I.T.A. NO.819/KB OF 1997-98, DECIDED ON 4TH APRIL, 1998. VS I.T.A. NO.819/KB OF 1997-98, DECIDED ON 4TH APRIL, 1998.
1998 P T D (Trib.) 3771
[Income-tax Appellate Tribunal Pakistan]
Before S.M. Sibtain, Accountant Member and Tahseen Ahmed Bhatti, Judicial Member
I.T.A. No.819/KB of 1997-98, decided on 04/04/1998.
(a) Income Tax Ordinance (XXXI of 1979)---
----First Sched., Part I, para. CCC, sub-para. (ii), cls. (b) & (c)---C.B.R. Circular No. 6 of 1994---Turn-key contract---Execution---Proof---Power project ---Assessee according to agreement entered into a trun key contract pursuant to which he had to design, procure, construct, test and commission pipeline and associated facilities---Actual nature of the work assigned to the assessee as set out in the contract, however, had never been given due consideration ---Assessee on the basis of uncontroverted facts had proved that neither had he designed the project nor had actually supplied the equipment and material but had only provided assistance in its procurement ---Assessee had also constructed the main and major portion of the pipeline system envisaged, planned and designed as per contract---Some of the essential elements of system had been constructed by others and until such other elements had been integrated, no testing or commissioning was possible for the assessee---Contract executed by the assessee, thus, lacked the essential characteristics of turn-key project both in terms of its dictionary meaning as well as explained in the C.B.R.'s Circular No.6 of 1994--?Finding of the C.I.T.(A) was confirmed by the Appellate Tribunal to the extent that the assessee had not executed turn-key contract in circumstances.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.80-C, First Sched., Part 1, para. CCC, sub-para. (ii) cls. (a) & (b)--?Power Policy, 1994---Rate of tax---Incentives for Private Sector Power Projects---Pipeline project not power project ---Assessee executed a sub?contract to design, procure, construct, test and commission pipeline project and associated facilities for supply of fuel to Hubco---Assessee claimed that gross contract revenue was chargeable under S.80-C @ 4% [as mentioned in cl. (c) of sub-para. (ii) of para. CCC of the First Sched.]---Reliance was placed on the confirmation issued by the Government of Pakistan, dated January 16, 1995 wherein the incentives for private sector generation project in Pakistan had been extended to other energy related infrastructure sector through the Prime Minister's Task Force on energy---Assessing Officer discarded the claim on ground that pipeline project was not a Power Project and taxed the assessee under cl. (b) of First Sched., Part I, para. CCC, Income Tax Ordinance treating same as turn-key contract---First Appellate Authority found that by virtue of confirmation by Government of Pakistan pipeline project was to be deemed to be part of the energy sector power project---Such finding of. First Appellate Authority was set aside by Appellate Tribunal with the direction to charge tax under clause/item (a), sub-para. (2), para. CCC, Part I of Sched. of the Ordinance @ 6% of the amount paid to the assessee with the observation that neither project was a "power project" nor a "turn-key contract".
(c) Statement of Policy on Private Sector Participation in the Energy Sector, 1994---
----"Energy sector" ---"Energy related infrastructure sector"--Distinction--?Clear distinction existed between the "energy sector" and "the energy related infrastructure sector" ---Contract falling into the category of "energy related infrastructure sector" does not fall into the category of "energy sector".
(d) Income Tax Ordinance (XXXI of 1979)---
----S.80-C, First Sched., Part I, para. CCC, sub-para. (ii)---Power Policy, 1994---Energy related infrastructure sector---Energy sector---Status of--? Pipeline project was deemed to be part of the energy sector power project by virtue of the confirmation of Government of Pakistan---Held, such project neither could be deemed nor could be assumed anything on the basis of Power Policy, nor on the confirmation by the Government, nor on the basis of any report of Prime Minister's Task Force on energy nor on the basis of approval of the Cabinet---Belief or assumption of those who frame Acts of Parliament could not make the law.
33 TC 259, 287 (HL) ref.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.14(2) & First Sched., Part I, para. CCC, sub-para. (ii), cl. (c)---Power project---Energy related infrastructure sector---Extension of incentive in cl.(c)---Availability--Essentials---Convassed extension of incentive in cl.(c) to the amount of payment for the execution of a contract in the energy related infrastructure sector was possible only through notification of the Federal Government in the official Gazettee under subsection (2) of S.14 of the Income Tax Ordinance, 1979 or by an Act of Parliament.
(f) Income Tax Ordinance (XXXI of 1979)---
----Ss.143-B, 55, 54, 80-C & First Sched., Part I, para. CCC, sub-para. (ii), cl.(b)---Non-resident assessee---Central Board of Revenue treated contract of the assessee as turn-key contract which was liable to tax @ 8%---On the request of the assessee withholding tax rate was reduced up to the extent of 50% of the normal rate ---Assessee filed return of total income under S.55 of the Income Tax Ordinance, 1979 on the basis of an estimated statement of profit and loss account and had paid tax @ 4 % of the gross revenue declared under S.143-B of the Income Tax Ordinance, 1979 being claim of Power Project under cl.(c), para. (ii) of para. CCC, Part 1 of First Sched.---Total income was declared on the basis of profit and loss account---Assessing Officer himself assessed same under cl. (b) treating same as turn-key contract---First Appellate Authority accepted assessee's statement under 5.143-B of the Ordinance---Held, there was no basis, on the facts of the case, for the objection raised on behalf of the Department that the Commissioner of Income Tax (Appeals) was not justified in accepting assessee's statement under S.143-B read with S.80-C of the Income Tax Ordinance, 1979, because the D.C.I.T. had himself invoked sub-para. (ii) of para. CCC of Part I of the First Sched. to determine assessee's tax liability under S.80-C of the Ordinance.
(g) Words and phrases---
----"Procurement"---Connotation---"Procurement" is not synonymous with "supply".
Mumtaz Ahmed, Commissioner and Amjad Jamshed, D.R. for Appellant.
I. N. Pasha for Respondent.
Date of hearing: 25th March, 1998.
ORDER
S. M. SIBTAIN (ACCOUNTANT MEMBER).---The Department, in this appeal seeks to take objection to the order of the learned C.I.T. (Appeals) for holding that the respondent has not executed a turn-key contract and that the receipts of the respondent for the year 1996-97, excluding its receipts for the assessment year 1995-96, are to be charged @ 4%, in accordance with clause (c) of sub-paragraph (ii) of paragraph CCC of Part I of the 1st Schedule to the Income Tax Ordinance, 1979, because the project is deemed to be part of the Energy Project as per the Power Policy, 1994.
2. We have heard Mr. Mumtaz Ahmed, C.I.T., the learned Representative of the Department and Mr. Iqbal Naeem Pasha, the learned counsel of the respondent.
3. Briefly the facts are that a Company by the name of M/s. Asia Petroleum Limited (APL) has been incorporated in Pakistan with its equity held in the ratio/4.8:5.2 by M/s. Pakistan State Oil Ltd. (PSO) and several foreign companies. The basic need for incorporation of A.P.L. is a "Fuel Supply Agreement". between P.S.O. and the Hub Power Company Ltd. (HUBCO), relating to a Power Generation Complex, hereinafter called the "Hub Power Project", at the mouth of the HUB River in Balochistan under . which inter alia, 'the two parties have undertaken that:---
"4.??????? FACILITIES TO BE PROVIDED BY THE COMPANY (HUBCO).
4.1.????? The Company shall, at its own cost and expenses and not later than sixty (60) days prior to the scheduled date of the First Unit, design construct and complete the Complex Storage Facilities.
4.2?????? The Complex Storage Facilities shall be developed, designed, insured, constructed and completed, owned, operated and maintained by the Company in accordance with internationally accepted oil industry engineering standards and within the specifications set out in Schedule 2.
5.???????? FACILITIES TO BE PROVIDED BY P.S.O.
5.1?????? P.S.O. to Construct Pipeline.
P.S.O. shall, at its own cost and expenses, develop, design, insure, construct and complete, own, operate and maintain the Pipeline and all such other facilities and equipment as are necessary to deliver R.F.O. to the Delivery Point. The Pipeline and such facilities shall be in all respect compatible with the Complex Storage Facilities to be constructed by the Company under clause (4).
5.4?????? Construction Schedule for Complex.
(a) Within thirty (30) days after the Effective Date, the Company will provide P.S.O. with a schedule for the construction of the Complex showing the Required Completion Date and the Scheduled Date of each Unit of the Complex.
(b)??????? Not later than six (6) months after the Effective Date. P.S.O. shall deliver to the Company a detailed schedule for the design and construction of the Pipeline.
(c)??????? During the construction of the Pipeline, the parties hereto will provide each other with quarterly reports showing progress of construction of the Pipeline and the Complex, respectively, as compared to the schedules provided pursuant to sub-clauses (a) and (b) above.
5.5. Exclusive Use of PiyeIine; Pipri Storage.
(a)??????? The portion of the Pipeline between the Pipri Installation and the Complex shall be used exclusively for the supply of R.F.O. under this Agreement; provided, however, that P.S.O. may from time to time utilize the unused capacity of the Pipeline for the supply of R.F.O. for the benefit of another customer if (i) it gives the Company at least fifteen (15) days prior written notice that the capacity of the Pipeline has been or is expected to be substantially under-utilized for a material period of time (for reasons other than the occurrence of an event of Force, Majeure), and (ii) the Company gives its approval (which approval shall not be unreasonably withheld or delayed). In the event that P.S.O. has exercised the foregoing right to utilize unused capacity, the company may resume the exclusive use of all of the unused capacity if it gives P.S.O. at least fifteen (15) days prior written notice that it requires the use of such unused capacity.
15.1 Failure by P.S.O. to Complete Pipeline.
(a)??????? PSO hereby undertakes to indemnify the Company for any costs, damages, losses or penalties (including reasonable legal expenses) incurred by the Company in so far as such costs, damages, losses or penalties are directly attributable to the failure of P.S.O. to complete the construction of the Pipeline by the Required Completion Date. "
4. M/s. Asia Petroleum Limited (APL), in turn has entered into a fuel supply agreement with Pakistan State Oil Company (PSO) to supply heavy furnace oil (H-FO) via an insulated Pipeline (the Pipeline) and associated facilities (collectively the Associated Facilities) to the Hub Power Company Limited (HUBCO) Complex located at Khalifa Point, Balochistan (Pakistan). A.P.L. has also entered into a transportation agreement pursuant to which A.P.L. has agreed to construct the Pipeline, hereinafter called the A.P.L. Pipeline Project.
5. Pursuant to the agreement to which the Design Basis Document (DBD) is an appendix (the Contract) A.P.L. has entered into a turn-key contract with Promet Engineering (Singapore) (Pvt.) Ltd. (Contractor), the respondent pursuant to which Contractor will design procure, construct, test and commission the Pipeline and Associated Facilities (collectively the Work) as set out in the Contract.
6. The work, as per Design Basis Document, comprises the engineering, procurement, construction, testing, assistance with and commissioning by Contractor of the Pipeline and Associated Facilities which will be used for the transportation of H.F.O. The Pipeline will be used to transport H.F.O. from the Fauji Oil Terminal and Distribution Company (FOTCO) Marine Oil Terminal at Port Qasim to the HUBCO Complex being developed at the mouth of the Hub River in Balochistan by HUBCO. The Contractor has accepted full responsibility for delivering to A.P.L. a completely operational facility in accordance with the D.B.D. alongwith all of the associated attachments and exhibits which form the Contract in its entirety. ,
7. The purpose of the D.B.D. is to present the design parameters which will form the essential elements for the basic and detailed engineering for the Pipeline and Associated Facilities being constructed by Contractor for A. P. L.
8. The D.B.D. encapsulates the basic design parameters, the A.P,L. Pipeline system components, the project codes standards and drawings. The D.B.D. sets forth the design basis for which the design of the project is based upon.
9. The parameters of the Design Basis Document have been drawn from the following documents, based on the basic and detail engineering design done by Flour Daniel William's Brothers, provided by the A.P.L.: .
(a)??????? System Study Report for Hub River Fuel Oil Pipeline for ENAR Petrotech Services (Pvt.) Ltd. prepared by Flour Daniel William's Brothers (Jan-March, 1994).
(b)??????? Operating Procedures for Systems P & I.Ds. for Hub River Fuel Oil Pipeline for ENAR Petrotech Services (Pvt.) Ltd. prepared by Flour Daniel William's Brothers (March, 1994).
(c)??????? 7 Volumes of ENAR Petrotech Engineering documents.
10. Both the Hub Power Project and the A.P.L. Pipeline Project are funded, up to 30 % of the Project costs, out of along term credit raised under a 'Loan Agreement', dated 20-2-1994 between the Islamic Republic of Pakistan and the International Bank for Reconstruction and Development (IBRD). Pursuant to the Loan Agreement the Government of Pakistan (GOP) has created a Private-Sector Energy Development Fund (PSEDF) under the Private Energy Division (PED) of the National Development Finance Corporation (NDFC). This has been done in pursuance to a "Statement of Policy" defined in the Loan Agreement as under:---
"(j)?????? 'Statement of Policy' means the statement of policy on Private Sector participation in the energy sector as adopted and issued by the Borrower in March, 1994, as amended from time to time describing the Borrower's (GOP) policies and procedures for evaluating and approving proposals for Private Sector participation in the energy and energy related infrastructure sector;"
11. The definitions reproduced hereunder from the Loan Agreement (supra) have also been referred to during the course of submissions made by Iqbal Naeem Pasha:---
"(o)????? 'Investment Project' means a specific development project in the energy, or energy-related infrastructure, sector to be carried out by an Investment Enterprise utilizing the proceeds of a sub-loan.
(p)??????? 'Hub Power Project' means the 1292 megawatt oil-fired power plant located in the Borrower's Province of Balochistan, being one of the Investment Projects to, be financed under P.S.E.D.P. and the Project.
(q)??????? 'APL Pipeline Project' means the oil Pipeline t4ibe built from Port Qasim in the Borrower's Province of Sindh to Khalifa Point in the Borrower's Province of Balochistan, being one of the Investment Projects to be financed under the Project."
12. It is the perspective (supra) that the respondent has approached the C.B.R. through the letter, dated April 17, 1995 that by virtue of being engaged in construction of a power project, it qualifies for withholding of tax on its receipts from A.P.L. @ 4% of the amount of payment under paragraph CCC(ii)(c) of Part I of the First Schedule to the Income Tax Ordinance. Sub-paragraph (ii) (ibid) is being reproduced hereunder for convenience of reference:---
"[(ii) In the case of every non-resident person, to whom section 80?C applies, on the income representing payments on account of:
| (a) execution of contracts, other than those mentioned in sub-clauses (b), (c) and (d). | six per cent of the amount of payment]. |
| (b) execution of turn-key contracts: | eight per cent of amount of payment |
| (c) execution of contracts of sub-contracts for designing, supply of plant and equipment and construction of power projects (other than hydel power projects) and transmission line projects. | four per cent. of the amount of payment.]" |
| (d)Execution of contracts, or sub-contractors for designing supply of plant and equipment and construction of hydel power project. | five per cent of the amount of payment. "] |
13. The Board, however, has not agreed with the respondent's proposition. The Board has conveyed vide letter, dated 28-6-1995 that it is of the view that the respondent is engaged in a turn-key project liable to withholding tax Q 8% of the amount of payment, adding:---
"C.B.R. is, however, willing to reduce the withholding tax rate as requested. For this purpose Commissioner of Income Tax (Cos.I), Karachi is being appropriately advised."
'14. The Commissioner of Income Tax, Cos-I, Karachi thereafter, has issued the certificate as under:---
"No.???? Jud-I/5(619)/E.T/95-96/109, dated 12-7-1995 Serial
No. C.16.
CERTIFICATE
In exercise of the powers conferred under subsection (4) of section 50 of the Income Tax Ordinance, 1979 it is hereby directed that the withholding tax rate of 8 % of gross amount as is applicable to turn-key project shall be reduced to 50% of the normal rate in case of contract for laying down of Pipelines exclusively for the Hub Power Project between M/s. Asia Petroleum Ltd. and M/s.
Promet Engg. (Pvt.) Ltd.
This certificate is valid up to 31-7-1995.
???????????????????????
(Sd.)
??????????????????????????????????????????????????????????????????????????????????? (Muhammad Daud Khan),
??????????????????????????????????????????????????????????????????????????????????? Commissioner of Income-tax
??????????? Companies-I, Karachi,
??????????????????????????????????????????????????????????????????????????????????? Code No.1-68-0058 "
15. Subsequently another certificate has been issued on 27-4-1996 in the following terms:---
CERTIFICATE
"Assessee having exercised option under clause (9-A) of the Part IV of the 2nd Schedule of the Income Tax Ordinance vide No.3035/P-1098, dated 27-4-1996 (FRRM) and having discussed ''with Mr. E.U. Khawaja of Ford, Rhodes, Robson, Morrow. A.R. of the assessee that M/s. Promet Engg. (Pte) Singapore execution of Pipeline Project being of specific nature; and in the light of the C.B.R. F.No.3(51) Int. Taxes/91, dated 17-4-1996. 1, exercising jurisdiction under section 50(4)(b) as interpreted by the C.B.R. in the light of their letter, hereby direct that tax at the rate of 4% be withheld under section 50(4) of the Income Tax Ordinance, 1979, by the A.P.L. on the Contractual Gross Payments including held ?up payments or in respect of adjustment for material supply etc.
This Certificate is being issued on the specific request of the non?resident assessee who is borne on N.T.N. 14-12-3951633.
This Certificate is valid up to 30-9-1996.
As per the understanding given by the F.R.R.M. the Return of Income under section 55 is, expected to be filed before 15-5-1996.
??????????????????????? (Sd.)???
(Mumtaz Ahmed),
??????????? ? Commissioner of Income-tat
???????????????????? Companies-I. Karachi
??????????? Clause (9-A) of Part IV of the Second Schedule reads as under:---
[(9-A) The provisions of section 80-C shall not apply in respect of a non-.???????? resident person unless he opts for the presumptive tax regime:
Provided that a declaration of final and irrevocable option is furnished in writing along with the return of total income under section 55].
Clause (9-A) inserted by Finance Act, 1994:
Words etc. "(other than the persons engaged in the execution of a contract or sub-contract for designing, supply of plant and equipment and construction of power and transmission line projects" omitted vide Finance Act, 1996. Earlier the words "projects" and transmission line" were inserted by Finance Act, 1995."
16. The respondent thereafter, has filed its return of total income on 26-5-1996 for the assessment year 1995-96 on the basis of an estimated statement of P&L A/c. as on 30-6-1995 and has paid tax under section 54 amounting to Rs.25,382, 498 @ 4% of the gross revenue declared at Rs.634,562,441. However, a total income of Rs.45,302,349 is declared in the return of income on the basis of a statement of estimated Profit and Loss Account enclosed with the return. Thus, it has opted out of the section 80-C T Regime by exercising the option allowed under clause (9-A) (ibid).
17. The learned D.C.I.T. during the course of assessment proceeding for assessment year 1995-96 has asked the respondent to explain the basis of the claim that item (c) of sub-para. (ii) of Para.CCC of Part I of the First Schedule supra is applicable to its case.
18. The respondent's A.R., as per assessment order passed on 27-6-1996, under section 62 of the Ordinance, has submitted, vide letter, dated 22-6-1996, copy of a confirmation issued by the Government of Pakistan dated January 16, 1995 wherein it is confirmed by the Secretary, Ministry of Water and Power and Secretary, Ministry of Petroleum and Natural Resources that the incentives for private sector generation projects in Pakistan have already been extended to other energy-related infrastructure sector through the report of Prime Minister's Task Force on Energy, dated 4-1-1994 which has been approved by the Cabinet of the Government of Pakistan. This clarification has been circulated to all the organisations listed therein. From this assurance given by the Federal Government, according to the learned A.R., it is quite clear that the benefits given to power projects also extend to this contract as the Pipeline for supply of fuel to Hubco is an energy-related infrastructure project.
19. The learned D.C.I.T. has further recorded in the assessment order for 1995-96:
"However, it was emphasized that assessee would not like to be '- assessed under section 80-C on turn-key concept.
The assessees' case is that they would pay 4 % minimum tax as per arrangement with Government, and higher tax if the final accounts of the project would yield profits attracting more tax than the minimum of 4%. The assessee further pointed out that they have opted out of 80-C Regime under clause (9-A) of Part-IV of Second Schedule and that normal Return has been filed."
20. However, the respondent has not filed any return of income under section 55 for the assessment year 1996-97. A statement under section 143-B has been filed in response to notice under section 56 on 14-6-1997. Contract, revenue is declared at Rs.1,138,831,300 and tax withheld against it under section 50(4) is declared at Rs.45,553,252 besides declaring interest income at Rs.597,766 and tax paid thereon as 46% amounting to Rs.274,982. It is claimed that the respondent's gross contract revenue is chargeable under section 80-C 0 4% under clause (c) of sub-para. (ii) of Para. CCC of the, First Schedule (supra), by virtue of execution of contract for designing, supply of plant and equipment and construction of power project other than hydel power project and transmission line project. The learned counsel of the respondent, during the course of proceedings, has placed reliance mainly on the confirmation issued by the Government of Pakistan, dated January 16, 1995 that the incentives for private sector Power Generation Projects have been extended to energy-related infrastructure sector. (Paragraphs 10 and 18 (supra).
21. The learned D.C.I.T. has discarded the claim that the respondent has executed a Contract of Power Project in the Energy Sector inter alia for the reason that the A.P.L. Pipeline Project is not a Power Project.
??????????? 22. On an appeal preferred before the learned C.I.T.(A) the submission, made on behalf of his appellant (the respondent) that by virtue of the "Confirmation", referred to in Paragraph 18 supra, the Pipeline Project is to be deemed to be part of the Energy Sector Power Project, has found the favour of the learned C.I.T.(A) and he has directed the learned D.C.I.T. to calculate the tax to be charged from the respondent under item (c) of sub? para. (ii) of Para. CCC of Part I of the First Schedule to the Income Tax Ordinance, 1979, @ 4 % of the gross contract revenue after excluding the receipts already charged to tax in the assessment order for the charge year 1995-96; hence the instant appeal.???
23. Regarding the applicability of tax @ 4 % as item (c) (ibid) on the amounts paid to respondent, Mr. Mumtaz Ahmed has submitted that the respondent has neither executed a contract on a sub-contract for designing, supply of plant and equipment and construction of Power Project. Referring to the agreements, the relevant extract wherefrom are reproduced (supra), he has submitted that the Pipeline Project does not fall in the category of energy sector i.e., the Power Project because it is not a part of Hubco and the Pipeline itself is incapable of producing power.
24 Mr. Iqbal Naeem Pasha, on the other hand, has submitted that the Hubco Power Project is incapable of producing any' power sans the pipeline (supra); hence pipeline part of the power project.
25. Both sides have submitted lay out plans of the pipeline to support their respective divergant contentions. Similarly both have placed reliance on the Loan Agreement (supra) to draw support for the two opposite stand points.
26. We have given our careful consideration to the objectives and terms of the "Loan Agreement" between G.O.P. and I.B.R.D., the "Fuel Supply Agreements" between HUBCO and P.S.O. and the 'Contract' between the A.P.L. and PROMET Engineer (Singapore) (Pvt.) Ltd. as well as the submissions of the learned representatives of the two sides against and for the impugned -order of the learned C.I.T. (Appeals). It transpires from the 'Statement of Policy' on Private Sector Participation in the Energy Sector as adopted and issued by the G.O.P. in March, 1994 and as amended from time to time, that there is a clear distinction between the 'Energy Sector' and the 'Energy Related Infrastructure Sector'. While there is no doubt that the respondent has executed a contract falling into the category of 'Energy Related Infrastructure Sector' it does not fall into the category of 'Energy Sector' itself as evident from the distinction made between the two sectors firstly in para. (J) of the 'Loan Agreement', Paragraph 10 (supra), while defining the "Statement of Policy", Secondly, while para.(o) of the 'Loan Agreement' includes both sectors in the definition of 'Investment Project', paras.(p) and (q) define the respective 'Hub Power Project' and the 'APL Pipeline Project' separately. Paragraph 11 (supra). Thus, we are persuaded to agree with the learned representative of the Department that the respondent has not executed any contract for designing, supply of plant and equipment and construction of power project. We regret, we cannot subscribe, to the views convassed by the learned counsel of the respondent that firstly the A.P.L. Pipeline Project is part and parcel of the Power Project and secondly that the G.O.P. has extended the incentives granted to the Private Sector energy generation projects (Power Projects) to the energy related infrastructure sector projects as well through the approval accorded by the Cabinet to the Report of the Prime Minister's Task Force on Energy; hence respondent's contract receipts chargeable @ 4 % as item (c) of sub-para. (ii) (ibid). The learned counsel of the appellant has also submitted before us, in support of this view the instructions of the C.B.R. to withhold tax @ 4% and the copies of certificates issued by the Commissioner of Income Tax under section 50(4) that tax is to be withheld @ 4% of the amounts payable to the respondent. He has specifically drawn our attention to words "willing to reduce withholding tax rate" used in the C.B.R. letter paragraph 13 (supra) and the words "Pipeline Project being of specific nature" used in the certificate under section 50(4), paragraph 15 (supra). The first view cannot be subscribed to in the presence of the preponderant documentary evidence (supra) that the respondent has executed a contract in the Energy Related Infrastructure Sector which is not a Power Project.
27. Regarding the second view (supra) we find that it has found favour with the C.I.T.(A). However, on the foregoing facts and circumstances, we are of the considered view that the learned C.I.T.(A) is? not justified in holding that "the project is deemed (emphasis provided by us) to be part of the energy project as per the Power Policy. 1994" because as per Rowlatt, J. "in a taxing Act one has to look merely at what is said. There is no room for any internment. There is no equity about a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used". [(1921) 1 KB 64, 71, 12 TC 358, 3661. Thus, neither can it be Deemed nor can be assumed anything on the busts of the Power Policy, 1994. nor on the basis of mere confirmation by the Secretaries of Ministries of Water and Power and Petroleum and Natural Resources, nor on the basis of any Report of Prime Minister's Task Force on Energy nor even on the basis of approval of the Cabinet because as per Lord Radcliffe "the belief or assumption of those who frame Acts of Parliament cannot make the law". [33 TIC 259, 287 (HL)].
28. Since tax @ 4% under item (c) of sub-para. (ii) (ibid) is to be charged specifically on the amount of payment for execution of contracts or sub-contracts for designing, supply of plant and equipment and construction of power projects, the convassed extension of the incentive in item (c) (ibid) to the amount of payments for the execution of a contract to design, procure, construct, test and commission the pipeline and associated facilities in the energy related infrastructure sector is possible only through either a Notification of the Federal Government in the official Gazette under subsection (2) of section 14 of the Income Tax Ordinance, 1979 or by an Act of Parliament.
??????????? 29. Accordingly, the impugned direction of the learned C.I.T.(A) to charge tax @ 4 % of the amount of payment for the contract executed by the F respondent for the charge year 1996-97 under item (c) of sub-para. (it) (ibid), is found unsustainable; hence vacated. This brings us to the consideration of the second objection taken on behalf of the Department to the finding of the learned C.I.T.(A) that subjection of receipt to tax 8%. by the D.C.I.T. is not justified.
30. The terms of the respondent's contract relevant to the impugned issue, have been recorded by us in paragraphs 4 to 9 (supra).
31. The learned D.C.I.T., after concluding in the assessment order that the contract executed by the respondent does not fall under item (c) of sub ?para. (ii) of para. CCC of Part I of the First Schedule, has held on the basis of the terms of contract and the response of the learned A.R. of the respondent to a letter, dated 31-1-1996 issued by the D.C.I.T. Circle 12, in the context of correspondence in respect of rate of withholding tax under section 50(4), has held that it falls into item (b) of sub-para. (ii) (ibid) that provides for charging tax @ 8 % of the amount of payment for execution of turn-key contracts. He, therefore, has charged tax @ 8% on the entire amount of Rs.1,773,393,741 paid during the two years for execution of the contract by the respondent. The learned D.C.I.T. has found that it is a turn?key project as per terms of the contract that specifically mentions that A.P.L. has entered into a turn-key contract with the respondent pursuant to which the respondent (Contractor) will design, procure, construct, test andcommission the pipeline and associated facilities as set out in the contract (paragraph 5, supra).
32. The learned C.I.T. (Appeals) has held:---
"Considering the nature of the contract receipts I am of the opinion that it was not a turn-key contract as evidence has been produced before me that miscellaneous machinery was supplied to show that mainline valves, mainline pumps, Heat Exchanger, Boiler etc. were provided by the APL. Relevant also in this background is the 'General Arrangement Drawing' Sketch, dated 16-10-1995 produced for my record in that it purports to show the Hubco Power Project with Pipeline from Port Qasim conceived and approved by M/s. Worely Engineering International Ltd. with Pipeline laid up by M/s. Asia Petroleum Ltd. through their contractors who are the appellant. It intends to show the involvement of more than one agency from one end to the other end, which is entirely contrary to the concept of 'turn-key' projects. The project of laying the pipeline and installation of pump was not one executed on a turn-key basis."
33. The learned representative of the Department has submitted that the learned C.I.T.(A) is not justified in ignoring the fact that according to the terms of the contract the respondent is supposed to design, procure, construct, test and commission the pipeline and associated facilities as set out in the contract. Thus, according to him, the contract meets all the characteristics of a turn-key contract as described in the C.B.R. Circular No.6 of 1994, dated 10-7-1994. Regarding the submission made before the learned C.I.T.(A) that a sizeable material and equipment installed in the Pipeline has been imported and supplied by the A.P.L., the learned D.R., has referred to para. 19.1 of the, DRAFT 220 January, 1995 at page 641 to clarify the position. It is reproduced hereunder:---
"Contractor shall be responsible for arranging all shipments to himself as consignee at the project shipping address, freight fully prepaid. Notwithstanding the preceding sentence, contractor shall by notice to A.P.L. be entitled to consign such shipments of materials for incorporation into the Pipeline and Associated Facilities to A.P.L. in the event such consignment is necessary to secure a tax exemption from Import Levies. Should any Pakistani authority levy any tax, duty or the like due with respect to the imported materials (other than permanent materials). Promet further agrees to indemnify and hold harmless A.P.L. from and against all such taxes and related costs and expenses incurred by A.P.L. in respect of such allegedly due."
?34. Mr. Iqbal Naeem Pasha, the learned counsel of the respondent, an the other hand, has submitted that one will have to examine closely the exact nature of the work executed by the respondent contractor in order to decide whether it is a turn-key project or not?
35. He submits that the D.B.D., para. l Introduction mentions that the contractor will design the Pipeline and associated facilities but Para.2. Purpose of D.B.D. provides that the D.B.D. encapsulates the basic design parameters which have formed the essential elements for the basic and detailed engineering design done by M/s. Flour Daniel Williams Brothers (Jan-March, 1994) for the Pipeline and Associated Facilities, provided by the A. P. L. to the contractor for construction thereof. Thus, he submits that according to the D.B.D. itself the contractor has not designed the Pipeline and Associated Facilities. It has done only Engineering Review (para.4 of D.B.D.) and actual construction of (1) a Booster Pump Station located adjacent to the P1 Area---the FOTCO Terminal Point up to which a 36-inch, diameter pipeline has been constructed by FOTCO to connect it with the two existing Marine Oil Terminals at Port Qasim, (2) Pipeline from Booster Pump Station to Pipri Terminal, (3) a 14-inch diameter pipeline to transport H.F.O. from Pipri Terminal to the HUBCO Complex a distance of approximately 80.0 kilometres where a scraper receiver facility is constructed by separate contractors of HUBCO (Para. 5, D.B.D. System Description). Thus, according to the System Description the elements of the Pipeline System integrating with the Pipeline and Associated Facilities include 5.1 Marine Oil Terminal at Port Qasim, Marine Loading Arms located at the Jetty and Pipeline from Jetty to the FOTCO Terminal Point, P1 constructed by FOTCO, the Booster Pump Station (BPS), the pipeline from BPS to Pipri Terminal (By PSO), the Pipri Terminal and the Pipeline from there to the Hubco Terminal constructed by respondent and the Hubco Terminal as well as the Pipeline up to Hubco Plant constructed by Contractors of Hubco. Mr. Pasha, therefore, has submitted that there are elements of Pipeline System that are not only not designed but not constructed as well by the respondent. Thus, according to him, no key-turning is possible unless elements/constructed by others are put together. Continuing his submissions, he has sought our indulgence to para.13. Compliance with World Bank Procedures and Guidelines: which provides that the respondent will assume and carry out procurement of items to be purchased on behalf of A.P.L. out of Private Sector Energy Development Fund (PSEDF) and Mr. Pasha has produced copies of A.P.L. letters, dated 25-11-1996 and 26-1-1997, addressed to the respondent, wherein it has been reminded that PSEDF items amounting to Rs.15,200,000 as per Appendix H-1 are A.P.L.'s property and the respondent is not entitled to dispose of any surplus or scrap thereof. The fact that A.P.L. has agreed to entitle the respondent to consign to it such shipments of materials for incorporation into the pipeline and associated facilities, in the event such consignment is necessary to secure a tax exemption from import levies, according to Mr. Pasha, proves that the Principals are under contractual obligation to supply duty free material wherever the law permits. He has submitted details, with copies of L.Cs. and other supporting evidence, showing that equipment and permanent materials worth US $ 15.2 million are supplied to respondent through LX. opened by A.P.L. and paid by A.P.L., worth US $ 1.5 million are supplied by respondent but installed by A.P.L./P.S.a, and worth US $ 8.5 million only, imported directly by the respondent. Mr. Pasha has submitted that no Pakistani Company would assist a non-resident to save taxes in Pakistan unless it stands to gain by making such stipulations into the contract.
36. The learned counsel of the respondent, on the basis of foregoing submissions on facts, has submitted that if the test of turn-key project laid down in para.4(d), C.B.R. Circular No.6 of 1994, dated 10-7-1994 is applied to the respondent's case it transpires that the terms of contract executed by the respondent, although employ the word 'design' but it is proved (supra) that the design done by others has been given to the respondent by A.P.L. Similarly major supply of equipment and permanent material is also done by A.P.L. Thus, the respondent has only done engineering review instead of designing, has extended mainly assistance in procurement of equipment and material instead of supplying the same and has constructed not the entire Pipeline System as defined in D.B.D., but a major portion of its component elements, whereas the essential characteristics of the turn-key projects, as per C.B.R. Circular (ibid), are that it involves designing, consultancy, supply of equipment and machinery and installation thereof.
37. Regarding the stipulation in the Introduction of the D.B.D. that the A.P.L. has entered into a turn-key contract with the respondent, Mr. Iqbal Naeem Pasha has submitted that two propositions are well-established in the application of law relating to income-tax. First the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. Secondly a transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form, which would attract tax. Reliance has been placed by him in support of his submission on the decision of the House of Lords in the case of Inland Revenue Commissioners v. Wesleyan General Assurance Society (1948) 16 ITR Suppl. 101.
38. Mr. Mumtaz Ahmed, the learned representative of the Department, responding to the submission of Mr. I.N. Pasha (supra), has submitted that firstly, by issuing certificates under section 50(4), to withhold tax at reduced rate of 4%, neither the C.B.R. nor the C.I.T. has ever conceded that the respondent is not executing a turn-key project. Secondly, regarding the requirement that the contract should include, inter alia, the supply of equipment and material, to be, installed in the project, by the contractor, to render is a turnkey project. Mr. Mumtaz Ahmed has submitted that the respondent has agreed, as per para. 13.1 of Appendix B, to assume and carry out, on behalf of the A.P.L., matters relating to procurement of the listed items.
39. Having given our careful consideration to the facts and circumstances of the case (supra), we find that the case of the Department, ' from the stage of assessment proceedings till the presentation of the case before us, continues to be based on the prima facie fact that para.1.0 Introduction to D.B.D. stipulates that A.P.L. has entered into a turn-key contract with the respondent (Contractor) pursuant to which Contractor will design, procure, construct, test and commission the Pipeline and Associated Facilities. However, it is evident from the impugned assessment order as well as from the submissions made both before the learned C.I.T.(A) and before us, on behalf of the Department, that the actual nature of the work assigned to the respondent "as set out in the contract" has never been given due consideration.
40. D.B.D. and we are inclined to agree with the view of Mr. Pasha convassed in paragraph 35 (supra) that contrary to what has been mentioned, in para.1.0 of D.B.D., the respondent has not designed the project. Similarly, we find no ground to disagree with the learned counsel of the respondent, on the basis of uncontroverted facts placed before us, that the contract neither envisages to award contract of supply of equipment and material nor it has actually been supplied by the respondent, except where during the course of providing assistance in procurement it has been found convenient to let the respondent open L.C. for a minor portion thereof. There is no doubt in our mind that the word "procurement" is not synonymous with "supply".
41. We further find that there is sufficient documentary evidence to conclude that although the respondent has constructed the main and major portion of the Pipeline System envisaged, planned and designed as per D.B.D., some of the essential elements of the system have been constructed by others and until such other elements have been integrated, no testing or commissioning has been possible for the respondent. Thus, in our considered opinion the contract executed by the respondent lacks the essential characteristics of a turn-key project both as commonly understood in terms of its dictionary meaning as well as explained in the C.B.R. Circular 6 of 1994 ibid and that the ratio of decision in (1948) 16 ITR (Suppl) 101 (HL) is applicable to the employment of the term turn-key in the instant case. We find that the respondent has not been extended the benefits that has prompted the legislation explained in sub-para.(d) of para.4 of the C.B.R. Circular being reproduced by us hereunder:---
"(d) Withholding tax regime for non-resident contractors. ---Non-resident Contractors, including those executing turn-key projects, were so far subject to withholding tax equivalent to 3 % of the gross receipts, which was treated as full and final tax liability. The rate of tax so charged was found to be low given relatively high profit margins in such contracts, particularly in case of turn-key projects involving designing, consultancy, supply of equipment and machinery, and installation thereof."
42. Accordingly, we hereby confirm the finding of the learned C.I.T.(A) that the respondent has not executed a turn-key project; hence not liable to the charge of tax under item (b) of sub-para.(ii) (ibid) and appeal dismissed on this ground.
43. We further find that the learned. C.I.T.(A) has no basis to hold that the contract executed by the respondent is deemed to be part of energy project, chargeable to tax as item (c) of sub-para.(ii) (ibid). Accordingly, the impugned order on this issue is found unsustainable; hence set aside with the directions to charge tax, under item (a) of sub-para. (ii) (ibid), @ 6% of the amount paid to the respondent by A.P.L. during the income year corresponding to assessment year 1996-97.
44. Before parting with this order we deem it appropriate to observe that there is no basis, on the facts of the case (supra), for the objection raised on behalf of the Department that the learned C.I.T.(A) is not justified in accepting respondent's statement under section 143-B read with section 80-C of the Income Tax Ordinance, 1979, because the learned D.C.I.T. has himself invoked sub-para.(ii) of para.CCC of Part I of the First Schedule to?????????? the Income Tax Ordinance to determine respondent's tax liability under section 80-C of the Ordinance.
45. The appeal is partly allowed in the manner indicated above.
A.A./560/Trib.???????????????????????????????????????????????????????????? Appeal partly allowed.