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ISLAMABAD: The Sindh High Court (SHC) has ruled that the capital gain arising from the sale of shares by the MND Exploration and Production to the Pakistan Petroleum Limited (PPL) does not constitute a “Pakistan-Source Income”, declaring that the transaction was a share sale rather than a sale of underlying assets, and, therefore, is not taxable under the Income Tax Ordinance, 2001. The landmark judgment was announced by Justice Mohammad Abdur Rahman and Justice Muhammad Junaid Ghaffar in Income Tax Reference Applications (ITRAs) Nos. 318 and 319 of 2019, filed by the Commissioner Inland Revenue, Zone-III, Karachi, and Pexcon A.S. (formerly MND E&P A.S.), respectively. This unanimous order has decided ITRA No. 318 of 2019, maintained by the Commissioner of the Inland Revenue Zone-III, Large Tax Payer Unit, Karachi, and ITRA No.319 of 2019, maintained by Pexcon A.S., which was formerly known as MND E&P A.S., (MND), each against an order dated 20 August 2019 passed by the Appellate Tribunal Inland Revenue Pakistan (Karachi) in ITA No.922 KB 2015 setting aside an order dated 23 April 2015 passed by the Commissioner Inland Revenue (Appeals) in Appeal No. 1314 of 2014 and an Order in Original dated 23 June 2014 passed by the Deputy Commissioner Inland Revenue under Sub-Section (1) of Section 122 of the Income Tax Ordinance, 2001, remanding the matter to the Deputy Commissioner of the Inland Revenue for conducting a reassessment. PPL earnings decline 22% in FY25 The SHC order revealed that the MND is a private limited company that is incorporated in the Czech Republic, which, inter alia, holds 100 percent of the shareholding of a company registered in the United Kingdom entitled MND Exploration and Production Limited. MND Exploration and Production Limited was incorporated as a company undertaking oil exploration and production, and which holds the right to Petroleum Concessions in both Pakistan and Yemen. In the Tax Year 2013, the entire shareholding of MND in MND Exploration and Production Limited was acquired by Pakistan Petroleum Limited (hereinafter referred to as “PPL”) through a Share Purchase Agreement dated 30 August 2012 (SPA). While MND is, for taxation purposes, a non-resident in Pakistan, the sale of the shares that it held in MND Exploration and Production Limited to PPL nevertheless was subject to withholding tax under Sub-Section (2) of Section 152 of the Income Tax Ordinance, 2001, read with Clause (2) of Division II of Part III of the First Schedule of the Income Tax Ordinance, 2001 and which mandated that 20 percent of the purchase price was to be withheld and deposited by the PPL. On this basis, a sum of Rs. 2,349,693,757 was deducted and deposited as withholding tax by the PPL. The MND filed its income tax return in Pakistan for the Tax Year 2013, and while showing a capital gain of Rs. 3,235,661,048 on the sale of the shares held by it in the MND Exploration and Production Limited claimed a refund on the entire amount of Rs. 2,349,693,757 that was treated as withholding tax by the PPL located in Pakistan and hence could not be treated as “Pakistan Source.” The SHC has also considered the argument raised by the Department that the SPA was in fact a scheme of tax evasion and should be set aside, and the transaction should rather be considered as a sale of the assets of MND Exploration and Production Limited. When this argument is considered, in the presence of Sub-Section (9) and Sub-Section (10) of Section 101 of the Income Tax Ordinance, 2001, it is apparent that the threshold in respect of such a transaction having been set in those sections, an inquiry under Section 109 of the Income Tax Ordinance, 2001, would not be warranted. Indeed, the Department has, rightly, also not made such a claim in the assessment order, and thus all that was required to be done was to interpret the provisions of Sub-Section (9) and Sub-Section (10) of Section 101 of the Income Tax Ordinance, 2001. The SHC’s ruling added that the transaction for the sale of the shares held by the MND in MND Exploration and Production Limited to the PPL should be considered a transaction for the sale of shares and not a transaction for the sale of assets, and the gain from which cannot be treated as “Pakistan Source.” Consequently, ITRA No. 318 of 2019, maintained by the Commissioner of Inland Revenue, Zone-III, Large Tax Payer Unit, Karachi, is hence dismissed, and ITRA No.319 of 2019, maintained by the MND, is allowed. Let a copy of this order be issued to the Appellate Tribunal, Inland Revenue Pakistan (Karachi), in terms of Sub-Section (5) of Section 133 of the Income Tax Ordinance, 2001, SHC order added. Copyright Business Recorder, 2025
