ISLAMABAD: The Federal Board of Revenue (FBR) has served a notice on ARY Communications Limited (ARY) and raised a tax demand of Rs992 million – alleging that the entity had evaded tens of millions in taxes through misrepresentation, concealment and misuse of exemptions, thereby causing a substantial loss to the national exchequer.

The order, dated June 30, 2019, followed a detailed, weeks-long exchange with ARY Communications as well as interactions with its representatives, in which the media house was unable to clear its position of misrepresenting facts in its Income Tax Returns to avoid millions in taxes, according to the FBR’s allegations in its detailed findings.

Furthermore, the FBR also claims that, during the course of these exchanges, it was found that, in a bid to escape the fresh tax demand, the media house allegedly tampered with previously-submitted official agreement documents – which were discovered by FBR.

Hence, the FBR notice states that “other consequential proceedings of penalty and prosecution will be initiated separately.”

In its replies to the FBR, in letters dated May 13, 2019, and June 25, 2019, ARY Communications repeatedly accused the tax collecting body of conducting a fishing expedition and also added that the proceedings are based on whims, assumptions, and guess work. It also said FBR had not allowed it ample time for replies.

However, there is no clear reply by ARY Communications on the charge of tampering the previously submitted agreement documents.

The FBR tax demand pertains to the year 2012-13; however, the FBR uncovered this matter when it started assessing prior tax statements, and, upon discovering evidence of misrepresentation, it has now given the media house an amended assessment, which it has the right to do under tax laws, of Rs.992 million.

ARY has challenged these finding in its replies to the FBR. This amended amount is just for the one year the FBR has assessed under Section 122 (5A) – 2012-13. Sources in FBR estimated that, if the FBR accusations also hold true for subsequent years, total tax demands can come close to Rs.5 billion.

The charges of the FBR investigation are multi-pronged.

The FBR investigation states that an offshore related party (co-owned) entity ARY FZLLC undertook transactions with the other two companies, ARY COMM and ARY Films and TV Productions Pvt, which by, virtue of section 85 of the Income Tax Ordinance, 2001, were its associates.

As per the investigation, the tripartite agreement was utilised to allow the three companies to settle their receivables and payables in Pakistan on behalf ARY FZLLC. The group tax assessment showed that the group obtained exemptions by claiming to export locally-produced content to the offshore entity in order to evade local taxes.

However, the same content was subsequently bought from the same Dubai entity and then telecasted in Pakistan.

“All three companies are in tripartite agreement with regard to purchase of production from Pakistan and selling to M/s ARY Communication Limited. This agreement allows all three parties to settle/adjust their outstanding balances at each financial year i.e. 30th June,” the FBR states.

The FBR had first sent a notice to the ARY Communication on April 26, 2019, pointing out that that ARY Communication stated among its expenses a head of “cost of transmission” amounting to Rs2,517,662,391. The FBR says the amount was inflated by industry standards (which the FBR refers to as not being on “arm’s length basis”). The claim by ARY Communication was “found erroneous in so far as prejudicial to the interest of revenue … hence it was confronted vide notice u/s 122(9)/122(5A).”

According to the FBR, the amount of approximately Rs2.5 billion was shown by ARY Communication, which operates in Pakistan, and is subject to Pakistani taxes, as being an expense against non-resident offshore company ARY Digital FZLLC, which is based in the UAE and is exempt from relevant Pakistani taxes. Hence no taxes were paid on this amount, of Rs2.5 billion, because it was shown under a head which ARY Communication claims was exempted from relevant taxes.

However, the FBR found, the taxpayer company, in garb of exempted payments, also remitted payments against cost of production and services, which were added under a single cost of “transmission costs” without deduction of relevant tax as required under Pakistani law. The FBR states that the media house claimed incorrect exemptions, and concludes that the amount is liable to be taxed in Pakistan.

ARY Communications stated in its defence that the FBR had not made correct cost comparisons and unfairly compared ARY with other media companies, stating that its costs are not inflated even if the costs are to a related party. It stated that it had a different business model compared to the other companies.

As the exchange between the media house and FBR continued, the FBR claims that ARY Communications, in an effort to justify the costs it included in the tax exempted head, actually tampered with an agreement it had previously submitted to FBR.

The FBR, in its order, has compared the two documents and pointed out exactly where ARY Communications had changed the language and added words in an attempt to show that the media house had not breached any agreement.

The FBR notes in its findings that “the tampering of document was done to defeat issue in show cause notice on transfer pricing, whereby comparison will be made in the changed position of comparable by adding words ‘content’ and replacing ‘advertisement & promotional content’, that is by enlarging scope of content to include other cost. Therefore, the tampering has been done to mislead the department to take advantage to this effect that the taxpayer case was different from case of comparable companies confronted in the show cause.”

ARY FZLLC allegedly tampered the documents as it obtained withholding tax exemptions 12 to 15 percent by submitting an agreement that indicated only airtimes charges but when FBR raised objection of highly unjustified value of airtime, the group allegedly submitted tampered agreement with addition of word “content” to “airtime”.

The cost of content was not part of airtime agreement and was not recorded in ARY Communications as it was shown as an export of ARY Films and TV Production. The Withholding Tax exemption is not available to associates as per law, but this fact was allegedly concealed from the FBR but later on indicated by auditor in the audited accounts.

The FBR, to state its case, also provided comparisons of airtime/ transmission costs of other companies in the industry, and concluded that ARY had overvalued its “airtime”. ARY COMM in initial years disclosed airtime charges in accounts, then changed its name into ‘transmission charges’. Later on, ARY network submitted another document to include content cost.

ARY in its replies requested FBR to provide copies of income tax return, audited accounts, agreements showing airtime rate of comparable companies, which FBR had provided in hearings and order sheets dated 29-05-19 and 17-06-19, as per documents available with this newspaper.

ARY Production produced and exported all content to ARY FZLLC, an offshore based in Dubai, at zero tax under the exemption as per second schedule of income tax ordinance under clause 114.

According to FBR sources, the FBR served the tax notice to the TV channel headquarters based in Karachi despite facing a lot of pressure from influential quarters to withdraw any such demand without issuance of any notice.

However, the concerned officials refused to succumb to any pressure and finally served the tax notice and have concluded its findings after input and detailed replies from the media house and its representatives.

However, when contacted to FBR high-ups, they argued that there were no pressures from any quarters because they believed on principle of merit and fair play so the concerned officials would take decision in accordance with the provision of tax laws.

When contacted to representative of this TV channel, he stated that they did not know anything about serving of tax notice by the FBR.