3G/4G auction price: leading cellular company refuses to pay $39.5 million WHT

A leading mobile phone operator has refused to pay withholding tax of $39.5 million, ie, 10 percent of the total auction price ($395 million) of next generation mobile services (3G/4G), while terming it unlawful, baseless and based on a gross misinterpretation of provision of the law. It is learnt that M/s Telenor Pakistan Pvt Ltd has filed petition in Islamabad High Court (IHC) against the federal government including FBR and Pakistan Telecommunication Authority (PTA).
Telenor Pakistan earlier this month was declared as winner of its 850MHz spectrum (3G/4G) auction with base price of $395 million. The company has already deposited half of price, ie, $197.5 million while the remaining 50 percent will be paid in five equal annual instalments along with cumulative mark-up @ LIBOR + 3 percent from effective date of license to date of payment.
However, the PTA maintained that proper procedure for auction was followed which is evident from the fact that the company had deposited the bid money. However, in case of single bidder, final bid was not required; hence the company is liable to pay WHT at the rate of 10 percent of the base price.
Meanwhile, IHC has refrained the Federal Board of Revenue (FBR) from taking coercive measure for recovery of 10 percent withholding tax under section 236A of the Income Tax Ordinance 2001 on the auction for 3G and 4G technology by a leading cellular company. IHC has admitted a petition filed by M/s Telenor Pakistan Pvt Ltd against the federal government including FBR and Pakistan Telecommunication Authority (PTA). The court has issued notices to the FBR to submit its comments and next date of hearing has been fixed June 29, 2016.
The petitioner has submitted to the court that the advance tax under section 236A of the Income Tax Ordinance 2001 is payable where there is a sale by public auction or auction by tender of any property or goods. It was further contended that in the instant case the use of spectrum rights were offered for sale through tender. However, no auction took place as there was no excess demand.
Meanwhile, no coercive measure shall be adopted for the recovery of the amount in question, IHC added. According to the cellular company, PTA has directed the company to deposit withholding advance income tax of US $39.5 million being 10 percent of the total auction price before awarding the license to the petitioner. PTA is a withholding agent of the government in term of section 236A of the Income Tax Ordinance falling under the jurisdiction of Large Taxpayer Unit (LTU) Islamabad. LTU said that the PTA was requested to ensure proper discharge of obligations as a withholding agent by depositing the advance income tax under section 236A of the Income Tax Ordinance 2001. Petitioner added that the demands raised by the FBR of deduction of withholding tax at 10 percent of the gross sale price are unlawful, baseless and based on a gross misinterpretation of the said provision without jurisdiction. The FBR has grossly misinterpreted and twisted the law to the detriment of the petitioner.
The petitioner further submitted that for any transaction to constitute a 'sale' certain components are essential. Firstly, there must be an owner of property. Secondly, there must be property. Thirdly, there must be a person willing to buy property. Fourthly, there must be an agreement to transfer title. And, finally, there has to be an actual transfer of title in the property.
It will be noted that all these ingredients are missing in the present case because of radio spectrum's basic lack of proprietary qualities. The petitioner is not clearly being transferred any title in the radio spectrum through the award of the license. In fact, no one had title in radio spectrum in the first place which could be transferred to another. In the absence of a transfer of title, it is submitted that, a transaction cannot be called a "sale". The licence awarded to the petitioner does not even grant any limited proprietary rights, let alone ownership rights, and merely contain an authorisation for use of the radio spectrum.
That it is submitted that the government does not own radio spectrum but merely has the right to maintain control over its use under the laws of Pakistan. Petitioner has requested the court that the demand of advance withholding tax from the mobile phone company be declared illegal, without lawful authority and of no legal effort.