2026 PLP 424 (PTD)

SYED MANSOOR ALI SHAH, J.

The brief facts of the case are that Messrs Mari Gas Company Limited, Islamabad (hereinafter referred to as the "Respondent") is a public limited company registered under the Companies Ordinance, 19841 (now the Companies Act, 20172) engaged in the business of exploration, production and distribution of gas. The Respondent filed their return of income for the year 1999-2000 with gross receipts from the sale of petroleum at Rs. 694,187,000/- for the assessment year 1999-2000 and claimed Rs. 104,128,050/- (15% of gross receipts representing wellhead value of production) as an allowance pursuant to Rule 3, Part I of Fifth Schedule to the Income Tax Ordinance, 1979 (the "1979 Ordinance"). Subsequently, the Petitioner passed an assessment order dated 21.05.2002 under Section 62 of the 1979 Ordinance holding that the amount of royalty payments made by the Respondent to the Government should have been deducted from the Respondent's gross receipts when calculating allowance since royalty represents share of the government. The said order was then challenged by the Respondent through a first appeal before the Commissioner of Income Tax/Wealth Tax (Appeals) which was dismissed3 vide order dated 17.06.2003. In response, the Respondent preferred a second appeal before the Income Tax Tribunal Islamabad (the "Tribunal") which was also dismissed vide order dated 26.10.2007 which was then assailed before the Islamabad High Court, Islamabad via income tax reference. On 31.03.2022, the Islamabad High Court, Islamabad in accepting the appeal passed a judgment ("Impugned Judgment") holding that for the purposes of calculating "depletion allowance" under Rule 3, Part I of Fifth Schedule to the 1979 Ordinance that the amount of royalty paid by a tax-payer to the government is not to be deducted while computing the well-head value. Hence, the present appeal by leave of this Court.

2. We have heard the learned counsel for the parties and perused the record. The primary question to be addressed by this Court is whether in calculating depletion allowance under Rule 3, Part I of the Fifth Schedule to the 1979 Ordinance, the amount of royalty is to be deducted from well-head value? To answer the question, Rule 3, Part I of the Fifth Schedule to the 1979 Ordinance is examined which is as follows: "

3. Depletion allowance. In determining the income of such undertaking for any year ending after the date on which commercial production has commenced, an allowance for depletion shall be made equal to fifteen per cent of the gross receipts representing the well-head value of the production: Provided that such allowance shall not exceed fifty per cent of the profits or gains of such undertaking before the deduction of such allowance." Rule 6(10), Part 1 of the Fifth Schedule to the 1979 Schedule defines the well-head value as: "6(10). "well-head value" has the meaning assigned to it in the agreement between the assessee and the Government and, in the absence of any such definition in the agreement, the meaning assigned to it in the Pakistan Petroleum (Production) Rules, 1949 [or the Pakistan Petroleum (Exploration and Production) Rules, 1986]."

3. A perusal of these rules when read in conjunction with the concession agreements between the Government and the Respondent does not offer any guidance as to the meaning of well-head value, thus the meaning assigned to it under Rule 2(k)4 of the Pakistan Petroleum (Exploration and Production) Rules, 1986 ("1986 Rules") is to be relied upon. The premise of Rule 2(k) of the 1986 Rules plainly provides that well-head value is the value derived after excluding the costs of gathering, processing, treatment and transportation of petroleum from the market value of petroleum. It is in this context that Rule 36(1) and 38 of the 1986 Rules need to be explained which provide: "

36. Royalty. (1) Subject to the payment of such additional amount by way of royalty as may be specified in any agreement with the Government to which the holder of the lease is a party, the holder shall pay a royalty at the rate of 12.5 per cent of the wellhead value of the [Petroleum] produced and saved. (2) Royalty is payable monthly within 10 days of the expiry of the calendar month in question. (3) From the amount of royalties payable in respect of any one year of the term of a lease, there shall be deducted the amount of yearly lease rent actually paid in respect of that year pursuant to rule 39." "

38. Value of Petroleum. For the purpose of calculating the amount due by way of royalty, the value of [Petroleum] shall be: (a) in the case of Petroleum delivered to national market pursuant to [rule] 41 the price actually realized in such sales; (b) in the case of [Petroleum] not sold pursuant to (rule) 41 the international market price determined in such manner as the Government, subject to the terms and conditions of any agreement between the PRESIDENT and the lessee, may, from time to time, determine." On a conjunctive reading of these provisions, it becomes clear that merely because the definition of well-head value incorporates by reference the mechanism for calculation of market value that is employed for purposes of calculation of royalty under Rule 38, does not automatically incorporate within the definition of well-head value the quantum of royalty payable to the Government as a cost that is to be excluded from market value for purposes of determination of well-head value.5 What the Tribunal has essentially done is to treat the royalty payable by petroleum exploration and production companies as an equity interest of the Government in the value of remaining product which is to be measured under the definition of the well-head value. The definition of well-head value does not allow reading into such definition exclusion of royalty payable by petroleum exploration and production companies to the Government for purposes of calculation of depletion. allowance pursuant to Rule 3, Part 1 of the Fifth Schedule to the 1979 Ordinance. Thus, the amount of royalty paid by a taxpayer to the Government has to be viewed as a separate component which is entirely independent on its own and is not to be deducted while computing the well-head value.

4. Therefore, in view of the answer to the question raised, we have not been able to take any exception to the Impugned Judgment and are of the view that it does not warrant any interference. These petitions are, therefore, dismissed. UN/D-2/SC Petitions dismissed. 1 Ordinance No. XLVII of 1984. 2 Act No. XIX of 2017. 3 Section 132, Income Tax Ordinance, 1979. 4 2(k). "Well-head value" means the market value of the Petroleum less gathering, processing, treatment and transportation costs from the well-head to the place at which the market value is determined, and in the case of natural is shall also include compression dehydration and liquefaction costs." 5 Impugned Judgment, para 10.