Karachi: This is to inform you that the Honourable Islamabad High Court has dismissed the appeals of the Company against the levy of tax by Federal Board of Revenue on issuance of shares against the project development costs. The background information on this case is available in note 11.2 to the condensed interim unconsolidated financial statements for the period ending December 31, 2011 which are already available with you and are also readily available on Company’s website; for easy reference copy of this note is attached. Based on the current demands outstanding, this case represents an exposure of approximately Rs. 2 billion on the profits of the Company.
The Company will now be filing appeals with the Honourable Supreme Court of Pakistan. The management, tax and legal advisors are of the view that the case is sound on technical basis and eventual outcome ought to be in favour of the Company.
Note 11.2 Extracted from Condensed Interim Unconsolidated Financial Statements for the Period Ended December 31, 2011.
(i) The Deputy Commissioner of Income tax (DCIT) made assessments under section 52/86 of the Income Tax Ordinance, 1979 ITO,79] amounting to Rs. 1,896 million stating that the Company did not withhold tax at the time of issue of shares to sponsors against project development costs incurred by them. The Company deposited tax amounting to Rs. 297 million against the above assessments in accordance with the departmental procedures. Appeals filed by the Company before the Commissioner of income tax (Appeals) the “CIT (A)”] and thereafter with the income Tax Appellate Tribunal (the “ITAT”) were decided against the Company. Against the decision of the ITAT, the Company filed appeals before the High Court (the “HC”). The HC granted a stay of demand for the outstanding tax liability which according to the provisions of section 136 of the ITO, 79 expired on August 2, 1999. However, the HC directed the DCIT not to institute recovery measures without its permission.
The management and their tax and legal advisors are of the opinion that the position of the Company is sound on technical basis and eventual outcome ought to be in favour of the Company.
(ii) Without prejudice to the above appeals, the Company filed an application for the resolution of the matter under the Alternate Dispute Resolution (ADR) provided under section 134A of the Income Tax Ordinance, 2001 with the Federal Board of Revenue (FBR). The Alternate Dispute Resolution Committee (ADRC) constituted by the FBR made certain recommendations to the FBR which required the Company to pay a total of Rs. 380 million (including Rs. 297 million already paid). However, the Company informed the FBR that the recommendation of the ADRC was not maintainable under the law because ADRC had gone beyond their mandate. The FBR, after reviewing the recommendations of the ADRC and the letter filed by the Company, decided not to agree with the recommendation of the ADRC and let the dispute be resolved by way of appeals pending before the HC. Without prejudice to its rights, the Company has held several meetings with the FBR in order to settle the matter in an amicable manner.
Various options have been discussed but no conclusion has yet been reached.
(iii) On the unpaid tax demands referred in (i) above, further assessment orders were issued for Rs. 50 million (Rs. 29 million being additional tax and Rs. 21 million being penalty). Against these orders, the Company filed appeals before the CIT (A), who has deleted the amount of additional tax of Rs. 29 million and reduced the penalty of Rs. 21 million by Rs. 6 million Against the decision of the CIT (A), the Company and Income Tax Department filed further appeals before the ITAT which had upheld the decision of the CIT (A). Against this order, the Company moved reference application to the ITAT which was rejected, The management and their tax advisors are of the opinion that if the HC decides the appeals against assessments made under section 52/86 of the ITO, 79 in favour of the Company, the penalty would also be deleted.
(iv) Due to nonpayment of tax demands referred in (i) and (iii) above, during the period further assessment orders were issued for Rs. 80 million. Against these orders, the Company tiled appeals before the Commissioner Inland Revenue (A) who has decided the appeals in favour of the Company by declaring the assessment orders as null and void.
Pending the resolution of the matters stated above, no provision has been made in these unconsolidated financial statements.
For more information, contact:
The HUB Power Company Limited
Islamic Chamber Building
P. O. Box 13841, Karachi-75600
Tel: 92-21 587 4677-86
Fax: 92-21 587 0397