TaxTMI 
TaxTMI 
2024 (3) TMI 620
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....ved by the petitioner SFDC Ireland Limited [SFDC Ireland] pursuant to the arrangement embodied in the Amended and Restated Reseller Agreement [Reseller Agreement] dated 01 February 2023. While proceeding to evaluate the application as made, the 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. 3. The impugned order rests on the second respondent finding that SFDC Ireland was not selling standard off-the-shelf and non-customized downloadable software and that it was in fact offering a comprehensive service experience or solution with the help of technology embedded in the software. It has held that the remittances so received are liable to be taxed as fee for technical services [FTS] within the meaning of Section 9(1)(vii) of the Act read along with Article 12 of the India-Ireland Double Taxation Avoidance Agreement [DTAA]. 4. For the purposes of evaluating the challenge which stands raised, it would be apposite to notice the following salient fact....
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....ny or combination of products that are best suited for their business requirements. The supply of SFDC products helps the customers/ clients in generating reports and summaries of the data which is fed into the 'Salesforce' software by the client itself. The customers input, store and retrieve their proprietary data through the CRM application software portal. The Petitioner's products provide access for customer's own use to generate reports, basis the information fed in by the customer in the desired format. Lastly, access to the Petitioner's products is for a limited duration and the period for which the subscription fee is paid by the customer. A high-level overview of the SFDC Products sold by the Petitioner and marketed/ resold by SFDC India in the territory of India, are annexed herewith as ANNEXURE 'P-1' to this submission." 8. During FY 2023-24, the petitioner estimated receipts of INR 518,21,03,624/- as being receivable from SFDC India in terms of the Reseller Agreement. Seeking consideration of its assertion of being entitled to a Nil withholding tax certificate, the petitioner moved the respondents by way of an application dated 28 July 2023. Along with t....
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....quirements. Mr. Vohra submitted that SFDC products assist the clients in generating reports and summaries of the data which is fed into the software by the client itself. Learned senior counsel pointed out that customers input, store and retrieve their proprietary data through the CRM application software portal. It was additionally pointed out that pursuant to the access granted to clients, subscribers are enabled to use the software to generate appropriate reports on the basis of information fed into the software and as per the format as desired. Mr. Vohra pointed out that the clients are provided access to the CRM application software portal based on the subscription fee that may be paid. 11. According to Mr. Vohra, the payments made by SFDC India do not partake the character of royalty nor can they be viewed as constituting FTS under Article 12(3)(b) of the DTAA. According to Mr. Vohra, since all that SFDC Ireland was providing was access to a software on a standardized basis as opposed to providing a customized solution, the remittances received by it would not fall within the scope of FTS. 12. It was further submitted that the access to the software portal was without a....
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....counsel for the appellants/Revenue that the payments that were considered in the case of Skycell Communications Ltd. [2001] 251 ITR 53 (Mad) were those made by a subscriber to the cellular mobile telephone facility provider and not by one cellular network provider to another. For this purpose, we must examine the appeals at hand de hors the decision of the Madras High Court in Skycell Communications Ltd. [2001] 251 ITR 53. 14. We have already pointed out that the expression "fees for technical services" as appearing in section 194J of the said Act has the same meaning as given to the expression in Explanation 2 to section 9(1)(vii) of the said Act. In the said Explanation the expression "fees for technical services" means any consideration for rendering of any "managerial, technical or consultancy services". The word "technical" is preceded by the word "managerial" and succeeded by the word "consultancy". Since the expression "technical services" is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on the Interpretation of Statutes (Twelfth Edition) in the following words (page 289) : "Where two or ....
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....an element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word "technical" as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. 20. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1)(vii) of the said Act. This is so because the expression "technical services" takes colour from the expressions "managerial services" and "consultancy services" which necessarily involve a human element or, what is now a days fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection/port access do not involve any human interface and, therefore, the same cannot be regarded as "technical services" as contemplated under section 194J of the said Act. ....
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....services." 7. Managerial and consultancy services" and, therefore, necessarily "technical services", would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. [CIT v. Bharti Cellular Ltd., (2014) 6 SCC 401 : (2011) 330 ITR 239] However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made." 15. Appearing for the respondents, Mr. Chawla took a preliminary objection to the maintainability of the writ petition and submitted that against the certification as granted, the petitioner has statutory alternative remedies including by way of invocation of the revisionary power that stands incorporated in Section 264 of the Act. In view of the aforesaid, Mr. Chawla, contended that the writ petition should be dismissed on this ground alone. 16. It was further submitted that the certification which is granted under Section 197 of the Act is based on the formation of....
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....er that since the impugned order was passed after an approval from the Commissioner of Income-tax, it cannot be challenged by way of a revision petition before the Commissioner of Income-tax under section 264 of the Act. To hold otherwise, would amount to directing the petitioner to file an "appeal from Caesar to Caesar". 20. The Karnataka High Court in CIT v. Smt. Annapoornama Chandrashekar (supra), while discussing the scope of revisional jurisdiction of the Commissioner of Income-tax with respect to an order passed after approval of the Commissioner of Income-tax under section 158BC read with section 158BG, held as under (page 37 of 2 ITR-OL) : "It was contended that it is an administrative order. Even the order of assessment is an administrative order and, therefore, the previous approval to make such an order valid cannot be other than an administrative approval. But the question is, once an approval is accorded by the Commissioner can he sit in judgment over such an order and find fault with such order on the ground that it is erroneous and is prejudicial to the interests of the Revenue. The question arises is to make the said order, previous approval of the....
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....e lower authority, he has no reason to disagree he finds no fault with that order and, therefore, he confirms the order by his approval. It is to be seen that the statute has not used merely the word 'approval'. The words used are 'previous approval'. Therefore, unless the approval is previously taken, the assessment order would have no value at all. Therefore, when previous approval is a condition precedent and 'approval' means to 'agree', i.e., to concur to give mutual assent, to come into harmony, it is possible only after application of mind by the authority according approval.. .. Therefore, this power conferred on the Commissioner is in the nature of supervisory power. If he finds that the order passed by the Assessing Officer is erroneous and also prejudicial to the interests of the Revenue, after examining the record of any proceedings under the Act to rectify such error and to protect the interests of the Revenue he can exercise the said power because the Commissioner becomes aware of such erroneous orders prejudicial to the Revenue after looking into the record. But if he has looked into the record, applied his mind and agreed with....
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....e to extract the following passages from our decision in Lionbridge Technologies:- "13. It becomes pertinent to observe that Section 197 of the Act lays and places a statutory procedure enabling a person to obtain a certificate in respect of withholding tax at either a lower rate or one which certifies that no deduction towards tax is mandated. While the view that the authority may take at the stage of consideration of a Section 197 application is undoubtedly provisional, the same does not detract from the obligation of the AO to at least examine and undertake a prima facie evaluation of whether the income is chargeable to tax at all. 14. We note that the scheme underlying Section 195 of the Act and which requires the issue of chargeability of tax being examined was succinctly explained by the Supreme Court in Engineering Analysis in the following terms:- "32. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, "chargeable under the p....
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.... to pay tax as an assessee under the Income Tax Act, and not otherwise. This judgment also clarifies, after referring to CBDT Circular No. 728 dated 30-10-1995, that the tax deductor must take into consideration the effect of the DTAA provisions. The crucial link, therefore, is that a deduction is to be made only if tax is payable by the non-resident assessee, which is underscored by this judgment, stating that the charging and machinery provisions contained in Sections 9 and 195 of the Income Tax Act are interlinked. 67. This conclusion is also echoed in Vodafone International Holdings BV v. Union of India [Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 3 SCC (Civ) 867], wherein the following observations were made on the scope and applicability of Section 195 of the Income Tax Act : (SCC pp. 690-91, paras 171-73) "171. Section 195 casts an obligation on the payer to deduct tax at source ("TAS", for short) from payments made to non-residents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargea....
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....f the previous year relevant to the assessment year; (ii) tax payable on the assessed or returned [or estimated income, as the case may be, of last four] previous years; (iii) existing liability under the Income-tax Act, 1961 and Wealth-tax Act, 1957; (iv) advance tax payment [tax deducted at source and tax collected at source] for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28]; (v) & (vi) [***] (3) The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period. (4) The certificate for deduction of tax at any lower rates or no deduction of tax, as the case may be, shall be issued direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate: Provided that where the number of persons responsible for deducting the tax is likely to exceed one hundred and the details of such persons are not available at the time of making application with....
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....b) of the DTAA. 20. Mr. Chawla also placed the following comparative chart seeking to highlight the key elements of Article 12(3)(b) of the DTAA and Section 9(1)(vii) to buttress his aforenoted submissions:- Relevant extract of Article 12 of India-Ireland DTAA Section 9(1)(vii) of Income deemed to accrue or arise in India ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 3. (b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. (vii) Income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried o....
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....ant clauses of the Reseller Agreement hereunder: - "RECITALS A. Vendor and Reseller are part of a network of affiliated companies. Vendor is in the business of marketing and selling SFDC Products in both Europe, Middle East, and Africa ("EMEA") and Asia Pacific ("APAC") regions providing consulting services and support to customers and desires to sell SFDC Products to the Reseller for onward sale to customers in the Territory. Reseller is engaged in the business of inter alia marketing and sales support services and desires to serve as a third-party reseller of SFDC Products for sale to customers in the Territory. B. Vendor does not desire to sell the SFDC Products directly to customers in the Territory. C. Vendor therefore wishes to appoint Reseller as its non-exclusive reseller of the SFDC Products in the Territory. D. Reseller has represented to Vendor that it has the facilities, personnel and expertise to serve effectively as a reseller of the SFDC Products within the Territory. xxxxx xxxxx xxxxx Section 1 - Definitions For purposes of this Agreement, the following terms shall have the meanings and definitions se....
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....shows and exhibitions), (ii) to train its customers and/or employees on the use of SFDC Products, (iii) to administer and manage its own customer accounts, and (iv) all other SFDC Products made available to Reseller and used by Reseller for internal business purposes including any related documentation. The use by Reseller of SFDC Products for Reseller's Internal Use shall be exclusively governed by the SFDC Products for Reseller's Internal Use Agreement, a copy of which is attached hereto as Exhibit B. xxxxx xxxxx xxxxx Section 2 - Appointment of Reseller 2.1 Appointment. Subject to the terms and conditions set forth in this Agreement, Vendor hereby appoints Reseller as its non-exclusive reseller of the SFDC Products in the Territory, and Reseller hereby accepts such appointment. Further, Reseller shall have the right to appoint one or more Additional Resellers within the Territory, and to enter into Partner Contracts with partners in the Territory. Nothing in this Agreement shall be construed to limit Vendor's right to appoint one or more Additional Resellers within the Territory. 2.2 Relationship between the Parties.....
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....FDC Products by Reseller in the Territory. Section 5 - Pricing and Payment Terms 5.1 Purchase Price, and Shortfall Payment. The purchase price payable by Reseller for the SFDC Products shall be as specified in Exhibit A attached hereto (the "Purchase Price"); provided however, that under certain circumstances related to the profitability of Reseller (as described in Exhibit A), Vendor shall instead be required to make a Shortfall payment as set forth in Exhibit A ("Shortfall Payment"). The Parties agree to periodically review the Purchase Price (and, as the case may be, the Shortfall Payments) and to make adjustments as deemed appropriate to maintain arm's-length compensation. 5.2 Amendments. The Parties will amend Exhibit A as necessary to maintain an arm's length price reflecting changes in economic conditions, Reseller's business operations and practices, and the ongoing development of Reseller's business. From time to time, the Parties will execute a written memorialization to document the updated Exhibit A. 5.3 Payment. Vendor will invoice Reseller for the amount of the Purchase Price for the SFDC Products supplied to Reseller hereunder on a....
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....seller shall be received for the account and the benefit of Vendor and Reseller agrees to inform Vendor of such refunds and to forward such refunds to Vendor, in each case without undue delay. Indirect Taxes, Tariffs and Fees. The Purchase Price is exclusive of all indirect taxes, including GST, central and local sales, or value added taxes, services tax, customs duties, or similar charges imposed by any governmental entity in respect of the resale of SFDC Products. Reseller shall payfor all such taxes, assessments, or charges, without reduction in the purchase price charged by Vendor. Section 6 - Intellectual Property Rights 6.1 Ownership. Reseller acknowledges Vendor's (or its licensor's) right, title, and interest in, and to, any and all Intellectual Property Rights and that, except as specified in this Agreement, Reseller shall acquire no rights whatsoever in, or to, any Intellectual Property Rights. Without limiting the foregoing, except as expressly provided herein, this Agreement does not constitute a license, sale, or any other transfer of the Intellectual Property Rights. Reseller shall not take any action that may adversely affect or impair Vend....
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....ent. A "Shortfall" exists if in any annual accounting period, Costs exceed the difference between (i) Reseller's Net Revenue as determined under Indian Generally Accepted Accounting Principles ("GAAP"), and (ii) 2.75% of Indian Territory Revenue. For any annual accounting period in which a Shortfall exists, Vendor shall pay Reseller a Shortfall Payment equal to an amount that allows Reseller to earn an operating margin equal to two point seven five percent (2.75%) of Indian Territory Revenue, or a rate agreed to by the Parties. 3. Purchase Price. Except as set forth herein, Reseller shall pay to Vendor a Purchase Price equal to Reseller's Net Revenue as determined under Indian GAAP less the sum of (i) its Costs and (ii) 2.75% of Indian Territory Revenue, or a rate agreed to by the Parties. For the avoidance of doubt, the Purchase Price for SFDC products charged by Vendor to Reseller would include all incidental costs incurred by Vendor pertaining to the sale of the SFDC Products to Reseller in the Territory. 4. Net Revenue. For purposes of this Exhibit A, "Net Revenue" shall mean recognized revenue from the resale of SFDC Products in the Territory and from the sal....
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....ce of business located at Torrey Pines, 3rd Floor Embassy Golflinks Software Business Park, Bangalore, Karnataka, 560075, India. (Vendor and Reseller are collectively referred to as the "Parties" and individually referred to as "Party"). RECITALS A. Vendor and Reseller are part of a network of affiliated companies. Vendor is in the business of marketing and selling SFDC Products in both EMEA and APAC regions, providing consulting services and support to customers and desires to sell SFDC Products to the Reseller for onward sale to customers in the Territory. Reseller is engaged in the business of inter alia marketing and sales support services and desires to serve as a third-party reseller of SFDC Products for sale to customers in the Territory. B. Vendor and Reseller intend to enter into a Amended and Restated Reseller Agreement (the "Agreement") as of the Effective Date. Reseller has represented to Vendor that it has the facilities, personnel and expertise to serve effectively as a reseller of the SFDC Products within the Territory. C. Vendor wishes to make available to Reseller certain SFDC Products for Reseller's In....
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....g obligations vis-à-vis Vendor, provided that such use is in accordance with the terms and conditions of this RIUA, the Agreement, the SFDC Terms of Use, the Documentation and any other terms as may be specified in an Order Form or otherwise by Vendor from time to time. 2.3 Where Reseller uses SFDC Products for Reseller's Internal Use to perform its sales and marketing activities in the Territory, Reseller is the "Customer" in terms of the SFDC Terms of Use with respect to such use and will fully comply with the agreed usage restrictions and limitations, it being understood that the use of SFDC Products for Reseller's Internal Use in accordance with the Agreement, this RIUA and the specifications by Vendor shall constitute a permitted use in terms of the SFDC Terms of Use. 2.4 This RIUA can be terminated by the Parties in accordance with the provisions of the Agreement and the SFDC Terms of Use. Section 3 - Choice of Law This RIUA, and any disputes arising out of or in connection with this RIUA, shall be governed by and construed in accordance with the laws of the State of California, U.S.A., excluding rules governing conflicts of laws. ....
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....ich stands placed as Exhibit B of the Reseller Agreement. 26. In order to evaluate the challenge which stands raised, it would be appropriate to briefly notice the nature of the products that are offered by SFDC Ireland. The assessee has along with its Brief Submissions placed an overview of its products which is reproduced below: - • "Sales Cloud : Salesforce Sales Cloud is a cloud-based customer relationship management (CRM) platform that helps businesses manage their sales processes, customer data, and interactions. It's designed to support sales, marketing, and customer support in both business-to-business (B2B) and business-to-customer (B2C) contexts. Demo : https://www.youtube.com/watch?v=2ZkjhgBNI-Y • Service Cloud : Salesforce Service Cloud is focused on providing support and help to the customers. This helps in retaining the customers, increasing their satisfaction and loyalty. Its uniqueness lies in providing faster service compared to traditional methods, giving individual attention to each customer's needs and taking a proactive approach to customer issues. That ultimately enhances the customer's experience hence loyalty whi....
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.... the outset be noted that undisputedly, the Reseller has not transferred any Intellectual Property Rights as is evident from Section 6 of the Reseller Agreement. 28. Section 2 of the Reseller Agreement defines the relationship between the petitioner and the Reseller as being on a principal-to-principal basis and that of a buyer and seller. The right of sale of SFDC Products as conferred upon the Reseller is on a non-exclusive basis. The Reseller is also not vested with any right to bind SFDC Ireland by its actions. SFDC Products are defined to mean customer relationship offerings, applications and platforms. These products, since they are cloud based, are accessed over the internet by end customers. 29. FTS under the DTAA is defined to mean consideration received for the rendering of managerial, technical or consultancy services. The payment which the party of the Contracting State receives in order to fall within the ambit of FTS must constitute consideration for technical services. In CIT vs. Bharti Cellular, the Court upon noticing how the word technical stood sandwiched between managerial and consultancy had held that the rendering of services would have to necessarily in....
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....not by one cellular network provider to another. For this purpose, we must examine the appeals at hand de hors the decision of the Madras High Court in Skycell Communications Ltd. [2001] 251 ITR 53. 14. We have already pointed out that the expression "fees for technical services" as appearing in section 194J of the said Act has the same meaning as given to the expression in Explanation 2 to section 9(1)(vii) of the said Act. In the said Explanation the expression "fees for technical services" means any consideration for rendering of any "managerial, technical or consultancy services". The word "technical" is preceded by the word "managerial" and succeeded by the word "consultancy". Since the expression "technical services" is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on the Interpretation of Statutes (Twelfth Edition) in the following words (page 289) : "Where two or more words which are susceptible of analogous meaning are coupled together, noscuntur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more ....
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....o have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. 20. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1)(vii) of the said Act. This is so because the expression "technical services" takes colour from the expressions "managerial services" and "consultancy services" which necessarily involve a human element or, what is now a days fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection/port access do not involve any human interface and, therefore, the same cannot be regarded as "technical services" as contemplated under section 194J of the said Act. 22. In the appeals before us it is obvious that the meaning of the expression "technical services" by itself, is far from clear. It is also clear that the word "technical" has been used in the "society" of the words "manage....
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.... by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. [CIT v. Bharti Cellular Ltd., (2014) 6 SCC 401 : (2011) 330 ITR 239] However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made." 32. Proceeding to explain the meaning liable to be attributed to the expression technical services, the Court in Kotak Securities held: "8. A reading of the very elaborate order of the assessing officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided for by the Stock Exchange. All such services, fully automated, are available to all members of the Stock Exchange i....
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.... a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to "technical services" provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression "technical services" as appearing in Explanation 2 to Section 9(1)(vii) of the Act." 33. Reiterating the aforesaid principles, the Supreme Court in Director of Income Tax (IT)-I vs. A.P. Moller Maersk A S (2017) 5 SCC 651 observed: - "8. The facts which emerge on reco....
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....nature of reimbursement of the expenses, it cannot be income chargeable to tax. 10. Pertinently, the Revenue itself has given the benefit of Indo-Danish DTAA to the assessee by accepting that under Article 9 thereof, freight income generated by the assessee in these assessment years is not chargeable to tax as it arises from the operation of ships in international waters. Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents. In such a situation, "profit" from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in CIT v. Kotak Securities Ltd. [CIT v. Kotak Securities Ltd., (2016) 11 SCC 424 : ....
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....rated. This is evident from the following extracts of the UN Handbook: - "17. In the view of these members of the Committee, as a policy matter, taxation of fees for technical services is warranted only when the service provider has a sufficient nexus to the payer's State, which typically is in the form of a permanent establishment or fixed base. 18. In other words, to justify taxation of technical services in a State, the services should be provided in that State with the degree of nexus required by Articles 5 (Permanent Establishment), 7 (Business Profits) and 14 (Independent Personal Services). 19. Those members of the Committee that did not agree with the inclusion of Article 12A in bilateral tax treaties were also concerned that the term "technical services" as used in the Article is not adequately defined. These members were therefore concerned that the application of the Article would result in increased uncertainty, inconsistent treatment, and lengthy disputes between taxpayers and tax authorities. 20. In the view of those members of the Committee that did not agree with the inclusion of Article 12A, a further problem with taxation of....
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....ticle 12A, may consider agreeing to amend article 12 (royalties) to permit taxation of certain "fees for included services," an approach that is found in a number of bilateral tax treaties between developing and developed countries. The underlying policy rationale for this narrower approach is that, in order to justify taxation by the State from which the payment is made even in cases where the services are not performed in that State, fees for services must be directly related to the enjoyment of property for which a royalty as otherwise defined in Article 12 is paid. Wording for this narrower alternative approach is set forth in paragraphs 25 and 26 of the Commentary on Article 12. 25. However, a majority of the members of the Committee of Experts was of the view that the alternative referred to in paragraph 24 is not an acceptable alternative to Article 12A for developing countries because, in essence, those members considered that there is no principled justification for restricting the taxation of fees for technical services to services directly related to property producing royalties. Moreover, those members took the view that the alternative supported by a minority ....
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.... based on all the relevant facts and circum-stances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company's shares or of the beneficial equity interest in the comany) or if another person possesses directly or indirectly more than 50 per cent of the beneficial interest (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company's shares or of the beneficial equity interest in the company) in the person and the enterprise. For the purposes of this Article, an individual shall be a closely related person with respect to another individual if the individual is related to that other individual by blood relationship, marriage or adoption." 37. Equally instructive is the following discussion on the subject of FTS:- "60. The paragraph lays down nothing about the mode of taxation in the State in which fees for t....
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....l or expertise with respect to a particular art, science, profession or occupation. Therefore, fees received for services provided by regulated professions such as law, accounting, architecture, medicine, engineering and dentistry would be fees for technical services within the meaning of paragraph 3. Thus, if an individual receives payments for professional services referred to in Article 14, paragraph 2 from a resident of a Contracting State, those payments would be fees for technical services. If the payments arise in that Contracting State because they are made by a resident of that State or borne by a permanent establishment or fixed base in that State, the payments would be subject to tax by that State in accordance with paragraph 2 irrespective of the fact that the services are not performed in that State through a fixed base in that State. xxxx xxxx xxxx 85. It is often necessary to distinguish between fees for services, including fees for technical services, and royalties in order to determine whether Article 12 or another Article of the Convention (Article 12A in the case of "fees for technical services") is applicable. The distinction between fees for s....
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....eating the database in State S." 38. As is manifest from the above, the Committee of Experts understood the word "technical" to entail the application of specialised knowledge, skill or art to a particular art, science, skill or expertise. Equally instructive in this context is the exemplar discussed in paras 90 and 91 and which reemphasized the existence of specialised rendering and solution providing as being key elements to answering the question of FTS. However, and insofar 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. The Reseller Agreement may now be tested on the aforenoted precepts. 39. 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 ex....
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.... 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. 43. Similarly Exhibit B speaks of the products being concerned with assisting the Reseller in the performance of its sales and marketing obligations. All of the above was thus aimed at merely equipping and educating the representatives of SFDC India to be in a position to comprehensively brief potential customers. 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. Th....
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....e issue of technical services. 47. 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. 48. We also bear in mind the indubitable fact that 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....