Supreme Court rules Attock Refinery payments not taxable supplies

The Supreme Court has ruled that payments Attock Refinery Limited received from crude oil suppliers for decanting and desalting crude oil are not taxable supplies under the Sales Tax Act, 1990, setting aside decisions of the Appellate Tribunal Inland Revenue and the Islamabad High Court.

A three-member bench headed by Justice Munib Akhtar, with Justices Malik Shahzad Ahmad Khan and Salahuddin Panhwar, decided the case in the refinery's favour, Profit by Pakistan Today reported.

The dispute covered the tax period from 1 July 2008 to 30 June 2009 and payments made by oil and gas exploration companies, including the Oil and Gas Development Company Limited. Under the contracts, the suppliers were responsible for decanting and desalting, but the refinery carried out the work at its own premises and was paid by the suppliers for it.

The tax department treated those payments as consideration for taxable services and moved against the refinery for not charging sales tax. The refinery's appeal was dismissed by the tribunal, and its tax reference before the Islamabad High Court also failed.

Senior counsel Sirdar Ahmed Jamal Sukhera, appearing for the refinery, argued that the payments were not consideration for services provided to the crude oil suppliers and could not attract sales tax under Section 3 of the Act. The department relied on the definition of taxable activity in Section 2(35).

The bench examined the relevant provisions and the amendments made by the Finance Acts of 1996, 1998 and 2008. Section 3(1), it held, requires three conditions to be met: a taxable supply must exist, it must be made by a registered person, and it must be made in the course or furtherance of a taxable activity. Each has to be established separately, with the necessary legal connection, before the charge applies.

On the facts, the bench found that decanting and desalting produced no new or distinct product. The crude oil remained identifiable as the same product before and after the process, and the department had not shown a separate product emerging that would meet the statutory definition of supply.

The court separated the original supply of crude oil from the payments under dispute, saying the question was whether those payments formed an additional taxable supply, not whether the crude oil itself was taxable. Under the contracts in question, the refinery was not providing taxable services to the suppliers merely by doing work the suppliers were responsible for. The payments were an adjustment or correction to the price payable for crude oil.

The judgment said that carrying on a taxable activity does not by itself create a sales tax liability. An identifiable taxable supply made in the course or furtherance of that activity must also be shown. The bench reaffirmed that the burden of proving a taxable transaction rests with the state, not the taxpayer, and that tax authorities must establish every statutory condition rather than rely on their own reading of a transaction's commercial nature.

The bench set aside the high court judgment and the tribunal's decision and answered the question of law in favour of Attock Refinery and against the tax department.