Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: OCEAN PAKISTAN LIMITED through Chief Executive Officer, Islamabad VS Respondent: ADDITIONAL COMMISSIONER INLAND REVENUE, (AUDIT-I), ISLAMABAD and 2 others
Court Name: Islamabad High Court Judge(s): Athar Minallah, Miangul Hassan Aurangzeb Title:OCEAN PAKISTAN LIMITED through Chief Executive Officer, Islamabad vs
ADDITIONAL COMMISSIONER INLAND REVENUE, (AUDIT-I), ISLAMABAD and 2 others Case No.: I.T.R. 1 of 2013 Date of Judgment:2018-01-15 Reported As: 2018 PCTLR 283, 2018 PTD 996 Result: Order accordingly Judgment ORDER ATHAR MINALLAH, J.---Through this Tax Reference, filed under section 133 of the Income Tax Ordinance, 2001 (hereinafter referred to as the "Ordinance of 2001"), Ocean Pakistan Limited (hereinafter referred to as the "applicant Company") has proposed for our consideration questions of law arising out of the judgment, dated 09-01-2013, rendered by the learned Appellate Tribunal Inland Revenue, Islamabad Bench, Islamabad (hereinafter referred to as the "Tribunal") in Income Tax Appeal No.521/IB/2012. 2. The facts, in brief, are that the applicant Company is a judicial person and has been incorporated under the laws of the Cayman Islands. The applicant Company is, inter alia, engaged in the business of petroleum exploration, prospecting, development, production, trade and sale thereof. The applicant Company and another incorporated entity were granted undivided rights and concessions pursuant to two separate Concession Agreements (hereinafter referred to as the "PCAs"). The said two separate PCAs i.e. Mirpur Khas Petroleum Concession Agreement and Khipro Petroleum Concession Agreement were executed on 29-12-1999. At the time of execution of the PCAs, licenses were also issued under the Pakistan Petroleum (Exploration and Production) Rules, 1986 (hereinafter referred to as the "Petroleum Rules, 1986"). The Petroleum Rules, 1986 have been made by the Federal Government pursuant to powers conferred under section 2 of the Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 (hereinafter referred to as the "Act of 1948"). A Joint Operating Agreement (hereinafter referred to as the "JOA"), which is annexed with each PCA, was also duly executed by the entities granted undivided
---
## Page 2
rights and concessions. The Government of Pakistan, vide letter dated 14.10.2004, approved the commercial discovery and development plan and pursuant thereto the applicant Company and other juridical persons were jointly granted Development and Production leases over the fields described in the letter of approval. The said leases were executed under the Petroleum Rules, 1986 on 26-09-2006. The expression 'Working Interest' has been defined in clause 1.40 under Article-I titled as Definitions in the PCAs as follows:-- "Working Interest" means all or any undivided interest in the entirety of the Petroleum concessions, rights and obligations and liabilities imposed by this Agreement, the Licence and any Lease(s) granted pursuant to the Rules and this Agreement, including the enjoyment of the exclusive right to explore and prospect for, develop, produce, sell and otherwise dispose of Petroleum from the Area which interest is chargeable with and currently obligated to bear and pay its proportionate share of all costs and Expenditures (including royalties on production and rentals) incurred by Working Interest Owners, is exploring and prospecting for, drilling, developing, producing, selling and otherwise disposing of Petroleum from the Area." 3. Likewise, the 'Working Interest Owner' is defined in clause 1.41 as meaning an owner of a Working Interest. Neither were the licenses nor the leases granted exclusively in favour of the applicant Company, nor was the latter given possession of any specific land or property. The parties, which were jointly granted licenses and leases and their respective shares are described therein. The Working Interest of the applicant Company in the license or the lease was to the extent of its share explicitly mentioned therein. In case of the lease, dated 14.10.2004, granted by the Government of Pakistan for the Mirpur Khas Block, the applicant Company was one of the lessees having 51.31% share of the undivided interest or the 'Working Interest'. The applicant Company is, therefore one of the Working Interest Owners. It has been explicitly mentioned in the respective lease granted in favour of the Working Interest Owner that it gives the latter the exclusive right to perform activities in connection, with exploration for and exploitation of petroleum within the lease area. Also, the PCAs have not been executed exclusively with the applicant Company and the share of the latter as one of the Working Interest Owners has also been expressly mentioned therein. The expressions 'Lease' and 'Licence' are defined in clauses 1.23 and 1.24 respectively in the PCAs. Article-II of the PCAs titled 'Rights and Liabilities' unambiguously guarantees to the applicant Company and other Working Interest Owners the petroleum concessions and other rights which have been described in the PCAs. Clause 2.5 provides that the PCA does not create a partnership or any taxable entity but is solely a joint operating arrangement among the Working Interest Owners. The PCAs were executed with all the Working Interest Owners, including the applicant Company. Likewise, the applicant Company was one of the licensees and lessees in the licenses and leases, as the case may be, granted under the Petroleum Rules, 1986. 4. The applicant Company assigned/sold its entire share of Working Interest to and in favour of BP Pakistan Exploration and Production Inc (hereinafter referred to as "BP Pakistan"). The latter is a juridical person incorporated under the laws of the State of Delaware, United States of America. Pursuant to the assignment of the Working Interest, a novation Agreement, dated 21-03-2009, was executed between all the parties. As a consequence the PCAs, licenses and leases were accordingly amended. The Additional Commissioner Inland Revenue issued a show-cause notice, dated 2.10.2011 under section 122(9) read with section 122 (5A) of the Ordinance of 2001. It was alleged that the assessm ent made in respect of the tax year 2010 under the deeming provision of section 120 of the Ordinance of 2001 was found erroneous and prejudicial to the interest of revenue. It was asserted that the Working Interest of the applicant Company had been assigned or sold to Messrs BP Pakistan for a consideration of Rs.15,013,099,485/-. It was alleged that on account .of the said assignment the applicant Company had received gain amounting to Rs.11,589,280,000/- and that the said gain had not been offered for tax. The applicant Company responded to the show-
---
## Page 3
cause notice by filing a written reply. After affording an opportunity of hearing to the applicant Company, the Additional Commissioner passed an order, dated 29-05-2012 (hereinafter referred to as the "Order-in-Original"). The applicant Company preferred an appeal before the learned Commissioner Inland Revenue (Appeals-II), Islamabad (hereinafter referred to as the "CIR (A)"). The latter dismissed the appeal vide order dated 25-06-2012. The applicant Company preferred an appeal before the learned Tribunal and the same was also dismissed vide judgment dated 09-01- 2013. Hence, the questions of law arising out of the said judgment have been proposed for our consideration through the instant Tax Reference. 5. The learned counsel appearing on behalf of the applicant Company has contended that; the letter had sold its interest in an immovable property to BP Pakistan; Working Interest constitutes an interest in land i.e. immovable property and, therefore, it is to be treated as an interest in immovable property in the context of subsections (9) and (10) of section 101 of the Ordinance of 2001; the Working Interest if not a capital receipt at best may be treated as capital gains; the Federal Government is not empowered to levy tax on account of the transfer of an interest in immovable property; the applicant Company had transferred its interest in the immovable property which was leased out to the applicant; the provisions of section 24(11) of the Ordinance of 2001 are not attracted; the Taxation Officer had taken an erroneous view regarding the definition of intangible provided under section 24(11); the applicant Company was guaranteed a freeze in relation to the applicable laws through Article 29.6 of the PCA; the latter clause draws its sanction from section 3B and clause (1) of the Schedule of the Act of 1948; the applicant Company was afforded full protection against any law or adverse consequences; the Additional Commissioner Inland Revenue was not vested with jurisdiction under section 122(9) read with section 122(5A) to exercise the powers and, therefore, the show-cause notice and all subsequent orders passed are without lawful authority and jurisdiction; the powers vested under section 122(5A) are required to be interpreted in the light of section 34-A of the Income Tax Act, 1922 (hereinafter referred to as the "Act of 1922") and section 66-A of the Income Tax Ordinance, 1979 (hereinafter referred to as the "Ordinance of 1979"); the insertion of subsection (1-A) in section 210 is of vital importance; the powers vested in the Commissioner under sub-section (5A) is in the nature of revisional jurisdiction; there is a distinction between subsection (1-A) and subsection (2) of section 210 in as much as subsection (1-A) is attracted in respect of an assessment, which the Commissioner had earlier considered; under subsection (5A) of section 122 it is mandatory for the Commissioner to apply his or her mind before reaching a conclusion that the assessment already considered and deemed as final was prejudicial to the interest of the revenue, before proceeding to delegate the powers under subsection (1A) of section 210 of the Ordinance; the factum of considering whether the assessm ent was prejudicial to the interests of the revenue is within the exclusive realm of the Commissioner and it cannot be delegated; a delegatee cannot amend an assessment order under subsection (5A) of section 122; the applicant Company is entitled to avail the benefits under the Ordinance of 1979 by virtue of the freezing clause explicitly inserted in the PCAs i.e. clause 29.6; Article 29.6 of the PCAs read with section 3B and clause (1) of the Schedule of the Act of 1948 protects the applicant Company; it is settled law that where the statute affects a substantive right, it operates prospectively, unless by express enactment or necessary intendment a retrospective operation has been given; reliance is placed on 'Malik Gul Hasan and Co. and 5 others v. Allied Bank of Pakistan' , 1996 SCM R 237 and 'Muhammad Arif v. The State' 1993 SCM R 1589; the language of Article 29.6 mandates that the expression 'revised' would include repeal or re-enactment and, therefore, the repeal of the Ordinance of 1979 was also covered; the scope of the concession areas in the context of the PCAs, licenses and leases are clearly outlined therein; the leasehold rights, granted after commercial discovery in the lease area, tantamount to granting rights in immovable property; the transfer of a Working Interest by the applicant Company to Messrs BP Pakistan with
---
## Page 4
respect to immovable property described in the respective leases is not an intangible right; lease is an integral part of the definition of Working Interest and the PCAs; the definition of the expression 'intangible' in section 24 of the Ordinance of 2001 is relevant in a different context; the learned Adjudicating Officer, the learned CIR (A) and the learned Tribunal had failed to appreciate the distinction between a lease and a license. 6. The learned counsel who has appeared on behalf of the Department has argued that; the sale of a Working Interest to a third party for a substantial consideration was an income liable to be taxed under the Ordinance of 2001; the sale of the Working Interest led to gain from disposal of 'intangible' arising out of contractual rights; sections 4 and 9 read together clearly 'show that the income arising out of the sale of a Working Interest was liable to be taxed; the lease granted under the Petroleum Rules, 1986 is in fact in the nature of a license; Working Interest as defined in the PCA refers to rights described therein; the Additional Commissioner, who had passed the Order-in- Original, was empowered and competent in terms of section 122(5A). 7. The learned counsel have been heard and the record perused with their able assistance. 8. The questions of law which have been proposed for our consideration are; firstly, the nature of the Working Interest, secondly, whether the leases granted under the respective PCAs create a 'benefit in an immovable property' and thus is excluded from the scope of income tax under the Ordinance of 2001, thirdly, the effect of relevant clauses of the respective PCAs relating to the applicability of the Ordinance of 1979 and, lastly, the jurisdiction of the Additional Commissioner who had issued the show-cause notice and adjudicated the same under section 122(5A) of the Ordinance, 2001. In a nut shell, it is the case of the applicant Company that the sale or assignment of a Working Interest does not create tax liability under the Ordinance of '2001. The admitted facts are that the applicant Company was one of the Working Interest Owners in the context of the respective PCAs. Neither the licenses nor the leases were exclusively granted in favour of the applicant Company. The expression 'Working Interest' has been explicitly defined in the respective PCAs as meaning the 'undivided interest in the entirety of the Petroleum concessions, rights, obligations and liabilities' imposed there under and the licenses and leases issued and executed pursuant thereto. The applicant Company had assigned or sold the Working Interest to the extent of its share in the PCAs, licenses or leases to BP Pakistan out the gain derived there from was not offered for tax in the relevant tax year. In order to answer the questions proposed for our consideration in the instant Tax Reference, it is essential to examine the nature of the transaction relating to the sale or assignment of a 'Working Interest' and the provisions of the relevant statutes i.e. the Ordinance of 2001, the Act of 1948 and the rules made there under, particularly the Petroleum Rules, 1986. 9. The Act of 1948 was enacted having the object and purpose to provide for matters relating to mines, oilfields and mineral development under the Government control. The Act of 1948 was amended through the Regulation of Mines and Oilfields and Mineral Development (Government Control) Amendment Act, 1996. Section 2 of the Act of 1948 empowers the Government to make Rules to provide for all or any of the matters described in clauses (a) to (h) thereof. Section 3A provides that, notwithstanding anything contained in any other law, or rules for the time being in force, the President may enter into an agreement with any company for the grant of a license or lease to explore, prospect and mine petroleum on the basis of a Production Sharing Agreement and on such terms and conditions as may be agreed between the Federal Government and the company. Section 3B further provides that every company shall be entitled to the concessions specified in the Schedule in addition to any concessions which may be admissible to it under any other law or the rules made under the Act of 1948. The Pakistan Petroleum (Production) Rules, 1949 were repealed by the Petroleum Rules, 1986. Clause (1) of Rule 2 defines petroleum rights as including a permit, license and lease issued under the Petroleum Rules, 1986. Rule 8 explicitly
---
## Page 5
provides that petroleum rights or any participating share therein shall not be assigned without the previous consent in writing of the Government. Rule 10 further provides that subject to Rules 21, 22 and 27, the grant of a petroleum right or renewal thereof is always at the discretion of the Government and that there is no obligation on the part of the latter to give any reason for the grant of or refusal to grant a Petroleum right. Rule 17 empowers the Government to grant an exclusive petroleum exploration license over any area and on such conditions as may be specified therein. Rules 18 and 19 describes the size and shape of the area for the purposes of rights granted under a license. Rule 20 describes the rights and obligations of a license holder. Rule 27 specifies the power of the Government to grant a development and production lease and provides that such a grant of lease shall be in respect of any discovery area within the licensed area already granted to the applicant under the Petroleum Rules of 1986. Rule 28 explicitly provides that the lease gives the holder an exclusive right to perform activities in connection with the development and production of petroleum in the area covered by the lease. Rules 29 and 30 are regarding the size and shape of a development area. The definition of the expression Working Interest has been reproduced above. The rights are in relation to exploring, developing, producing, selling and otherwise disposing of petroleum from the specified area. As already noted the applicant Company is one of the Working Interest Owners. Likewise, the PCAs, or the licenses and leases granted pursuant to the execution thereof under the Act of 1948 read with the Petroleum Rules, 1986 are not granted exclusively in favour of the applicant Company and the latter has an undivided interest in the entirety of the Petroleum rights to the extent of its share. The shape and size of the area covered under the PCAs, licenses and leases is described therein. Neither the title nor the exact description of the land included or covered within such area has been specified or mentioned. The possession of the land covered within ambit of the size and shape of the area described in the PCAs, licenses or leases is also not transferred or handed over exclusively to the Working Interest Owners. The ownership of such lands which fall within the scope of the size and shape described in the PCAs may vest in different persons or Governments. 10. A plain reading of the respective PCAs, licenses and leases executed and granted under the Act of 1948, read with the Petroleum Rules, 1986, clearly shows that the rights are restricted to interests in petroleum concessions, rights, obligations and liabilities which are specified therein. It is also obvious that neither is an interest intended to be created in the title of the lands covered within the area specified for the purposes of the PCAs, licenses or leases nor is the possession thereof exclusively transferred or in any other manner given to the Working Interest Owners. Likewise, when the PCA is read in its entirety it is further affirmed that the petroleum rights are only to the extent of the Petroleum concessions and such rights which are explicitly described therein. The respective PCAs executed with the Working Interest Owners and the licenses or leases granted under the Act of 1948 read with the Petroleum Rules of 1986 by no stretch of the imagination vest a right in respect of exclusive possession of the land(s), which is included in the area specified in such instruments. The PCAs, licenses and leases, when read together, explicitly shows that none of the Working Interest Owners can claim a right with respect to the immovable property or properties included in the specified area. 11. The learned counsel for the applicant Company has laid stress on the grant of 'lease' and has thus strenuously attempted to build a case that, as a consequence, an interest in immovable property is created and, therefore, any income derived or accrued there from will be outside the scope of nor can be treated as income under the various heads specified under the Ordinance of 2001. He has also extensively referred to various clauses in the PCA in support of this argument. It is, therefore, relevant to ascertain the nature of the 'lease' granted under the Act of 1948 read with the Petroleum Rules of 1986 i.e. to what extent does it create an interest in an immovable property. The expression 'lease' is defined under section 105 of the Transfer of Property Act, 1882, while 'license' is
---
## Page 6
defined under section 52 of the Easement Act, 1882. The august Supreme Court in the case titled 'Abdul Razzaq and 8 others v. Shah Jehan and 5 others", 1995 SCM R 1489, has observed and held that in order to determine the true nature of a document the Court is required to ,read the same as a whole and its nature is to be determined by looking at the substance and not the form of its title. The difference, therefore, between a lease and license would depend on the substance of the document and the terms and conditions stipulated therein. The Sindh High Court in the case titled 'Sajid All Khan v. Muhammad Ahmed Farooqui' PLD 1959 (W.P.) Karachi 24, has observed and held that the test of exclusive possession is very important in determining whether a person is a lessee of property or a mere licensee. Likewise, in "Azim Khan v. State of Pakistan and another", PLD 1957 (W.P.) Karachi 892, it has been observed that the essential feature which distinguishes a lease from a license is the presence of exclusive possession in the case of a lease and its absence in the case of a license. The distinction between a lease and a license has been discussed in great detail by the august Supreme Court in the case titled 'Abdullah Bhai and others v. Ahmad Din', PLD 1964 SC 106. The intention of the parties to an agreement is the pivotal factor in determining whether an agreement is to be treated as a lease or a license. If it is gathered from the terms or substance of the document that the parties had intended to create an interest in the property then it would tantamount to a lease otherwise it will be in the nature of a license though it may be titled as a 'lease'. 12.In the instant case, the respective PCAs, licenses and leases executed and granted under the Act of 1948. Read with the Petroleum Rules, 1986, unambiguously shows that no right is created in favour of the Working Interest Owners or any one of them in any specific immovable property. All these instruments grant undivided interests in favour of the Working Interest Owners in respect of Petroleum concessions and rights expressly described therein. This is further highlighted by a combined reading of the Act of 1948 and the Petroleum Rules, 1986. Rules 10, 22, 27, 28, 62A, 63, 64, 65, 68 and 69, when read with the provisions of the respective PCAs, licenses or leases granted under the Petroleum Rules, 1986 unambiguously establishes that no right is created in favour of the Working Interest Owners, jointly or severally, to claim an interest or right in relation to the title or exclusive possession of any identified immovable property covered within the area specified in such instruments. The lease granted under the Petroleum Rules, 1986, therefore, is in the nature of a license and it is not a lease as defined under section 105 of The Transfer of Property Act, 1882. The very premise of the argument advanced by the learned counsel for the applicant Company is, therefore, misconceived and falls to the ground in the context of the applicability of the charging provisions of the Ordinance of 2001. 13. Having discussed the nature of a lease granted under the Petroleum Rules, 1986 it is essential for the adjudication of the instant Tax Reference to advert to the relevant provisions of the Ordinance of 2001. The Ordinance of 2001 was enacted to consolidate and amend the law relating to income tax and provides for matters ancillary thereto or connected therewith. The expressions 'capital asset', 'disposal', 'income', 'intangible', 'tax', 'taxable income', 'taxpayer' and 'total income' are respectively defined in clauses 11, 18, 29, 30, 63, 64, 66 and 69 of section 2. Section 4 is the charging section and provides that, subject to the Ordinance of 2001, income tax shall be imposed for each tax year at the rate or rates specified in Division I, IB or II of Part I of the First Schedule on every person who has taxable income for that particular year. The scope of 'Taxable income' has been described in section 9 as the total income of a person under clause (a) of section 10 for the year, reduced but not below zero by the total of any deductible allowances under Part IX of Chapter III of the Ordinance of 2001. Clause (a) of section 10 provides that the total income of a person for a tax year shall be the sum of the latter's income under all heads of income for that particular year. Section 11 enumerates in clauses (a) to (e) of subsection (1) the different categories or heads of income. Income from business has been described in section 18 while income from property under
---
## Page 7
section 15. Section 20 is in…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.