OGDCL Clarification

Apropos a news item published in Business Recorder on 20th January, 2011 under caption "PAC EXPRESSES SERIOUS CONCERN OVER PATHETIC PERFORMANCE OF FBR". It is hereby stated that OGDCL would like to clarify that gas discovered under Uch Lease had low heating value, which was fit only for power generation.
GOP, therefore, allocated this gas to Uch Power (Private) Limited, an Independent Power Producer (IPP), for its power generation complex at Dera Murad Jamali, Nasirabad, Balochistan. The following payment components were agreed in the Gas Supply Agreement entered into between OGDCL add Uch Power.
i. COMMODITY CHARGE: This represents the price of actual quantity of gas delivered to Uch Power.
ii. COMMODITY TRANSPORTATION CHARGE: This represents the transportation charges for actual quantity of gas transported through the pipeline.
iii. DEMAND CHARGE: This represents a consideration for installation of project-specific facilities and commitment of maximum daily quantity (MDQ) of 106,000 MMBTU and the reserves under Uch Lease to Uch Power. Any failure in fulfillment of MDQ results in payment of heavy liquidated damages by OGDCL.
iv. DEMAND TRANSPORTATION CHARGE: This represents a consideration for recovery of capital cost of the project-specific 47KM long pipeline.
2. Since inception (October 1999) OGDCL was paying royalty @12.5 percent on Commodity Charge which represents the value/prime of the gas actually delivered. Sales Tax was being paid on first two components ie Commodity Charge and Commodity Transportation Charge, which actually form the total consideration/value of supply for actual quantity of gas delivered to Uch Power Ltd. Since the third and fourth components of payments. ie Demand Charge and Demand Transportation Charges have no relation/nexus with the actual quantity of gas delivered and these are fixed charges which are payable even when no gas is sold to Uch Power Ltd. These fixed charges are paid on account of investment made by OGDCL on project-specific plants and equipment and pipeline, therefore, the later two components do not form part of the value of gas supplied. In view thereof, sales tax is not applicable on two later components which do not form part of the "VALUE OF SUPPLY" as defined in section 2(46) of the Sales Tax Act, 1990. It would be pertinent to mention here that payments against third and fourth components are similar to the "capacity payments" received by IPPs which, according to FBR Sales Tax General Order No 01/2000 dated January 24, 2010, are not to be included in the "value of supply" for the purpose of levy of sale tax.
3. During 2008, the Government of Balochistan demanded payment of royalty on all four components. The matter was discussed with Directorate General of Petroleum concessions (DGPC) and it was agreed that the matter may be referred to an external counsel for an independent advice. M/s ORR Dignam & Co, legal counsels opined that OGDCL's royalty payments to be in line with the applicable royalty rules.
4. Later on, in a meeting held at National Assembly Secretariat Islamabad on June 18, 2008, presided by Minister for Law and Justice, Human right and parliamentary Affairs, OGDCL was directed to pay royalty to Government of Balochistan on all four components. (While accepting this high level decision OGDCL pointed out that this may mislead the tax authorities even in calculation of sales tax. OGDCL therefore requested DGPC to refer the matter to Law & Justice Division for clarification but no response was received).
5. All information regarding sale of gas made by OGDCL during each month are timely reported to DGPC as well as FBR. In addition, FBR and Directorate General of Revenue Receipt Audit (DGRRA) had been conducting annual sales tax audit of OGDCL/DGPC accounts since inception of this project. However, no violation of sales tax law on the part of OGDCL was ever reported in these audits.
6. Order-in-Original passed by the sales tax officer in which sales tax was also charged on third and fourth components was based on DGRRA audit para which in turn was premised on the method of payments of royalty decided in the afore-mentioned meeting chaired by the Minister for Law & Justice Division. Furthermore, despite OGDCL's clarification that it has already paid sales tax on both first and second components, the sales tax officer double charged sale tax on the second component namely, commodity Transportation Charge. The whole controversy emanated from a misconception of the mechanism of the recovery of costs of the Uch Project by DGRRA.
7. OGDCL has always paid sales tax on top priority basis. Since sales tax is a pass-through item for OGDCL, therefore, no benefit accrues to OGDCL for non-payment of sales tax. However, in case the sales tax is also levied on the fixed charges then this additional sales tax would have been adjusted by Uch Power Ltd as input tax against its output tax on Energy Purchase Price (EPP). Resultantly the overall payment of sales tax into the Government Exchequer would remain the same in either of the two situations. Therefore no loss has occasioned to the national exchequer in this case.
9. Since OGDCL does not accept the sales tax order for the reasons mentioned here in above, therefore, its counsel is in the process of filing an appeal before the Appellate Tribunal against the order-in-appeal passed by the Commissioner Appeals.