M/s Attock Gen Limited. Vs The Commissioner IR, Zone-1, LTO, Islamabad.

 APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I, ISLAMABAD

ITA No.1403/IB/2024

(Tax Year 2018)

 

M/s Attock Gen Limited, 5th Floor, Attock House, Morgah, Rawalpindi.		Appellant
	Vs
The Commissioner Inland Revenue, Zone-I, CTO, Islamabad.		Respondent
Appellant By:		Mr. Aazar A. Hameed, ACA Mr. Moeen-uddin, ACA
Respondent By:		Ms. Naila Gul, DR

 

Date of Hearing:		13.11.2024
Date of Order:		11.12.2024

ORDER

M. M. AKRAM (Judicial Member): The titled appeal was transferred by the Commissioner of Inland Revenue (Appeals-IV), Islamabad, on August 29, 2024, pursuant to Section 126A(4) of the Income Tax Ordinance, 2001 ("the Ordinance"), as the tax assessment value exceeded twenty million rupees. Consequently, this Tribunal is now vested with the responsibility of adjudicating the appeal.

Case Background

2.      The appellant taxpayer in this case is a company engaged in a power generation project. Profits and gains from the project are exempt from income tax under Clause (132), Part I, of the Second Schedule to the Ordinance. Proceedings under Section 122(5A) of the Ordinance were initially finalized on June 1, 2022, resulting in a tax demand of Rs. 172,478,612. Aggrieved by this outcome, the taxpayer filed an appeal before the Commissioner of Inland Revenue (Appeals-IV), Islamabad. Through Order No. 611/2022, dated November 7, 2022, the Commissioner (Appeals) annulled the initial order and directed the Additional Commissioner Inland Revenue (Add CIR) to re-examine the record, address discrepancies or objections raised by the taxpayer, and issue a detailed speaking order. In compliance, a notice under Section 122(5A) read with Section 124 of the Ordinance was issued on October 3, 2023, with a compliance deadline of October 10, 2023. This deadline was subsequently extended to October 25, 2023, upon the taxpayer’s request. On the extended date, the taxpayer’s authorized representative (AR) appeared before the tax authorities. After reviewing the departmental inquiries and the available record, the Add CIR concluded the proceedings and issued an amended order on November 7, 2023. In this amended order, the Add CIR rejected the taxpayer’s claim for exemption on income derived from an insurance claim, the sale of scrap, and the gain on the sale of fixed assets under Clause (132), Part I, of the Second Schedule to the Ordinance.

Findings of the Add CIR

3.      The Assessing Officer concluded that income from the aforementioned sources did not qualify for exemption under Clause (132) of Part I of the Second Schedule to the Ordinance, as it was not derived from the profits and gains of the power generation project. Conversely, the taxpayer contended that this income was part and parcel of the project’s income. The taxpayer argued that the exemption clause should not be narrowly construed to refer exclusively to income from the sale of electricity. According to the AR, the phrase "profits and gains" from an electric power project has a broader interpretation and includes profits earned from sources closely or remotely related to the project's operation. This argument, however, was not accepted by the Add CIR, who held that income assessable under Section 39 of the Ordinance could not be attributed to the running of the project. Consequently, the proceeds were considered taxable under the head "Income from Other Sources." Furthermore, the Add CIR imposed the Workers’ Welfare Fund (WWF) charge, rejecting the taxpayer’s assertion that it did not qualify as an "industrial establishment" under the WWF Ordinance, 1971. Dissatisfied with this decision, the taxpayer filed an appeal with the Commissioner Inland Revenue (Appeals-IV), Islamabad. On August 29, 2024, the case was transferred to this Tribunal under Section 126A(4) of the Ordinance. The taxpayer has challenged the amended order on several grounds.

Proceedings Before the Tribunal

4.      The case was heard on November 13, 2024. The taxpayer’s authorized representative (AR) argued that proceeds from the sale of scrap, insurance claims, and gain on the sale of fixed assets during the tax year were directly connected to the power generation project, the income from which is exempt under Clause (132), Part I, of the Second Schedule to the Ordinance. It was explained that the costs of these items were recorded against exempt income without impacting the computation of taxable income. The AR emphasized that the plant, machinery, articles, stores, and other assets used in electricity generation, whose costs had been accounted for against exempt income, were integral to the taxpayer’s exempt business activities. Relying on several precedents, the AR asserted that this Tribunal has consistently recognized such receipts as exempt when closely linked to the exempt operations of the electricity generation project. In support, the AR cited judgments reported in 2013 PTD 349 (Trib), 2011 PTD 2440, 2006 PTD 499, and 2005 PTD 1208. It was contended that these precedents establish that proceeds from the sale of scrap, insurance claims, and fixed assets related to the project qualify for exemption as part of business income under Clause (132) of the Ordinance.

4.      Summary of Arguments on Workers’ Welfare Fund (WWF) Liability 

The learned Authorized Representative (AR) for the appellant presented detailed arguments regarding the levy of WWF under the Workers’ Welfare Fund Ordinance, 1971, which are summarized below for clarity.

1. Industrial Establishment.

 

1.1    Definition under WWF Ordinance

 

The definition of "industrial establishment" in Section 2(f) of the Workers' Welfare Fund Ordinance, 1971, specifies that the establishment must produce, adapt, or manufacture articles using mechanical or other non-human energy. Amendments made through Finance Acts 2006 and 2008, which attempted to expand this definition, were struck down by the Supreme Court of Pakistan.

1.2    Distinction between "Articles" and "Goods"

 

The Constitution of Pakistan (Article 260) and the Sale of Goods Act distinguish between "materials," "commodities," and "articles." Electricity, while included in the definition of "goods," does not qualify as an "article" under the WWF Ordinance.

1.3    Legislative Treatment of Electricity as a Service

 

Electricity generation and supply are classified as services under various laws, including:

• Constitution of Pakistan (Article 157): Refers to electricity generation as an activity, not the creation of goods.
• Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997 (NEPRA Act): Defines "electric power service" and explicitly regulates electricity as a service.

1.4    Judicial and Regulatory Observations

• Various courts, including the Sindh High Court, Peshawar High Court, and international courts, have consistently recognized electricity supply as a service.
• NTDC, a key entity in the electricity sector, has communicated that it does not produce "articles" and is therefore not subject to WWF.

1.5    Terminology and Process Analysis

 

The WWF Ordinance uses "produced, adapted, or manufactured," which implies tangible items distinct from electricity. Electricity is continuously generated and measured in units of energy (e.g., kilowatt-hours), not weight or separable quantities. Case law from India and other jurisdictions supports that electricity is not an "article."

2.       Discrimination in WWF Levy

2.1    Inconsistent Application of WWF

The Tax Department has not levied WWF on similar entities in the following cases, demonstrating inconsistency and discriminatory treatment:

• Fauji Kabirwala Power Company Ltd (Tax Year 2005)
• UCH-II Power (Pvt) Ltd (Tax Year 2018)
• UCH Power (Pvt) Ltd (Tax Year 2023)
• Foundation Wind Energy-I Ltd (Tax Year 2020)

2.2    Appellant’s Own Case

 

For Tax Year 2008, the Tribunal remanded the matter back to the Assessing Officer, yet no further proceedings were initiated. Charging WWF in the present case violates principles of uniformity and non-discrimination.

Conclusion

The arguments demonstrate that:

1.   Electricity generation and supply do not involve the production, adaptation, or manufacture of articles as required under the WWF Ordinance.

2.   The Tax Department's inconsistent treatment of comparable cases constitutes unlawful discrimination.

Submission: The levy of WWF on the Appellant's income is neither legally supported under the definition of an "Industrial Establishment" nor consistent with precedent and established practice. It should therefore be deleted.

5.      Without prejudice to the above legal debate on the issue, the learned AR for the appellant contended that the learned Assessing Officer failed to provide any computation or working for the WWF charge and simply replicated the WWF amount levied in the original amended assessment order. This approach ignores the changes made in the amended assessment, particularly the exclusion of interest on delayed payments from taxable income. It was explained that the Assessing Officer erred in levying WWF on income exempt from tax, contrary to the provisions of the WWF Ordinance and judicial precedents, including:

• Peshawar High Court Judgment (2000 PTD 2182): It was held that WWF is not leviable on income exempted under the Income Tax Ordinance except under Section 48.
• Supreme Court of Pakistan: Affirmed that WWF is not chargeable on income exempt from tax under provisions other than Section 48 of the Income Tax Ordinance.
• Sindh High Court (2002 PTD 14): Concluded that WWF cannot be levied on income exempted under the Second Schedule of the Income Tax Ordinance.

Erroneous WWF Calculation:

 

The learned Assessing Officer further erred in determining WWF liability as PKR 75,744,956 based on a taxable income of PKR 3,787,247,800, whereas the actual assessed income was PKR 135,476,804. Correctly computed, the WWF liability should be PKR 2,709,536 instead of PKR 75,744,956.

5.      On the other hand, the learned DR for the department supported the order of the Add CIR and contended that there is no infirmity in the impugned order.

FINDINGS/DECISION  

6.      We have heard the parties and perused the record. The following issues/questions emerge from the pleadings and arguments presented by the parties for our  consideration:-

i.        Whether the proceeds from the sale of scrap, insurance claims, and gains on the sale of fixed assets during the tax year constitute business income of the project and qualify for exemption under Clause (132), Part I, of the Second Schedule to the Ordinance?

ii.       Whether the Worker’s Welfare Fund (WWF) is applicable to a power generation project under the Workers’ Welfare Fund Ordinance, 1971?

Before answering question no. (i) and interpreting the relevant clause (132) of Part-1 of the Second Schedule to the Ordinance, it is crucial to first understand the distinction between the terms "Profits and Gains" and "Any Income" as used in the various clauses of Part-1 of the Second Schedule to the Ordinance. It is essential to avoid conflating these two expressions. While granting exemptions, the legislature has intentionally employed the term "Profits and Gains" in clause (132) of Part-1 of the Second Schedule to the Ordinance. By contrast, other exemption clauses, such as clause (126AD) of Part-1 of the Second Schedule to the Ordinance, begin with the phrase "any income derived." This deliberate choice of language demonstrates the legislature's intent to differentiate between exemptions specific to "profits and gains" and those applicable to "any income" arising under all heads. Moreover, it is important to recognize that conceptually, "income" and "total income" are distinct from "profits and gains." There are various "heads of income," and if an assessee earns income from multiple heads, these are aggregated for determining the "total income." "Profits and Gains of Business and Profession" represent just one of these heads of income.

7.      The terms “profits and gains” and “any income” are commonly used in tax law, but they have distinct meanings and implications. Following is an explanation of both terms and their differences:

1. Profits and Gains

• Definition and Scope:

The term "profits and gains" refers specifically to the net financial benefit or advantage derived from business or professional activities. This term is commonly associated with income from business operations, including trading, manufacturing, or providing services.

• Context in Clause (132):

In Clause (132) of the Ordinance "profits and gains" relate specifically to the financial benefits derived from an electric power generation project. This indicates that the exemption applies to the income arising directly from the operation of such a project, such as revenue from electricity generation, less the expenses incurred in generating it.

2. Any Income

• Definition and Scope:

The term "any income" is broader and more inclusive than "profits and gains." It encompasses all types of income received or accrued to a taxpayer, regardless of its source. This could include income from dividends, interest, rents, capital gains, or even non-business activities.

• Context in Clause (126AD):

In Clause (126AD), "any income" explicitly refers to dividend income received by China Overseas Ports Holding Company Limited. The use of "any income" ensures that all types of income derived from the specified companies qualify for exemption, without restricting it to specific categories like business profits.

Key Differences Between the Terms:

Aspect	Profits and Gains	Any Income
Scope	Narrower; relates to business operations or activities that generate financial benefits.	Broader; includes all forms of income, regardless of the source.
Example	Revenue minus expenses from an electricity generation project.	Dividend income, rent, capital gains, or other miscellaneous income.
Applicability	Linked specifically to income derived from business or trade activities.	Covers all types of income, including non-business sources.
Implication in Clauses	Restricted to project-specific business income, as in Clause (132).	Includes all forms of income specified, such as dividend income in Clause (126AD).

Conclusion

In the context of the Ordinance:

• "Profits and gains" in Clause (132) is limited to operational income directly tied to the electric power generation project.
• "Any income" in Clause (126AD) has a wider scope, covering all income types received by the taxpayer from specified sources, ensuring comprehensive tax exemption.

The distinction ensures clarity in applying exemptions based on the type of income and its source.

8.      Answer to Question (i):

To determine whether income derived from the sale of scrap by an electric power generation project qualifies for exemption under clause (132) of Part-1 of the Second Schedule to the Ordinance, a detailed analysis of the clause and its implications is essential. The relevant portion of the clause of (132), Part-1 of the Second Schedule to the Ordinance is reproduced hereunder for ease of reference:-

“(132) Profits and gains derived by a taxpayer from an electric power generation project set up in Pakistan on or after the 1st day of July, 1988. The exemption under this clause shall apply to such project which is---”  (Emphasis supplied)

1.   Primary Purpose of the Exemption:

Clause (132) specifically exempts "profits and gains derived by a taxpayer from an electric power generation project." This exemption is directed at income directly attributable to the core activity of power generation. Income arising from activities incidental to power generation, such as the sale of scrap, gain on sale of fixed assets, etc does not directly result from the generation of electricity.

2.   Direct vs. Incidental Income:

Income from the sale of scrap is generally considered incidental or ancillary rather than a direct profit from the primary activity of the project. Since the exemption applies solely to profits derived from power generation, incidental incomes such as scrap sales do not qualify, as they are not inherently connected to the power generation process.

3.   Interpretation of "Derived From":

Tax law typically interprets the term "derived from" narrowly, restricting its application to income directly tied to the primary business activity. The sale of scrap is not an inherent part of the power generation process but rather a by-product of operational activities like equipment replacement or maintenance. Consequently, it does not satisfy the strict interpretation of income "derived from" electric power generation. While interpreting clause 176 of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979—which granted exemption to profits and gains derived from electric power generation projects, similar in scope to clause (132) of Part-I of the Second Schedule to the Income Tax Ordinance, 2001—the Supreme Court, in the cases of Generation Pakistan Ltd. and others v. Income Tax Appellate Tribunal of Pakistan and others (2004 SCMR 1319), applied a restrictive interpretation.

Further, it is settled law that an exemption clause has to be strictly construed. Reliance may be placed to M/s Humayun Ltd. v. Pakistan and others (PLD 1991 SC 963), the basic principles and rationale of the exemption clause are emphasized by reproducing an excerpt from the case Bank of Commerce v. Tennessee (161 US 134), which is as under:-

"Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of anyone to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded on plain language. There must be no doubt or ambiguity in the language used upon which the claim to the exemption is founded. It has been said that a well-founded doubt is fatal to the claim; no implication will be indulged in for the purpose of construing the language used as giving the claim for the exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power". 

In Karachi Development Authority v. Central Board of Revenue through Members Central Excise and Land Customs, Islamabad and others (2005 PTD 2131), the Hon'ble Apex Court held,    

"Taxing statutes were construed strictly in favour of subjects whereas the provisions relating to exemptions were construed in favour of Government as Taxing authority and the Government while exercising the power of exemption of duty on a particular article, might impose such condition, limitation, and restriction as it deemed fit."               

A necessary corollary is that while interpreting an exemption clause, plain language is to be considered; implications are not allowed; conditions stipulated in the exemption clause must be fulfilled; and in case of any doubt or two possible interpretations, the one favouring chargeability of tax is to be employed. It is also a principle that exemption presupposes the chargeability, the judgment in Collector of Customs and others Vs. Ravi Spinning Ltd. and others (1999 SCMR 412) can be referred to.

Conclusion:

The income derived from the sale of scrap by an electric power generation project is unlikely to be exempt under clause (132) of Part-1 of the Second Schedule to the Ordinance. This is because such income is considered incidental and not directly derived from the activity of power generation.

9.      Analysis of Insurance Proceeds and Gain on Sale of Fixed Assets:

1.   Insurance Proceeds:

Insurance proceeds received by an electric power generation project do not qualify for exemption under clause (132). These proceeds are compensation for losses or damages and not income directly derived from the core activity of power generation. The strict interpretation of the phrase "derived from" excludes contingent incomes like insurance recoveries, as they do not arise from the process of generating electricity.

2.   Gain on Sale of Fixed Assets:

Similar to the sale of scrap, any gain realized on the sale of fixed assets would also likely fall outside the scope of the exemption. The gain from disposing of fixed assets is unrelated to the project’s primary business of generating power and is instead considered incidental income.

Conclusion:

Neither insurance proceeds nor gain on the sale of fixed assets qualifies for the exemption under clause (132). Both are incidental or contingent incomes that do not meet the criteria of being "profits and gains derived from" electric power generation.  Top of Form

10.    Based on the above discussion, it is declared that the sale proceeds from scrap, insurance claims, and gains on the sale of fixed assets fall within the ambit of the appellant's business income for the tax year under consideration. However, such income does not qualify for exemption under clause (132) of Part-1 of the Second Schedule to the Ordinance. Accordingly, the assessing officer is directed to recompute the income under these heads after allowing all admissible expenses as per the law and subsequently levy tax in accordance with the applicable legal provisions.

12.    Answer to Question (ii):       Levy of Workers Welfare Fund. 

The taxpayer has argued that it is not covered by the definition of “industrial establishment” as defined in the WWF Ordinance, hence, it is not liable to pay the Workers Welfare Fund (WWF). In this respect, the learned AR for the appellant has made many arguments some of which are misplaced and/or self-contradictory yet are dealt with hereinbelow jointly and severally. Before dilating upon the arguments, it would be beneficial to quote the relevant excerpt from Section 2 of the WWF Ordinance, 1971 which defines the term “industrial establishment” as under: -

(f) “industrial establishment” means ---- 

(i)          Any concern owning or managing a factory, workshop, or other establishment in which articles are produced, adapted or manufactured with the aid of electrical, mechanical, thermal, nuclear or any other form of energy transmitted mechanically and not generated by human or animal agency. 

It has been argued by the learned AR that the taxpayer generates electricity and its consequent produce, that is, the electricity does not fall within the scope of the term “article” as used in the above-quoted definition of the “industrial establishment”. The term “article” is not defined in WWF therefore, we must have recourse to the dictionary definition of the said term. Black’s Law Dictionary (12^th ed. 2024) identifies the term “article” as:

“Generally, a particular item or thing <article of clothing>” 

The above definition signifies that an article must be capable of being called, referred to or particularised as an “item” or “thing”. It is argued by the taxpayer that the intangible and invisible nature of electricity excludes it from the objective scope of being called an “item” or a “thing”. We are afraid that this interpretation if accepted, would limit the levy of WWF on the establishments which are producing liquid or solid materials to the exclusion of gases or other invisible or intangible substances. Nevertheless, we do not see any such intention of the legislature qualifying the term article when enunciated in the definition of the “industrial establishment”. Hence, we find that the term “article” as used in the above-quoted definition of industrial establishment does include electricity. 

In this context, we are persuaded by the speech of Lord Reid in the case reported as Longhurst v Guildford Water Board [1961] 3 All ER 545 at 546–547, HL, per Lord Reid in which his lordship, in a similar context as is in this case, rejected the argument that the term article is limited to solid substances and does not include liquid (water) or gasses.

“The question whether premises are a factory depends on the nature of the process which is carried on there: the definition specifies various kinds of process, but all are processes dealing with “articles”. The respondents say that water is not an article and therefore dealing with it cannot make their premises a factory. They say that no one has ever maintained that the Factories Act 1937, applies to any kind of waterworks. This case therefore raises an important new point. The word “article” has many different meanings or shades of meaning and therefore the context in which it occurs is of crucial importance. The respondents maintain that an article must be a solid article and that the word excludes liquids and gases, or alternatively, they maintain that a natural substance or at least a natural liquid or gas is not an article: no one would call water in a stream or air in a room an article and it can make no difference that it is collected, impounded or confined in some way. There may have been a time when few liquids but alcohol and no gases were made or treated by industrial processes, but that time is long past and I find it impossible to suppose that as recently as 1937 Parliament intended to make so fundamental a distinction between solid articles and, say, petrol or coal gas as to deny the benefits of the Factories Act 1937, to workers in premises where only liquids or gases were being treated or manufactured. Many substances take solid, liquid or gaseous form according to temperature and pressure and it would be, to say the least, odd, if in this context a substance is an article when solid, ceases to be an article when made liquid or gaseous, and becomes an article again when it solidifies. I need not consider whether water is an article before it has been impounded or reduced into possession. But if other liquids are articles, I see no reason why the natural origin of water should make a difference. No doubt water is generally dealt with in larger quantities than other liquids, but it could not be that a small quantity of water is an article, but a large quantity is not. It therefore appears to me that the water in the filter house is an article and that by reason of its treatment there, the premises are a factory within the meaning of the definition in s 151.” 

In view of the above, it is clear that there is little difference between electricity, gas, or water, and the intangible and invisible nature of electricity by no means can be used as a lawful rationale to exclude it from the objective scope of being called an article. 

13.    It was further argued by the learned AR that electricity is a “commodity” which is distinct from an “article”, and the terms cannot be substituted with each other in the given scenario. In further expanding on his argument, the learned AR has invited us to interpret the term “article” through the prism of Article 260 of the Constitution of Pakistan and treat it as a term distinct from “commodity” and “material” as used in the definition of goods under Article 260 of the Constitution of Pakistan. To quote from Article 260 of the Constitution of Pakistan: -

Article 260

Constitution of Pakistan 1973 

“‘goods’ includes all materials, commodities and articles;” 

It is argued by learned AR that the use of the words “material”, “commodities” and “articles” clearly demonstrates that the three terms bear different and distinct meanings. We are afraid that so far as the definition of “goods” as outlined in the Constitution of Pakistan is concerned the argument of the learned AR does not hold much water in the context of this case. In this respect, we would limit our analysis in relation to the words “commodities” and “articles” in the context of “electricity” to hold that they are not mutually exclusive terms and as such they cannot be distinguished from each other in a watertight compartment. We are quite troubled with this argument because according to the Short Oxford English Dictionary the term “commodity” means “an article to be bought or sold.”; and the term “article” means “thing, object, item, commodity”.       

14.    In this context, the learned AR has relied upon a decision of the Hon’ble Supreme Court of India reported as Commissioner of Sales Tax, Madhya Pradesh v Madhya Pradesh Electricity Board, (1970 AIR 732). The learned AR has argued that the Hon’ble Supreme Court overturned the decision of the Madhya Pradesh High Court holding that electricity was a “good”. It is further argued by the learned AR that the Hon’ble Supreme Court of India in overturning the decision of the lower court did admit that the electricity is not an “article”.  We have gone through the above-referred decision and find that the argument of the learned AR is misplaced as well as misdirected. A wholesome analysis of the decision of the Hon’ble Supreme Court of India reveals that it has never specifically declared that the electricity was not an “article”. Likewise, in overturning the decision of the Madhya Pradesh High Court, there was no reason for the Hon’ble Supreme Court of India to declare so because the lower court, that is, the Madhya Pradesh High Court has never declared that electricity is an article; rather it had declared contra, that is, the “electricity could not be regarded as an article or matter which could be possessed or moved or delivered.” Hence, the reliance of the learned AR that the Hon’ble Supreme Court of India did admit that electricity is not an “article” is not well founded.

15.    The learned AR has submitted that there would have been no dispute of levy of WWF by the taxpayer, if the legislature had used the term “goods” instead of “article” in clause (i) of subsection (f) of section 2 of the WWF Ordinance, 1971 in defining the term “industrial establishment”. In this respect, the learned AR has un-understandably argued that section 2 of the Sale of Goods Act, 1930 defines the term “goods” which initially did not include electricity, yet it was so included by legislative means through amendment introduced by Ordinance XLVII of 1962. We note that this argument of AR contradicts the submission that electricity is a “commodity” and as such is covered within the scope of “goods” as defined in Article 260 of the Constitution of Pakistan. Nevertheless, so far as the facts of this case are concerned, the argument of the learned AR that the “electricity” is not “goods” but for the definition under the Sale of Goods Act, 1930, does have any bearing on the findings of this case. This is so because the law for time being in force at the time relevant to this case remains that the term “electricity” did come within the definition of the “goods” as defined under the Sales Tax Act, 1990, as well as, a commodity (as admitted by the AR) and/or additionally as an “article” (as concluded above) under Article 260 of the Constitution of Pakistan, 1973. The above findings also sufficiently address the arguments of the learned AR that (1) the isolated use of “article” in clause (i) of subsection (f) of section 2 of the WWF Ordinance, 1971 instead of “goods” has restricted the scope of the term “industrial establishment”; and (2) every article is a “good” but every “good” is not article.

16.    The learned AR further submitted that the process of generation of electricity is a service as opposed to a process of manufacture of goods. In relying on these submissions, the learned AR has referred to the legislative text used in different legislative and other instruments etc. The learned AR has specifically relied upon Section 2, 3, 7, 31 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997; condition of the supply of electricity with the consumers set out in Form No. CP-02 of Water and Power Development Authority (WAPDA); 2023 YLR 2082; and an unreferenced Judgement of Michigan court of appeal reported as Williams V. Detroit Edison Co. We have gone through each of the documents relied upon by the learned AR and find that the question that whether the “process” of generation of electricity is a service or manufacture of goods, does not have any relevance under clause (i) of subsection (f) of section 2 of the WWF Ordinance, 1971 because what matters here is the nature of final produce (electricity) created by that process. We have already determined that the electricity comes within the scope of “article” within the scope of “industrial establishment” clause (i) of subsection (f) of section 2 of the WWF Ordinance, 1971, hence, this question does not require any further dilation.

17.    In relying on case No. 09-02048 of the United States Bankruptcy Court for the District of Puerto Rico, the learned AR argued that the event of supply of electricity is service. The learned AR also submitted that the electric supply has been referred to as an essential service by the Hon’ble Sindh High Court in a judgment reported as 2023 CLD 718 Karachi. We find that the reliance of the learned AR is quite misplaced because the court in either of the cases did not dilate upon the question that the provision or sale of the electric power is a sale of “goods” or “services”. Moreover, as already pointed out the argument of “service” is opposed to the admitted position of the taxpayer that the electricity is “good”, we take this opportunity to observe that these hopping arguments made by the taxpayer have been extremely unhelpful to the taxpayer’s case. 

18.    We are further intrigued by another submission made by the learned AR in which while relying on the case from the Hon’ble Supreme Court of India reported at 1995 PTD 95 [204 ITR 412] the learned AR has asked us to find that “generation of electricity is kin to the construction of dam and not a manufacture or production of an article having components of raw material thereby not subject to WWF liability.” We have read the case relied upon by the learned AR and we find that their reliance on this case is wholly misplaced. Before going any further, it would be useful to quote the relevant excerpt at this juncture: -

“Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multistorey building. To say that all of them fall within the meaning of the word "articles" is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a darn is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices, etc. But to say that the end-product, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions "manufacture" and "produce" are normally associated with movables---articles and goods, big and small--but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building.” 

A perusal of the above quote reveals that the Hon’ble Supreme Court of India has declared that the construction of a dam cannot be characterised as the manufacture or production of an article, and the rationale behind the same was that manufacture and produce are normally used in the context of a moveable property as opposed to a construction activity associated with an immovable property. Now applying the above rationale in the context of the generation of electricity, which is of course not an immovable property, we have no other option but to find that the production of electricity is not kin to construction of a dam but essentially a manufacture or production of an article. 

19.    In relying on the legislative text used in Article 157 of the Constitution of Pakistan, 1973 the learned AR further argued that the process of creation of electricity is termed as “generation” of electricity as opposed to “production” or “manufacturing”, as used in the clause (i) of subsection (f) of section 2 of the WWF Ordinance, 1971. We do not find any force in the argument of the learned AR because in defining the term “electrical power” under clause (ix) of Section 2 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, (as has also been relied upon by the learned AR in his submissions) the legislature has used the phrase “production of electric power” in defining the term “electric power”. To quote:

“(ix)   ‘electric power’ means electrical energy or the capacity for the production of electric power.” 

We believe that the taxpayer does not dispute that the term “electric power” is not synonymous with “electricity”. Hence, we reject the argument of the learned AR that the creation of electricity cannot be termed as “production” or “manufacturing” but it can be only termed as “generation” of electricity.

20.    The learned AR further relies on correspondence No. COO/CPPA/DGMF/MF-1/1173-84 dated 08 February 2012 outlining their interpretation of the issue. Based on the said letter, the learned AR has argued that it had been communicated to the taxpayer by National Transmission & Dispatch Company Ltd (NTDC) that it was not in the business of producing an “article” and therefore not subject to the levy of WWF. The argument of the learned AR could have attached considerable weight if the said correspondence had been issued by the Federal Board of Revenue, Ministry of Law, Justice, and Parliamentary Affairs, or by the Ministry of Finance, Government of Pakistan. We note that the NTDC is a power transmission company managed by the Ministry of Energy Government of Pakistan, with no lawful mandate to interpret the revenue legislation. We are therefore unable to attach any weight to this correspondence No. COO/CPPA/DGMF/MF-1/1173-84 dated 08 February 2012.  

20.    For what has been discussed above, the answer to the question No. (ii) is in the affirmative against the appellant taxpayer. Therefore, the appellant is liable to pay the WWF under the WWF Ordinance, 1971.

21.    Computation of WWF

We are also not convinced by the arguments presented by the learned AR for the appellant that the Workers’ Welfare Fund (WWF) should be charged solely on taxable income and not on exempt income, for the following reasons:-

1.   Section 4(1) of the WWF Ordinance, 1971

This provision mandates that industrial establishments with a total income of at least five lakh rupees in a given year must contribute an amount equal to 2% of their total income to the Workers’ Welfare Fund (WWF). The term "total income" is explicitly defined in Section 2(i) of the WWF Ordinance as having the same meaning as provided in the Income Tax Ordinance. It is important to note that the definition of “total income” was amended through the Finance Act, 2006. However, the amendments introduced via the Finance Acts of 2006 and 2008 were subsequently declared ultra vires by the Hon’ble Supreme Court of Pakistan in the case reported in PLD 2017 SC 28. Therefore, we have applied the definition as it existed prior to the substitution.

Definition of Total Income Under the Income Tax Ordinance, 2001

Section 10 of the Income Tax Ordinance defines total income as comprising:

o   Income under all heads (e.g., salary, business, property, etc.), and

o   Income exempt from tax under any provision of the ordinance.

This definition unequivocally includes all income, irrespective of whether it is taxable or exempt.

2.   Sub-section (4) of Section 4, WWF Ordinance, 1971

This subsection authorizes the Taxation Officer to determine WWF's liability based on assessed income, considering amounts already paid. However, the calculation of WWF liability is based on the "total income" as referenced in sub-section (1) of Section 4.

3.   Legislative Alignment

o   Section 4(1) of the WWF Ordinance does not exclude exempt income from the computation of total income for WWF purposes.

o   Section 10 of the Income Tax Ordinance explicitly includes exempt income within the scope of total income, further affirming this interpretation.

4.   Legislative Intent

o   The inclusion of exempt income aligns with the underlying purpose of the WWF, which is to generate contributions for welfare measures.

o   The WWF is a levy designed to operate on a broad income base, encompassing all income sources rather than being limited to taxable income.

5.   Absence of Exclusion in the WWF Ordinance

o   The WWF Ordinance contains no provision that explicitly excludes exempt income from the calculation of total income. In the absence of such a provision, exempt income must be included.

Conclusion

• The WWF Ordinance employs the term "total income" without qualifying it as "taxable income."
• By incorporating the definition of total income from the Income Tax Ordinance, the WWF Ordinance adopts a broader interpretation that includes exempt income.
• Therefore, WWF contributions are to be calculated on the total income, including income exempt from taxation.

In light of the above discussion, the assessing officer is instructed to recalculate the WWF liability in accordance with the outlined principles.

22.    For what has been discussed above, the appeal of the appellant is disposed of in the manner stated above.

23.    The office is instructed to forward this order to the learned Member (Legal) of the Federal Board of Revenue for circulation among all adjudicating officers, ensuring their awareness and facilitating necessary action.   

 

	-SD-                   (M. M. AKRAM)                  JUDICIAL MEMBER
-SD- (IMRAN LATIF MINHAS) ACCOUNTANT MEMBER