The case revolved around M/s Inter Quest Informatics Services, a Netherlands-based company, which had entered agreements with Schlumberger Seaco, Inc. to provide software programs in Pakistan. The company argued that its earnings fell under “business profits” as per Article 7 of the Double Taxation Agreement (DTA) between Pakistan and the Netherlands, thus qualifying for tax exemption. Conversely, Pakistani tax authorities contended these payments were “royalties” under Article 12 of the DTA, subject to a 15% tax.
The case journeyed through various legal stages:
- Initial Assessments: Tax authorities imposed a 15% royalty tax, upheld by the Tax Tribunal.
- High Court Appeal: The petitioner succeeded, with the court declaring software leasing payments exempt from tax under the DTA.
- Supreme Court Majority Judgment: An appeal restored the tax assessments, classifying payments as royalties.
- Review Decision: In a unanimous review dated November 28, 2024, the Supreme Court reversed its prior stance, aligning payments with “business income,” exempt under the DTA for entities without a permanent establishment (PE) in Pakistan.
This verdict aligns Pakistan’s approach with international tax norms, promoting consistency in applying DTAs. By exempting non-resident companies from income tax on software payments without a PE in Pakistan, the decision is expected to lower barriers for foreign entities, encouraging collaborations and investments in the Pakistani tech sector. The ruling not only reduces tax liabilities for businesses but also enhances Pakistan’s credibility in cross-border economic dealings, setting a precedent for fair tax practices.