Receipts for Leasing Software Tapes did not constitute “Royalties” but were “Business Profits hence are Taxable --- Supreme Court of Pakistan set aside his own Majority Judgment declaring such receipts as Non-Taxable
Islamabad 13-12-2024: In a significant ruling, the Supreme Court of Pakistan has recalled a majority judgment in the case of CIT Vs. Inter Quest Informatics Services (2023 SCMR 1803), declaring the company’s software lease receipts as non-taxable “business profits” under the Pakistan-Netherlands Double Taxation Treaty (DTT). This decision, issued in review jurisdiction, underscores the importance of accurately interpreting international tax treaties and the jurisdictional role of High Courts in tax matters.
The case involved M/s Inter Quest Informatics Services, a non-resident company incorporated in the Netherlands. The company’s receipts from leasing software under agreements with Schlumberger Seaco, Inc. were taxed by Pakistani authorities as “royalties” under Article 12 of the DTT. However, the company argued these were “business profits” exempt under Article 7 of the treaty.
In 2023, a majority judgment by the Supreme Court of Pakistan set aside the Sindh High Court’s decision, which had ruled in favor of the company, and restored the tax authorities’ stance. The minority judgment dissented, supporting the High Court’s decision.
The Court reiterated that review jurisdiction is not a re-hearing but is limited to correcting errors apparent on the face of the record. It held that the original judgment contained such errors, warranting recall.
It emphasized that the High Court’s reference jurisdiction under tax laws is appellate in nature and cannot be declined due to the availability of alternative remedies under Article 24 of the DTT.
The Court held that the receipts for leasing software tapes did not constitute “royalties” but were “business profits.” It found that the majority judgment failed to adequately address whether the receipts fell within the definition of royalties under Article 12 of the DTT.
The judgment highlighted the need for dynamic and purpose-driven interpretation of tax treaties, balancing international cooperation with the protection of domestic tax bases.
The Supreme Court of Pakistan identified several errors in the majority judgment, including:
- Erroneous assumptions about the High Court’s jurisdiction.
- Failure to conclusively determine whether the receipts constituted royalties under the DTT.
- Overlooking admitted facts regarding the nature of the receipts.
The Court’s ruling restores the Sindh High Court’s decision, which favored the Petitioner, and dismisses the appeals of the tax authorities. This sets an important precedent for interpreting international tax treaties, particularly in cases involving software and intellectual property.
The judgment also clarifies the jurisdictional scope of High Courts in reference applications under tax laws, ensuring that legal questions cannot be dismissed on procedural grounds.
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