𝐈𝐧𝐭𝐞𝐫𝐧𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐓𝐫𝐞𝐚𝐭𝐢𝐞𝐬 𝐨𝐧 𝐓𝐚𝐱 𝐚𝐫𝐞 𝐑𝐞𝐥𝐢𝐞𝐯𝐢𝐧𝐠 𝐢𝐧 𝐍𝐚𝐭𝐮𝐫𝐞. 𝐓𝐡𝐞𝐲 𝐒𝐡𝐨𝐮𝐥𝐝 𝐛𝐞 𝐈𝐧𝐭𝐞𝐫𝐩𝐫𝐞𝐭𝐞𝐝 𝐁𝐫𝐨𝐚𝐝𝐥𝐲:

𝐈𝐧𝐭𝐞𝐫𝐧𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐓𝐫𝐞𝐚𝐭𝐢𝐞𝐬 𝐨𝐧 𝐓𝐚𝐱 𝐚𝐫𝐞 𝐑𝐞𝐥𝐢𝐞𝐯𝐢𝐧𝐠 𝐢𝐧 𝐍𝐚𝐭𝐮𝐫𝐞. 𝐓𝐡𝐞𝐲 𝐒𝐡𝐨𝐮𝐥𝐝 𝐛𝐞 𝐈𝐧𝐭𝐞𝐫𝐩𝐫𝐞𝐭𝐞𝐝 𝐁𝐫𝐨𝐚𝐝𝐥𝐲:

𝐀 𝐓𝐡𝐫𝐞𝐞-𝐦𝐞𝐦𝐛𝐞𝐫 𝐁𝐞𝐧𝐜𝐡 𝐨𝐟 𝐭𝐡𝐞 𝐒𝐮𝐩𝐫𝐞𝐦𝐞 𝐂𝐨𝐮𝐫𝐭 𝐜𝐨𝐦𝐩𝐫𝐢𝐬𝐢𝐧𝐠 𝐉𝐮𝐬𝐭𝐢𝐜𝐞 𝐒𝐲𝐞𝐝 𝐌𝐚𝐧𝐬𝐨𝐨𝐫 𝐀𝐥𝐢 𝐒𝐡𝐚 (𝐭𝐡𝐞 𝐀𝐮𝐭𝐡𝐨𝐫 𝐉𝐮𝐝𝐠𝐞), 𝐉𝐮𝐬𝐭𝐢𝐜𝐞 𝐉𝐚𝐦𝐚𝐥 𝐊𝐡𝐚𝐧 𝐌𝐚𝐧𝐝𝐨𝐤𝐡𝐢𝐚𝐥 𝐚𝐧𝐝 𝐉𝐮𝐬𝐭𝐢𝐜𝐞 𝐀𝐭𝐡𝐚𝐫 𝐌𝐢𝐧𝐧𝐚𝐥𝐥𝐚𝐡 𝐡𝐚𝐬 𝐠𝐢𝐯𝐞𝐧 𝐚 𝐬𝐢𝐠𝐧𝐢𝐟𝐢𝐜𝐚𝐧𝐭 𝐣𝐮𝐝𝐠𝐦𝐞𝐧 𝐨𝐧 𝐭𝐡𝐞 𝐢𝐧𝐭𝐞𝐫𝐩𝐫𝐞𝐭𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐢𝐧𝐭𝐞𝐫𝐧𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐭𝐚𝐱 𝐭𝐫𝐞𝐚𝐭𝐢𝐞𝐬.

The dispute was between a domestic revenue authority, Commissioner Inland Revenue Karachi and two foreign companies, one from Denmark and another from Belgium, which were operating through local agent in Pakistan.

The issue before the Court was that “whether income arising from container detention charges (“𝐂𝐃𝐂”), container service charges (“𝐂𝐒𝐂”) and terminal handling charges (“𝐓𝐇𝐂”) falls within the category of “profits from the operation of ships in international traffic” in the context of double taxation conventions concluded between Pakistan and Denmark, as well as between Pakistan and Belgium.”

𝐓𝐡𝐞 𝐂𝐨𝐦𝐦𝐢𝐬𝐬𝐢𝐨𝐧𝐞𝐫 𝐈𝐧𝐥𝐚𝐧𝐝 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐊𝐚𝐫𝐚𝐜𝐡𝐢’𝐬 𝐅𝐢𝐧𝐝𝐢𝐧𝐠:

The Commissioner Inland Revenue, Karachi had declared that such an income arising from the three heads mentioned above does fall within the category of “profits from the operation of ships in the international traffic”, thus relaxation in light of Section 107 of the Income Tax Ordinance, 2001 and  Article 8 of the two Conventions, “Pakistan-Denmark Convention” and “Pakistan-Belgium Convention”, which have been concluded between the state parties, cannot be extended to them. This matter came up before the Sindh High Court which set aside the finding of the Commissioner. The Commissioner challenged the same before the Supreme Court.

𝐓𝐡𝐞 𝐉𝐮𝐝𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐨𝐮𝐫𝐭:

The Supreme Court held that such treaties require different interpretive approach from that which is applicable to domestic laws. They need broader interpretation as they are relieving in nature, they provide relaxation in tax and avoid double taxation. Further, the sources of interpretation of such treaties can be found in model treaties, their commentaries, international tax language and scholarly academic works where appropriate. They ought to be interpreted in a common and workable manner by applying expansive and broader interpretive approach.

The Supreme Court ruled that Article 8 of the Conventions does not only cover direct profits obtained from transportation by ships but it also includes profits arising from activities connected to shipping directly or indirectly, that is to say, ancillary thereto. The Court interpreted ancillary activities as those activities which by their nature are associated to operation of ships so closely as they cannot be regarded as a separate business to it, they make a minor contribution relative to such operation and they are not needed by the enterprise for its personal use in operation of the ships in the international traffic.

𝐂𝐨𝐧𝐜𝐥𝐮𝐬𝐢𝐨𝐧:

So the gist of the judgment is that broader and expansive interpretive approach ought to be adopted while interpreting international tax treaties; profits which are covered under Article 8 of the Conventions to avoid double taxation and grant tax relaxation are not confined to profits arising directly from transportation of ships but they also include those profits which arise from activities directly connected to operation of ships or ancillary thereto.

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