Daily Times

The Supreme Court overturned the impugned judgments passed against Federal Board of Revenue that had previously been rendered by the Division bench of the Sindh High Court regarding the applicability of article 7 or 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, 200. The Supreme Court ruled on a number of tax appeals in favour of the Federal Board of Revenue. Under Article 185(3) of the Islamic Republic of Pakistan’s Constitution, the High Court’s decisions were challenged before Supreme Court..

The Bench comprised of Chief Justice Umar Atta Bandiyal, Justice Qazi Fiaz Eisa, and Justice Mansoor Ali Shah. The designated Chief Justice has written the judgment. Hafiz Ahsaan Ahmad Khokhar Advocate Supreme Court represented the appellant FBR and Mr Makhdoom Ali Khan represented the respondent company before the Supreme Court.

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. The Income Tax Officer, however, 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% royalty tax. The dispute was originally resolved internally within the department, after which the department appealed to the Sindh High Court, which ruled against the FBR.

The department argued before the Supreme Court through Hafiz Ahsaan Ahmad Khokhar, an attorney, 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. The Department claimed that because the Respondent Company’s receipts were royalties under Article 12 of the Convention but not business profits as defined by Article 7 of the Convention, the Respondent was therefore liable for the payment of the Convention. He 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.

After hearing arguments from both parties, the Supreme Court ultimately ruled that the High Court had a poor understanding of the facts because the 1986 Agreement included reference to the FLIC tapes. However, the contested judgments’ include reference to the 1995 Agreement, which left out any mention of FLIC cassettes; as a result, the High Court proceeded erroneously. Furthermore, it was decided that despite three forums ruling against the respondent at the same time, the respondent had invoked the High Court’s jurisdiction under sections 136(1) of the ITO 1979 and 133(1) of the ITO 2001, which was limited to legal questions, and nevertheless, the factual question of whether the receipts constituted royalties was taken into consideration.

Therefore, the High Court’s contested judgments in all fourteen appeals cannot stand, and neither can the High Court’s justifications for overturning the assessment decisions, appellate orders, and Tribunal judgments’, all of which are reinstated as a result. As a result, these appeals are granted with all associated costs and the High Court’s contested judgments’ are set aside.