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Petitioner: FAUJI KABIRWALA POWER COMPANY LTD. and 8 others VS Respondent: COMMISSIONER INLAND REVENUE, ZONE-HI, LTU, ISLAMABAD
Court Name: Appellate Tribunal Inland Revenue Judge(s):Javed Iqbal, Sohail Afzal, Muhammad Akram Tahir, Fiza Muzaffar, Ch.
Anwaar-ul-Haq, Muhammad Waseem Ch., Ch. Shahid Iqbal Dhillon Title:FAUJI KABIRWALA POWER COMPANY LTD. and 8 others vs COMMISSIONER INLAND REVENUE, ZONE-HI, LTU, ISLAMABAD Case No.: S.T.As. Nos. 605/LB, to 608/LB and 979/LB to 982/LB of 2013 Date of Judgment:2013-12-13 Reported As: 2015 PTD (Trib.) 63 Result: Appeals dismissed Judgment ORDER CH. ANWAAR UL HAQ (JUDICIAL MEMBER).---Through this single order we intend to dispose off the titled eight appeals filed by the registered persons against the appellate order passed by the Commissioner of Inland Revenue, (Appeals), Islamabad, as common issues is involved in these appeals. 2. The appellants, in these appeals, are Independent Power Producers [IPPs] and are engaged in the business of production and sale of electricity to WAPDA. In this respect, each of the appellants has entered into Power Purchase Agreement [PPA] with Government of Pakistan/WAPDA. The basic features of the PPA, in each case, are broadly the same. The tariff of electricity supplied by the appellants, under respective PPA, is approved by National Electric Power Regulatory Authority (NEPRA). In terms of PPA, the consideration accruing to IPP in respect of sale of electricity is classifiable inter alia into following categories:-- Energy Purchase Price [EPP]: payable for each kWh of net electrical output or for each kW of Dependable Capacity and determined in terms of fuel component together with operational and maintenance expenditure; Capacity Purchase Price [CPP]: payable for each kWh of dependable capacity and comprises of components in respect of fixed operations and maintenance cost, insurance, administration, return on equity, service charges including payments of principal, interest and other fees to lenders; Energy Purchase Price Premium: payable based on the Net Electrical output delivered to WAPDA;
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Supplementary Charges: payable on account of unit start-up costs and pass through items as agreed in PPA; and Bonus: payable based on the Net Electrical Output if it is in excess of the Bonus Threshold. 3. The exemption of sales tax on electricity was withdrawn through S.R.O. 922(1)/99 dated August 16, 1999 prior to which date no sales tax was leviable on sale of electricity. In consequence to withdrawal of exemption of sales tax, as aforesaid, certain special provisions were initially prescribed for the levy and collection of sales tax with regard to IPPs which broadly have remained unchanged and, at present, are contained in Chapter-III of. The Sales Tax Special Procedures Rules, 2007 titled 'Special Procedure for Collection and Payment of sales tax on Electric Power'. These Rules have been framed by the Federal Government in terms of provisions contained in section 71 of the Sales Tax Act, 1990 (together with exercising of powers under other enabling provisions in the statute) which read as under:-- "71. Special Procedure.---(1) Notwithstanding anything contained in this Act, the Federal Government may, by notification in the official Gazette, prescribe special procedure for scope and payment of tax, registration, book keeping and invoicing requirements and returns, etc, in respect of such supplies as may be specified therein ...... 4. The subject matter of the present appeals revolves around Understanding, interpretation and application of provisions contained in sub-rule (3) of Rule 13 of the Chapter III of the Sales Tax Special Procedures Rules, 2007 titled 'Special Procedure for Collection and Payment for Sales Tax on Electric Power', which provide as under:-- (3) In case of an LP.P, HUBCO or KAPCO, the value of supply shall be the amount received by such IPP or, as the case may be, HUBCO or KAPCO, on account of Energy Purchase Price only and any amount in excess of Energy Purchase Price received on account of Capacity Purchase Price, Energy Purchase Price Premium, Excess Bonus, Supplemental Charges, etc., shall not be deemed as a component of the value of supply. 5. The core dispute between the IPPs and the Revenue is that whether the limit provided for in the aforesaid provisions vis-a-vis the computation of 'value of supply' require apportionment of the input tax as specified in section 8(2) of the Sales Tax Act, 1990 read with Chapter IV of the Sales Tax Rules, 2006. In other words, the sole controversy is whether the mechanism / principle for computation of 'value of supply' in the aforesaid provisions of law that it shall only be to the extent of 'energy purchase price' ['EPP'] and shall not include the other receipts/components like 'capacity purchase price'[CPP'] etc. Has an effect of bifurcating the 'supply' into 'taxable' and 'non-taxable' components for the purposes of valid and lawful application of section 8(2) of the Sales Tax Act, 1990 under which there is a restriction that taxpayer could only claim / deduct input tax as is attributable to taxable supply. In the context of this and for the purposes of invocation of section 8(2) of the Sales Tax Act, 1990, the Revenue has treated the consideration on account of EPP as 'taxable' supply and that on account of CPP etc. As 'non-taxable' supply. 6. It will be appropriate to first highlight the background of the controversy involved in the matter. The first case on the matter was made out against Messrs Fauji Kabirwala Power Company Limited (2011 PTD 1306), wherein this Tribunal upheld the orders of the authorities below with the following observations:-- "The foregoing discussion amply answers the question raised by us in the beginning of this para. The scope of the discussion is that FBR or any other executive agency is not an unelected wielder of legislative power. An agency exercising a delegated legislative power cannot change the purpose of a statute promulgated by the delegator, i.e. The legislature. In this case the effect of sections 2 (46), 7 and 8 of the Sales Tax Act, 1990 was neutralized in favour of IPPs through Sales Tax Rules, 2006 and STGO 3/2004. It is our considered opinion that F.B.R. Could not lawfully defy a statutory provision. The exclusion of capacity purchase price from the purview of value of supply
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given in section 2(46) read ,with sections 7 and 8 of the Sales Tax Act, 1990, through the device of STGO 3/2004 and the Rule 13 of Sales Tax Rules, 2006, cannot survive the test of judicial scrutiny if challenged before superior Courts of Pakistan. We understand that we are not supposed to arrogate ourselves to the power of judicial review of rules framed by F.B.R., however, we are not expected to become party to something that is not lawful." This judgment of the Tribunal is presently subject-matter in reference application before the Islamabad High Court, filed by the said company in terms of section 47 of the Sales Tax Act, 1990. 7. Subsequently, the said company Messrs Fauji Kabirwala Power Company Limited filed an application for rectification against the aforesaid findings, before this Tribunal and for dealing with a larger bench consisting of five members was constituted. The said larger bench accepted the rectification application, by majority [3:2] and modified the earlier decision and hold that no apportionment was legally warranted in the facts and circumstances applicable to IPPs. This decision of the larger bench is now reported as (2013) 107 Tax 318 (Trib.). Relevant portion of the said judgment is reproduced here under:- "It is an undisputed fact that the applicant is an independent Power Producer and is involved in only one activity and that is taxable activity of producing electricity. Capacity Purchase Price one of the segments of tariff of electricity agreed by the applicant with WAPDA the only buyer of its product, electricity however Capacity Purchase Price is not to be included in the value of electricity for the purposes of levy of sales tax. Rule 25 of Chapter-IV of Sales Tax Rules, 2006 is applicable where the taxpayers are involved in taxable and exempt activities. Section 13 of the Sales Tax Act, 1990 provides that supply of such goods would be exempt from levy of sales tax as are specified in sixth schedule. Capacity Purchase Price neither is a separate goods not is include in Sixth schedule for being treated as exempt. Accordingly upholding treatment of Capacity Purchase Price in the impugned order and the proposed judgment as exempt supply an apportionment of input tax on that basis is a mistake apparent from record, for the reasons recorded in paragraphs above and required to be rectified in the impugned order. After rectification of impugned order S.T.A. No. 132/IB/2010, as held hereinabove, the apportionment of input tax to Capacity Purchase Price by the authorities below is held to be without any legal authority and hereby deleted and consequently the relief originally sought by the applicant is hereby allowed. The findings recorded in the impugned order to this effect are hereby rectified." Against the aforesaid rectification order the department approached to the honourable Islamabad High Court through statutory reference application and constitutional petition. In both cases, their lordships were pleased to suspend the operation of the rectification order passed by this Tribunal and the said suspension orders still subsist. 8. Later on, in another appeal filed by Messrs Hub Power Company Limited, on the same issue, came up for hearing before a Division Bench of this Tribunal, at Islamabad, this appeal was accepted holding that no apportionment of input tax is warranted under any circumstances. In this order dated February 26, 2013, passed in S.T.A. No. 35/IB/13, the Tribunal not only derived strength from the rectification order, referred supra, but also otherwise concluded against the apportionment of input tax. In the course of relying upon and deriving strength from the rectification order of the larger bench, the operations of which were admittedly suspended by the honourable Islamabad High Court, the Tribunal inter alia placed reliance on PLD 1975 (Lahore) 65 and PLD 1980 (Karachi) 492 the ratio whereof is that interim order, being not in the nature of deciding any question of law, is not binding in nature and operates inter se parties to the matter only. It was held in these decisions that even if a decision is suspended the ratio decidendi therein could still be followed unless the same is reversed or overruled by a higher authority. Relevant portion of the said judgment is reproduced here under:-
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"We have heard the parties and let's first examine whether the Order of the Larger Bench in M.A. (R) S.T.A. No. 27/IB/2009 dated 3 September 2012 still holds the field or not. We have carefully gone through the judgments of Honourable High Court reported as PLD 1975 Lah. 65 and 2012 CLD 2029, both the decisions uphold in an unequivocal terms that suspensory order have the effect of inter- parties only and not as judgment in rem. Besides, the Writ Petition before the honourable Islamabad High Court only challenges Re-opening of appeal on application for rectification, whereas merits of the case are not the subject matter of the petition. Further, the honourable High Court has only suspended the operation of the impugned Order till the date fixed. If the honourable High Court dismisses the Writ Petition then the Order of the Larger Bench in M.A. Will continue to hold the field until and unless decided otherwise by any superior court; on merit of; the case. If, however the Honourable High Court allows the petition and suspends the Order of the Larger Bench even then that will decide the issue of rectification of the order and will not decide merits of the case. The learned three Members of the Larger Bench have decided the merits in favour of the taxpayer as against the two other learned Members. Even after suspension of the Order of Larger Bench that will still hold the field as the guiding force. Now coming to facts, both the parties, the learned AR and the learned DR, have relied on the facts and legal position as discussed/debated and decided in the case of Fauji Kabirwala Power Company Limited in support of their respective positions. We have carefully reviewed the Order of the Division Bench in S.T.A. No. 132/IB/2010 and in M.A. (R) S.T.A. No. 27/IB/2009 with respect to the legal position on merit and agree with the legal position as decided by the Larger Bench by majority in M.A. (R) S. TA. No. 27/1B/2009. Therefore, even if it is assumed that the Order in aforesaid M.A. (R) does not stay in the field, we hold apportionment of input tax to Capacity Purchase Price by the authorities to be without legal authority and is hereby deleted and consequently the relief sought by the appellant is hereby allowed in the instant appeal." 9. It is in the aforesaid background that the subject appeals viz-aviz the issue on hand in the first instance were heard by a Division Bench of this Tribunal or August 19 and 20, 2013, however, considering the complexity arising from multiple decisions given by the Tribunal in the matter as referred above, a need for constitution of larger bench was felt. Accordingly, a larger bench, comprising of seven members, was constituted to answer/dilate upon specifically the following question of law for resolution of the controversy, which both the parties to the dispute, have agreed to:-- "Whether in the facts, circumstances and legislative framework admittedly applicable to Independent Power Producers, in particular the provisions of Chapter-III of the Sales Tax Special Procedures Rules, 2007, the provisions of section 8(2) of the Sales Tax Act, 1990 read with Chapter IV of the Sales Tax Rules, 2006 (setting out principles for apportionment of input tax) are ab initio applicable with regard to receipts on account of Energy Purchase Price 'EPP' and other receipts comprising of Capacity Purchase Price 'CPP', Interest on delayed payments and Supplemental bonus income etc." Relevant law on apportionment 10. The relevant provisions, dealing with apportionment of input tax in specified cases, are contained in section 8 of the Sales Tax Act, 1990 which read as follows: "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 than 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;
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............................................................................................................................... (2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board." 11. It is also an admitted And undisputed position that with reference to provisions of section 8(2) of the Sales Tax Act, 1990, the Federal Board of Revenue, by exercising powers available under section 50 of the Sales Tax Act, 1990, has prescribed following provisions in Sales Tax Rules, 2006 for effecting the apportionment on input tax:-- "CHAPTER IV APPORTIONMENT OF INPUT TAX 24. Application. ---The provisions of this Chapter shall apply to the registered persons who make taxable and exempt supplies simultaneously. 25. Determination of input tax.---(1) Input tax paid on raw materials relating wholly to the taxable supplies shall be admissible under the law. , (2) Input tax paid on raw materials relating wholly to exempt supplies shall not be admissible. (3) The amount of input tax incurred for making both exempt and taxable supplies shall be apportioned according to the following formula, namely: - Residual input tax credit Value of taxable supplies _____________ x Residual input tax
on taxable supplies = (Value of taxable + exempt
12. The case of the department is that it was reported by its Auditors that the appellant IPP's had failed to make apportionment of input tax in respect of amount received against Capacity Purchase Price (CPP) from Messrs WAPDA during the financial period from July 2007 to June 2011. It is further added that CPP (component of bulk tariff supplied to WAPDA against consideration) was exempted from levy of Sales Tax in terms of Sales Tax Special Procedures Rules, 2007 notified vide S.R.O. 480(1)/2007 subject to the provisions of sections 7, 8 and all other relevant provisions of the Act, rules and notifications. Therefore, if a registered person deals in taxable supplies and non- taxable/exempt supplies, it can reclaim only such proportionate of input tax as is attributable to tax supplies in such manner as may be specified in terms of section 7 read with section 8 of the Sales Tax Act, 1990. Accordingly show-cause notices were issued to the appellants/taxpayers for the recovery of following amounts under section 11(2) along with default surcharge under section 34 and penalty under section 33 of the Act:-- # Name of appellant Period involved Tax Involved Rs: 1 Messrs Fauji Kabirwala Power Company Limited, Rawalpindi. July, 2007 to June, 2011672,869,554 2 Rousch (Pak) Power Limited, Karachi.July, 2007 to June, 20112,026,408,256 3 Habib Ullah Coastal Power Company (Private) Limited, Quetta.January, 2007 to December, 2009374,688,308
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4 Messrs Southern Electric Power Company Limited, Islamabad. .July, 2007 to June, 2011552,132,768 5 Messrs UCH Power (Private) Limited, Islamabad.January, 2007 to December, 20101,393,048,905 6 Messrs Orient Power Company (Private) Limited, Lahore.July, 2009 to June, 2011305,864,492 7Messrs Saba Power Company (Private) Limited, Islamabad.January, 2007 to December, 2010697,463,185 8Messrs TNB Liberty' Power Limited, IslamabadJanuary, 2007 to December, 2009907,233,563 CONTENTIONS OF THE DEPARTMENT 13. The department, all in the underlying show-cause notices and the orders-in-original, has based its findings on the contention that the taxpayers, under the law, could only claim adjustment of input tax in terms of the provisions of sections 7 and 8 of the Sales Tax Act, 1990 read with rule 15 sub-rule (1) of the Special Procedures Rules, 2007. In this respect, the department has concluded in the orders (already confirmed by the first appellate authority) that while EPP constitutes consideration for 'taxable supply', the consideration for CPP constituted 'non-taxable supply' which distinction permits it to restrict/disallow part of input tax, claimed by the taxpayers, by resorting to aforesaid provisions of section 8(2) of the Sales Tax Act, 1990 read with Chapter-IV of the Sales Tax Rules, 2004. In arriving at this conclusion i.e. The revenue stream comprised of taxable and non- taxable supplies, the Revenue relied upon provisioris of sub-rule (3) of Rule 13 of Chapter III of the Sales Tax Special Procedures Rules, 2007. 14. It is the Revenue's assertion that the mechanism for computation of 'value of supply', specified in the aforesaid provisions, has an effect of splitting the supply/consideration into 'taxable' and 'non- taxable' supplies which lawfully then warrants apportionment of input tax under section 8(2) of the Sales Tax Act, 1990 read with Chapter-IV of the Sales Tax Rules, 2006. In this connection, it is important to note that this is only basis adopted by the Revenue while initiating and concluding the adverse proceedings against the taxpayers, which are new the subject matter of the present appeals in all the cases. CONTENTIONS OF THE APPELLANTS 15. Primarily the appellant IPP's relied on Procedural Rules notified vide S.R.O. No. 480(1)/2007 issued by the Federal Government wherein under Rule 13(3), CPP was excluded from value of supply (Section 2(46) of Sales Tax Act, 1990); hence as CPP was not a part of value of supply the respondents could not make apportionment of input tax. 16. It is the contention of the IPP's that they are involved only and exclusively in one taxable activity i.e. Production and sale of electricity. The consideration on account of CPP, as against the inference drawn by the Revenue that it constitutes 'non-taxable supply', in fact, is one of the segments of tariff/sale consideration of electricity, agreed by IPPs with WAPDA, the only buyer of its product. The CPP is not a consideration for any identifiable supply rather this is one of the components of consideration for taxable supply which, in this case, is electricity. The understanding developed by the Revenue is not only erroneous but is also based on mis-interpretation of the provisions of Rule 13(3) of the Special Procedures. These provisions do not categorize the revenue representing CPP as a consideration for 'non-taxable supply' rather these EXCLUDE the same from the amount
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chargeable to sales tax under the law. This exclusion has been wrongly and unlawfully equated by the Revenue with non-taxable/exempted supply. 17. It is the further contention of the IPP's that applicability of section 8(2) of the Sales Tax Act, 1990, under a correct interpretation, is restricted and limifed in cases only where there are identifiable and distinguishable taxable and non-taxable supplies. The cases where consideration in respect of one taxable supply is split into categories in a manner that part amount is required to be subjected to sales tax and part amount to be excluded from charge of sales tax remain outside the purview of apportionment, specified in section 8(2) of the Sales Tax Act, 1990 read with Sales Tax Rules, 2006. In the case of IPPs, as stated above, there is ONLY one supply i.e. Supply of electricity (which is a taxable supply), the consideration for which is split in the PPAs under different heads. It is in this context that provisions of Rule 13(3) of the Special Procedures make exclusion while prescribing the charge of tax and restrict the same to the extent of EPP. Under no circumstances, this could be construed or equated with the situation conceived by the lawmaker to be the subject matter of section 8(2) of the Sales Tax Act, 1990 read with Chapter-IV of the Sales Tax Rules, 2006. 18. It is also the contention of the IPP's that in fact an altogether erroneous conclusion drawn by the Revenue that dragged the matter into the mischief of section 8(2) of the Sales Tax Act, 1990 read with Chapter-IV of the Sales Tax Rules, 2006. For the reasons described above, it is abundantly clear that this matter ab initio did not involve the issue of takable and non-taxable/exempt supply and pertained exclusively to determination of scope of 'value of supply', still the invocation of section 8(2) of the Sales Tax Act, 1990 read with Chapter IV of the Sales Tax Rules, 2006 is flawed and wholly misconceived. It is an admitted position that in terms of provisions contained in section 8(2) of the Sales Tax Act, 1990 (i) 'apportionment' is required where a registered person deals in 'taxable supplies' and 'non-taxable supplies'; and (ii) such apportionment could only be carried out in 'such' manner as may be specified by the Board in the Rules. It is also undisputed fact that the Federal Board of Revenue, while exercising powers under the aforesaid provisions of section 8(2) of the Sales Tax Act, 1990, has prescribed Chapter IV in the Sales Tax Rules, 2006 in which 'apportionment' is specified between 'taxable supplies' and 'exempt supplies' exclusively. In these Rules, the expression used is 'exempt supplies' and not 'nontaxable supplies'; an expression used in primary legislation i.e. Section 8(2) of the Act. 19. The learned AR further submitted that aforesaid position i.e. Difference in language used in primary and subordinate legislation necessitates that one determines as whether there is any disharmony in the two. It is the taxpayers' assertion there is no such disharmony and as such both the primary and subordinate legislations are at absolute par. The learned AR submitted that the primary legislation uses terms 'taxable supply' and 'non-taxable supply'. The term 'taxable supply has been defined in section 2(41) of the Sales Tax Act, 1990 to mean "supply of taxable goods made other than a supply of goods which is exempt under section 13 ....". This, therefore, clearly follows that 'non-taxable supply' means opposite of 'taxable supply' and thus represents 'exempt supply'. Consequehtly,, it is for the reason that under the statute 'nontaxable supply' corresponds to 'exempt supply' that in Chapter-IV of the Sales Tax Rules, 2006 the expression 'exempt supply' has been used while prescribing the principles for apportionment of input tax. Thus both the primary and secondary legislation are completely harmonious with regard to scope of apportionment. 20. The aforesaid analysis then leads the discussion to…
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