The Supreme Court of Pakistan has ruled that payments received by Attock Refinery Limited for decanting and desalting crude oil are not taxable supplies, and so do not attract sales tax under Section 3 of the Sales Tax Act, 1990. A three-member bench headed by Justice Munib Akhtar set aside the Islamabad High Court's judgment and the decision of the Appellate Tribunal Inland Revenue, Islamabad. The ruling settles a dispute in which the tax department had treated the refinery's receipts as payment for taxable services.
How the dispute began
The refinery received payments from crude oil suppliers, including Oil and Gas Development Company Limited (OGDCL), for decanting and desalting the crude. Under the contracts, the suppliers were responsible for these processes, yet the refinery carried them out at its own premises and was paid for the work. In general terms, decanting means drawing off the liquid from the crude, and desalting means removing salt before refining. The department said these activities were a taxable activity under Section 2(35) of the Act, and that the payments were consideration for taxable services.
Senior counsel Sirdar Ahmed Jamal Sukhera, representing the refinery, framed the dispute as one question: whether these receipts were consideration for taxable services and therefore liable to sales tax. The Appellate Tribunal dismissed the refinery's appeal, and the High Court also decided against it in the tax reference. The Supreme Court has now answered the legal question in the refinery's favour and against the department.
What the Court found
The Court examined Section 3(1), the charging provision of the Sales Tax Act, which requires three elements: a taxable supply, made by a registered person, in the course or furtherance of a taxable activity. Each element must exist on its own and must be legally connected to the others before the tax can apply. The judgment also reviewed amendments introduced through the Finance Acts of 1996, 1998 and 2008.
The Court found that the crude oil remained the same identifiable product before and after decanting and desalting, and that no separate product emerged from the processes. The department had not established such a product, which it needed to bring the payments within the statutory definition of supply. The processes also did not amount to services provided to the suppliers. Because the suppliers were contractually responsible for the work, the Court treated the payments, in commercial terms, as an adjustment of the price payable for the crude.
The Court also stressed that a taxable activity alone is not a taxable event, and that the burden of proving every essential element of a tax rests on the State rather than the taxpayer. Without that proof, it said, no tax liability can be imposed simply on the basis of the department's reading of a commercial transaction.
Aasan alfaaz mein
Supreme Court ne faisla diya hai ke Attock Refinery ko crude oil ki decanting aur desalting ki adaigiyon par sales tax nahi dena hoga. Adalat ke mutabiq yeh adaigiyan tax wali supply nahi hain, kyunke crude oil ek hi cheez reheti hai. Tax lagane ke liye State ko har zaroori shart sabit karni hogi. Aam log ke liye iska seedha asar fori taur par zahir nahi hota, lekin yeh sales tax qanoon ki ek ahem tashreeh hai.
