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Petitioner: Messrs MOL PAKISTAN OIL AND GAS CO. B.V. VS Respondent: C.I.R., L.T.U., ISLAMABAD
Court Name: Appellate Tribunal Inland Revenue Judge(s): Javed Iqbal, Shahid Masood Manzar, Muhammad Riaz Title: Messrs MOL PAKISTAN OIL AND GAS CO. B.V. vs C.I.R., L.T.U., ISLAMABAD Case No.: I.T.As. Nos. 263(IB), 264(IB), 265(IB), 266(IB) and 267(IB) of 2015 Date of Judgment:2015-05-08 Reported As: 2018 PTD (Trib.) 1344 Result: Appeals rejected
Judgment ORDER These appeals have been filed by Messrs MOL Pakistan Oil and Gas Company against Appellate Orders Nos. 745/746/747/748/749/2015 dated 27.02.2015 passed by Commissioner Inland Revenue (Appeals I) Islamabad. 2. Briefly the relevant facts of the case for the disposal of appeals are that taxpayer is registered in Pakistan as a Branch office MOL Pakistan Oil and Gas. Co. B.V., Netherlands, which is fully owned subsidiary of MOL NYRT, Hungry. The taxpayer derives income from exploration and production of Oil and Gas. Returns for the tax years 2010, 2011, 2012, 2013 and 2014 were filed on due dates declaring profit/(loss) of Rs.(1,093,973,895), Rs.131,240,414/-, Rs.1,083,458,198/-, Rs.1,415,422,609/- and Rs.3,375,614,307/- respectively which constituted deemed assessment orders under section 1-20(1) of the Income Tax Ordinance, 2001 (the Ordinance). Subsequently the Additional Commissioner Audit-I after examining the record found that the assessments in question were erroneous as well as prejudicial to the interest of revenue. Accordingly, show-cause notices A were issued confronting the taxpayer on different issues (being discussed in the later part of this order). The reply submitted by the taxpayer was found unsatisfactory and accordingly the officer passed the amended orders under section 122(5A) of the Income Tax Ordinance, 2001 (hereinafter called Ordinance, 2001). Being aggrieved from the aforementioned order the taxpayer filed appeals before the Commissioner Inland Revenue (Appeals-I) Islamabad, who rejected the appeals. The treatment meted out by the CIR (A) has been impugned before this forum on the following grounds:-- GROUNDS OF APPEAL:- Tax Year 2010:
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1. That the Appellate Orders Nos. 745, 746, 747, 748, 749/2015 dated February 27, 2015 (the Order) issued by the learned Commissioner Inland Revenue (Appeals-I), Islamabad (CIR-Appeals) under section 129 of the Income Tax Ordinance, 2001 (the Ordinance) is bad in law and facts of the case and therefore is illegal, null and void. 2. Without prejudice to above grounds of appeal; 2.1 That the learned CIR-Appeals has erred in upholding the treatment meted out by the Additional Commissioner Inland Revenue, Audit-I, Large taxpayer Unit, Islamabad (ADCIR) and not allowed following geological and geophysical expenditure of Rs.742,957,320 claimed by the appellant under sub-rule (5) of Rule 22 of the Part I of Fifth Schedule to the Repealed Income Tax Ordinance, 1979/Income Tax Ordinance, 2001 which allow expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended after the commencement of commercial production (CCP) wholly and exclusively for the purpose of the business of production and exploration of petroleum as tax deductible. 2.2 without prejudice to the above, the learned CIR-Appeals has erred in upholding in action the treatment meted out by the learned ADCIR by not considering the judgment of Honourable Supreme Court of Pakistan in the case reported at 1993 PTD 758 whereby it has been held that once a taxpayer has commenced its operations, no two separate commercial commencements can be attributed to it for separate plants/lines of production as one return, income and assessm ent is to be framed there related. 2.3 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR by not allowing indirect charges of Rs.39,148,478 by involving provisions of clause (c) of subsection (1) of section 105 of the Income Tax Ordinance, 2001. 2.4 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in adding back realized exchange gain of Rs.8,004,461 to declared income/loss of the appellant. 2.5 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in not allowing provisions for staff gratuity of Rs.30,468,966. 2.6 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR, in disallowing amortization of decommissioning cost of Rs.5,878 202. 2.7 that the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in disallowing decommissioning accretion charges of Rs.2,181,675. Tax Year 2011: 1. That the Appellate Orders Nos. 745, 746, 747, 748, 749/2015 dated February 27, 2015 (the Order) issued by the learned Commissioner Inland Revenue (Appeals-1), Islamabad (CIR-Appeals) under section 129 of the Income Tax Ordinance, 2001 (the Ordinance) is bad in law and facts of the case and therefore is illegal, null and void. 2. Without prejudice to above grounds of appeal 2.1 That the learned CIR-Appeals has erred in upholding the treatment meted out by the Additional Commissioner Inland Revenue, Audit-I, Large Taxpayer Unit, Islamabad (ADCIR) and not allowed following expenditure claimed by the appellant under sub-rule (5) of rule 22 of the Part I of Fifth Schedule to the Repealed Income Tax Ordinance, 1979 / Income Tax Ordinance, 2001 which allow expenditure (not being the nature of capital expenditure or personal expenses of the assessee) laid out or expended after the commencement of commercial production (CCP) wholly and exclusively for the purpose of the business of production and exploration of petroleum as tax deductible. Rs.20,352,489 on account of Geological and Geophysical expenditure Rs.956,843,176 on account of Exportation expenditure 2.2 Without prejudice to the above, the learned CIR-Appeals has erred in upholding in action the treatment meted out by the learned ADCIR by not considering the judgment of Honourable
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Supreme Court of Pakistan in the case reported at 1993 PTD 758 whereby it has been held that once a taxpayer has commenced its operations, no two separate commercial commencements can be attributed to it for separate plants/lines of production as one return, income and assessm ent is to be framed there related. 2.3 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR by not allowing indirect charges of Rs.53,988,433 by invoking provision of clause (c) of subsection (1) of section 105 of the Income Tax Ordinance, 2001. 2.4 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing realized exchange loss of Rs.274,521,649 without considering the fact that exchange loss is an allowable expense. 2.5 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in not allowing provisions for staff gratuity of Rs.61,470,672. 2.6 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing Workers' Profit Participation Fund of Rs.104,874,931 without considering that the fact that the same is allowable deduction in terms of section 60B of the Ordinance. 2.7 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in not disallowing depletion allowance of Rs.279,526,191 based on contention contrary to the provisions of Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979. 2.8 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in computing depletion allowance under Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979, the expenditure incurred on account of royalty is to be deducted from "gross receipts". 2.9 That the learned CIR-Appeals has also erred in upholding the action of the learned ADCIR in applying tax rate of 52.5% on its profits and gains assessable under Part I of Fifth Schedule to the Income Tax Ordinance, 1979 company to the provisions of Rule 4 of the said Schedule. 2.10 Your Appellant seeks consequential relief in Workers' Welfare Fund. Tax Year 2012: 1. That the Appellate Orders Nos.745, 746, 747, 748, 749/2015 dated February 27, 2015 (the Order) issued by the learned Commissioner Inland Revenue (Appeals-1), Islamabad (CIR-Appeals) under section 129 of the Income Tax Ordinance, 2001 (the Ordinance) is bad in law and facts of the case and therefore is illegal, null and void. 2. Without-prejudice to above grounds of appeal. 2.1 That the learned CIR-Appeals has erred in upholding the treatment meted out by the Additional Commissioner Inland Revenue, Audit-I, Large Taxpayer Unit Islamabad (ADCIR) and not allowed following expenditure claimed by the appellant under sub-rule (5) of Rule 22 of the Part I of Fifth Schedule to the Repealed Income Tax Ordinance, 1979/Income Tax Ordinance, 2001 which allow expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended after the commencement of commercial production (CCP) wholly and exclusively for the purpose of the business of production and exploration of petroleum as tax deductible. Rs.47,003,489 on account of Geological and Geophysical expenditure Rs.706,971,240 on account of Exportation expenditure 2.2. Without prejudice to the above, the learned CIR-Appeals has erred in upholding in action the treatment meted out by the learned ADCIR by not considering the judgment of Honourable Supreme Court of Pakistan in the case reported at 1993 PTD 758 whereby it has been held that once a taxpayer has commenced its operations, no two separate commercial commencements can be attributed to it for separate plants/lines of production as one return, income and assessm ent is to be framed there related.
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2.3 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR by not allowing indirect charges of Rs.30,309,738 by invoking provisions of clause (c) of subsection (1) of section 105 of the Income Tax Ordinance, 2001. 2.4 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing realized exchange loss of Rs.269,517,430 without considering the fact that exchange loss is an allowable expense. 2.5 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in not allowing provisions for staff gratuity of Rs.112,014,442. 2.6 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing Workers' Profit Participation Fund of Rs.139,776,391 without considering that the fact that the same is allowable deduction in terms of section 60B of the Ordinance. 2.7 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in not disallowing depletion allowance of Rs.84,574,690 based on contention contrary to the provisions of Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979. 2.8 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in computing depletion allowance under Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979, the expenditure incurred on account of rqyalty is to be deducted from "gross receipts". 2.9 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in applying tax rate of 52.5% on its profits and gains assessable under Part I of Fifth Schedule to the Income Tax Ordinance, 1979 contrary to the provisions of Rule 4 of the said Schedule. 2.10 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in not considering the refunds available to the appellant. 2.11 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in levying tax on interest income at the rate of 52.2% without considering the fact that income is subject to tax at the rate of 35%. 2.12 Your Appellant seeks consequential relief in Workers' Welfare Fund. Tax Year 2013: 1. That the Appellate Orders Nos.745, 746, 747, 748, 749/2015 dated February 27, 2015 (the Order) issued by the learned Commissioner Inland Revenue (Appeals-I), Islamabad (CIR-Appeals) under section 129 of the Income Tax Ordinance, 2001 (the Ordinance) is bad in law and facts of the case and therefore is illegal, null and void. 2. Without prejudice to above grounds of appeal 2.1 That the learned CIR-Appeals has erred in upholding the treatment meted out by the Additional Commissioner Inland Revenue, Audit-I, Large Taxpayer Unit, Islamabad (ADCIR) and not allowed Geological and Geophysical expenditure of Rs.278,995,145 claimed by the appellant under sub-rule (5) of rule 22 of the Part I of Fifth Schedule to the Repealed Income Tax Ordinance, 1979 / Income Tax Ordinance, 2001 which allow expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended after the commencement of commercial production (CCP) wholly and exclusively for the purpose of the business of production and exploration of petroleum as tax deductible 2.2 Without prejudice to the above, the learned CIR-Appeals has erred in upholding in action the treatment meted out by the learned ADCIR by not considering the judgment of Honourable Supreme Court of Pakistan in the case reported at 1993 PTD 758 whereby it has been held that once a taxpayer has commenced its operations, no two separate commercial commencements can be attributed to it for separate plants/lines of production as one return, income and assessm ent is to be framed there related. 2.3 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR by not
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allowing indirect charges of Rs.78,027,407 by invoking provisions of clause (c) of subsection (1) of section 105 of the Income-Tax Ordinance, 2001. 2.4 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing realized exchange loss of Rs.578,312,098 without considering the fact that exchange loss is an allowable expense. 2.5 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in not allowing provisions for staff gratuity of Rs.83,185,369. 2.6 That the learned CIR Appeals has erred in upholding in action of the learned ADCIR in disallowing Workers' Profit Participation Fund of Rs.181,273,612 without considering that the fact that the same is allowable deduction in terms of section 60B of the Ordinance. 2.7 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in not disallowing depletion allowance of Rs.106,238,802 based on contention contrary to the provisions of Rule 3 of. Part I of Fifth Schedule to the Income Tax Ordinance, 1979. 2.8 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in computing depletion allowance under Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979, the expenditure incurred on account of royalty is to be deducted from "gross receipts". 2.9 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in applying tax rate of 52.5% on its profits and gains assessable under Part I of Fifth Schedule to the Income Tax Ordinance, 1979 contrary to the provisions of Rule 4 of the said Schedule. 2.10 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in levying tax on interest income at the rate of 52.2% without considering the fact that income is subject to tax at the rate of 35% 2.11 Your Appellant seeks consequential relief in Workers' Welfare Fund. Tax Year 2014: 1. That the Appellate Orders Nos. 745, 746, 747, 748, 749/ 2015 dated February 27, 2015 (the Order) issued by the learned Commissioner Inland Revenue (Appeals-I) Islamabad (CIR-Appeals) under section 129 of the Income Tax Ordinance, 2001 (the Ordinance) is bad in law and facts of the case and therefore is illegal, null and void. 2. Without prejudice to above grounds of appeal 2.1 That the learned CIR-Appeals has erred in upholding the treatment meted out by the Additional Commissioner Inland Revenue, Audit-I, Large Taxpayer Unit, Islamabad (ADCIR) and not allowed following expenditure claimed by the appellant under sub-rule (5) of Rule 22 of the Part I of Fifth Schedule to the Repealed Income Tax Ordinance, 1979 / Income Tax Ordinance, 2001 which allow expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or Expended after the commencement of commercial production (CCP) wholly and exclusively for the purpose of the business of production and exploration of petroleum as tax deductible. Rs.927,220,088 on account of Geological and Geophysical expenditure Rs.276,557,348 on account of Exportation expenditure 2.2 Without prejudice to the above, the learned CIR-Appeals has erred in upholding in action the treatment meted out by the learned ADCIR by not considering the judgment of Honourable Supreme Court of Pakistan in the case reported at 1993 PTD 758 whereby it has been held that once a taxpayer has commenced its operations, no two separate commercial commencements can be attributed to it for separate plants/lines of production as one return, income and assessm ent is to be framed there related. 2.3 That the learned ,CIR-Appeals has erred in upholding in action of the learned ADCIR, by not allowing indirect charges of Rs.80,621,786 by invoking provisions of clause (c) of subsection (1) of
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section 105 of the Income Tax Ordinance, 2001. 2.4 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing realized exchange loss of Rs.6,972,978 without considering the fact that exchange loss is an allowable expense. 2.5 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in not allowing provisions for staff gratuity of Rs.124,787,509. 2 6 That the learned CIR-Appeals has erred in upholding in action of the learned ADCIR in disallowing Workers' Profit Participation Fund of Rs.244,197,213 without considering that the fact that the same is allowable deduction in terms of section 60B of the Ordinance. 2.7 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in disallowing technical assistance fee of Rs.8,923,204 without considering the fact that technical assistance fee is an allowable expense and the appellant has duly deducted the tax @ 15% on the amounts paid as technical services. Further learned ACIR has not allowed adequate time to produce the reconciliation and evidence of the withholding tax on payments of technical assistance fee. 2.8 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in not disallowing depletion allowance of Rs.136,101,747 based on contention contrary to the provisions of Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979. 2.9 That the learned CIR-Appeals has erred in upholding the action of the learned ADCIR in computing depletion allowance under Rule 3 of Part I of Fifth Schedule to the Income Tax Ordinance, 1979, the expenditure incurred on account of royalty is to be deducted from "gross receipts". 2.10 That the learned CIR-Appeals has also erred in upholding the action of the learned ADCIR in applying tax rate of 52.5% on its profits and gains assessable under Part I of Fifth Schedule to the Income Tax Ordinance, 979 contrary to the provisions of Rule 4 of the said Schedule. 2.11 Your Appellant seeks consequential relief in Workers' Welfare Fund. 3. All the grounds of appeal raised by the taxpayer are being disposed of the following parts of order Geological and geophysical costs Expenditure:-- (G &. G cost) and Exploration 4. The assessing officer made addition of Rs.742,957,320/- in tax year 2010, Rs.20,352,849/- in tax year 2011, Rs.47,003,489/- in tax year 2012, Rs.278,995,145/- in tax year 2013 and Rs.927,220,088/- in tax year 2014 on account of geological and geophysical cost. Moreover addition was made on account of exploration expenditure amounting to Rs.956,843,176/- in tax year 2011, Rs.706,971,240/- in tax year 2012 and Rs.276,557,348 in tax year 2014. White making the impugned addition the Assessing Officer observed that the claimed cost related to the fields where no commercial activity had taken place during the period under consideration. The claim was therefore, treated to be not admissible under the provisions of Rule 2(5) of the Fifth Schedule to the Income Tax Ordinance, 2001 (the Ordinance) as the prerequisite events in terms of Sub-Rules (2) to (4) of Rule 2 Part-I of the Fifth Schedule to the Income Tax Ordinance, 2001 which constituted a prequel to Rule 2(5) of the Part-I of the Fifth Schedule to the Ordinance had not occurred. This treatment was confirmed by Commissioner (Appeals) vide his impugned order holding that computation of profits from petroleum exploration and production business had to be made on the principles of "ring fencing". In this manner income and deductions of each Petroleum Concession Agreement (PCA) is to be computed separately. It was taxpayer's contention that total income of the business of oil exploration and petroleum from all PCAs had to be lumped together for the purpose of taxation. This contention was rejected by the CIP(A) by placing reliance on judgment of the Appellate Tribunal Inland Revenue (ATIR) in the case of Messrs OGDCL vide I.T.As. Nos.642 and 219/IB/2013 and I.T.A. No.666/IB/2013 dated 19.8.2014 with the observation that taxpayer was not entitled to
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deduction of expenditure under these heads incurred in one PCA prior to commencement of commercial production in that area against profits of concession area falling under different PCA. 5. Learned A.R. of the appellant stated that the expenditure under consideration had rightly been claimed by the company under the provisions of Sub-rule (5) of Rule 2 of Part-I of Fifth Schedule to the Repealed Income Tax Ordinance, 1979 (1979 Ordinance)/2001 Ordinance which allows expenditure (not being in the nature of capital expenditure or personal expenses of the assesses) laid out or expended after the commencement of commercial production (CCP) wholly and exclusively for the purpose of the business of production and exploration of petroleum as tax deductible. Relevant extract of Sub-rule (5) of Rule 2 of Part I of Fifth Schedule to 1979 Ordinance/2001 Ordinance reads as under:-- (5) Any expenditure, including a royalty paid to the Federal Government by an onshore petroleum exploration and production undertaking on, or after, the first day of July, 2001 (not being in the nature of capital expenditure or personal expenses of the taxpayer) laid out or expended after the commencement of commercial production wholly and exclusively for the purpose of the business of production and exploration of petroleum carried on by such undertaking shall be allowed as a deduction. 6. Learned A.R. emphasized that in view of the above provisions of Sub-rule (5) of Rule 2 of Part I of Fifth Schedule, any expenditure incurred after the commencement of commercial production is an allowable expenditure for the purpose of computing profit and gains of the company from exploration and production of petroleum, if incurred for the purpose of business of production and exploration of petroleum not being in the nature of capital expenditure or personal expense. The learned A.R. further argued that the business of exploration and production of petroleum is assessable under special provisions contained in Rule of Part I of the Fifth Schedule to the Ordinance which reads as under. RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS FROM THE EXPLORATION AND PRODUCTION OF PETROLEUM. Exploration and Production of Petroleum a Separate Business: 1. Where any person carries on, or is treated as carrying on, under an agreement with the Federal Government, any business which consists of, or includes, the exploration or production.of petroleum in Pakistan or setting up refineries at Dhodak and Bobi fields, income of exploration and production companies from pipeline operations, and manufacture and sale of liquefied petroleum gas or compressed natural gas, such business or part thereof, as the case may be, shall be, for the purposes of this Ordinance, treated as a separate business undertaking (hereinafter referred to as "such undertaking") and the profits and gains of such undertaking shall be computed separately from the income, profits, or gains from any other business, if any, carried on by the person." 7. The learned A.R. stated that the provisions of Rule 1 of Part I of the Fifth Schedule to the 1979 Ordinance are, in essence, identical to those of Rule 1 of Part I of the Fifth Schedule to the 2001 Ordinance. As per Rule 1 of Part I of Fifth Schedule to the 1979 Ordinance / 2001 Ordinance, the entire business of exploration and production of petroleum under agreements with the Government of Pakistan has to be treated as one unit. It is very categorically provided in Rule-1 that where any…
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