Double taxation pact with The Netherlands: SC turns down SHC’s judgement on applicability of Article 7 or Article 12

ISLAMABAD: The Supreme Court turned down the Sindh High Court’s judgment regarding the applicability of Article 7 or Article 12 of the Agreement for Avoidance of Double Taxation between Pakistan and The Netherlands with reference to sections 136(1) of the Income Tax Ordinance, 1979, and section 133(1) of the Income Tax Ordinance, 2001.

The impugned judgments of the SHC in all 14 appeals are not sustainable nor are the reasons given by the High Court to set aside the assessment orders, the appellate orders and the Tribunal’s judgments, which are accordingly restored, said the verdict of a three-judge bench of the apex court, headed by Chief Justice Umar Ata Bandial and comprised Justice QaziFaez Isa, and Justice Syed Mansoor Ali Shah.

Hafiz Ahsan Ahmad Khokhar, represented the Commissioner of Income Tax (petitioner), while Makhdoom Ali Khan appeared on behalf of M/s Inter Quest Informatics Services (respondent).

A Divisional Bench of the SHC on October 12, 2007, decided 13 references, filed by the respondent under section 136(1) of the Income Tax Ordinance, 1979 and section 133(1) of the Income Tax Ordinance, 2001 through a common judgment and one was decided vide judgment dated 11 November 2010, which relied on its earlier judgment.

The respondent then assailed the assessment orders, the appellate orders and the judgments of the Tribunal before the High Court by filing references, respectively under section 136(1) of ITO 1979 and section 133(1) of ITO 2001.

Two questions were formulated for consideration by the High Court. Firstly, whether the said payment receipts were business profits under Article 7 of the treaty and, secondly, whether the same constituted income from royalties under Article 12 of the treaty, and as such were not business profits under Article 7.

The High Court decided the questions in favour of the respondent, and held that the amounts received by the respondent did not constitute royalties.

The judgments of the High Court were assailed before this Court under Article 185(3) of the Constitution.

The respondent was a firm that was incorporated in The Netherlands, had its major place of business there, and had no presence in Pakistan, according to the case’s summary facts. The respondent files its income tax returns under various headings, and under the heading, Income Claimed to be Exempted and not Included in Total Income.

The respondent requested an exemption for its receipts related to the rental of FLIC Software computer software, which it claimed was exempt under Article 7 of the Agreement for the Avoidance of Double Taxation between Pakistan and the Netherlands.

However, the income tax officer rejected the respondent’s argument and believed that this income constituted royalty and was subject to assessment under Article 12-3(a)(b) of the Tax Treaty between Pakistan and the Netherlands. He asked the respondent to clarify why this income could not be subject to a 15 per cent royalty tax. The dispute was originally resolved internally within the department, after which the department appealed to the SHC, which ruled against the FBR.

Hafiz Ahsaan had argued that the Convention between The Netherlands and Pakistan was properly notified in Pakistan in 1981 and that the respondent company and SSI had entered into an Agreement for Lease of FLIC Tapes in 1986.

He contended that as respondent company’s receipts were royalties under Article 12 of the Convention, and not business profits as defined by Article 7 of the Convention, therefore the respondent was liable for the payment of the Convention.

Hafiz Ahsaan further argued that the respondent had claimed in response to the notices from the Income Tax Officer that the payment receipts were rentals for tapes paid for by SSI and that they did not constitute a patent, trademark, trade name, secret formula or process, design or model, equipment, films, or tapes for television or broadcasting, despite the fact that the full definition of royalties in paragraph 3 (a) of Article 12 of the Convention included payments for information concerning such things.

He further argued that the respondent was required to prove that the receipts were not royalties in order to receive the benefit of an exemption when it was sought by the party making the claim.

Since the matter was not clearly decided in the impugned judgments by the High Court, those judgments may kindly be set aside, which they have failed given right interpretation of convention and agreement.

Copyright Business Recorder, 2023