Supreme Court Rules in Favor of Foreign Software Company Operating in Pakistan in Double Taxation Case

A review bench of the Supreme Court of Pakistan has given a decision in favor of computer companies and declared that the payment/consideration for the use of a computer software/program is a “business income” not a “royalty”. The SC bench comprising Justice Syed Mansoor Ali Shah, Justice Athar Minallah, and Justice Aqeel Ahmed Abbasi decided the matter in favor of the taxpayer in Civil Review Petitions No.988 to 1001 of 2023 (M/s Inter Quest Informatics Services versus Commissioner of Income Tax, etc). 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 favor of the petitioner, holding that the amounts received by the petitioner for leasing FLIC tapes (software programs) 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 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. The Supreme Court exercising its 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/program 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 program/software the consideration by the recipient is not a ‘royalty’. The decision further 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 that arose on account of the earlier judgment of the Supreme Court which has now been recalled.