2024 (3) TMI 620 - HC - Income Tax

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.

Summary

Issues Involved:
1. Validity of the certificate and order issued under Section 197 of the Income Tax Act, 1961.
2. Whether the payments received by the petitioner from SFDC India qualify as "fees for technical services" (FTS) under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA).

Summary:

Issue 1: Validity of the Certificate and Order Issued Under Section 197
The petitioner challenged the certificate dated 16 October 2023 and the order dated 18 October 2023 issued by the second respondent under Section 197 of the Income Tax Act, 1961, which denied a Nil/lower rate withholding tax certificate and imposed a 10% TDS on payments received from SFDC India. The court held that the writ petition was maintainable as the impugned order had the approval of the Commissioner, making alternative remedies futile. The court emphasized that the authority must examine the chargeability of tax even at the stage of granting a withholding tax certificate.

Issue 2: Characterization of Payments as Fees for Technical Services (FTS)
The second respondent's order was based on the finding that SFDC Ireland was providing a comprehensive service experience, qualifying as FTS under Section 9(1)(vii) of the Act and Article 12 of the DTAA. However, the court found that the relationship between SFDC Ireland and SFDC India was that of a seller and buyer on a principal-to-principal basis, with no transfer of Intellectual Property Rights or customized technical services. The court noted that the technical assistance and training provided were aimed at marketing and sales support, not constituting specialized or exclusive technical services.

The court referred to precedents, including CIT vs. Bharti Cellular and Kotak Securities, which emphasized that technical services must involve a human element and specialized knowledge tailored to the client's needs. The court found no evidence that the payments were for customized technical services, and the impugned order failed to establish an indelible link between the payments and the provision of technical services.

Conclusion:
The court quashed the order dated 16 October 2023 and the certification dated 18 October 2023, remitting the matter to the respondent for fresh consideration in light of the observations made, particularly regarding the nature of the payments and the scope of services provided. Pending applications were also disposed of.