Delhi High Court: Services Offered by Irish Co to Indian Counterpart Not Technical

Delhi High Court: Services Offered by Irish Co to Indian Counterpart Not Technical

The matter was relevant in the context of the India-Ireland Double Taxation Avoidance Agreement

The Delhi High Court has nullified the order denying ‘Nil’ or lower Tax Deducted at Source (TDS) certificates stating that the services provided by the assessee, an Irish company, SFDC Ireland Ltd to its Indian counterpart salesforce.com India Pvt Ltd were not technical.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav observed that though the power to grant a TDS certificate was merely a preliminary examination of the taxable issue and had no implication on the assessment, due consideration should have been accorded while examining applications made under Section 197 of the Income Tax Act, 1961.

The petitioner (SDFC Ireland) challenged the certificate issued and passed by the respondent (tax department). It held being entitled to a Nil/lower rate while withholding tax certificates of payments received from salesforce India.

The SDFC Ireland received the payments pursuant to the arrangement embodied in the 01 February 2023 amended and restated reseller agreement.

However, the respondent denied withholding the tax certificate as requested by SFDC Ireland, permitting it to receive payment upon deduction of 10 percent as TDS on the entire amount to be received for the Financial Year 2023-2024 from SDFC India.

The tax department noted that SFDC Ireland was not selling standard off-the-shelf and non-customized downloadable software and was offering a comprehensive service solution with technology embedded in the software.

It held that the remittances received were liable to tax as fees for technical services under Section 9(1)(vii), read with Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA).

In this context, it was relevant to note:

• The petitioner is a tax resident of the Republic of Ireland holding a valid Tax Residency Certificate under Article 4 of the DTAA.

• Since it does not have a place of business, employee, or presence in India, it does not have a permanent establishment as contemplated under Article 5 of the DTAA.

• It deals in customer relationship management offerings, applications, and platforms, including sales, service, marketing, commerce, integration, analytics, and related products and services, collectively referred to as SFDC products.

The petitioner contended that the tax department erred in treating the remittances made by SFDC India as constituting FTS. It ignored the undisputed position that SFDC products were standardized with the customers having the option to pick any combination of products best suited to their business requirements. The products assisted clients in generating reports and summaries of the data, which the client fed into the software.

It added that the customers stored and retrieved their proprietary data through the CRM application software portal. This enabled them to use the software to generate appropriate reports based on information fed into the software and as per the format.

On the other hand, the revenue department submitted that the certification granted under Section 197 was based on the formation of a tentative opinion and did not merit the court’s interference. It urged that the rights of the assessee were fully safeguarded since the sum determined as chargeable to tax would be available to be offset from the TDS. The grant of withholding the tax certificate was premised on the maxim abundans cautela non nocet (abundant caution does no harm).

Justice Varma and Justice Kaurav noted the relevant clauses of the reseller agreement. They observed that the Indian company was appointed as a non-exclusive reseller without any technology transfer. The technical assistance and training do not bear the characteristics of the conferral on specialized or exclusive technical services. They are concomitant with the sale of principal products in the territory, aimed at equipping and educating the representatives of SFDC India to brief potential customers adequately.

The bench held that technical assistance and training did not constitute either the core or foundational basis of the consideration received by the assessee, and there was no transmission of specialized knowledge or skill. It added that under the DTAA, imparting training or educating a person on the functionality and attributes of a software or application did not amount to technical service.