Judgment summary
This is a review of the Supreme Court of Pakistan's majority judgment dated 8 September 2023, reported as CIT v. Inter Quest Informatics Services (2023 SCMR 1803). The petitioner, M/s Inter Quest Informatics Services, sought review on the ground of error apparent on the face of the record.
The Court (Syed Mansoor Ali Shah, Athar Minallah and Aqeel Ahmed Abbasi, JJ.) accepted the review petitions, recalled the majority judgment, and dismissed the appeals of the respondent, thereby upholding the judgments of the Sindh High Court in favour of the petitioner.
Background
The petitioner, a company incorporated in the Netherlands and a non-resident for income tax purposes in Pakistan, entered into two agreements with Schlumberger Seaco, Inc., a company operating in Pakistan: the 'Agreement for Lease of FLIC Tapes', dated 1 February 1986, and the 'Software Rental Agreement' dated 1 January 1995 (para 5).
The petitioner declared receipts under these agreements as 'business profits' and sought exemption from income tax in Pakistan under Article 7 of the Convention Between the Kingdom of the Netherlands and the Islamic Republic of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (para 5).
The tax department treated the receipts as 'royalties' under Article 12 of the Convention and taxed them at fifteen percent. The Income Tax Officer, Commissioner of Income Tax (Appeals) and the Tribunal concluded the payments fell within the definition of 'royalties' under paragraph 3(a) and (b) of Article 12 of the Convention (para 5).
The petitioner challenged these findings before the Sindh High Court via references, and the High Court ruled in the petitioner's favour, holding the amounts were not 'royalties' under the Convention. The respondent appealed to the Supreme Court, which by majority judgment dated 8 September 2023 allowed the appeals, set aside the High Court judgments, and restored the Tribunal's decision. The minority judgment had dismissed the respondent's appeals and upheld the High Court judgments (para 5).
Core dispute
The dispute concerned whether receipts from the lease of FLIC tapes containing computer software programs constituted 'business profits' exempt under Article 7 of the Convention, or 'royalties' taxable under Article 12 of the Convention.
In the review petitions, the core question was whether the majority judgment of 8 September 2023 contained errors apparent on the face of the record, warranting recall under the Court's review jurisdiction (paras 3, 6).
Court findings
The Court identified five reasons underlying the majority judgment and examined each for error apparent on the face of the record (para 6).
On grounds (i) and (ii), concerning possible tax adjustment by the Netherlands authority and the alternate remedy under Article 24 of the Convention, the Court found an error apparent on the record. It held the majority judgment mistakenly conflated the High Court's discretionary jurisdiction under Article 199 of the Constitution with its reference jurisdiction under the Income Tax Ordinance, the latter being akin to appellate jurisdiction as held in M/s Squibb Pakistan v. CIT (2017 SCMR 1006) and followed in CIR v. Rafeh Limited (PLD 2020 SC 518). Neither a reference application nor the exercise of reference jurisdiction can be declined on the ground of an alternate remedy (paras 7).
On ground (iii), the Court found the majority judgment proceeded on an erroneous assumption of material fact, as the nature of the receipts, rentals for leasing FLIC tapes containing computer software programs, was an admitted fact before the Income Tax Officer, the Commissioner (Appeals) and the Tribunal, and the questions referred to the High Court were questions of law, not fact (paras 8).
On ground (iv), the Court found the difference between Article 12 of the UN MC and the OECD MC immaterial to the case, as neither the tax authorities, the Tribunal, nor the respondent relied on the equipment clause, and FLIC tapes were admittedly not 'equipment' (para 9).
On ground (v), considered the most significant ground, the Court found the majority judgment had cursorily noted that 'royalties' under paragraph 3(a) of Article 12 includes payments for 'information concerning industrial, commercial, or scientific experience' but failed to clearly and decisively hold that the petitioner's receipts fell within that clause (paras 10, 11).
The Court endorsed the reasoning of the minority judgment, which, after detailed examination, concluded the receipts fell neither within the 'information concerning industrial, commercial or scientific experience' clause nor any other clause of the definition of 'royalties'. It reiterated the principle that payments for rights to use copyrights in a program (such as by reproducing or distributing it) constitute royalties, whereas payments merely for the right to operate the program, such as a consumer purchasing a copy for use, do not (para 12).
Outcome
The Court found that the majority judgment under review suffered from errors apparent on the face of the record, having proceeded on an erroneous assumption of material fact and having overlooked a material question of law and important aspects of the matter (para 13).
The Court accepted the review petitions, recalled the majority judgment under review, and dismissed the appeals of the respondent, thereby upholding the judgments of the Sindh High Court dated 12 October 2007 and 11 November 2010 (paras 13, 5).
Major issues / areas of contention
- Whether receipts from leasing FLIC tapes containing computer software programs constitute 'business profits' under Article 7 or 'royalties' under Article 12 of the Netherlands-Pakistan Double Taxation Convention.
- Whether the possibility of tax adjustment in the Netherlands or an alternate remedy under Article 24 of the Convention was a valid ground for the High Court to decline to answer questions of law referred under its reference jurisdiction.
- Whether the reference jurisdiction of the High Court under the Income Tax Ordinance is interchangeable with its constitutional jurisdiction under Article 199, particularly regarding the doctrine of alternate remedy.
- Whether the nature of the receipts was an admitted fact before the fact-finding forums, making it unwarranted to treat it as an unresolved factual question.
- Whether the difference between the definitions of 'royalties' in the UN Model Convention and the OECD Model Convention was material to the outcome of the case.
- Whether payments for the lease of FLIC tapes fell within the clause 'information concerning industrial, commercial or scientific experience' in the definition of 'royalties'.
- Whether the majority judgment of 8 September 2023 contained errors apparent on the face of the record justifying review and recall.