Income Tax Act| Existence Of Exclusive, Unique & Tailored Service Of Technical Character Essential To Characterize Receipts As FTS: Delhi HC

The Delhi High Court has observed that in order for receipts to be characterized as fees for technical services (FTS), there must be an existence of an exclusive and special service of a technical character which was provided to the recipient, which must be unique and tailored to the requirements of the recipient.

In that context, the Bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav observed that, "In order for receipts of SFDC Ireland being characterized as FTS, one would have to discern and find the existence of an exclusive and special service of a technical character which was provided to the recipient. Not only would that service have to be unique and tailored to the requirements of the seeker, it must also be technical. Unless one finds the transfer of technological knowledge which is exclusive and specialised to the need of the recipient, it would clearly not fall withinthe scope of technical service."

Senior Counsel Ajay Vohra, along with others, appeared for the petitioner, while Senior SC Aseem Chawla, along with others, appeared for the respondents.

In this writ petition, the petitioner challenged a certificate and order issued by the second respondent under Section 197 of the Income Tax Act, 1961. The petitioner, SFDC Ireland Limited, sought a Nil/lower rate withholding tax certificate for payments received from salesforce.com India Private Limited. These payments were made pursuant to a Reseller Agreement between the petitioner and SFDC India.

The second respondent denied the withholding tax certificate, stating that the payments constituted fees for technical services (FTS) under Section 9(1)(vii) of the Act and Article 12 of the India-Ireland Double Taxation Avoidance Agreement. The petitioner argued that it did not have a Permanent Establishment in India and therefore should not be subject to taxation on these payments.

SFDC Ireland provided standardized software products to SFDC India for onward resale, enabling businesses to manage customer relationships and data. The petitioner contended that these products did not qualify as FTS since they did not involve customization or human intervention.

The Court observed that, "FTS under the DTAA is defined to mean consideration received for the rendering of managerial, technical or consultancy services. The payment which the party of the Contracting State receives in order to fall within the ambit of FTS must constitute consideration for technical services."

Placing reliance on the case of CIT vs. Bharti Cellular, the Court emphasized how the word technical stood sandwiched between managerial and consultancy, and held that the rendering of services would have to necessarily include a human element. 

Subsequently, it was observed that, "The technical assistance and training imparted to SFDC India staff appears to be aimed at enabling them to understand the variousattributes 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 the Reseller Agreement does not appear to bear the characteristics of a conferral of specialised or exclusive technical service. In any case, the training and assistance proffered by SFDC was a concomitant to the sale of its principal products in the territory and fundamentally aimed at readying SFDC India to undertake the marketing of those products. The technical assistance and training did not constitute either the core or the foundational basis of the consideration which was received by SFDC Ireland."

Holding that the respondents failed to establish an indelible link between the payment received by SFDC Ireland and the same constituting "consideration" for providing technical services, the impugned order was quashed.

Appearances:

Petitioner: Senior Counsel Ajay Vohra, Counsels Aniket D Agrawal, Samarth Chaudhari

Respondents: Senior SC Aseem Chawla, Counsels Pratishtha Chaudhary, Aditya Gupta

Cause Title: SFDC Ireland Ltd. vs Commissioner of Income Tax & Anr.

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