SFDC Ireland Limited v. Commissioner of Income Tax

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. ―Consultant‖ itself has been defined, inter alia, ―as a person who gives professional advice or services in a specialized field‖. It is obvious that the word ―consultant‖ is a derivative of the word ―consult‖ which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ― ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action‖. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.

19. From the above discussion, it is apparent that both the words ―managerial‖ and ―consultancy‖ involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word ―technical‖ as 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 used in the ―society‖ of the words ―managerial‖ and ―consultancy‖. In such a situation, the rule would clearly apply and, therefore, the expression ―technical services‖ would have to take colour from the expressions ―managerial services‖ and ―consultancy services‖

13. The Supreme Court in appeal in Commissioner of Income Tax, Delhi vs. Bharti Cellular Limited12 held:- ―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.‖ ( 2014) 6 SCC 401

14. We also find it apposite to notice the following principles which came to be laid down in Commissioner of Income Tax vs. Kotak Securities13:-

26. In order to evaluate the challenge which stands raised, it would be appropriate to briefly notice the nature of the products that are offered by SFDC Ireland. The assessee has along with its Brief Submissions placed an overview of its products which is reproduced below: -  ―Sales Cloud: Salesforce Sales Cloud is a cloud-based customer relationship management (CRM) platform that helps businesses manage their sales processes, customer data, and interactions. It's designed to support sales, marketing, and customer support in both business-to-business (B2B) and business-to-customer (B2C) contexts. Demo: https://www.youtube.com/watch?v=2ZkjhgBNI-Y  Service Cloud: Salesforce Service Cloud is focused on providing support and help to the customers. This helps in retaining the customers, increasing their satisfaction and loyalty. Its uniqueness lies in providing faster service compared to traditional methods, giving individual attention to each customer's needs and taking a proactive approach to customer issues. That ultimately enhances the customer‘s experience 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 audience segments. Additionally, through identity resolution one can achieve a single, actionable view of the customer. Demo: https://www.youtube.com/watch?v=dhkuzFbrIG[8]  Tableau: Tableau helps to democratize and automate data analytics with innovative, no-code, AI-powered solutions like machine learning (ML), natural language processing (NLP), smart data preparation, and more. With a proprietary query language (VizQL) at the heart of its functionality, Tableau effortlessly renders visuals of data sets with a simple drag-and-drop action. Demo: https://www.youtube.com/watch?v=YfE9jBq002‖

27. As is manifest from the above, SFDC Ireland provides a cloudbased customer management platform which enables its customers to track sales, collate customer data, enabling its users to track customer requests, digital marketing, marketing automation, creation of ecommerce platforms and a host of other functions. The cloud-based software driven platform appears to be an automated managerial software as well as an analytical and predictive tool with marketing and customer engagement constituting some of its primary attributes. It must at the outset be noted that undisputedly, the Reseller has not transferred any Intellectual Property Rights as is evident from Section 6 of the Reseller Agreement.

28. Section 2 of the Reseller Agreement defines the relationship between the petitioner and the Reseller as being on a principal-toprincipal basis and that of a buyer and seller. The right of sale of SFDC Products as conferred upon the Reseller is on a non-exclusive basis. The Reseller is also not vested with any right to bind SFDC Ireland by its actions. SFDC Products are defined to mean customer relationship offerings, applications and platforms. These products, since they are cloud based, are accessed over the internet by end customers.

29. 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. In CIT vs. Bharti Cellular, the Court upon noticing how the word technical stood sandwiched between managerial and consultancy had held that the rendering of services would have to necessarily include a human element. We deem it apposite to extract the 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 Ltd. [2001] 251 ITR 53 (Mad), a learned single judge of the Madras High Court noted that installation and operation of sophisticated equipment with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. It was also held that technical service referred to in Explanation 2 to section 9(1)(vii) contemplated the rendering of a ―service‖ to the payer of the fee and that mere collection of a ―fee‖ for use of a standard facility provided to all those willing to pay for it did not amount to the fee having been received for technical services. We find ourselves to be in agreement with the views expressed by the learned single judge of the Madras High Court in Skycell Communications Ltd. [2001] 251 ITR 53. However, we still have to deal with the submissions made by the learned counsel for the appellants/Revenue that the payments that were considered in the case of Skycell Communications Ltd. [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 in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.‖

15. This 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. ―Consultant‖ itself has been defined, inter alia, ―as a person who gives professional advice or services in a specialized field‖. It is obvious that the word ―consultant‖ is a derivative of the word ―consult‖ which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ― ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action‖. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.

19. From the above discussion, it is apparent that both the words ―managerial‖ and ―consultancy‖ involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word ―technical‖ as 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 used in the ―society‖ of the words ―managerial‖ and ―consultancy‖. In such a situation, the rule would clearly apply and, therefore, the expression ―technical services‖ would have to 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 been pronounced and science and technology today tending to blur or obviate the requirement of human intervention, the Supreme Court in Kotak Securities pertinently observed as follows: - “6. What meaning should be ascribed to the words ―technical services‖ appearing in Explanation 2 to clause (vii) to Section 9(1) of the Act is the moot question. In CIT v. Bharti Cellular ITR 239] this Court has observed as follows: (SCC p. 402, para 5) ―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‖.‖

7. Managerial and consultancy services‖ and, therefore, necessarily ―technical services‖, would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular 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.‖

32. Proceeding to explain the meaning liable to be attributed to the expression technical services, the Court in Kotak Securities held: ―8. A reading of the very elaborate order of the assessing officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided for by the Stock Exchange. All such services, fully automated, are available to all members of the Stock Exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. ―Technical services‖ like ―managerial 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 which, in our considered view, would require a specific notice. The service made available by the Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which the charges in question had been paid by the appellant assessee are common services that every member of the Stock Exchange is necessarily required to avail of to carry out trading in securities in the Stock Exchange. The view taken by the High Court that a member of the Stock Exchange has an option of trading through an alternative mode is not correct. A member who wants to conduct his daily business in the Stock Exchange has no option but to avail of such services. Each and every transaction by a member involves the use of the services provided by the Stock Exchange for which a member is compulsorily required to pay an additional charge (based on the transaction value) over and above the charges for the membership in the Stock Exchange. The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to ―technical services‖ provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression ―technical services‖ as appearing in Explanation 2 to Section 9(1)(vii) of the Act.‖

33. Reiterating the aforesaid principles, the Supreme Court in Director of Income Tax (IT)-I vs. A.P. Moller Maersk A S18 observed: - ―8. The facts which emerge on record are that the assessee is having its IT system, which is called the Maersk Net. As the assessee is in the business of shipping, chartering and related business, it has appointed agents in various countries 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 facts. It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is reemphasised that neither AO nor CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro rata division thereof among the agents for reimbursement. Not only that, the assessee has even submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm's length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.

10. Pertinently, the Revenue itself has given the benefit of Indo- Danish DTAA to the assessee by accepting that under Article 9 thereof, freight income generated by the assessee in these assessment years is not chargeable to tax as it arises from the operation of ships in international waters. Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents. In such a situation, ―profit‖ from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in CIT v. Kotak Securities Ltd. [CIT v. Kotak Securities Ltd., (2016) 11 SCC 424: (2016) 383 ITR 1] has categorically held that use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided 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 passages which find place in the UN Handbook. While the MLI does not shed any additional light on the question which stands posited, the UN Handbook while noticing Article 12A of the Model Convention has some instructive passages which are worthy of notice.

36. It is pertinent to note that within the United Nations Committee of Experts itself there appeared to be a divergence of opinion in respect of how the FTS issue was to be tackled. While some members were of the view that FTS must be tied to the service provider having a sufficient nexus to the payer‘s State, another group was concerned with the ambiguity surrounding the term ―technical service‖ and even advocating the adoption of the ―fee for services‖ language. However, and insofar as the India-Ireland DTAA is concerned, it has chosen to adhere to the managerial, technical and consultative services model as opposed to the word services being used generally or for that matter services being specifically enumerated. This is evident from the following extracts of the UN Handbook: - ―17. In the view of these members of the Committee, as a policy matter, taxation of fees for technical services is warranted only when the service provider has a sufficient nexus to the payer's State, which typically is in the form of a permanent establishment or fixed base.

18. In other words, to justify taxation of technical services in a State, the services should be provided in that State with the degree of nexus required by Articles 5 (Permanent Establishment), 7 (Business Profits) and 14 (Independent Personal Services).

19. Those members of the Committee that did not agree with the inclusion of Article 12A in bilateral tax treaties were also concerned that the term "technical services" as used in the Article is not adequately defined. These members were therefore concerned that the application of the Article would result in increased uncertainty, inconsistent treatment, and lengthy disputes between taxpayers and tax authorities.

20. In the view of those members of the Committee that did not agree with the inclusion of Article 12A, a further problem with taxation of fees for technical services on a gross basis is that it can lead to double taxation. The imposition of a tax on a gross basis denies the taxpayer the ability to take into account expenses that were incurred in connection with the provision of the services, which woulddeductible 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 also concerned that the inclusion of Article 12A would lead to trade distortions as the taxation of goods and services would operate on a different basis. The reason for this is that the profits of an exporter of goods are taxable only in its State of residence, whereas, under Article 12A, what is in effect an import tarifi would be applied to technical services.

23. In summary, these members did not accept the analysis in paragraphs 2 to 15 above, and regarded any expanded taxing jurisdiction on fees for technical services as an unjustified shift of the balance of taxation from the place where services are provided to the place where services are consumed. Countries sharing these concerns may wish not to include Article 12A in their bilateral tax treaties.

24. Alternatively, countries, which wish to obtain additional taxing rights on fees for technical services, but are concerned with the broad scope of article 12A, may consider agreeing to amend article 12 (royalties) to permit taxation of certain "fees for included services," an approach that is found in a number of bilateral tax treaties between developing and developed countries. The underlying policy rationalefor this narrower approach is that, in order to justify taxation by the State from which the payment is made even in cases where the services are not performed in that State, fees for services must be directly related to the enjoyment of property for which a royalty as otherwise defined in Article 12 is paid. Wording for this narrower alternative approach is set forth in paragraphs 25 and 26 of the Commentary on Article 12.

25. However, a majority of the members of the Committee of Experts was of the view that the alternative referred to in paragraph 24 is not an acceptable alternative to Article 12A for developing countries because, in essence, those members considered that there is no principled justification for restricting the taxation of fees for technical services to services directly related to property producing royalties. Moreover, those members took the view that the alternative supported by a minority of the members of the Committee contains many vague terms of uncertain meaning, which may lead to frequent disputes about the interpretation of that provision.

26. Instead, countries concerned about the scope of Article 12A and the uncertainty associated with the definition of "fees 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 considerationfor 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 performed in that State; or (b) the payer is a resident of that State and the fees are paid to a closely related enterprise or person unless the payer carries on business in the other Contracting State or a third State through a permanent establishment situated in that State, or performs independent personal services through a fixed base situated in the other Contracting State or a third State and such fees are borne by that permanent establishment or fixed base; or

(c) the payer has in that State a permanent establishment or a fixed base in connection with which the obligation to pay the fees for services was incurred, and such fees are borne by such permanent establishment or fixed base, and are paid to a closely related enterprise or person. For the purposes of this Article, a person is closely related to an enterprise if, based on all the relevant facts and circum-stances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company's shares or of the beneficial equity interest in the com-pany) or if another person possesses directly or indirectly more than 50 per cent of the beneficial interest (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company's shares or of the beneficial equity interest in the company) in the person and the enterprise. For the purposes of this Article, an individual shall be a closely related person with respect to another individual if the individual is related to that other individual by blood relationship, marriage or adoption.‖

37. Equally instructive is the following discussion on the subject of FTS:- ―60. The paragraph lays down nothing about the mode of taxation in the State in which fees for technical services arise. Therefore, it leaves that State free to apply its own laws and, in particular, to levy the tax either by deduction at source or individual assessment. As with other provisions of the United Nations Model Convention, procedural questions are not dealt with in the Article. Each State is able to apply the procedure provided in domestic law.

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 technicalservices" as payments for managerial, technical or consultancy ser-vices. Given the ordinary meanings of the terms "managerial," "tech-nical" 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 within the scope of Article 12A.

63. The ordinary meaning of the term "management" involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. Thus, if the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers or employees of the enterprise, payments made by the enterprise for those management services would be fees for technical services within the meaning of paragraph 3. Similarly, payments made to a consultant for advice related to the management of an enterprise (or of the business of an enterprise) would be fees for technical services.

64. The ordinary meaning of the term "technical" involves the application of specialized knowledge, skill or expertise with respect to a particular art, science, profession or occupation. Therefore, fees received for services provided by regulated professions such as law, accounting, architecture, medicine, engineering and dentistry would be fees for technical services within the meaning of paragraph 3. Thus, if an individual receives payments for professional services referred to in Article 14, paragraph 2 from a resident of a Contracting State, those payments would be fees for technical services. If the payments arise in that Contracting State because they are made by a resident of that State or borne by a permanent establishment or fixed base in that State, the payments would be subject to tax by that State in accordance with paragraph 2 irrespective of the fact that the services are not performed in that State through a fixed base in that State.

85. It is often necessary to distinguish between fees for services, including fees for technical services, and royalties in order to determine whether Article 12 or another Article of the Convention (Article 12A in the case of "fees for technical services") is applicable. The distinction between fees for services and royalties is clear in principle. Under Article 12, paragraph 3, royalties are payments for the use, or the right to use, certain types of property or information concerning industrial, commercial or scientific experience (so-called know-how).In contrast, the performance of services does not involve any transfer of the use of, or the right to use, property. However, in practice it is often difficult 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.

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 Companyaccess to the database - are routine services that do not involve the application of R Company's knowledge, skill and expertise for the benefit of S Company, Accordingly, Article 12A would not apply to the payments.

91. If, however, S Company entered into a contract with R Company under which R Company created a specialized database customizedfor S Company's use from information supplied by S Company or collected by R Company, the payments by S Company to R Company would be "fees for technical services" under paragraph 3. In this situ-ation, R Company would be applying its knowledge, skill and expertise for the benefit of S Company. As a result, the payments would be taxable by State S in accordance with paragraph 2. It would not matter whether R Company performed all or any part of the services of creating the database in State S.‖

38. As is manifest from the above, the Committee of Experts understood the word ―technical‖ to entail the application of specialised knowledge, skill or art to a particular art, science, skill or expertise. Equally instructive in this context is the exemplar discussed in paras 90 and 91 and which reemphasized the existence of specialised rendering and solution providing as being key elements to answering the question of FTS. However, and insofar as we are concerned, the issue of technical service has to be examined on the anvil of not only a specially crafted and individualised rendition but additionally upon it being found that services of a technical character were provided. The Reseller Agreement may now be tested on the aforenoted precepts.

39. 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 within the scope of technical service. While in today‘s age it may not be appropriate to understand the word technical to be confined to industrial or applied sciences or for that matter the use of an instrument or facility, the test of exclusivity, individualization and specially crafted solutions would continue to govern.

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 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 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.

42. Insofar as the products for SFDC India‘s internal use were concerned, they stood restricted to those which would enable SFDC India to demonstrate the functionality of SFDC products in trade shows and exhibitions, to train its customers and employees on the use of those products and products to administer and manage customer accounts. None of these aspects would appear to be imbued with a technical hue. Imparting training or educating a person with respect to the functionality and attributes of a software or application would clearly not amount to the rendering of technical service under the DTAA. More importantly, the technical assistance and training which the petitioner proposed to provide was confined to marketing, distribution, support and sale of SFDC products. The assistance and training which Section 4.[3] of the Reseller Agreement speaks of was concerned with fields wholly unrelated to providing technical service.

43. Similarly Exhibit B speaks of the products being concerned with assisting the Reseller in the performance of its sales and marketing obligations. All of the above was thus aimed at merely equipping and educating the representatives of SFDC India to be in a position to comprehensively brief potential customers. The training and assistance was thus primarily aimed at the sale of SFDC products and customer related issues. This does not appear to comprise a transmission of specialised knowledge or skill. This more so when we bear in mind the indubitable fact that the phrase ―technical service‖ is to be read in conjunction with ―managerial‖ and ―consultation‖ and it being the settled position in law that the principle of noscitur a sociis is to apply.

44. With advancements in computing capabilities and the range of software applications that stretch the boundaries of analytics and predictive abilities each day, business enterprises are empowered 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 software was being customized or specially designed for a consumer and which constituted the basis of the consideration received.

46. The respondent holds against the petitioner additionally on the ground that it was providing “comprehensive services experience or solutions with the help of technology embedded in the software”. Even if that were to be accepted as a correct appreciation of the SFDC bouquet of products, it would remain a facet or attribute of the software application available to any customer. This would again fall within the standard scope of service as opposed to an individualization of the application. In any case, a service experience or solution cannot possibly be countenanced as the correct test for the purposes of answering the issue of technical services.

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 with rights as specified in that agreement. It was merely tasked with the marketing, sale and distribution of SFDC Products as also the onboarding of potential customers. It was not the ultimate recipient of those products or of those services. The respondent was thus required to confine the scope of the enquiry to the nature of the service extended by SFDC Ireland to SFDC India as opposed to the potential benefits that could have been derived from the products in question by the end customer.

48. We also bear in mind the indubitable fact that in order to fall within the ambit of FTS, it was incumbent upon the respondents to establish an indelible link between the payment received by SFDC Ireland and the same constituting ―consideration‖ for providing technical services. Presently and on the state of the record as it exists today, the respondents do not appear to have evaluated the claim for withholding tax as raised on the touchstone of whether the remittances made to SFDC Ireland was for customized technical services. The impugned order does not proceed on the basis of any material or evidence which may have indicated that the moneys remitted to the assessee could be said to constitute consideration for technical services. Support, 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 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 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 16 October 2023 as well as the certification dated 18 October 2023. The matter shall in consequence stand remitted to the respondent for considering the application of SFDC Ireland afresh bearing in mind the observations entered hereinabove especially those highlighted in paras 48 and 49.

51. Pending application also stands disposed of.

YASHWANT VARMA, J. PURUSHAINDRA KUMAR KAURAV, J. MARCH 11, 2024