2024 (3) TMI 620 - HC - Income Tax

Payments under Reseller Agreement not technical services under India-Ireland tax treaty, withholding tax order quashed

Delhi HC held that payments received by petitioner under a Reseller Agreement did not constitute fees for technical services (FTS) under the India-Ireland ... Entitlement to Nil/lower rate withholding tax certificate u/s 197 - determination of “consideration” for providing technical services - payments were received by the petitioner SFDC Ireland Limited [SFDC Ireland] pursuant to the arrangement embodied in the Amended and Restated Reseller Agreement [Reseller Agreement] - second respondent has denied the withholding tax certificate in terms as requested by SFDC Ireland and permitted it to receive payment upon deduction of 10% as TDS on the entire amount of INR 518,21,03,624/- which it was to receive from SFDC India for Financial Year [FY] 2023-2024 HELD THAT:- SFDC Ireland was obliged to extend technical assistance and training and thus clearly qualifying technical service which forms the subject matter of Article 12(3)(b) of the DTAA. As pertinent to note that within the United Nations Committee of Experts itself there appeared to be a divergence of opinion in respect of how the FTS issue was to be tackled. As we are concerned, the issue of technical service has to be examined on the anvil of not only a specially crafted and individualised rendition but additionally upon it being found that services of a technical character were provided. Reseller Agreement may now be tested on the aforenoted precepts. In order for receipts of SFDC Ireland being characterized as FTS, one would have to discern and find the existence of an exclusive and special service of a technical character which was provided to the recipient. Not only would that service have to be unique and tailored to the requirements of the seeker, it must also be technical. Unless one finds the transfer of technological knowledge which is exclusive and specialised to the need of the recipient, it would clearly not fall within the scope of technical service. While in today’s age it may not be appropriate to understand the word technical to be confined to industrial or applied sciences or for that matter the use of an instrument or facility, the test of exclusivity, individualization and specially crafted solutions would continue to govern. As per terms of the Reseller Agreement, its stipulations do not appear to contemplate any technology transfer to SFDC India. The Indian entity appears to have been designated merely to act as the Reseller which would engage with and onboard customers within the territory for use of SFDC products. As is evident from the definition of SFDC Products, it speaks of customer relationship management offerings, applications, platforms, products and offerings exclusively for resale in the territory. The obligation of SFDC Ireland as per Section 4 of the Reseller Agreement was to provide SFDC products as notified from time to time. The price for those products was to be as per the stipulations contained in Exhibit A. The aforesaid clauses merely speak of the Reseller being accorded the right to sell SFDC products as distinct from what would constitute technical service. The technical assistance and training imparted to SFDC India staff appears to be aimed at enabling them to understand the various attributes and capabilities of SFDC Products so as to be informed when interacting with prospective customers in the territory. The technical assistance and training as in the Reseller Agreement does not appear to bear the characteristics of a conferral of specialised or exclusive technical service. In any case, the training and assistance proffered by SFDC was a concomitant to the sale of its principal products in the territory and fundamentally aimed at readying SFDC India to undertake the marketing of those products. The technical assistance and training did not constitute either the core or the foundational basis of the consideration which was received by SFDC Ireland. Products for SFDC India’s internal use were concerned, they stood restricted to those which would enable SFDC India to demonstrate the functionality of SFDC products in trade shows and exhibitions, to train its customers and employees on the use of those products and products to administer and manage customer accounts. None of these aspects would appear to be imbued with a technical hue. Imparting training or educating a person with respect to the functionality and attributes of a software or application would clearly not amount to the rendering of technical service under the DTAA. More importantly, the technical assistance and training which the petitioner proposed to provide was confined to marketing, distribution, support and sale of SFDC products. The assistance and training which Section 4.3 of the Reseller Agreement speaks of was concerned with fields wholly unrelated to providing technical service. The training and assistance was thus primarily aimed at the sale of SFDC products and customer related issues. This does not appear to comprise a transmission of specialised knowledge or skill. This more so when we bear in mind the indubitable fact that the phrase “technical service” is to be read in conjunction with “managerial” and “consultation” and it being the settled position in law that the principle of noscitur a sociis is to apply. With advancements in computing capabilities and the range of software applications that stretch the boundaries of analytics and predictive abilities each day, business enterprises are empowered to plan, review and evaluate data in ways unknown in the past. However, these attributes and hallmarks alone would not justify jettisoning the tests formulated in the decisions aforenoted and which have while interpreting FTS consistently recognised them to be the rendering of specialised and customized service of a technical character. It is this precept which would continue to constitute the lodestar for answering the issues which arise from Article 12(3)(b) of the DTAA. Respondents failed to allude to any material which may have even remotely established that the platform or for that matter the software was being customized or specially designed for a consumer and which constituted the basis of the consideration received. The respondent holds against the petitioner additionally on the ground that it was providing “comprehensive services experience or solutions with the help of technology embedded in the software”. Even if that were to be accepted as a correct appreciation of the SFDC bouquet of products, it would remain a facet or attribute of the software application available to any customer. This would again fall within the standard scope of service as opposed to an individualization of the application. In any case, a service experience or solution cannot possibly be countenanced as the correct test for the purposes of answering the issue of technical services. More fundamentally, the allusion to “non-standardized software” and “comprehensive service experiences” would have been pertinent provided those were applicable to the position in which SFDC India stood placed under the Reseller Agreement. The said entity was merely designated as the Reseller with rights as specified in that agreement. It was merely tasked with the marketing, sale and distribution of SFDC Products as also the onboarding of potential customers. It was not the ultimate recipient of those products or of those services. The respondent was thus required to confine the scope of the enquiry to the nature of the service extended by SFDC Ireland to SFDC India as opposed to the potential benefits that could have been derived from the products in question by the end customer. In order to fall within the ambit of FTS, it was incumbent upon the respondents to establish an indelible link between the payment received by SFDC Ireland and the same constituting “consideration” for providing technical services. Presently and on the state of the record as it exists today, the respondents do not appear to have evaluated the claim for withholding tax as raised on the touchstone of whether the remittances made to SFDC Ireland was for customized technical services. The impugned order does not proceed on the basis of any material or evidence which may have indicated that the moneys remitted to the assessee could be said to constitute consideration for technical services. According to SFDC Ireland, no remuneration is charged or received for providing technical assistance and training. It is also unclear from the record whether SFDC Products for Resellers Internal Use and which were restricted to training of customers and employees on the use of SFDC Products as also for managing customer accounts are charged for. The aforenoted conclusions thus clearly merit the impugned order being quashed and set aside with liberty being reserved to the respondent to examine the issue in light of the above. We allow the instant writ petition and quash the order as well as the certification. The matter shall in consequence stand remitted to the respondent for considering the application of SFDC Ireland afresh bearing in mind the observations entered hereinabove. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:Whether the payments received by SFDC Ireland from SFDC India under the Reseller Agreement were liable to be taxed as 'fees for technical services' (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961, and Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA).Whether the issuance of a Nil withholding tax certificate to SFDC Ireland was justified under the circumstances.Whether the impugned order denying the Nil withholding tax certificate was valid, considering the nature of the products and services provided by SFDC Ireland.Whether the payments made by SFDC India to SFDC Ireland were in the nature of business profits and not liable to tax in India in the absence of a Permanent Establishment (PE).Whether the technical assistance and training provided to SFDC India by SFDC Ireland constituted technical services under the DTAA.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involved Section 9(1)(vii) of the Income Tax Act, 1961, which defines FTS, and Article 12 of the India-Ireland DTAA, which addresses royalties and FTS. The Court referred to precedents such as CIT vs. Bharti Cellular and Kotak Securities to interpret the term 'technical services' and emphasized the rule of noscitur a sociis, which requires the term to be read in conjunction with 'managerial' and 'consultancy' services.Court's Interpretation and ReasoningThe Court analyzed whether the services provided by SFDC Ireland to SFDC India constituted FTS. It concluded that the services did not involve a transfer of specialized knowledge or technical expertise tailored to SFDC India's needs. The Court emphasized that technical services must involve a human element and cater to the special needs of the recipient, which was not the case here.Key Evidence and FindingsThe Court examined the Reseller Agreement, which defined the relationship between SFDC Ireland and SFDC India as a principal-to-principal basis. It noted that SFDC India was merely a reseller without rights over intellectual property or the ability to alter the SFDC products. The technical assistance and training provided were aimed at marketing and sales support, not the provision of technical services.Application of Law to FactsThe Court applied the principles from precedents to determine that the services provided by SFDC Ireland were not technical services under the DTAA. The services were standardized and available to all customers, lacking the exclusivity and customization required for FTS classification.Treatment of Competing ArgumentsThe Court addressed the respondent's argument that the payments constituted FTS by highlighting the absence of any material evidence supporting this claim. It also rejected the preliminary objection regarding the writ petition's maintainability, noting that the impugned order had already received the Commissioner's approval, making alternative remedies futile.ConclusionsThe Court concluded that the payments received by SFDC Ireland did not constitute FTS under the DTAA. It quashed the impugned order and remitted the matter for reconsideration, emphasizing the need for a thorough examination of the nature of the services and payments involved.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning'In order for receipts of SFDC Ireland being characterized as FTS, one would have to discern and find the existence of an exclusive and special service of a technical character which was provided to the recipient.'Core Principles EstablishedTechnical services under the DTAA must involve a human element and cater to the special needs of the recipient.The rule of noscitur a sociis requires 'technical services' to be read in conjunction with 'managerial' and 'consultancy' services.Standardized services available to all customers do not qualify as FTS.Final Determinations on Each IssueThe payments received by SFDC Ireland were not liable to be taxed as FTS under the DTAA.The denial of the Nil withholding tax certificate was not justified, and the matter was remitted for reconsideration.The technical assistance and training provided did not constitute technical services under the DTAA.