HUB POWER COMPANY LIMITED vs DEPUTY COMMISSIONER INLAND REVENUE (AUDIT-VI) Ss — 2026 PTD 173 ISLAMABAD

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HUB POWER COMPANY LIMITED VS DEPUTY COMMISSIONER INLAND REVENUE (AUDIT-VI) Ss. 2(12a) & 3(1)(d)---Federal Excise Rules, 2005, R.43A---"Franchise"---Federal Excise Duty, levy of---Shareholding between Independent Power Plant and its associated company---Bi-partite services contracts---Stance of the Department was that from Hub Power Company Limited (HPCL), an Independent Power Plant (IPP), the Federal Exercise Duty (FED) should be recovered, for tax years 2010 to 2013, on account of "Franchise Service, Royalty or Technical Services Fee" in respect of the services obtained by HPCL from its associated company, International Power Global Development Limited (IPGDL), under an Operations and Maintenance (O&M) contract between the two---This stance was acknowledged up to the Appellate Tribunal Inland Revenue---Question whether the O&M Agreement between the Applicant and IPGDL creates a "franchise" as defined under S. 2(12) of the Act, 2005, between the parties, thus attracting the levy of FED, under S. 3(1)(d) of the Act, on the payments made by the Applicant to IPGDL under the O&M Agreement?---Held: Applicant / HPCL is an independent power project set up pursuant to an Implementation Agreement with the Government of Pakistan---It is the industry norm for the operations and maintenance of a power plant to be carried out, for consideration, by a separate company qua an O&M contractor, who may or may not be an associated company of the power plant owning company---The O&M cost is one of the major cost components for an IPP, which is a cost borne to operate and maintain the power plant----The tax years-in-question (2010 to 2013) fall after S.2(12a) of Federal Excise Act, 2005 was added in 2008, and the reliance by the adjudicating forums below on R. 43A of Federal Excise Rules, 2005, was not valid, given that the statutory definition of the term "franchise' was to prevail over its sub-statutory definition that existed prior to the insertion of the statutory definition---It's sheer absurdity of inferring a franchise relationship solely for the reason of one company's shareholding in another---Besides , the commercial relationship between IPGDL and HPCL does not constitute a franchise by any principle known to law---Neither in the impugned orders nor in the argument / stance of the Respondent /Department was it clarified as to how the O&M services of a coal-fired power plant were marketed by either IPGDL or HPCL ; no rights to sell or market electricity (the product manufactured by HPCL) are given by HPCL to IPGDL under the O&M contract ; nor has the converse been shown as to how any services are sold or marketed by IPGDL which can be identified with HPCL's services---If the absurd argument that prevailed with all the three forums below is countenanced, then all bi-partite services contracts between any two companies will become a franchise contract ; a construction contract between an employer and its contractor, a transportation contract between a haulage company and a company wanting to move its goods from one spot to another, a distributorship contract between an importer and the exporter, and a whole gamut of other bi-partite which do not result in any sale of any goods or services by one of the two parties to third parties branding such goods or services so that they can be identified with the franchisor would all become a franchise, which is obviously neither the letter nor the intent of the definition of "franchise" under the Federal Excise Act, 2005---Thus, the O&M agreement between IPGDL and HPCL did not create a franchise for the purposes of the Federal Excise Act 2005---Therefore, answer to proposed question was in the negative, that is, against the Department and in favour of Applicant---Federal Excise Reference Application, filed by Independent Power Plant (IPP), was allowed.

HUB POWER COMPANY LIMITED vs DEPUTY COMMISSIONER INLAND REVENUE (AUDIT-VI) Ss — 2026 PTD 173 ISLAMABAD

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