Concealment of tax by multinational beverage company: LTU Lahore urged to initiate strict legal course of action

Directorate General of Intelligence and Investigation Inland Revenue (IR) Federal Board of Revenue (FBR) has strongly proposed Large Taxpayer Unit (LTU) Lahore to initiate strict legal proceedings under Income Tax Ordinance 2001 against a multinational beverage company for concealment of income for Tax Years (2007-2011).
Sources told Business Recorder here on Monday that agency has analysed data of a leading soft drink manufacturer falling within the jurisdiction of LTU Lahore and detected massive concealment of income during the past five tax years. The directorate of intelligence IR has asked the LTU Lahore to immediately amend the assessment orders of the multinational beverage manufacturer for the Tax Years 2007-2011. The agency has asked the LTU Lahore to recover the amount for the past tax years by invoking relevant enforcement provisions of the Income Tax Ordinance 2001 against the soft drink manufacturer.
During scrutiny of tax record, the directorate of intelligence IR was surprised to know that a big multinational company has adopted different technique to conceal income causing revenue loss to the national kitty. This case is one of its kind where the agency has examined all available records in details and unearthed methods used by the multinational beverage company to evade the tax authorities.
The directorate has further proposed the LTU Lahore to take legal action against the soft drink manufacturing company under section 122(5A) and section 69(b) of the Income Tax Ordinance, 2001. Under section 122(5A), the commissioner may amend an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue. Secondly, under section 69(b) of the Income Tax Ordinance, 2001 powers would be invoked pertaining to 'receipt of income', under which a person shall be treated as having received an amount, benefit, or perquisite under certain circumstances.
The multinational company has declared income and returns filed thereon have become assessment orders under Universal Self Assessment Scheme (USAS). However, these assessments for the tax years 2007 to 2011 are erroneous so far these are prejudicial to the interest of revenue as envisaged under section 122(5A) of the Income Tax Ordinance 2001. Therefore, the intelligence arm of the FBR has proposed that legal proceedings u/s 122(5A) read with Section 69(b) of the Income Tax Ordinance, 2001 for the retrieval of the loss of revenue.
The agency has found that the expenses incurred/meted out by the bottlers on behalf of multinational beverage company is "receipt of income" of the said international beverage company under section 69(b) of the Income Tax Ordinance, 2001. Details of the case revealed that the directorate of intelligence IR has initiated an exercise to analyse tax declarations of Beverage industry. An international beverage company is on the tax roll of the LTU, Lahore. Income Tax/Sales Tax returns filed for the tax years 2007 to 2011 were downloaded from FBR e-portal, which shows that multinational company has been engaged in manufacturing/supply of beverage concentrate and in fact is the real owner of the brands in Pakistan.
During the Sales Tax proceedings initiated by the agency, it has been found that there is an "Exclusive Bottling Appointment Agreement" made on February 1, 2002 between the multinational beverage company and its bottlers. Furthermore, Co-operative Agreement for Advertising and Marketing has also been signed between the seller and purchasers of the concentrate. Perusal of the co-Co-operative Advertising and Marketing Agreement has revealed that the multinational beverage company and its eight bottlers have agreed to share the advertisement expenses on 50:50 for all of the years mentioned above ie Tax Years 2007-2011.
Sources said that the scrutiny of the record, provided during the sales tax/ federal excise duty proceedings, revealed that during the tax years 2007 to 2011 an amount of Rs 13,184,564,896 was to be spent on account of advertisement/ marketing of three famous brands of beverages by the bottlers and multinational beverage company under the above referred agreements.
In view these agreements, 50% amount of Rs 6,592,282,448 of the advertisement/ marketing expenses were to be incurred by the multinational beverage company and an equal amount was to be incurred by the bottlers on behalf of concentrate manufacturer. The year-wise break of the said expense by each bottler under the head of advertisement/marketing has been analysed by the FBR's department for detailed investigation.
Further investigation revealed that the bottler's appointment agreements indicate that manufacturer of the concentrate ie multinational beverage company who is the real owner of Trademark & brands/ products is the sole decision maker with respect to the advertisement & marketing of the Trademarks and the Bottlers are under obligation rather constrained to advertise the said product under instructions of multinational beverage manufacturer, which is obvious from the following clause/phrases of the Co-operative Marketing and Advertisement Agreements:
Firstly, bottlers have been appointed in Pakistan to bottle, sell and distribute the beverages known and sold under a specific trademark (clause 2 of the agreement). Secondly, bottlers are also under obligation by the concentrate manufacturer to buy concentrate only from multinational beverage company at a price established by the seller to be invoiced in US$ (Clause 2).
Thirdly, the decision of the company on all matters concerning its trademark shall be final and conclusive and not subjected to question by the bottlers and the company will protect and defend the Trademarks at its sole cost and expenses (Clause 3). Fourthly, bottler recognises the company's ownership of the Trademarks. Nothing contained in the agreement to be construed as conferring upon the bottler any right or interest in the Trademarks (Clause 3).
Fifthly, bottler is under obligation to sell the Beverage to retailers in the territory at prevailing competitive market price. However, the seller of the concentrate holds the right to establish from time to time the maximum price which bottler may charge to retailers (Clause 9).
Sixthly, bottler is under obligation to actively advertise the beverage and spend for such purpose during each calendar year Bottler's share of that year's advertising and sales promotion expenses as fixed by mutual agreement between the Bottler and the Seller of Concentrate in the "Co-Co-operative Advertising and Marketing Agreement" (Clause 17).
Seventhly, bottler is under further obligation to use only such advertising strategies for the beverage as the seller of concentrate may develop for that market. The seller of the concentrate has the right to appoint advertising, sale promotion and public relation agency with respect to the beverage (Clause 18).
Eight, bottler at his own cost and expense, will use, distribute and display the advertising and marketing materials furnished by the Seller. The cost and expense using, distributing and displaying all such materials shall not constitute part of the Bottler's share of the expenditure, but shall be in addition thereto (Clause 5).
Ninth, bottler is bound to deliver to the Seller a report of all advertising and marketing expenses paid by him during the preceding calendar quarter together with receipted bills and additional proof of such payment. Only advertising and marketing expenses with respect to which proof of payment has been presented to multinational beverage company shall be considered part of the Bottler's share of the expenditure. Each party shall reimburse the other any amount of expense incurred by the other, but on this behalf to this agreement, if such expenses for previously were approved in writing by it (Clause 6a).
Tenth, bottler's shall not assign, sell, transfer or otherwise dispose off or relinquish control or use of the assets purchased under the agreement without the prior written consent of the multinational beverage company (Clause 8 of the agreement).
It is crystal clear from the above clauses that the Bottlers are under obligation to abide by terms & conditions dictated/ imposed by the multinational company though in reciprocity no such conditions are to be fulfilled by the concentrate manufacturer. These terms and conditions in itself depicts that advertising/ marketing expenses meted out by the Bottlers are incurred on the instructions of the concentrate manufacturer for the promotion of brand as envisaged by the taxpayer.
As such bottlers are under obligation to carry out promotional/ advertising campaign on the Instructions of the taxpayer. Any breach of the terms and conditions by the bottler may cost him heavily. Therefore, the expenses incurred/meted out by the Bottlers on behalf of multinational beverage company is "receipt of income" of the said international beverage company in view of section 69(b) of the Income Tax Ordinance, 2001 which is reproduced as under: "For the purpose of this Ordinance, a person shall be treated as having received an amount, benefit, or perquisite if it is-
(a) Actually received by the person;
(b) Applied on behalf of the person, at the instruction of the person or under any law; or
(c) Made available to the person.", section 69(b) of the Income Tax Ordinance, 2001.
It is therefore evident that multinational beverage company is to be treated as having received the amount as enunciated by the operation of Section 69(b) of the Income Tax Ordinance, whereby the bottlers have incurred an expense of multinational beverage company. Since, the trademark of multinational beverage company is owned by the taxpayer, any expense for the advertisement of the trademark exclusively is obligation of the concentrate manufacturer and the expense has to be borne by the owner of the trademark and not by the bottlers. Hence, the taxpayer is to be treated as having received the amount under discussion as it has been applied by the bottlers on behalf of the taxpayer, at the instructions of the taxpayer, directorate of intelligence IR added.
In the backdrop of above stated facts and circumstances of the case, taxable income and tax payable for the years under consideration in the case of multinational beverage company has been recomputed by the directorate of intelligence IR.
The taxpayer ie multinational beverage company has declared income as mentioned above and returns filed thereon have become deemed assessment orders. However, these assessments for the tax years 2007 to 2011 are erroneous so far these are prejudicial to the interest of revenue as envisaged under section 122(5A) for the said reasons, directorate of intelligence IR said.
It is therefore proposed that proceedings u/s 122(5A) read with Section 69(b) of the Income Tax Ordinance, 2001 may be initiated by the Large Taxpayer's Unit, Lahore for the retrieval of the loss of revenue, directorate of intelligence IR added.