TaxTMI 
TaxTMI 
2025 (2) TMI 713
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....fter SFDC India) after withholding Tax Deducted at Source (TDS is short) at the rate of 2% (excluding cess and surcharges). 2. The petitioner also impugns the certificate dated 09.07.2024 (hereafter the impugned certificate) issued under Section 197 of the Act authorising SFDC India to make payments on account of the petitioner after deducting withholding tax at the rate of 2%. 3. According to the petitioner, its income resulting from the receipts from SFDC India is not chargeable to tax in India and, therefore, its application to authorise payments without deducting any withholding tax, ought to have been allowed. 4. Thus, the controversy to be addressed is whether the impugned order and the impugned certificate are liable to interfered with in the present proceedings on account of respondent no. 2 (hereafter the AO) rejecting the petitioner's request for allowing SFDC India to make payments at Nil rate of withholding tax. FACTUAL MATRIX 5. The petitioner is a tax resident of the Republic of Ireland within the meaning of Article 4 of the Double Taxation Avoidance Agreement (DTAA) between Ireland and India. The petitioner states that it is engaged in the business of ....
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....DC India entered into a "Amended and Restated Reseller Agreement" (hereafter the Reseller Agreement), whereby the petitioner appointed SFDC India as a non-exclusive reseller of SFDC Products. The petitioner claims that in terms of the Reseller Agreement, SFDC India procures the SFDC Products from the petitioner for onward resale to its customers in India. 8. The petitioner estimates that during the FY 2024-25 relevant to AY 2025-26, it would receive a sum of Rs. 6,33,34,44,669/- from SFDC India in terms of the Reseller Agreement. On 17.04.2024, the petitioner filed an application in the prescribed form (Form 13) under Section 197 of the Act requesting the AO to issue the certificate authorizing the petitioner to receive payments from SFDC India without any withholding tax (TDS). In its application, the petitioner referred to the decision of this court in petitioner's own case for the prior year, AY 2024-25, rendered on 11.03.2024, captioned SFDC Ireland Limited v. Commissioner of Income Tax & Another Neutral Citation No.: 2024:DHC:1910-DB. Pursuant to the said decision, the AO had allowed the petitioner's application under Section 197 of the Act for receiving payments from SFDC ....
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....ved that at the stage of proceedings under Section 197 of the Act, the scope of enquiry is limited and therefore, certain facts could not be verified in detail. 15. The AO also observed (a) at that stage it was difficult to establish the level of dependency of SFDC India over the petitioner; and, (b) it was difficult to determine the level of involvement of SFDC India in determination of final product price of the SFDC Products. 16. The AO declined to issue the certificate for Nil withholding tax, as the AO held that "issuance of tax withholding certificate @ 0% at this stage would literally amount to accepting of facts of the case without suitable enquiry which is not considered desirable from the point of view of revenue" RIVAL CONTENTIONS 17. Mr Ajay Vohra, learned counsel appearing for the petitioner submitted that respondent no. 2 had failed to appreciate that the SDFC Products provided by the petitioner were standardized and non-customized and akin to off the shelf products. He submitted that SFDC India is a non-exclusive reseller for procuring the SFDC Products from the petitioner and selling the same. He stated that an Indian customer interested in availing the ....
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....use, which was found to be inapplicable. However, in FY 2024-25, the AO had invoked the Business Income Clause holding that the petitioner had a PE in India. He earnestly contended that each assessment year is a separate unit of assessment and the AO is not precluded from correcting an error or mistake in subsequent years. He also referred to the decision of Joshi Technologies International Inc. v. Union of India and Ors. (2015) 7 SCC 728 in support of his contention that the decision of the AO was reasoned and thus was not amenable to challenge in proceedings under Article 226 of the Constitution of India. 23. Lastly, he contended that directing a withholding tax at 2% translates to approximately 5% of the income on gross receipts which was very reasonable and therefore, did not warrant any interference by this court. REASONS AND CONCLUSION 24. Section 197 (1) of the Act enables an assessee to make application for a certificate requiring the deduction of tax at lower rate or no deduction at all, if the Assessing Officer is satisfied that the total income of the recipient justifies such nil deduction or deduction at a lower rate. It is, thus, incumbent upon the Assessing O....
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.... 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 the person making such application, the certificate for deduction of tax at lower rate may be issued to the person who made an application for issue of such certificate, authorising him to receive income or sum after deduction of tax at lower rate. (5) The certificates referred to in sub-rule (4) shall be valid only with regard to the person responsible for deducting the tax and named therein and certificate referred to in proviso to the sub-rule (4) shall be valid with regard to the person who made an application for issue of such certificate. (6) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall lay down procedures, formats and standards for issuance of certificates under sub-rule (4) and proviso thereto and the Principal Director General of Income-tax (Systems) or the Director Gene....
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....ction 195 (2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions i.e. Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195 (1). 16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195 (1). While interpreting a section one has to give weightage to every word used ....
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....e omitted, it also leads to an absurd consequence, The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195 (2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. 19. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that Section 195 (2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO (TDS) of payments made to non-residents. In other words, according to the Department Section 195 (2) is a provision by which the payer is required to inform the Department of the remittances he makes to the non-residents by which the Dep....
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....t which would prevent revenue leakage." 28. The aforesaid view was reiterated by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax and Another [2021] 432 IRT 471, in the following words: "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 provisions of [the] Act", to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under Section 2 (37-A) (iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Importantly, such deduction is only to be made if the non-resident is liable to pay tax under the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under Section 195 (1) o....
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....cope of Section 195 of the Act in the earlier decision in Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613: "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 chargeable to tax then no obligation to deduct the tax would arise. Shareholding in companies incorporated outside India (CGP) is property located outside India. Where such shares become subject-matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of TAS would not arise. 172. If in law the responsibility for payment is on a non-resident, the fact that the payment was made, under the instructions of the non-resident, to its agent/nominee in India or its PE/Branch Office will not absolve the payer of his liability under Section 195 to deduct TAS. Section 195 (1) casts a duty upon the payer of any income specified therein to a non-resident to deduc....
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.... 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. The parties now agree as follows: Section 1 - Definitions For purposes of this Agreement, the following terms shall have the meanings and definitions set forth below: 1.1 "Additional Resellers" shall mean and include a Person appointed as a non-exclusive sub-reseller by the Reseller of SFDC Products in the Territory. xxxx xxxx xxxx 1.4 "Customer Contracts" shall mean and include Reseller's contracts with its customers for the SFDC Products. xxxx xxxx xxxx 1.9 "SFDC Products" shall mean and include individually and/or collectively, as the context requires, customer relatio....
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....dependent contractors. Nothing in this Agreement shall be construed to constitute either Party as the agent of the other Party for any purpose whatsoever, and neither Party shall have the power to bind the other Party to any contract or the performance of any other obligation, or represent to any third party that it has any right to enter into any binding obligation on the other Party's behalf. Reseller shall advise its customers that the customers will contract solely with Reseller and the customers will have no contractual relationship with Vendor. 2.3 Reseller's Appointment of Sub-contractors. Reseller shall have the right to appoint sub-contractors (other than its employees) to provide marketing, resale, and sales support services (including post-sale support services) for the SFDC Products to customers in the Territory, subject to the policies established by Vendor from time to time. Reseller shall require sub-contractors appointed by Reseller pursuant to this Section 2.3 to agree in writing to adhere to the same obligations as Vendor has imposed on Reseller under this Agreement for the purpose of protecting Vendor's Confidential Information and Intellectual Property ....
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....tached 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. xxxx xxxx xxxx 5.3 Payment. Vendor will invoice Reseller for the amount of the Purchase Price for the SFDC Products supplied to Reseller hereunder on a monthly basis. Reseller shall pay the full amount of the Purchase Price (and, as the case may be, Vendor shall pay the full amount of the Shortfall Payment) as set forth in Section 5.1 hereof within ninety (90) calendar days after the end of each month. All payments hereunder shall be made in INR or in such other currency as the Parties may agree to from time to time. Section 8 - Indemnification Vendor or its designee shall indemnify, defend, and hold Reseller harmless against any and all claims, suits, actions, demands, proceedings, losses, ....
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....ian 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 sale of services ancillary to the SFDC Products in the Territory, net of all non-recoverable sales, use, value added, or similar taxes, duties, and other similar charges, and less all credits, discounts, and amounts refunded to customers. 5. Indian Territory Revenue. For purposes of this Exhibit A, "Indian Territory Revenue" shall mean the sum of 1) Reseller's Net Revenue as determined under Indian GAAP and 2) Net Revenue of all Affiliates under US GAAP. 6. Costs. For purposes of this Exhibit A, Reseller's "Costs" shall be an amount equal to Reseller's ordinary and necessary costs, as calculated in accordance with Indian GAAP, including, without limitation, employee salaries, travel expenses, professional fees, rent, depreciat....
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....nts made by SFDC India to the petitioner would be covered under fees for technical services under Article 12 of the India-Ireland DTAA. However, the petitioner had contested the same and had filed a writ petition before this court [SDFC Ireland Limited v. Commissioner of Income Tax and Anr.: Neutral Citation No. 2024:DHC:1910-DB]. This court had examined the terms of the Reseller Agreement and had rejected the said approach as the terms of the Reseller Agreement did not indicate that SFDC India renders any technical service or that the payments for SFDC Products could constitute fees for technical service. We consider it apposite to reproduce the following extract from the said decision: "40. As we read the 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 ....
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.... could be said to constitute consideration for technical services. Support, training and assistance provided by the assessee was asserted to be free of charge. 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 a liberty being reserved to the respondent to examine the issue in light of the above. 49. There remains one other important aspect which remains unresolved and does not appear to have been evaluated by the respondents while passing the impugned order. Exhibit A while dealing with Purchase Price does not speak of individual or institutional sales of applications or subscriptions to the platform but of the Reseller's Net Revenue. The purchase price is thus not linked to a particular sale of SFDC products or access fee to the platform. The various streams and heads of revenue of S....
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....ner's income from receipts pertaining to sale of the SDFC Products, from SDFC India is chargeable to tax as Royalty or Fees for Technical Services. The AO had merely made observations to the effect that (i) the petitioner's contention cannot be accepted as the petitioner company had no assessment/scrutiny history in the given circle; and (ii) issuance of nil withholding tax certificate would literally amount to accepting facts of the case without suitable enquiry. The contents of the impugned order suggests that the AO had accepted that the petitioner's income was in the nature of Business Profits and had suggested an element of dependency of SDFC India on the petitioner. Thus, though not specifically stated, the AO had suggested that there was an issue regarding the petitioner having a PE in India. It is, thus, relevant to refer to Article 7 of the India-Ireland DTAA, which refers to the taxability of business profits. 41. Article 7 of the India-Ireland DTAA is set out below: "Article 7: Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State t....
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....h prima facie finding. The impugned order does not hold that the petitioner has a PE in India in form of SFDC India. 43. It is relevant to refer to Article 5 of the India-Ireland DTAA, which defines the expression "Permanent Establishment" (PE) for the purposes of the India-Ireland DTAA. Article 5 of the India-Ireland DTAA, reads as under: "ARTICLE 5: Permanent Establishment - 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction or exploration of natural resources; (g) an installation or structure used for the exploration or exploitation of natural resources; (h) a sales outlet; (i) a warehouse in relation to a person providing storage facilities for others; and (j) a farm, plantation or other place where agricultural, forestry, ....
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.... of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 5 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control as that enterprise. 7. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 8 applies. 8. An enterprise shall not be deemed to have a perm....
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.... under the provisions of that paragraph." UN MC "5. Notwithstanding the provisions of paragraphs 1 and 2 but subject to the provisions of paragraph 7, where a person is acting in a Contracting State on behalf of an enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, if such a person: a) habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are i) in the name of the enterprise, or ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or iii) for the provision of services by that enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business (other than a fixed place of business to which paragraph 4.1 would apply), would not make this fixed place of business a permanent est....
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....oses, of course, that the conclusion of contracts by that person, or as a direct result of the actions of that person, takes place repeatedly and not merely in isolated cases." 46. India-Ireland DTAA is not identical to OECD or UN Model Conventions. More importantly, India's stand regarding interpretation of a PE is also different in some aspects. However, it is relevant to bear the aforesaid rationale as articulated in Klaus Vogel's text in mind in examining whether, prima facie, the petitioner has a PE in India in the form of SDFC India. 47. Plain reading of paragraph 6 of Article 5 of the India-Ireland DTAA indicates that the following conditions are to be satisfied: (a) The agent habitually acts on behalf of the enterprise. (b) He habitually exercises authority to conclude contracts in the name of the enterprise. (c) He has no ostensible authority to conclude contract but habitually maintains a state of stock of goods or merchandise and delivers the same on behalf of the enterprise. (d) Habitually secures orders wholly or almost wholly for the enterprise (or other enterprises, which are controlling or controlled by the enterprise). 4....
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....territory of India. The AO had also noted that although the petitioner had appointed SFDC India as a non-exclusive reseller, the petitioner had not appointed any other entity as the reseller of its products. But SFDC India had appointed sub-resellers. 53. Additionally, the AO had found that SFDC India had a role to play in the process of determining the price of the SFDC Products. 54. Both the aforesaid contentions are stoutly disputed by the petitioner. The petitioner denies that it has empowered SFDC India to enter into any contract on its behalf. The Reseller Agreement, which governs the relationship between the petitioner and SFDC India, explains the relationship between the parties and expressly provides that neither party would have the power to bind the other party to any contract or the performance of any other obligation. Neither party can represent to a third party that it has the right to enter into any binding obligation on behalf of the other party. Given the unambiguous terms of the Reseller Agreement, the conclusion that SFDC India is empowered to bind the petitioner or enter into contracts on its behalf cannot, absent any other definitive material establishing....
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....seller of products and is not required bear the liability on account of infringement of any intellectual property rights attributable to sale of SFDC Products in India. This is because all the intangible rights such as copyright, patent, trademarks in respect of SFDC Products vests with the petitioner and SFDC India cannot claim any such rights. This is expressly recorded in the Reseller Agreement. It would, thus, obviously follow that SFDC India - as any reseller - is entitled to indemnity against any action brought about by a person claiming infringement of its rights on account of sale of SFDC products. This principle would also apply to product liability and in terms of Section 3.4 of the Reseller Agreement, the petitioner has also agreed to indemnify SDFC India against claims relating to product liability or in respect of obligations under the Reseller Agreement. However, the petitioner does not indemnify SDFC India against any claims resulting from gross negligence or which are not related to performance of its obligations under the Reseller Agreement. 59. In the present case, we do not find that there is any material or a finding, which would justify denial of the petitio....