9911796707
TMI Blog2024 (3) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... SFDC Ireland] pursuant to the arrangement embodied in the Amended and Restated Reseller Agreement [Reseller Agreement] dated 01 February 2023. While proceeding to evaluate the application as made, the 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. 3. The impugned order rests on the second respondent finding that SFDC Ireland was not selling standard off-the-shelf and non-customized downloadable software and that it was in fact offering a comprehensive service experience or solution with the help of technology embedded in the software. It has held that the remittances so received are liable to be taxed as fee for technical services [FTS] within the meaning of Section 9(1)(vii) of the Act read along with Article 12 of the India-Ireland Double Taxation Avoidance Agreement [DTAA]. 4. For the purposes of evaluating the challenge which stands raised, it would be apposite to notice the following salient facts. The petitioner, SFDC Ireland, is stated to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business requirements. The supply of SFDC products helps the customers/ clients in generating reports and summaries of the data which is fed into the 'Salesforce' software by the client itself. The customers input, store and retrieve their proprietary data through the CRM application software portal. The Petitioner's products provide access for customer's own use to generate reports, basis the information fed in by the customer in the desired format. Lastly, access to the Petitioner's products is for a limited duration and the period for which the subscription fee is paid by the customer. A high-level overview of the SFDC Products sold by the Petitioner and marketed/ resold by SFDC India in the territory of India, are annexed herewith as ANNEXURE 'P-1' to this submission." 8. During FY 2023-24, the petitioner estimated receipts of INR 518,21,03,624/- as being receivable from SFDC India in terms of the Reseller Agreement. Seeking consideration of its assertion of being entitled to a Nil withholding tax certificate, the petitioner moved the respondents by way of an application dated 28 July 2023. Along with the detailed submissions which were filed with the second respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... summaries of the data which is fed into the software by the client itself. Learned senior counsel pointed out that customers input, store and retrieve their proprietary data through the CRM application software portal. It was additionally pointed out that pursuant to the access granted to clients, subscribers are enabled to use the software to generate appropriate reports on the basis of information fed into the software and as per the format as desired. Mr. Vohra pointed out that the clients are provided access to the CRM application software portal based on the subscription fee that may be paid. 11. According to Mr. Vohra, the payments made by SFDC India do not partake the character of royalty nor can they be viewed as constituting FTS under Article 12(3)(b) of the DTAA. According to Mr. Vohra, since all that SFDC Ireland was providing was access to a software on a standardized basis as opposed to providing a customized solution, the remittances received by it would not fall within the scope of FTS. 12. It was further submitted that the access to the software portal was without any human intervention and consequently the same would not qualify under Article 12(3)(b) of the DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. [2001] 251 ITR 53 (Mad) were those made by a subscriber to the cellular mobile telephone facility provider and not by one cellular network provider to another. For this purpose, we must examine the appeals at hand de hors the decision of the Madras High 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. 20. It is independently provided by the use of technology and that too, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including this Court in Bharti Cellular Ltd. [CIT v. Bharti Cellular Ltd., (2014) 6 SCC 401 : (2011) 330 ITR 239] However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made." 15. Appearing for the respondents, Mr. Chawla took a preliminary objection to the maintainability of the writ petition and submitted that against the certification as granted, the petitioner has statutory alternative remedies including by way of invocation of the revisionary power that stands incorporated in Section 264 of the Act. In view of the aforesaid, Mr. Chawla, contended that the writ petition should be dismissed on this ground alone. 16. It was further submitted that the certification which is granted under Section 197 of the Act is based on the formation of a tentative opinion alone and thus merits no interference by this Court in exercise of its extraordinary writ jurisdiction. It was in this connection further urged that the rights of the assessee are in any case fully safegua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt to directing the petitioner to file an "appeal from Caesar to Caesar". 20. The Karnataka High Court in CIT v. Smt. Annapoornama Chandrashekar (supra), while discussing the scope of revisional jurisdiction of the Commissioner of Income-tax with respect to an order passed after approval of the Commissioner of Income-tax under section 158BC read with section 158BG, held as under (page 37 of 2 ITR-OL) : "It was contended that it is an administrative order. Even the order of assessment is an administrative order and, therefore, the previous approval to make such an order valid cannot be other than an administrative approval. But the question is, once an approval is accorded by the Commissioner can he sit in judgment over such an order and find fault with such order on the ground that it is erroneous and is prejudicial to the interests of the Revenue. The question arises is to make the said order, previous approval of the Commissioner is a condition precedent, was the Commissioner not expected to look into the draft block assessment order placed before him for approval to find out whether the said order is lawful and whether the said order is prejudicial to the interests of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is previously taken, the assessment order would have no value at all. Therefore, when previous approval is a condition precedent and 'approval' means to 'agree', i.e., to concur to give mutual assent, to come into harmony, it is possible only after application of mind by the authority according approval.. .. Therefore, this power conferred on the Commissioner is in the nature of supervisory power. If he finds that the order passed by the Assessing Officer is erroneous and also prejudicial to the interests of the Revenue, after examining the record of any proceedings under the Act to rectify such error and to protect the interests of the Revenue he can exercise the said power because the Commissioner becomes aware of such erroneous orders prejudicial to the Revenue after looking into the record. But if he has looked into the record, applied his mind and agreed with the order of the assessing authority, this power of revision under section 263 is not available to him after according approval to such order." (emphasis supplied) 21. The Bombay High Court in Tata Teleservices (Maharashtra) Ltd. v. Dy CIT (TDS) [2018] 402 ITR 384 (Bom) (Writ Petition No. 2701 of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated. While the view that the authority may take at the stage of consideration of a Section 197 application is undoubtedly provisional, the same does not detract from the obligation of the AO to at least examine and undertake a prima facie evaluation of whether the income is chargeable to tax at all. 14. We note that the scheme underlying Section 195 of the Act and which requires the issue of chargeability of tax being examined was succinctly explained by the Supreme Court in Engineering Analysis in the following terms:- "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 the DTAA. Importantly, such deduction is only to be made if the non-resident is liable to pay tax und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment, stating that the charging and machinery provisions contained in Sections 9 and 195 of the Income Tax Act are interlinked. 67. This conclusion is also echoed in Vodafone International Holdings BV v. Union of India [Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 3 SCC (Civ) 867], wherein the following observations were made on the scope and applicability of Section 195 of the Income Tax Act : (SCC pp. 690-91, paras 171-73) "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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8]; (v) & (vi) [***] (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 proviso to the sub-rule (4) shall be valid with regard to the person who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. (vii) Income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: 'Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seller 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. xxxxx xxxxx xxxxx Section 1 - Definitions For purposes of this Agreement, the following terms shall have the meanings and definitions set forth below: xxxxx xxxxx xxxxx 1.3 "Confidential Information" shall mean and include all information that either Party makes available to the other Party relating to this Agreement, in any format, including information that relates to (a) the design, development, commercialization, and maintenance of the SFDC Products, or (b) the business, plans, products, services, finances, technology, or affairs of either of the Parties. All information disclosed or revealed by either of the Parties orally, electronically, in writing, or in other tangible form, shall be deemed to be Confidential Information if (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby appoints Reseller as its non-exclusive reseller of the SFDC Products in the Territory, and Reseller hereby accepts such appointment. Further, Reseller shall have the right to appoint one or more Additional Resellers within the Territory, and to enter into Partner Contracts with partners in the Territory. Nothing in this Agreement shall be construed to limit Vendor's right to appoint one or more Additional Resellers within the Territory. 2.2 Relationship between the Parties. The relationship of Vendor and Reseller established by this Agreement is of seller and buyer. The transactions between Vendor and Reseller will be undertaken on principal-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 beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintain an arm's length price reflecting changes in economic conditions, Reseller's business operations and practices, and the ongoing development of Reseller's business. From time to time, the Parties will execute a written memorialization to document the updated Exhibit A. 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. 5.4 Adjustments. In the event of a proposed adjustment to the amounts payable hereunder by any government authority, the Parties will take all reasonable efforts to avoid double taxation, as they may agree upon, including the payment of the amount of such adjustment plus applicable interest at the arm's length rate. 5.5 Withholding tax. If and to the extent that Reseller is required under applicable law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept as specified in this Agreement, Reseller shall acquire no rights whatsoever in, or to, any Intellectual Property Rights. Without limiting the foregoing, except as expressly provided herein, this Agreement does not constitute a license, sale, or any other transfer of the Intellectual Property Rights. Reseller shall not take any action that may adversely affect or impair Vendor's right, title, or interest in or to the Intellectual Property Rights. 6.2 Notices, Marks, Legends, and Name. Reseller may use the Marks solely in connection with its marketing and distribution of the SFDC Products in the Territory. Such use shall be strictly in accordance with the trademark guidelines communicated by Vendor to Reseller from time to time. Reseller shall not market or resell the SFDC Products under any name, sign, or logo other than the Marks. Any and all goodwill generated from the use of the Marks by Reseller hereunder shall inure to the benefit of the legal owner of the Marks, and Reseller shall acquire no rights whatsoever to the Marks. Reseller shall not alter, remove, cover, or add to, in any manner whatsoever, any patent notice, copyright notice, brand name, or legend that Vendor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts 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 option expenses, non-recoverable goods and services taxes ("GST"), third party costs incurred by Reseller in its operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it has the facilities, personnel and expertise to serve effectively as a reseller of the SFDC Products within the Territory. C. Vendor wishes to make available to Reseller certain SFDC Products for Reseller's Internal Use in order to enable the Reseller to perform its sales and marketing obligations vis-à-vis Vendor under the Agreement. The Parties now agree as follows: Section 1 - Definitions 1.1 "Documentation" means the applicable Service's Trust and Compliance documentation, and its usage guides and policies, as updated from time to time, accessible viahelp.salesforce.com or login to the applicable Service. 1.2 "SFDC Products" shall mean and include individually and/or collectively, as the context requires, customer relationship management ("CRM") offerings, applications, and platforms including sales, service, marketing, commerce, integration, analytics, and related products and services procured by 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. 1.3 "SFDC Products for Reseller's Internal Use" shall mean and include individually and/or coll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the laws of the State of California, U.S.A., excluding rules governing conflicts of laws. Section 4 - General Provisions 4.1 No Waiver. The failure of either Party to assert any of its rights under this RIUA shall not be deemed to constitute a waiver of that Party's right thereafter to enforce each and every provision of this RIUA in accordance with its terms. 4.2 Subject Headings. The subject headings of this RIUA are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 4.3 Severability. In the event that any provision hereof is found invalid or unenforceable pursuant to a final judicial decree or decision, the remainder of this RIUA will remain valid and enforceable according to its terms. In the event of such partial invalidity, the Parties shall seek in good faith to agree on replacing any such legally invalid provision with a provision which, in effect, will most nearly and fairly approach the effect of the invalid provision. 4.4 Language of the Contract; Counterparts. The Parties agree that the English language shall be the language of interpretation of this RIUA. This RIUA may be executed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce hence loyalty which in turn creates a good impact on sales. Demo : https://www.youtube.com/watch?v=tRhzdHSMgLI * Marketing Cloud : Salesforce Marketing Cloud is the name of Salesforce's platform for multi-channel customer engagement, digital marketing, marketing automation, analytics, and personalization. The platform is a set of software as a service (SaaS) products with different types of functionality and additional add-on features offered from salesforce. Demo : https://www.youtube.com/watch?v=tWPsPEWdRlM * Commerce Cloud : Salesforce Commerce cloud is an ecommerce solution for B2C (business to consumer) and B2B (business to business) customers. That means that organizations purchase Commerce Cloud to provide the best ecommerce websites to their customers who are shopping online-whether they are consumers buying the latest fashion or businesses making a large wholesale purchase. Demo : https://www.youtube.com/watch?v=mXAMMeo70ZE * Data Cloud : Salesforce's Data Cloud Organize and unify data across Salesforce and other external data sources. After data has been ingested into Data Cloud, it can be used to drive personalization and engagement through the creation of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following passages from that decision: - "12. The aforesaid Explanation makes it clear that "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any "managerial, technical or consultancy services" but does not include consideration for any construction, assembly, mining or like products in the country by the recipients or consideration which would be income of the recipients chargeable under the head "Salaries". The said definition is in two parts. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his would mean that the word "technical" would take colour from the words "managerial" and "consultancy", between which it is sandwiched. The word "managerial" has been defined in the Shorter Oxford English Dictionary, Fifth Edition as: "of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc." 16. The word "manager" has been defined, inter alia, as : "a person whose office it is to manage an organization, business establishment, or public institution, or part of one ; a 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. "Consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take colour from the expressions "managerial services" and "consultancy services" 30. The aforenoted view was upheld by the Supreme Court in Bharti Cellular when it observed: "4. The question basically involved in the lead case is: whether TDS was deductible by M/s Bharti Cellular Ltd. when it paid interconnect charges/access/port charges to BSNL? For that purpose, we are required to examine the meaning of the words "fees for technical services" under Section 194-J read with clause (b) of the Explanation to Section 194-J of the Income Tax Act, 1961 ("the Act", for short) which, inter 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." 31. However, while noticing the march of technology since that decision had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would, therefore, stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialised, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 to Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. 9. There is yet another aspect of the matter whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries 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 the assessee, including the three agents in India, used the Maersk Net System. This system is a facility which enables the agents to access several information like tracking of cargo of a customer, transportation schedule, customer information, documentation system and several other informations. For the sake of convenience of all these agents, a centralised system is maintained so that agents are not required to have the same system at their places to avoid unnecessary cost. The system comprises of booking and communication software, hardware and a data communications network. The system is, thus, integral part of the international shipping business of the assessee and runs on a combination of mainframe and non-mainframe servers located in Denmark. The expenditure which is incurred for running this business is shared by all the agents. In this manner, the systems enable the agents to coordinate cargos and ports of call for its fleet. 9. Aforesaid are the findings of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided 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 services", the Supreme Court in Kotak Securities had observed that it must be a service which is provided to cater to the special needs of the client. A self-automatized analytical or predictive software or platform which caters to the requirement of multifarious clients as opposed to one created with special attributes or characteristics tailored to the need of a particular client was stated to fall outside the ken of technical services. It was in the above context pertinently observed that a distinction must be acknowledged to exist between a "service provided" and a "facility offered". 35. This would be an appropriate juncture to briefly notice some of the additional material which was placed for our consideration by Mr. Chawla, learned counsel for the respondent, who with his characteristic erudition had additionally highlighted some of the issues which were noticed in the MLI, the aspects relating to Base Erosion Profit Sharing as well as some instructive pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices, 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 State. 21. As a matter of broader economic policy, those members that opposed the inclusion of Article 12A were concerned that, as a result of the Article, consumers of technical services in the source State may encounter higher prices for those services, because foreign service providers could pass added tax costs on to the consumer through means such as so-called "gross-up" clauses in contracts. Typically, a gross-up clause will specify a net amount that the provider will receive, effectively passing the burden of any withholding tax on to the consumer of the services. The use of gross-up clauses could result in the tax being shifted to the consumer and make it more expensive to purchase the services. This can put a foreign service provider at a competitive disadvantage, effectively foreclosing access to a market that imposes such a withholding tax and restricting the consumer's legitimate choice of suppliers. 22. These members were als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services provided outside that State by closely related persons, other than payments expressly excluded under paragraphs 3(a), (b), and (c). Under this alternative provision, paragraphs 1, 2, 4, and 7 of Article 12A would remain unchanged except that the term "fees for technical services" in those paragraphs would be replaced by the term "fees for services." However, paragraphs 3, 5 and 6 would be replaced by the following paragraphs: 3. The term "fees for services" as used in this Article means any payment in consideration for any service, unless the payment is made: (a) to an employee of the person making the payment; (b) for teaching in an educational institution or for teaching by an educational institution; or (c) by an individual for services for the personal use of an individual. 5. For the purposes of this Article, fees for services shall be deemed to arise in a Contracting State if: (a) the services are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services are not included in the definition and are not dealt with in Article 12A. 62. Article 12A applies only to fees for technical services, and not to all payments for services. Paragraph 3 defines "fees for technical services" as payments for managerial, technical or consultancy services. Given the ordinary meanings of the terms "managerial," "technical" and "consultancy," the fundamental concept underlying the definition of fees for technical services is that the services must involve the application by the service provider of specialized knowledge, skill or expertise on behalf of a client or the transfer of knowledge, skill or expertise to the client, other than a transfer of information covered by the definition of "royalties" in Article 12, paragraph 3. Services of a routine nature that do not involve the application of such specialized knowledge, skill or expertise are not withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficult 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 Convention, which reproduces paragraphs 11.2-11.6 of the Commentary on Article 12 of the OECD Model Convention. xxxx xxxx xxxx 90. Example 3: R Company is a resident of State R. R Company's business is the collection, organization and maintenance of various databases. R Company sells access to these databases to its clients. One of R Company's clients is Company S, a resident of State S. State R and State S have entered into a tax treaty that contains a provision identical to Article 12A of the United Nations Model Convention. The payments that R Company receives from S Company for access to its databases would not be fees for technical services within the meaning of paragraph 3. Although R Company used its knowledge, skill and expertise in creating the database, the services that R Company provides to S Company-access to the database-are routine services that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 41. 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 which is spoken of in Section 4.3 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powered 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. 45. In any case the respondent has failed to allude to any material which would have lent credence to its conclusion that SFDC Ireland was not selling a "standard off the shelf/non customized/electronically downloadable software". The respondent fails to found this conclusion on any stipulation of the contract or any other material that was gathered in the course of evaluation of the application of SFDC Ireland. The impugned order also fails to advert to any material to indicate that the supply of SFDC Products departed from a standard scope of services. Even before us, the respondents failed to allude to any material which may have even remotely established that the platform or for that matter the softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 of products, if any, are aspects which do not appear to have been exa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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