APPELATE
TRIBUNAL INLAND REVENUE, DIVISION BENCH-I, ISLAMABAD
ITA No.452/IB/2026
(Tax Year 2019)
ITA No.453/IB/2026
(Tax Year 2020)
ITA No.454/IB/2026
(Tax Year 2021)
ITA No.455/IB/2026
(Tax Year 2022)
ITA No.456/IB/2026
(Tax Year 2023)
ITA No.457/IB/2026
(Tax Year 2024)
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M/s
Rousch (Pakistan) Power Limited; 403-C, Descon Office, 4th Floor,
Evacuee Trust Complex, Sector F-5/1, Islamabad. NTN:0819027
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Appellant |
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Vs |
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The
Commissioner Inland Revenue, Zone-III, CTO, Islamabad. |
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Respondent |
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Appellant
By: |
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Mr.
Aneel Peter, FCA & Ms.
Fariha Hassan, ACA |
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Respondent
By: |
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Mr.
Sheheryar Akram, DR |
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Date
of Hearing: |
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13.05.2026 |
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Date
of Order : |
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18.05.2026 |
O R D E R
M.
M. AKRAM (JUDICIAL MEMBER): The
titled appeals have been instituted by the appellant-taxpayer against the
impugned appellate orders, all dated 16.03.2026, passed by the learned
Commissioner Inland Revenue (Appeals-IV), Corporate Tax Office, Islamabad,
under section 129 of the Income Tax Ordinance, 2001 (hereinafter referred to as
“the Ordinance”), for the tax years
2019 to 2024. Since common questions of law and fact are involved in all the
appeals, the same are being disposed of through this consolidated order.
FACTS OF THE CASE
2. In the instant case, interim relief was
granted vide order dated 01.04.2026, wherein the Bench, while recording its
prima facie observations, held as follows:
“7.
Furthermore, considering that this Bench holds a prima facie view which may not
be entirely aligned with the view expressed in earlier decisions of coordinate
Benches, we consider it expedient and in the interest of judicial propriety
that the controversy be resolved by the constitution of a Larger Bench. We,
therefore, recommend to the Hon’ble Chairman to constitute a Larger Bench to
adjudicate upon the questions framed hereinabove. It is also directed that
after getting approval from the competent authority, all identical or similar
appeals pending before different Benches on this issue be clubbed and fixed
before the Larger Bench, so as to ensure consistency, avoid divergent
interpretations, and settle the controversy conclusively.”
Subsequently, on
11.05.2026, the appellant moved an application seeking an early hearing of the
appeal. Through the said application, it was, inter alia, brought to the notice
of the Bench that identical controversies had already been heard and decided by
the learned DB-11 and DB-IV, while judgment in another connected matter had
already been reserved by the learned DB-III. On the strength of these
developments, the appellant contended that the circumstances which had earlier
necessitated the recommendation for the constitution of a Larger Bench no
longer subsisted, and accordingly requested that the present appeal be fixed
for out-of-turn hearing and adjudication.
In
view of the submissions advanced in the application, the matter was accordingly
fixed for hearing on 13.05.2026 and was heard on the said date. During the
course of proceedings, the learned Authorized Representative (“AR”) appearing on behalf of the
appellant placed on record copies of all judgments rendered by different
Benches of this Tribunal on the issue involved, including those decided both in
favour of and against the taxpayers. The same were taken on record and duly
considered by the Bench while hearing the matter.
3. Briefly stated, the appellant is a public
limited company duly incorporated under the laws of Pakistan with the principal
object of establishing, operating, and maintaining an electric power generation
project for generation and sale of electricity. In furtherance of its business
activities, the appellant entered into a Power Purchase Agreement (“PPA”) with its sole purchaser and
off-taker, namely the Water and Power Development Authority (WAPDA), under which the electricity
generated by the appellant’s power project is supplied in accordance with the
tariff mechanism and operational framework prescribed therein. The appellant
operates a combined cycle thermal power plant having a gross (ISO) generation capacity of 450 Mega
Watts, situated near Sidhnai Barrage, Abdul Hakim Town, District Khanewal,
Punjab, Pakistan.
4. Under the terms of the Power Purchase
Agreement (“PPA”), the tariff
payable by WAPDA/CPPA-G comprises two principal components, namely the Energy
Purchase Price (“EPP”) and the
Capacity Purchase Price (“CPP”). The
EPP constitutes consideration attributable to the actual generation and supply
of electricity and is directly linked with the quantum of electrical energy
dispatched to the national grid. The CPP, conversely, constitutes consideration
payable to the appellant for ensuring the continued availability, operational
readiness, maintenance, and dependable performance of the power plant and
associated infrastructure in accordance with the contractual obligations
undertaken under the PPA. The CPP mechanism is designed to compensate the
appellant for fixed costs, financing obligations, debt servicing, return on
equity, and other expenditures incurred in maintaining the generation facility
in a condition capable of supplying electricity whenever required by
WAPDA/CPPA-G. Although no separate or independent supply of electricity is made
specifically against CPP, such receipts arise directly from, and are
inextricably linked with, the integrated commercial arrangement embodied in the
PPA governing the generation and supply of electric power.
A
similar commercial and regulatory concept also exists in the context of
Alternative Energy Projects, including wind and solar power projects, in the
form of Non-Project Missed Volume (“NPMV”).
NPMV broadly represents compensation in respect of electrical energy which the
project was capable of generating and delivering, but which could not be
supplied due to the occurrence of a non-project event, as defined under the
relevant Energy Purchase Agreements. Under the applicable contractual
framework, interruptions in generation capability arising from outages,
operational conditions, or equipment failures attributable to the power project
itself do not qualify as non-project events. The computation of NPMV is based
upon a formula that takes into account the Net Delivered Energy (“NDE”) which the project was capable of
generating under normal operating conditions. The calculation further factors
in the duration of the non-project event together with the technical time
requirements associated with the staggered and safe synchronization of turbines
with the national grid system. Accordingly, NPMV does not represent
compensation for exact or physically delivered units of electricity; rather, it
constitutes a commercially and technically determined estimate of the quantity
of electricity that could reasonably have been delivered to CPPA-G had the
intervening non-project event not occurred. In this respect, NPMV bears
substantial similarity to CPP, inasmuch as both mechanisms are fundamentally
linked with available generation capacity and operational capability rather
than the precise quantum of electricity actually dispatched. Both CPP and NPMV,
therefore, form integral components of the tariff and compensation structure
governing regulated power generation projects.
5. The income derived from the generation of
electricity by the appellant’s power project was claimed as exempt under Clause
(132) of Part I of the Second Schedule to the Ordinance. The returns of income
filed by the appellant for the relevant tax years were deemed to have been
assessed under section 120 of the Ordinance. Subsequently, upon examination of
the deemed assessment orders, the learned Additional Commissioner Inland
Revenue (“the Assessing Officer”)
formed the view that the said orders were erroneous insofar as they were
prejudicial to the interest of revenue. Accordingly, proceedings under section
122(9) read with section 122(5A) of the Ordinance were initiated through
issuance of notices for the relevant tax years. The basis adopted by the department
was that, in terms of clause 11A(v) of Part IV of the Second Schedule to the
Ordinance, exemption from minimum tax was available only in respect of receipts
arising from actual sale of electricity, namely EPP, whereas receipts on
account of CPP, premiums, excess bonuses, supplemental charges, and other
ancillary receipts did not directly relate to sale of electricity and were
therefore liable to tax under the normal tax regime. Reliance in this regard
was also placed upon the judgment rendered by this Tribunal in ITA No.
1275/IB/2018 dated 11.03.2025.
6. The appellant furnished detailed
explanations in response to the notices issued under section 122(9) read with
section 122(5A) of the Ordinance; however, the same were not found satisfactory
by the learned Assessing Officer, who consequently passed amended assessment
orders for all the relevant tax years. Aggrieved by the said treatment, the
appellant preferred appeals before the learned Commissioner Inland Revenue
(Appeals) [CIR(A)], who, vide the
impugned orders all dated 16.03.2026, upheld the action of the Assessing Officer
both on jurisdictional/legal grounds as well as on merits.
7. The learned CIR(A), after examining the
assessment record, the submissions advanced by both sides, and the relevant
statutory framework, held that the proceedings initiated under section 122(5A)
of the Ordinance were lawfully assumed as the Assessing Officer possessed
sufficient material on record, including discrepancies between the sales tax
returns and income tax returns, to form the opinion that the deemed assessment
orders were erroneous and prejudicial to the interest of revenue. Reliance was
also placed upon the judgment reported as 2018 PTD 977 to hold that the
Commissioner is competent to conduct such inquiries as deemed necessary for
amendment of an assessment order.
8. On merits, the learned CIR(A) observed
that although EPP and CPP arise under the same PPA, they constitute distinct
commercial components serving separate economic purposes. According to the
learned CIR(A), EPP pertains to the actual generation and supply of
electricity, whereas CPP relates solely to recovery of fixed and
capital-related costs incurred for maintaining the plant in an available and
operational condition. It was further observed that CPP accrues irrespective of
actual generation or supply of electricity and therefore lacks the requisite
nexus with the activity of power generation. The learned CIR(A) also noted that
sales tax is charged only on EPP and not on CPP, which, according to the
appellate authority, further demonstrates the distinction between the two
categories of receipts.
9. The learned CIR(A) ultimately concluded
that the exemption available under Clause (132) of Part I of the Second
Schedule to the Ordinance is confined only to income directly derived from the
generation and sale of electricity and cannot be extended to receipts of any
other nature. Referring to section 18(1)(b) of the Ordinance, it was held that
business income must arise from the sale of goods or provision of services,
whereas CPP is neither linked with the actual sale of electricity nor with the rendering
of any service. Consequently, CPP was held to constitute “income from other
sources” and not “business income,” thereby rendering it ineligible for
exemption under Clause (132). Reliance in this regard was placed upon the
judgments reported as 2010 PTD 1809 (UCH Power (Pvt.) Ltd and others Vs Income
Tax Appellate Tribunal and others) and ITR No. 03/2009 (Fauji
Kabirwala Power Company Ltd Vs CIR, LTU, IBD). The learned CIR(A)
further observed that the authorities relied upon by the appellant pertained
primarily to minimum tax under section 113 and did not address the essential
question whether CPP constituted business income or income from other sources.
Accordingly, the appeals were dismissed, and the amended assessment orders were
upheld. Still feeling aggrieved, the appellant has preferred the instant
appeals before this Tribunal.
10. The appeals were heard on 13.05.2026.
SUBMISSION OF THE APPELLANT
A. Legal
objection
10.1 The learned AR contended that the SCNs issued
under section 122(9) read with section 122(5A) for Tax Years 2019 to 2024 were
self-contradictory and legally incoherent. He pointed out that the entire basis
of the proceedings, as expressly narrated in paragraphs 3 to 5 of the SCNs,
revolved around the alleged non-applicability of exemption from minimum tax
under sub-clause (v) of Clause (11A) of Part IV of the Second Schedule to the
Ordinance. Reliance in the SCN was specifically placed upon the judgment of the
learned Appellate Tribunal Inland Revenue in ITA No.1275/IB/2018, wherein the
issue under consideration pertained to the applicability of minimum tax upon
CPP receipts. However, despite relying upon provisions relating to minimum tax
exemption, the Department simultaneously proposed to subject CPP receipts to
taxation under the Normal Tax Regime by treating the same as business income
under section 18 of the Ordinance. According to the learned AR, this inherent
contradiction rendered the SCNs legally unsustainable and demonstrated a
complete absence of a clear and lawful basis for amendment of assessment.
10.2 The learned AR emphasized that the Assessing Officer,
by expressly treating CPP receipts as “business income” under section 18 in the
SCNs and the assessment orders, had itself acknowledged the true legal
character of CPP as business income. Once the Assessing Officer accepted CPP as
business income, the same automatically fell within the ambit of the exemption
available under Clause 132 of Part I of the Second Schedule to the Ordinance,
being profits and gains derived from the electric power generation project.
Therefore, according to the learned AR, the Assessing Officer could not
simultaneously characterise CPP as business income and yet seek to tax it under
the Normal Tax Regime, as such a position was legally self-destructive and
mutually contradictory.
10.3 It was further contended that the assessment
orders passed under section 122(5A) perpetuated the very same contradiction
contained in the SCNs. The orders declared the deemed assessments to be
erroneous and prejudicial to the interest of revenue while simultaneously
treating CPP receipts as “business income under section 18” and taxing them
under the Normal Tax Regime. The learned AR argued that such internally
inconsistent findings rendered the entire proceedings arbitrary, mechanically
framed, and unsustainable in law.
10.4 The learned AR also strongly assailed the
jurisdiction exercised by the learned CIR(A), contending that the appellate
authority travelled beyond the scope of the dispute and adjudicated upon issues
which were neither raised in the SCNs nor formed part of the assessment orders.
It was submitted that the Department had never taken the position that CPP
constituted “income from other sources” or that the exemption under Clause 132
was altogether unavailable. Rather, the Assessing Officer’s entire case rested
upon the applicability of minimum tax provisions. However, the learned CIR(A),
while deciding the appeal, independently concluded that CPP could not be
classified as “business income” and effectively treated it as non-exempt
income, thereby introducing an entirely new controversy beyond the subject
matter of assessment proceedings.
10.5 In support of this contention, reliance was
placed upon the judgment of the Honourable Supreme Court of Pakistan, wherein
it was held that an appellate forum cannot suo motu introduce and adjudicate
upon a question which was never raised in the show cause notice or disputed
between the parties. The learned AR submitted that the learned CIR(A), by
altering the entire basis of taxation without issuance of any separate show
cause notice, materially exceeded his lawful jurisdiction and violated settled
principles of natural justice.
10.6 Lastly, the learned AR contended that the
findings recorded by the learned CIR(A) were mutually destructive and legally
irreconcilable. On one hand, the learned CIR(A) upheld the validity of the Assessing
Officer’s order by observing that the amendment under section 122(5A) was not
based upon surmises or conjectures; yet on the other hand, he himself concluded
that CPP could not be classified as business income, thereby effectively
repudiating the very basis adopted by the Assessing Officer in the SCNs and
assessment orders. This, according to the learned AR, created a “threefold
illegality,” namely: (i) the Department initiated proceedings on the basis of
minimum tax provisions; (ii) the Department concluded the proceedings by
treating CPP as business income taxable under normal tax regime; and (iii) the
learned CIR(A) thereafter altered the nature of the income altogether by
treating CPP as non-business income without any lawful notice or jurisdiction.
Consequently, the learned AR asserted that the entire proceedings under section
122(5A) lacked a lawful foundation and were liable to be annulled in toto.
B. On
Merit
10.7 The
learned AR vehemently contended that the impugned orders passed by the learned
CIR(A) are without lawful authority, contrary to the scheme of the Ordinance,
and in conflict with binding judicial precedents governing Independent Power
Producers (IPPs). It was argued that
the learned CIR(A) failed to appreciate the principles laid down by the
Honourable Islamabad High Court in I.T.R. No. 51 of 2020 decided on 18.07.2022,
as well as other authoritative pronouncements, wherein it has been recognized
that CPP, being payable under the same PPA governing the supply of electricity,
partakes the same legal and fiscal character as other tariff-based receipts and
consequently qualifies for exemption under Clause (132) of the Second Schedule
to the Ordinance as well as exemption from minimum tax under clause 11A(v) of
Part IV of the Second Schedule to the Ordinance.
10.8 The
learned AR further submitted that the learned CIR(A) exceeded his appellate
jurisdiction by adjudicating upon issues that neither formed part of the
assessment proceedings nor constituted grounds raised by the Assessing Officer,
namely, whether CPP constituted “income from other sources” and whether it fell
outside the exemption contemplated under Clause (132). According to the
appellant, such findings amount to introducing a new source and characterisation
of income, which is impermissible in law. It was contended that CPP constitutes
an inseparable component of the appellant’s business income and represents
profits and gains derived from the electric power generation project, as such
receipts arise solely due to the existence, operational readiness, and
availability of the plant under the tariff framework and contractual
arrangement embodied in the PPA.
10.9 The
learned AR also argued that the learned CIR(A) fundamentally misconstrued
section 18(1)(b) of the Ordinance by treating CPP as “income from other
sources,” despite the fact that the said provision pertains to trade,
professional, and similar associations and bears no applicability to the
appellant’s business operations. It was further contended that the expression
“profits and gains derived by an electric power generation project” employed in
Clause (132) is sufficiently broad to encompass the entire commercial yield
arising from the project, including CPP receipts arising under the PPA executed
with WAPDA, and is not confined merely to receipts directly attributable to the
actual sale of electricity.
10.10 The
learned AR for the appellant contended that the judgments relied upon by the
learned CIR(A), namely Uch Power (Pvt.) Ltd. and Others v.
Income Tax Appellate Tribunal and Others (2010 PTD 1809), and
I.T.R. No. 03/2009 (M/s Fauji Kabirwala Power Co. Ltd. v. Commissioner Inland Revenue,
LTU, Islamabad), had in fact been misconstrued, as the findings
therein substantially supported the appellant’s case. Referring specifically to
para 16 of the judgment rendered in the UCH Power case, he submitted that the
Hon’ble Supreme Court had merely held that exemption under Clause 176 was
restricted to income falling under the head “profits and gains of business”
within the meaning of section 22 of the Ordinance, and did not extend to income
assessable under section 30 as “income from other sources,” such as interest
earned on bank deposits and savings accounts. According to the learned AR, the
ratio of the said judgment was confined to independent income streams lacking
nexus with the core business activity of power generation, and therefore did
not apply to receipts directly arising under the Power Purchase Agreement
(PPA).
10.11 The
learned AR further submitted that in I.T.R. No. 03/2009 titled Fauji Kabirwala Power Company Ltd Vs
Commissioner of Income Tax, LTU, Islamabad, the Hon’ble
Islamabad High Court had decided, inter alia, the issue relating to interest
charged on delayed energy payments received by IPPs from WAPDA under the PPA in
favour of the taxpayer. He emphasized that the said view was subsequently
affirmed by the Hon’ble Supreme Court in the UCH Power case cited supra,
thereby reinforcing the proposition that receipts intrinsically connected with
and arising from obligations under the PPA retained the same exempt character
as the principal business income.
10.12 It
was additionally argued that the learned CIR(A) wrongly relied upon the
judgment of this Tribunal dated 11.03.2025 passed in ITA No. 1275/IB/2018
without appreciating that the said judgment arose under the Sales Tax Act, 1990,
in relation to apportionment of input tax and had no bearing upon the
characterisation or exemption of CPP under the Income Tax Ordinance, 2001.
According to the learned AR, the treatment accorded to EPP and CPP under the
Sales Tax Act, 1990, is wholly irrelevant for purposes of the Ordinance, as
exclusion of CPP from “value of supply” under sales tax law does not imply its
exclusion from “income from business” or from “profits and gains derived by an
electric power generation project” under Clause (132).
10.13 Without
prejudice to the foregoing submissions, the learned AR contended that even if
CPP were assumed to constitute “income from other sources” under section 39 of
the Ordinance, taxation could only be imposed on the net income after deduction
of corresponding expenses and not on the gross receipts, thereby rendering the
impugned demand excessive and unlawful. It was lastly argued that even if CPP
receipts were assumed not to arise from “sale of electricity” for purposes of
clause 11A(v), such receipts nevertheless do not fall within the statutory
definition of “turnover” under section 113(3) of the Ordinance and therefore
remain outside the ambit of minimum tax under section 113.
SUBMISSION OF THE DEPARTMENT
11. Conversely, the learned Departmental
Representative (“DR”) strongly
supported the impugned orders passed by the learned CIR(A) and the Assessing Officer.
It was submitted that the exemption available under Clause (132) of Part I of
the Second Schedule to the Ordinance is specifically confined to profits and
gains directly derived from the activity of electric power generation and
cannot be extended to receipts which do not arise from the actual generation or
sale of electricity. According to the learned DR, the distinction between EPP
and CPP is clearly recognised under the PPA itself, wherein EPP relates to
actual energy supplied to the grid, whereas CPP merely represents compensation
for fixed costs, financing charges, and plant availability. It was argued that
CPP accrues irrespective of whether electricity is actually generated or
supplied and therefore lacks the direct nexus required for claiming exemption
under Clause (132).
11.1 The learned DR further contended that CPP does
not constitute “business income” within the meaning of section 18 of the
Ordinance, as the same neither arises from the sale of goods nor from the provision
of services. Rather, such receipts are appropriately classifiable as “income
from other sources” under section 39 of the Ordinance. It was also submitted
that the fact that sales tax is chargeable only upon EPP and not upon CPP
further reinforces the distinction between the two streams of receipts and
supports the Assessing Officer’s position that CPP cannot be equated with
consideration for the supply of electricity.
11.2 The
learned DR also defended the validity of proceedings initiated under section
122(5A) of the Ordinance by submitting that the Assessing Officer possessed
sufficient material on record to conclude that the deemed assessment orders
were erroneous insofar as prejudicial to the interest of revenue. According to
the learned DR, the proceedings were not initiated on the basis of fishing or
roving inquiries but were founded upon discrepancies apparent from the returns
and records available before the department. Reliance was placed upon the
judgment reported as 2018 PTD 977 in support of the proposition that the
Commissioner is fully empowered to conduct inquiries and amend an assessment
where circumstances so warrant.
11.3 The
learned DR finally submitted that the case laws relied upon by the appellant
pertain mainly to the applicability of minimum tax under section 113 and do not
determine the essential legal issue involved in the present appeals, namely,
whether CPP constitutes business income eligible for exemption under Clause
(132). It was accordingly prayed that the impugned appellate orders, being
lawful and in accordance with the scheme of the Ordinance, may be upheld and
the appeals filed by the appellant be dismissed.
FINDINGS
12. We have heard the learned representatives
for the parties at considerable length and have carefully examined the impugned
orders, the assessment record produced before us, the relevant statutory
provisions relied upon by the parties, as well as the judicial precedents cited
at the bar. The principal controversy arising in the present appeals pertains
to the true legal nature and character of the receipts earned by the appellant
under the head of CPP in terms of the PPA, and whether such receipts are entitled
to exemption under Clause (132) of Part I of the Second Schedule to the
Ordinance, together with the corresponding protection from minimum tax
available under Clause 11A(v) of Part IV of the Second Schedule to the
Ordinance.
In addition to the principal controversy,
certain ancillary yet substantial issues have also arisen for consideration
regarding the legality and validity of the proceedings initiated under section
122(5A) of the Ordinance, as well as the jurisdiction, authority, and
competence of the learned CIR(A) to recharacterize the CPP receipts as “income
from other sources.” We are conscious of the settled principle of law that
jurisdictional and legal objections ordinarily merit determination prior to
entering into the merits of the controversy. However, considering that
divergent views rendered by different learned benches of this tribunal
presently hold the field on the substantive issue involved, we deem it
appropriate, in the peculiar facts and circumstances of the case, to first
examine and determine the controversy on merits, and thereafter advert to and
dilate upon the legal and jurisdictional objections raised by the appellant.
Accordingly, for the purposes of a proper, effective, and comprehensive
adjudication of the disputes arising between the parties, the following
questions arise for determination:
i. Whether receipts under Capacity
Purchase Price (CPP) and Energy Purchase Price (EPP) are both intrinsically
connected with, and attributable to, the business of electric power generation
and sale of electricity?
ii. Whether receipts under CPP are to be
characterized as “business income” derived from the electric power generation
project, or as “income from other sources”?
iii. Whether the exemption provided under
Clause (132) of Part I of the Second Schedule to the Income Tax Ordinance, 2001
is restricted only to operational income directly linked with actual generation
and dispatch of electricity (i.e., EPP), or whether it also extends to
capacity-based receipts (CPP)?
iv. Whether the tax authorities are
competent to disregard or recharacterize the nature of receipts as defined and
agreed upon in the Power Purchase Agreement between the parties, in the absence
of any express statutory provision to that effect?
v. Whether
the show cause notices issued under section 122(9) read with section 122(5A) of
the Ordinance and the consequential assessment orders are legally sustainable
where (i) the SCNs are internally contradictory as to the basis of taxation,
(ii) the assessing officer simultaneously treats CPP as business income while
denying exemption, and (iii) the appellate authority travels beyond the scope
of the SCN and assessment order to re-characterize the nature of income without
lawful notice?
13. Question No.1
Whether receipts under Capacity Purchase Price (CPP) and
Energy Purchase Price (EPP) are both intrinsically connected with, and
attributable to, the business of electric power generation and sale of
electricity?
13.1 The
controversy in the present matter pertains to the true legal and commercial
character of the receipts earned by an Independent Power Producer (“IPP”) under the Power Purchase
Agreement (“PPA”). In order to
correctly appreciate the issue, it is necessary to examine the structure of the
power generation regime and the integrated tariff mechanism governing IPPs
operating under the regulatory framework of the National Electric Power
Regulatory Authority (“NEPRA”). Under
the standard PPA framework, the tariff payable to an IPP is divided into two
principal components:
1. Energy Purchase Price (“EPP”) — compensation linked with
actual generation and dispatch of electricity, generally covering fuel cost,
variable operation and maintenance expenses, and other variable
generation-related costs; and
2. Capacity Purchase Price (“CPP”) — compensation payable for
maintaining generation capacity available for dispatch and recovery of fixed
costs, including return on equity, debt servicing, insurance, fixed operation
and maintenance expenses, working capital costs, and other fixed financial
obligations.
3. A similar commercial and regulatory
concept also exists in the context of Alternative Energy Projects, including
wind and solar power projects, in the form of Non-Project Missed Volume (“NPMV”). NPMV broadly represents
compensation in respect of electrical energy which the project was capable of
generating and delivering, but which could not be supplied due to the
occurrence of a non-project event, as defined under the relevant Energy Purchase
Agreements. Under the applicable contractual framework, interruptions in
generation capability arising from outages, operational conditions, or
equipment failures attributable to the power project itself do not qualify as
non-project events. The computation of NPMV is based upon a formula that takes
into account the Net Delivered Energy (“NDE”)
which the project was capable of generating under normal operating conditions,
while also factoring in the duration of the non-project event together with the
technical time requirements associated with the staggered and safe synchronisation
of turbines with the national grid system. Accordingly, NPMV does not represent
compensation for exact or physically delivered units of electricity; rather, it
constitutes a commercially and technically determined estimate of the quantity
of electricity that could reasonably have been delivered to CPPA-G had the
intervening non-project event not occurred. In this respect, NPMV bears
substantial similarity to CPP, inasmuch as both mechanisms are fundamentally
linked with available generation capacity and operational capability rather
than the precise quantum of electricity actually dispatched. Both CPP and NPMV,
therefore, form integral components of the tariff and compensation structure
governing regulated power generation projects.
13.2 The
admitted factual position emerging from the record is that the appellant
operates a combined cycle thermal power plant under a comprehensive and
integrated Power Purchase Agreement executed with WAPDA. The PPA constitutes
the sole commercial arrangement governing the appellant’s business operations,
tariff structure, obligations, risk allocation, and revenue stream. Under the
said contractual framework, EPP relates to variable charges linked with actual
generation and dispatch of electricity, whereas CPP represents the mechanism
through which the appellant recovers fixed costs, financing charges, debt
servicing obligations, return on equity, operation and maintenance expenses,
and costs associated with maintaining the plant in an operationally available
condition capable of generating electricity whenever called upon by the
purchaser.
13.3 The
Assessing Officer seeks to artificially segregate CPP from the business of
electric power generation by contending that CPP is not linked with the actual
generation and dispatch of electricity. Such a proposition, in our considered
view, proceeds on an erroneous understanding of the commercial and contractual
architecture of the power sector and ignores the broader statutory and
regulatory framework governing Independent Power Producers in Pakistan.
13.4 The
obligation undertaken by the IPP under the PPA is not merely to generate
electricity whenever dispatched, but fundamentally to establish, maintain, and
continuously keep available an operational generation facility capable of
supplying electricity to the national grid whenever called upon. The
availability of generation capacity is itself the core commercial service
contracted for under the PPA. The purchaser does not contract merely for units
of electricity actually dispatched; rather, it contracts for dependable and
assured generation capacity.
13.5 The
electric power sector in Pakistan operates under a regulated tariff regime
wherein the viability and sustainability of power generation projects are not
dependent solely upon actual units of electricity generated, but equally upon
the assurance of plant availability and capacity maintenance. The CPP mechanism
forms the very financial backbone of such projects, as it enables recovery of
fixed and capital costs necessary for establishing and maintaining the
generation facility. Without CPP, the project itself cannot commercially
survive. Therefore, CPP cannot be viewed in isolation or divorced from the core
business activity of power generation merely because its quantification is not
directly linked with units dispatched to the grid.
13.6 The
learned CIR(A) appears to have proceeded on the assumption that only receipts
directly attributable to the actual generation and physical supply of
electricity can qualify as profits and gains derived from the electric power
generation project. Such reasoning fails to appreciate the settled legal
distinction between “generation of electricity” as a commercial undertaking and
“actual sale of units” as merely one operational consequence thereof. The
business of an IPP under the prevailing tariff regime does not consist merely
in the sale of electricity; rather, it encompasses establishment, financing,
operation, maintenance, and continuous availability of the generation facility
in accordance with the contractual and regulatory framework.
13.7 Thus,
CPP is not a passive, independent, or collateral receipt detached from the
business activity of the taxpayer. It constitutes consideration for maintaining
the plant, machinery, technical infrastructure, operational readiness, and
continuous availability of the generation facility, without which electricity
generation itself cannot occur. The distinction between CPP and EPP is
therefore merely a tariff bifurcation adopted for regulatory, accounting, and
commercial purposes. Both collectively constitute the composite revenue stream
of the power generation undertaking. Further support for the aforesaid
conclusion is also available from the express terms of the Power Purchase
Agreement (“PPA”) itself, which
unequivocally demonstrate that “capacity” and “energy” constitute inseparable
and coequal components of the commercial arrangement executed between the
parties.
i. Article
II of the PPA executed between the appellant and the Central Power Purchasing
Agency (Guarantee) Limited (“CPPA-G”)
is titled “Sale and Purchase of Energy and Capacity”, thereby making it
abundantly clear that the contractual subject matter of the agreement is not
confined merely to the sale of electricity actually generated and dispatched,
but extends equally to the making available of dependable generation capacity.
ii. Section
2.1 of Article II of the PPA expressly provides that, subject to the terms and
conditions of the Agreement, the Company shall make available to WAPDA/CPPA-G
both:
(a)
The
Dependable Capacity of the project up to the prescribed contractual limit; and
(b)
The
Net Electrical Output of the Complex, to the extent dispatched by the
purchaser, in consideration of the tariff mechanism provided under Article IX
of the Agreement.
The aforesaid provision clearly
establishes that the contractual obligations undertaken by the appellant are
twofold in nature, namely:
a. maintenance and availability of dependable
generation capacity; and
b. generation and supply of electrical
output upon dispatch instructions.
The PPA thus treats “capacity
availability” itself as an independent and essential contractual performance
obligation forming part of the core business activity of the power generation
project.
iii. This
position is further reinforced by Section 9.1(b) of Article IX of the PPA
relating to Capacity Payments, which provides that where the Company remains
unable, for a specified period, to meet the dispatch requirements requested by
WAPDA/CPPA-G, the purchaser becomes entitled to suspend Capacity Payments until
the Company restores its operational capability. The very fact that Capacity
Payments are directly linked with operational readiness and dispatch capability
demonstrates that such payments are not passive or unrelated receipts, but
constitute consideration for maintaining the plant in a state of continuous
operational availability capable of generating and supplying electricity
whenever required.
iv. Likewise,
Section 9.1(c) of Article IX further stipulates that where the Dependable
Capacity of the Complex falls below the agreed thresholds determined through
Annual Capacity Tests, the CPP shall correspondingly stand adjusted and
reduced. This contractual mechanism conclusively establishes that CPP is
intrinsically linked with the generation capability, operational efficiency,
and dependable performance of the power plant itself.
v. The
cumulative effect of the aforesaid contractual provisions leaves no manner of
doubt that CPP is not an independent, collateral, or detached receipt unrelated
to the business of electric power generation. Rather, CPP constitutes
contractual consideration payable for maintaining, operating, and continuously
making available the generation infrastructure forming the very foundation of
the appellant’s power generation undertaking.
vi. The
PPA itself therefore demolishes the artificial distinction sought to be drawn
between “generation of electricity” and “availability of generation capacity.”
Under the contractual and regulatory framework governing Independent Power
Producers, availability of dependable capacity is itself an integral and
indispensable component of the business of electric power generation.
Consequently, CPP cannot, either in commercial substance or in legal character,
be segregated from the core business activity of the appellant or treated as
“Income from Other Sources.”
13.8 The
Hon’ble Supreme Court of Pakistan in Commissioner
of Income Tax v. Sui Northern Gas Pipelines Ltd (1991 SCMR 2321),
laid down the principle that the real commercial character and substance of a
receipt must determine its tax treatment. The Court emphasized that receipts
arising directly from the carrying on of the business operations retain the
character of business income, notwithstanding the accounting methodology or
nomenclature employed. The principle was similarly recognized in the English
decision of IRC v. Korean
Syndicate Ltd [(1921) 3 KB 258], wherein it was held that income
assumes the character of business income where it forms part of the commercial
exploitation of the business undertaking and arises directly from the
operations constituting the business activity. Reference may also be made to
the judgment of the Indian Supreme Court in CIT v. Govinda Choudhury & Sons [(1993) 203 ITR
881 (SC)], wherein the Court held that receipts arising directly from
contractual obligations undertaken in the ordinary course of business
constitute business income even where the receipts compensate for delayed
execution or ancillary contractual obligations. The Court emphasized the need
to assess the “nexus” between the income and the business activity, rejecting a
narrow reading that would artificially separate such receipts from core
business earnings. Similarly, in CIT
v. Bokaro Steel Ltd [(1999) 236 ITR 315 (SC)], the Indian Supreme
Court observed that where receipts are inextricably linked with the business or
project operations, such receipts partake the same character as the principal
business activity itself. The Court held that the true test is whether the
receipt has a direct nexus with the business undertaking. The ratio decidendi
emerging from the aforesaid authorities is that where a receipt arises directly
from the carrying on of the core business activity and forms an inseparable
component of the commercial structure of the undertaking, such a receipt cannot
be artificially detached from the business itself.
13.9 It
is pertinent to observe that the controversy regarding the tax treatment of
Delayed Energy Payments received by IPPs from WAPDA under the PPA is no longer
res integra. The Honourable Islamabad High Court, in M/s Fauji Kabirwala Power Co.
Ltd. v. Commissioner of Income Tax, Legal (LTU), Islamabad, bearing
T.R. Nos.
03/2009, 20/2009 and 55/2009, through a common judgment dated 27.07.2009,
while examining
the scope of Clause 176 of Part I of the Second Schedule to the repealed Income
Tax Ordinance, 1979 [corresponding to Clause 132 of Part 1 of the Second
Schedule to the Income Tax Ordinance, 2001], categorically held that interest
received from WAPDA on delayed payments constituted “profit and gains derived from an
electric power generation project” and was therefore exempt from tax.
The Honourable High Court unequivocally held that such receipts had a direct
nexus with the business activity of electric power generation.
i. The aforesaid judgment was subsequently
affirmed by the Honourable Supreme Court of Pakistan in Uch Power (Pvt.) Ltd. and
Others v. Income Tax Appellate Tribunal and Others (2010 SCMR 1236), wherein the Apex Court dismissed
the relevant civil petitions and upheld the view taken by the Islamabad High
Court. The Honourable Supreme Court specifically recognized that the
controversy pertained to the interpretation and applicability of Clause 176 of
the repealed Ordinance [now Clause 132 of the Income Tax Ordinance, 2001], and
conclusively answered the questions accordingly. The
Apex Court, while consolidating various civil petitions, including those arising out of
the Fauji Kabirwala judgment, unequivocally upheld the
said decision by dismissing the relevant petitions. In paragraph 2 of its
judgment, the Honourable Supreme Court clarified that the matter pertained to
the interpretation and applicability of Clause 176 of Part I of the Second
Schedule to the repealed Income Tax Ordinance, 1979 [now corresponding to
Clause 132 of the Second Schedule to the Income Tax Ordinance, 2001], observing
as follows:
“2.
Though, broadly speaking, the questions of law for consideration involved in
all these petitions for leave to appeal/civil appeals are about the
interpretation and applicability of Clause‑176 of Part‑I of the IInd Schedule
to the repealed Income Tax Ordinance, 1979 [now corresponding to clause‑132 of
the Second Schedule to the Income Tax Ordinance, 2001] (hereinafter referred to
as ‘clause 176’), but for better understanding of relevant facts, it will
be useful to classify these petitions into five different categories as under:-
……………………………………………………………………………
(e)
Civil Petitions for Leave to Appeal No.1772 to 1774/2009 (three in number),
arise from the common judgment dated 27‑7‑2009, passed by the Islamabad High
Court, Islamabad, whereby, T.R. Nos. 3, 20 and 25/2009, preferred by the
petitioner, a public limited company (M/s Fauji Kabir Wala Power Company
Limited), engaged in the Private Sector Power Generation Project,
containing following questions of law for the opinion of the Court, were
disposed of:---
(i)…………………………………………………………………………
(vi)
Whether the interest received by the petitioner from WAPDA on delayed payments
is not exempt under clause 176 of the 2nd Schedule to the Ordinance, being
attributable to the business activities of its electric power generation
project?"
(Emphasis supplied)
ii. In
paragraph
18, the Honourable Supreme Court concluded and disposed of the petitions
in categorical terms, holding:
“18.
This being the position, the remaining twenty‑two petitions placed in
categories (b) to (e) are also dismissed. The questions for consideration
proposed by this Court in some of the appeals, vide leave granting orders dated
13‑12‑2006 and 22‑10‑2009, are also answered and disposed of in terms of the
above discussion. Questions answered accordingly.” (Emphasis supplied)
The legal position thus attained
finality and became binding under Article 189 of the Constitution of the
Islamic Republic of Pakistan, 1973.
iii. It is
equally significant to note that the learned AR for the appellant rightly
pointed out that the reliance placed by the learned CIR(A) upon the judgments
reported as 2010 PTD 1809 (UCH Power case) and I.T.R. No.03/2009 (Fauji
Kabiwala case) was misconceived and selective in nature. A careful reading of
paragraph 16 of the judgment rendered by the Honourable Supreme Court in the
Uch Power case reveals that the Apex Court merely excluded from the scope of
exemption those receipts which were independently assessable under section 30
of the Ordinance as “Income from Other Sources,” namely interest earned on bank
deposits and savings accounts having no proximate nexus with the electric power
generation activity. The Honourable Supreme Court categorically distinguished
such independent and separable income streams from receipts intrinsically
arising from and connected with the execution of obligations under the PPA.
Consequently, the ratio decidendi of the said judgment was confined to
ancillary investment income lacking direct nexus with the power generation
project, and not to tariff-related receipts arising directly from the business
operations of the IPPs.
iv. The learned AR further correctly emphasized
that the very same judgment, while dealing with the cases falling in category
(e), including the Fauji Kabirwala Power Company matters, expressly upheld the
exemption in respect of interest received from WAPDA on delayed tariff payments
under the PPA. Thus, the Honourable Supreme Court itself drew a clear legal
distinction between (a) passive income generated from surplus funds parked in
bank accounts, and (b) receipts emanating directly from the commercial and
operational framework of the power generation project. The latter category was
judicially recognized as attributable to and derived from the business activity
of electric power generation and therefore entitled to exemption under Clause
176/Clause 132.
v. Thereafter, the same issue again came before
the Honourable Islamabad High Court in M/s Fauji Kabirwala Power Co. Ltd. v.
Commissioner Inland Revenue, LTU, Islamabad, [ITR Nos. 74, 13
& 72 of 2009], decided on 17.12.2019. The following question of law
was framed and answered in paragraph 10 of the judgment:
“Whether
the interest received by the applicant from WAPDA on delayed payments is not
exempt under clause 132 of the 2nd Schedule to the Ordinance, being
attributable to the business activities of its electric power generation
project?”
The Honourable Islamabad High
Court, while reiterating its earlier view, held as under:
“10……………..
Thus, the amount received by the applicant on account of interest for
delayed payment from WAPDA has a nexus with the business income from power
generation and qualifies for exemption under clause 132 of the 2nd
Schedule to the Income Tax Ordinance, 2001.” (Emphasis supplied)
vi. The
significance of the aforesaid judgments lies in the fact that even receipts in
the nature of interest arising on account of delayed payment of tariff
obligations under the PPA were held to be attributable to, and inseparable
from, the business activity of electric power generation. Once even delayed
payment charges and interest receipts have been judicially recognised as
profits and gains derived from the electric power generation project, it would
be wholly illogical and legally untenable to contend that the principal tariff
component, namely CPP itself, constitutes “Income from Other Sources.” If
ancillary and incidental receipts arising from delayed payment of tariff
obligations retain the character of business income attributable to the power
project, the principal receipts forming the very foundation of the tariff
structure cannot, by any principle of law or commercial interpretation, be
detached from the core business activity of electric power generation.
vii. Applying
the aforesaid principles, CPP and EPP are clearly interdependent and
inseparable components of the integrated tariff mechanism governing the power
generation project. CPP represents consideration for maintaining generation
capacity available in accordance with the obligations under the PPA, whereas
EPP represents consideration for actual generation and dispatch. Both arise
directly from the same indivisible business activity of electric power
generation and supply.
13.10 It
is further pertinent to observe that under the tariff structure prescribed in
the PPA, the EPP merely represents reimbursement and recovery of the variable
costs associated with actual generation and dispatch of electricity. The EPP
component ordinarily covers fuel costs, variable operation and maintenance
expenses, start-up costs, auxiliary consumption, and other generation-linked
expenditures incurred by the IPP in the process of producing and supplying
electricity to WAPDA/NTDC. By its very nature, therefore, EPP is substantially
a pass-through component designed to compensate the generator for variable
operating expenditures actually incurred during generation.
i. The factual and commercial reality of the
power generation business clearly demonstrates that EPP, in isolation, does not
constitute the true profit-yielding component of the tariff structure. Rather,
it primarily enables the IPP to recover the operational and variable costs
necessarily incurred for producing electricity. If the entire tariff mechanism
is artificially dissected and only EPP is treated as “business income”
attributable to electric power generation, while CPP is excluded therefrom, the
inevitable consequence would be that the appellant’s core business activity
would effectively become commercially non-viable and incapable of yielding any
real profit or return on investment.
ii. It is an admitted and undisputed feature
of the independent power generation regime that massive capital investments are
made by IPPs for establishment of power plants, procurement of machinery,
repayment of financing obligations, servicing of debt, maintenance of
generation capacity, staffing, insurance, depreciation, fixed operation and
maintenance expenses, and ensuring continuous availability of the plant in
accordance with the strict performance obligations under the PPA. The economic
recovery of these fixed and capital-related costs is embedded within the
Capacity Purchase Price (“CPP”), which constitutes the consideration payable
for maintaining the generation facility in an operationally ready condition,
irrespective of actual dispatch.
iii. Thus, CPP is not an independent or
ancillary receipt detached from the business of power generation; rather, it is
the very component through which the IPP recovers its fixed costs, financing
charges, return on equity, depreciation, and capital investment. Excluding CPP
from the ambit of business income would therefore amount to ignoring the
fundamental commercial structure upon which the entire private power generation
framework is based.
iv. In practical terms, if EPP alone were to be
regarded as the income attributable to the business of electric power
generation, then the appellant would merely be recovering its variable fuel and
operational expenditures without any corresponding recovery of capital costs,
fixed operational expenses, financing obligations, or return on investment.
Such an interpretation would lead to the commercially absurd conclusion that
the appellant’s power generation business operates perpetually without profit,
despite the fact that the entire tariff regime approved by NEPRA and
incorporated in the PPA is specifically structured to ensure recovery of both
variable and fixed costs together with a reasonable return to the investor.
v. The law does not permit interpretation of
fiscal provisions in a manner that defeats commercial reality or renders the
business model recognized by the Government itself commercially meaningless.
The tariff mechanism under the PPA constitutes a single integrated compensation
structure comprising both EPP and CPP, each serving distinct but complementary
functions within the same indivisible business activity of electric power
generation. EPP compensates the generator for actual electricity produced and dispatched,
whereas CPP compensates the generator for maintaining generation capacity,
operational readiness, and availability in accordance with contractual
obligations. Both components arise directly, exclusively, and inseparably from
the same electric power generation project.
vi. Therefore, once receipts such as delayed
payment interest under the PPA have been judicially recognised by the
Honourable Superior Courts as profits and gains attributable to the electric
power generation project, there remains no legal or logical basis to exclude
CPP, which forms the principal and foundational component of the tariff
structure, from the ambit of business income derived from the project. Any
contrary interpretation would not only contradict the commercial substance of
the PPA but would also produce an anomalous and impracticable result whereby
the appellant’s principal business activity would effectively cease to generate
taxable business profits at all.
13.11 It may also further be observed that Clause 176
of Part I of the Second Schedule to the repealed Income Tax Ordinance, 1979,
now corresponding to Clause 132 of Part I of the Second Schedule to the Income
Tax Ordinance, 2001, was originally inserted through the Finance Act, 1988 as
part of the legislative framework designed to encourage and facilitate private
sector investment in electric power generation projects. Since its inception,
and throughout the considerable period spanning several decades thereafter, the
consistent understanding and implementation of the said exemption by both the
taxpayers and the Revenue authorities remained that receipts arising from the
electric power generation business under the PPA, including tariff-related
components, constituted exempt profits and gains attributable to the project.
i. Significantly, despite repeated
assessments, audits, appellate proceedings, and scrutiny of Independent Power
Producers (“IPPs”) over the years, no such controversy appears to have been
raised by the Department questioning the character of CPP as being outside the
scope of the exemption clause. The long-standing and uninterrupted
administrative practice consistently recognized CPP and allied tariff receipts
as forming part of the exempt business income of the electric power generation
project. Such contemporaneous and consistent executive interpretation of a
fiscal provision carries persuasive value and cannot lightly be discarded,
particularly where the Legislature, despite repeated amendments and
reenactments of the tax law, chose not to alter or clarify the provision in a
manner supporting the interpretation now sought to be advanced by the
Department.
ii. It is a well-settled principle of
interpretation that where a particular construction of a statutory provision
has consistently prevailed over a long period of time and has formed the basis
of commercial arrangements, investments, and fiscal conduct of the parties, any
sudden departure therefrom must be supported by clear statutory authority and
compelling legal justification. More so in the present case, where the
exemption regime was specifically introduced to incentivize enormous private
capital investment in the power sector involving long-term financial
commitments and contractual obligations under Government-backed PPAs.
iii. The abrupt attempt by the Department, after
several decades of settled practice, to artificially bifurcate the integrated
tariff structure and to characterize CPP as “Income from Other Sources” appears
not only contrary to the legislative intent and commercial substance of the
transaction, but also inconsistent with the binding judicial pronouncements of
the Honourable Superior Courts discussed hereinabove. The Department has
neither pointed out any amendment in law, nor any subsequent authoritative judicial
pronouncement warranting such deviation from the settled legal position.
iv. We are, therefore, constrained to observe
that the present controversy appears to have been raised unnecessarily on
hyper-technical grounds, resulting in avoidable and frivolous litigation. Such
an approach not only burdens the appellate fora with repetitive and unnecessary
disputes but also undermines the certainty and predictability which are
essential attributes of fiscal administration and investment-related taxation
regimes. The appellate authorities are not expected to encourage litigation
divorced from commercial realities, particularly where the legal position
already stands substantially settled through authoritative pronouncements of
the Honourable High Courts and the Honourable Supreme Court of Pakistan.
v. Accordingly, the long-standing legislative
history, consistent departmental practice, and binding judicial interpretation
further reinforce the conclusion that CPP constitutes profits and gains derived
from and attributable to the electric power generation project and therefore
squarely falls within the exemption contemplated under Clause 132 of Part I of
the Second Schedule to the Income Tax Ordinance, 2001.
Finding:
It
is accordingly held that both CPP and EPP are intrinsically connected with, and
attributable to, the business of electric power generation and the sale of
electricity. CPP and EPP together constitute the composite revenue structure of
the power generation undertaking and are commercially as well as legally
inseparable components of the same business activity. The attempt to
characterize CPP as “Income from Other Sources” is contrary to the true
commercial substance of the PPA framework, the integrated tariff regime
governing Independent Power Producers, and the binding judicial precedents
discussed hereinabove.
14. Question
No.2
Whether receipts under CPP are to be characterized as
“business income” derived from the electric power generation project, or as
“income from other sources”?
14.1 Under
the scheme of the Ordinance, income is classified under specific heads. The
residuary head “Income from Other Sources” can only be invoked where a receipt
does not properly fall under any other specific head of income recognized by
the Ordinance.
14.2 Section
18 of the Ordinance defines “business” in broad and comprehensive terms so as
to include any trade, commerce, manufacture, adventure, or concern in the
nature of trade. The legislative intent underlying the provision is to bring
within the ambit of business income all receipts directly arising from the
carrying on of the commercial undertaking. CPP satisfies every recognized test
of business income because:
i. It
arises directly from the principal business activity of the taxpayer;
ii. It
accrues under the core operational agreement governing the power project;
iii. It
constitutes a recurring commercial receipt under the approved tariff structure;
and
iv. It
is generated through the deployment of capital assets, plant, machinery,
infrastructure, and operational readiness maintained by the taxpayer.
CPP cannot be equated with passive
or independent receipts such as interest income, windfall gains, or ancillary
receipts unrelated to the principal business undertaking. The entitlement to
CPP arises solely because the taxpayer establishes, maintains, and operates the
generation facility in accordance with the obligations imposed under the PPA
and the regulatory regime.
14.3 The
Assessing Officer’s contention that CPP should be classified under “Income from
Other Sources” proceeds upon the misconception that actual generation alone
constitutes the business activity. Such an interpretation ignores the essential
commercial reality that the maintenance of generation capacity and operational
readiness is itself the principal obligation undertaken by the IPP under the
PPA.
14.4 The
learned CIR(A), while exercising appellate jurisdiction, proceeded to hold that
CPP itself constitutes “income from other sources” under section 39 of the
Ordinance. Such determination substantially altered the very character of the
receipts and introduced a new dimension not forming part of the original
assessment framework. It is a settled principle of appellate jurisprudence that
although an appellate authority possesses wide powers, it cannot introduce a
completely new source of income or alter the essential nature of assessment
beyond the scope of controversy arising from the assessment order.
14.5 The
reliance placed by the learned CIR(A) upon section 18(1)(b) of the Ordinance
also appears to be misconceived. The appellant is admittedly carrying on an
organized commercial undertaking involving the generation and sale of
electricity under a statutory and contractual regime. The receipts on account
of CPP are intrinsically connected with and arise from such business
operations. Merely because CPP is linked with plant availability rather than
the quantum of units dispatched does not convert it into “income from other
sources.”
14.6 The
expression “business” under the Ordinance has consistently received a broad and
commercial interpretation, encompassing all receipts arising from or incidental
to carrying on the business undertaking. Reliance may be placed on the judgment
titled Commissioner of Income Tax v.
Tamil Nadu Dairy Development Corporation Ltd [(1995) 216 ITR 535], the Madras
High Court while discussing the term “business” it was held that word business
carry very wide connotation and by no means determinate its scope, which has to
be considered with reference to each particular kind of activity and occupation
of the concerned perso. The CPP receipts satisfy the test of commercial nexus
and operational integration with the appellant’s business activity and
therefore squarely fall within the ambit of business income.
14.7 The Hon’ble Supreme Court of Pakistan in Elahi Cotton Mills Ltd. v. Federation
of Pakistan (PLD 1997 SC 582), held that classification of receipts
for tax purposes must depend upon their true legal and commercial character
rather than upon artificial distinctions or narrow technicalities. The
Honorable Islamabad High Court, in its judgment rendered in I.T.R. No. 51 of
2020 in the case of Foundation
Power Company (Daharki) Ltd., examined the question as to whether
the learned Appellate Tribunal Inland Revenue was justified in granting
exemption from minimum tax on receipts under the Capacity Purchase Price (CPP),
despite the fact that Clause (11A) of Part IV of the Second Schedule to the
Ordinance specifically provides exemption only in respect of receipts arising
from the “sale of electricity.” While adjudicating the controversy, the Hon’ble
Court observed that there was no dispute regarding the taxpayer’s entitlement
to exemption under Clause 132; however, the dispute centred upon the
interpretation of the phrase “in respect
of receipts from sale of electricity” appearing in sub-clause (v) of Clause
(11A). The contention advanced on behalf of the Revenue was that receipts under
the Capacity Purchase Price (CPP) could not be treated as receipts from the
sale of electricity. The Hon’able Court, however, upheld the findings of the
subordinate fora and observed that the CPP emanated from the very same Power
Purchase Agreement under which the taxpayer supplied and sold electricity. It
was further held that where receipts originate from the same contract and
constitute part of the same commercial arrangement, such receipts cannot be
artificially bifurcated for taxation purposes so as to assign a different
character to one component thereof. The Court emphasized that the receipts
under the CPP undisputedly arose under the same PPA and, therefore, could not
be treated as receipts from “other sources.” The Hon’ble Court
further noted that the Revenue had failed to identify any separate or
independent business source from which the disputed receipts could be said to
arise. Consequently, the Hon’ble Islamabad High Court concluded that the CPP retained
the same character as receipts from the sale of electricity and, therefore,
qualified for exemption from minimum tax. Accordingly, the question of law was
answered in the affirmative, in favour of the taxpayer company and against the
Revenue.
14.8 Likewise,
in CIT v. Bokaro Steel Ltd
(236 ITR 315), the Indian Supreme Court held that receipts directly linked with
project operations and business activities partake the same character as the
principal undertaking itself. Further reliance may be placed upon CIT v. Chugandas & Co
(1965) 55 ITR 17 (SC), wherein it was held that income arising directly from
business operations cannot be excluded from the business head merely because it
possesses certain ancillary characteristics.
14.9 The
judgments relied upon by the learned CIR(A), titled Uch Power (Pvt.) Ltd. and Others v.
Income Tax Appellate Tribunal and Others (2010 PTD 1809), and I.T.R. No. 03 of 2009,
have not been properly appreciated, as those cases involved multiple and
distinct questions of law, including, inter alia, the tax treatment of interest
on delayed payments, which was decided in favour of the taxpayer. Certain
matters in those judgments also related to interest income earned from bank
deposits and other ancillary investments, which were held to constitute
independent and separable sources of income having no direct nexus with the
exempt business activity. In contrast, the receipts under the CPP in the
present case arise directly and exclusively under the PPA itself, which forms
the foundational and governing commercial arrangement of the appellant’s power
generation project. Consequently, the CPP receipts cannot be equated with
income arising from independent or ancillary sources, as they are intrinsically
connected with and emanate from the core business activity carried out under
the PPA. Conversely,
the judgments relied upon by the appellant, particularly the decision of the
Honourable Islamabad High Court in I.T.R. No. 51 of 2020 Foundation Power
Company (Daharki) Ltd., lend substantial support to the appellant’s contention
that receipts arising under the same contractual framework governing supply of
electricity partake the same legal character.
14.10 Even otherwise, assuming arguendo that CPP receipts could somehow be
treated separately from EPP, the Assessing Officer has failed to demonstrate
how such receipts cease to constitute operational business receipts and become
“income from other sources.” Section 39 of the Ordinance operates residually
and applies only where income cannot reasonably be brought within any other
specific head. Once it is established that CPP arises directly from the
appellant’s core business undertaking and commercial operations under the PPA,
recourse to the residuary head becomes legally impermissible.
Finding:
It
is therefore held that CPP constitutes business income derived from the
electric power generation project and cannot lawfully be recharacterized/ reclassified
under the residuary head “Income from Other Sources.”
15. Question
No.3
Whether the exemption under Clause (132) of Part I of the
Second Schedule extends only to operational income linked with actual dispatch
of electricity (EPP), or also includes CPP?
15.1 Clause
(132) of Part I of the Second Schedule grants an exemption in respect of:
“profits and
gains derived by a taxpayer from an electric power generation project.”
A careful reading of the provision
reveals that the Legislature has consciously employed broad terminology, namely
“profits
and gains derived by a taxpayer from an electric power generation project,”
instead of restricting the exemption merely to receipts arising from “sale of
electricity.” The statutory language contemplates an exemption in respect of
the commercial yield generated by the project as a whole, provided such
receipts possess a direct and proximate nexus with the operations and business
framework of the electric power generation undertaking.
15.2 The
legislature has deliberately employed the expression “profits and gains derived
from” the project and not merely profits arising from actual electricity
dispatched. The exemption is therefore attached to the entirety of profits
directly emanating from the eligible undertaking.
15.3 No
doubt, the expression “derived from” requires a direct and proximate nexus
between the receipt and the eligible activity. However, once such a nexus
exists, the exemption cannot be artificially curtailed by dissecting integral
components of the project revenue structure. CPP arises solely because:
i. The
taxpayer establishes and maintains the generation facility;
ii. The
regulatory tariff mechanism recognizes CPP and EPP as integrated tariff
components;
iii. Recovery
of fixed costs through CPP is indispensable for the commercial viability of the
project; and
iv. The
generation undertaking cannot survive economically without CPP.
Accordingly, CPP cannot be
characterized as an independent or collateral source of income detached from
the generation project.
15.4 The
learned CIR(A) observed that CPP accrues irrespective of actual generation or
supply of electricity and therefore lacks nexus with power generation. We are
unable to subscribe to such reasoning. The business of an IPP is not confined
merely to actual dispatch of electricity but includes continuous operational
readiness and maintenance of generation capacity in accordance with the PPA and
regulatory obligations.
15.5 The
electric power sector operates under a regulated tariff mechanism where the
viability and sustainability of projects depend equally upon availability
payments and energy payments. CPP, therefore, forms an inseparable component of
the commercial yield arising from the project itself.
15.6 In
Liberty India v. CIT [(2009)
317 ITR 218 (SC)], the Indian Supreme Court held that the expression “derived
from” requires a direct nexus between the receipt and the eligible undertaking.
However, the Court simultaneously recognized that where the receipt directly
emanates from the operational structure of the undertaking itself, the nexus
requirement stands satisfied. CPP flows directly from the PPA governing the
generation undertaking itself and not from any independent or external source. Similarly,
in Pandian Chemicals Ltd. v. CIT
[(2003) 262 ITR 278 (SC)], the Indian Supreme Court distinguished between
receipts having a direct nexus with the industrial undertaking and receipts
arising from independent external sources. CPP clearly falls within the former
category. Likewise, in CIT v.
Meghalaya Steels Ltd [(2016) 383 ITR 217 (SC)], the Indian
Supreme Court held that incentives integrally connected with the operational
viability of the industrial undertaking qualify as profits derived from the
undertaking where a direct nexus exists.
15.7 The
Department’s attempt to isolate CPP from exempt business profits effectively
amounts to reading into the statute a restriction which the legislature itself
never enacted. Had the legislature intended to confine the exemption only to
units of electricity actually dispatched, it would have employed clear
restrictive language to that effect. No such limitation exists in Clause (132).
Finding:
It
is therefore held that the exemption under Clause (132) of Part I of the Second
Schedule to the Ordinance extends to the entire profits and gains directly
derived from the electric power generation project, including both CPP and EPP.
The exemption is not confined merely to operational receipts arising from the actual
dispatch of electricity.
16. Question
No.4
Whether the tax authorities are competent to disregard or
recharacterize the nature of receipts defined under the PPA in the absence of
express statutory authority?
16.1 It
is a settled principle of tax jurisprudence that while tax authorities may
examine the true legal effect of a transaction, they cannot rewrite commercial
arrangements or substitute contractual terms merely because a different
characterization may produce greater tax revenue. Recharacterization is
permissible only where:
i. The
transaction is sham, fictitious, or colourable;
ii. Fraud
or tax evasion is established; or
iii. An
express statutory provision authorizes such departure.
The PPA constitutes the governing
commercial instrument regulating the rights and obligations of the parties
within the power sector. The bifurcation between CPP and EPP is part of the
statutory and regulatory framework approved by NEPRA and embedded within the
tariff structure governing the project. There is nothing on record suggesting
that the arrangement lacks commercial substance or constitutes a colourable
device.
16.2 Considerable
emphasis was placed by the learned CIR(A) on the fact that sales tax is charged
only upon EPP and not upon CPP. Such reasoning is legally unsustainable. The
Sales Tax Act, 1990 and the Income Tax Ordinance, 2001, operate in distinct
statutory domains and serve different legislative purposes. The definition of
“value of supply” under the sales tax regime cannot be imported into the
Ordinance for determining the character of income under Clause (132). Merely
because CPP may not constitute consideration for taxable supply under sales tax
law does not imply that it ceases to be business income arising from the power
generation project for income tax purposes.
16.3 The
Hon’ble Supreme Court of Pakistan in the case titled Commissioner of Income Tax,
Peshawar Vs M/s Siemen A.G (1991 PTD 488), held that tax liability
must ordinarily be determined in accordance with the legal rights and
obligations arising under valid contractual arrangements and that revenue
authorities cannot disregard lawful arrangements merely on subjective
considerations. Similarly, the celebrated judgment in IRC v. Duke of Westminster [(1936)
AC 1], established the enduring principle that taxpayers are entitled to
arrange their affairs within the framework of law and that genuine legal
transactions cannot be disregarded merely because they result in reduced tax
incidence. Lord Tomlin famously observed:
“Every man is entitled if he can to
order his affairs so that the tax attaching under the appropriate Acts is less
than it otherwise would be.”
Likewise, in Vodafone International Holdings BV v. Union of India [(2012)
341 ITR 1 (SC)], the Indian Supreme Court reaffirmed that, absent sham or
fraud, genuine commercial arrangements must be respected and tax authorities
cannot substitute their own perception of economic substance in place of the
legal form adopted by the parties.
16.4 The
Assessing Officer’s attempt to carve out CPP for separate adverse treatment
lacks a statutory basis and effectively amounts to rewriting the PPA and the
regulatory tariff mechanism governing the power project.
Finding:
Accordingly,
it is held that the tax authorities are not competent to disregard or
recharacterize CPP receipts contrary to the terms of the PPA in the absence of
express statutory authorization. The contractual characterization and
commercial framework embodied in the PPA must be respected for tax purposes.
17. Question
No.5
Whether the
show cause notices issued under section 122(9) read with section 122(5A) of the
Ordinance and the consequential assessment orders are legally sustainable where
(i) the SCNs are internally contradictory as to the basis of taxation, (ii) the
assessing officer simultaneously treats CPP as business income while denying
exemption, and (iii) the appellate authority travels beyond the scope of the
SCN and assessment order to re-characterize the nature of income without lawful
notice?
17.1 Having considered the
contentions of the learned AR in the context of the impugned show cause notices
issued under section 122(9) read with section 122(5A) of the Ordinance, it
appears that the foundational legality of the proceedings is seriously
questioned on account of internal inconsistencies and jurisdictional
infirmities. The SCNs, as noted, proceed on the premise of alleged
non-applicability of exemption under sub-clause (v) of clause (11A) of Part IV
of the Second Schedule relating to minimum tax regime, while simultaneously
relying upon section 18 of the Ordinance to propose taxation of CPP receipts
under the normal tax regime as business income. This dual and apparently
inconsistent basis creates ambiguity as to the precise legal charge and the exact
statutory provision under which an adverse inference was intended, thereby
rendering the notices legally vulnerable in light of the settled principle that
a show cause notice must be clear, specific, and unambiguous, being the very
foundation of valid fiscal proceedings.
17.2 The further contention that the assessing
officer itself treated CPP as “business income” in SCNs and assessment orders,
while at the same time denying the benefit of exemption under Clause (132),
also reflects a self-contradictory approach, as once the character of receipt
as business income from electric power generation is accepted, its exclusion
from exemption must rest on clear statutory disqualification and not on
mutually inconsistent reasoning. The assessment orders under section 122(5A)
appear to perpetuate the same inconsistency by simultaneously declaring the
original assessments as erroneous and prejudicial to the interest of revenue
while adopting a treatment of CPP which does not clearly align with the stated
basis of the SCN, thereby giving rise to an impression of a lack of coherent
jurisdictional foundation.
17.3 It is equally significant that the learned
CIR(A), while upholding the action of the Department, has travelled beyond the
precise controversy raised in the SCNs and assessment orders by independently
re-characterising CPP as not constituting business income, an issue which was
neither expressly framed in the SCN nor adopted by the assessing officer as the
basis of amendment. Such an approach, in the considered view of this Tribunal,
is not in consonance with the settled principle that an appellate authority
cannot travel beyond the scope of the show cause notice or the assessment order
and introduce a new and independent line of reasoning without affording proper
opportunity to the taxpayer. The Hon’ble Supreme Court of Pakistan, in
consistent jurisprudence, including the principle reaffirmed in Commissioner
Inland Revenue, LTO, Islamabad v. Concern
Worldwide, Islamabad and others (C.P.L.A.
1626/2025), Commissioner Inland Revenue v. M/sRYK
Mills (2023 SCMR 1856), M/s Al-Khair Gadoon Ld v. The Appellate
Tribunal and others (2019 SCMR 2018), and Collector Central Excise and
Land Customs and others v. Rahm Din (1987 SCMR 840) has held that
adjudication beyond the scope of notice or dispute between the parties vitiates
the process. Similarly, the Indian
Supreme Court in CIT v. Manjunatha Cotton and Ginning Factory [(2013)
359 ITR 565 (SC)] and CIT
v. Laxman Das Khandelwal [(2019)
417 ITR 325 (SC)] has emphasized that
jurisdictional defects in notice and failure to clearly specify the charge are
fatal to assessment proceedings.
17.4 Viewed in this legal backdrop, the present
proceedings disclose a structural infirmity where the assessing officer’s case
lacks a consistent legal foundation, the SCN suffers from ambiguity and
internal contradiction, and the appellate authority has introduced a new
dimension to the dispute without proper legal notice. Such cumulative defects
go to the root of jurisdiction and cannot be treated as mere irregularities
curable in appellate proceedings. The law is well-settled that where the very
foundation of jurisdiction is defective, any superstructure built thereupon
must necessarily fall. Consequently, the entire proceedings under section
122(5A), being based on inconsistent premises and having been further vitiated
by jurisdictional overreach at the appellate stage, are rendered legally
unsustainable.
Finding:
The
question is answered in the affirmative in favour of the appellant. The
proceedings initiated under section 122(5A), including SCNs and consequential
orders, are legally unsustainable, being founded on contradictory premises, and
the appellate authority has further acted beyond jurisdiction by
re-characterising the nature of income without lawful notice, rendering the
entire proceedings void ab initio.
18. Overall Conclusion:
18.1 In
view of the foregoing discussion, the statutory framework, and the
authoritative judicial pronouncements discussed hereinabove, the following
conclusions are reached:
i. CPP and EPP are integral,
interdependent, and inseparable components of the tariff and revenue structure
of an electric power generation project.
ii. Both CPP and EPP arise directly from
and are attributable to the business of electric power generation and supply of
electricity.
iii. CPP constitutes business income
under the Income Tax Ordinance, 2001, and cannot lawfully be classified as
“Income from Other Sources.”
iv. The exemption under Clause (132) of
Part I of the Second Schedule extends to the entirety of profits and gains
derived from the electric power generation project, including CPP as well as
EPP.
v. The Department lacks lawful
authority to disregard, rewrite, or artificially recharacterize the commercial
framework embodied in the PPA in the absence of explicit statutory
authorization.
vi. The proceedings initiated under
section 122(5A), including the show-cause notices and consequential orders, are
legally unsustainable as they rest on contradictory premises; furthermore, the
appellate authority exceeded its jurisdiction by re-characterising the nature
of income without proper lawful notice, thereby rendering the entire
proceedings void ab initio.
Consequently, the treatment accorded
by the Department seeking exclusion of CPP from exempt business profits is
legally unsustainable, contrary to the scheme of the Income Tax Ordinance,
2001, inconsistent with the commercial structure of the power sector, and
opposed to the settled principles of domestic as well as comparative tax
jurisprudence. Accordingly, all the appeals filed by the appellant are allowed,
and the orders passed by the lower authorities are annulled.
|
Sd/- (SHARIF UD DIN KHILJI) MEMBER |
Sd/- (M.M. AKRAM) JUDICIAL MEMBER |
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