2009 P T D (Trib.) 1149
[Income-tax Appellate Tribunal Pakistan]
Before Khalid Waheed Ahmed, Chairperson and Istataat Ali, Accountant Member
I.T.As. Nos. 394/IB and 395/IB of 2008, decided on 27/11/2008.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.26(b), First Sched. & Fifth Sched.---Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits---Rate of tax---Assessee contended that specific provisions had been laid in S.26(b) of the Income Tax Ordinance, 1979 to the effect that rules contained in Part-I of Fifth Schedule of the Income Tax Ordinance, 1979 shall not apply for the purposes of working out profits and gains and tax payable thereon in respect of income of companies who discovered petroleum (including natural gas) before 24-9-1954---In such conditions, rates of tax on income of companies as contained in First Schedule to the Income Tax Ordinance, 1979 were applicable---Tax was payable @ 35% in assessment year 1997-98 and 33% in assessment year 1998-99 on company's income in the light of provisions contained in First Schedule to the Income Tax Ordinance, 1979---Assessing Officer was not justified to apply tax 50% on company's income and First Appellate Authority was not legally correct to uphold the same---Validity---On 24-9-1954 no separate Schedule existed in the Income Tax Act, 1922, about working out tax liability of petroleum companies---With the introduction of Income Tax Ordinance, 1979 Fifth Schedule was specifically introduced therein which contained rules for the computation of profits of petroleum companies and taxes payable thereon---When said specific legislation came into existence, the profit of all petroleum companies and taxes payable thereon had to be worked out in the light of such specific/exclusive provisions of law---Nevertheless the agreement between the company and Government of Pakistan was at the same time applicable for working out the tax liability of the company---Since, taxes had been specifically fixed @ 50% in the agreement, dated 24-9-1954, the company's profits shall be taxable at the same rate during the entire period of currency of agreement-- Any upward or downward revision in tax rates by Government of Pakistan shall not apply to the case of said company---During such assessment years, rate of tax for private companies including those not engaged in oil exploration business was more than 50% and it was not clear as under what provisions of law the assessee was claiming that tax @ 35% or 33%---Taxation Officer had rightly charged tax @ 50% of company's profit---Such treatment was absolutely correct in the eyes of law and First Appellate Authority had rightly upheld the same---Orders of authorities below were confirmed by the Appellate Tribunal and company's appeal being devoid of any merit was rejected.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.26(b), proviso---Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits---Application of proviso to S.26(b), Income Tax Ordinance, 1979---Scope---Proviso to S.26(b) of the Income Tax Ordinance, 1979 applies to companies who discovered commercial production before 26-9-1954---Assessee-company achieved the level of commercial production after the said date---No evidence was submitted that the company had achieved commercial production before 24-9-1954---In fact, company entered into agreement for production of petroleum with Government of Pakistan on 24-9-1954 and commenced its operations after the said date---Commercial production was discovered much later than the said date---Proviso to S.26(b) of the Income 'fax Ordinance, 1979, thus did not apply to company's case.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.26(b)---Special provisions regarding business of insurance and production of oil and natural gas and exploration and extraction of other mineral deposits--Rate of petroleum companies were specifically determined in the concession agreement(s) entered into by them with Government of Pakistan---Said tax rates remain fixed/frozen during the period of currency of concession agreement---Any upward or downward revision in tax rates by the Government of Pakistan did not apply to the cases of petroleum companies----Said companies were liable to par taxes @ 50% of its income.
Khalid Mehmood, F.C.A. for Appellant.
Muhammad Asif, D.R. for Respondent.
ORDER
ISTATAAT ALI (ACCOUNTANT MEMBER)---These appeals have been filed by the assessee against order, dated 24-5-2008 passed by CIT(A), Rawalpindi.
2. As per facts, the assessee, a private limited company, is engaged in the business of exploration, production and distribution of natural gas. Assessment was under section 62/ 132 on 30-6-2007 at net income (before tax) of Rs.218,459,049 for assessment year 1997-98 and Rs.246,715,922 (before tax) for assessment year 1998-99. The assessee filed appeal against this assessment on various grounds and learned CIT(A) vide his impugned order, dated 2-5-2008 adjudicated the issues raised before him. Dissatisfied with this order, the assessee has filed second appeal for both the years on common ground that CIT(A) has erred in upholding the action of Assessing Officer in subjecting the company's income to tax rate of 50% instead of 35% for assessment year 1997-98 and 33% for assessment year 1998-99.
3. Learned AR stated that concession agreement for exploration of petroleum and natural gas was signed on 24-9-1954 between the company (ESSO Eastern Inc) and Government of Pakistan (GOP). Article-10 (h) of this agreement provides that exactly half of the company's net income shall constitute "payments to Government" including taxes on income. He stated that at the time of signing of the agreement all taxes on income were regulated through provisions of First Schedule to the Income Tax Act, 1922. No exclusive schedule was available in the Income Tax Act, 1922 about taxes payable by companies engaged in exploration of oil and natural gas. He stated that in these conditions, the rates of taxes provided in the said First Schedule were applicable to company's income. He contended that Fifth Schedule was introduced for the first time in Income Tax Ordinance, 1979. In this schedule rules for computation of profits and gains from exploration and production of petroleum were provided. He stated that Fifth Schedule to the Income Tax Ordinance, 1979 has been framed in pursuance of provisions contained in section 26, which contains special provisions regarding business of production of oil and natural gas. He contended that proviso to section 26(b) stipulates that the provisions contained in Part-I of the Fifth Schedule shall not apply to the profits and gains attributable to production of petroleum including natural gas, which was discovered before 24-9-1954. Learned AR contended that this proviso primarily protects interests of the appellant company because company entered into afire rent for exploration of petroleum with the Government of Pakistan on 24-9-1954. Learned AR contended that specific provisions have been laid in section 26(b) of the Income Tax Ordinance to the effect that rules contained in Part-I of Fifth Schedule shall not apply for the purposes of working out profits and gains and tax payable thereon in respect of income of companies who discovered petroleum (including natural gas) before 24-9-1954. In these conditions, the rates of tax on income of companies as contained in First Schedule to the Income Tax Ordinance, 1979 are applicable in the case of this company. Learned AR emphasized that tax was payable @ 35% in assessment year 1997-98 and 33% in assessment year 1998-99 on company's income in the light of provisions contained in First Schedule to the Income Tax Ordinance, 1979. He stated that Assessing Officer was not justified to apply tax @ 50% on company's income and learned CIT(A) was also not legally correct to uphold this treatment.
4. Learned DR stated that taxes on income of companies engaged in business of production of petroleum are payable according to the provisions of Fifth Schedule to the Income Tax Ordinance, 1979 in conjunction with the terms and conditions of agreement between the Government of Pakistan and the companies. He stated that in the case of this company, it has been specifically provided in the agreement that taxes on income shall be equal to 50% of company's income. He contended that when the assessments were made in the case of this company under the provisions of Income Tax Act, 1922 (now repealed) the company was paying tax @ 50% on its income in spite of the fact that taxes on income of companies (other than oil companies) were much higher than 50% during that period. It means that the company was paying taxes on income according to the terms and conditions of the aforesaid agreement. He further stated that in the cases of petroleum companies the rates of taxes and payments to Government are fixed at the time of signing of agreement and such taxes always remain frozen at that agreed rate irrespective of any changes brought about in the income tax law(s). In these circumstances, the company was liable to pay taxes on its income according to terms and conditions of the agreement, dated 24-9-1954.
5. Learned DR stated that provisions of section 26(b) are of no help to the assessee because it applies only to those companies who "discovered" their production before 24-9-1954. This company entered into agreement with Government of Pakistan on 24-9-1954 and naturally discovered commercial production after the said date. Therefore, provisions of section 26(h) are not applicable to company's case.
6. We have considered arguments of both the sides in the light of relevant material laid before us and we tend to agree with learned DR that proviso to section 26(b) applies to companies who discovered commercial production before 26-9-1954. This company achieved the level of commercial production after the said date. Learned AR could not submit any evidence at bar to prove that this company had achieved commercial production before 24-9-1954. In fact the company entered into agreement for production of petroleum with Government of Pakistan on 24-9-1954 and commenced its operations after the said date. Commercial production was therefore, discovered much later than the said date. The proviso to section 26(b), thus does not apply to company's case.
7. We also agree with learned DR that tax rates of petroleum companies are specifically determined in the concession agreement(s) entered into by them with Government of Pakistan. These tax rates remain fixed/frozen during the period of currency of concession agreement. Any upward or downward revision in tax rates by the Government of Pakistan does not apply to the cases of petroleum companies. This company was, therefore, liable to pay taxes @ 50% of its income.
8. Learned AR tried to argue that on 24-9-1954 no separate schedule was available in the income tax law about working out profits of petroleum companies and taxes thereon and that Fifth Schedule subsequently added to Income Tax Ordinance, 1979 does not apply to this company, he tried to make out a case that company is liable to pay taxes at the rates applicable to other companies and no distinction can be created between the petroleum companies and companies other than petroleum companies. We are constrained to disagree with learned AR. In our opinion, on 24-9-1954 no separate schedule existed in the Income Tax Act, 1922 about working out tax liability of petroleum companies. However, with the introduction of Income Tax Ordinance, 1979 Fifth Schedule was specifically introduced therein. It contained rules for the computation of profits of petroleum companies and taxes payable thereon. When this specific legislation came into existence, the profits of all petroleum companies and taxes payable thereon had to be worked out in the light of these specific/exclusive provisions of law. Nevertheless the agreement between the company and Government of Pakistan was at the same time applicable for working out the tax liability of this company. Since, taxes have been specifically fixed @ 50% in the said agreement, dated 24-9-1954, the company's profits shall be taxable at the same rate during the entire period of currency of agreement. Any upward or downward revision in tax rates by Government of Pakistan shall not apply to the case of this company.
9. There is difference between "commencement of exploration activities" and "achievement of commercial production". Learned AR has tried to mix these two concepts. This company had not achieved the level of "commercial production" by 24-9-1954. It had simply singed the contract with GOP on the said date. After signing of agreement with GOP, the company commenced exploration activities by putting up necessary machinery and infrastructure. The level of "commercial production" was achieved much later. It is thus established that during the period under appeal this company was not in "commercial production". The proviso to section 26(h) of the Income Tax Ordinance, 1979 therefore, does not apply to the assessee company.
10. It may also be added that during assessment years under appeal the rate of tax for private companies including those not engaged in oil exploration business was more than 50%. It is not clear as under what provisions of law the appellant is claiming that tax @ 35% or 33%.
11. In the light of foregoing discussion, we have no hesitation to hold that the taxation officer has rightly charged tax @ 50% of company's profits. This treatment is absolutely correct in the eyes of law and CIT(A) has also rightly upheld it. We do not find any infirmity in the orders of both the authorities below, which are hereby confirmed and company's appeal being devoid of any merit is hereby rejected.
Ordered accordingly.
C.M.A./62/Tax (Trib.)Order accordingly.