ISLAMABAD: The Lahore High Court has ruled in a complex tax matter involving Sui Northern Gas Pipelines Limited (SNGPL), declaring that the Cost Equalisation Adjustment (CEA) is an expenditure incurred by the company “wholly and exclusively” for its business.
In its detailed ruling, the LHC held that considering the settled principles of law, it is unequivocally held that the CEA is an expenditure, which was incurred by SNGPL “wholly and exclusively for its business” as the statutory obligation and inevitability of this expenditure is such that SNGPL’s business would not have even survived in any other case.
Briefly, the facts which are necessary for the decision of this reference are that applicant SNGPL filed its return of income for the tax year 2010, which was taken as a deemed assessment under Section 120(1) of the Income Tax Ordinance, 2001.
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The deemed assessment was subsequently alleged to be erroneous and prejudicial to the interests of the FBR. Accordingly, a show cause notice dated 13.02.2012 (“SCN”), issued under Sections 122(9) and 122(5A) of the Ordinance, was served upon the applicant, SNGPL.
It is pertinent to mention here that there were multiple issues of alleged evasion of taxes, however, the only issue which requires determination by the court pertains to the permissibility of the deduction of an amount of Rs 11,217,001,000 as CEA, which amount was deducted by the applicant SNGPL while computing its income chargeable to tax under the head as ‘income from business’ for the tax year 2010, in terms of Section 20 of the Ordinance, 2001. The SCN was duly replied to, supported by all relevant documents; however, considering the said reply as insufficient, the Assessing Officer proceeded to pass the Amended Assessment order dated 10.04.2012 under Section 122(1) read with Section 122(5A) of the Ordinance, 2001 (“ONO”).
Being aggrieved, the applicant SNGPL filed an appeal under Section 127 of the Ordinance, 2001, before the Commissioner Inland Revenue (Appeals) “CIR (A),” which appeal was heard on 07.11.2012, to the extent of the issue in hand, i.e., adjustment/deduction of CEA, and was decided in favour of the applicant SNGPL.
Feeling dissatisfied with the order dated 28.12.2012 passed by CIR(A), the respondent-FBR filed an appeal under Section 131 of the Ordinance, 2001, before the Tribunal, which appeal was dismissed vide order dated 03.08.2015. The respondent Revenue filed a reference bearing ITR No.39651 of 2019 before this Court, which reference was allowed vide order dated 10.03.2025 in the terms that the order dated 03.08.2015 passed by the Tribunal was set aside and the matter was remanded to the Tribunal for decision afresh.
In post remand proceedings, the Tribunal heard the parties and proceeded to pass the Impugned Order, whereby the order passed by the CIR(A) was set aside, and the findings rendered by virtue of ONO were upheld. Since the applicant SNGPL is a State-Owned Enterprise (“SOE”), the matter was referred to the Alternative Dispute Resolution Committee (“ADRC”) in terms of the provisions contained in Section 134A of the Ordinance, 2001. ADRC passed the order dated 17.06.2025, settling all issues except the issue relating to CEA.
Considering that the issue of deduction of CEA and the applicability of Section 20 of the Ordinance, 2001, also has its trappings with an agreement dated 22.09.2003 (“Agreement”), executed between the applicant SNGPL and Sui Southern Gas Company Ltd (“SSGC”), counsel for the applicant SNGPL commenced his submissions by explaining the background.
While concluding his submissions, counsel for the SNGPL submitted that CEA expenditure/cost is deductible as it is a mandatory and unavoidable expenditure since execution of Agreement and compliance thereof is not a voluntary decision, as erroneously determined by the Tribunal, instead, being licencee, OGRA’s directions carry statutory obligations for SNGPL, therefore, the compliance of such directions is “sine qua non” for the very existence and continuation of the SNGPL’s business.
The LHC stated that as is evident, the applicability and interpretation of Section 20 of the Ordinance, 2001, particularly the expression - “wholly and exclusively for the purpose of business” - is at the heart of the dispute between the parties.
The precise issue in this case is not whether the terms of the Agreement can be allowed to injure the mandatory provisions of the Ordinance, 2001; instead, it is a simple case where it has to be determined whether the expenditure incurred by the applicant SNGPL is deductible while applying the test: “wholly and exclusively for business”?
In view of the foregoing, the question framed is accordingly answered in the affirmative. Consequently, this and connected Reference Applications are hereby allowed, and while setting aside the Impugned Order passed by the Tribunal, we hereby hold that the order dated 28.12.2012, passed by the Commissioner Inland Revenue (Appeals), to the extent of the issue in hand, is upheld, the LHC added.
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