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Official Citation: 2025 LHC 7211
Court / Jurisdiction: Supreme Court / High Court of Pakistan
This judicial decision was delivered by the Supreme Court / High Court of Pakistan. The matter involves proceedings between Petitioner and Respondent, officially reported as 2025 LHC 7211. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.
Case cited as 2025LHC7211
Stereo. H C J D A 38. Judgment Sheet IN THE LAHORE HIGH COURT AT LAHORE. JUDICIAL DEPARTMENT STR No. 9011 of 2021 Quaid-e-Azam Thermal Power Private Limited Versus Appellate Tribunal Inland Revenue and 3 others JUDGEMENT Date of Hearing: 04.11.2025 Applicant by: In STR Nos. 9011 & 49639 of 2021 M/s. Umair Ahmad and Haris Irfan, Advocates In STR No. 16313 of 2024 Mr. Yasir Islam Chaudhary, Advocate In STR No. 63693 of 2024 Ms. Humera Bashir, Advocate Respondents by: For Federation of Pakistan in all cases Mirza Nasar Ahmad, Additional Attorney General alongwith Mr. Asad Ali Bajwa, Deputy Attorney General & Mr. Shakil A. Pasha, Assistant Attorney General For CIR/FBR In STR No. 9011 of 2021 Barrister Ahmed Pervaiz and Barrister Ahad Asif For CIR/FBR in STR No. 49639 of 2021 Mr. Muhammad Yahya Johar, Advocate In STR No. 16313 of 2024 M/s. Hashim Aslam Butt, Ahmad Yar Khan, Muhammad Irfan & Muhammad Umer Shahzad, Advocates KHALID ISHAQ, J. This judgment will decide the captioned Sales Tax Reference as well as the following Sales Tax References since common questions of law and facts are involved in all these cases: i. STR No. 49639 of 2021 ii. STR No. 16313 of 2024 iii. STR No. 63693 of 2024 2. For the purpose of this judgment, the facts of the present case shall suffice.
STR No. 9011 of 2021 Page 2 3. This Sales Tax Reference Application, filed under section 47(1) of the Sales Tax Act, 1990 (the “Act, 1990”), seeks opinion of this Court on the following questions of law, which are said to have arisen from order dated 27.11.2020 (“Impugned Order”) passed by Appellate Tribunal Inland Revenue, Lahore (“Tribunal”): “i) Whether the respondents could have disallowed input tax amounting to PKR 986,088,811/- claimed on taxable services while erroneously assuming that the input tax was not paid to the concerned provincial sales tax authority in ignorance of the facts and evidence? ii) Whether the respondent could have disallowed input tax amounting to Rs. 986,088,811/- claimed on taxable services while erroneously assuming that the input tax was relating to the purchase of construction raw materials like cement, steel etc. as opposed to construction services in ignorance of the facts and evidence?” 4. The facts giving rise to the lis at hand are that while scrutinizing the sales tax returns of the applicant for the tax period 04/2016, 05/2016, 12/2016 and 04/2017, the Assessing Officer observed that the petitioner has claimed inadmissible input tax amounting to Rs.986,088,811/- against invoices issued to the applicant taxpayer by M/s. HEI-HRL Joint Venture (“JV”) for procuring services for the construction, installation and commissioning of 1180 Megawatts, RLNG based power plant at Bhikki, Sheikhupura (“Project”). The JV was admittedly registered with Punjab Revenue Authority (“PRA”) at the relevant time. The claim of input tax adjustment was related to the services in the form of Engineering, Procurement and Construction Agreement (“EPC Agreement”). It was the case of the respondent department, affirmed by the Tribunal, that in essence, the EPC Agreement was essentially a contract for the sale of goods in relation to fixed assets and not for the provision of construction services. The main thrust of the respondent department is premised on the provisions contained in Clauses (a) & (h) of sub-section (1) of Section 8, read with Section 2 (14) and Section 7 of the Act, 1990. On the basis of Revenue’s inferences, the applicant taxpayer was served a show cause notice dated 15.05.2017 (“SCN”), issued under Section 11 of the Act, 1990, calling upon the applicant taxpayer to explain as to why the amount of Rs.986,088,811/- should not be recovered from it alongwith default surcharge and penalty. The SCN was duly replied, refuting all charges and maintaining that the input tax was lawfully claimed. However, while rendering the said reply unsatisfactory, the Assessing Officer proceeded to pass order-in-original No.10/2018 dated 03.01.2018
STR No. 9011 of 2021 Page 3 (“ONO”) against the applicant taxpayer. Feeling aggrieved, the applicant taxpayer filed an appeal under section 45B of the Act, 1990 before the Commissioner Inland Revenue (Appeals), which appeal was dismissed vide order dated 27.03.2019 and consequently the ONO was upheld. Applicant taxpayer filed 2nd appeal under Section 46 of the Act, 1990 before the Tribunal, which appeal was also dismissed vide the Impugned Order. Hence this Reference Application. 5. Learned counsel for the applicant taxpayer submits that the respondent department as well as the Tribunal erred in law while disallowing the input tax adjustment made by the applicant taxpayer regarding the services procured from JV against which the provincial sales tax on services was duly paid to the PRA, therefore, in terms of Sections 7 and 2(14)(d) of the Act, 1990, the applicant taxpayer lawfully claimed input tax adjustment from its output tax against the sale of electricity being generated from its plant as the services procured by the applicant taxpayer and rendered by the JV were taxable under the Punjab Sales Tax on Services Act, 2012 (“Act, 2012”), read with Punjab Sales Tax on Services (Adjustment of Tax) Rules, 2012 (“Rules, 2012”); adds that the Second Schedule of the Act, 2012, as it stood at the relevant time, provided for a list of services which were amenable to provincial sales tax; learned counsel has specifically referred to Entries No.14 and 16 of the Second Schedule of the Act, 2012. Placed Reliance on Commissioner Inland Revenue, Legal Zone, LTO and another v. M/s. Mayfair Spinning Mills Ltd and others (2025 SCMR 1), Commissioner Inland Revenue, Corporate Zone, RTO Peshawar v. M/s. Flying Kraft Paper Mills and another (2025 SCMR 724), Association of Builders and Developers of Pakistan v. Province of Sindh and others (2018 PTD 1487), Commissioner Inland Revenue v. M/s. Descon Engineering Ltd. (2022 PTD 1209), M/s. International Body Boilers v. Sales Tax Office Lahore and 2 others (1979 PTD 488), Sales Tax Officer, Lahore v. M/s. International Body Builders, and others (1987 SCMR 1398), Pak Telecon Mobile Ltd. v. Federation of Pakistan and others (2017 PTD 2296), Commissioner Inland Revenue v. M/s. Attock Cement Pakistan Ltd. (2023 PTD 320 [SC]), Coca-Cola Beverages Pakistan Ltd. v. Customs, Excise and Sales Tax Appellate Tribunal (2017 PTD 2380), Nishat Mills Ltd. v. Federation of Pakistan (ICA No. 72329 of 2019 decided on 29.01.2020).
STR No. 9011 of 2021 Page 4 6. Conversely, learned counsel for the respondent department submits that the applicant has purchased/procured the building materials and not services from JV and thus, under Section 8(1)(a)(h) of the Act, 1990, the input tax adjustment has rightly been disallowed against the said purchase; adds that the building being constructed by the JV for the applicant taxpayer under the EPC Agreement does not have any direct nexus with taxable supply of the applicant as the applicant taxpayer merely supplies electricity to its customers/recipients and component of the building is not related to its core taxable activity; further adds that the basic spirit of Section 7, when read with Section 8 of the Act, 1990 is to adjust or refund input tax for items which are part of the supply chain. Learned counsel for the respondent department has taken a great pain to argue that the adjustment sought to be made is hit by clauses (h) & (i) of sub-section (1) of Section 8 of the Act, 1990; contends that Sub-section (14) of Section 2 of the Act, 1990 is only a definition clause and thus, does not create any legal right for claiming input tax; further contends that as a matter of fact, the applicant taxpayer has purchased the construction material i.e. cement, iron etc. for the purpose of construction of building and there is no provision available in the Second Schedule of the Act, 2012, which may cover the supply of building material as services amenable to input adjustment in terms of Section 7, read with Section 8 of the Act, 1990. Placed reliance upon Commissioner of Income tax Companies Zone, Islamabad v. M/s. GEOFIZYKA KRAKOW Pakistan Ltd., Islamabad (2015 PTD 2067), Nishat Mills Ltd. v. Federation of Pakistan and others (2020 PTD 101), Nishat Mills Ltd. v. Federation of Pakistan and others (2020 PTD 1641), M/s. Syntronics Limited, Industrial Estate, Hattar v. Additional Collector (Adj) Customs, CE & Sales Tax Peshawar (2007 PTD 749). 7. Arguments heard. Record perused. 8. In essence, the following proposition of law requires determination by this Court: i. Whether the EPC Agreement executed between the applicant taxpayer and JV is a contract for sale and purchase of goods or a contract for rendering services.
STR No. 9011 of 2021 Page 5 ii. Whether the Project constructed under the EPC Agreement is a valid admissible input, which can be adjusted against the applicant taxpayer’s output i.e. electricity. 9. Since many changes have taken place in the relevant provisions of law and rules, which are at play in the case in hand, therefore, the relevant provisions, as they stood at the relevant time, are reproduced herein below: Section 2 (14) of the Act, 1990 2(14) “input tax”, in relation to a registered person, means – (a) tax levied under this Act on supply of goods to the person; (b) tax levied under this Act on the import of goods by the person; (c) in relation to goods or services acquired by the person, tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the goods, or the rendering or providing of the services;] (d) […….] [Provincial Sales Tax levied on services rendered or provided to the person; and] (e) levied under the Sales Tax Act, 1990 as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by the person;] Section 7 of the Act, 1990 7. Determination of tax liability. – (1) [Subject to the provisions of [section 8 and] , for] the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall [, subject to the provisions of section 73,] be entitled to deduct input tax [paid [or payable [during the tax period for the purpose of taxable supplies made, or to be made, by him] from the output tax [excluding the amount of further tax under sub-section (1A) of section 3.] [ ] that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9 [:] Section 8 of the Act, 1990 [8. Tax credit not allowed. – (1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on – (a) the goods or services used or to be used for any purpose other for taxable supplies made or to be made by him; (b) any other goods or services which the Federal Government may, by a notification in the official Gazette, specify; (c) the goods under sub-section] (5) of section 3; (ca) the goods or services in respect of which sales tax has not been deposited in the Government treasury by the respective supplier; (caa) purchases, in respect of which a discrepancy is indicated by CREST or input tax of which is not verifiable in the supply chain; (d) fake invoices;
STR No. 9011 of 2021 Page 6 (e) purchases made by such registered person, in case he fails to furnish the information required by the Board through a notification issued under sub- section (5) of section 26; (f) goods and services not related to the taxable supplies made by the registered person; (g) goods and services acquired for personal or non-business consumption; (h) goods used in, or permanently attached to, immoveable property, such as building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables, but excluding pre-fabricated buildings and] such goods acquired for sale or re-sale or for direct use in the production or manufacture of taxable goods; (i) vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969 (IV of 1969), parts of such vehicles, electrical and gas appliances, furniture furnishings, office equipment (excluding electronic cash registers), but excluding such goods acquired for sale or re-sale; (j) services in respect of which input tax adjustment is barred under the respective provincial sales tax law; (k) import or purchase of agricultural machinery or equipment subject to sales tax at the rate of 7% under Eighth Schedule to this Act; and (l) from the date to be notified by the Board, such goods and services which, at the time of filing of return by the buyer, have not been declared by the supplier in his return or he has not paid amount of tax due as indicated in his return. Section 2(38) of the Act, 2012 2. . . . . . (38). “Service” or “Services” means anything which is not goods or providing of which is not a supply of goods and shall include but not limited to the services listed in First Schedule; Explanation.—A service shall remain and continue to be treated as service regardless whether or not rendering thereof involves any use, supply, disposition or consumption of any good either as an essential or as an incidental aspect of such rendering; Entry No.14 to the Second Schedule of the Act, 2012 14. Construction services and services provided by contractors of building (including water supply, gas supply and sanitary works), roads and bridges, electrical and mechanical works (including air conditioning), horticultural works, multi- discipline works (including turn-key projects) and similar other works but: . . . . . Entry No.16 to the Second Schedule of the Act, 2012 16. Services provided by persons engaged in contractual execution of works or furnishing supplies . . . . . . 10. The applicant taxpayer made input tax adjustments against its output tax in terms of Section 7 of the Act, 1990 and a sum of Rs.986,088,811/- was claimed as admissible input tax for the relevant tax periods on the basis of
STR No. 9011 of 2021 Page 7 invoices issued by JV, whereby, the same amount of tax was collected and deposited by the JV with the PRA in terms of the then applicable Second Schedule of Act, 2012. The perusal of the relevant entries i.e. Entries No.14 & 16, of the Second Schedule of Act, 2012, as reproduced above, when read with Section 2(14)(d) of the Act, 1990, clearly brings home that the services procured by the applicant taxpayer and rendered by the JV were taxable services under the Act, 2012 and the provincial sales tax paid being admissible input tax, was also adjustable at the relevant time. Of course, the entitlement of input tax adjustment is subjected to the conditions enumerated in Section 8 of the Act, 1990. The perusal of Section 8 ibid would reflect that in the facts and circumstances of the case in hand, the respondent department as well as the learned Tribunal have attempted to invoke the mischiefs of clauses (a) & (h) of Sub-section (1) of Section 8 ibid to deny the admissibility of input tax adjustment in question. While considering various clauses of the EPC Agreement, the learned Tribunal has proceeded to hold that in essence, the EPC Agreement is a contract for sale of goods in relation to fixed assets, therefore, the findings rendered by the Tribunal led to the conclusion that it was an agreement for sale of goods and not for provision of construction services. With respect, for rendering such opinion, the learned Tribunal has dissected the scope of EPC Agreement, relied upon one of its component and ignored the overwhelming, controlling and predominant features and effects of the same. Whilst it may be true that the determination of the legal effect of a contract may involve the application of external rules of law (for example: the intervention of a statute, or some rule of public policy) which has nothing to do with the intention of the parties as expressed in their contract and that the determination of the legal effect to be given to the contract may turn in part on words which the parties have not actually used, which are properly to be implied, and it is now settled that the process of implying terms may be resorted to in interpretation of contracts. Nonetheless, it is equally well settled that such construction is to be made in the meaning which the instrument would convey to a reasonable person having all the background knowledge, which would reasonably be available to the audience to whom the instrument is addressed. The purpose of interpretation is to assign to the language of the text the most
STR No. 9011 of 2021 Page 8 appropriate meaning which the words can legitimately bear1. The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual sense2. Per Lord Hoffmann's statement3: ‘Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’. 11. It is well settled position of law that for proper comprehension and insight of an agreement, it is to be read as a whole and where its language was simple, then the intention of the parties be gathered from its contents without adverting to any extraneous factors4. The construction of a document as a whole necessarily involves giving effect to each part of it in relation to all other parts of it. Accordingly, as a corollary of the principle that a document must be construed as a whole, effect must be given to each part of the document. It is also well settled that while interpreting covenants of a document, it has to be seen that what was the main purpose and object, which brought the parties to the table to sign the document5. It is vouched by the respectable authority that in construing a document, one has to read the same as a whole and not by picking and choosing a particular paragraph or portion thereof6. Similarly, it is a cardinal principle of interpretation of documents that in order to determine the true nature of a document, the Courts have to read the document as a whole and to look at the substance and not the form or its title7. In order to arrive at the true interpretation of a document, a clause must not be considered in isolation, but must be considered in the context of the whole of the document. In the words of 1 Commerzbank AG v. Jones [2003] EWCA Civ 1663 2 Sirius International Co. v. FAI General Insurance Ltd. [2004] 1 W.L.R. 3251 3 Investment Compensation Scheme v. West Bromwich Building Society [1998] 1 W.L.R 896 4 Raja Ali Shan v. M/s. Essem Hotel Limited and others (2007 SCMR 741), Liaqat Ali Khan and others v. Falak Sher and others (PLD 2014 SC 506), Montage Design Build through Partner v. The Republic of Tajikstan through the Embassy of Tajikistan and 2 others (2015 CLD 8), Petroleum Exploration (Private) Ltd. v. Federal Government of Pakistan through Secretary, Ministry of Petroleum and Natural Resources and 3 others (PLD 2020 Islamabad 214) 5 Abdul Ghaffar Adamjee and others v. National Investment Trust Limited and another (2019 SCMR 812) 6 Anwar ul Haq v. Federation of Pakistan (1995 SCMR 1505) 7 Abdur Razzaq v. Shah Jahan (1995 SCMR 1489)
STR No. 9011 of 2021 Page 9 Lord Hallsbury L.C.8: ‘Looking at the whole of the instrument, and seeing what one must regard as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract’. Considering the foregoing settled principles of interpretation of a contract/document, the treatment being given to EPC Agreement by the learned Tribunal is inconsequential as only the segment of the use of the material i.e. cement, steel etc., for the main purpose of the Project, has been considered, whereas, the rest of the provisions of the EPC Agreement have been ignored for no plausible and legal reasons. 12. While handing down these findings, the learned Tribunal has failed to take into account the provisions contained in Section 2(38) of the Act, 2012, the effect of which omission goes to the very root of the issue in hand. The only lawful inference, which may arise from the perusal of Section 2(38) of the Act, 2012 is to the effect that the contract in issue i.e. the Turnkey Project, has to be construed and treated as service regardless of the fact that a component of such taxable services involved consumption of any goods either essentially or incidentally. The doubt about such an interpretation, if any, is nullified by the explanation supplied under Section 2 (38) of the Act, 2012, which is to the effect that even an essential use or consumption of goods for the provision of services, will not render the same as an agreement of sale of goods. Considering the nature of the EPC Agreement (“Turnkey Agreement”), as evident from various clauses of the same, would lead to an ineluctable conclusion that it was not an agreement for procurement of building materials for the project and was rather a turnkey arrangement for the complete and satisfactory construction, installation and commissioning of the Project. The nature of the scope of work and services being rendered for the applicant taxpayer, the procurement of building material, in isolation of the commissioning of the project, is of no avail to the applicant taxpayer. Without burdening this judgment by reproducing the relevant provisions of the EPC Agreement, we are inclined to note that a bare perusal of clauses 1.1, 1.3, 4.1, 5.1 and 7.1 would clearly demonstrate the overwhelming and controlling feature of the EPC Agreement, whereby, it is the JV’s responsibility to execute, complete, operationalize and remedy the Project, therefore, the mere reliance on the goods being consumed in the Project’s 8 Glynn v. Margetson & Co. [1893] A.C. 351
STR No. 9011 of 2021 Page 10 design, completion and execution, from its initiation to fruition, is utterly misplaced for construing the taxable services as sale of goods. 13. The question of affixation of building material to immoveable property and treating such an agreement as sale of building material is neither new nor novel as the same question was decided as back as in 1979 by a learned Division Bench of this Court in the case of M/s. International Body Boilers v. Sales Tax Office Lahore and 2 others (1979 PTD 488) in the following terms: “13. In view of the above a transaction involving sale of a chattel on thing which accedes to the immovable property inseparably and which had not been sold as such or in parts before it was worked in, will not amount to sale of goods. Again a transaction involving any service and not transfer of a property, will not be a sale and generally will not be taxable, except under a special statutory provision. However, there may be certain contracts in which one of the parties engages itself to render service and also supply its own material for the completion of the work for a pecuniary or other consideration to be paid by the other party. The question then arises whether the finished articles or the materials with labour supplied by the workmen should be considered as purchased by the other party? It was held in Clark v. Bulmer that there can be no contract of sale unless the contract contemplates the delivery of a chattel as such and not merely the affixing of a chattel by the workman to land or some other chattel. . . . . . . 15. . . . . . . But if the substance of the contract is that skill and labour have to be exercised for the production of the article and that it is only ancillary to that there will pass from the producer to his client some materials in addition to the skill involved, the substance of the contract is skill and it will not be a sale of goods. (see Clark v. Mumford.). . . . . . . . . 21. . . . . . . . (1) A contract whereby a chattel is to be made and affixed by the workman to land or to another chattel before the property therein is to pass, is not a contract of sale, but a contract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as such.” 14. It is pertinent to mention that the above-mentioned judgment of the learned Division Bench of this Court was assailed before the Supreme Court of Pakistan and the same was upheld vide judgment reported as Sales Tax Officer, Lahore v. M/s. International Body Builders, and others (1987 SCMR 1398). Similarly, in the case of Association of Builders and Developers of Pakistan v. Province of Sindh and others (2018 PTD 1487 [DB]), it was observed…
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