M. M. Akram Reported Judgements : August 2025

APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH – I,

ISLAMABAD

FEA No.19/IB/2022

MA(AG) FEA No.75/IB/2025

(Tax Period, June 2016 to May 2017)

FEA No.20/IB/2022

MA(AG) FEA No.76/IB/2025

(Tax Period, June 2017 to May 2018)

FEA No.21/IB/2022

MA(AG) FEA No.77/IB/2025

(Tax Period, June 2018 to May 2019)

FEA No.22/IB/2022

MA(AG) FEA No.78/IB/2025

(Tax Period, June 2019 to May 2020)

******

M/s Oracle Systems Pakistan (Pvt) Ltd., 4^th Floor, 555-C, U-Fone Tower, Jinnah Avenue, Blue Area, Islamabad.		Appellant
	Vs
Commissioner Inland Revenue, LTO, Islamabad.		Respondent

Appellant By:		Syed Shabbar Zaidi, FCA
Respondent By:		Mr. Atif Rahim Barki, LA Mr. Imran Shah, FCMA/DR

Date of Hearing:		19.06.2025
Date of Order:		18.08.2025

ORDER

M. M. AKRAM (JUDICIAL MEMBER): The titled appeals, along with miscellaneous applications for raising additional grounds, have been preferred by the appellant/registered person against Orders-in-Appeal Nos. 166/2022, 165/2022, 164/2022, and 123/2022, dated 24.06.2022, passed by the learned Commissioner Inland Revenue (Appeals-I), Large Taxpayers Office, Islamabad, for the relevant tax periods, on the grounds set forth in the respective memoranda of appeal. The appellant also raised an additional ground at the time of the hearing of the appeal, which, being legal in nature, was admitted and is adjudicated hereunder.

2. The brief facts leading to the instant appeals are that the appellant, a private limited company, is engaged in the supply of hardware, sublicensing of software, and provision of related support services to customers across Pakistan under a distribution agreement with its foreign group entities namely Oracle CAPAC Services, an Irish company (“OCAPAC”). During scrutiny and analysis of the sales tax record for the tax periods under consideration, it was observed that the appellant had failed to discharge its liability towards Federal Excise Duty on account of franchise services/royalty/technical service fee in respect of payments made to its non-resident parent company, OCAPAC. The assessing officer noted that the appellant, as reflected in its financial statements, had made payments on account of franchise fee/license fee/royalty to its parent company for the relevant periods, which, in the officer’s view, attracted the levy of Federal Excise Duty.

Sr. No.	Tax Period	Value	FED
1	June, 2016 to May, 2017	3,153,562,951	315,356,295
2	June, 2017 to May, 2018	6,651,255,687	665,125,568
3	June, 2018 to May, 2019	16,189,096,751	1,618,909,675
4	June, 2019 to May, 2020	8,778,414,321	877,841,432

Accordingly, show cause notices (SCNs) under section 14 of the Federal Excise Act, 2005 (“the Act”) were issued to the appellant company in respect of the discrepancies detected from the relevant record. The contravention proceedings so initiated culminated in the passing of assessment orders, wherein default of Federal Excise Duty for the tax periods under consideration was established and held recoverable from the appellant, along with default surcharge under section 8 of the Act (to be calculated at the time of payment), as well as penalty under section 19 of the Federal Excise Act, 2005.

3. Being aggrieved by the said orders, the appellant registered person preferred appeals before the learned Commissioner Inland Revenue (Appeals-I), LTO, Islamabad. The learned appellate authority, however, vide the impugned Orders-in-Appeal Nos. 166/2022, 165/2022, 164/2022, and 123/2022 dated 24.06.2022, disposed of the appeals filed by the appellant. Dissatisfied with the findings of the first appellate authority, the appellant has now preferred the instant appeals before this Tribunal, challenging the impugned orders on multiple grounds.

4. The case was fixed for hearing on 19.06.2025. The appellant was represented by Mr. Shabbar Zaidi, FCA, Authorized Representative (AR), while the Department was represented by Mr. Atif Rahim Barki, Legal Advisor, and Mr. Imran Shah, FCMA/Departmental Representative (DR). The learned AR for the appellant advanced threefold contentions. Firstly, it was argued that the appellant, Oracle Systems Pakistan (Private) Limited (OSPL), is engaged in the business of distributing software licenses, solutions, and related services in Pakistan, and that its principal activity of software distribution has not been duly appreciated or appropriately considered by the authorities below. Secondly, and without prejudice to the first contention, it was submitted that the Federal Government, through a specific amendment introduced by the Finance Act, 2016, in Table II of the First Schedule to the Federal Excise Act, 2005, exempted franchise services from the levy of federal excise duty. Thirdly, and without prejudice to both the foregoing submissions, it was contended that the levy of federal excise duty under the Federal Excise Act, 2005, cannot override the constitutional framework, inasmuch as the right to tax services has been devolved to the Provinces pursuant to the 18th Amendment to the Constitution. The learned AR also placed on record a detailed written submission compiled in booklet form in support of the above contentions.

5. Conversely, the learned Legal Advisor/DR representing the Department filed written submissions in support of the impugned orders, which were also taken on record. The learned DR inter alia by referring to various aspects of the Distribution Agreement between the appellant and OCAPAC to substantiate that the relationship between the appellant and OCAPAC is that of a franchise and consequently, all consideration payable or paid under such arrangement constitutes a fee for franchise services attracted by FED.

6. We have heard the parties, examined the written submissions, and perused the record. The following issues are arising for determination in the present appeal:

i. Whether in the facts and circumstances of the case, the consideration paid or payable by the appellant to its overseas associated enterprises i.e., OCAPAC or OFSS, as the case may be (hereinafter referred to as SLF) includes in it a consideration for any such right covered by the term “franchise” as per section 2(12a) of the Act?

ii. Whether, in view of the amendment introduced through the Finance Act, 2016, in Table II of the First Schedule to the Federal Excise Act, 2005, franchise services stand exempt from the levy of federal excise duty?

iii. Whether, in the aftermath of the 18th Amendment to the Constitution of the Islamic Republic of Pakistan, the imposition of federal excise duty on services continues to be a valid exercise of legislative competence by the Federation, when the right to levy tax on services has been devolved to the Provinces?

7. Issue No. i

The issue regarding the existence of a franchisor–franchisee relationship between the appellant and OCAPAC has already stands concluded by this Tribunal in (2023) 128 TAX 302 (Trib). Following the rule of consistency, the matter is decided against the appellant. The relevant extract of the said judgment is reproduced below:–

“FED ON SUB-LICENSE FEES (SLF)

12. The second and third questions, framed as above, are interconnected. To answer these vis-à-vis the applicability of FED on SLF, the relevant facts are that the appellant has entered into two Distribution Agreements with its overseas associated enterprises, i.e., OCAPAC Ireland and OFSS Singapore. Broadly speaking, under these Agreements, the appellant has been appointed as a non-exclusive authorized distributor/sub-licensor for Oracle software products and other allied services (classified as education, consulting, etc.), and consequently requires the appellant to pay consideration to these entities as a percentage of its revenue under the respective heads. The SLF expense charged and recorded in the audited financial statements for the respective periods is given below:-

	*2011-12*	*2012-13*	*2013-14*	*2014-15*	*2015-16*
SLF expense	1,105,270,614	1,837,599,486	2,162,985,505	2,490,378,015	2,944,883,060

It was explained by the ARs during the hearings that the above amount of expense for the first four years relating to FEA Nos. 35 & 36 relate to OCAPAC Ireland, whereas, for the last year relating to FEA No. 15, the expense amount also includes SLF relating to OFSS Singapore. The basis of the calculation of SLF amounts is governed by the respective Distribution Agreements with these foreign associated companies. It was further pointed out by the ARs that as against the above amounts of SLF expense for the respective tax periods, the Department has erroneously picked up the amounts from the Balance Sheet of the appellant under the head ‘payable to related parties’ which resulted in some duplications for prior periods and also included certain other heads which did not relate to SLF. This assertion, when confronted to the learned DR, he candidly conceded on this point and submitted that the principal issue relating to the classification of SLF as franchise services chargeable to FED may be dilated upon and decided in the appeals, while this factual controversy may be considered as decided in favour of the appellant.

13. Keeping in view the above facts, in order to understand the nature of SLF expense, it would be advantageous to reproduce here relevant excerpts of the Distribution Agreement between OCAPAC Ireland and the appellant (being referred to as ORASUB in the Agreement) some of which were also discussed in great detail during the hearing of the instant appeals.

“ RECITALS

WHEREAS, OCAPAC owns all rights, title, and interest in, or has been licensed by, the developer of the programs;

WHEREAS, ORASUB desires to promote, market, distribute, and sublicense the Programs as specified in this Agreement;

WHEREAS, OCAPAC desires to grant ORASUB a license to promote, market, distribute, and sublicense the Programs as specified in this Agreement;

…………………………………………………………………………………………………………………………….

ARTICLE 2

LICENSES GRANTED

2.1 APPOINTMENT AS DISTRIBUTOR

Subject to the terms of this Agreement, OCAPAC hereby appoints ORASUB as its non-exclusive authorized distributor for the Programs[1] to concentrate its distribution efforts within the Territory[2], with the right to make copies of the Programs of distribution to the public.

2.2 SUBLICENSING LICENSE

2.2.A. End User Sublicensing

OCAPAC hereby grants to ORASUB a license to market, promote, and to Sublicense the Programs to Sublicensees in the Territory, under the terms of this Agreement; a) for use by Sublicensee for its operations on computer systems located in the Territory, and b) upon approval via the Oracle Group’s international approval policies and procedures, for use outside of the Territory. ORASUB may also grant the Sublicensee the right to make copies of the Programs, provided that each copy made by the Sublicensee shall be deemed to be a Sublicense subject to the terms of this Agreement, for which OCAPAC shall be paid a Sublicense Fee. OCAPAC or its designee shall provide ORASUB with copies of the Program(s) and Update(s), at the then prevailing Documentation and media Sublicensee price, for the uses specified herein.

The Sublicensing license granted by this Article 2.2.A permits ORASUB to:

(i) make and/or deliver to the Sublicensee an object code copy of a Program for each Sublicense granted;

(ii) use the Programs to provide training, Product Support and Additional Support Services to its Sublicensees and Subdistributors;

(iii) use the Programs for demonstration to third parties;

(iv) use the Programs for preparing documentation, marketing, promotional and other materials to further ORASUB’s marketing and distribution efforts under this Agreement;

(v) grant trial Sublicenses so that prospective Sublicensees and Sub-distributors may have the opportunity to evaluate the Programs for a reasonable period of time; and

(vi) use and reproduce the Programs to the extent necessary for internal use, safekeeping and archival purposes.

ORASUB may not use the Programs for any purpose not specified herein without the prior consent of OCAPAC.

…………………………………………………………………………………………………………………………….

ARTICLE 5

FEES AND PAYMENTS

5.1 SUBLICENSE FEES

5.1.A General Sublicense Fees

In consideration for each Sublicense of a Program (including any Modifications) granted by ORASUB or a ORUSB Subdistributor hereunder, ORASUB shall pay a fee equal to that set out in Part I of Schedule I.

SCHEDULE I

FEES AND PAYMENTS

Part I General Sublicense Fee (Article 5.1)

The fee payable by ORASUB to OCAPAC under Article 5.1 shall equal (a) seventy-seven and eight tenths percent (77.8%) of the net amount recognized as Program License revenue, and (b) seventy-seven and eight tenths percent (77.8%) of the net amount recognized as Support revenue (excluding Additional Support Services Revenue).”

14. We also reproduce the definition of ‘franchise’ as per section 2(12a) as under:-

“franchise” means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved.”

The interpretation of the above definition has been a subject matter of various orders passed by the Appellate Tribunal as well as Higher Courts some of which were also cited by both parties during the hearing. We, however, deem it relevant to refer to a recent judgment of the Hon’ble Islamabad High Court in the case of Pakistan Television Corporation in FERA No. 04/2021 decided on 28.02.2022wherein relying on an earlier judgment of Hon’ble Lahore High Court in the case of Honda Atlas Car Pakistan (2016 PTD 1328), it was held as under:-

“9. The ingredients to infer a franchise under section 2(12)(a) of the Act are 5 in number, namely, (i) authority by the franchisor, (ii) the resultant right acquired by the franchisee, (iii) the franchised service or product, (iv) the fee therefor, and (v) the identification of the product or service with the franchisor. All the impugned orders, however, focus only on the first 4 ingredients, and leave out the most critical ingredient no. (v). Not keeping the ‘identified with the franchiser’ ingredient as the overriding one leads to reductio ad absurdum, reducing the myriad business relationships in any economy, recognized as legally-distinct relationships with distinctly peculiar characteristics, to one single description, for then the legal doctrines of agency, construction, charter party, outsourcing, advertising, transportation and well-nigh all else will be reduced to the singular description of franchise as they all contain the ingredients (i) to (iv) noted above.”

Keeping in view the above principles, one can fairly deduce from the above-referred excerpts of the Distribution Agreement that there are multiple authorizations and rights granted by OCAPAC to the appellant with regard to products and services clearly identified with OCAPAC. Hence, the arrangement between the parties could be implied to fall within the purview of ‘franchise’ in so far as conditions (i), (ii), (iii), and (v) laid down in the above judgment. It was further emphasized by the ARs during the hearing that the status of the appellant is that of a ‘distributor’ which is distinct from ‘franchise’. However, we have noted that there is a specific definition of ‘distributor’ in section 2(8) of the Act which read as under:-

“Section 2(8) “distributor” means a person appointed by a manufacturer in or for a specified area to purchase goods from him for sale to a wholesale dealer in that area.”

The underlying concept of a distributor is purchasing and selling of goods from a manufacturer to the next person in the supply chain. In the instant case, the act of acquiring the software on license from OCAPAC and its subsequent sub-licensing to the customers / end-users cannot be equated as the purchase and sale of goods as the Distribution Agreement itself unequivocally stresses that the ownership in such programs or software products always remain with OCAPAC. Furthermore, it was noted that such software is claimed by the appellant to be acquired by way of downloading from the internet and not on any tangible medium such as CDs, hard disks, etc. Since the arrangement of the appellant with OFSS Singapore is also similar hence our findings above squarely apply on the same as well. Accordingly, in our view, the appellant does not qualify to be a distributor for the purpose of the provisions of the Act and consequently, that could not be the basis to exclude its relationship with OCAPAC and OFSS from the ambit of the franchise. Further, it is always the substance which is to be seen and consider rather than the form. Reliance may be placed on the judgments titled Habib Insurance Co. Ltd Vs Commissioner Income Tax, Karachi, (PLD 1985 SC 109) and Commissioner of Income Tax Vs Gammon (Pak) Ltd, Karachi, (1966) 14 Tax 304 (Kar). We, therefore, answer the question No. ii in the affirmative and against the appellant.”

8. We now proceed to address the following issues arising for determination in the present appeal:

Brief Facts:

In order to answer the aforesaid issues, it is essential to recapitulate the brief factual background of the case. The appellant is engaged as a franchisee, within the meaning ascribed to that term under Rule 2(mb) of the Federal Excise Rules, 2005 (“the Rules”), framed pursuant to the Federal Excise Act, 2005 (“the Act”). The expression “franchise” itself is defined under section 2(12a) of the Act. The appellant, being a company incorporated in Pakistan, entered into a franchise agreement with a non-resident company, namely OCAPAC. This arrangement, by its nature, constitutes the provision of dutiable services within the contemplation of section 2(8d) of the Act, as franchise services are expressly enumerated as excisable services at serial no. 11 of Table II to the First Schedule of the Act. The period relevant to the present dispute spans from June 2016 to May 2020.

It is an admitted position that the services were rendered by the non-resident company, OCAPAC, to the appellant in Pakistan. The services originated outside Pakistan but culminated and terminated within Pakistan. Accordingly, by operation of section 3(5) of the Act, the liability to discharge the incidence of federal excise duty squarely rests upon the recipient of the services, which in the instant matter is the appellant company. The charging section of the Act is Section 3, and subsection (5) thereof, as presently relevant, is in the following terms:

“(5) The liability to pay duty shall be — …… (c) in case of services provided or rendered in Pakistan, of the person providing or rendering such service, provided where services are rendered by the person out of Pakistan, the recipient of such service in Pakistan shall be liable to pay duty; ….” (Emphasis supplied)

The subsection sets out the legal liability to pay the duty, i.e., specifies on whom lies the legal incidence of the tax. In the instant case, admittedly, the services were provided by the non-resident company OCAPAC to the appellant; therefore, the appellant (recipient of services in Pakistan) shall be liable to pay the duty. Thus, the second part of the above provision would apply in the instant case.

The record further reflects that the head office of the appellant is situated in Islamabad. The stance of the Department is that the franchise services provided by the non-resident entity terminated at Islamabad, inasmuch as the appellant’s operations and payments to the non-resident were made from Islamabad. Consequently, the Department maintains that the charge of federal excise duty under serial no. 11 of Table II to the First Schedule of the Act has been validly raised.

During the course of appellate proceedings, the learned Authorised Representative (AR) for the appellant was specifically confronted with the query as to whether the franchise services rendered by OCAPAC were, in fact, terminated within different provinces outside the territorial jurisdiction of Islamabad. The learned AR, while not providing an immediate response, sought time and undertook to file written submissions, together with supporting documentation, substantiating his stance by 30th June 2025. However, despite the lapse of a considerable period, no such submissions were forthcoming from the appellant. This failure to adduce evidence, prima facie, lends credence to the Department’s contention that the franchise services in question stood terminated at Islamabad. The absence of contrary material thus strengthens the inference that the incidence of tax was appropriately attracted within the territorial jurisdiction of Islamabad.

Against the backdrop of the foregoing factual matrix, we now turn to the consideration of the legal issues framed hereinabove. The relevant clause, i.e, serial No.11 of Table II of the Second Schedule to the Act, along with note thereof, is reproduced below for ease of reference.

“11. Franchise Services, royalty and fee for technical services.

Note. The duty on the services as specified against serial Numbers 1, 2, 2A, 5, 8, 11, and 13 shall not be levied on services provided in the province where the provincial sales tax has been levied thereon.”

9. Issue No. ii

Whether, by virtue of the Finance Act, 2016 amendment to Table II of the First Schedule to the Federal Excise Act, 2005, “franchise services” stand exempt from the levy of federal excise duty (FED).

i. Upon careful consideration of the statutory scheme, the legislative amendment introduced through the Finance Act, 2016, the arguments advanced, and the material available on record, we are of the view that the Finance Act, 2016 does not provide a blanket exemption from federal excise duty in respect of franchise services. The insertion of the Note to Table II of the First Schedule to the Act must be read strictly and purposively. Its clear object is to avoid concurrent taxation by two authorities on the same subject-matter within the same territorial jurisdiction. For that reason, the Note excludes federal excise duty only where the services specified therein, including franchise services at Serial No. 11, are (i) provided in a province, and (ii) subjected to provincial sales tax in that province. In all other circumstances, the general charging provision of the Act continues to apply.

ii. The language of the Note itself underscores its limited scope. It does not strike down or delete Serial No. 11 from the Schedule, nor does it enact an unqualified exemption. Had Parliament intended to completely exempt franchise services from federal excise duty, it would have either omitted the entry altogether or created a specific exemption clause. Instead, the legislature retained franchise services within the taxable list, thereby manifesting its intent to keep them subject to federal excise duty except where the two specified conditions are met. This construction preserves the constitutional balance by allowing provinces to exercise their authority in relation to sales tax on services, while simultaneously retaining the federal competence to levy excise in all other situations.

iii. Applying this principle to the facts of the instant case, it was incumbent upon the appellant, being the party asserting the exemption, to demonstrate by reliable and contemporaneous evidence that the services in dispute were provided in a province and that provincial sales tax was in fact levied and paid on such services. The appellant was afforded ample opportunity during the appellate proceedings to discharge this burden. Indeed, when specifically asked, the learned Authorised Representative of the appellant undertook to file written submissions together with supporting documentation by 30 June 2025, but no such evidence was forthcoming. The absence of such proof, coupled with the admitted facts that the appellant’s head office is situated in Islamabad, that payments to the non-resident franchisor were made from Islamabad, and that the consumption of the services also occurred in Islamabad, prima facie establishes that the franchise services terminated within the territorial limits of Islamabad Capital Territory. Since Islamabad is not a province and no provincial sales tax is leviable therein, the statutory conditions for the application of the Note stand unfulfilled.

In these circumstances, we hold that the exclusionary Note inserted through the Finance Act, 2016 cannot be invoked by the appellant. Franchise services, as specified at Serial No. 11 of Table II, remain within the charge of federal excise duty in the present case. The appellant, being the recipient of such services under section 3(5) of the Act, is accordingly liable to discharge the duty in respect of the period under consideration.

10. Issue No. iii

Whether, after the 18th Constitutional Amendment, the imposition of FED on services remains within the Federation’s legislative competence, notwithstanding the devolution to Provinces of the power to tax services.

i. The second issue requiring adjudication pertains to the impact of the 18th Amendment to the Constitution of the Islamic Republic of Pakistan, 1973, on the competence of the Federation to impose federal excise duty on services. The appellant’s underlying contention, albeit not supported by documentary evidence, is premised on the assumption that after the 18th Amendment, the right to tax services stands exclusively devolved to the Provinces, thereby ousting the Federation’s authority in this domain. The question, therefore, is whether the levy of federal excise duty on franchise services, as sustained by the Department, is constitutionally valid in light of the amended legislative framework. After the 18th Constitutional Amendment, sales tax on services falls within the exclusive legislative domain of the Provinces. However, Federal Excise Duty (FED) remains a distinct levy under Entry 44 of the Federal Legislative List, separate from sales tax on goods or services under Entry 49. The mode of collection of FED through sales tax machinery does not alter its character; it continues to be excise duty under section 3(1)(d) of the Federal Excise Act, 2005. The Honourable Islamabad High Court, in its judgment reported as M/s Telenor Pakistan (Pvt.) Ltd. v. Federation of Pakistan and others (2017 PTD 2269), has lucidly articulated the distinction between Federal Excise Duty and the Provincial Sales Tax on services. The pertinent extract from the said judgment is reproduced herein below.

11. The thrust of the arguments by the learned counsel for the petitioners was that after incorporation of 18th Amendment in the Constitution, the legislative power of the Federal Legislature has changed drastically and it does not has the power to legislate on sales tax on services. In this behalf it was contended that since in pith and substance the Federal Excise Duty on services is sales tax on services hence, the Federal Government i.e. Federal Excise Department has no authority and power to raise any demand with respect thereto after passing of 18th Amendment Act, 2010 in the Constitution. The effect of 18th Amendment is that the concurrent list has been done away and the subjects in the Federal Legislative list falls within the exclusive domain of the Federal Legislature and other subjects are within the purview/domain of the Provinces. For the purposes of the instant petitions Entries Nos.44 and 49 of Part-I of the Federal Legislative List provided in 4th Schedule to the Constitution are relevant. The referred entries are as follows:--

Entry No. 44.

Duties of excise including duties on salt, but not including duties on alcoholic liquors, opium and other narcotics.

Entry No. 49.

Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed (except sales tax on services).

12. The above two entries clearly show that duties of excise are separate from taxes on the sales and purchases of goods even sales tax on services. The contention of the learned counsel for the petitioners is that in essence the excise duty on services is tax on the sales of the services hence sales tax on services; the referred argument is not correct, inasmuch as if such was the case the legislature would not have had two separate entries for duties on excise and taxes on the sales and purchases of goods. The fact that there are two separate entries for the referred taxes means the legislature for all the legal and practical purposes intended two levies to be separate. The fact that excise duty on telecommunication services is to be recovered through sales tax mode also does not make the levy sales tax on services. In this regard as mentioned in PLD 1989 Lahore 337 supra the assessment and collection provisions are merely the machinery sections distinct from the charging provision. On the referred basis the legislature under section 7 of the Act and S.R.O. No.550(I)/2006 has made the machinery of sales tax applicable for collecting the Federal Excise Duty and the same is only for the referred purposes only. The tax/levy/duty so collected remains duties on excise under section 3(1) (d) of the Act.”

ii. It is by now well-settled that the 18th Amendment significantly restructured the distribution of legislative fields between the Federation and the Provinces. Under Article 142 of the Constitution, matters not enumerated in the Federal Legislative List fall within the exclusive competence of the Provinces. Sales tax on services, which previously appeared in the Concurrent List, now stands within the exclusive legislative and fiscal competence of the Provinces. However, this devolution is limited to the imposition of sales tax on services. The authority of the Federation to impose duties of excise, which stems from Entry No. 44 of Part I of the Federal Legislative List, remains intact. It is important to appreciate that excise duty and sales tax, although they may operate on overlapping transactions, are distinct fiscal imposts in terms of both their constitutional foundation and their incidence. Excise is traditionally a tax on the rendering, consumption, or enjoyment of specified goods or services, while sales tax is a levy on the value of a transaction involving the provision of services within provincial boundaries.

iii. The statutory scheme of the Federal Excise Act, 2005 reflects this constitutional balance. Through the amendment introduced by the Finance Act, 2016, Parliament inserted a Note to Table II, which specifically excludes the levy of federal excise duty on certain services, including franchise services, where such services are provided in a province and are already subjected to provincial sales tax. This deliberate exclusionary mechanism serves two purposes: first, it ensures that the constitutional allocation of fiscal powers post-18th Amendment is respected by preventing double taxation within a province; and second, it preserves the federal charge in circumstances where the provincial levy is inapplicable, such as in the Islamabad Capital Territory or in respect of services not brought within the purview of provincial taxation. Thus, rather than negating the competence of the Federation, the amendment affirms the continued validity of federal excise duty in a manner that harmonizes with provincial fiscal autonomy.

iv. On the facts of the present case, the record demonstrates that the services in question were rendered by a non-resident company, OCAPAC, and were received, consumed, and paid for by the appellant at its head office situated in Islamabad. It is not shown that these services were terminated in any province, nor has any evidence been produced to establish that they were subjected to provincial sales tax. The Note appended to Table II, therefore, does not come into play. As Islamabad is not a province, the competence to impose and collect federal excise duty therein remains squarely with the Federation, and no constitutional encroachment upon provincial taxing rights arises.

Accordingly, we hold that the imposition of federal excise duty on the franchise services in question is fully intra vires the Constitution, notwithstanding the devolution introduced by the 18th Amendment. The distinction between sales tax on services, which is a provincial levy, and excise duty on services, which remains within the competence of the Federation, must be clearly maintained. In the instant case, the levy under Serial No. 11 of Table II read with section 3(5) of the Act is legally sustainable, as the conditions for provincial exclusion have not been satisfied and the situs of consumption lies within the federal territory of Islamabad. The constitutional challenge, therefore, fails, and the Department’s position is upheld.

11. In view of the foregoing analysis and findings, it is held that the demand of federal excise duty raised by the Department on franchise services received by the appellant from the non-resident franchisor for the period June 2016 to May 2020 is lawful and sustainable. The appellant’s challenge, being devoid of merit and unsupported by requisite evidence, is therefore dismissed. However, it is clarified that should the appellant subsequently produce cogent documentary proof that any part of the impugned services was provided in a province and was in fact subjected to provincial sales tax therein, the assessing authority shall extend relief strictly to that extent in accordance with law.

12. All the appeals of the appellant are disposed of in the above terms.

-SD-

(M. M. AKRAM)

JUDICIAL MEMBER

-SD-

(MUHAMMAD NAEEM ASHRAF)

MEMBER

[1] Defined in clause 1.14 of the Agreement as “Unless otherwise specified by OCAPAC, “Program(s)” shall mean all software programs specified, or expected to be included, in the Price List, including Updates. “Program(s)” shall include (a) the object code computer software program, (b) any modified version of such program, and (c) Documentation. “Programs” shall include Modifications. Certain Programs’ utilities may not be available in all operation system environments.

[2] Pakistan

M. M. Akram Reported Judgements

Pages

Monday, August 18, 2025

M/s Oracle Systems Pakistan (Pvt) Ltd., Vs The Commissioner Inland Revenue, LTO, Islamabad