WATEEN TELECOM LIMITED vs COMMISSIONER INLAND REVENUE Ss — 2026 PTD 269 ISLAMABAD

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WATEEN TELECOM LIMITED VS COMMISSIONER INLAND REVENUE Ss.2(54)(e), 152, 161 & 205---Telecommunication companies---International interconnection arrangements---Failure to withhold tax from payments made to international interconnecting counter parties, allegation of---Tax demand by the department, challenge to---Characterization of interconnect payments as 'royalty'---Legality and scope---Briefly, present income tax references arose from demands raised by the tax department under sections 161 and 205 of the Income Tax Ordinance, 2001, alleging that the applicant telecom companies failed to withhold tax on payments made to their foreign international interconnecting telecom operators; the tax authorities treated these payments as "royalty" under S. 2(54)(e) of the Ordinance on the premise that, through interconnect agreements, the applicants were using or had the right to use the industrial, commercial, or scientific equipment and networks of their foreign counterparts for the conveyance of international telecommunication traffic, and therefore were liable to deduct withholding tax under S. 152; the assessing officer's view was upheld by the appellate forums, leading to the present references---Main issue for determination before the High Court was "whether payments made under international telecom interconnection agreements constituted "royalty" as consideration for the use or right to use equipment of the foreign operators, or whether they were payments for services of traffic conveyance where the use of equipment was merely incidental?"---Held: Interconnection agreements were made for conveyance of traffic between the interconnecting networks with the use of the respective equipment and networks being necessarily incidental to the contracted services of two-way conveyance of traffic---There was no warrant in law or logic for the tax department to characterize a transaction contrary to what the parties contracted between them if the operative nature of the transaction remained what was contracted and was not a sham cover for the real underlying transaction---In anutshell, the proposition and stance of the tax department was so preposterous that unveiling it tested the very limits of commons sense and logic---Section 2(54)(e) made it clear that, in order to constitute royalty, the consideration must be for the use or right of use of the counterparty's equipment; the contractual promise by the counterparty must be that the first party would or would have the right to use, the counterparty's equipment---If however, the promise was that the counterparty would provide services or goods that in order to perform that promise would entail the use of the counterparty's equipment by the counterparty, then the consideration was not for the use of the counterparty's equipment, but for the services or goods procured by the first party---It was concluded that the interconnect payments did not constitute royalty---Question of law was answered in negative, in favor of the taxpayer companies and against the tax department.

WATEEN TELECOM LIMITED vs COMMISSIONER INLAND REVENUE Ss — 2026 PTD 269 ISLAMABAD

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