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TMI Blog2024 (3) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - HON'BLE MR. JUSTICE YASHWANT VARMA AND HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV For the Petitioner Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Aniket D. Agrawal and Mr. Samarth Chaudhari, Advs. For the Respondents Through: Mr. Aseem Chawla, Sr.SC with Ms. Pratishtha Chaudhary and Mr. Aditya Gupta, Advs for Revenue. JUDGMENT YASHWANT VARMA, J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectively referred to as SFDC products . 5. On 01 February 2023, the petitioner entered into a Reseller Agreement with SFDC India, as a consequence of which the latter came to be appointed as the non-exclusive reseller of SFDC products for onward resale to end customers in India. According to the writ petitioner, SFDC India was to procure SFDC products from it for the purposes of onward resale. As per the terms of the Reseller Agreement, the relationship between the two parties was that of seller and buyer and all transactions were to be undertaken on a principal-to-principal basis. 6. SFDC India in terms of the Reseller Agreement was to market, distribute and sell SFDC products in India. However, it was accorded no rights over the intellectual property rights existing in SFDC products. According to the writ petitioner, SFDC India was also not transferred the right to manage, control, adapt, alter, modify, decompile, translate, disassemble or reverse engineer the content of SFDC products. 7. The SFDC products themselves are explained to be a software which enables businesses to manage customers and prospect relationships with data. The writ petitioners in their brief synopsis have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made by SFDC India to the Petitioner is subject to EL @ 2% of the gross amount of consideration in the hands of the latter, in terms of section 165A of the Finance Act, 2016 as amended by Finance Acts of 2020 and 2021 as a matter of fact, the Petitioner has been paying EL to the Government of India; the Petitioner has deposited EL amounting to Rs. 7,64,11,243 for the period from 01.04.2023 till 31.12.2023; d. Consequently, in terms of section 10(50) of the Act, the payments made by SFDC India to the Petitioner for sale of SFDC products, being subject to EL and accepted as such by the Government of India, is exempt from taxation under the Act in the hands of the Petitioner; 9. It may at this stage itself be clarified that we had heard learned counsels for respective sides restricted to the claim for issuance of a Nil withholding tax certificate and the same being examined solely on the anvil of Section 9(1)(vii) of the Act read along with Article 12 of the DTAA. Learned counsels had also agreed that the contention of SFDC Ireland being absolved from the payment of any tax by virtue of the imposition of an equalization levy in terms of Section 165A of the Finance Act, 2016 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. The first part is means and includes type of definition and the second part is does not include definition. In the present appeals we are not concerned with the second part. The entire focus is on attracted to the first part and that, too, to the expression consideration... for the rendering of any managerial, technical for consultancy services . It is only if the payments made by the respondents/assessees to MTNL/other companies in respect of interconnect/port access charges fall within the ambit of this expression that the said payments could be regarded as fees for technical services as contemplated under section 194J of the said Act. 13. In Skycell Communications Ltd. [2001] 251 ITR 53 (Mad), a learned single judge of the Madras High Court noted that installation and operation of sophisticated equipment with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. It was also held that technical service referred to in Explanation 2 to section 9(1)(vii) contemplated the rendering of a service to the payer of the fee and that mere collection of a fee for u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc. 17. It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression manager and consequently managerial service has a definite human element attached to it. To put it bluntly, a machine cannot be a manager. 18. Similarly, the word consultancy has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field . It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ask advice for, seek counsel or a professional opinion from ; refer to (a source of information) ; seek permission or approval from for a proposed action . It is obvious that the service of consultancy also necessari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r alia, states that fees for technical services shall have the same meaning as contained in Explanation 2 to clause (vii) of Section 9(1) of the Act. 5. Right from 1979 various judgments of the High Courts and tribunals have taken the view that the words technical services have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words technical services in Section 9(1)(vii) read with Explanation 2 comes in between the words managerial and consultancy services. 14. We also find it apposite to notice the following principles which came to be laid down in Commissioner of Income Tax vs. Kotak Securities (2016) 11 SCC 424:- 6. What meaning should be ascribed to the words technical services appearing in Explanation 2 to clause (vii) to Section 9(1) of the Act is the moot question. In CIT v. Bharti Cellular Ltd . [ CIT v. Bharti Cellular Ltd., (2014) 6 SCC 401 : (2011) 330 ITR 239 ] this Court has observed as follows: (SCC p. 402, para 5) 5. Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words technical services have got to be read in the narrower sense by applying the rule of noscitur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax (TDS) and Anr. 2020 SCC OnLine Del 1844 wherein the following was observed:- Court's reasoning 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 18. This court is of the view that the present writ petition is maintainable as there is no efficacious alternate remedy available to the petitioner to challenge the impugned order. In fact, the Commissioner of Income-tax can entertain a revision petition under section 264 only when the order, which is the subject matter of revision is passed by an authority subordinate to him. Further, Notification No. 8 of 2018 dated December 31, 2018 issued by the Central Board of Direct Taxes mandates that the decision under section 197 with effect from December 31, 2018 has to be taken by the Commissioner, i. e., after a conscious application of mind. It has also been unequivocally admitted by the respondent in para 7 of the impugned order that approval of higher authorities was tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght about as under : Approval ' and permission ordinarily the difference between approval and permission is, that in the first the act holds good until disapproved, while in the other case it does not become effective until permission is obtained. But permission subsequently obtained, may all the same validate the previous act. Approval of a person means that, and only that which he has, with full knowledge, approved. Approve. To accept, as good, or sufficient for the purpose intended. To pronounce good. To accept as good or sufficient for the purpose intended : to confirm authoritatively. Approved. When one of the parties to a bargain writes 'approved' at the end of the draft of the agreement and adds his signature, he thereby makes the draft a binding contract, and does not merely express approval of its form after the manner of conveyancers'.. . Therefore, it is clear 'approval' means to agree with full knowledge of the contents of what is approved and pronounce it as good. In other words confirm authoritatively. When the power of such approval is vested in a higher authority, when such higher authority approves an order of the lower authority, which mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and not an efficacious remedy. ( Please see Ram and Shyam Co. v. State of Haryana (1985) 3 SCC 267). (emphasis supplied) 18. While Mr. Chawla is correct that on a fundamental plane, the power to grant a withholding tax certificate is merely a preliminary examination of the issue of taxability and has no implication on the ultimate assessment that may be made, we must also be cognizant of the serious repercussions that ensue the denial of such a certificate without due consideration being accorded upon the question of chargeability to tax. We recently had an occasion to consider this aspect in Lionbridge Technologies LLC vs. Deputy Commissioner of Income Tax, International Taxation, Cirlce 2 (2) (1), New Delhi W.P (C) 3403/2023 and where we had emphasized the imperatives of striking a just balance and ensuring that merely because the examination of taxability at the stage of grant of a withholding tax certificate may not be determinative or have attributes of finality, the authority dealing with such an application is not relieved of the obligation to confer due consideration upon factors which are germane to the question of taxability. We deem it appropriate to extract the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT, (2010) 10 SCC 29]. xxxx xxxx xxxx 36. It will be seen that Section 194-E of the Income Tax Act belongs to a set of various provisions which deal with TDS, without any reference to chargeability of tax under the Income Tax Act by the non-resident assessee concerned. This section is similar to Sections 193 and 194 of the Income Tax Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Income Tax Act. On the other hand, as has been noted in GE Technology [GE (India) Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29], at the heart of Section 195 of the Income Tax Act is the fact that deductions can only be made if the non-resident assessee is liable to pay tax under the provisions of the Income Tax Act in the first place. xxxx xxxx xxxx 66. What is made clear by the judgment in GE Technology [GE (India) Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29] is the fact that the person spoken of in Section 195(1) of the Income Tax Act is liable to make the necessary deductions only if the non-resident is liable to pay tax as an assessee under the Income Tax Act, and not otherwise. This judgment also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment . 15. We in this regard also take note of Rule 28AA of the Income Tax Rules, 1962 and which stands framed in the following terms:- Certificate for deduction at lower rates or no deduction of tax from income other than dividends. 28AA. (1) Where the Assessing Officer, on an application made by a person under sub-rule (1) of rule 28 is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub-section (1) of section 197 for deduction of tax at such lower rate or no deduction of tax. (2) The existing and estimated liability referred to in sub-rule (1) shall be determined by the Assessing Officer after taking into consideration the following: (i) tax payable on estimated income of 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) e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollected at source in the previous years. Rule 28AA of the 1962 Rules thus clearly required the authority to confer and accord due consideration on aspects pertaining to chargeability when raised by the assessee. 17. What needs to be emphasised is that merely because the grant of a certificate under Section 197 of the Act is not accorded finality or may not amount to a definitive determination on the question of taxability, the same would not absolve the authority from considering all aspects in light of the statutory mandate referred to above. 19. Insofar as the merits are concerned, Mr. Chawla submitted that the second respondent has on a due consideration of the provisions contained in the Reseller Agreement including Section 4.3 found 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. 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting [MLI], as well as the United Nations Model Double Taxation Convention Handbook [UN Handbook] and which material shall be considered in the subsequent parts of this decision. 22. As noticed hereinabove, the dispute in relation to withholding tax arises out of the payments received by the petitioner from SFDC India, the Reseller appointed by the former in terms of the Reseller Agreement. The solitary question which arises for our consideration is whether those payments were liable to be subjected to a withholding tax and treated as FTS as per Article 12(3)(b) of the DTAA. 23. As is manifest from a reading of the Reseller Agreement, SFDC India came to be appointed as the non-exclusive reseller by SFDC Ireland for its products. We deem it apposite to extract the relevant 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts and services procured by the Reseller from Vendor exclusively for resale or provision of trial use to customers in the Territory, excluding, however, SFDC Products for Reseller s Internal Use. 1.10 SFDC Products for Reseller s Internal Use shall mean and include individually and/or collectively, as the context requires, all SFDC Products made available by Vendor to Reseller for internal business purposes at no extra cost to permit Reseller to perform its obligations under this Agreement. Such SFDC Products for Reseller s Internal Use include, without limitation, SFDC Products made available to Reseller and used by Reseller (i) to demonstrate the functionality of the SFDC Products (e.g., in trade 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts, Vendor shall provision the SFDC Products as soon as reasonably practicable, subject to the contract being compliant with Vendor's policies for the provisioning of the SFDC Products as notified to Reseller from time to time. 4.2 Marketing Materials . Vendor shall, at no cost, provide Reseller with a reasonable quantity of marketing and promotional materials to assist Reseller in its marketing activities hereunder. 4.3 Technical Support. Vendor shall provide Reseller with reasonable technical assistance and training with respect to the marketing, distribution, support, and sale of SFDC 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) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he applicable double taxation treaty, the applicable directive, or under applicable domestic tax law, such cooperation to include providing Vendor with any and all information / documentation available to Reseller and reasonably requested by Vendor to make the necessary filings. Upon the provision of a withholding tax exemption certificate issued by the relevant tax authority, Reseller shall abstain from further withholding in accordance with the withholding tax exemption certificate issued. Any refunds of withholding taxes received by Reseller 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 . Resell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment This Exhibit A sets forth the means of computing payments required under the Agreement (Purchase Price, and in some circumstances described herein, Shortfall Payments). 1. Payment Obligations. Pursuant to Section 5.1 of this Agreement, if a Shortfall exists, Vendor shall pay Reseller a Shortfall Payment described in this Exhibit A. If no such Shortfall exists, Reseller shall pay Vendor the Purchase Price described in this Exhibit A. 2. Shortfall Payment. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ( SFDC Ireland or Vendor ), a company organized and existing under the laws of Ireland and having its principal place of business located at Salesforce Tower, 60 R801, North Dock, Dublin, Ireland, and salesforce.com India Private Limited ( SFDC India or Reseller ), a company organized and existing under the laws of India and having its principal place 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 Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing activities in the Territory. 2.2 Reseller may use such SFDC Products for Reseller s Internal Use solely to perform its sales and marketing obligations vis- -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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Use is regulated by the Agreement which 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 which in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 include a human element. We deem it apposite to extract the following passages from that decision: - 12. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh 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 general being restricted to a sense analogous to that of the less general. 15. This would mean that the word technical would take colour from the words managerial and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 managerial and consultancy . In such a situation, the rule would clearly apply and, therefore, the expression technical services would have to take colour from the expressions managerial services and consultancy services 30. The aforenoted view was upheld by the Supreme Court in Bharti Cellular wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. Technical services like managerial and consultancy service would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 record are that the assessee is having its IT system, which is called the Maersk Net. As the assessee is in the business of shipping, chartering and related business, it has appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation, etc. through these agents. Aforementioned three agents are appointed in India for the said purpose. All these agents of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersk 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 : (2016) 383 ITR 1 ] has categorically held that use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all. 34. The aforenoted observations of the Supreme Court were not only apt but also prophetic when viewed in the context of software driven platforms. However, while explaining what would constitute technical ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 fees for technical services on a gross basis is that it can lead to double taxation. The imposition of a tax on a gross basis denies the taxpayer the ability to take into account expenses that were incurred in connection with the provision of the services, which would deductible if tax were imposed on a net basis. Thus, it is possible that the residence State's remedies for relieving double taxation may not be adequate to fully relieve the gross-basis taxation imposed by the other Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the members of the Committee contains many vague terms of uncertain meaning, which may lead to frequent disputes about the interpretation of that provision. 26. Instead, countries concerned about the scope of Article 12A and the uncertainty associated with the definition of fees for technical services in Article 12A, paragraph 3 might consider an alternative version of Article 12A under which Article 12A would potentially apply to all fees for services (technical and other services) provided in a Contracting State, and also to fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 technical services arise. Therefore, it leaves that State free to apply its own laws and, in particular, to levy the tax either by deduction at source or individual assessment. As with other provisions of the United Nations Model Convention, procedural questions are not dealt with in the Article. Each State is able to apply the procedure provided in domestic law. 61. This paragraph specifies the meaning of the phrase fees for technical services for purposes of Article 12A. The definition of fees for technical services in paragraph 3 is exhaustive. Fees for technical services are limited to the payments described in paragraph 3; other payments for se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services and royalties is clear in principle. Under Article 12, paragraph 3, royalties are payments for the use, or the right to use, certain types of property or information concerning industrial, commercial or scientific experience (so-called know-how).In contrast, the performance of services does not involve any transfer of the use of, or the right to use, property. However, in practice it is often difficult to distinguish between royalties and fees for services, including technical services, especially with respect to so-called mixed contracts. Guidance with respect to the distinction between fees for services and royalties is provided in paragraph 12 of the Commentary on Article 12 of the United Nations Model Conventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. 44. 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 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. 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 ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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