APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I ISLAMABAD
ITA No.207/IB/2023
(Tax Year, 2018)
********
O R D E R
M. M. AKRAM (JUDICIAL MEMBER): The appellant taxpayer has filed the titled appeal challenging the
Order-in-Appeal No. 304/2023, dated January 20, 2023, issued by the
Commissioner of Inland Revenue (Appeals-I), Large Taxpayers Office (LTO),
Islamabad. This appeal pertains to the tax year 2018 and was filed under
Section 131(1) of the Income Tax Ordinance, 2001 (“the Ordinance”),
based on the grounds outlined in the memorandum of appeal.
2. The relevant facts culled out from the
record indicate that the appellant, a publicly listed company engaged in the
manufacturing, importing, purchasing, and marketing of fertilizers and
chemicals across Pakistan, filed its return of total income for the tax year 2018.
This return constituted a deemed assessment finalized under Section 120(1)(b)
of the Ordinance. Upon examination, the Additional Commissioner Inland Revenue
(Add CIR) identified the deemed assessment as erroneous and prejudicial to the
interest of revenue. Consequently, an amended assessment order was issued on
September 13, 2019, assessing the appellant's income at Rs. 20,527,687,233/-
and creating a tax demand of Rs. 3,030,049,853/-. Subsequently, the learned
CIR(A), via an appellate order dated December 14, 2019, disposed of the appeal
filed by the appellant. In response, the appellant filed a second appeal before
the Appellate Tribunal Inland Revenue (ATIR) against the CIR(A)'s order, which
remains pending.
3. Pursuant to the appellate order dated
December 14, 2019, the Assessing Officer issued an appeal effect order dated
January 22, 2020, under Sections 124/122(5A) of the Ordinance. This order
addressed the issues confirmed by the CIR(A), determining the appellant's
income at Rs. 12,542,631,698/- and calculating a tax liability of Rs.
232,021,210/-.
4. On November 30, 2021, the learned CIR(A)
remanded the appeal effect order dated January 22, 2020, for re-examination.
The appellant subsequently filed a second appeal before the ATIR against the
CIR(A)'s order, which remains pending adjudication. Meanwhile,
the Assessing Officer issued a show-cause notice dated September 18, 2019,
proposing further amendment of the appellant’s assessment for the tax year 2018
under Section 122(5A) of the Ordinance. The appellant's Authorized
Representative (AR) submitted replies, which the Assessing Officer deemed
unsatisfactory. Consequently, a further amended assessment order was passed on
December 11, 2020, raising a demand of Rs. 412,346,949/-. The appellant filed
an appeal before the CIR(A) against this order. The CIR(A) disposed of the
appeal via an order dated December 7, 2022, under Section 129(1) of the
Ordinance. The appellant has filed a second appeal before the ATIR against the
CIR(A)'s order, which is still pending adjudication.
5. The Assessing Officer also issued a
show-cause notice dated October 25, 2021, under sub-section (4) read with
sub-section (5) of Section 122 of the Ordinance, proposing further amendment of
the assessment pursuant to the selection of the case for audit. The appellant's
replies were deemed unsatisfactory, and the Assessing Officer subsequently
issued a further amended assessment order on December 31, 2021, under Section
122(4) read with Section 122(5) of the Ordinance, raising a demand of Rs.
6,435,254,090/-. The appellant filed an appeal before the CIR(A), who disposed
of the matter via an order dated March 27, 2023. The appellant has filed a
second appeal before the ATIR against this order, which remains pending
adjudication.
6. Furthermore, the Additional Commissioner
Inland Revenue (Add CIR) issued a show-cause notice dated April 5, 2021,
proposing a further amendment of the assessment under Sections 122(5A) read
with Section 122(4) of the Ordinance for the tax year 2018. The appellant was
directed to provide explanations regarding the following issues:
|
Particulars |
Amount |
|
(i) |
Gas
Infrastructure Development Cess |
22,944,401,000 |
|
(ii) |
Tax
credit u/s 65B |
113,650,531 |
|
(iii) |
Workers
Profit Participation Fund |
511,757,000 |
|
(iv) |
Workers
Welfare Fund |
253,868,000 |
|
|
Other
direct expenses |
3,106,256,000 |
|
(v) |
Provision
for compensated leave absences |
1,470,781,000 |
|
(vi) |
Retirement
benefits |
263,835,000 |
|
(vii) |
Provision for doubtful debts |
1,758,000 |
|
(viii) |
Research
& development |
862,416,000 |
|
(ix) |
Re-measurement
loss on staff retirement benefits |
789,197,000 |
|
(x) |
Deficit
on re-measurement of investment available for sale |
193,427,000 |
In
response to the show-cause notice, the appellant submitted replies through
letters T-5783 dated June 9, 2021, and T-5430 dated May 21, 2021, addressing
the issues raised. Despite this, the Additional Commissioner Inland Revenue
(Add CIR) issued a further amended assessment order dated October 7, 2022,
under Section 122(5A) of the Ordinance, making the following additions and
disallowances.
|
|
Particulars |
Amount |
|
(i) |
Government Infrastructure Development Cess |
18,891,676,000 |
|
(ii) |
WWF |
617,366,189 |
|
(iii) |
Other direct expenses |
2,229,461,000 |
|
(iv) |
Provision for compensated leave absences |
1,470,781,000 |
|
(v) |
Retirement benefits |
235,566,000 |
|
(vi) |
Levy of super tax |
1,610,873,804 |
In the further amended assessment order dated October 7, 2022, issued
under Section 122(5A) of the Ordinance, the appellant's income was assessed at
Rs. 53,695,793,462, with a corresponding tax liability of Rs. 14,098,146,894.
For ease of reference, the relevant portion of the amended assessment order,
along with the computation, is reproduced below.
|
Amended income
vide amendment order dated 31st December 2021 |
30,250,943,273 |
|
Additions |
|
|
GIDC payable
under section 5 read of GIDC Act with section 20 of ITO 2001 |
18,891,676,000 |
|
Other direct expenses under section
21© |
2,229,461,000 |
|
Provision for compensated leave
absences under section 34(3) |
1,470,781,000 |
|
Retirement benefits under section
34(3) |
235,566,000 |
|
Amended income |
53,695,793,462 |
|
Tax chargeable |
17,921,616,359 |
|
Normal income tax |
16,108,738,039 |
|
Final/fixed/average/minimum
tax |
858,266,488 |
|
WWF |
617,366,189 |
|
Tax
credits (subject to verification) |
26,824,225 |
|
Super
tax |
1,610,873,804 |
|
Withholding
income tax (subject to verification) |
2,470,273,401 |
|
Advance
tax (subject to verification) |
2,600,000,000 |
|
Tax
payable |
14,098,146,894 |
Aggrieved by the
aforementioned order, the appellant filed an appeal before the learned
Commissioner of Inland Revenue (Appeals). Through the appellate order dated
January 20, 2023, the learned CIR (Appeals) disposed of the appeal against the
further amended assessment order dated October 7, 2022, upholding the
additions/disallowances on the following account:-
|
|
Particulars |
Rupees |
|
|
|
|
|
(i) |
Other indirect
expenses |
2,229,461,000 |
|
(ii) |
Gas
Infrastructure Development Cess |
18,891,676,000 |
|
(iii) |
Retirement benefits |
235,566,000 |
|
(iv) |
WWF |
617,366,189 |
|
(v) |
Provision for
compensated leave absences |
1,470,781,000 |
Still feeling aggrieved, the
appellant filed an appeal before this tribunal and assailed the impugned
appellate order on a number of grounds.
PROCEEDINGS BEFORE THE
TRIBUNAL
7. The case was heard numerous times and finally
on December 18, 2024. During the proceedings, the learned Authorized Representative
(AR) for the appellant focused exclusively on the addition/disallowance made
under the head "Gas Infrastructure Development Cess (GIDC)."
Regarding the other additions confirmed or remanded by the learned Commissioner
of Inland Revenue (Appeals), it was mutually agreed by the parties that these
matters would be referred back to the assessing officer for reconsideration.
Consequently, the primary issue in this case concerns the addition/disallowance
of the GIDC amounting to Rs. 18,891,676,000.
APPELLANT’S ARGUMENTS/SUBMISSIONS
8. The learned AR submitted
that GIDC was imposed under the GIDC Act, 2015, requiring specific gas
consumers, including the appellant, to pay a cess based on the volume of gas
consumed. Although the appellant recorded the GIDC as a liability in its
financial statements, the payment was not made during the tax year under review
because the constitutionality of the GIDC Act, 2015, was under judicial
consideration by the Honorable Supreme Court of Pakistan. Subsequently, in its
judgment dated August 13, 2020, the Supreme Court upheld the constitutionality
of the GIDC Act, 2015. Further civil review petitions were dismissed by the
Supreme Court on December 7, 2020, allowing the Government to recover arrears
in installments. Following this, the appellant and other fertilizer companies
filed suits in the Sindh High Court, which issued stay orders restraining
coercive recovery actions. These stay orders were reflected in multiple entries
made between 2020 and 2021.
9. The AR further contended that the Income Tax
Ordinance, 2001, is a comprehensive tax code, and its provisions override any
conflicting provisions in other laws, including the GIDC Act, 2015, as
explicitly provided in Section 3 of the Ordinance. The AR also referred to
Section 54, emphasizing that exemptions, reductions, or other provisions from
external laws hold no legal effect unless expressly incorporated into the
Ordinance. On the matter of accounting treatment, the AR argued that under the
accrual or mercantile system of accounting, as mandated for companies by
Section 32(2) of the Ordinance, GIDC should be deductible even if unpaid, as it
was accrued as a liability during the tax year. Furthermore, the AR referred to
Section 34(1) of the Ordinance, which states that expenditures are deemed
incurred when they become payable under the accrual method. Section 34(3) was
also cited to assert that an amount becomes payable when all
liability-determining events have occurred, and the liability can be measured with
reasonable accuracy. In conclusion, the appellant asserted that
the GIDC expense should be allowed as a deduction based on the principles of
accrual accounting and the overriding provisions of the Income Tax Ordinance,
2001. In support of the arguments, the learned AR for the appellant placed reliance on judgments reported as
(2006) 93 Tax 413 (SC), (1992) 65 Tax 254 (SC), (1985) 51 Tax 137 (HC), 2018
PTD 1344 (Trib), (2014) 109 Tax 141 (Trib.), 2012 PTD 1055 (Trib), (2011) 106
Tax 208 (Trib), (2006) 96 Tax 408 (Trib) and 1991 PTD 894 (Trib) wherein the
issue of allowability of an expenditure on accrual basis has been settled by
various Appellate Authorities in favour of the taxpayer. The AR also referred
to a judgment of the Tribunal in the case reported as (1996) PTD 890 (Trib)
wherein it was held that the provisions of any other law shall have no legal
effect unless also provided for under the Ordinance.
DR ARGUMENTS/SUBMISSIONS
10. The learned Departmental Representative (DR) contended that the
deduction of the Gas Infrastructure Development Cess (GIDC) claimed by the
appellant, amounting to Rs. 18,891,676,000, was not permissible as the amount
was not actually paid during the tax year under review. Relying on Section 5 of
the GIDC Act, 2015, the DR emphasized that the cess qualifies as an allowable
expense for income tax purposes only when it has been paid. The provision
explicitly states:
"The cess paid
by a company shall be an expenditure for which allowance is to be made under
the Income Tax Ordinance, 2001, in computing the profits or gains of that
company."
11. The DR argued that since the
GIDC was merely recorded as payable in the appellant's accounts and no actual
payment was made, the claimed deduction was invalid. The purpose and wording of
Section 5 make it clear that actual payment is a precondition for claiming GIDC
as an expense under the Income Tax Ordinance, 2001. The DR further asserted
that the reliance placed by the appellant on Section 54 of the Ordinance, which
addresses the overriding effect of the Ordinance, was misplaced, as the
assessing officer had not disputed the applicability of the GIDC Act, 2015 to
the Income Tax Ordinance, 2001. The DR also addressed the appellant’s argument
regarding the accrual basis of accounting under Sections 34(1) and 34(3) of the
Ordinance. While acknowledging that the accrual system allows for expenditure
to be recorded when it becomes payable, the DR argued that the liability for
GIDC had not crystallized during the tax year in question. The DR pointed to
the ongoing legal proceedings surrounding the GIDC Act, 2015:
1.
The Sindh High Court (SHC),
in its judgment dated October 26, 2016, declared the GIDC Act, 2015
unconstitutional.
2.
The Supreme Court of
Pakistan (SCP), in its judgment dated August 13, 2020, upheld the
constitutionality of the Act.
3.
Following the SCP judgment,
civil review petitions were dismissed on December 7, 2020, allowing the
Government to recover arrears in installments.
Subsequently, the appellant and other fertilizer companies filed suits
in the SHC, resulting in stay orders restraining the Federal Government and
relevant authorities from taking coercive action for the recovery of unpaid
GIDC arrears. The SHC issued these stay orders on multiple dates, including
September 10, 2020, and January 14, 2021.
12. Against this backdrop, the learned
DR argued that the liability for GIDC had not become definitive, as the stay
orders prevented any coercive recovery actions. Therefore, under Section 34(3)
of the Ordinance, which stipulates that an amount is payable only when all
liability-determining events have occurred and the liability can be determined
with reasonable accuracy, the appellant’s claim was premature. In conclusion,
the DR asserted that the GIDC expense claimed by the appellant did not meet the
conditions of actual payment under the GIDC Act, 2015, or the criteria for
recognition under Sections 34(1) and 34(3) of the Income Tax Ordinance, 2001.
Accordingly, the claimed deduction was not allowable.
FINDINGS/DECISIONS
13. We have heard the parties and perused the
record. The controversy between the parties hinges upon the interpretation of
Section 5 of the GIDC Act, 2015, and Section 34 of the Income Tax Ordinance,
2001.
HISTORY
OF GIDC ACT, 2015
In
2011, the Gas Infrastructure Development Cess Act, 2011 (GIDC Act, 2011) was
enacted as a Money Bill in the National Assembly, categorizing the imposed Cess
as a tax. The Cess was levied on industrial and commercial consumers of natural
gas to fund infrastructure for importing natural gas via pipelines from Iran
and Turkmenistan and for transporting liquefied natural gas (LNG) imported from
Qatar through the North-South pipeline. The GIDC Act, 2011 was challenged in
the Peshawar High Court by industrial and commercial consumers in Khyber
Pakhtunkhwa, resulting in a 2013 decision declaring it unconstitutional. On
appeal, the Supreme Court upheld this decision on 22 August 2014 in the Durrani Ceramics case
(2014 SCMR 1630), holding that the Act constituted a fee rather than a tax and
could not have been introduced as a Money Bill under Article 73 of the
Constitution. Following the Supreme Court's ruling, the President promulgated
the Gas Infrastructure Development Cess Ordinance, 2014 on 25 September 2014,
reimposing the Cess with retrospective effect from 15 December 2011. This
Ordinance remained effective until the Federal Government's review petition
against the Durrani
Ceramics decision was dismissed by the Supreme Court
on 15 April 2015 (PLD 2015 SC 354). Subsequently, the Parliament enacted the
Gas Infrastructure Development Cess Act, 2015 (GIDC Act, 2015) on 15 May 2015.
This Act reimposed the Cess on all natural gas consumers except domestic consumers
and retrospectively legitimized the levies collected under the earlier GIDC
Act, 2011, and GIDC Ordinance, 2014. The AR also submitted the following
details of GIDC accrued and paid in prior years:-
Year ended December, 31 |
GIDC opening balance |
Total billed |
Total paid |
GIDC closing balance |
|
|
Rupees |
Rupees |
Rupees |
Rupees |
|
|
A |
B |
C |
D = (A+B-C) |
|
|
|
|
|
|
|
2012 |
- |
11,055,000,000 |
11,055,000,000 |
- |
|
2013 |
- |
11,201,000,000 |
2,669,000,000 |
8,532,000,000 |
|
2014 |
8,532,000,000 |
17,732,000,000 |
1,499,000,000 |
24,765,000,000 |
|
2015 |
24,765,000,000 |
18,103,000,000 |
42,039,000,000 |
829,000,000 |
|
2016 |
829,000,000 |
18,768,000,000 |
15,545,000,000 |
4,052,000,000 |
|
2017 |
4,052,000,000 |
18,891,000,000 |
- |
22,943,000,000 |
|
2018 |
22,943,000,000 |
19,140,000,000 |
- |
42,083,000,000 |
|
2019 |
42,083,000,000 |
18,981,000,000 |
- |
61,064,000,000 |
14. The controversy firstly revolves around the
disallowance of a Rs. 18,891,676,000/- expense claimed for Gas Infrastructure
Development Cess (GIDC) by the assessing officer under Section 20 of the
Income Tax Ordinance, 2001. This disallowance was based on Section 5 of the
GIDC Act, 2015, which permits the deduction of GIDC expenses only if the
amounts have been paid, whereas the claim represented a payable amount not
settled during the relevant tax year. Conversely, the appellant argued that the
Income Tax Ordinance, being a comprehensive tax code, overrides conflicting
provisions in other laws, including the GIDC Act, 2015, as stipulated in
Section 3 of the Ordinance. The appellant also highlighted Section 54, which
invalidates other law provisions unless explicitly incorporated into the
Ordinance. To resolve this controversy, it would be expedient to first
reproduce hereunder the relevant provision of the GIDC Act, 2015:-
Section 2(b). “company” means a company specified in the First
Schedule.
THE FIRST SCHEDULE
[See section 2(b)]
1. Sui Northern Gas Pipelines Limited.
2. Sui Southern Gas Company Limited.
3. Mari Petroleum Company Limited (formerly
Mari Gas Company Limited).
4. Pakistan Petroleum Limited.
5. Tullow Pakistan Development Limited.
6. Oil and Gas Development Company Limited.
7. Any
other company engaged
in the sale of gas
to any category
of gas consumers
as may be notified in the official Gazette
Section 3. Levy of cess. (1) The cess shall be levied and charged by the
Federal Government from gas consumers, other than the domestic sector
consumers, or the company at the rates as provided in the Second Schedule to
this Act. The gas company shall be responsible for billing of cess to gas
consumers, its collection from gas consumers, and its onward payment to Federal
Government in the manner as prescribed by the Federal Government.
Section 5. Allowance to be made for cess for purposes of income. The cess paid by a company
shall be an expenditure for which allowance is to be made under the Income Tax
Ordinance, 2001 (XLIX of 2001) in computing the profits or gains of that
company. (Emphasis supplied)
Key
Provisions of the GIDC Act, 2015:
I.
Section 3 (Charging Provision):
o GIDC is levied on gas consumers (excluding domestic consumers), with gas
companies responsible for billing, collection, and remittance to the Federal
Government.
o Gas companies bear the obligation to remit the cess, even if not
recovered from consumers.
II. Section 5
(Tax Allowance):
o Allows cess paid by gas companies only (specified in the First Schedule
to the GIDC Act, 2015) to be treated as a deductible expense under the Income
Tax Ordinance, 2001.
o Does not explicitly extend this benefit to gas consumers. Hence,
this provision does not relate to the appellant.
Core Issues:
- Gas consumers bear the primary liability
for the cess, while gas companies act as intermediaries, assuming
financial risk for non-recovery.
- The tax allowance under Section 5 is
limited to gas companies only, creating ambiguity regarding gas consumers’
ability to claim such expenses.
Reconciliation:
i.
Primary vs. Secondary
Liability:
o Gas consumers hold the primary liability for the cess.
o Gas companies have a secondary operational liability, stepping in if
consumers default.
ii. Rationale for Tax Allowance to Gas Companies:
o Gas companies incur administrative costs, financial risks, and
obligations to remit the cess, justifying the tax allowance.
iii. Gas Consumers’ Entitlement:
o Although not covered by Section 5, gas consumers may claim cess as a
deductible expense under general tax principles (section 20 of the Ordinance)
if it is incurred and paid as part of business operations.
iv. Non-Payment by Consumers:
o In cases of non-payment, the financial burden shifts to gas companies,
aligning with the intent of Section 5.
Conclusion: The GIDC is levied on gas
consumers, with gas companies acting as intermediaries responsible for its
administrative and financial management. Section 5 of the GIDC Act, 2015, only
addresses the risks borne by gas companies and does not explicitly deny tax
relief to consumers. Therefore, the revenue department's decision to disallow
the expense under section 5 of the GIDC Act is based on an incorrect
interpretation. At the same time, the appellant has also incorrectly justified
their claim under section 5 ibid. However, the appellant (gas consumer) has otherwise
the right to claim this expense under section 20 of the Income Tax Ordinance, 2001
as it is incurred exclusively for business purposes.
15. The second limb of the argument of the learned
DR is that the appellant's liability for GIDC was not definitive, as the
legality of the levy was under challenge before various courts and ultimately
resolved by the Hon’ble Supreme Court. During this period, stay orders
prevented any coercive recovery actions. Consequently, under Section 34(3) of
the Ordinance which requires that all liability-determining events must occur
and the liability be determinable with reasonable accuracy. Thus, according to
the learned DR, the appellant’s claim was premature. The provision of cess
created by the appellant in its books of accounts was contradictory to the
recognition criteria under Sections 34(1) and 34(3) of the Ordinance. To answer
the aforesaid contentions of the DR, it is first important to interpret and
understand the provisions that have given rise to this adjustment. The
applicable legal authority governing the conditions under which an expense is
deemed to be "incurred" and the criteria for its qualification as a
deductible expense in the computation of taxable income on an accrual basis is
found in Sections 34(1) and 34(3) of the Ordinance. For ease of
reference, these provisions are reproduced below as follows:
“S.34 Accrual-basis accounting ⎯ (1) A person accounting for income chargeable to tax
under the head “Income from Business” on an accrual basis shall derive income
when it is due to the person and shall incur expenditure when it is payable by
the person.
(3) Subject to this Ordinance, an amount shall be payable
by a person when all the events that determine liability have occurred, and the
amount of the liability can be determined with reasonable accuracy.”
Interpretation
Section
34(1) of the Income Tax Ordinance, 2001, specifies that income is recognized
when it becomes "due" to the taxpayer, and an expenditure is
recognized when it becomes "payable" by the taxpayer. The phrase
"shall incur expenditure when it is payable by the person"
means that an expense is recognized in the tax year when the obligation to pay
arises. The term "payable" indicates that the liability for
the expense has become definite and enforceable within the relevant tax year.
This provision excludes liabilities that are uncertain, contingent, or
dependent on future events from being considered "payable." For an
expense to be deductible, the liability must be clearly established during the
tax year and not subject to future conditions or unresolved contingencies.
Section 34(3) provides a
two-stage test for recognizing a liability as "payable":
1.
All
events that determine liability have occurred: This
condition requires that all events establishing the obligation to pay must have
occurred. The liability must no longer be contingent on future actions,
conditions, or events. It must be definite and finalized, leaving no
uncertainty regarding the obligation itself.
2.
The
amount of the liability can be determined with reasonable accuracy:
This condition stipulates that the amount of the liability must be determinable
with reasonable accuracy. The taxpayer must be able to calculate or estimate
the liability with sufficient precision.
Together,
these conditions ensure that a liability is recognized as payable only when it
is definite, enforceable, and its amount can be reliably estimated.
12. Keeping in view the facts of the present
case and the interpretation of Section 34 of the accrual-basis accounting
principles, let’s analyze whether the gas consumers have correctly created the
provision in their books of account.
Key Considerations:
1.
Government-Imposed Cess: The Government has mandated a cess on gas consumers, and the gas
companies are responsible for billing and collecting this cess.
2. Billing and Collection: Gas companies must bill
the cess along with gas bills and collect the specified amount from the gas
consumers.
3.
Government Obligation: After collecting the cess, the government is obligated to develop
infrastructure.
Analysis Based on Section
34:
1. Accrual Basis for Income and Expenditure:
o Income Recognition: The gas companies must
recognize the income (cess) when it becomes due from the gas consumers, not
necessarily when it is collected.
o Expenditure Recognition: Similarly, gas consumers
must recognize the expense when the liability to pay the cess becomes due, not
necessarily when it is paid.
2. Subsection (3) Analysis:
o Events That Determine Liability: The
liability arises when the government imposes the cess and the gas companies
bill the gas consumers for it. The act of billing by the gas companies
establishes the liability for the gas consumers.
o Reasonable Accuracy: The amount of cess to be
paid by the gas consumers is determined with reasonable accuracy as it is
specified by the Government and billed by the gas companies.
Conclusion:
Given that, the liability for the cess arises when the gas companies
bill the gas consumers, and the amount is determined with reasonable accuracy
based on government rates, the gas consumers have rightly created the provision
in their books of account. This aligns with the principles outlined in Section
34 for recognizing liabilities on an accrual basis.
In summary, the provision for the cess in the gas consumers' books is
appropriate as it meets the criteria for accrual accounting by recognizing the
liability when it is payable (upon billing) and determining the amount with
reasonable accuracy.
16. Further, it is important to analyze
the provision of the cess in the context of International Accounting Standards
(IAS) 37, which deals with provisions, contingent liabilities, and contingent
assets.
IAS 37 Criteria for
Recognizing a Provision
IAS
37 states that a provision should be recognized when all the following
conditions are met:
1.
Present Obligation:
A present obligation (legal or constructive) as a result of a past event.
2.
Probable Outflow of Resources:
It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
3.
Reliable Estimate:
A reliable estimate can be made of the amount of the obligation.
Application to the Provision
of Cess
1. Present
Obligation:
o Event:
The government has imposed a cess on gas consumers.
o Billing
by Gas Companies: Gas companies are required
to bill the cess to gas consumers, creating a legal obligation.
o Conclusion:
The imposition of the cess and the subsequent billing by gas companies
establish a present obligation for gas consumers.
2. Probable
Outflow of Resources:
o Liability:
The obligation to pay the cess arises from the government's mandate and the
billing process.
o Likelihood:
Given the legal requirement and the billing mechanism, it is more likely than
not that gas consumers will need to pay the cess.
o Conclusion:
It is probable that an outflow of resources (payment of the cess) will be
required.
3. Reliable
Estimate:
o Specified
Rate: The rate of the cess is specified by the
government.
o Billing:
The amount to be billed to gas consumers is determined based on the specified
rate.
o Conclusion:
The amount of the obligation can be estimated reliably based on the
government’s specified rates and the billing details provided by gas companies.
Conclusion
Given the above analysis:
·
Present Obligation:
The gas consumers have a present obligation to pay the cess once billed by the
gas companies.
·
Probable Outflow:
It is probable that an outflow of resources will be required to settle this
obligation.
·
Reliable Estimate:
The amount of the cess can be reliably estimated based on the specified rates
and billing information.
Thus,
the appellant has correctly created a provision for the cess in their books of
account, as it meets the criteria set out by IAS 37. This provision reflects
the present obligation, probable outflow, and reliable estimate needed for
accurate financial reporting. For the reasons mentioned above, the second part
of the learned DR's argument is also flawed and untenable.
17. Considering the case from a different
perspective, the levy of GIDC was ultimately upheld as intra vires by the
Hon’ble Supreme Court in the case M/s
Khurshid Soap & Chemical Industries (Pvt.) Ltd. vs. Federation of Pakistan,
etc. (2020 SCP 150). The review petitions against this
judgment were also dismissed through an order dated December 7, 2020. Following
the judgment of the Hon’ble Supreme Court of Pakistan, the appellant, along
with other fertilizer companies, filed Suit No. 1282 of 2020 before the Hon’ble
Sindh High Court. In its interim order dated September 23, 2020, the Hon’ble
Sindh High Court considered the core contention raised by the appellant
(plaintiff in the said suit), which was presented before the court as follows:
“2) Learned Counsel for the Plaintiff submits that Plaintiff is engaged
in the business of urea and is the largest producer of urea in Pakistan.
Through the instant Suit, the plaintiffs have impugned the levy of Gas
Infrastructure Development Cess (GIDC) on the plaintiffs gas connections
categorized as an industrial connection by the defendants No.2 and 3 in
violation of the Judgment dated 13.08.2020 passed by the Honourable Supreme
Court of Pakistan in Civil Appeal No.1113/2017 and others as well as in violation
of proviso to Section 8(2) of the GIDC Act, 2015. Relevant portions from
para-37 & 42 of the Judgment read as under:-
Para-37
"Every
industrial and commercial entity using natural gas for its business activity is
entitled to claim the burden of Cess as their business expense, being part of
the cost of their goods or services rendered, and get it adjusted against their
business profits. They must have already done so in their books of account and
the annual returns of their income must have been filed before the Income tax
authorities accordingly. Thus the Cess under GIDC Act, 2015 has been
levied only on those consumers of natural gas who on account of their
industrial or commercial dealings pass on its burden to their customers/clients."
Para-42
"(i)
From the date of this judgment, we restrain the Federal Government from
charging Cess which power of the Federal Government shall remain suspended
until the Cess revenue collected and that which is accrued so far but not yet
collected is expended on the projects listed in Section 4 of the GIDC Act,
2015.
(iii) As all
industrial and commercial entities which consume gas for their business
activities pass on the burden to their customers/clients therefore all arrears
of 'Cess' that have become due up to 31.07.2020 and have not been
recovered so far shall be recovered by the Companies responsible under the GIDC
Act, 2015 to recover from their consumers. However, as a concession, the same
be recovered in twenty-four equal monthly installments starting from 01.08.2020
without the component of late payment surcharge. The late payment surcharge
shall only become payable for the delays that may occur in the payment of any
of the twenty-four installments.”
Learned
Counsel for the plaintiffs submits that plaintiffs fall within the category of
gas consumers, who have neither collected the GIDC from their
clients/customers and even not passed it on to their clients and customers.
Learned
Counsel states that the period between 2011 and 2020 where the Plaintiffs have
not paid GIDC to Defendant SSGC on the basis of injunctive orders and the
reported judgments of the Hon'ble Supreme Court of Pakistan in the case of Federation
of Pakistan V. Durrani Ceramics & Others (2014 SCMR 1630).
Learned
Counsel for the Plaintiff states that the Plaintiff never collected the GIDC
from their clients/customers and even not passed on to their clients and
customers which is evident from the Income Tax Returns, Books of Accounts and
Auditor's Report which are regularly audited. Learned counsel for the plaintiff
further states that he has already filed the documents relating to the accounts
of the company and income tax record. He has referred to page 671
wherein it is specifically mentioned that:-
“GoP had
imposed GIDC effective from Jan 01, 2012, on Feed and Fuel gas. The rate of
GIDC was increased from Jan 01, 2014. GIDC on Feed gas has been increased to
Rs.300 per MMBTU from Rs.197 per MMBTU and Fuel gas to Rs.100 per MMBTU from
Rs.50 per MMBTU. This will affect the profitability of the Company going
forward as FEBL has not passed on its impact to the customers".
.....................................................” (Emphasis supplied)
18. As the final fact-finding
authority, this tribunal directed the appellant to provide records to verify
the facts and contentions presented before the Hon’ble Sindh High Court when
seeking interim relief. Specifically, the tribunal sought to determine whether
the appellant had collected GIDC from its clients/customers and passed on the
incident to them. In response, the appellant submitted its audited financial
accounts for the tax years 2015 to 2019. A review of these records reveals the
following:
|
Tax year |
Note number
of Audited Accounts |
GIDC amount
included in creditor's closing balance (Rupees) |
|
2015 |
10.1 |
829,260,000 |
|
2016 |
10.1 |
4,052,725,000 |
|
2017 |
9.1 |
22,944,401,000 |
|
2018 |
9.1 |
42,083,302,000 |
|
2019 |
10.1 |
61,064,027,000 |
1.
From
the above Tabular presentation, it is crystal clear that the appellant Company
itself declared in the Audited Accounts that the GIDC was part of creditors in
the Tax year 2015 to 2019 without payment against the same.
2.
The
taxpayer company has not only used the said amounts of GIDC in the said tax
years for its benefit but has also not paid applicable income tax by claiming
the same as admissible expense without its payment under the head income from
Business.
3.
The
non-payment of the GIDC is also evident from note no. 10.1 of the audited
accounts of tax years 2015, 2016, 2019 and note no. 9.1 of the tax years 2017
and 2018 and further, the amount of GIDC is accumulating in each subsequent
year without its payment. The reason for non-payment has also been stated by
the taxpayer company in note no. 10.1 of the tax year 2019 by stating that the
GIDC payment was subjudice before the Honorable Supreme Court of Pakistan.
4.
Hence
there remains no doubt that the Taxpayer Company has already claimed GIDC as
Profit and Loss expense in all the Tax years from 2015 to 2019 on an accrual
basis without its payment to the respective Gas Distribution Companies.
5.
GIDC
has been claimed as an expense as a component of the cost of sales on an accrual
basis for the amount reflected in the gas bills, which is relevant for the
purposes of determination of the sale price of the end product. Thus, it
clearly follows that the expense (GIDC) has been passed on to the ultimate
consumer/purchaser of the end product. GIDC to the contrary was shown by the
appellant as payable in the audited accounts for the relevant tax years. However,
it is evident that because of the claim of such unpaid expense, the taxable
profit was not offered for tax, and this short paid. In consequence of the
respective short paid tax, notwithstanding the tax year, shall be recoverable
from the appellant in the circumstances.
6.
Based on the aforementioned
facts and circumstances, it is evident that the core contention raised by the
appellant before the Hon’ble Sindh High Court is not substantiated by the
record. These facts were presented to the learned
Authorized Representative (AR) of the appellant, who was unable to refute them.
It is settled law that the burden of proof is on the appellant to establish
that the cess was not passed on to their clients/consumers. The appellant
miserably failed to establish this fact therefore, an adverse presumption may also
be drawn against it under Article 129 of the Qanoon-e-Shahadat Order, 1984 that
the incidence of cess had been passed on to the purchaser of the end product.
19. Based on the provided facts and analysis, it
is clear that the Gas Infrastructure Development Cess (GIDC) was passed on to the end consumer.
Below is a detailed rationale for this conclusion:
Key
Observations
1.
GIDC Included in Creditors' Closing Balances
(Tax Years 2015–2019):
o The taxpayer consistently
reported GIDC amounts in the audited accounts as part of creditors, demonstrating
non-payment to the respective gas distribution companies.
o The accumulation of unpaid
GIDC balances across multiple years highlights the company's reliance on these
funds without fulfilling its statutory payment obligations.
2.
Claiming GIDC as an Expense:
o The taxpayer claimed GIDC
as an expense under the cost of sales on an accrual basis without making actual
payments.
o This treatment reduced the
taxable profit while benefiting from the associated tax deduction, effectively
lowering the company's income tax liability.
3.
Increase in GIDC Amounts:
o The progressive
accumulation of GIDC amounts across the years shows that the taxpayer included
the cess in their pricing mechanism and used these funds as working capital or
for other business purposes.
4.
Judicial Proceedings:
o The company's
justification for non-payment, citing ongoing legal proceedings before the
Supreme Court, does not negate the fact that the GIDC cost was accounted for as
part of the cost of sales, influencing the pricing of the end products.
5. Passing
the Burden to End Consumers:
o The inclusion of GIDC in
the cost of sales inherently signifies that the cess was incorporated into the
pricing of the final product, thereby indicating that the burden of the cess
was ultimately borne by the consumer.
o This is further
corroborated by the company’s audited accounts, which show GIDC as a payable
liability, confirming that the company retained these amounts rather than
absorbing the cost or paying it to the government. The appellant brought
nothing on record to rebut that the incidence of cess has not passed on to the
consumer. The appellant cannot be absolved of its responsibility to prove the
factum passing or otherwise of the incidence of cess to the consumer. Reliance
is placed on the judgment titled M/s Asia Ghee Mills (Pvt) Ltd vs
Assistant Collector (Audit) and two others, [PTCL 2009 CL 28 (H.C,
Lah)]
6. From
a legal and ethical perspective, when the appellant company had collected the
cess from its customers on behalf of the Government, it assumes a fiduciary and
legal obligation to remit the collected amount to the Federal Government
forthwith. The company is not entitled to withhold payment and uses it for its
own purpose.
20. CONCLUSION
i. The revenue department's decision to disallow the
expense under section 5 of the GIDC Act, 2015 is based on an incorrect
interpretation. At the same time, the appellant has also incorrectly justified
their claim under section 5 ibid. However, the appellant (gas consumer) has
otherwise the right to claim this expense under section 20 of the Income Tax
Ordinance, 2001 as it is incurred exclusively for business purposes.
ii. The
provision for the cess in the appellant’s books is appropriate as it meets the
criteria for accrual accounting by recognizing the liability when it is payable
(upon billing) and determining the amount with reasonable accuracy. Thus, the appellant has
correctly created a provision for the cess in their books of account, as it
meets the criteria set out by IAS 37.
iii. It is evident from the record that
the appellant collected the cess from its clients/customers and passed the
incidence of the cess onto them. Therefore, in light of the judgment of the
Hon’ble Supreme Court, the appellant is directed to promptly deposit the amount
of cess into the government treasury, along with the applicable default
surcharge. The relevant excerpt from the judgment of the Supreme Court
is reproduced below for ease of reference:-
“Para-42
...............................
(iii) As all
industrial and commercial entities which consume gas for their business
activities pass on the burden to their customers/clients therefore all
arrears of 'Cess' that have become due up to 31.07.2020 and have not been
recovered so far shall be recovered by the Companies responsible under the GIDC
Act, 2015 to recover from their consumers. However, as a concession, the same
be recovered in twenty-four equal monthly installments starting from 01.08.2020
without the component of late payment surcharge. The late payment surcharge
shall only become payable for the delays that may occur in the payment of any
of the twenty-four installments.”
iv. Regarding the other additions confirmed or remanded
by the learned Commissioner of Inland Revenue (Appeals), it was mutually agreed
by the parties that these matters would be referred back to the assessing
officer for reconsideration. Order accordingly. However, being an old matter,
the assessing officer is directed to pass the order preferably within two
months from the date of receipt of this order after giving proper opportunity
to the appellant.
21. Let this order be sent to the following
authorities for information and necessary action:-
i. Learned Secretary, Ministry of Petroleum
and Natural Resources, Block-A, Pak Secretariat, Islamabad.
ii. Learned Director General, Oil and Gas
Regulatory Authority. Office at Plot No.54, Fazal-e-Haq Road, Near PIA
building, Blue Area, Islamabad.
|
|
Sd/--
-SD- (M. M. AKRAM) JUDICIAL MEMBER |
|
Sd/-- -SD- (IMRAN
LATIF MINHAS) ACCOUNTANT
MEMBER |
|
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