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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 ..... 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 been allowed. 4. Thus, the controversy to be addressed is whether the impugned order and the impugned certificate are liable to interfered with in the present proceedings on account of respondent no. 2 (hereafter the AO) rejecting the petitioner's request for allowing SFDC India to make payments at Nil rate of withholding tax. FACTUAL MATRIX 5. The petitioner is a tax resident of the Republic of Ireland within the meaning of Article 4 of the Double Taxation Avoidance Agreement (DTAA) between Ireland and India. The petitioner states that it is engaged in the business of operating Customer Relationship Management (CRM) offerings, applications, and platforms, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 197 of the Act requesting the AO to issue the certificate authorizing the petitioner to receive payments from SFDC India without any withholding tax (TDS). In its application, the petitioner referred to the decision of this court in petitioner's own case for the prior year, AY 2024-25, rendered on 11.03.2024, captioned SFDC Ireland Limited v. Commissioner of Income Tax & Another Neutral Citation No.: 2024:DHC:1910-DB. Pursuant to the said decision, the AO had allowed the petitioner's application under Section 197 of the Act for receiving payments from SFDC India in FY 2023-24 with nil TDS. The petitioner sought a similar certificate for AY 2025-26 as well. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain 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 without suitable enquiry which is not considered desirable from the point of view of revenue" RIVAL CONTENTIONS 17. Mr Ajay Vohra, learned counsel appearing for the petitioner submitted that respondent no. 2 had failed to appreciate that the SDFC Products provided by the petitioner were standardized and non-customized and akin to off the shelf products. He submitted that SFDC India is a non-exclusive reseller for procuring the SFDC Products from the petitioner and selling the same. He stated that an Indian customer interested in availing the SFDC Products enters into a contract with SDFC India. He further submitted that the SFDC Products can be availed on the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner 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 withholding tax at 2% translates to approximately 5% of the income on gross receipts which was very reasonable and therefore, did not warrant any interference by this court. REASONS AND CONCLUSION 24. Section 197 (1) of the Act enables an assessee to make application for a certificate requiring the deduction of tax at lower rate or no deduction at all, if the Assessing Officer is satisfied that the total income of the recipient justifies such nil deduction or deduction at a lower rate. It is, thus, incumbent upon the Assessing Officer to consider whether in the given facts, a lower rate or nil rate of withholding tax is justifiable. It is well settled law that at thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made an application for issue of such certificate. (6) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall lay down procedures, formats and standards for issuance of certificates under sub-rule (4) and proviso thereto and the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the issuance of said certificate." 26. It is clear from the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195 (1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act dehors the machinery sections. The Act is to be read as an integrated code. 17. Section 195 appears in Chapter XVII whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax. 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 Department that Section 195 (2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO (TDS) of payments made to non-residents. In other words, according to the Department Section 195 (2) is a provision by which the payer is required to inform the Department of the remittances he makes to the non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. 20. We find no merit in these contentions. As stated hereinabove, Section 195 (1) uses the expression "sum chargeable under the provisions of the Act". We need to give weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 under the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under Section 195 (1) of the Income Tax Act, or such person has, after applying Section 195 (2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in Section 201 of the Income Tax Act, follow, by virtue of which the resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 non-resident, the fact that the payment was made, under the instructions of the non-resident, to its agent/nominee in India or its PE/Branch Office will not absolve the payer of his liability under Section 195 to deduct TAS. Section 195 (1) casts a duty upon the payer of any income specified therein to a non-resident to deduct therefrom TAS unless such payer is himself liable to pay income tax thereon as an agent of the payee. Section 201 says that if such person fails to so deduct TAS he shall be deemed to be an assessee-in-default in respect of the deductible amount of tax (Section 201). 173. Liability to deduct tax is different from "assessment" under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resented 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 and include Reseller's contracts with its customers for the SFDC Products. xxxx xxxx xxxx 1.9 "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 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontractual 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 Vendor has imposed on Reseller under this Agreement for the purpose of protecting Vendor's Confidential Information and Intellectual Property Rights. Section 3 - Obligations of Reseller xxxx xxxx xxxx 3.3 Personnel and Facilities. Reseller shall occupy and maintain facilities adequate to market and resell the SFDC Products in the Territory and to provide after sale support services to its customers in the Territory. Reseller shall retain and have at its disposal at all times an adequate staff of trained and qualified personnel to perform its obligations under this Agreement. 3.4 Representations and Warranties. Reseller shall not make representations or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eseller 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, suits, actions, demands, proceedings, losses, damages, liabilities, costs, and expenses, including, without limitation, interest and reasonable attorneys' fees, arising out of, relating to, or resulting from a claim that Reseller's use, marketing, or sale of any SFDC Product in the Territory infringes the patent, copyright, trademark, trade secret, or other proprietary right of any other Person and shall pay any costs and damages finally awarded against Reseller in any such action which are attributable to any such claim. Vendor's indemnification obligation is subject to the conditions that (a) Reseller notifies Vendor of any such claim, and (b) Vendor (or its de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded 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 the SFDC Business in the Territory, compensation or reimbursements paid to an Affiliate, and any other costs agreed to by the Parties; but excluding interest, penalties, income taxes, goodwill, one-time charges, other non-operating expenses, and any costs incurred by Reseller for which it is compensated or reimbursed by an Affiliate. For the avoidance of doubt, Costs shall not include the Purchase Price set forth herein. 7. GST. The payments payable hereunder by Reseller is exclusive of any GST, which shall be invoiced as applicable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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. xxxx xxxx xxxx 47. More fundamentally, the allusion to "non-standardized software" and "comprehensive service experiences" would have been pertinent provided those were applicable to the position in which SFDC India stood placed under the Reseller Agreement. The said entity was merely designated as the Reseller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 examined. The present, in that sense, is unlike cases where an agency may have been designated to merely market, sale and distribute a prepackaged software product or application and remit the cost thereof. Whether the remittance of 2.75% of the Reseller's Indian Territory Revenue would include supply of customized technical services is an aspect which does not appear to have either fallen for notice or consideration of the respondent. 50. Accordingly, and for the aforesaid reasons, we allow the instant writ petition and quash the order dated October 16, 2023 as well as the certification dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue 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 aforesaid, the profits of the enterprise may also be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ploration 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 or activity last more than six months. 4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carryon business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used for or to be used in, the prospecting for, or extraction or exploitation of mineral oils in that State. 5. Notwithstanding the previous provisions of this Article, the term "permanent establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 almost wholly for the enterprise and the conditions made or imposed between them in their commercial and financial relations differ from those which would have been made or imposed if this had not been the case, that agent shall not be considered to be an agent of an independent status for the purpose of this paragraph. 9. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the text Klaus Vogel on Double Taxation Conventions [Pg. 357, Volume 1, Fifth Edition Edited by Ekkehart Reimer and Alexander Rust.], in the context of OECD Model Conventions, which sets out the rationale of including a dependent agent in a contracting state as a PE of an enterprise in the other contracting state: "83. [Dependent agents, i.e. persons] Persons whose activities may create a permanent establishment for the enterprise are i.e. persons, whether or not employees of the enterprise, who act on behalf of the enterprise and are not doing so in the course of carrying on a business as an independent agent falling under paragraph 6. Such persons may be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolling 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 of the India- Ireland DTAA. 49. In Formula One World Championship Ltd. v. CIT 2016 SCC Online Del 6144, this court had observed as under: "69. Article 5(5) has certain preconditions if an entity has to be treated as dependent agent. The agent must have the authority to conclude contracts, which bind the represented enterprise, and it must habitually exercise such authority. If these positive preconditions are met, then only an enterprise shall be deemed to have a PE in that State in respect of any activities, which that person undertakes for the enterprise. The contention that because the three entities were subsidiaries of FOWC, they acted on its behalf and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitive 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 involved in providing any inputs for determination of pricing, the same would not render SFDC India as a dependent PE. 56. Mr Aggarwal, learned counsel for the Revenue had sought to sustain the impugned order mainly on the remuneration model and Section 8 of the Reseller Agreement, whereby the petitioner has agreed to indemnify SFDC India. He had submitted that the revenue model in fact takes into account operating cost and all other cost of SFDC India and ensures SFDC India, a fixed revenue of 2.75%. The price at which the SDFC Products are invoiced to SDFC India is based on a revenue model, which ensures a mark-up of 2.75% of the operating cost. It is materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial 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 PE in India. And, the impugned order does not disclose sufficient grounds, which would substantiate this assumption. 61. In view of the above, we set aside the impugned order and direct the AO to issue the certificate under Section 197 (1) of the Act for nil withholding tax, bearing in mind the observations made in this order. 62. We, however, clarify that the observations made in the present order are confined to the question of issuance of a certificate under Section 197 (1) of the Act. This order will not preclude the AO from examining and framing an assessment in accordance with law, uninfluenced by this order. 63. The petition is allowed in the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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