Independent Power Producers: LTUs, RTOs stopped from implementing ATIR decision

The Federal Board of Revenue (FBR) has immediately stopped the Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) from implementing a major judgement of the Appellate Tribunal Inland Revenue (ATIR) Islamabad against Independent Power Producers (IPPs), under which the IPPs would be denied sales tax refunds, creating more liquidity problems for the power producers with increased litigation in courts.
It is learnt here on Saturday that the FBR has issued instructions to the LTUs and RTOs to bar the field formations from the implementation of the ATIR judgement in the case of the IPPs, which according to the FBR, will have serious implications for them. Sources told Business Recorder that the FBR has termed the judgement of the ATIR Islamabad against the relevant provisions of the Sales Tax Special Procedure Rules, 2007, 'Special Procedure for Collection and Payment of Sales Tax on Electric Power' and relevant Sales Tax General Orders. The FBR has also apprehended that the implementation of the judgement of the ATIR Islamabad would further increase litigation in courts.
According to the FBR's instructions issued to the LTUs/RTOs, the issue regarding apportionment of input tax between Energy Purchase Price (EPP) and Capacity Purchase Price (CPP) in the case of IPPs as emanating from the decision of the Appellate Tribunal Inland Revenue (ATIR) in 2011 PTD 1306 has been examined by the FBR.
The Board is of the opinion that the order of the ATIR does not take into account the full background and scheme of Sales Tax Special Procedure Rules, 2007 as well as the provisions of Sales Tax General Orders applicable in these cases. M/s Fauji Kabirwala Power Company Limited has already filed a reference before the Islamabad High Court against the said order of ATIR. The application of this decision in the case of other IPPs will lead to serious issues including multiplicity of litigation. "Accordingly, you are advised not to apply this decision of the ATIR in the case of any other IPP till the issue attains finality. In case, the High Court confirms the Order of ATIR, matter may be referred to the Board for further instructions," FBR's instructions added.
Referring to the comments of a leading Karachi-based chartered accountants firm on this judgement, sources explained that the issue is related to the recent decision of the Appellate Tribunal Inland Revenue, Islamabad Bench issued in the case of M/s Fauji Kabirwala Power Company Limited [now reported as 2011 PTD (Trib.) 1306] wherein it has been held that input sales tax, suffered on purchases of fuel and lubricants etc, needs to be apportioned between Energy Purchase Price [EPP] and Capacity Purchase Price [CPP] in terms of provisions contained in section 8(2) of the Sales Tax Act, 1990 read with Chapter IV of the Sales Tax Rules, 2006.
Notwithstanding the fact that there are certain glaring errors and omissions in the order of the ATIR (which lead the Members to arrive at an improper conclusion) for which both rectification application and reference have already been filed at appropriate forums, it is submitted that the decision recorded by ATIR is contrary to the intentions of the legislation which is evident not only from the clarification issued by the Board but also from the provisions of General Order issued in this respect. Further, the provisions of 'Special Procedure for Collection and Payment of Sales Tax on Electric Power' are clear enough to suggest that no apportionment of input tax is required between the two revenue streams as are applicable in the case of IPPs, chartered accountants firm stated.
In view of the fact that the subject decision is considered to be against both the expressed provisions of law and the intentions of the legislature, there are strong chances that the same would be overruled as and when subjected to review by higher courts. In the intervening period, ie, until the matter attains finality, there is a need that the field formations are advised not to apply the decision on other cases. This is necessary because the implication of the aforesaid decision on IPPs would be such that these would be denied sales tax refunds thus leading to further liquidity problem which is already at an alarming level owing to the prevailing issue of circular debt, a chartered accountants firm maintained.
Sources further said that it is not out of place to make a reference to instructions dated May 20, 2002 issued by Regional Commissioner of Income Tax, Karachi when in a similar situation, which arose in consequence or interpretation by Income Tax Appellate Tribunal of section 50 (7D) of the repealed Income Tax Ordinance, 1979, the field formations were advised not to make any further case on the basis of the decision. Accordingly, the FBR has been requested to intervene in the matter and issue directions to the respective LTUs/ RTOs to an effect that no contravention case is made against any IPP on the basis of aforesaid decision until the matter is decided by the High Court, chartered accountants firm concluded.