ISLAMABAD: The Supreme Court of Pakistan, while exercising its review jurisdiction, has held that the payment/consideration for the use of a computer software/programme is a business income not a royalty.
While deciding a review petition before the SC, the bench comprising Justice Syed Mansoor Ali Shah, Justice Athar Minallah and Justice Aqeel Ahmed Abbasi decided the matter in favour of a taxpayer in Civil Review Petitions No988 to 1001 of 2023 (M/s Inter Quest Informatics Services versus Commissioner of Income Tax, etc).
The SC held, “the Tribunal was not correct, and the High Court was correct, in determining that the receipts received by the petitioner for the lease of FLIC tapes containing computer software programs were not income from “royalties” but were “business profits”, as claimed by the petitioner in its tax returns”.
The petitioner, a company incorporated in The Netherlands and thus, a non-resident for income tax purposes in Pakistan, entered into two agreements with Schlumberger Seaco, Inc, a company operating in Pakistan. The petitioner, in its tax returns, declared the receipts under the agreements as “business profits” and sought exemption from income tax in Pakistan under Article 7 of the Convention Between Netherlands and Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“the Convention”). However, the tax department treated these receipts as “royalties” under Article 12 of the Convention and subjected them to income tax at the rate of 15 percent.
The income tax officer, Commissioner of Income Tax (Appeals) and the Tribunal concluded that the payments received by the petitioner fell within the definition of “royalties” and were, therefore, liable to income tax in Pakistan.
The petitioner challenged the assessment orders, appellate orders and Tribunal judgments before the High Court through references. The High Court ruled in favour of the petitioner, holding that the amounts received by the petitioner for leasing FLIC tapes (software programmes) under the agreements did not qualify as “royalties” under the Convention and were not subject to income tax in Pakistan.
The respondent tax department appealed to the SC and the majority judgment under review allowed the appeals, setting aside the High Court’s judgments and restoring the Tribunal’s judgments as well as the original and appellate orders of the income tax officers. The minority judgment, however, dismissed the respondent’s appeals and upheld the High Court’s judgments.
Details of the case revealed that the Supreme Court of Pakistan in their judgement reported as (2023) 128PTD193 (SC) decided on September 8, 2023 had by majority of two to one decided that the payment for the use of a copy of the computer software/ programme is royalty not a business income.
Accordingly, it was held that the amount is taxable in Pakistan even if the recipient does not maintain any permanent establishment in Pakistan. The recipient was denied the right under Article 7 of the Model Tax Treaty of OECD.
The non-resident recipient in that case being dissatisfied with the judgement filed a review petition to the Supreme Court of Pakistan. The Supreme Court exercising their review jurisdiction has recalled the earlier order and by a unanimous judgement of three members has overruled the earlier majority judgment by an order dated November 28, 2024.
It has now been held that the payment/consideration for the use of a computer software/programme is a business income not a royalty. The crux of the matter in this case is that where there is only the right to use/operate a copy of a computer programme/software the consideration by the recipient is not a “royalty”.
The decision added that such consideration is not on account of “information concerning industrial, commercial or scientific experience” which has been placed under the definition of fees for technical services. This decision has resolved a major question which arose on account of the earlier judgement of the Supreme Court which has now been recalled.
Tax experts were of the view that the present decision is in line with the internationally-accepted framework of the Double Tax Treaties.
Copyright Business Recorder, 2024
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