A five-member larger bench of the Appellate Tribunal, Inland Revenue has given a detailed landmark judgement in favour of the Federal Board of Revenue (FBR) on two issues regarding application of tax rate on Exploration & Production Companies (E&P) companies and claim of depletion allowance by the E&P companies.
Explaining implications of a judgement of Appellate Tribunal released in last week of November 2011, sources explained here on Monday that there was a controversy on the two pivotal tax issues between the E&P companies and the FBR. Firstly, the application of tax rate on the E&P companies and the second issue is related to the claim of depletion allowance by the E&P companies.
This issue is related to the manner of calculation of the depletion allowance. As per oil companies, such calculations has to be on gross receipts whereas the department contested that the amount of the royalty has to be deducted from the gross receipt before calculating the depletion allowance. The revenue impact of these two issues in these cases is approximately Rs 35 to Rs 40 billion up to Tax Year 2010 having future repercussions. Both the revenue and the E&P companies were involved in litigation before the Tribunal for about last five years.
Earlier, the issue of claim of depletion allowance was decided first by the Division Bench and then by the full Bench of the Appellate Tribunal, the highest fact finding authority in the hierarchy of appellate fora, in favour of revenue department and on the issue of application of tax rate in the cases of E&P companies there existed two divergent decisions first one of the Islamabad Bench and later of Karachi Bench of equal strength. In order to resolve the issues, a larger bench of five members (three judicial and two accountant members) was constituted. This Bench of the Appellate Tribunal Inland Revenue after dilating upon the issues in detail has decided both the issues in favour of the department.
According to the sources, judgement of the Appellate Tribunal, Islamabad is a major achievement of the FBR legal team headed by Muhammad Aqil Usman, Member (Legal) which successfully pleaded the departmental case against the E&P companies and saved huge amount of revenue.
Sources said that the companies have filed petitions before the Islamabad High Court for implementation of an understanding between PPEPCA and FBR has reached through filing of MoU. The court had granted the stay against recovery of tax demand in these cases.
Referring to judgement, sources said that the five-member larger bench of the Appellate Tribunal, Inland Revenue observed that the nut and shell of the discussions is that the royalty being the share of the GoP in the mineral resources and levy just like sales tax and excise duty with only difference that sales tax and excise duty are recoverable from the end user and royalty is recoverable at the time of production from the oil/gas producer.
The exclusion of sales tax, excise duty from the gross receipts representing the well head value for the purpose of depletion allowance has not been disputed by the E&P companies. The royalty being share of the GoP in minerals and also a government levy for the purpose of the depletion allowance is liable to deduction from the gross receipts representing the well head value.
Further, the royalty paid to the government is an adjustable payment towards the income tax liability so opposing its deduction would be availing double benefit, something which is not provide in the law. The concept of the depletion allowance is unique as it is percentage of the gross income. The true concept and proper comprehension of the situation demands that to allow the depletion allowance of such gross receipts which have been arrived at after the legally prescribe deduction, the judgement added.