Interquest Informatics, 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. These agreements were titled the “Agreement for Lease of FLIC Tapes” and the “Software Rental Agreement”. Interquest Informatics, 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 tax treaty between the Netherlands and Pakistan.
The tax authorities concluded that the payments fell within the definition of “royalties” under paragraph 3(a) and (b) of Article 12 in the tax treaty and subjected them to income tax.
An appeal was filed by the company that ended up in the Supreme Court.
Judgment
The Supreme Court decided in favor of Interquest Informatics.
Excerpts
“As for ground (iv), it has been contended on behalf of the petitioner that, in the majority judgment, it escaped the notice of this Court that there is no significant difference in the definition of “royalties” provided in Article 12 of the UN MC and Article 12 of the OECD MC; therefore, the reference to Article 12 of the OECD MC, instead of Article 12 of the UN
MC, by the High Court was inconsequential. This contention, we find, is supported by a plain reading of the two definitions. The only material difference between the definitions of “royalties” in the UN MC and the OECD MC is that the former includes payments received as consideration “for the use of, or the right to use, industrial, commercial or scientific
equipment” in its definition. However, since neither the Income Tax Officer, the Commissioner (Appeals), the Tribunal, nor the respondent before this Court relied upon this clause of the definition of “royalties” as FLIC tapes containing computer software programs are admittedly not “equipment”, this difference was immaterial to the decision of the case.”
“The minority judgment, after a detailed examination of all clauses of the definition of “royalties” that could possibly bring the receipts received by the petitioner within the scope of “royalties” and thereby taxable in Pakistan, concluded that the receipts received by the petitioner for the lease of FLIC tapes containing computer software programs fall neither within the clause “information concerning industrial, commercial or scientific experience” nor within any other clause of the definition of “royalties”. It is reiterated that if a payment is in respect of rights to use the copyrights in a program, (e.g. by reproducing it and distributing it) then such a payment would be considered as a royalty. Other payments, however, only give a user the right to operate the program, where a consumer pays for a copy of computer program to use, this is not royalty payment.
“For the same reasons as recorded in the minority judgment, we hold that the Tribunal was not correct, and the High Court was correct, in determining that the receipts received by the petitioner for the lease of FLIC tapes containing computer software programs were not income from “royalties” but were “business profits”, as claimed by the petitioner in its tax returns.”
“For the above reasons, we find that the majority judgment under review suffers from errors apparent on the face of the record.”