COMMISSIONER INLAND REVENUE (LEGAL DIVISION) LARGE TAXPAYER UNIT, ISLAMABAD vs NOKIA SIEMENS NETWORKS PAKISTAN

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COMMISSIONER INLAND REVENUE (LEGAL DIVISION) LARGE TAXPAYER UNIT, ISLAMABAD VS NOKIA SIEMENS NETWORKS PAKISTAN (PVT.) LTD. Ss. 12(2)(e)(iii), 20 & 24(1)(b)---Voluntary Separation Scheme payment---Salary payments made to employees---Income from business---Deduction of expenses---Capital expense asserted by Tax Authorities---Department filed Reference against order of Appellate Tribunal Inland Revenue ('Tribunal') in favour of taxpayer---Validity---Findings of the Tribunal was correct that the expense sought by the respondent /taxpayer to be deducted while computing income from business in relation to payments made to employees under a Voluntary Separation Scheme (VSS) constituted salary expense in terms of S.12(2)(e) (iii) of Income Tax Ordinance, 2001 ('the Ordinance, 2001')---There is no reasoning in the order of the Commissioner or that of Commissioner (Appeals) establishing how the payments made under the voluntary separation scheme, that constitute salary payments, could qualify as an intangible asset of the respondent taxpayer that had a normal useful life exceeding one year in terms of S. 24(1)(b) of the Ordinance, 2001---The conclusion drawn by the Commissioner could not have been drawn without inflicting serious injury on the concept of salary payments---Any payment under a golden handshake scheme qualifies as a salary payment in terms of S.12(2)(e)(iii) of the Ordinance, 2001 as is acknowledged by the Department---By refusing to allow deduction of such expense the route chosen by the Department was to argue that such payment was of a capital nature as the benefit that it procured for the company had a normal useful life of more than one year---By said logic any salary payment by a company to an employee could arguably produce a benefit for the company for more than one year as it had the effect of retaining such employee in the countenanced---The VSS expense incurred by the company to terminate its employees created no benefit for the company in terms of S. 24(1)(b) of the Ordinance, 2001 that had a normal useful life exceeding one year---By no stretch of imagination could such expense be treated as a capital expense thereby refusing a deduction of such expense in the relevant tax year---As a general rule funds used for payment of salaries are a revenue expense that are deducted from the company's revenue in the tax year in which such salaries are paid to calculate the company's taxable profit---Salaries are paid to employees to sustain day-to-day operations of the company and generate revenue in the relevant tax period , which are fully deductible in the tax year in which they are paid, as they are not paid to acquire a long-term asset for the company (There may be limited exceptions to this general principle, which needed not to be indulged with for our present purposes, but such exceptions only prove the rule)---Likewise, payments made in relation to a golden handshake or voluntary separation scheme also qualify as salary payments in terms of S. 12 (2)(e) (iii) of the Ordinance, 2001 and do not constitute a capital expense---Such payments are made as part of the company's operational restructuring strategy to manage its workforce and control ongoing costs---There was nothing to establish that the Voluntary Separation Scheme was not a redundancy scheme to manage costs, but was instead an expense incurred to create a lasting asset, such that it ought to be treated as a capital expense and not a revenue expense---Thus, Department's treatment of the salary expense as a payment to acquire an intangible asset was not in accordance with law and company did not err while claiming deduction of the VSS payment as a revenue expense---Therefore, the judgment of the Tribunal suffered from no infirmity when it concluded that the VSS payment was a salary expense which was deductible in terms of S.20 of the Ordinance, 2001 in the relevant tax year---Proposed question was answered in favor of the taxpayer and against the Applicant / Department---Reference Application, filed by the Department , was dismissed, in circumstances.

COMMISSIONER INLAND REVENUE (LEGAL DIVISION) LARGE TAXPAYER UNIT, ISLAMABAD vs NOKIA SIEMENS NETWORKS PAKISTAN (PVT — 2025 PTD 1863 ISLAMABAD

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