IHC rules telecom's tower deal taxable

Orders telecom operator to pay Rs22b in taxes on transactional gain

ISLAMABAD:

A Division Bench of the Islamabad High Court (IHC), led by Justice Babar Sattar, has recently delivered a significant ruling in favour of revenue in a tax reference filed by a major telecom operator.

The ruling upholds the powers and jurisdiction of the Federal Board of Revenue (FBR) in assessing tax liability on a high-value intra-group transaction involving the transfer of telecom operator's tower assets. As a result, the telecom operator is now liable to pay taxes amounting to approximately Rs22 billion ($78 million) on its gain from the transaction.

The landmark case focused on a 2018 internal asset reorganisation, where the Telecom Operator transferred its nationwide tower infrastructure to its wholly owned subsidiary.

The disposal of these assets for Rs98.5b ($940m) by the telecom operator was recorded in its financial statements as an accounting gain of approximately Rs75.9b. However, the telecom operator contended that the transaction was not taxable because the asset was disposed of to its wholly owned subsidiary, according to section 97(1) of the Income Tax Ordinance, 2001 (ITO) concerning intra-group transfers.

The IHC dismissed the petitioner's argument, stating that the provision permits a tax-neutral event only if all conditions of section 97 of the ITO are met. This includes ensuring that the written-down value of the transferred asset remains unchanged in the hands of the transferee compared to the transferor, meaning the transaction should not generate any economic value leading to taxable income. The Court determined that the transaction was conducted at a fair market value of USD 940 million, accepted by the petitioner as consideration, thereby violating section 97 of the ITO.

Consequently, the court concluded that the gain from the transaction was clearly a taxable event since nothing remained to defer taxation to a later date. Additionally, the Court ruled that the Commissioner had the authority to consider accounting income when evaluating taxable income.

This remarkable success of the FBR on judicial front is another step toward accomplishment of vision of the Hon'ble Prime Minister for expeditious liquidation of state revenue involved in the cases pending before the various appellate fora.

Under the guidance of Rashid Mehmood, Chairman of the FBR, Legal Wing of the FBR headed by Mir Badshah Khan Wazir, Member (Legal IR) in association with Director General (Law) has already taken a number of initiatives to actively pursue the pending cases by providing proper assistance to the courts.