Interpreting "Technical Services" under Tax Treaties: A Comprehensive Analysis

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Comprehensive Analysis of the Judgement on Technical Services under Tax Treaty

Reported as:

2024 (3) TMI 620 - DELHI HIGH COURT

Introduction

This article provides a detailed analysis of a recent judgement by the Delhi High Court concerning the interpretation of the term "technical services" under the India-Ireland Double Taxation Avoidance Agreement (DTAA). The case involved a dispute between the Income Tax Department and Salesforce.com Ireland Limited (SFDC Ireland), a company engaged in the business of providing customer relationship management (CRM) software and related services.

Arguments Presented

Assessee's Arguments

SFDC Ireland contended that the payments received from its Indian subsidiary, SFDC India, were not in the nature of "fees for technical services" under Article 12(3)(b) of the India-Ireland DTAA. The company argued that it was merely selling standard, off-the-shelf, non-customized software products to SFDC India, which acted as a reseller in the Indian territory. The technical assistance and training provided to SFDC India were incidental to the sale of the software products and did not constitute the rendering of technical services.

Revenue's Arguments

The Income Tax Department argued that SFDC Ireland was providing comprehensive services and solutions with the help of technology embedded in the software. The department contended that the payments received by SFDC Ireland were in the nature of "fees for technical services" and subject to withholding tax under the DTAA.

Discussions and Findings of the Court

Interpretation of "Technical Services"

The court extensively discussed the interpretation of the term "technical services" under the DTAA and relevant case laws. It referred to the Supreme Court's decision in C.I.T. -4, Mumbai Versus M/s Kotak Securities Ltd. - 2016 (3) TMI 1026 - Supreme Court., which held that the use of a facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them.

The court also relied on the United Nations Handbook on Selected Issues in Administration of Double Tax Treaties, which provided guidance on the interpretation of "technical services." The Handbook emphasized that technical services must involve the application of specialized knowledge, skill, or expertise by the service provider on behalf of a client or the transfer of such knowledge, skill, or expertise to the client.

Analysis of the Reseller Agreement

The court analyzed the terms of the Reseller Agreement between SFDC Ireland and SFDC India. It found that the agreement did not contemplate any technology transfer to SFDC India. SFDC India was merely designated as a reseller to engage with and onboard customers within the territory for the use of SFDC products.

The technical assistance and training provided by SFDC Ireland were aimed at enabling SFDC India's staff to understand the attributes and capabilities of SFDC products for marketing purposes. The court held that such training and assistance did not constitute the conferral of specialized or exclusive technical services.

Customization and Individualization

The court observed that the respondent (Income Tax Department) failed to establish that SFDC Ireland was providing customized or specially designed software solutions to its customers. The impugned order did not advert to any material indicating that the supply of SFDC products departed from a standard scope of services.

The court emphasized that in order to fall within the ambit of "fees for technical services," it was incumbent upon the respondents to establish an indelible link between the payment received by SFDC Ireland and the consideration for providing customized technical services.

Analysis and Decision by the Court

Doctrine of Noscitur a Sociis

The court applied the principle of noscitur a sociis, which means that words should be interpreted in the context of the words associated with them. The phrase "technical service" was to be read in conjunction with "managerial" and "consultation" services, as mentioned in the DTAA.

Lack of Evidence for Technical Services

The court found that the respondents failed to evaluate the claim for withholding tax on the touchstone of whether the remittances made to SFDC Ireland constituted consideration for customized technical services. The impugned order did not proceed based on any material or evidence indicating that the moneys remitted to the assessee could be said to constitute consideration for technical services.

Remittance Based on Reseller's Net Revenue

The court noted that the purchase price paid by SFDC India to SFDC Ireland was based on the Reseller's Net Revenue, as per Exhibit A of the Reseller Agreement. The various streams and heads of revenue of SFDC India, including earnings from customization or individualization of the SFDC suite of products, if any, did not appear to have been examined by the respondents.

Decision

The court allowed the writ petition and quashed the order dated 16 October 2023 and the certification dated 18 October 2023. The matter was remitted to the respondent for considering SFDC Ireland's application afresh, bearing in mind the court's observations, particularly those highlighted in paragraphs 48 and 49 of the judgement.

Doctrine or Legal Principle Discussed

The key legal principle discussed in the judgement is the interpretation of the term "technical services" under the India-Ireland DTAA. The court relied on the Supreme Court's decision in CIT v. Kotak Securities Ltd. and the guidance provided by the United Nations Handbook on Selected Issues in Administration of Double Tax Treaties to establish the criteria for determining whether a service constitutes a "technical service" under the DTAA.

Comprehensive Summary of the Judgement

The Delhi High Court, in this judgement, provided a comprehensive analysis of the interpretation of the term "technical services" under the India-Ireland DTAA. The court emphasized that for a service to be considered a "technical service," it must involve the application of specialized knowledge, skill, or expertise by the service provider on behalf of a client or the transfer of such knowledge, skill, or expertise to the client.

The court analyzed the Reseller Agreement between SFDC Ireland and SFDC India and found that the technical assistance and training provided by SFDC Ireland were aimed at enabling SFDC India's staff to understand the attributes and capabilities of SFDC products for marketing purposes. Such training and assistance did not constitute the conferral of specialized or exclusive technical services.

The court also noted that the respondents failed to establish that SFDC Ireland was providing customized or specially designed software solutions to its customers. The impugned order did not advert to any material indicating that the supply of SFDC products departed from a standard scope of services.

Furthermore, the court observed that the respondents did not evaluate the claim for withholding tax on the touchstone of whether the remittances made to SFDC Ireland constituted consideration for customized technical services. The purchase price paid by SFDC India to SFDC Ireland was based on the Reseller's Net Revenue, and the various streams and heads of revenue of SFDC India were not examined.

Ultimately, the court allowed the writ petition and quashed the order, remitting the matter to the respondent for fresh consideration in light of the court's observations.

Full Text:

2024 (3) TMI 620 - DELHI HIGH COURT