20-08-2025, 09:59 AM
Summary of the Order by M. M. Akram (Judicial Member)
Case Overview:
The appellant, Oracle Systems Pakistan (Private) Limited (OSPL), appealed against Federal Excise Duty (FED) demands on payments made to its non-resident parent company, Oracle CAPAC Services (OCAPAC) Ireland, for franchise services/royalty/technical service fees under the Federal Excise Act, 2005, for tax periods June 2016 to May 2020.
Core Facts:
OSPL is engaged in distributing software licenses, sublicensing software, and delivering related support services in Pakistan under a distribution agreement with OCAPAC Ireland.
The Department observed non-payment of FED on amounts paid to OCAPAC, considering these as fees for franchise services liable to FED.
Assessing Officer issued show cause notices, resulting in orders demanding FED, surcharge, and penalty.
The first appeal was dismissed by the Commissioner Inland Revenue (Appeals-I), leading to the present appeal.
Issues for Determination:
Nature of payment: Whether payments made by OSPL to OCAPAC constitute payment for "franchise" services as defined by the Federal Excise Act, 2005.
Exemption under Finance Act, 2016: Whether franchise services are exempt from FED due to amendments via Finance Act, 2016.
Constitutional competence post-18th Amendment: Whether FED on services (specifically franchise services) can be validly levied by the Federation, given that taxing rights on services have been devolved to provinces.
Issue 1: Franchise Relationship and Applicability of FED
The tribunal relies on a previous ruling (2023) 128 TAX 302 (Tribunal) that confirms the relationship between OSPL and OCAPAC qualifies as a franchise.
Definition of Franchise (Section 2(12a), Federal Excise Act, 2005):
“Franchise means an authority by the franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any business activity in respect of goods or provide services identified with the franchiser against a fee including royalty or technical fee.”
OSPL's licensing and sublicensing rights, and the fees paid meet the criteria of franchise as per section 2(12a).
OSPL cannot be considered a mere distributor under section 2(8) since no transfer of ownership of goods occurs, only sublicensing of software rights.
The substance of the contractual relationship predominates over form — it is a franchisor-franchisee relationship attracting FED on franchise services.
Issue 2: Effect of Finance Act, 2016 Amendment
The Finance Act, 2016 introduced a Note to Serial No. 11 of Table II of the First Schedule of the Federal Excise Act, which reads:
“The duty on franchise services, royalty and fee for technical services shall not be levied where the service is provided in the province and provincial sales tax has been levied thereon.”
The amendment does not grant a blanket exemption from FED on franchise services.
It excludes FED only if:
a) The service is provided in a province; and
b) Provincial sales tax has been levied on that service in that province.
Since OSPL’s head office is in Islamabad (a federal territory, not a province), and no provincial sales tax was levied, the exemption note does not apply.
Therefore, FED liability on franchise services in this case remains intact.
Issue 3: Constitutional Validity of FED on Services Post-18th Amendment
The 18th Amendment devolved the right to tax services exclusively to Provinces. However, this applies to Sales Tax on Services, not Federal Excise Duty.
Relevant Constitutional Provisions:
Entry 44 of Part I, Federal Legislative List: Duties of excise including duties on salt (but excluding narcotics etc.).
Entry 49 of Part I, Federal Legislative List: Taxes on sale and purchase of goods except sales tax on services.
FED and Sales Tax on Services are distinct levies; FED is an excise duty, not sales tax. Thus, FED on services remains valid post-18th Amendment.
The machinery for FED collection may use the sales tax system, but it does not alter the nature of FED as a federal excise duty.
Case law cited:
M/s Telenor Pakistan (Pvt.) Ltd. v. Federation of Pakistan (2017 PTD 2269) — emphasized the distinction between FED and Sales Tax on Services and upheld FED post-18th Amendment.
The appellant failed to demonstrate provision of services in any province or payment of provincial sales tax; hence, no constitutional breach arises.
Final Conclusion and Directions:
The FED demand on franchise services paid to OCAPAC for tax periods June 2016 to May 2020 is lawful and sustainable.
The appeal is dismissed, with the possibility of relief if OSPL can later prove services were rendered in a province and subjected to provincial sales tax.
The constitutional and statutory framework supports the continued imposition of FED on franchise services in Islamabad.
Relevant Law Sections and References:
Federal Excise Act, 2005:
Section 2(12a): Definition of Franchise
Section 2(8): Definition of Distributor
Section 3(5)©: Liability for FED on services rendered by non-resident — recipient in Pakistan liable to pay.
Table II, First Schedule, Serial 11: Franchise services liable to FED.
Finance Act, 2016: Amendment inserting Note to Table II para exempting FED where provincial sales tax applied.
Constitution of Pakistan:
Entry 44 — Duties of excise (Federal)
Entry 49 — Sales tax on goods except services (Provincial)
18th Amendment: Devolution of service taxation powers to Provinces.
Case Overview:
The appellant, Oracle Systems Pakistan (Private) Limited (OSPL), appealed against Federal Excise Duty (FED) demands on payments made to its non-resident parent company, Oracle CAPAC Services (OCAPAC) Ireland, for franchise services/royalty/technical service fees under the Federal Excise Act, 2005, for tax periods June 2016 to May 2020.
Core Facts:
OSPL is engaged in distributing software licenses, sublicensing software, and delivering related support services in Pakistan under a distribution agreement with OCAPAC Ireland.
The Department observed non-payment of FED on amounts paid to OCAPAC, considering these as fees for franchise services liable to FED.
Assessing Officer issued show cause notices, resulting in orders demanding FED, surcharge, and penalty.
The first appeal was dismissed by the Commissioner Inland Revenue (Appeals-I), leading to the present appeal.
Issues for Determination:
Nature of payment: Whether payments made by OSPL to OCAPAC constitute payment for "franchise" services as defined by the Federal Excise Act, 2005.
Exemption under Finance Act, 2016: Whether franchise services are exempt from FED due to amendments via Finance Act, 2016.
Constitutional competence post-18th Amendment: Whether FED on services (specifically franchise services) can be validly levied by the Federation, given that taxing rights on services have been devolved to provinces.
Issue 1: Franchise Relationship and Applicability of FED
The tribunal relies on a previous ruling (2023) 128 TAX 302 (Tribunal) that confirms the relationship between OSPL and OCAPAC qualifies as a franchise.
Definition of Franchise (Section 2(12a), Federal Excise Act, 2005):
“Franchise means an authority by the franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any business activity in respect of goods or provide services identified with the franchiser against a fee including royalty or technical fee.”
OSPL's licensing and sublicensing rights, and the fees paid meet the criteria of franchise as per section 2(12a).
OSPL cannot be considered a mere distributor under section 2(8) since no transfer of ownership of goods occurs, only sublicensing of software rights.
The substance of the contractual relationship predominates over form — it is a franchisor-franchisee relationship attracting FED on franchise services.
Issue 2: Effect of Finance Act, 2016 Amendment
The Finance Act, 2016 introduced a Note to Serial No. 11 of Table II of the First Schedule of the Federal Excise Act, which reads:
“The duty on franchise services, royalty and fee for technical services shall not be levied where the service is provided in the province and provincial sales tax has been levied thereon.”
The amendment does not grant a blanket exemption from FED on franchise services.
It excludes FED only if:
a) The service is provided in a province; and
b) Provincial sales tax has been levied on that service in that province.
Since OSPL’s head office is in Islamabad (a federal territory, not a province), and no provincial sales tax was levied, the exemption note does not apply.
Therefore, FED liability on franchise services in this case remains intact.
Issue 3: Constitutional Validity of FED on Services Post-18th Amendment
The 18th Amendment devolved the right to tax services exclusively to Provinces. However, this applies to Sales Tax on Services, not Federal Excise Duty.
Relevant Constitutional Provisions:
Entry 44 of Part I, Federal Legislative List: Duties of excise including duties on salt (but excluding narcotics etc.).
Entry 49 of Part I, Federal Legislative List: Taxes on sale and purchase of goods except sales tax on services.
FED and Sales Tax on Services are distinct levies; FED is an excise duty, not sales tax. Thus, FED on services remains valid post-18th Amendment.
The machinery for FED collection may use the sales tax system, but it does not alter the nature of FED as a federal excise duty.
Case law cited:
M/s Telenor Pakistan (Pvt.) Ltd. v. Federation of Pakistan (2017 PTD 2269) — emphasized the distinction between FED and Sales Tax on Services and upheld FED post-18th Amendment.
The appellant failed to demonstrate provision of services in any province or payment of provincial sales tax; hence, no constitutional breach arises.
Final Conclusion and Directions:
The FED demand on franchise services paid to OCAPAC for tax periods June 2016 to May 2020 is lawful and sustainable.
The appeal is dismissed, with the possibility of relief if OSPL can later prove services were rendered in a province and subjected to provincial sales tax.
The constitutional and statutory framework supports the continued imposition of FED on franchise services in Islamabad.
Relevant Law Sections and References:
Federal Excise Act, 2005:
Section 2(12a): Definition of Franchise
Section 2(8): Definition of Distributor
Section 3(5)©: Liability for FED on services rendered by non-resident — recipient in Pakistan liable to pay.
Table II, First Schedule, Serial 11: Franchise services liable to FED.
Finance Act, 2016: Amendment inserting Note to Table II para exempting FED where provincial sales tax applied.
Constitution of Pakistan:
Entry 44 — Duties of excise (Federal)
Entry 49 — Sales tax on goods except services (Provincial)
18th Amendment: Devolution of service taxation powers to Provinces.