PPELLATE TRIBUNAL INLAI LAHORE ITA No.6346/LB/2022 (Tax Year 2014) M/s. National Transmission & Dispatch _...Appellant Company, Limited, Lahore. Versus The CIR, LTO, Lahore. «Respondent Appellant by: Mr. Ageel Ahmad Sheikh, Advocate Respondent by: Mr. Husnain Shamim, DCIR A/w Mr. Amir Yasin, DCIR, DRS 06.06.2023 09.06.2023 ORDER appeal has been filed by the appellant-taxpayer against the order dated 27.12.2022 passed by the learned Commissioner Inland Revenue (Appeals-I), Lahore("CIR(A)") for the Tax Year 2014 on the grounds set forth in the memo of appeal. 2. The facts in brief leading to the present appeal are that the appellant-taxpayer, a public limited company, is engaged in purchase and supply/ transmission of electricity to the Distribution Companies (DISCOs) by using its transmission network, under the license bearing No.TL/01/2002 dated 31.12.2002 issued in pursuance to section 17 of the Regulation + of Generation, Transmission and Distribution of Electric Power ‘Act, 1997 (XL of 1997). It may not be out of place to mention here that the supply of electric power is legally prohibited without a license of distribution and determination of tariff rates by NEPRA under the said Act. 3. The appellant filed its income tax return for the tax year 2014 on 15.08.2015 and claimed refund of (Rs. 690,112,821). The return of income filed by the appellant-taxpayer was treated, as deemed assessment under section 120(1) of the Income Tax Ordinance, 2001("the Ordinance 2001”) by Scanned with CamScannera anossnazas operation of law. On observing that the sald deemed assessment u/s 120 was erroneous as well as prejudicial to the interest of revenue, the concerned Additional Commissioner Inland Revenue (“AACIR") initiated amendment of assessment proceedings u/s 122(5A) of the Ordinance 2001 by issuing show-cause notice u/s 122(9) of the Ordinance ibid. The said proceedings culminated in passing the order u/s 122(5A) dated 16.12.2020, creating income tax demand of Rs.8,189,206,628/- on a single issue of charging minimum tax u/s 113 of the Ordinance 2001 on the , declared business turnover of appellant-taxpayer as was fainable from the audited final accounts appended with the 4. In the first round of appeal proceedings against theorder of the CIR(A), this learned Tribunal remanded the case back to the CIR(A) vide order dated 23.09.2022 in ITA No.3891/LB/2021, with the directions to decide the appeal on merits. The CIR(A), took up the matter again, and disposed of the appeal vide his order dated 27.12.2022, rejecting the appeal of the appellant- taxpayer while holding as under: “In view of the discussion made hereinabove, I am of the considered view that the treatment accorded by the AGCIR, charging tax u/s 113 on total turnover, is legally and factually correct and valid. Therefore, the impugned order for tax year 2014 passed u/s 122(5A) dated 16.12.2020 is endorsed and hereby confirmed.” 5. Aggrieved yet again, the appellant has filed instant appeal before this Tribunal, in the second round of proceedings. 6. Mr. Ageel Ahmad Sheikh, Advocate appeared on behalf of the appellant-taxpayer as Authorized Representative ("AR"). The respondent-department was represented by Mr. Husnain Shamim, DCIR and Mr. Amir Yasin, DCIR as the Departmental Representatives. Scanned with CamScannera amass 7. The learned AR vehemently argued that the learned AdCIR was not justified in charging minimum tax u/s 113 of the Ordinance 2001 because the “declared turnover” adopted by the AACIR does not pertain to/belong to the appellant-taxpayer. While highlighting the relevant provisions of Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (XL of 1997) and the license issued to the appellant- taxpayer in pursuance to the Act 1997 ibid, the learned AR contended that the appellant-taxpayer is not legally entitled to urchase and sell electricity. He argued that the whole domain of siness activities of the appellant-taxpayer is confined to revenues from “transmission charges”, which revenue be to the appellant-taxpayer and, therefore, the appellant hasVoluntarily paid minimum u/s 113 of the Ordinance 2001 on ‘such transmission charges. The AR continued that the appellant- taxpayer only acts as a conduit between the power generation companies i.e. Generation Companies (GENCOs) & Independent Power Producers (IPPs) on the one hand and the Distribution , Companies (DISCOs) on the other, As per the learned AR, no profit margin is earned by the appellant-taxpayer on the transactions for which it only acts as a conduit. In view of the above arrangements, which is contended to be supported by the relevant law and business license issued to the appellant- taxpayer under section 17 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (XL of 1997), charging minimum tax u/s 113 is absolutely unjustified and against the law. The AR fervidly stated that the assessing officer as well as the CIR(A) have completely ignored the fact that the appellant-taxpayer had disclosed the cost/sale of electricity as its turnover in its financial statements for reporting purpose only. He went on to quote judgment of the honorable Supreme Court of Pakistan cited as PLD 1985 SC 109 in support of his argument that mere fact that the taxpayer has himself categorized a certain type of activity in a certain manner in his financial statements Is not enough to treat it in the manner in the accounts without looking into the actual declared substance of the transactions. In view of these averments, the Scanned with CamScanner‘ sanasusnanors learned AR emphasized that charging of minimum tax on turnover is against the law and facts of the case, therefore, the same is liable to be deleted. 8. Both the learned DRs opposed the contentions of the counsel of the appellant-taxpayer. They informed that, as is clearly evident from the copies of the audited final accounts, the taxpayer itself has treated the revenue from sale of electricity as its own revenue. They further apprised the court that the appellant-taxpayer has filed sales tax returns for the period under reference as well as for the preceding and succeeding tax periods wherein sale and purchase of electricity has been shown .e appellant-taxpayer. It is an admitted position of fact that eneration companies issue invoice in the name of the -taxpayer who in turn sells electricity to the DISCOs raises necessary sale tax invoices in this regard. The irther informed that the declared turnover from sale of clectricity, under the Identical circumstances, was previously exempt from payment of minimum tax under section 113 of the Ordinance 2001 in view of clause (5) of Part-III of Second Schedule to the Ordinance 2001, which clause was subsequently omitted from the statutes by the Finance Act, 2013 with effect m 01.07.2013. The DRs underscored that the appellant clause fror taxpayer was mentioned by name in the sald exemption which leaves no room for doubt that that appellant was engaged in the sale and purchase of electricity. The DR's main argument was built on the premise that the said omission of clause (5) ibid took away the benefit earlier available to the appellant-taxpayer for computation of its tumover chargeable u/s 113 of the ordinance 2001.The DRs continued that the exemption clause itself is a final and irrefutable proof that the taxpayer is engaged in purchase and sale of electricity and the turnover from sale of electricity declared by the appellant-taxpayer belongs to it. ‘Therefore, the theory of being a mere conduit for transmission of electricity from power generation companies to distribution companies is only an after-thought and the same is of neither any consequence nor of any benefit to the appellant-taxpayer. Scanned with CamScanner5 sanosusnanon The learned DRs vehemently argued that had the appellant- taxpayer not been the owner of turnover representing sale of electricity, there would not have been any need to the legislature to grant exemption from payment of minimum tax u/s 113 by Inserting specific clause to this effect In the Second Schedule to the Ordinance 2001. 9. Arguments advanced by both the parties have been heard and record has been perused with the able assistance of the learned AR of the appellant and the DRs. 10. It is observed that one of the line of reasoning of the tellant-taxpayer at the lower forums was that the learned a was not competent to invoke the provisions of section 2A8HA) of the Ordinance 2001 under the powers delegated by efgAcommissioner Inland Revenue. Since this issue has attained finality in view of the honorable Supreme Court of Pakistan judgment dated 23.05.2023 in C.P. No, 6-L of 2023 (Allied Bank Limited vs. The Commissioner of Income Tax, Lahore etc.), this issue was not pressed by the learned AR of the appellant-taxpayer. Similarly, the argument of the learned AR that the AdCIR passing impugned order u/s 122(5A) did not have proper jurisdiction is found to be without any merits because, the learned AR’s reference to the jurisdiction order dated 12.03.2011 is misplaced. The ACIR Is found to have been delegated with the powers u/s 122(5A) by the CIR’s jurisdiction order dated 11.08.2020. 41. It is further seen that a similar Issue has already been decided by this learned Tribunal In favour of the department in the cases CIT, Legal Division, LTU Lahore vs. M/s. Total Parco Pakistan Limited (ITA Nos. 668 to 670/LB/2007) & M/s. Total Parco Pakistan Limited vs. CIT, Legal Division, LTU Lahore (ITA Nos. 2136/LB/2007, 129 to 131/LB/2007 and 609 to 611/LB/2007), wherein It has been held that minimum tax Is to be pald on turnover and not the profit margin. Scanned with CamScanneranesuensraons A 12. Another case came up for consideration by this court which a is cited as 1991 SCMR 1447. The matter in this case was that a Person named Dalima had paid advance tax on behalf of Eruck Maneckj Nawroz Maneckji and Pakistan Progressive Cement Industries Limited. The concerned officer rejected such claim by observing that the advance tax paid by Dalima was on account of its own business income. Another relevant fact of the said case was that it was accepted by the department itself while Passing the assessment order in the case of another taxpayer. jalima was carrying on business on behalf of above said Ns and no declaration regarding this business income was sd to be made by Mr. Dalima. The Hon'ble Court decided in f department. In the instant case, neither the appellant- taxpayer has claimed that it has paid minimum tax on behalf of Distribution Companies, nor Distribution Companies have made any such claim. Hence, the facts of the cited case are not at all four with the facts of the case of appellant-taxpayer. 13. Perusal of the written arguments and documents annexed therewith further shows that the learned counsel for the appellant-taxpayer has also paced reliance on the following cases. 2004 PTD 174 (Trib.) 2003 PTD 869 (Trib.) 1994 PTD 758 (Trib.) iv. 2015 PTD 1926(Trib.) v. 1993 SCMR 287 vi. 1997 PLD 582 ‘A careful analyses of these cases have revealed that, in the case cited a 2004 PTD 174 (Trib.), the Tribunal had held that the assessing authorities could not establish that the Lahore Development Authority (LDA) was engaged in any business. Since minimum tax under section 80D of the repealed Income Tax Ordinance, 1979 was payable on the declared “business turnover", therefore, minimum tax charged under that provision was deleted because of want of evidence regarding conduct of business by-the.LDA.-As. the fact_of sale_and_purchase of Scanned with CamScannermena electricity stands established In the case of the appellant, benefit of this case cannot be extended to the appellant. The cases. reported as 2003 PTD 869 (Trib.), 1994 PTD 758 (Trib.) and 2015 PTD 1926(Trib.) have been decided by the Tribunal on the principle that there was a clear-cut distribution agreement between the principal companies with the agents (principal-agent relationship), and the agents were merely selling the products at the behest of and under the Instructions of the principal companies at the prices given by the principals. all these cases, it was established that the agents were jing only commission/margin and all sale activity of the \cts belonged to the principal companies and not the Tax Ordinance, 1979 or corresponding provisions of section 113 of the Income Tax Ordinance, 2001 was directed to be levied on commission in these cases. The facts of these cases are distinguishable from the facts of this appellant because no principal-agent relationship exists between the generation ‘companies (GENCOs)/Independent Power Producers (IPPs) and the appellant-taxpayer. Therefore, the cases cited as precedent are of no avail to the appellant. Lastly the cases relled upon by the learned AR, 1993 SCMR 287 (SC) and 1997 PLD 582 (SC) are also of no help to the appellant because the case cited as 1993 SCMR 287 (SC) holds that, "Y think that, properly considered, income tax Is a tax on a person in relation to his income. The tax {s not imposed on income generally; it is imposed on the income of a person. “The appellant-taxpayer has failed to establish that at factual level It Is not engaged In purchase and sale of electricity as a necessary part of Its own business, The case cited as 1997 PLD 582 (SC)exhaustively dealt with the definition of the word Income and ultimately held that “business turnover” can been deemed as “Income” by the legislature for levy of minimum tax under section 80D of the Repealed Income Tax Ordinance, 1979. 14. Perusal of the licensing arrangement of the appellant taxpayer shows that NEPRA has Issued license to NTDC Scanned with CamScannera . (eppeliant-taxpayer) for procurement, supply, and transmission of electricity as nobody can deal in generation, Purchase, sales or transmission electricity without taking license from NEPRA as Per sections 14B,16, 20, 22, 23C of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, This Is just like any other regulated regime in Pakistan, for anosenanons Instance none can sell medicine in Pakistan without obtaining license from Drug Regulatory Authority of Pakistan (DRAP) under BXrovisions of the Drug Act,1976. The same is situation for % oil &petroleum products Btion, import and sales of gas, 3 regulated by the OGRA under the Oil & Gas Regulatory Yonce, 2002. Therefore, the argument that the appeliant- xpayer is not involved in sale and Purchase of electricity is far from convincing even in view of the licensing arrangement relied upon by the appellant, 15. Further, it would be advantageous to reproduce clause (5) Of Part-III of Second Schedule to the Ordinance 2001 here, ready reference: iWhere the corporatized entities of Pakistan Water and Power Development Authority (DISCOs) and National 7ransmission and Dispatch Company(NTDC), are required to Pay minimum tax u/s 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax up to the tax year 2013.” for ‘The above quoted omitted clause makes it crystal clear that as a, matter of a special concession granted by the legislature, the “purchase price of electricity’ was to be excluded from the turnover on account of sale of electricity llable to minimum tax till the tax year 2013.After the omission of clause (5) of Part-II Of Second Schedule to the Ordinance 2001, appellant-taxpayer cannot take cover of an Article out of its license to avoid Payment of minimum tax on its declared turnover, inclusive of electricity price, in respect of tax year 2014 and onwards, 16. It seems relevant to mention here that the external auditors of the appellant-taxpayer who had audited the final’ accounts of the appellant-taxpayer were “KPMG Taseer Hadi & Co." and they had given an opinion on the audited accounts for Scanned with CamScanner. ne snesnasn0nd tx year 2014 while highlighting fallure of the appellant-taxpayer + to comply with the provisions of section 113 of the Ordinance 2001. Clause (c) of Para3 of the Auditor's Opinion Is reproduced hereunder for reference: “() as explained In note 28.1 of the accompanying financial statements, the Company was granted exemption by Federal Government vide SRO171(1/2008) dated 21 February 2008 to exclude purchase price of electricity from oss turnover for the purpose of charging minimum tax Ner section113 of Income Tax Ordinance, 2001 till tax \ 2013. The exemption period, expired, and the a any has not made, provision for tax In the financial dments based on minimum tax chargeable on gross over Including purchase price of electricity. The * -afpellant-company only considers use of system charges for calculation of minimum tax. Had the provision of minimum tax based on gross turnover been made in the financial statements, tax provision and current tax expense for the year would have been higher by Rs. 7,686.44 million and profit after tax and accumulated profits would have been lowered by Rs. 7,686.44 million.” It seems that the appellant was well aware of the legal position as to mandatory payment of minimum tax, however, it had deliberately avolded to make due payment of minimum tax on the declared business turnover including sale of electricity. 17. In view of what has been discussed above, we do not have any doubt in our minds that the appeal filed by the appellant- taxpayer is devold of any merits, hence, liable to be dismissed. We order accordingly. oh (CH. MUHAMMAD TARIQUE) oA Accountant Member (MONIM SULTAN) Judicial Member lad De pcle tb fr 4% Assle tr Widisha even sontthgitirlona BITHE GIR, eomensorntraat Scanned with CamScanner