INTERQUEST INFORMATION SERVICES VS COMMISSIONER OF INCOME TAX, 2007 PTD-KARACHI-HIGH-COURT-SINDH 2549 (2007)

2007 P T D 2549

2007 P T D 2549

[Karachi High Court]

Before Muhammad Athar Saeed and Nadeem Azhar Siddiqi, JJ

Messrs INTERQUEST INFORMATION SERVICES

Versus

COMMISSIONER OF INCOME TAX

I.T.Rs. Nos. 71 of 1997 and 99 of 2006, I.T.R.As. Nos. 514 to 516 of 2006 and I.T.As. Nos. 274 to 281 of 1998, decided on 12/10/2007.

Income Tax Ordinance (XXXI of 1979)----

----Ss.30, 33 & 136---Treaty for Avoidance of Double Taxation between Pakistan and Netherland, Art.12.3---Double taxation---Business profits or royalty---Determination---Receipts of assessee from leasing FLIC Tapes were held by Income Tax Appellate Tribunal to be income from royalty and not business profits---Validity---Agreement between parties clearly showed that payments received by assessee were' not for use or exploitation of copy .rights patent, know-how, secret process or formula or for supply of specialized knowledge, invention or patent but for its business use of patented software product and system---As the product could only be utilized for its technical use and could not be passed off to any other person, therefore, it did not fall within the definition of royalty as defined in para. 3 of Art.12 of Double Taxation Agreement between Pakistan and Netherlands---Such receipts fell in other income which might be covered-under business profits---Order of Income Tax Appellate Tribunal could not be sustained, and was set aside in favour of assessee---Reference was answered accordingly.

Glaxo Industries Ltd. v. Commissioner of Income Tax, Karachi 1991 PTD 195 rel.

Commissioner of Agricultural Income Tax East Bengal v. B.W.M. Abdur Rahman 1989 PTD 909; Khalid Qureshi and 5 others v. United Bank Limited I.I. Chundrigar Road, Karachi 2001 SCMR 103; Oxford University Press v. Commissioner of Income Tax 2001 PTD 2484; K. Govindan and Sons v. Commissioner of Income Tax 2001 PTD 225.8; C.W.S. (India). Ltd. and others v. Commissioner of Income Tax 1995 PTD 741; Don Basco High School v. The Assistant Director, E.O.B.I. and others PLD 1989 SC 128; International Law in Relation to Double Taxation of Income" by I.P. Gupta; Taxmann's "Indian Double Taxation Agreements and Tax Laws" Vol. I, 4th Edition" by D.P. Mittal; "Principles of International Taxation" by Karl Sonntage and C.S. Mathur; International Tax Review for February, 2007; International Tax Review for March, 2005; Taxation of Computer Programs In Cross Border Transactions" by Sandeep Tandon; Application of the OECD interpretation to tax treaties in New Zealand; Advance ruling from India bearing P. No.30 of 1999 reported in (1999) 238 ITR 296 (AAR) (1999) 105 and Taxman 240 and UOI v. Azadi Bachao Andolan 263 ITR 706 ref.

Faroagh Naseem and Iqbal' Salman Pasha for Applicants.

Jawed Farooqui for Respondent.

Date of hearing: 12th October, 2007.

JUDGMENT

MUHAMMAD ATHAR SAEED, J.---These 13 Reference Applications and Income Tax Appeals have been filed by the applicant against the various orders of the Tribunal by Which .their appeals were dismissed. In ITA No.71 of 1997 and ITR No.99 of 2006, the Tribunal` has referred the following questions for the opinion of this Court:--

I.T.A. No. 71 of 1997.

Whether the learned Appellate Tribunal was right in holding that receipts of the Applicant from leasing FLIC Tapes were income from "Royalty" and were not business profits?

ITA No.99 of 2006.

(1) Whether the learned Income Tax Appellate Tribunal was right in holding that the receipts of the applicant from providing on rental, proprietary software from providing on rental, proprietary software programme products and. integrated software system, and leasing FLIC Tapes, were not "Business Profits" under Article 7 of the tax treaty between Pakistan and Netherlands?

(2) Whether the learned Income Tax Appellate Tribunal was right in holding that the receipts of the applicant from providing on rental, proprietary software programme products and integrated software system, and leasing FLIC Tapes, were income from "Royalty" under Article 12 of the tax treaty between Pakistan and the Netherlands and not "Business Profits" under Article 7 of the said treaty?

2. In all the other cases although same words may be different but in substance the opinion of this Court has been sought on almost identical questions and, therefore, we intend to dispose them off by this common order.

3. Brief facts of the case are that the applicant assessee who is a non-resident company had declared the payments received for FLIC software computer programs received from Messrs Schlumberger Seaco Inc. and claimed it to be exempt under Article 7 of the Agreement for Avoidance of Double Taxation between Pakistan and Netherlands as according to the applicant it was their business income and since admittedly the applicant did not have a permanent establishment in Pakistan, therefore, their business income. was exempt from tax but the Income Tax Panel held these payments to be in nature of royalty receipts which were liable to tax under Article 12-3 (a and b) of the Treaty for Avoidance Double Taxation between Pakistan and Netherlands and levied tax accordingly.

4. The applicant-being aggrieved by the orders of the Income Tax Panel preferred appeal before the CIT(Appeals) who vide orders passed on various dates rejected the appeals and maintained the action of the Income Tax Panel/Officer.

5. Being aggrieved by the order of the CIT(Appeals), the applicant filed appeals before the Income Tax Appellate Tribunal who vide their common order for the assessment years 1987-88 and 1989-1990, dated 22-12-1992 in I.T.As. Nos. 1687/HQ of 1989-90, 3222/HQ of 1989-90 and 168/HQ of 1989-90 upheld the order of the CIT(Appeals) and dismissed the appeals and -held that the said income had rightly been treated as royalty. In the other Income Tax Appeals and income tax references the income tax appellate Tribunal has followed the above judgment and dismissed the appeals of the applicant. Hence these references applications and appeals.

6. We have heard Mr. Dr. Faroagh Naseem and Mr. Iqbal Salmon Pasha learned counsel for the applicants and Mr. Jawaid Farooqui the learned counsel for the respondents.

7. Mr. Faroagh Naseem has taken as through the "provisions. of Article 12 of the Avoidance of Double Taxation Agreement between Pakistan and Netherlands.. He stated that the term royalty has been defined in paragraph 3 of this article and the Tribunal has misinterpreted this definition by reading it in. the light of the software rental agreement entered into between the applicant and Messrs Schlumberger Seaco Income on 1st January, 1995. The learned counsel then took us through the order of the Income Tax Tribunal to point out the alleged fallacies in the- impugned order. The learned counsel pointed out that the Tribunal has unnecessarily laid great stress on paragraph 5 of the agreement which deals with the confidentiality of the tapes and has wrongly relied on the judgment of this Court reported as GLAXO Industries Ltd. v. Commissioner of Income Tax, Karachi (1991 PTD 195), which according to the learned counsel is distinguishable. The learned counsel argued that according to the definition of .the word `royalty' given in paragraph 3 of Article 12 of the Avoidance of Double Taxation Agreement between Pakistan and Netherlands where the payment is received for the use and utilized of patent, know-how, copyright etc. it will fall under the definition of royalty but where the payment is received in consideration for the use and utilization of a patented or copyrighted product the same will be treated as normal income. He further submitted that any other interpretation including the interpretation given by the Income Tax Panel and the Tribunal, if accepted, will lead to absurdity and it is a principle of interpretation that the interpretation which leads to manifest absurdity should, if possible, be avoided. The learned counsel also relied on the principle of ejusdem generis and argued that if the principle of ejusdem generic is followed then it will only apply to the use and utilization of patents and not to the use and utilization of patented projects. In support of his various contentions the learned counsel relied on the following case-laws:--

(1) Commissioner of Agricultural Income Tax East Bengal v. B.W.M. Abdur Rahman 1989 PTD 909.

(2) Khalid Qureshi and 5 others v. United Bank Limited I.I. Chundrigar Road, Karachi (2001 SCMR 103).

(3) Oxford University Press v. Commissioner of Income Tax (2001 PTD 2484).

(4) K. Govindan and Sons v. Commissioner of Income Tax (2001 PTD 2258).

(5) C.W.S. (India) Ltd. and others v. Commissioner of Income Tax (1995 PTD 741).

(6) Don Basco High School v. The Assistant Director, E.O.B.I. and others (PLD 1989 SC 128):

8. The learned counsel also filed the following extracts from various publications relating to the taxability of royalty 'in transactions .involving software:--

(1) "International Law in Relation to Double Taxation of Income" by I. P. Gupta.

(2) Taxmann's "Indian Double Taxation Agreements and Tax Laws" Vol. I, 4th Edition" by D: P. Mittal.

(3) "Principles of International Taxation" by Karl Sonntage and C.S. Mathur.

(4) International Tax Review for February, 2007.

(5) International Tax Review for. March, 2005.

(6) "Taxation of Computer Programs in Cross Border Transactions" by Sandeep Tandon.

(7) Application of the OECD interpretation to tax treaties in New Zealand.

(8) Advance ruling from India bearing P. No.30 of 1999 reported in (1999) 238 ITA 296 (AAR) (1999) 105 Taxman 240.

(9) UOI v. Azadi Bachao Andolan 263 ITR 706.

9. Mr. Jawed Farooqui are learned counsel for the respondent supported the judgment of the Tribunal and stated that on a plain and simple reading of the definition of royalty given in paragraph 3 of Article 12 of the Double Taxation Agreement between Pakistan and Netherlands it is clear that there can only one interpretation i.e. when any payment is received as consideration for use or right to use .any secret formula or process then such payment will fall within the definition of royalty. Referring to the software rental agreement the learned counsel submitted that in the agreement it has been stated that the. applicant is in possession of full right and authority in proprietary software program projects and integrated software system for use in the field of data processing interpretation and data management in the oil and gas industry and this software has been provided to Messrs Schlumberger Seaco Inc. for a settled consideration and the applicant has also offered to assist in installation of the software program and training of customers employees in the use of software. According to the learned counsel this is a secret process which has been provided to Messrs Schlumberger Seaco Inc. for the use to its oil field and therefore any consideration for the use and utilization of this secret process will fall within the definition of royalty as rightly held by the .Income Tax Appellate Tribunal. The learned counsel also relied on the judgment of the Honorable Supreme Court of Pakistan. in the case of .Commissioner of Agricultural Income Tax, East Bengal v. B.W.M. Abdur Rahman 1989 PTD 909 also relied on by the learned counsel for the applicant and the case of GLAXO Industries Ltd. v. Commissioner of Income Tax, Karachi (1991 PTD 195) which has been relied on by the Tribunal.

10. We have examined the case in the .light of the arguments of the learned counsel and have perused the records of the case including the impugned order and the case--laws relied on by the learned counsel and the various publications which have been relied on by the learned counsel for the applicant and have also managed to lay our hands on few publications on this point and have studied them carefully. Since the subject-mater of this controversy revolves round the interpretation of. para. 3 of Article 12 of the Avoidance of Double Taxation Agreement between Pakistan and Netherlands it will be relevant to produce the same which reads thus:

(3) The term "Royalties" as used in this Article means payments of any kind received as consideration for the use of or the right to use:-

(a) a patent, trade mark or trade name, secret formula or process, design or model, or information concerning industrial, commercial or scientific experience;

(b) industrial, commercial or scientific equipment, cinematograph films and tapes for television and broadcasting;

(c) a copyright of a literary, artistic or scientific work but excluding cinematograph films and tapes for television or broadcasting.

11. Before we proceed to examine the questions before us, it will also be relevant to reproduce extracts from the various publications procured by us or submitted by the learned counsel for the applicant on the taxability of income from software. Klaus Vogel while writing on double taxation conventions states asunder:--

(13) (Three types of software) Three situations are considered. The first is of payments made where less than the full rights in software are transferred. In a partial transfer of rights the consideration is likely to represent a royalty only in very limited circumstances. One such case is where the transferor is the author of the software (or has .acquired from the author his rights. of distribution and reproduction) and he has placed part of his rights at the disposal of a third party to enable the latter to develop or exploit the software itself commercially, for example by development and distribution of it. It .should be noted that even where a software payment is properly to be regarded as a royalty there are difficulties in applying the copyright provisions of the Article to software royalties since paragraph 2 requires that software should be classified as a literary, artistic. or scientific work. None of these categories seems entirely apt but a scientific work might be the most realistic approach. Countries of which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all reference to the nature of copyrights or refers specifically to software.

(14) (Software used by purchaser) In other cases, the acquisition of the software will generally be for the personal or business use of the purchaser. The payment will then fall to be dealt with as commercial income in accordance with Article 7 or 14. It is of no relevance that the software is protected by copyright or that there may be restrictions on the use to which the purchaser can put it.

(15) (Alienation of rights) The second situation is .where the payments are made as consideration for the alienation of rights attached to the software. It is clear that where consideration is paid for the transfer of the full ownership, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving:--

* exclusive right of use during a specific .period or in a limited geographical area;

* additional consideration related to usage;

* consideration in the form of a substantial lump sum payment.

(16) (Nature of consideration) Each case will depend on its particular facts but in general such payments are likely to be commercial income within Article 7 or 14 a capital gains matter within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated in full or in part, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in installments or, in the view of most countries, by the fact that the payments are related to a contingency.

(17) (Mixed contracts) The Third situation is where software payments are made under mixed contracts, Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know-how are equally applicable to computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part.

12. In a paper prepared by Indian Tax Consultant Shefali Goradia on international taxation of software she express her opinion as under:--

Phra. 13.1 provides that where the payment is for a right to use the program in the manner that would, without such licence, result in infringement of a copyright, the payment can be characterized as `royalty'. Some of the examples of this type of payment are the payment for the license to reproduce and distribute or to modify and publicly display the programs. In many countries there is a problem in analyzing the character of the software payment based on the above parameters as generally, a copyright is defined to a mean a literary, artistic or scientific work. Software may not fall within any of these categories. However, some countries have corrected this problem by specifically classifying software as a literary or scientific work.

Para. 14 deals with transactions under which the buyer gets merely to operate the software for his own use. He may get the licence to copy the program on his memory (hard drive) or for archival purposes. Such payments should be regarded as `business income' and taxed according to the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services).

13. Following extract on software .transactions resulting in commercial income and' resulting in royalties is reproduced from international law in relation to .double taxation of income by I.P. Gupta

(8.5) Software Transactions Resulting in Commercial Income.

Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot be a royalty. Difficulties can arise where there is extensive but partial alienation of the right, involving.

* Exclusive right of use during a specific period of time 'or in a limited geographical area;

* additional consideration related to usage;

* consideration in the form of substantial lump sum payment.

* In OECD's vies, such payment are in general likely to be commercial income, which follows from the fact that where ownership has been alienated in full or in part, the payment cannot be for the use of the right. In particular, the following types of transactions are considered to produce commercial income rather than royalties.

* Transactions in which the rights acquired are necessary to enable the user to operate the program, for instance, where the buyer is granted a limited right to reproduce the program copy. In these cases the rights are specific to the nature of a computer program. For instances; they allow the user to copy the program onto his computer's hard drive, or for archival purposes.

* In other cases the buyer obtains the right to make multiple copies of the programme for operation in his own business. Where by such an arrangement the buyer may make copies for the use on his own computers, and reproduction for any other purpose is not permitted, the payment will normally have to be dealt with as business income.

(18.6) Software Transactions Resulting in Royalties.

Two specific types of transactions are singled out by OECD in which payments are considered royalties rather than commercial income. These are:

* The granting of the right to use the' program in a manner that would, without such a license, constitute an infringement of copyright. Illustrations include licenses to reproduce and distribute to the public software or to modify and publicly display the program.

* The supply of information about the ideas and principles underlying a program, such as logic, algorithms or programming languages or techniques.

Payments for such information may be royalties to the extent that they represent consideration for the' use of, or the right to use, secret formulae or for the transfer of .know-how. It is observed in the commentaries that in the cases in question here, there may be difficulties in applying the copyright provisions of Art, 12 since its para. 2 requires that software be classified as a literary, artistic or scientific work, which may not always comply with the domestic rules of the countries concerned. It is, therefore, suggested that where such ambiguities occur, the relevant treaty adopt an amended version of the model article which either omits all references to the nature of copyright or refers specifically to software. Of these options, the former does not occur in India's treaties, whereas in the treaties with Kazakhstan, Kyrgyzstan, Moroco, Namibia, Trinidad and Tobago and Turkrrrenistan; computer software, is expressly named as an item. triggering withholding tax on royalties.

14. In a review. of a judgment of the Bangalore Income Tax Appellate Tribunal in the case of Sonata Information Technology Limited v. Addl. Additional Commissioner of Income Tax published in ITR February, 2007, issue on International Tax Review.. -The gist of the decision is, given as under:--

"The taxpayer contended that it had acquired copyrighted articles and so considered the Income represented the Income represented by payments for software purchase to be business profits of the overseas vendors taxable only under Article 7 of the respective Double Taxation Avoidance Agreements (DTAAs). In the absence of Permanent Establishment (PE) of the overseas vendors in India the same was not taxable in India and consequently it was not under an obligation to withhold tax. The tax officer was, however, of the view that the payment made by the taxpayer was a royalty and so the taxpayer had to pay withholding tax at the specified rates.

The ITAT extensively analysed the previsions of the Copyright Law, OECD and UN Commentary as well as rulings on this issue in other countries 'and held that what the taxpayer had acquired were software products and could not be considered for acquisition of any intellectual property rights. The ITAT observed that the author of the word by creating the work has certain exclusive rights such as the reproduction rights, distribution rights, rental or lending rights. The ITAT observed -that on sale of computer software, the vendors had exercised the exclusive rights and had not the transferred such 'rights to the taxpayer. The taxpayer was merely acting as a distributor of the software. The ITAT concluded that the taxpayer has acquired copyrighted articles which partakes the character of purchase and sale of goods. Accordingly, in the absence of the PE of the overseas vendors in India they are not taxable and consequently the taxpayer did not have to pay withholding tax. "

15. In Taxation of Computer Programs in Cross Border Transactions by Sandeep Tandon on Indian Tax Consultant, he has categorized the nature of payment received for transaction as under:--

Nature of Payment

Where payment is not towards consideration for transfer of copyright in software---Cannot be categorized as `royalties', but only as `business income'.

If payment is towards consideration for granting right to commercially exploit the copyright in the software by selling the same or making derivative software etc. Income will be categorized as `royalties'.

16. In the light of the above extracts it is clear that OECD which is the authority which has drafted the Double Taxation Agreements has in respect of Software Transactions categorized the income arising from the transactions where proprietary. rights of patent or copyrights have been transferred or where the vendee "or the lessee has .been empowered to exploit the copyright or the patent for its manufacturing activities or for distribution of such copyright or patented software as falling within the definition of royalty but where the consideration is for the use of copyrighted product for its own personal or business use then such income will fall within the definition of commercial or business income. In the light of the above conclusion and from a perusal of the relevant material on the software of transactions we have examined the software rental agreement between the applicant and Messrs Schlimberger Saece Inc., which is the source of the disputed income, the judgment of this Court in the case of Glaxo Industries Ltd". v. Commissioner of Income Tax, Karachi quoted supra and the reasons advanced by the Tribunal is support in us order dismissing the appeal of the applicant.

17. A perusal of the agreement leads. to the conclusion that it is an agreement between a company which has developed a software program product and integrated software system for the use in the field of data processing interpretation and data management in oil and gas industry and a company which is providing oil field services to the oil and gas exploration and production companies in Pakistan for the use of this software for its personal/business use in the oil field, data processing and log interpretation. Vide .paragraphs 2 and 3 of this agreement the applicant company has also agreed to provide maintenance services for the software at the request of the customer, the applicant has agreed to assist in installation of software program and the training of the customer's employees in the use of this software. In our opinion these two clauses are general clauses which are present in all agreements where a specialized product is sold from one person to another person and the seller provides maintenance guarantee and also agree to assist in the installation of such specialized products and trains the purchaser's employees in the operation/use of the specialized product. Vide paragraphs 5 of this agreement confidential clause has been incorporated and by this clause the customer i.e. Messrs Schlimberger Saece Inc., has been bound that this software will be used exclusively by them and no other party shall have access to the software documentation or technique used or supplied by the company and that they shall not make any copies of the software manuals related to .portions of the document thereon without prior permission of the applicant. By perusing the provisions of the agreement together it is apparent that the applicant has only provided a copyright or a patented software product to the customer and the customer has not been given the proprietary rights of the copyright or the patent of this software product in as much as they have even been restrained from allowing any other party to use this software product and system. It is, therefore, our opinion that the agreement is for the sale of a copyrighted or patented product and not for the sale of rights of copyrights or patent and by selling the software programme the applicant has not provided any secret formula or process to the customer as the know how of the secret process of producing the software programme has not been divulged to the customer by this agreement.

18. We have also carefully perused the judgment of this Court in the case of GLAXO Industries Ltd. V. Commissioner of Income Tax, Karachi quoted supra on which the Tribunal has relied for holding that the income the above agreement is to be treated as royalty in the hands of the applicant. On a careful perusal of thy above judgment we have arrived at the conclusion that the judgment is not only distinguishable but instead of helping the respondent it is inclined in favour of the applicant. We have reached to this conclusion because in this case the agreement related to the provision of manufacturing information of the products of the company which had received the consideration and the company had transferred all its patents to the seller and had allowed them to manufacture the products of the company in .Pakistan for sale and distribution and the Income. Tax Officer himself had treated the consideration received for the provision of information and patents as royalty but had disallowed the consideration for factory, administration, training and technical staff and storage and control and this Court had held that since clause-b related to provision of experience in the organization and administration which may enable the company to make efficient use of machinery it was directly related to the manufacture of specialized products and was material to increase efficiency and quality and therefore fell within the category of royalty. The Court also held that consideration for training on technical staff was necessary for exploitation and 'use of patent or secret formula and was therefore covered by royalty whereas technical and scientific information was provided for stability, storage of products and therefore fell within the category of royalty. However, the Court also made the following observations:-

"Therefore, any payment which is not paid .as consideration for use of property rights like patent, trade mark, secret process or formula or for similar purpose will not be covered by Article VIII(2).

19. In the light, of above observations we have examined the impugned judgment of the Tribunal. The Tribunal seems to have been carried away by the confidentiality clause in the agreement and have on the basis of this .confidentiality clause, .wherein the customer has been restrained from passing of any information or knowledge in relation to PLIC Tapes to any other person held that it was a secret process and information concerning some industrial commercial or scientific experience, which was not to be disclosed to any other. person and, therefore, by holding that it was secret process they have held that it falls within the definition of royalty in accordance with para.3 of Article 12 of .the Double Taxation Agreement. They have also relied on the following extract from the judgment of this Court from the case of Glaxo Industries Ltd. v. Commissioner of Income Tax, Karachi (quoted supra).

"The royalty is a consideration for use and exploitation of .any invention, secret process or patent which is granted by the licensor on payment of consideration by the licensee. The payment is thus, a matter of .agreement between the parties but the moving factor and sole consideration is the supply of specialized knowledge, process, invention or patent of which the licensor is the proprietor. For such sue and exploitation several other allied and connected- matters are referred but they are only ancillary to the grant of payment for such use is not based mainly on such considerations. It is a common feature of such agreements to provide for various conditions which a licensor considers necessary for protection of its rights and earn as much profit as possible. It may provide services of varied nature connected with the use, manufacture and exploitation but payments made in respect of such services which are directly connected with use, manufacture and exploitation will be covered by the word `Royalty' Any payment made under such agreement for purposes which are ancillary to the purpose of the agreement will not be royalty. "

20. From a perusal of this extract it is clear that the Court has held that moving factor and the sole consideration for the treatment of income as royalty is the .supply of specialized knowledge, process, invention or patent of which the licensor is the proprietor. It has also been held that payments made in respect of such services, which are directly connected with the use, manufacture or exploitation will be covered by the word "royalty' .

21. From a perusal of the agreement we are of the considered opinion that the payment made by Messrs 5chlumberger Saeco Inc., to the applicant is not for the use or exploitation of copyright patent, know-how, secret process or formula or for supply of specialized knowledge, invention or patent, but for its business use of patented software product and system and since this product can only be utilized for its technical use and cannot be passed off to any other .person, therefore, in our opinion, it does not fall within the definition of royalty as defined in para.3 of Article 12 of the double taxation Agreement between Pakistan and Netherlands but will fall in other income which may be covered under business profits and, therefore, the order of the Income Tax Appellate Tribunal for all the years cannot be sustained.

22. In view of the above discussion we would answer the question referred in ITR No.71 of 1997 in negative in favour of the applicant against the respondent and both the questions referred in ITR No.99 of the 2006 in negative in favour of the taxpayer and against the department. The identical question in all other connected ITRAs are answered in the terms that the receipt of the applicant from leasing FLIC Tapes do not fall within the definition of royalty income.

23. All the above titled ITRs and ITAs are disposed of in the above terms.

24. A copy of this order under the signature of the Registrar and seal of this Court, be remitted to the Income Tax Appellate Tribunal for passing of order in conformity with this order.

M.H./I-19/KOrder accordingly.