In a landmark decision, the Supreme Court of Pakistan has ruled that payments made for the use of computer software or programs are to be treated as “business income” rather than “royalties.” The ruling was delivered by a review bench comprising Justice Syed Mansoor Ali Shah, Justice Athar Minallah, and Justice Aqeel Ahmed Abbasi, overturning an earlier majority judgment.

The case, titled M/s Inter Quest Informatics Services vs. Commissioner of Income Tax, involved Civil Review Petitions No. 988 to 1001 of 2023. The petitioner, a Netherlands-based company, had entered into agreements with Schlumberger Seaco, Inc., which operates in Pakistan. The petitioner declared the payments received under these 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.

However, the tax department classified these payments as “royalties” under Article 12 of the Convention and subjected them to a 15 percent income tax. The Income Tax Officer, Commissioner of Income Tax (Appeals), and the Tribunal upheld this classification, prompting the petitioner to challenge the rulings in the High Court. The High Court ruled in favor of the petitioner, stating that the payments for leasing software programs (FLIC tapes) did not qualify as royalties under the Convention and were not taxable in Pakistan.

The tax department appealed the High Court’s decision to the Supreme Court, which initially ruled in favor of the tax department, restoring the Tribunal’s judgment and the original tax assessments. However, in its review jurisdiction, the Supreme Court has now unanimously overturned its earlier decision through an order dated November 28, 2024.

Key Ruling: Software Payments Are Not Royalties

The Supreme Court clarified that payments for the use or operation of a copy of a computer program or software do not constitute royalties. The judgment emphasized that such payments are not made for “information concerning industrial, commercial, or scientific experience,” which falls under the definition of Fees for Technical Services. Instead, these payments are to be treated as business income.