SOHAIL SARFRAZ

ISLAMABAD: Islamabad High Court (IHC) has declared that the sales tax zero-rating on ‘petroleum crude oil’ also extends to condensate.

This is the crux of the judgement of the IHC on the issue of applicability of sales tax on condensate oil.

The interpretation of the tax department has been held as illegal and misconceived by the IHC.

The IHC has issued judgement in favour of petroleum companies.

According to the judgement of the IHC, the applicant companies were engaged in the business of exploration, production, and sale of petroleum and natural gas. They did not charge sales tax on the sales of “condensate” for various tax periods in the belief that the supply of condensate was zero-rated for sales tax purposes. Their belief emanated out of SRO 549(I)/2008, dated 11.06.2008.

The progress of the disputes in these STRs from the show-cause notices up to the appellate tribunal inland revenue (ATIR) was substantially similar, with the orders-in-original and the orders by the Commissioners (Appeal) in all cases coming out against the taxpayers, except in STR 17 (sales tax reference), where the Commissioner (Appeals) decided for the taxpayer. The ATIR’s decisions were all against the taxpayers with the ATIR’s judgment dated 08.09.2021 leading to STR 17 being the most detailed one.

The assessing officer in the case leading to STR 17 disallowed the taxpayer’s stance by returning the finding that, though both crude oil and condensate were petroleum products, they were distinct products on several counts, including the methods of their production and their physical and chemical properties.

The assessing officer referred to several treatises to conclude that condensate oil is yielded as a liquid when natural gas is depressurized at atmospheric conditions after extraction from the earth, much in the same manner as steam condenses in a decanter to produce water; hence the term ?condensate?. On the other hand, crude oil exists in liquid form from inception and is pumped out of the earth as a liquid. He therefore concluded that the zero rating was limited to crude oil only, because entry no. 4(xvii) in SRO 549 did not mention condensate.

By establishing that condensate oil and crude oil were two different products, they inferred that the mention of one of the two products in SRO 549 implied the exclusion of the other, IHC maintained.

“Anyone familiar with the petroleum industry is aware that condensate and crude oil are two different products of the petroleum family, just as cheese, cream, and butter are distinct products of the dairy family. But the taxpayers” case had never been the one the assessing officers and the learned ATIR set up for themselves to rebut. The taxpayers” case was that condensate was to be meted out the same treatment of zero-rating because it was also crude oil for the purposes of the PCT heading 2709.0000, with reference to which the good in question was zero-rated in exercise of the power under section 4(c) of the Sales Tax Act, IHC judgement added.

The IHC has reckoned the member of the ATIR who authored this sentence ought not be wasting his scientific talents writing tax judgments, but ought to head out to some leading Petroleum Institute to teach all the petroleum scientists and engineers in the world that they all have been wrong in treating condensate as oil, because it is not oil but natural gas! We reckon we need say no more to demonstrate the sheer absurdity of the reasoning followed by the learned member to come to this phantasmagorical conclusion in a desperate attempt to move condensate out of the pale of PCT heading 2709.0000 into another PCT heading.

Resultantly, these sales tax reference applications (companies) are answered in the positive, that is, for the taxpayers and against the FBR, IHC judgement added.