I.T.AS. NOS.905/113; 906/113 OF 1991-92, 963/113 OF 1993-94, 1053/IB, 1054/IB, 960/113 VS I.T.AS. NOS.905/113; 906/113 OF 1991-92, 963/113 OF 1993-94, 1053/IB, 1054/IB, 960/113, 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 291 (1997)

July 10, 1997 INCOME TAX APPELLATE TRIBUNAL PAKISTAN 1998 PTD 291

1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 291

I.T.AS. NOS.905/113; 906/113 OF 1991-92, 963/113 OF 1993-94, 1053/IB, 1054/IB, 960/113 VS I.T.AS. NOS.905/113; 906/113 OF 1991-92, 963/113 OF 1993-94, 1053/IB, 1054/IB, 960/113

1998 P T D (Trib.) 291

[Income-tax Appellate Tribunal Pakistan]

Before Muhammad Mujibullah Siddiqui, Chairman, Rashid A. Sheikh,

Judicial Member and Hamidullah Malik, Accountant Member

I.T.As. Nos.905/113; 906/113 of 1991-92, 963/113 of 1993-94, 1053/IB, 1054/IB, 960/113 to 962/113 of 1993-94, 140/113 and 141/113 of 1994-95, decided on 10/07/1997.

(a) Income Tax Ordinance XXXI of 1979)----

---S. 26(b) & Fifth Sched., Part I, R. 6(6)---Pakistan Petroleum Production Rules, 1949, R. 41---Regulations of Mines and Oilfields and Mineral Development (Government Control) Act (XXIV of 1948), Ss. 2, 3-A & 4-- Income from exploration and production of petroleum---Liquefied petroleum gas (L.P.G.) and Petroleums, crude oil, natural gas and casing-head petroleum spirit---Natural---Expression "petroleum" had not been defined in Fifth Sched to Income Tax Ordinance, 1979 but by way of legislation by reference, the definition contained in Pakistan Petroleum Production Rules, 1949 had been incorporated with further restriction that refined petroleum would not be included in the said definition-- "Petroleum", meant crude oil, natural gas and casing-head petroleum spirit but excluded refined petroleum products ---Liquefied petroleum gas (L.P.G.) being mainly consisting of propane and butane was to be taken as crude oil, natural gas and casing-head petroleum spirit with exclusion of refined petroleum products.

(b) Pakistan Petroleum Production Rules, 1949---

---8. 41---"Petroleum" concession agreement---Definition of terms-- Existence of conflict between definition of terms---Effect---In case of conflict between definition of any terms contained in the Rules and Agreement, terms of Agreement shall prevail.

(c) Income Ordinance (XXXI of 1979)---

--Fifth Sched., Part I, R. 6(6)---Regulations of Mines and Oilfields and Mineral Development (Government Control) Act, 1948---Petroleum concession agreement--- Cumulative effect----Cumulative effect of all the provisions is that the profits and gains of, the business in pursuance of petroleum concession agreement were to be computed in accordance with the Fifth Sched to the Income Tax Ordinance, 1979.

(d) Income Tax Ordinance (XXXI of 1979)---

---Fifth Sched., Part I, R. 6(6)---Liquefied Petroleum Gas (L.P.G.)---Not a refined petroleum---Reasons stated in details.

(e) Income Tax Ordinance (XXXI of 1979)---

----Fifth Sched., Part I, R. 6(6)---Income from business of L.P.G.-- Assessment of ---Liquified Petroleum Gas being not refined petroleum product was included in expression "petroleum" as defined in R. 6(6) of Fifth Sched. to the Income Tax Ordinance, 1979---Income from the business of Liquid Petroleum Gas to be assessed under the provisions of the said Fifth Sched.

(f) Income Tax Ordinance (XXXI of 1979)---

----S. 12(5)---Fee for technical services, means consideration for rendering of any managerial technical or consultancy services including the provision of services of technical or other personnels.

(g) Income Tax Ordinance (XXXI of 1979)---

----S. 32---Method of accounting---Mercantile system---Payments and receipts, deeming of---In mercantile system of accounting, actual payment or receipt is immaterial, the moment the payment or receipt is entered in the books of accounts, it shall be deemed to be actually received or paid-- [I.T.As. Nos.237 and 238(IB) of 1989-90 overruled].

I.T.As. Nos.237 and 238(IB) of 1989-90 overruled.

1993 PTD (Trib.) 722; PLD 1963 SC 352 and 1990 PTD 248 ref.

Abdul Jalil, D.R. for Appellant (in I.T.As. Nos.905/IB and 906/113 of 1991-92).

Khalid Majeed, F.C.A. for Respondent (in I.T.As. Nos.905/IB and 906/113 of 1991-92).

Khalid Majeed, F.C.A. for Appellant (in I.T.A. No.963/IB of 1993-94).

Abdul Jalil, D. R. for Respondent (in I.T.A. . No. 963/111 of 1993-94).

Abdul Jalil, D.R. for Appellant (in I.T.As. Nos.1053/IB and 1054/113 of 1993-94).

Khalid Majeed, F.C.A. for Respondent (in I.T.As. Nos.1053/IB and 1054/113 of 1993-94).

Khalid Majeed, F.C.A. for Appellant (in I.T.As. No.960/IB to 962/IB of 1993-94, 140/IB

and 141/113 of 1994-95).

Abdul Jalil, D.R. for Respondent (in I.T.As. No.960/IB to 962/113 of 1993-94, 140/113 and 141/113 of 1994-95).

Date of hearing: 8th April 1997.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---This Full Bench has been constituted to consider the following main questions:

(i) Whether L.P.G. produced by O.G.D.C. and Occidental of Pakistan falls within the definition of petroleum as defined in Rule 6(6) of Part I of the 5th Schedule to the Income Tax Ordinance, 1979.

(ii) If L.P.G. comes within the purview of petroleum whether the income derived from the sale of L.P.G: is to be assessed under the provisions contained in 5th Schedule read with section 26 (b) of the Income-tax Ordinance, 1979.

2. The subsidiary questions relate to the setting off of losses of L.P.G. business against petroleum income and admissibility of depletion allowance on production of L.P.G. also.

3. The main point for consideration by this Full Bench is whether L.P.G. falls within the purview of petroleum as defined in Rule 6(6), Part 1 of the 5th Schedule to the Income Tax Ordinance, 1979.

4. We-have heard Mr. Khalid Majeed, F.C.A., learned representative for the appellant and Mr. Abdul Jalil, learned representative for the department. Mr. Nasim Zaffar I.T.P. was also present at the time of hearing of appeals and on our request he has also assisted as on the point in issue. The common facts before us are that the O.G.D.C., M/s. Occidental of Pakistan Inc. (a non-resident foreign company), Messrs Pakistan Oil Fields Limited (not a party to the proceedings before us) a private limited company and Occidental of Pakistan Inc. a non-resident company derived income from production and sale of crude oil, natural gas and liquified petroleum gas (L.P.G.) and are engaged in exploration, production and drilling as well under agreement with the Government of Pakistan through President of Pakistan. So far the business relating to crude oil and natural gas is concerned there is no dispute that the income from these sources is assessable under 5th Schedule to the Income Tax Ordinance, 1979. However, a perusal of record shows that a lot of confusion is prevailing on the point if the business from sale of L.P.G. is a business other than petroleum business. The dispute and confusion has arisen on the interpretation, if L.P.G. falls within the purview of petroleum as defined in Rule 6(6) of Part 1 of 5th Schedule to the Income. Tax Ordinance, 1979 or is refined petroleum product. The decision on subsidiary issues depends on the decision on this point. A perusal of record produced by the learned representatives for the parties shows that while framing assessment order in respect of M/s. Pakistan Oil Field Limited, Rawalpindi (N.T.N. 02-01-0200241) for the assessment year 1985-86 the assessing officer found that two separate accounts were maintained first under the head oil and gas and the second under Liquified petroleum gas. Profit was declared under the head oil and gas, whereas loss was declared under the head L.P.G. Depletion allowance was claimed at 15 % on gross receipts and was restricted to 50 % of the profit declared under the head oil and gas without taking loss of L.P.G. from the profit on oil and gas. The assessing officer observed that the assessee should have deducted loss of L.P.G. from the profit of oil and gas and depletion allowance should have been restricted to 50 % of the resultant profit. The assessee in its reply contended that it has two lines of business one relates to oil. and gas activities and other relates to L.P.G. plant. The A.R. of the assessee explained that L.P.G. comes under the definition of "refined petroleum products" and income/loss from L.P.G. is not assessable under the 5th Schedule to the Income-tax Ordinance, 1979. They further explained that due to this reason loss declared under the head L.P.G. was not deducted from the profit declared under the head oil and gas for restricting the depletion allowance to 50% of the profit declared. The assessing officer ultimately held as follows:

"A detailed correspondence was made and discussions were held with the assessee company regarding the taxability of L.P.G. as per 5th Schedule and the interpretation of well head value. There is thus a difference of opinion between the assessee and the department about the meaning and implication of the wellhead value as well as the treatment with the L.P.G. The assessee is producing crude oil and natural gas from its different wells. As the natural gas produced by the assessee is very rich in Hydrocarbons specially Propane and Butane which can be separated. It has set up a Plant at the well-head for extraction of L.P.G. (Propane and Butane) from the Natural Gas produced from different wells. The assessee has contended that the loss from the production and sale of L.P.G., for calculating of depletion allowance, cannot be adjusted against the profit from the sale of crude oil and natural gas. It has been claimed that the production of natural gas is a business activity, which is not covered by the Schedule.

In view of the above facts and perusal of Pakistan Petroleum Production Rules, 1949 it is concluded that the contention of the assessee regarding adjustment of depletion allowance is not acceptable, as in the case of the assessee, the business activity with regard to production and sale of L.P.G. is to be considered for the calculation of depletion allowance. This conclusion is based simply on the fact that the assessee (by employing only mechanical process) separates and liquifies certain gases out of the natural gas obtained from the wells and sells them separately. This process of separation which is established at the well head site is employed before the sale of any product to any other agency is part of the well head production process of the assessee and its profits/loss from this activity is profit/loss of the assessee from the exploration and production of petroleum, which is to be computed under Part I of the 5th Schedule. This conclusion is further strengthened from the definition of well head value given in the Pakistan Petroleum Production Rule, 1949. The assessee's claim is based on the argument that L.P.G. as produced by it, is a refined petroleum product and as per definition of petroleum given is sub-rule (6) of Rule 6 of the 5th Schedule, Profit from production and sale of L.P.G. are not to be computed under the 5th Schedule. This interpretation of definition of petroleum does not appear to be correct because of the understanding that L.P.G. is not a refined petroleum product as is being obtained by the assessee. The assessee is only separating different gases by employing a mechanical process. As a result of this process, the sale of gas, after extraction of Propane and Butane, to Sui Northern Gas Pipelines, Company is reduced. If L.P.G. had not been extracted from the natural gas, the quantity of gas sold to the gas company in terms of volume would have been resulting in more sales and more profit. On questioning the petroleum Engineer Mr. Rizvi it was learnt that the natural gas which was left after extraction of Propane and Butane (LPG) and which is supplied to Sui Northern, can also be liquified, by employing a very sophisticated and expensive process. If the assessee had employed such process, the production of natural gas of the assessee would have become nil. In such an eventuality the sale of natural gas would have been totally eliminated from the accounts of the assessee, which were to be considered for computation of income under the 5th Schedule. This does not seem to be the purpose and spirit of the legal provisions enacted for determining profits from the exploration and production of petroleum. However, the expert personnel of the company do not agree with this interpretation of the issue. They stated that since separate L.P.G. plant, has been installed for processing the natural gas in accordance with the specification of S.N.G.P.L. and A.R.L., the income/loss computed under the head L.P.G. should not be adjusted against income/loss computed under the head oil and gas.

To elaborate the exact process of separation and liquefaction of natural gas, the representatives of the assessee company further explained that after drilling the crude oil and gas on the well head the, gas oil and water are separated through well head separator. Gas being lighter escaped through the top portion of the well head separator, water being heavier is drained from the bottom and oil is taken out from the middle. Some of the oil is then again separated from the gas in the form of casing-head spirit and then gas is taken through pipeline to a storage tank of L.P.G. plant. The temperature of gas in the plant is reduced up to minus 120oF. As a result of lower temperature two gases namely Propane and Butane get liquified to become liquified petroleum gas. Other contents of gas get separated from L.P.G. L.P.G. is sold to marketing companies while remaining gas is sold to D.N.G.P. Ltd. He has, therefore, contended that loss from L.P.G. being a refined petroleum having no effect upon the sales of gas is not assessable as per 5th Schedule which should not be taken into account for depletion allowance. He has further submitted that under the head 'gas' value of total gas produced has been given as per price fixed by the Government at the well head before its bifurcation into L.P.G. on other gas sold to S.N.G.P. However on the advice and explanation of the experts of the company, the plea of the assessee company in this regard is accepted and the declared version that L.P.G. may not be accounted for depletion allowance is accepted subject of action under section 156/65. "

5. A perusal of the above finding shows that in the year 1985-86 while computing assessment in respect Pakistan Oil Field Limited, the contention on behalf of department was that the L.P.G. was not a refined petroleum product and was, therefore, included within the expression 'petroleum' as defined in Rule 6(6) of Part 1 of 5th Schedule to the Income Tax Ordinance, 1979 and the assessing. officer was insisting that the income, profits and gains from the L.P.G. business is liable to be assessed under 5th Schedule to the Income Tax Ordinance, 1979 which the contention on behalf of the experts of the Pakistan Oil Field Ltd. was that L.P.G. was refined petroleum product and, therefore, the profit from production and sale of L.P.G. was not to be computed under the 5th Schedule. It is very interesting to note that in the assessment order for the assessment year 1988-89 in respect of O.G.D.C. which is subject-matter of the present appeals (I.T.A. No.905/IB of 1991-92) the positions taken by the two parties were diametrically opposed. The assessing officer has observed that, "assessee's gross receipts include receipts from sale of L.P.G. which is a separate business and not assessable under the 5th Schedule". A notice was issued to the assessee asking as to why the profit/loss arising from sale of L.P.G. should not be treated as a separate business from its main business of exploration and production of the petroleum in Pakistan and assessed accordingly. The exact reply given on behalf of assessee has not' been incorporated in the assessment order. However, the assessing officer has observed that the assessee has taken pains to technically establish that L.P.G. is not a product distinct from natural gas. This contention has not been accepted by the assessing officer and he has held as follows:

"It is to be pointed out that definition given in the Fifth Schedule of the Income Tax Ordinance, 1979 is so specific and clear that no external help is required to interpret its wording reproduced below:

Petroleum means crude oil, natural gas and casing-head petroleum spirit as defined in the Pakistan Petroleum (Production) Rules, 1949 but does not include refine petroleum products.

As is evident from the above, this definition is restrictive and nothing can be added to it or included in it. The very fact that a separate technology is operated through independent extensive plant to convert natural gas into L.P.G. itself establishes the distinction involved. For the sake of convenience it would be appropriate to elaborate the exact process of separation and liquification of natural gas. It is to be pointed out that after drilling the crude oil and gas on the well head, the gas, oil and water are separated through well head separater. Gas being lighter escapes through the top portion of the well head separater, water being heavier is drained from the bottom and oil is taken out from the middle. Some of the oil is then again separated from the gas in the form casing head spirits and then gas is taken through pipelines to a storage tank or L.P.G. Plant. The temperature of gas in this plant is reduced up to 120F. As a result of lower temperature two gases Propane and Butane get liquified to become liquified petroleum gas. Other contents of gas get separated from L.P.G. L.P.G. is sold to marketing companies. Needless to point out that although the law-makers have included oil, natural gas and casing head petroleum spirit in the definition of petroleum but have not included liquified petroleum gas deliberately. It may be mentioned that losses of L.P.G. could not be set off against the business of drilling of oil and gas etc. A plain reading of the words 'Profits and gain of such undertaking shall be computed separately from his income, profits or gains from any other business, if any carried on by him clearly indicates that the business of exploration and production of oil and natural gas has to be segregated from other business income of the assessee. It also becomes obvious from plain reading of section 26(b) that the segregation is not only confined to the computation of income but it is operative right up to the point of calculation of tax. This can only be possible if losses of other business carried on by the assessee are not allowed to be set off against the profits of petroleum activities. Section 26 which begins with the words 'notwithstanding anything contained in this Ordinance' and Fifth Schedule lays down specific exception to the general principles."

6. The same treatment was given in the assessment orders for the assessment years 1989-90 and 1990-91. However, two different treatments were given at the first appellate stage while deciding first appeals for the assessment years 1988-89 and 1989-90 the learned C.I.T.(A), Islamabad vide. his order dated 5-12-1991 held as follows:---

"The appellant's income in r/o sale of P.L.G. was considered by the I.T.O. not to be determinable in the light of provision of the 5th Schedule. It may be observed here that income in respect of extraction has been made assessable under the 5th Schedule in accordance with the provisions contained in section 26(b) of the Ordinance. While discussing the merits of the case the assessing officer held that since L.P.G. was covered by the terms 'refined petroleum products' in sub-rule (6) of Rule 6 of the 5th Schedule, the income arising from this source was assessable under section 23 of the Income Tax Ordinance and not under the rules contained in the 5th Schedule. The learned A.R. is not satisfied with the reasoning of the I.T.O. and contended that L.P.G. formed as much part of the petroleum products defined in the 5th Schedule as crude oil, natural gas and casing-head petroleum spirit. In this respect reference has been made to Pakistan Petroleum Production Rules, 1949 in which the term 'natural gas' has been defined as 'gas obtained from bore-holes and well and consisting primarily of hydro carbons'. Again the Pakistan Petroleum (Refining, Blending and Marketing) Rules, 1971 have defined petroleum products to means 21 products of different kinds named therein but none of these includes liquid petroleum gas as a petroleum product.

The learned A.R. contended that whatever L.P.G. may mean, it certainly does not mean a refined petroleum product as contained in the 5th Schedule. In his lengthy written arguments it has been urged by the learned A.R. that L.P. G. was part of crude oil or natural gas and, consequently, income therefrom was assessable in the light of the 5th Schedule. I find myself in agreement with the arguments of the learned A.R. and would consequently, direct the I.T.O. to assess income from sale of L.P.G. alongwith income from sale of crude oil and natural gas."

7. Against a similar finding another CIT(A), Islamabad vide his order dated 17-10-1993 in respect of assessment year 1990-91 rejected the contention of assessee by placing reliance on the order of this Tribunal in I.T.As. Nos. 1742, 1743, 443 and 444 Islamabad Bench dated 5-12-1991 and held that the L.P.G. business should not be treated as part of business exploration and production of petroleum for computing income under 5th Schedule.

8. In the case of Occidental of Pakistan Limited in respect of assessment years 1989-90. 1990-91, 1991-92, 1992-93 and 1993-94, it was held by the assessing officer that L.P.G. business does not form part of the business of exploration and production of the petroleum and is not assessable under the provision of 5th Schedule to the Income Tax Ordinance, 1979. The assessing officer in this behalf referred to assessment order for the charge year 1988-89 and maintaining thereof by the learned C.I.T.(A), Rawalpindi vide his order dated 26-3-1990. The assessing officer further observed that, "the method whereby the assessee included profit from L.P.G. business in profit from business of exploration and production of petroleum was not correct'. He further observed that "it would not be out of place to mention here that the provision of section 26(b) override any other provision of the Income Tax Ordinance and it states that profit and gains from exploration And production of petroleum and the tax payable thereon shall be computed in accordance with the rules contained in para of the 5th Schedule. Since, while assessing the profit and gains from the business of exploration and production of petroleum one cannot be go beyond the ambit of Part 1 of 5th Schedule, the set off of losses of other business Would amount to altering the very nature of the income assessable under 5th Schedule and thereby distort the method provided in the said Schedule for computation of assessee's tax liability".

9. The assessing officer further observed that in view of detailed discussion in the assessment order for the charge years 1986-87, 1987-88 and 1988-89 the fact that L.P.G. and petroleum business are distinct and separate stands established. The learned C.I.T.(A) by placing reliance on the first appellate order for the assessment years 1986-87 to 1988-89 maintained the finding that the profit from sale of L.P.G. was not assessable under 5th Schedule. while placing reliance on the same order held that the assessee was entitled to claim set off of the loss from L.P.G. business against the business of production and sale of petroleum assessed under 5th Schedule to the Income Tax Ordinance, 1979. The department is in appeal in the assessment years 1989-90 and 1990-91 assailing the finding for adjustment of loss in L.P.G. account against profits and gains from business of production and sale of petroleum while assessee is in appeal against the finding that L.P.G.

business is separate from business of exploration and thus is not assessable under 5th Schedule.

10. The main order in favour of department at first appellate stage is in the case of M/s. Occidental of Pakistan Inc. In respect of assessment years 1987-88 and 1988-89, dated 26-03-1990. The contention was raised before the learned C.I.T.(A) on behalf of assessee that the provisions contained in Concession Agreement to the effect that separation of hydrocarbons (other than Methane) -from gas in liquid form shall be treated as crude 'oil will override the provisions contained in the Fifth Schedule to the Income Tax Ordinance, 1979. The contention was not accepted. The learned C.I.T.(A) after referring the contention and with referred to chemical composition of natural gas held that L.P.G. cannot be deemed to be petroleum as it is natural crude oil nor natural gas or casing head petroleum spirit and therefore, provisions of Fifth Schedule to the Income Tax Ordinance, 1979 is not applicable. For the sake of convenience the finding of learned C.I.T.(A) in the case of Occidental of Pakistan Inc. for the assessment year 1987-88 is reproduced below:--

"The appellant has challenged the action of the ITO/Penal and prays that the L.P.G. business should be treated as a part of the business of exploration and production of petroleum assessable under the Fifth Schedule. The AR submitted the following arguments in support of his contentions:---

(a)Under Rule 6(6) of Part I of the Fifth Schedule to the Income Tax Ordinance, 1979, 'Petroleum' has been defined to mean 'crude oil, natural gas and casing-head petroleum spirit as defined in the Pakistan Petroleum (Production) Rules, 1949 but does not include refined petroleum products'. This definition is also given at clause 1.18 of Article 1 of the North Potwar Petroleum Concession Agreement.

(b)According to the Pakistan Petroleum Production Rules, 1949, crude oil, natural gas and casing-head petroleum have been defined as under:---

'Crude oil' means-oil in its natural state before the same has been refined or otherwise treated, but excluding water and foreign substance.

Natural gas' means gas obtained from bore-holes and wells and consisting primarily of hydrocarbons.

Casing-head petroleum spirit' means any liquid hydro-carbons obtained from natural gas (before crude oil from which it is derived has been measured for royalty) by separation or by any chemical or physical process.

(c)Under the Liquified Petroleum Gas (Production and Distribution) Rules 1971 liquified petroleum Gas' has been defined to mean hydrocarbons mainly consisting of Propane and Butane mixed or unmixed whether with or without gases which are vapors at room temperature and pressure but can be liquified on slight compression.

(d)'Gas' has also been defined under the Natural Gas Rules, 1960 to means natural unmixed and natural gas mixed with artificial gas and includes all other fluid hydrocarbons not defined as oil.

(e)L.P.G. as per its definition given above, is also casing head petroleum spirit, being liquid hydrocarbon obtained from natural gas by separation or by any chemical or physical process, while it has not been included in schedule or petroleum products referred to above.

(f)In this regard, the definition of 'natural gas' given in clause 1.15 of Article 1 of North Potwar Petroleum Concession Agreement again confirms that hydrocarbons other than Methane are to be treated as crude oil.

(g)Clause 7.5(c) of Articles VII of the North Potwar Petroleum Concession Agreement is reproduced below which clearly states that all hydrocarbons other than methane, like for instance Butane and Propane, if extracted, are to be considered as crude oil.

"The provisions of this agreement shall not restrict the rights of the parties to remove any hydrocarbons other than methane (CH4) from gas. Such other hydrocarbons, if extracted, shall be considered as crude oil under the other clauses of this Agreement and not as gas under this clause."

In nutshell, the contention of the A.R. is that L.P.G. is included alternatively in the terms 'crude oil', 'natural gas' or 'casing-head petroleum spirit' as per their definitions given above. Hence income from L.P.G. business is liable to be computed under the Fifth Schedule.

The A.R.'s reliance on the provisions of North Potwar Concession Agreement in support of his contention that separation of hydrocarbons (other than Methane) from gas in liquid form, shall be treated as 'crude oil' is of no help to him because the provisions of the said agreement cannot override the provisions of the Fifth Schedule. The agreement may define crude oil and natural gas differently for the specific purposes of the agreement which could be calculation of royalty or some other purpose. However, for tax purposes, provisions (including definitions) of the Fifth Schedule shall prevail.

L.P.G. cannot be treated as a 'casing-head petroleum spirit' for the simple reason that the chemical formula of both the products are totally different. Whereas chemical formula of 'casing-head petroleum spirit' is C.5 plus that of L.P.G., which is the combination of Propane and Butane gases in 60:40 percentage, is totally different. Moreover, 'casing-head petroleum spirit' is obtained from natural gas before crude oil from which it is derived is measured for royalty. On the other hand, L.P.G. is obtained from natural gas after crude oil is measured for royalty.

L.P.G. cannot be included in the terns 'natural gas' for the following reasons:---

(a)Natural gas means gas obtained from bore holes and wells. In other words, such gas is in its natural and undiluted form, physically as well as chemically. L.P.G. is produced from two distinct sources. First, it is produced as a result of extraction from natural gas streams and in some cases from crude oil at or close to the point of production, as in the instant case. Second, it is produced from the processing of crude oil in refineries.

(b)The composition of natural gas varies from field to filed. But most natural gases consist largely of Methane and other light hydrocarbons. The following paraffinic hydrocarbons are usually available in natural gas:

Name	Chemical formula
Methane	CH4
ethane	C2 H6
Propane	C3 Hg
normal butane	C4 H10
normal pentane	C5 H12
normal hexane	C6 H14
normal heptane	C7 H16
normal octane	C8 H18

L. P. G. consists of Propane and Butane in the ratio of 60 % and 40%. Thus L.P.G. is chemically a totally different thing from the natural gas. The relationship of these two can be illustrated with a simple example. Natural milk is composed of fat, calcium, protein and water. If we extract fat (i.e. cream) out of milk by skimming it and the cream is then converted into butter through physical process, the end product (i.e. butter) cannot be termed as natural milk. Similarly, L.P.G. (i.e. a combination of Propane and Butane) which are the two out of many constituents of natural gas, when separated and liquified, cannot be considered as natural gas. Their chemical formulae and physical shapes are also different. L.P.G., in particular, contains virtually no sulpher, whereas natural gas has the elements of sulpher.

(c) In the 'Petroleum Hand Book' by Shell International Petroleum Company, London, 1996 classification of gaseous fuels shows thatL.P.G. and natural gas have been categorised separately. It means that even in the commercial practice, natural gas and L.P.G. are treated as two different products.

(d)The Government of Pakistan has also made separate rules for L.P.G. and natural gas thereby indicating that the Government also treats the two commodities as different from each other.

The definition of 'petroleum' as contained in rule 6(6) of Part I of the Fifth Schedule is specific and exhaustive. It means that no other item can be added to it. L.P.G. cannot be deemed to be 'petroleum'in terms of the said rule independent of an addition to the crude oil, natural gas and casing-head petroleum spirit. Only that product can be considered as a petroleum product for the purpose of the said Schedule which falls under any of the said three items. From the above discussions, it is crystal clear that the provisions of the Fifth Schedule do not apply to the computation of income from production and sale of L.P. G."

10. This order was the subject-matter of appeal before a Division Bench of this Tribunal in I.T.As. Nos.237 and 238/113 of 1989-90. The learned accountant Member in the order, dated 9-9-1992 held as follows:---

"We have heard the arguments of both the sides and have also examined the evidence produced in support thereof.

As far as the definition of the word 'petroleum' is concerned, it has very restrictive definition starting with the word 'means' and excluding 'refined petroleum products'. Similarly, Crude Oil, Natural Gas and Casing-head petroleum spirit have also been defined in very restrictive terms. And once particular items have been defined as such, we cannot go by loose commercial practices. In this view, therefore, we see that L.P.G. is not covered by any of these definitions. Reverting to the A.R.'s argument that manufacturing of L.P.G. is a part of normal exploration and drilling operations, one would like to ask the question as to why the business of the production of L.P.G. was started in 1987-88? Had it been part of normal operations, its production and sale should have been from the very beginning of this business. But since this is not so the A.R. s argument fails. Alongside it also exposed the fact that the manufacture of L.P.G. entails some other processes which are not normally employed in simple exploration and drilling. "

11. The learned Judicial Member while agreeing with the conclusions recorded his own reasons as follows: ---

"The profits and gains from the exploration and production of petroleum including natural gas and the tax payable thereon is computed in accordance with the rules contained in Part I of the Fifth Schedule to the Income Tax Ordinance, 1979. Question that is being agitated in these appeals is whether the profits and gains of the assessee company which is engaged in the production and sale of liquified petroleum gas are computable in accordance with the rules of Part I of the Fifth Schedule to the Income Tax Ordinance in accordance with the general rules by which the profits and gains from any other business are computed. The assessee contends that notwithstanding that the end product it sells is 'a liquid put in cylinders' the product remains the 'natural gas and profits and gains for the production of the same are to be computed in accordance with the rules of the Fifth Schedule ibid. We have been referred to certain definitions which proceed to indicate that chemically 'liquified petroleum gas' is in substance natural gas. But what we are required to determine in the contract of the present case is not whether 'liquified petroleum gas' is or is not 'natural gas' as chemically understood. The question is whether the Legislature included the 'liquified petroleum gas' into the definition of petroleum within the meanings of the petroleum and for the purposes of computation of profits and gains for its production under the Income-tax Ordinance. 1979 The Legislature has not left open the question to be answered with reference to chemistry It has defined the expression 'petroleum' and, since third definition starts with the word 'means' so it has to be read narrowly. My understanding of the meanings of the 'petroleum' for the purposes of the computation of the profits and gains and the tax payable thereon from its production is that they are to be taken narrowly and any petroleum product which has been refined or subjected to any process whether simple or complex to make it usable would go out of the definition of the said expression. The judgment of the Lahore High Court reported as 1992 MLD 499, does not answer the question in the context of the definition of the natural gas' for the purposes of the Income Tax Ordinance."

12. A perusal of our order, dated 5-5-1996 whereby constitution of Full Bench was recommended shows that the then D.R. while assailing the direction of learned C.I.T.(A), Islamabad, dated 5-12-1991 which is the subject-matter of I.T.As. Nos.905 and 906(IB)/1991-92 contended that the direction to consider income from L.P.G., as part of income arising from extraction and sale of crude oil and gas was in conflict with the Tribunal's order, dated 9-9-1992 in I.T.As. Nos.237 and 238(IB) of 1989-90. Mr. Khalid Majeed, FCA had contended that the points agitated by him were not considered by the Division Bench in its order dated 9-9-1992 While accepting the plea of Mr. Khalid Majeed for referring the case to Full Bench it was observed by us as follows:

"We have carefully considered the contentions raised by Mr. Khalid Majeed and we are of the opinion that the issue relating to the provision under which income from sale of L.P.G. is to be assessed requires further in depth and elaborate consideration. We are persuaded to agree with the submission of Mr. Khalid Majeed that in order to arrive at the correct conclusion the provision contained in 5th Schedule to the Income Tax Ordinance, 1979 and the agreement entered into between various companies and O.G.D.C. with the Government of Pakistan and exploration of petroleum products are to be considered. "

13. The learned representatives for the parties aye addressed lengthy arguments before us with reference to the various legal provisions and with reference to chemistry as well. Mr. Khalid Majeed has submitted as right up prepared with the assistance of experts in support of the contention that L.P.G. is petroleum from scientific point of view. This right up is in rebuttal of finding contained in the order of C.I.T.(A), dated 26-3-1990 with reference to the chemical composition of natural gas which was confirmed by a Division Bench of this Tribunal vide order, dated 9-9-1992 which finding: is being reconsidered by this Full Bench. The right up is as follows:

"L. P. G. IS PETROLEUM - TECHNICAL DETAIL

1.The chemical components of Petroleum which is derived by oil and gas exploration and production companies from'oil wells' are:

Chemical Name	Chemical Sign
Methane	C1
Ethane	C2
Propane	C3
Butane	C4
Pentane	C5
Hexane	C6
Heptane+	C7+

2.Due to various proportions of above hydrocarbons Petroleum Reservoirs have been divided into four main types, which are given below:

2.1Black Oil

At reservoir condition this type of oil is in liquid phase. The composition analysis shows that a small amount of gas is liberated from it when it is brought up to the surface conditions.

2.2Volatile Oil

It is in liquid phase at reservoir pressure and temperature conditions. This oil releases more gas which includes methane, ethane, propane, butane etc. when brought up to the surface condition.

2.3Gas Condensate

It is in gaseous phase at reservoir temperature and pressure conditions. When the gas is brought up the surface temperature and pressure conditions, a liquid phase is recovered from it which is called condensate. The main components of condensate are propane, butane, pentane, hexane and heptane plus.

2.4Dry Gas

It is in gaseous phase at reservoir conditions and brought up the surface condition it remains in gaseous phase at surface temperature and pressure conditions. No liquids are recovered from dry gas. The main components are methane and ethane, a small amount of propane and butane is present in it.

3.A table showing proportions of hydrocarbons in above four types of Petroleum Reservoirs is given below:--

Hydrocarbon	Black Oil	Volatile Oil	Gas	Dry Gas
C1---Methane	48.83	64.36	81.07	95.85
C2---Ethane	2.75	7.52	4.67	2.67
C3---Propane	1.93	4.74	2.29	0.34
C4---Butane	1.60	4.12	2.74	0.52
C5---Pentane	1.15	2.97	1.83	0.08
C6---Hexane	1.59	1.38	1.60	0.12
C7+--Heptane+	42.15	14.91	5.80	0.42
	100.00	100.00	100.00	100.00

4.Dhurnal field of O.P.I. is a Volatile Oil Field. As discussed in para 2.2 this type of oil reservoir releases more gas which includes rich components of Methane (C1), Ethane (C2), Propane (C3) and Butane (C4). From above table it is clear that the amount of Propane and Butane is higher in Volatile Oil Reservoir as compared with other Reservoirs.

5.What is L.P.G.?

5.1L.P.G. consists of liquid hydrocarbon compounds. L.P.G. can be converted back into its gaseous state by changing the temperature and/or pressure of the fluid.

5. 2Chemically L.P.G. includes rich proportions of hydrocarbons Propane (C3) and Butane (C4) other than some percentage of Ethane (C2) and Pentane (CS).

6.Why L.P.G. is separated from natural gas and crude Oil?

6.1Crude oil and natural gas obtained from wells are sold to Oil Refineries and Gas Companies respectively. In case of OPI crude oil is sold to Attock Refinery and natural gas is sold to Sui Northern Gas Pipelines Limited. The mode of transmission of crude oil and natural gas is pipeline.

6.2If L.P.G. is allowed to be transmitted to gas company alongwith natural gas then, due to the temperature and pressure of surface, particularly in winter season, the rich components of Propane (C3) and Butane (C4) will convert into hydrates (ice balls) and will cause line plugging. .

6.3If L.P.G. is allowed to be transmitted to crude oil refinery alongwith crude oil, then the rich components of Propane (C3) and Butane (C4) will increase the Reid Vapor Pressure of crude oil up to 14 R.V.P. While according to the specifications given by the refinery the Reid Vapor Pressure of crude oil should be around 8 to 10 RVP. Therefore, an oil and gas exploration and production company cannot mix Propane (C3) and Butane (C4) with crude oil.

6.4The third option is to recover the gas and then flare it, which is not possible because Government of Pakistan does not allow to flare the gas.

6.5Just for the sake of argument disposal of L.P.G. by either of the above three methods i.e., mixing of L.P.G. in gas, mixing of L.P.G. in crude oil or flaring it, would have a major financial impact on the Government of Pakistan since it would be forced to import L.P.G. at free market prices to make up for the loss of local L.P.G. which is sold to local distributors at a Government controlled price which is much less than the free market price.

6.6Due to the reason mentioned in paras. 6.2 and 6.3, L.P.G. is separated from natural gas and crude oil.

6.7Apart from above obvious reasons, another advantage of manufacturing L.P.G. is easy handling and transportation.

7.How L.P.G. is derived?

7.1As already explained above, natural gas produced from a Volatile Oil Field includes rich components of Methane (C 1), Ethane (C2), Propane (C3) and Butane (C4). While the main constituents of L.P.G. are Propane (C3) and Butane (C4).

7.2Produced crude oil and gas is transmitted through a vessel known as Separator. Function of Separator is that it exclude water and foreign substance from crude oil. and separates natural gas from crude oil. After separation crude oil and gas flows through different piping to their processing plants.

7.3Gas obtained from Separator is fed to Gas Plant where it is cooled in various heat exchangers by refrigeration and finally by bringing down the temperature to ---47oF, Propane (C3), Butane (C4) and some other heavier hydrocarbons are considered and separated from natural gas. Propane (C3) and Butane (C4) are disposed of a liquefied Petroleum Gas and heavier hydrocarbons are mixed with crude oil.

7.4Crude oil is also fed to the crude stabilizer which is a part of Gas plant where Propane (C3) and Butane (C4) are separated from the crude oil and mixed with oncoming gas to the Gas plant. As such crude oil is stabilized i.e., its Reid Vapor Pressure is maintained within the limits acceptable to the refinery, around 8 to i0 RVP (see para 6.3 above).

8.How L.P.G. is-easing-head petroleum spirit?

According to the Manual of Oil and Gas Terms, page 122, Casing- head petroleum spirit is a terms used in the United Kingdom and Australia to refer to liquid hydrocarbons recovered from natural gas or casing-head gas.

9.As discussed in page 7 above, L.P.G., being derived from natural gas in the shape of liquid hydrocarbons, is casing-head petroleum spirit,

9.1 What is Separation?

Separation is a process in which two or more items having different molecular structure i.e., Solid, Liquid and Gaseous, at a given temperature and pressure, are segregated from each other. In the process of Separation the colecular structure of each item remains the same, like separation of crude oil from natural gas.

9.2What is Chemical Process?

In a Chemical Process, molecular structure of item (s) involved is changed permanently from its original shape. After Chemical Process the molecular structure of changed item(s) is not possible to be reinstated at its original shape, like preparation of greases from crude oil.

9.3What is Physical Process?

In a Physical Process, molecular structure of an item is temporarily changed from its original 'condition,. However,. it is possible to convert the molecular structure of concerned item into its original shape and condition.

For example, after bringing down the temperature to a certain level, water in liquid shape converts into hard ice. After raising the temperature, hard ice melts into liquid shape of water.

9.4In view of the above definitions of three processes, the method of recovery of L.P.G. by O.P.I. as explained in paragraph 7, falls within the ambit of 'PHYSICAL PROCESS'. Because L.P.G. recovered in liquid shape can be converted into gas by raising the temperature.

9.5L.P.G. mainly consists of Propane (C3) and Butane (C4) in liquid shape and those two hydrocarbons are separated from natural gas through a physical process at Gas Plant by cooling down the temperature up to --- 470F.

10.If L.P.G. is not a refined product of natural gas, then what can be deemed to be refined product of natural gas?

Through refining, constituent hydrocarbons of Natural Gas i.e., Ethane, Propane, Normal Butane and Iso-Butane are segregated. . After segregation Ethane is further processed into Ethylene and Propane into Propylene which are used as raw material for manufacture of many Petrochemical like Plastic and Plastic bags. Therefore, in this case the refined products of natural gas are Ethylene and Propylene."

14.We have carefully considered the contention raised by the learned representatives for the parties and the material placed on record. We are of the opinion that the contention by Mr. Khalid Majeed raised time and again at various stages that the provisions contained in the agreement between the assessees in the present case and President of Pakistan called as "petroleum concession agreement" shall override the provisions contained in any other law for the time being in force, so far the definitions of the petroleum terms is concerned was not given the proper and due consideration which it required. We have observed that because of pushing the moot point in oblivion, the state of confusion prevailed. The matter was sought to be decided in the light of chemical composition of gases and with reference to chemistry, with the result that in the case of Pakistan Oil Field Limited in the assessment year 1985-86 the departmental view was that L.P.G. was not a refined petroleum product and, therefore, the income from sale of L.P.G. was to be assessed under 5th Schedule to the Income Tax Ordinance, 1979. On the other hand, the experts on behalf of Pakistan Oil Field Limited pleaded that L.P.G. was a refined petroleum product and thus income/loss from L.P.G. was not assessable under the 5th Schedule to the Income Tax Ordinance, 1979. Subsequently, in the case of two appellants before us diametrically opposed pleas were taken and again with reference to chemistry the opposite contentions were supported. At the first appellate stage also conflictory conclusions were drawn mainly with reference to the chemical composition of gases. We find that the learned Judicial Member in his order, dated 9-9-1992 reached to the crux of the matter by observing that, "we have been referred to certain definitions which proceed to indicate that chemically liquified petroleum gas" is in substance natural gas and what we are required to determine in the context of the present case is not whether liquified petroleum gas is or is not natural gas as can be chemically understood. The question is whether the Legislature included the liquified petroleum gas into the definition of petroleum within the meaning of petroleum and for the purpose of computation of profit and gains for its production under the Income Tax Ordinance, 1979".

15. However, we find that after correctly reaching to the point requiring consideration it was not taken to the logical end, probably due to lack of assistance and the issue was decided in a very cursory manner with the observation that, "the Legislature has not left open the question to be answered with reference to chemistry. It has defined the expression "petroleum" and since the definition starts with the word "means" so it has to be read narrowly. My understanding of the meaning of the petroleum for the purpose of computation of the profits and gains and the tax payable thereon from its production is that they are to be taken narrowly and any petroleum product which has been refined or subjected to any process whether simple or complex to make it usable would go out of the definition of the said expression".

16. Thus while reconsidering the issue decided vide order, dated 9-9-1992 by the learned Division Bench of this Tribunal we will start from the point where it was left without taking to its logical conclusion and after picking the threads from their wound try to take the issue in the same direction up to its logical end without entering into the vagaries of so-called expert opinions with reference to the chemical composition of gases and the chemistry of L.P.G.

17. As there is consensus of opinion between the learned representatives for the parties and all the departmental officers that the income from business of L.P.G. shall be governed with the provisions contained in 5th Schedule to the Income Tax Ordinance, 1979 if it falls within the definition of petroleum as given in Rule 6(6) of Part 1 of the 5th Schedule to the Income Tax Ordinance, 1979 only, therefore, it would be appropriate to start with the definition of petroleum contained in Rule 6(6) of the 5th Schedule to the Income Tax Ordinance, 1979 which read as follows prior to amendment by Finance Act, 1994:

"Petroleum means crude oil, natural gas and casing-head petroleum spirit as defined in the Pakistan Petroleum (Production) Rules, 1949, but does not include refined petroleum products."

18. A perusal of the above definition shows that the expression! "petroleum" has not been defined in 5th Schedule itself but by way of legislation by reference, the definition contained in Pakistan Petroleum Production Rules, 1949 has been incorporated with a further restriction that refined petroleum products shall not be included in the said definition. Thus first we have to examine the definition of crude oil, natural gas and casing head petroleum spirit and thereafter we will examine whether L.P.G. is included in refined petroleum products in order to arrive at the conclusion if it is to be excluded from the definition of petroleum in the light of provisions contained in Rule 6(6) of the 5th Schedule to the Income Tax Ordinance, 1979 read with the provisions contained in Pakistan Petroleum Production Rules, 1949. A perusal of the Pakistan Petroleum Rules, 1949 shows that the rules have been made in exercise of the powers conferred by section 2 of the Regulations of Mines and Oilfields and Mineral Development (Government Control) Act, 1948. It is necessary to examine the parent Act under which Pakistan Petroleum Production Rules, 1949 have been enacted for the -reason. that the rules being in the nature of subordinate legislation are always governed under the provisions contained in the parent statutory Act. Section 4 of the Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 reads as follows:

"Effect of rules etc., inconsistent with other enactments. ---Any rule made under this Act, and any order made under any such rules, shall have effect notwithstanding anything inconsistent therewith contained in any enactment or in any instrument having effect by virtue of an enactment other than this Act."

19. Section 3-A of the above Act is reproduced below:

"3-A. Production sharing agreement.--- (1) 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, whether incorporated in Pakistan or outside Pakistan, for the grant of a licence or lease to explore prospect and nine petroleum on the basis of Production Sharing Agreement and on such terms and conditions as may he agreed upon between the Federal Government and the company.

(2)Notwithstanding anything contained in the Income-tax Act, 1922 (XI of 1922) a company with which an agreement such as is referred to in subsection (1) is for the time being in force shall not be liable to pay tax on its income, profits or gains."

20. Before proceeding further it appears appropriate to reproduce the definition of agreement as contained in Rule 6(1) of the 5th Schedule to the Income Tax 6rdinance, 1979 which reads as follows:---

"agreement' means an agreement entered into between the Government and, an assessee for the exploration and production of petroleum in Pakistan."

21. We have referred to the definition of agreement contained in 5th Schedule .to the Income Tax Ordinance, 1979 for the reason that the provisions contained in the agreement referred to in para. 4 of this Order and the agreement in-between the President of Pakistan and the assessees in the present case in pursuance of provisions contained in section 3-A of the Regulations of Mines and Oilfields and Mineral Development and (Government Control) Act, 1948 read with Rule 41 of the Pakistan Petroleum Production Rules, 1949 shall come for consideration presently. Now we come to the definitions of crude oil, natural gas and casing-head petroleum as defined in Pakistan Petroleum Production Rules, 1949. The definitions are as follows:

"'Crude oil' means oil in its natural state before the same has been refined or otherwise treated, but excluding water and foreign substance".

"Natural gas" means gas obtained from bore-holes and wells and consisting primarily of hydro-carbons".

"Casing-head petroleum spirit" means any liquid hydrocarbons obtained from natural gas (before crude oil from which it is derived has been measured for royalty) by separation or by any chemical or physical process."

22.Rule 41 of the Pakistan Petroleum Production Rules, 1949 reads as follows:

"41. Power of President to enter into agreement. ---The Presidentmay enter into agreement with any of the oil companies incorporated in Pakistan or outside Pakistan to explore, prospect, mine and refine Petroleum in Pakistan, and if any of the terms of such an agreement are in conflict with any of the provisions of the foregoing, rules, the terms of the agreement shall prevail. "

23. A perusal of the above provisions shows that by virtue of the overriding effect of section 4 of the Regulations of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 any rule made under the Act and any order made under any such rules shall have effect notwithstanding anything contained in any enactment or any instrument having effect by virtue of an enactment other than said Act and again by virtue of provisions contained in Rule 41 of the Pakistan Petroleum Production Rules, 1949 the definition of any term contained in the agreement entered into between the oil companies and the President of Pakistan to explore, prefect, mine and refine petroleum in Pakistan shall prevail if there is any conflict with any of the provisions of the rules. The logical conclusion of these overriding provisions is that the expression refined in the agreement shall override. any other definition contained in any other enactment rule or instrument.

24. This brings us to the Potohar Petroleum Concession Agreement between President of Pakistan and Oil and Gas Development Corporation, Occidental of Pakistan Inc., Pakistan Oilfields Limited and the Attock Oil Company Limited. In Article 1 of the agreement definitions are provided. Article 1.7 defines crude oil as follows:

" 1.7.Crude oil' or 'Crude' means oil in its natural state before the same has been refined or otherwise treated. It does not include oil produced through destructive distillation of coal, bituminous shales or other stratified deposits, either in its natural state or after the extraction of water and sand or other foreign substances therefrom, It does include all other substances contained therein, including sulphur, sulphur compounds helium and any hydrocarbons other than methane (CH4) extracted from gas in liquid form."

25.Article 1.15 defines ' natural gas' as under:

"1.15. Natural gas' means gas and all other substances contained therein, including sulphur, sulphur compounds, and helium, obtained from boreholes and wells and consisting primarily of hydrocarbons. Hydrocarbons other than methane (CH4) which are extracted from gas in liquid form shall be treated as crude oil under the provisions of section 1.7 hereof."

26. The term "Petroleum" is defined in Article 1.18 which is exactly same as contained in para. 6(6) of the 5th Schedule to the Income Tax Ordinance, 1979. It reads as follows:

" 1.18. 'Petroleum' means crude oil, natural gas and casing-head petroleum spirit as defined in the Pakistan Petroleum (Production) Rules, 1949 but does not include refined petroleum products.

27. Article 7.5(c) of the Agreement further provides that the parties 'shall have right to remove any hydrocarbons other than methane (CH4) from gas and all such other hydrocarbons if extracted shall be considered as crude oil under the other clauses of this agreement and not as gas under this clause. It reads as follows:

"(c) the provisions of this Agreement shall not restrict the rights of the parties to remove any hydrocarbons other than methane (CH4) from gas. Such other hydrocarbons, if extracted, shall be considered the same as crude oil under the other clauses of this Agreement and not as gas under this clause."

28.The above provision categorically takes out the hydrocarbons other than methane (CH4) extracted by the parties. to the agreement from the purview of gas and brings it within the definition of crude oil for the purposes of agreement. As already stated in the earlier part of this order the L.P.G. mainly consists of propane and butane, therefore, the L.P.G. is to be taken as crude oil. The L.P.G. business is a part of the agreement as indicated from the provisions contained in Article 7.4(b) of the agreement which says that, ' if sold to a third party not in its natural state but after processing for sale, the well-head value shall be the amount realized from such sale during the relevant period less the cost .of such processing including but not limited to the costs of gathering, transporting to, processing facility, compressing, treating, dehydrating, liquifying and processing the gas.' The intention is further indicated from the provision contained in Article 7.5(b) which states that, 'the price to be paid to each working interest owner for their share of gas production associated with the production of crude oil shall be no less than 10% (ten per cent.) higher than the highest price being paid to producer of associated gas in Pakistan after the extraction of L.P.G."

29. The agreement has taken care of the matters relating to taxation as well in Article 12 of the agreement. It is provided in Article 12.5 that in case of any conflict in respect of taxation matters between any of the provisions of the agreement including its annexures and the provisions of Income Tax Ordinance, 1979 or its schedules the provisions of Income Tax Ordinance shall prevail. Article 12.5 reads as follow:

" 12.5. In case of any conflict in respect of taxation matters between any of the provisions of this Agreement including its Annexures, and the provisions of the Income Tax Ordinance, 1979 (No.XXXI of 1979) or its Schedules, or the Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 (Act No. XXIV of 1948), as amended uptodate then the provisions of the GaelIncome Tax Ordinance, 1979 (No. XXXI of 1979), and the Schedules thereto, as in force on the date the parties execute this Agreement, shall prevail."

30. Article 12.1 further provides that "the profits or gains shall be computed for the purpose of income-tax in accordance with the provisions of the Income Tax Ordinance, 1979 and the rules contained in the 5th Schedule to that Ordinance as in force on the date the parties execute this agreement".

31. A resume of the above previsions shows that the cumulative effect of all the provisions reproduced above is that the profits or gains of the business in pursuance of petroleum concession agreement are to be computed in accordance with the 5th Schedule to the Income Tax Ordinance, 1979. The terms used in the agreement shall be assigned the meanings as defined in the agreement by virtue of the provisions contained in para. 6(6) of the 5^th Schedule to the Income Tax Ordinance, 1979, the Regulations of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 and the Pakistan Petroleum Production Rules, 1949. However, if there is any conflict the provisions contained in the Income Tax Ordinance, 1979 shall prevail. Keeping in view the context in which this entire discussion is being made we are required to see if there is any conflict between any provisions contained in the Income Tax Ordinance and the provisions contained in the Regulations of Mines and Oilfield and Mineral Development (Government Control) Act, 1948, Pakistan Petroleum Production Rules, 1949 and the Petroleum Concession Agreement. We find that there in no such conflict. The reason being that the moot point is whether L.P.G.' falls within the purview of petroleum as defined in the 5th Schedule to the Income Tax Ordinance, 1979 and we have seen that the definition of expression 'petroleum' in Rule 6(6) of the 5th Schedule and Article 1.18 of the Petroleum Concession Agreement is absolutely similar. According to both the definitions 'petroleum' means crude oil, natural gas and casing-head petroleum spirit as defined in the Pakistan Petroleum Production Rules, 1949 with the exclusion of refined petroleum products. Thus the terms crude oil, natural gas and casing-head petroleum spirit have not been defined in the 5th Schedule to the Income Tax Ordinance, 1979 or in any other provision of the said Ordinance and these terms as defined in Pakistan Petroleum Production Rules, 1949 have been adopted". The discussion above, with reference to various provisions shows that the crude oil is defined in the Pakistan Petroleum Production Rules, 1949 to mean oil in its natural state before the same has been refined or otherwise treated but excluding water and foreign substance. However by virtue of provisions contained in Rule 41 of the Pakistan Petroleum Production Rules, 1949 if there is any conflict between the definition of any terms contained in the rules and the agreement execute between the President of Pakistan and Oil companies the term of the agreement shall prevail. Thus by virtue of this overriding provision contained in Rule 41 of the Pakistan Petroleum Production Rules, 1949 the term 'crude oil' shall include all other substances including any hydrocarbons other than methane (CH4) extracted from gas in liquid form. There is no dispute between the departmental officers and the oil companies that the L.P.G. consists of propane and butane gases which are admittedly hydrocarbons. We have already seen that according to the definition of casing-head petroleum spirit contained in Pakistan Petroleum Production Rules, 1949 it means liquid hydrocarbons obtained from natural gas (before crude oil from which it is derived has been measured for reality) by separation or by any chemical or physical process. As already discussed the contention of Mr. Khalid Majeed has been before the assessing officer, and before the learned C.I.T. (A) who decided the first appeal against the assessee vide order, dated 26-3-1990 in the case of M/s. Occidental of Pakistan Inc. that the L.P.G. falls within the expression casing-head petroleum spirit which contention has not been accepted so far and rightly so because the L.P.G. consists of propane and butane and all the hydrocarbons other than methane extracted from gas in liquid form has been included in the definition of crude oil by virtue of the provisions contained in Articles 1.7 and 1.15 and Article 7.5(c) of the Petroleum Concession Agreement executed between the President of Pakistan and oil companies. Thus, L.P.G. shall fall within the category of crude oil in the facts and circumstances of the present case.

32. As the present Full Bench has been constituted to reconsider the issue decided earlier by Division Bench of this Tribunal, therefore, the reasons prevailing in earlier proceedings are also to be looked into. A perusal of the finding contained in the earlier order by Division Bench, dated 9-9-1992 in I.T.As. Nos.237 and 238/113 of 1989-90 shows that the learned Accountant Member refused to accept the contention raised by the learned counsel for the assessee for the reason that the terms 'crude oil', 'natural gas' and 'casing-head petroleum spirit' have been defined in very restrictive terms in the 5th Schedule to the Income Tax Ordinance, 1979, which observation appears to be incorrectly made. As already demonstrated these terms have not been defined in the 5th Schedule to the Income Tax Ordinance, 1979 and according to Rule 6(6) of Part 1 of 5th Schedule to the Income Tax Ordinance, 1979 'petroleum' means crude oil, natural gas and casing-head petroleum spirit as defined in Pakistan in Petroleum Production Rules, 1949. Thus, it was absolutely necessary to examine the definition contained in the Pakistan Petroleum Production Rules, 1949 and the other relevant provisions contained in the rules and the agreement and the non- examination thereof has resulted in drawing incorrect conclusions. The learned Members of the Division Bench further fell in error in holding that the L.P.G. is a refined petroleum product just for the reason that the production and sale of L.P.G. did not start from the very beginning of this business and the L.P.G. shall be excluded from the definition of petroleum simply for the reason that it is subject to any process whether simple or complex. We will presently examine this issue with reference to the relevant law on the point. The learned Members of the Division Bench confirmed the first appellate finding without any discussion that, "the A.R.'s reliance on the previsions of North Potwar Concession Agreement in support of his contention that separation of hydrocarbons (other than methane from gas in liquid form) shall be treated as crude oil is of no help to him because provisions of the said agreement cannot override the provisions of the 5th Schedule. The agreement may define crude oil and natural gas differently for the specific purpose of the agreement which would be calculation of royalty or some other purpose. However, for tax purposes provisions including definitions of the 5th Schedule shall prevail".

33. We find that in the above finding there are certain presumptions which are not warranted in fact and law. There is a presumption in the above finding that there is any conflict in the definitions given in the 5th Schedule to the Income Tax Ordinance, 1979 and the Petroleum Concession Agreement which is not correct. We have shown that the definition of petroleum in the 5th Schedule to the Income Tax Ordinance, 1979 and in the Petroleum Concession Agreement is exactly same and both the provisions have not given any definition of its own but have incorporated the definition given in Pakistan Petroleum Production Rules, 1949. The finding is based on some assumed conflict and, therefore, the very premises being incorrect, the findings have also been arrived at, incorrectly. No question of overriding the provisions of 5th Schedule arises on examination of all the relevant provisions and, therefore, it is held that the learned Members of the Division Bench were not justified in confirming such findings. It appears that the finding was confirmed due to lack of assistance. So far the discussion based on chemical composition of L.P.G. and natural gases are concerned we have already held that the learned Judicial Member sitting on the Division Bench rightly observed that the Legislature has not left open the question to be answered with reference to chemistry.

34. The upshot of the above discussion is that in the context of entire law for the time being applicable to the assessee before us the L.P.G. falls within the definition of crude oil. This brings us to the consideration if the L.P.G. is included in the refined petroleum products and if it is so then notwithstanding that the L.P.G. is included in the term 'crude oil' it shall not be included in the term petroleum as defined in the 5th Schedule to the Income Tax Ordinance, 1979. For this purpose we will examine the relevant provisions contained in the Liquified Petroleum Gas Production and Distribution Rules, 1971 and Pakistan Petroleum Refining, Blending and Marketing Rules, 1971. The L.P.G. is defined in rule 2(g) of the Liquified Petroleum Gas Production and Distribution Rules, 1971 as follows:

"'Liquified petroleum gas' or 'L.P.G.' means hydrocarbons, mainly consisting of propane and butane, mixed or unmixed, whether with or without other gases, which are vapours at room temperature and pressure but can beliquified on slight compression. "

35. A perusal of above definition shows that no process of refining is envisaged for making of L.P.G. Under section 2(h) of the Pakistan Petroleum Refining, Blending and Marketing Rules, 1971 the 'petroleum products' mean any of the products specified in Schedule which is as follows:

1. Aviation 73 Octane.

2. Aviation Gasoline 100/130 Octane.

3. Aviation Turbine Fuel JP-4.

4. Aviation Gasoline 115/145 Octane.

5. Aviation Turbine Fuel JP-1.

6. High Octane Blending Component.

7. Motor Spirit.

8. Naphtha.

9. Vaporising Oil.

10. Superior Kerosene.

11. Inferior Kerosene.

12. High Speed Diesel Oil.

13. Light Diesel Oil.

14. Jute Batching Oil.

15. Furnace Oil.

16. Lubricating Oils including base oils.

17. Waxes.

18. Asphalt/Bitumen.

19. Greases.

20. Mineral Turpentine.

21. Solvent Oil.

36. In rule 2(d) crude oil has been defined to mean a mineral oil of petroleum origin consisting mainly of hydrocarbons. Under rule 14 every refinery is required to submit to the authority appointed by the Central Government or an officer specified by it the information required in Form II which also contains the following:

FORM-II

[See Rule (14)]

Refinery Limited

Monthly production, etc. for the month of...

1. Aviation Gasoline 115/145 ON.

2.Aviation Gasoline 100/130 ON.

3. Aviation Gasoline 73 ON.

4. Aviation Turbine Fuel JP-1

5. Aviation Turbine Fuel JP-4.

6. High Octane Blending Component.

7. Naphtha.

8. Motor Spirit.

9. Superior Kerosene.

10. Inferior Kerosene.

11. High Speed Diesel Oil.

12.Light Diesel Oil.

13.Furnace Oil.

14. Vaporising Oil.

15.SBP/Solvent Oil

16.Mineral Turpentine

17. Jute Batching Oil.

18.Asphalt/Bitumen.

19.Lubricating Oils.

20.Greases.

21.Waxes.

37. A perusal of the Schedule II of the Pakistan Petroleum Refining, Blending and Marketing Rules, 1971 and information required in Form II under Rule 14 shows that they contain complete list of the refined petroleum products. L.P.G. is not included either in Schedule II or in Form II which is indicative of the fact that L.P.G. has not been included in the refined petroleum products which supports the contention on behalf of assessees that no process of refining is involved in the case of L.P.G. The L.P.G. is derived by a process of separation only through a physical process and by cooling down the temperature.

38. The above discussion leads to the conclusion that the L.P.G. is not a refined petroleum. product and, therefore, it cannot be excluded from the definition of petroleum ac contained in the 5th Schedule to the Income Tax Ordinance, 1979. For the foregoing reasons both the questions reproduced in para. 1 of this order are replied in affirmative. The earlier Division Bench order of this Tribunal, dated 9-9-1992 in I.T.As. Nos.237 and 238 (IB) of 1989-90 is hereby overruled and it is held that the point under consideration has not been correctly appreciated in the said order. In view of our finding that L.P.G. is not refined petroleum product and is included in the expression petroleum as defined in Rule 6(6) of the Income Tax Ordinance, 1979 and that the income from L.P.G. business is to be assessed under the provisions contained in 5th Schedule to the Income Tax Ordinance, 1979 we need not to dilate on the point if loss in L.P.G. account is to be adjusted against profits and gains from business of production and sale of petroleum. At this juncture we would like to observe that subsequently the Legislature has also included the manufacture and sale of liquified petroleum gas or compressed natural gas to be part of separate business undertaking under Rule 1 of the 5th Schedule to the Income Tax Ordinance, 1979 by an amendment introduced through Finance Act, 1994.

39. After coming to the above conclusion we will take up each appeal separately in order to avoid any confusion, in respect of findings on the grounds agitated by the department and assessees.

40. In I.T.A. No.905/IB of 1991-92 (Assessment Year 1988-89) the first objection is to the setting aside of assessment on the point of add backs on account of prior years' expenses. A perusal of first appellate order shows that the learned C.I.T. (A) set aside the issue for the reason that the assessing officer has not fully discussed the implications of fact and law. He has given direction to decide the issue again in accordance with the law. We are of the opinion that the impugned direction has not caused any prejudice and consequently the impugned direction is hereby maintained.

41. The second objection raised on behalf of the department is to the direction to consider the income from L.P.G. as part of income arising with extraction and sale of crude oil and gas and not to take the receipt from sale of L.P.G. as a departure business not assessable under 5th Schedule to the Income Tax Ordinance, 1979. For the reasons recorded by us the objection raised on behalf of department is hereby repelled and the impugned direction is hereby maintained. I.T.A. No.905 (IB) of 1991-92 (assessment year 1988-89) at the instance of department stands dismissed.

42. In I.T.A. No.906 (IB)/1991-92 (assessment year 1989-90) similar objections have been raised at the instance of department and for the reasons stated above this appeal also stands dismissed.

43. In I.T.A. No.963 (IB)/1993-94 (assessment year 1990-91) at the instance of Oil and Gas Development Corporation. The sale objection has been raised that the learned C.I.T. (A) has misdirected himself in upholding the action of the assessing officer that the provision of 5th Schedule to the Income Tax Ordinance, 1979 are not applicable in computing the income from sale of liquified petroleum gas in the case of appellant. It has been prayed that the direction be given to treat the L.P.G. as part of the business of exploration and production of petroleum in terms of the North Potwar Petroleum Concession Agreement and compute the income accordingly under the 5th Schedule.

44. For the reasons already recorded the appeal is allowed in the terms of our finding contained in earlier part of this order.

45. In I.T.As. Nos.1053 and 1054 (IB) of 1993-94 relating to the assessment years 1989-90 and 1990-91 at the instance of department a common objection has been raised to the direction of learned C.I.T. (A), Rawalpindi to adjust loss in L.P.G. account against profits and gains from business of production and sale of petroleum The impugned direction is hereby maintained, but not for he reasons recorded by the learned C.I.T. (A). The direction is maintained for the reason that L.P.G. is part of "separate business undertaking" envisaged in Rule 1 of the 5th Schedule to the Income Tax` Ordinance, 1979, and thus, the income from business of production and sale of crude oil natural gas and liquefied petroleum gas is to be treated as a composite business. Both the appeals at the instance of department stand dismissed.

46. The sole objection in I.T.A. No.960 (IB) of 1993-94 (assessment year 1989-90), I.T.A. No.961 (IB) of 1993-94 relating to assessment year 1990-91, I.T.A. No.962(IB) of 1993-94 (assessment year 1991-92), I.T.A. No.141(IB) of 1994-95 (assessment year 1993-94) and objection No.1 in I.T.A. No. 140 (IB) of 1994-95 (assessment year 1992-93) is that the learned C.I.T.(A) misdirected in upholding the action of Deputy Commissioner of Income-tax that the provision of 5th Schedule to the Income Tax Ordinance, 1979 are not applicable in computing the income from sale of L.P.G. All the appeals on this point are allowed in terms of the findings given earlier while deciding appeals at the instance of other assessee.

47. The last objection requiring consideration is raised by the Occidental of Pakistan Inc. in the assessment year 1992-93 which relates to the disallowance of claim on account of payment of Rs. 1,69,75,533 paid to a non-resident M/s. Red Adair Company Inc. for the reason that tax was not deducted under section 50(3-A) and consequently the claim was not admissible by virtue of provisions contained in section 24(b) of the Income Tax Ordinance, 1979.

48. The relevant facts are that the assessee company debited payment of Rs.1,69,75,533. or well-control operations at Pindori Well No.1 to the credit of the non-resident Red Adair Co. The assessing officer formed view that the payment was made on account of technical services as the job was performed by highly technical persons who have specialized in the particular field. As the tax was not deducted and paid by the assessee from the payments to the non-resident, therefore, the assessing officer called for explanation of the assessee in this behalf. It was contended on behalf of the assessee that the payment made to non-resident amounted to industrial or commercial profit as defined in Article II(1) of the Agreement for avoidance of double taxation between the Government of Pakistan and the Government of U.S.A. and, therefore, enjoyed exemption by virtue of the provisions contained in Article III of the said agreement as the non-resident has no permanent establishment in Pakistan. Article II(1) of the Agreement for avoidance of double taxation between U.S.A. and Pakistan and Article III(1) read as follows:

"II(1) The term 'industrial or commercial profits' does not include rents or royalties in respect of motion picture films or of oil wells, mines and quarries, or income in the form of dividends, interest, rents, or royalties, or fees or other remuneration derived by an enterprise From the management, control or supervision of the trade, business or other activity of another enterprise or concern, or remuneration for labour or personal services, or income from the operation of ships.

III(1)A United States enterprise shall not be subject to Pakistan tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it is so engaged, Pakistan tax may be imposed upon the entire income of such enterprise from sources within Pakistan. "

48.It was contended on behalf of assessee that the services performed by the Red Adair is not covered under any of the exclusions given in Article II(1) of the agreement and, therefore, the income of the non-resident under consideration enjoyed exemption, therefore, no deduction was required to be made under section 50(3-A), and thus, prohibition contained in section 24(b) was not attracted. It was further contended that the amount in issue was not debited to the expenses claimed during the year under review and the same has been set off against the insurance claim and that the payment to Red Adair was made in the month of January, 1992 while the income year corresponding to the assessment year 1992-93 was ending 31-12-1991 and, therefore, no payment was made during the year under consideration. The assessing officer rejected the contentions for the reason that the exemption claimed by virtue of the provisions contained in Article II(I) and Article III(1) of the Agreement for avoidance of double taxation between U.S.A. and Pakistan was not available as the payment was made on account of technical services which is separate from industrial or commercial profit. The assessing officer in this behalf placed reliance on C. B.R. clarification contained in its Letter No. 2(3) IT-II/77, dated 20-11-1982, wherein it was stated that, "the agreement for avoidance of double taxation of income between Pakistan and U.S.A., does not lay down any source rule in respect of fees for technical services and as such the question of treaty provisions overriding the provisions of section 12(5) of the income Tax Ordinance, 1979 does not arise". The plea of exemption was, therefore, repelled. The next contention that expenses claimed have been set off against the insurance claimed was also repelled for the reason that during the year under consideration entire expenditure was first debited to, the production account and later on the amount receivable from the insurance company was credited to the production account. The assessing officer considered the method of accounts employed by the assessee and held that the assessee was employing mercantile system of accounting and the amount of Rs.1,69,75,533 is included in the accrued liabilities amounting to Rs.15,95,26,055 shown in the balance-sheet as on 31-2-1991. The last objection that the amount was not actually paid before 31st of December, 1991 was also repelled for the similar reason. It was held by the assessing officer by placing reliance on a judgment of this Tribunal reported as 1993 PTD (Trib.) 722 and the judgment of Hon'ble Supreme Court of Pakistan reported as PLD 1963 SC 352 that the assessee was bound to pay tax under section 50(3-A) on debiting into account with the expenditure and crediting the account of M/s. Red Adair Inc., U.S.A. The assessing officer, therefore, disallowed the claim and added the same to the total income of assessee.

49. Similar contentions were raised before the learned C.I.T. (A) which were not accepted and it was held that the assessing officer has rightly disallowed the claim. Another plea was raised in the alternative to the effect that addition of entire amount of Rs.1,69,75,533 was not justified because the assessee-company paid Rs.1,35,80,426 only as its 80% share while balance 20% was paid to non-resident company by the insurance company hence the maximum addition could be made at Rs.1,35,80,426 only. The contention was repelled for the reason that the total amount was debited in the accounts of appellant company and credited to the account of non resident company hence the entire payment would be treated to have been made by the appellant company.

50. Being still dissatisfied the assessee has preferred second appeal before us.

51. Mr. Khalid Majeed, learned counsel for the assessee has reiterated the same contentions before us as agitated before the learned two officers below. While explaining the nature and job performed by Red Adair the non resident company, Mr. Khalid Majeed has referred to letter, dated 11th May, 1993 in which it is contained that of the Pindori-1 well became out of control during a normal stimulation job. The result was that hot wellbore fluids and gases were being uncontrolably spread into the atmosphere, resulting in very unsafe conditions in a wide area surrounding the well due to high risk of fire". The letter further contains that, "the Red Adair Company Inc. specializes controlling "out of control" wells and their personnel can best be described as well "firemen". The first action taken by Red Adair "fireman" upon his arrival was to have a review session with Oxy and Drilling C Tractor Personal in order to ascertain what events had occurred to that point. Immediately following this, this 'fireman' was responsible for walking into the centre of the uncontrolled gas cloud and shutting off the major source of escaping fluids and gases from the well. Once this courageous task was completed, the Red Adair "fireman" in conjunction with Oxy Personnel began the arduous task of reviewing the repairing of all damages to the wellhead and wellbore that occurred during the "out of control" situation. This work continued until the Red Adair "fireman" and Oxy could safely say that the repairs were completed and work could be accomplished under normal working conditions. Once that joint was reached, the Red Adair "fireman" went back".

52. While explaining the nature of job performed by the non-resident company it is further stated that, "the plan of action required the top blowout preventer (B.O.P.) unit, which was leaking, to be removed and replaced with a new (B.O.P.) unit. The blowout preventer (B.O.P.) is essentially and extremely large high pressure value which is installed on top of the well casing. The B.O.P. is designed to control the flow of gas and fluids from the wellbore by closing off the top of the well. The repair/replacement of the B.O.P. was extremely dangerous in this situation as hot wellbore fluids and gases were blowing out through the top of the B.O.P. unit. To perform this repair work the two Red Adair assistants were called in as they were very knowledgeable in this repair work. Once-this repair work was completed, these two assistants were immediately sent bark to the U.S.A. In summary the Red Adair personnel are called to work once a potential oil/gas well disaster has occurred. These personnel are very highly experienced and skilled "firemen" who utilize their practical experience to safely and quickly, eliminate potential risks while bringing the well under control".

53. Looking to the nature of job performed by the non-resident company the point for consideration is whether the remuneration paid comes within the purview of term "industrial and commercial profits attracting the exemption provisions contained in the tax treaty between U.S.A. and Pakistan or it falls within the purview of, "fees for technical services" as defined in explanation to section 12(5) of the Income Tax Ordinance, 1979, The term "industrial and commercial profits" as defined in tax treaty between U. S. A. and Pakistan has already been reproduced and now the explanation to section 12(5) of the Income Tax Ordinance, 1979 is reproduced below:

"Explanation. ---For the purposes of this subsection clause (b) of section 24, subsection (2) of section 30, subsection (3-A) ' of section 50 and section 80-AA, 'fees for technical services' means any consideration (including any lump sum consideration for the rendering of any managerial, technical or consultancy services (including the provision of the services of technical or other personnel) but does not include consideration for any construction, assembly or like project undertaken by the recipient of the consideration which would be income of the recipient chargeable under the head 'salary'."

54. The term "industrial or commercial profits" as defined in the tax treaty between U.S.A. and Pakistan mainly consists of exclusion of various items of income from the terms 'industrial' and 'commercial' profits and does not contain any definition of the term as such. As the term "industrial or commercial profits" has not been defined in the treaty, therefore, we have to fall back on the definition of terms in the common parlance. The term 'industrial' is defined in the Legal Thesaurus by William C. Burton as follows:

"INDUSTRIAL, adjective automated, commercial, engaged in business, engaged in traffic, factory-made, industrialized, machine made, manufactural, manufactured, manufactured for sale, mass produced, mechanical mechanized, mercantile, relating to traffic, standardized, technical, technological."

55. The term 'commercial' has been defined in the same back as follows:

"Commercial, business, business-like, commercium, economic, engaged in commerce, financial, fiscal in the market, industrial jobbing, manufactured for sale, mercantile, merchandising, monetary, pecuniary, pertaining to business, pertaining to merchants, pertaining to trade, prepared for sale, skilled in commerce, supplying, trade, trading."

56. The expression "fees for technical services" has been defined in explanation to section 12(5) of the Income Tax Ordinance, 1979 which means any consideration for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personne). The nature of job performed by the -non-resident company according to the description given by the assessee itself does not bring it in the purview of industrial or commercial activity. We will examine if the services rendered by them which is described in the invoices submitted by Red Adair Company, dated 16-12-1991 as "well control services" amounts to rendering of technical services including the provision of services of technical or-other personnel. For this purpose it is to be seen as to what is the connotation of term "technical". This term has not been defined in the Income Tax Ordinance, 1979 and, therefore, we will again seek assistance from the dictionaries as the meaning is to be taken in its ordinary sense. The word "technical" has been defined in Legal Thesaurus by William C. Burton, 1980 Edition as follows:

"Technical, abstruse, difficult to understand, highly specialized, highly specific, industrial, mechanical, occupational, professional, scientific, special, specialized, specific, trained, vocational."

57. In the New Shorter Oxford English Dictionary, 1993 Edition the term "technical" includes the following meanings:

"Technical: 1. Of a person: having knowledge of or expertise in a particular art, science or other subject. 2. Pertaining to, involving or characteristic of particular art, science, profession, or occupation, or the applied arts and sciences generally. 3 Of a writer, textbook, etc. using or dealing with terms that belong to a particular subject or field; requiring specialist knowledge to be understood, treating a subject in a specialist way. 4. Officially or properly so called or regarded; that is such according to the particular terminology or from the particular viewpoint of an art, science, etc. 5. Legally such; so regarded according to a strict legal interpretation, 6. Finance, pertaining to or designating a market in which prices are determined chiefly by internal factors."

58. Applying the above meanings of word "technical" to the nature of job performed by the non-resident company we find that the job performed is on all fours to the rendering of technical services. The definition "fees for technical services" is inclusive of the provision of services of technical or other personnel and the nature of job already explained above shows that the assessing officer has rightly held that the remuneration paid by the assessee company to the non-resident does not fall within the purview of industrial or commercial profits so as to attract the exemption provisions contained in the agreement for avoidance of double taxation between U.S.A. and Pakistan. We are also persuaded to agree with the view held by the C.B.R in its letter dated 20th November, 1982 that the treaty does not lay down any source rule in respect of "fees for technical services" and as such question of treaty provisions overriding the provisions of section 12(5) of the Income Tax Ordinance does not arise. It is further held that by virtue of the provisions contained in section 12(5) the income by way of fees for technical services paid by the assessee shall be deemed to accrue or arise in Pakistan and consequently the assessee was required to deduct tax on the amount payable to the non-resident by way of fees for technical services at the rate specified in the First Schedule under section 50 (3A) and the non-deduction of tax shall attract the provision contained in section 24(b) which provides that any sum paid to a non-resident on account of interest, fees for technical services, brokerage or commission, or any other sum chargeable under the provisions of this Ordinance shall not be allowed as an allowance or deduction unless tax thereon has been paid or deducted and paid under section 50 as the case may be. The findings of the learned two officers below in this behalf are, therefore, maintained.

59. The next objection in this behalf that the amount was not actually paid in the income year relevant to the assessment year is without substance as the assessee is admittedly employing mercantile system of accounting and it has been held by Hon'ble Sindh High Court in the case of C.I.T. v. Chemdyes Pakistan Limited, 1990 PTD 248 that, "but so far as mercantile system is concerned, actual payment or receipt is not material. The moment the receipt or payment is entered in the books of accounts it shall be deemed to be actually received or paid. The respondent is employing mercantile system, therefore, the liability will be incurred the moment any expensepayment is entered in the books of account". The objection is, therefore, repelled.

60. The last contention is that if the addition is to be made it is to be restricted to the extent of Rs.35,80,426 being the appellant's share in the insurance claim as 20% of the claim was paid by the insurance company. We do not find any substance in the contention because the 20% share from the insurance company was received by the assessee company which formed part of its income and thereafter, the total amount was debited in the accounts of appellant company and credited to the account of non-resident company hence the entire payment would be treated to have been made by the appellant company. We agree with the finding of learned C.I.T. (A) in this behalf which is hereby maintained. The upshot of the above discussion is that the disallowance is made by the learned two officers below in respect of Rs.1,69,75,533 payable to the non-resident company M/s. Red Adair Company Inc. is hereby maintained.

61. The appeals stand disposed of as above.

C.M.S./395/Trib.Petition disposed of.

I.T.AS. NOS.905/113; 906/113 OF 1991-92, 963/113 OF 1993-94, 1053/IB, 1054/IB, 960/113 VS I.T.AS. NOS.905/113; 906/113 OF 1991-92, 963/113 OF 1993-94, 1053/IB, 1054/IB, 960/113, 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 291 (1997)

ORDER

"L. P. G. IS PETROLEUM - TECHNICAL DETAIL

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