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TMI Blog2025 (2) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Counsel, Mr Shivansh B Panday, Ms Priya Sarka, Mr Viplav Acharya, JSCs and Mr Utkarsh Tiwari, Advocates. JUDGMENT VIBHU BAKHRU, J. 1. The petitioner has filed the present petition, inter alia, impugning an order dated 09.07.2024 (hereafter the impugned order) passed by respondent no. 2 under Section 197 of the Income Tax Act, 1961 (hereafter the Act) in respect of the Financial Year (FY) 2024-25 relevant to the Assessment Year (AY) 2025-26 authorizing the petitioner to receive the payment (estimated at Rs. 6,33,34,44,669/-) from M/s Salesforce.com India Private Limited (hereafter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mit the reseller, in this case, SFDC India, to perform its obligations under the Reseller Agreement, at no extra cost)." 6. The petitioner claims that it does not have any place of business in India; has not engaged any employee; and does not have any sort of presence in India. The petitioner has also annexed a copy of the Tax Resident Certificate to establish that it is a tax resident of Ireland, as well as a declaration in the Form 10F declaring that it does not have any permanent establishment (hereafter PE) in India. 7. On 01.02.2023, the petitioner and SFDC 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SFDC products is decided based on the quantity, period, etc. and is finalized on the basis of discussion with customers and internal approvals. The AO reasoned that the same also indicated dependency of SFDC India over the petitioner. 14. The AO noted that in FY 2023-24, the receipts were held to be fees for technical services - a conclusion which was rejected by this court. Subsequently, the certificate issued for AY 2024-25 was revised pursuant to the directions issued by this court. However, the AO did not follow the same course and observed 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 withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner. He emphasized that the petitioner undertook all the risks and was entitled to all the benefits. SFDC India was merely entitled to commission of 2.75% of the Indian territory revenue with no risk or additional reward. He also referred to Section 3.5 and Section 8 of the Reseller Agreement, which record that the petitioner has a right to inspect books / records of SFDC India and the petitioner has undertaken to fully indemnify SFDC India. He submitted that in the earlier years, the AO had invoked the FTS/Royalty clause, 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 withhold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant to the previous year till the date of making application under sub-rule (1) of rule 28; (3) The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period. (4) The certificate for deduction of tax at any lower rates or no deduction of tax, as the case may be, shall be issued direct to the person responsible for 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "any amount" referred to in the specified provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 195 (1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. 15. Section 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 ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be 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 Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1-4-2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction is to be made only if tax is payable by the non-resident assessee, which is underscored by this judgment, stating that the charging and machinery provisions contained in Sections 9 and 195 of the Income Tax Act are interlinked." [emphasis added] 29. The Supreme Court also noted the following observations made in regard to the scope 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts in both Europe, Middle East, and Africa ("EMEA") and Asia Pacific ("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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to principal basis. Vendor and Reseller hereby agree that, in the performance of their respective obligations hereunder, they are and shall remain independent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75% of Indian 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, depreciation, stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner 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 the territory. The obligation of SFDC Ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port, 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 SFDC India, earnings from customization or individualization of the SFDC suite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable 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 through a permanent establishment situated therein. If the enterprise carries on business as aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, plantation or related activities are carried on. 3. A building site or construction or assembly project or supervisory activities in connection there with constitute a permanent establishment only if such site, project o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitually 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 permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 establishment under the provisions of that paragraph; or b) the person does not habitually conclude contracts nor plays the principal role leading to the conclusion of such contracts, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which that person regularly delivers goods or merchandise on behalf of the enterprise." 45. We also consider it apposite to refer to the following passage from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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). 48. Even if the aforesaid conditions are satisfied, an enterprise will not be deemed to have a PE in India if the agent has an independent status and is covered under paragraph 8 of Article 5 of the India-Ireland DTAA. That is, he is a broker, general commission agent or any other agent of independent status and acts in the normal course of its business. Paragraph 6 of Article 5 of the India-Ireland DTAA also does not cover persons, which are mentioned in paragraph 5 of Article 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wered 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. 55. The 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. The 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 petitioner's application on the ground that its income is chargeable to tax in India. 60. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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