ISLAMABAD: The Supreme Court has held that income tax authorities rightly issued amended or fresh assessment orders to a number of Compressed Natural Gas (CNG) filling stations in the tax year 2004 and 2007, since the sale of CNG in those years was under reported.

“We find no legal infirmity in the manner in which the tax authorities ascertained the quantum of CNG produced from the volume of natural gas consumed in the process of conversion,” said a verdict authored by Justice Faisal Arab

A three-judge Supreme Court bench, headed by Chief Justice Mian Saqib Nisar, had taken up appeals by the commissioner for inland revenue in Rawalpindi against 19 CNG stations: Khan CNG Filling Station Rawalpindi, Badhan CNG Filling Station Rawalpindi, Zam Zam CNG Filling Station, Techno Gas Service CNG Station and others.

The appeals were moved against different decisions of the Lahore High Court’s Rawalpindi Bench from Nov 2012 to 2014.

Court upholds tax commissioner’s assessment of discrepancies in gas purchased and sold in Rawalpindi

Filling stations sell CNG by compressing natural gas for use as a fuel, and the gas supplied is measured on gas meters in terms of million British thermal units (MMBTU).

After it is converted into CNG, however, the gas is sold by its mass in kilogrammes, at a retail price regulated by the Oil and Gas Regulatory Authority (Ogra).

For the purposes of determining the retail per kilogram price of CNG, Ogra has adopted a formula that converts MMBTUs of natural gas into kilogrammes of CNG.

It appeared, the verdict said, that tax authorities in Rawalpindi region decided to treat CNG stations as a separate class of business in order to audit their income tax affairs. Their returns were thus scrutinised and, in the process, a disparity between CNG sales was reported with the corresponding purchase of natural gas in 2004 and 2007.

This conclusion was drawn after the prices of natural gas and its volume consumed by the filling stations in the tax years in question were obtained from Sui Northern Gas Pipelines Limited (SNGPL) and the prices of CNG for the tax years in question were calculated through the formula for converting MMBTU to kilogrammes, procured from Ogra.

After noticing a significant disparity in the consumption of natural gas and the sale of CNG declared in the returns of income, the commissioner inland revenue issued notices to the CNG stations to amend the assessment orders.

After hearing out the representative of the CNG stations, the commissioner applied Ogra’s conversion formula and determined the quantum of CNG produced by each of the respondents in the tax year.

After allowing for 11pc wastage of natural gas in the process of conversion, the quantum of CNG sold in the tax years in question was determined. This exercise was repeated for all the tax years in question and the amended assessment orders were issued accordingly.

But when the filling stations failed to substantiate the discrepancies, the commissioner adjusted the expenses, which increased their tax liability.

Although the CNG operators opted for departmental appeals against the decision, they remained unsuccessful. They then filed representations before the inland revenue appellate tribunal in Islamabad, which found in their favour.

The tax department then chose to file tax references before the Rawalpindi bench of the high court.

In its judgment, SC held that the quantum of CNG produced by the filling stations in each of the tax years in question was not determined on the basis of some hypothetical or arbitrary criteria.

Similarly, they procured the rates of CNG prevalent in the tax years in question from Ogra. Both the sources of information were competent bodies to divulge such information with absolute correctness.

After obtaining the information, tax authorities applied the relevant conversion formula and concluded that the sale of CNG had been under-reported, which led to the issuance of amended assessment orders.

Published in Dawn, August 31st, 2017

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