9000)

78

4(ix)

10.

Cheese (PCT Heading 0406.3000)

79

4(x)

11.

Processed cheese not grated or powered (PCT Heading 0406.3000)

80

4(xi)

12.

Frozen, prepared, or preserved sausages and similar products of poultry meat or meat offal (PCT Heading 1601.0000)

82

4(xii)

13.

Meat and similar products of prepared frozen or preserved meat or meat offal of all types including poultry meat and fish (PCT Heading 1602.3200…………..

83

4(xiii)

14.

Preparations for infant use, put up for retail sale (PCT Heading 1901.1000)

84

4(xiv)

15.

Fat filled milk (PCT Heading 1901.9090)

85

4(xv)

16.

ETC

ETC

ETC

 

at

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