Supreme Court Allows USF Tax Appeal over Section 153 Deductions

Independently written and published by Shahbaz Shah Legal Journal.

Two questions decided in Universal Service Fund’s favour

The Supreme Court of Pakistan has allowed Universal Service Fund’s appeal against a tax ADR decision, resolving both its entitlement to appeal and the underlying withholding-tax dispute. It held, for the limited statutory purpose before it, that USF was not wholly owned by the Federal Government. It also concluded that the payments examined did not attract the deduction obligation under section 153(1)(b), because the telecom services were provided to the public in unserved or underserved areas rather than to USF itself. Judgment, paragraphs 19–20, 35 and 40–47.

The order in Civil Appeal 430/2026 was announced on 20 October 2026 after a hearing on 19 June 2026. Justice Munib Akhtar wrote for a bench also comprising Justices Jamal Khan Mandokhail and Irfan Saadat Khan. The appeal arose under the special proviso to section 134A(13) of the Income Tax Ordinance, 2001, not through the ordinary sequence of a tax reference from the High Court. Judgment, paragraph 1 and concluding announcement.

The case matters on two distinct levels. It explains how a particular state-owned enterprise retained a judicial remedy after amendments to the tax ADR regime. It then explains why the contractual recipient of services mattered when interpreting the withholding provision. Neither holding should be detached from the statutory version and factual setting examined by the Court.

The assessment and the ADR decision

For tax year 2023, the Department questioned USF’s failure to deduct tax from payments of approximately Rs. 17.76 billion to telecom licensees for projects in unserved or underserved areas. The Department applied section 21(c) to disallow expenditure on the footing that deductions should have been made under section 153. The amended assessment dated 31 January 2024 produced a tax liability of Rs. 4,793,282,885. Judgment, paragraph 5.

USF maintained that it disbursed subsidy grants to enable telecom services for the public and was not itself the recipient of the services. The Department took the contrary view and treated the payments as attracting section 153(1)(b). The Court later examined that actual departmental finding rather than deciding the dispute merely from the label subsidy. Judgment, paragraphs 5 and 38–46.

USF initially appealed to the Commissioner (Appeals). Following the 2024 amendments making ADR mandatory for SOEs, that appeal was disposed of with an instruction to use ADR. On 21 March 2025, the ADR Committee accepted the deduction obligation but offered substantial relief: payment of Rs. 1,533,018,333, representing the amount considered deductible plus surcharge, by the stipulated date would suffice to annul the section 21(c) consequence over the entire expenditure. Judgment, paragraphs 6–7.

USF still disputed the underlying obligation and challenged the ADR decision through W.P. 1181/2025 in the Islamabad High Court. The next amendment to section 134A changed the route by which that challenge could continue. Judgment, paragraphs 8–17.

Why the version of section 134A mattered

The Court traced repeated substitutions of section 134A, focusing on the version introduced in 2023, as amended in 2024, and the replacement effective from 26 January 2026. Under the former regime, SOEs had to invoke ADR and immediately withdraw pending litigation. Other taxpayers were differently situated, with acceptance of the ADR result material to whether it became binding. Judgment, paragraphs 2–11.

Under the 2026 version examined by the Court, all SOEs still had to refer disputes to ADR, irrespective of the amount. But the consequences of the decision distinguished SOEs wholly owned, directly or indirectly, by the Federal Government from those not wholly owned by it. The former category faced finality and binding effect; the latter was treated differently in relation to available remedies. Judgment, paragraphs 10–16.

The transitional provisions were decisive here:

• Section 134A(12) addressed pending court challenges by wholly federally owned SOEs and provided for their abatement.
• Section 134A(13) addressed specified High Court petitions by SOEs not wholly federally owned; its proviso permitted an appeal to the Supreme Court or Federal Constitutional Court, as applicable, within sixty days from commencement of the 2026 amendment.
• The proviso to section 134A(11), separately discussed by the Court, concerned direct appeals in the circumstances described there for SOEs outside the wholly owned category.

These routes must not be merged into a general right of direct Supreme Court appeal for every taxpayer. The present appeal depended on the particular ownership category and a qualifying pending High Court challenge to the earlier ADR decision. Judgment, paragraphs 12–18.

“Wholly owned” received a strict, contextual meaning

The Department objected that USF was wholly owned by the Federal Government and therefore could not use the section 134A(13) appeal route. The Supreme Court emphasized that it was construing that expression for a narrow fiscal and remedial purpose: whether this appeal could proceed. It expressly warned that the answer could be different in other statutory or factual contexts. Judgment, paragraphs 18–20.

The Court interpreted wholly as complete ownership, leaving nothing outside it. Even a small departure from that maximum mattered. One reason was that the provision concerned preservation of an already pursued judicial remedy after a legislative change. The Court preferred an available interpretation that preserved access to judicial redress. Judgment, paragraph 20.

This was not a ruling that USF ceased to be an SOE or that it was outside public-sector regulation. Its SOE status was common ground. The issue was the more demanding description of complete federal ownership for the particular appeal provision. Judgment, paragraphs 3, 19–20 and 26.

A guarantee company required an inquiry into membership

USF is a company limited by guarantee without share capital. An ordinary shareholding inquiry could not answer who wholly owned it. The Court therefore examined whether all its members were, directly or indirectly, federal nominees, reading the Companies Act, 2017 alongside the USF Rules, 2006 and the SOE Act, 2023. Judgment, paragraphs 21–26.

The annual return recorded three members who could be regarded as federal nominees. But that was not conclusive. The Court considered the membership requirement for directors under section 153(i) of the Companies Act and the statutory composition of USF’s board. It held that the directors representing licensee and consumer interests under rule 11(1)(e)–(h) had to be deemed members while serving as directors, ensuring compliance with both company law and the Rules. Judgment, paragraphs 27–28.

Those members were not all federal nominees. The Court read the Government’s role in approving licensee nominees as a vetting or veto role within a two-stage process. The relevant directors represented the licensee groups; the consumer representative likewise represented consumer interests. The SOE Act’s requirements concerning independence reinforced that conclusion. Judgment, paragraphs 29–35.

The result was that USF did not meet the complete federal-ownership test for this limited purpose. The preliminary objection failed and the Court could reach the tax merits. Judgment, paragraph 35.

Section 153: who received the services?

On the merits, the relevant provision was section 153(1)(b), concerning payments for rendering or providing services. The Department’s interpretation focused on the payer, the payee and the fact that a payment was made for services. It considered the identity of the recipient of those services immaterial. Judgment, paragraphs 36 and 38–43.

The Court identified another reasonable reading in the contractual setting: the provision could require the payer to deduct when it paid for services provided to itself. In ordinary contracts the two readings produce the same result because the payer is also the service recipient and beneficiary. The difference emerges where genuinely separate third-party beneficiaries enter the arrangement. Judgment, paragraphs 39–45.

Here, USF funded special telecom projects under its statutory framework. The services were supplied to residents of unserved or underserved areas. They were not services that could be rendered to USF itself. Both the recipients of the services and those benefiting from them were the relevant members of the public. Judgment, paragraphs 40–41 and 46.

The decision therefore concerns more than a project having a public purpose. Its reasoning turned on who actually received the contractual services. A payer cannot assume that every payment labelled a subsidy, grant or public-benefit expense falls outside withholding. The arrangements and the statutory wording still require examination. Judgment, paragraphs 38–46.

Strict construction of a withholding obligation

The Court relied on its discussion in Commissioner Inland Revenue v. Coca-Cola Pakistan Ltd., reported as 2026 SCMR 130 and 2026 PTD 29. As reproduced in the order, that discussion treats withholding duties with care because default can expose the person required to deduct to serious financial consequences. Such provisions require a tight and narrow interpretation rather than being treated simply as recovery machinery. Judgment, paragraph 37.

The Court added that where more than one reasonable interpretation exists as to whether a deduction obligation arises, the interpretation more favourable to the person said to owe that duty should be adopted. On the particular third-party service arrangements before it, that approach supported USF’s position. Judgment, paragraphs 37 and 44–47.

The limits of the decision

The judgment expressly distinguished services being rendered to someone from benefits flowing to someone. A contract might provide services to a contracting party while benefits accrue to an outsider. It would be wrong automatically to treat those concepts as identical. On these facts, however, the telecom services themselves, as well as their benefits, were directed to the public rather than USF. Judgment, paragraph 46.

The order also confined its ownership reasoning to the appeal question before it. It does not give a universal definition of ownership for every guarantee company or every SOE. Nor does it decide every withholding category or every tax year. The merits concerned the service-payment provision and the tax-year 2023 arrangements described in the record. Judgment, paragraphs 19–21 and 36–47.

For precision, most of the substantive discussion identifies the service provision as section 153(1)(b). Paragraphs 45 and 47 contain references to section 153(2)(b). This article uses section 153(1)(b) for the provision set out and analysed in paragraphs 36–46; the linked PDF preserves the order’s wording. Judgment, paragraphs 36 and 45–47.

Result and practical effect

The Supreme Court allowed the appeal, set aside the ADR decision and the amended assessment to the relevant extent, and declared section 21(c) inapplicable to the facts before it. The earlier figures were disputed assessment and ADR amounts, not damages or a compensation award to USF. Judgment, paragraphs 5, 7 and 47.

For tax practitioners, the order calls for two separate exercises. First, identify the operative ADR version, the enterprise’s ownership position and the precise statutory route to judicial review or appeal. Second, examine the contracts and the actual recipient of the services before applying the withholding provision. The Court’s reasoning depends on doing both carefully rather than letting an SOE label or a subsidy label decide the dispute.

Frequently asked questions

Did the Supreme Court hold that USF is not a state-owned enterprise?

No. Its SOE status was common ground. The Court held that it was not wholly federally owned for the limited section 134A appeal inquiry. Judgment, paragraphs 3 and 19–35.

Can every taxpayer appeal an ADR decision directly to the Supreme Court?

No. This appeal used a special transitional provision for a qualifying SOE and a qualifying pending High Court petition. The Court separately explained other statutory categories and routes. Judgment, paragraphs 12–18.

Are all subsidy payments exempt from withholding tax?

The order does not establish that broad proposition. It examined the actual arrangements, the service-payment provision and services supplied to third-party public recipients rather than USF. Judgment, paragraphs 38–46.

What happened to the assessment and ADR decision?

The appeal was allowed. The ADR decision and the amended assessment, to the relevant extent, were set aside, and section 21(c) was declared inapplicable on the facts. Judgment, paragraph 47.

When was the USF order announced?

It was announced at Islamabad on 20 October 2026 following a hearing on 19 June 2026. Judgment, first page and concluding announcement.

Sources and case reference

• Read or download the complete supplied judgment.
• Searchable judgment page and case particulars.
• Supreme Court of Pakistan: latest judgments.

The analysis follows the supplied judgment. Earlier authorities are described as the Court discussed them in this case.