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2025 (2) TMI 713 - HC - Income TaxOrder passed by section 197 - payment after withholding Tax Deducted at Source (TDS) at the rate of 2% (excluding cess and surcharges) - whether the impugned order and the impugned certificate are liable to interfered with AO rejecting the petitioner s request for allowing SFDC India to make payments at Nil rate of withholding tax? - petitioner claimed that its income was not chargeable to tax as fees for technical services or royalty HELD THAT - In the present case there is no prima facie finding by the AO that SFDC India habitually exercises authority to conclude contracts in the name of the petitioner. There is also no finding that SDFC India without authority habitually maintains a state of stock of goods or merchandise and regularly delivers the same on behalf of the petitioner or habitually secures orders. As apparent from above it is not necessary for the AO to finally determine the tax chargeable. As essential for the AO to form an opinion regarding the taxability of the income on a prima facie basis before rejecting the assessee s application u/s 197 (1) of the Act. The impugned order proceeded on the basis that the petitioner had empowered SFDC India to enter into contracts with customer on its behalf within the territory of India. 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. Additionally the AO had found that SFDC India had a role to play in the process of determining the price of the SFDC Products. 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 to the contrary be sustained. Contention that SFDC India has a role in price determination of the SFDC Products also appears to be without sufficient foundation. The petitioner emphasises that SFDC Products are standardized products and SFDC India does not determine the said prices. AO had reasoned that the involvement of SFDC India in price determination points towards the dependency of SFDC India over the petitioner. This observation is also unsustainable as even if SFDC India is involved in providing any inputs for determination of pricing the same would not render SFDC India as a dependent PE. Undisputedly SFDC India is an affiliate of the petitioner its transaction would be benchmarked on arm s length basis. In the present case we do not find that there is any material or a finding which would justify denial of the petitioner s application on the ground that its income is chargeable to tax in India. We are unable to sustain the impugned order as in the given facts there is little indication at least at this stage that amounts paid by SFDC India to the petitioner as consideration for sale of SFDC Products are chargeable to tax under the Act. It is also important to note that the AO has not returned any findings which indicate to the contrary. There is no express finding on a prima facie basis that the petitioner has a PE in India. And the impugned order does not disclose sufficient grounds which would substantiate this assumption. We set aside the impugned order and direct the AO to issue the certificate u/s 197 (1) of the Act for nil withholding tax bearing in mind the observations made in this order. The observations made in the present order are confined to the question of issuance of a certificate u/s 197 (1) of the Act. This order will not preclude the AO from examining and framing an assessment in accordance with law uninfluenced by this order.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Relevant legal framework and precedents: The legal framework involves the interpretation of Section 197 of the Income Tax Act, 1961, which allows for reduced or nil withholding tax certificates if the AO is satisfied that the recipient's total income justifies such a deduction. The DTAA between India and Ireland, particularly Articles 5 and 7, is crucial in determining the taxability of the petitioner's income and whether a PE exists in India. The court also referenced precedents such as GE India Technology Centre Pvt. Ltd. v. Commissioner of Income Tax and Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax, which emphasize that tax deduction at source (TDS) is contingent on the income being chargeable under the Act. Court's interpretation and reasoning: The court emphasized that the AO must form a prima facie opinion on the taxability of the income before rejecting an application for a nil withholding tax certificate. The court noted that the AO did not provide a definitive finding that the petitioner had a PE in India, which is necessary for taxing business profits under Article 7 of the DTAA. The court highlighted that the relationship between the petitioner and SFDC India, as defined in the Reseller Agreement, is that of a seller and reseller, operating on a principal-to-principal basis, which does not inherently establish a PE. Key evidence and findings: The Reseller Agreement between the petitioner and SFDC India was pivotal in determining the nature of their relationship. The agreement specified that SFDC India acts as a non-exclusive reseller, and neither party has the authority to bind the other in contracts. The court found no evidence that SFDC India habitually exercises authority to conclude contracts on behalf of the petitioner, which is a critical factor in establishing a PE under the DTAA. Application of law to facts: The court applied the DTAA provisions to conclude that the petitioner's income from SFDC India is not chargeable to tax in India as business profits unless a PE is established. The court found that the AO's observations regarding the petitioner's dependency on SFDC India and the latter's role in pricing were insufficient to establish a PE. The court also noted that the indemnification clause in the Reseller Agreement did not indicate a dependent agent relationship. Treatment of competing arguments: The petitioner argued that its income was not chargeable to tax in India and that the AO failed to consider the nil withholding tax certificates issued in previous years. The Revenue contended that SFDC India constituted a PE for the petitioner in India and that the remuneration model indicated dependency. The court found the petitioner's arguments more persuasive, emphasizing the lack of a prima facie finding of a PE by the AO. Conclusions: The court concluded that the AO's decision to deny a nil withholding tax certificate was not supported by sufficient evidence or legal reasoning. The court directed the AO to issue a certificate for nil withholding tax, noting that this decision does not preclude the AO from conducting a detailed assessment later. 3. SIGNIFICANT HOLDINGS Preserve verbatim quotes of crucial legal reasoning: The court stated, "The liability to deduct tax at source is contingent upon whether the payments represent the income of the recipient, which is chargeable to tax under the Act." Core principles established:
Final determinations on each issue:
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