SALESFORCE.COM SINGAPORE PTE LTD.,SINGAPORE vs. ACIT, CIRCLE- 3(1)(2), INTL. TAXATION, DELHI

The facts in brief are the assessee is a tax resident of Singapore and has claimed that assessee is providing a comprehensive array of on-demand CRM services, which enable customers and subscribers to systematically record, store and act upon business data and to help business manage customer accounts, track sales leads, evaluate marketing campaigns and provide better post-sales service. The services enable companies to generate reports and summaries of this data and share them with authorized individuals across functional areas. Saiesforce.com Singapore Pte Ltd (SFDC Singapore) delivers its enterprise business applications via the World Wide Web. SDFC Singapore has entered into Master Services Agreement with various customers in India for provision of CRM services. SDFC Singapore derives income in the nature of subscription fees for providing such CRM services. During the FY 2016-17 relevant to AY 2017-18, it is submitted by the assessee that it has received a sum of Rs. 224,21,58,428/- from various customers in India in the nature of subscription fees, on account of provision of CRM services. These receipts are received in Singapore and interest income of Rs. 3,09,88,428/- making a total of Rs. 227,31,46,856/-. However, as per AIR report as on 27.11.2019 total receipts are of Rs, 227,41,59,429/-.

The claims set up by the assessee on the basis of business model was not accepted and following previous years the ld. AO followed directions of DRP and recomputed the taxable income of the assessee while treating receipts of income as royalty to be taxed @ 10% and interest income to be taxed @ 15%.

The assessee is in appeal raising following grounds :-

It was submitted on behalf of the assessee that in regard to assessee’s own case for the assessment year 2010-11 to 2016-17, the issue relating to treatment of subscription fees received by the assessee has been settled in favour of the assessee vide and Ors vide order dated 25.03.2022. This fact could not be disputed by the Ld. Sr. DR appearing for the revenue. Ld. Counsel representing the assessee submitted that the ground no. 6 and 7 may be allowed with directions to the AO for verification and ground no. 8 and 9 are consequential while ground no. 10 is not pressed being premature.

Giving thoughtful consideration to the matter on record it comes up that in assessee’s own case for the assessment year 2010-11 to 2016-17 a co- ordinate Bench, on which one of us ‘the Judicial Member’, was in quorum had considered the issue giving rise to ground no. 1 to 5 and had observed in para 13 to 30 as under :

Further, the assessee does not provide any information concerning industrial, commercial, scientific experience. The assessee only processes the proprietary data of the customers and provides the result in form of desired reports etc. On this count also, it cannot be said that consideration for CRM services are in the nature of royalty.

In our considered opinion, if the services have been rendered de hors imparting of knowledge or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article 12 of the treaty.

Further, by granting access to the information forming part of the database, the assessee neither shares its own experience, technique or methodology employed in evolving databases with the users, nor imparts any information relating to them. 17. In our considered view, the income earned by the assessee from the Indian customers with respect to the subscription fees for CRM cannot be taxed as royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the treaty. 18. The lower authorities have also placed strong reliance on the AAR decision in the case of Thought Buzz (P) Ltd 346 ITR 345. We find that in that case, the assessee was in the business of gathering and collating of data which was obtained from various sources and shared via report with the users, whereas in the case in hand, the assessee is using the data provided to it by the customers and then generates desired reports. 19. The co-ordinate bench in the case of American Chemical Society vs. DCIT [2019] 106 taxmann.com 253 (Mumbai – Trib) had the occasion to consider similar grievance. The relevant findings of the co-ordinate bench read as under: “8. As discussed earlier, in the instant case, the assessee merely identifies, aggregates, and organizes publicly disclosed chemistry related scientific information or publishes research work submitted by scientists worldwide. Thus, this information is clearly not undivulged; rather, it is an information which is available in public domain, as is also evident from the factual position noted by the Assessing Officer himself in the assessment order. Further, chemistry and related scientific information accumulated by the assessee in the form of a database is the experience of various scientists, researchers and various other persons and not that of the assessee. Thus, what the assessee collates is experience of others and provides access thereto. The database does not provide any information arising from assessee's own previous experience or knowledge of the subject.

In this context, the learned Counsel pointed out that similar situation has been considered by the AAR ruling in the case of Dun & Bradstreet Espana S.A. (supra), which has been upheld by the Hon'ble Bombay High Court in the case of Dun & Bradstreet Information Services India (P.) Ltd. (supra). In this case, the applicant, a non-resident company of Spain was engaged in the business of compilation and selling Business Information Reports ('BIR') in their local markets and to other associate companies worldwide. On the issue of whether the payment made for the purchase of BIRs would be in the nature of Royalty, the AAR opined that the applicant has rightly equated the transaction of sale of Business Information Reports in electronic form to a sale of book, which does not involve any transfer of intellectual property and held that the payment to non-resident company for downloading BIRs is not in the nature of Royalty or fee for technical services. The AAR held that the purchase of standardized reports publicly available on the internet upon payment of subscription charges is akin to payment for a copyrighted article and accordingly does not constitute Royalty. Relevant extract of the AAR ruling is as follows: "1. This application …………DB US is the leading seller of BIRs enabling business-to-business commerce for about 160 years. The operating subsidiaries and associates of D&B US in each country are engaged in compilation and selling BIRs in their local markets and to other associate companies worldwide as their core business. Each associate company of D&B compiles Salesforce.com Singapore Pte. Ltd. 8 the information in respect of companies functioning in its country in the standardized D&B format which is electronically uploaded on the server of the associates companies and is copied (mirrored) on the Central data base server situated in US. DBIS is also engaged in a similar business of compilation and selling BIRs in respect of business entities, either they are incorporated in their respective countries or doing business in their country. The US server farm is owned and operated by D&B US and it contains mirror servers of all the D&B associate companies. The modus operandi of the business of DBIS is that whenever an Indian customer places an order for a BIR in respect of a company situated in Spain, DBIS would access the master server of D&B US. Thereupon, the master server would identify DBIS and would allow access to connect to the mirror server of the applicant which is situated in US server farm. It was then DBIS would request the applicant for a BIR of the company for which the Indian customer has placed an order. On locating the required BIR, DBIS would download, print and deliver a copy thereof to the customer. DBIS is under an obligation not to take additional copies or reproduce the BIR in any manner or sell it to any customer other than Indian customer on whose requisition the BIR is ordered because the BIR is copyright protected with the copy right vested in the applicant who prepares the BIR. There is further obligation on the Indian customer to use the BIR for its own purpose, the copyright in the BIR would neither be licensed nor assigned to either the DBIS or the Indian customer ………… 7. It will be ………………..

In another case, the co-ordinate bench in the case of GECF Asia Ltd /(MUM.)/2010 48 Taxmann.com 148 has held as under: “10. From the above, it can be gathered that the royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to the concept of knowhow. There is an element of imparting of knowhow to the other, so that the other person can use or has right to use such knowhow. In case of industrial, commercial and scientific experience, if services are being rendered simply as an advisory Salesforce.com Singapore Pte. Ltd. 10 or consultancy, then it cannot be termed as "royalty", because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience. The eminent author Klaus Vogel in his book "Klaus Vogel On Double Tax Convention" has reiterated this view on difference between royalty and rendering of services in the following manner:- 'Imparting of experience: Whenever the term "royalties" relates to payments in respect of experience (knowhow) the condition for applying art. 12 is that the remuneration is being paid for "imparting" such knowhow…. In contrast, the criterion used to distinguish the provisions of know-how from rendering advisory services is the concept of imparting. An advisor or consultant, rather than imparting this experience, uses it himself (BFH BStBI.II 235 (1971); Minister des Relations exterieures, Reponses a M. Bockel, 36 Dr. Fisc. Commn. 1956 (1984). All that he imparts is a conclusion that he draws interalia from his own experience. His obligation to observe secrets, or even his own interest in retaining his "means of production' will already prevent a consultant from imparting his experience. In contrast to a person using his own know-how in providing advisory services, a grantor of know-how has nothing to do with the use, the recipient makes of it.' 11. The thin line distinction which is to be taken into consideration while rendering the services on account of information concerning industrial, commercial and scientific experience is, whether there is any imparting of knowhow or not. If there is no "alienation" or the "use of" or the "right to use of" any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as "royalty". The services may have been rendered by a person from own knowledge and experience but such a knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. Hence, in such a case, it cannot be held that such services are in nature of "royalty". Thus, in principle Salesforce.com Singapore Pte. Ltd. 11 we hold that if the services have been rendered de– hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article– 12. Since neither the Assessing Officer nor the DRP has examined the nature of service rendered by the assessee from this angle therefore, we are of the opinion that the matter should be restored back to the file of the Assessing Officer to examine the nature of services in line of the principles discussed above. If such services do not involve imparting of knowhow or transfer of any knowledge, experience or skill, then it cannot be held to be taxable as royalty. Since the issue of FTS is not the subject matter of dispute after the direction of the DRP, hence, we are not expressing any opinion on FTS. Thus, ground no.1 and 2, are treated as partly allowed for statistical purposes.”

In yet another case Kotak Mahendra Primus Ltd & 2001/2011 SOT 578, the co-ordinate bench held as under: “16. We now come to the provisions of article 12(3)(c) of the India Australia tax treaty. It provides that where the payment is for "the supply of scientific, technical, industrial or commercial knowledge or information", the same shall be considered as ‘royalty’ for the purposes of article 12 of the treaty. By no stretch of logic, it could be said that the payment is made to the Australian company for the supply of any knowledge or information or any nature whatsoever. Learned Departmental Representative could not point out any legally sustainable reasons on the basis of which the payment can be said to be covered by article 12(3)(c). We have also carefully considered factual matrix of the case and are of the considered view that the payment in question cannot be said to be for the supply or any knowledge or information. The information is in fact furnished by the Indian company, the same is processed in Australia and transmitted back to the Indian company. This activity only involves processing, and not supply of information. Accordingly, the provisions of article 12(3)(c) will also not have any application in the matter.

It is not also the case of the revenue that remaining parts of article 12(3), i.e., article 12(3)( d) to article 12(3)(l), will have any application in the matter. No specific arguments are Salesforce.com Singapore Pte. Ltd. 12 advanced in this regard in any event, we have also carefully considered these provisions as also the facts of the case before us, and we are of the considered view that these provisions also have no application in the present situation. The impugned payment cannot be said to be for consultancy services, in terms of the provisions of article 12(3)(d). This payment cannot also be said to be for making available any technical knowledge, experience, skill, know-how or processes etc. in the sense that recipient of services, i.e., Indian company, is not enabled to make use of technical knowledge on its own, without recourse to the provider of service, which is sine qua non for making available’ technical knowledge, experience, skill, know-how etc. in terms of provisions of article 12(3)(g). It is also not covered by any other clause of the article 12 either. As regards learned Departmental Representative’s reliance on the ruling given, by the Hon’ble Authority for Advance Ruling in the case of ABC ( supra), in the light of the detailed reasons set out above, we see no need to deal with the same separately. The Assessing Officer had adopted the reasoning approved by the Hon’ble Authority for Advance Ruling and we have dealt with the same in the course of our consideration to the matter. The prescription of section 245S is unambiguous. Section 245S of the Act provides that the Advance Ruling pronounced by the Authority under section 245R will be binding only on the applicant who had sought it, in respect to the transaction in relation to which the ruling had been sought, on the Commissioner, and the income-tax authorities subordinate to him, in respect to the applicant and the said transaction. It is, therefore, obvious that, apart from whatever its persuasive value, it would be of no help to us. We are not inclined to disturb our conclusions merely because the conclusions arrived at above, and in the light of detailed reasons set out earlier in the order, are at variance with the conclusions arrived at in the said ruling. We have carefully perused the esteemed views of the Hon’ble Authority for Advance Ruling, and, with respect but without hesitation, we are not persuaded.

In view of the above discussions, in our considered view, the impugned payment cannot be held to be covered by the scope of expression ‘royalty’ under article 12(3) of the India Australia Double Taxation Avoidance Agreement. Since the Australian Salesforce.com Singapore Pte. Ltd. 13 company admittedly does not have any permanent establishment (PE) in India, this payment cannot also be taxed as a business profit of the Australian company in India. It is so in view of the fact that article 7(1) of the applicable tax treaty specifically provides that, "The profits of the enterprises of one of the Contracting States shall only be taxable in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein". This leads us to the conclusion that the right of Indian tax jurisdiction does not extend to taxing the impugned payment of A$ 3,25,000 to the Australian company, i.e., FCAL, for specialized data processing of information furnished by the Indian company.”

In light of the aforesaid discussion, we will now revert to the master subscription agreement wherein “Customer Data” has been defined as: “all electronic data or information submitted by the customer to the service”

Users Means:

Considering the facts of the case in totality, in light of the Master Subscription Agreement, we are of the considered view that the customers do not have any access to the process of the service provider i.e. the assessee, and the assessee does not have any access Salesforce.com Singapore Pte. Ltd. 15 except otherwise provided in the master subscription agreement to the data of the subscriber.

In our considered opinion, all the equipments and machines relating to the service provided by the assessee are under its control and are outside India and the subscribers do not have any physical access to the equipment providing system service which means that the subscribers are only using the services provided by the assessee.

In light of the above discussion, we have no hesitation to hold that the subscriber fees received by the assessee do not fall within the ambit of royalty u/s 9(1)(vi) of the Act nor under Article 12 of the India – Singapore DTAA. The Assessing Officer is accordingly directed to delete the impugned additions.”

Accordingly the substantive ground no. 1 to 5 stand decided in favour of the assessee. Further ground no. 6 and 7 are also allowed with a direction for the verification and to be allowed by the Ld. AO in accordance with law and ground no. 8 to 10 are dismissed as not pressed. Order pronounced in the open court on 30th August, 2022.