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Facts
The assessee, BlackLine Systems Inc., provides cloud-based SaaS, implementation, and user training services. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) proposed an addition of Rs. 5,45,42,749/-, holding that the receipts were taxable as Fees for Included Services (FIS) under Article 12(4) of the India-US DTAA, arguing that the 'make available' clause was satisfied due to human involvement, customization, and transfer of technical knowledge.
Held
The Tribunal, relying on Supreme Court precedents, held that the services provided by the assessee, including SaaS subscriptions, implementation, and training, do not 'make available' any technical knowledge, experience, skill, or process to the recipient. The recipients are not enabled to apply the technology on their own without the service provider's assistance, which is a key requirement for the 'make available' clause to be satisfied. Therefore, the receipts from the subscription of cloud-based services are not taxable under Article 12(4)(b) of the India-US DTAA.
Key Issues
Whether the assessee's provision of cloud-based SaaS, implementation, and training services satisfies the 'make available' clause under Article 12(4)(b) of the India-US DTAA, making the receipts taxable as Fees for Included Services (FIS).
Sections Cited
143(3), 144C(13), 133(6), 9(1)(vii), 195, 270A, Article 12(4), Article 12(4)(b), Article 12(3)
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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Dr. B. R. R. Kumar, Sh. Anubhav Sharma
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 30.10.2023 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 2. The only issue to be adjudicated in this case is that whether the assessee is satisfying the requirement of the clause of ‘make available’ as per the India-US DTAA.
Blackline Systems Inc.
3. To determine that, the services provided in lieu of the receipt have been examined. The assessee has provided the following services: a. The Company provides Software on cloud under SaaS model (referred to as "Cloud- based services” or "Subscribed services") i. directly to end-users wherein it grants a non-exclusive, non- transferable, worldwide right to use the Hosted Services, solely for their internal business purposes; and ii. through BPO partner wherein it grants non-exclusive, non- transferable and non-sublicensable right to the BPO partner to resell the automated services to end-users in India. b. The Company also provides (i) certain implementation services to get the customer on boarded for the purpose of provision of Cloud-based services; and (ii) user trainings to enable the end-user access the Subscribed services. c. The Cloud-based service automates finance and accounting requirements of the subscribers to the services. Such services are completely automated and do not involve human intervention in the provision of such services.
i. Such Cloud-based services include service products viz., Finance transformation, Reconciliation Management, On- demand Professional and Close Process Management etc. which are standard products of the Company, the provision of which is fully automated.
Blackline Systems Inc. ii. The Software on cloud under SaaS model is a standard facility provided by the Company at a pre-defined tariff rate, on a non-exclusive basis, to its customers/end- users. iii. The ownership of the data that is input by the subscriber continues to vest in the subscriber/end- user/customer. The customer has the ability to access the reports automatically generated by the Software and no rights in the copyright of the ware, provided on cloud, is granted to the BPO partner/end- users/customers. Further, none of them have the right to copy, modify or create a derivative work or reverse engineer any part of the Software. iv. The processing of the customer data by the Software is carried out without any human involvement. The only human involvement is during provision of implementation services and in provision user training services to a minimal/limited extent (in web-based user trainings/instructor led trainings). v. The Software is used for processing of the customer data in an automated manner which is a standard processing of customer data by the Software housed cloud and no customization in this regard is required to the Software. The Software, as a standard product, has inbuilt functionality to generate reports in varied formats. The functionality for the format, as desired by the client/customer is only enabled by the Company
Blackline Systems Inc. during implementation and there is no specific customization which is required to accommodate to the customer's desired format of the end output i.e., the reports. d. The implementation services are services offered by the Company for a new system implementation i.e., implementation services to get the customer set up for BlackLine Cloud-based services. This includes activities viz., i. Implementation kick-off (includes project kick-off call to discuss the data collection templates, project overview and targeted go-live date); ii. Data collection (wherein the Company provides data templates and step-by-step instruction guide on the information needed from the Customer's systems); iii. Application configuration and data import (includes determining currency requirements, reconciliation thresholds, email alert configuration, data import from data collection phase, etc.); and iv. Data validation (to ensure that the data that has been imported into the BlackLine application is correct and to verify that all the application settings have been reviewed). v. Implementation services are utilized at the time of on- boarding of a new customer or deployment of another standard Software product/another Software module for Blackline Systems Inc. an existing customer and such services are not rendered throughout the period of provision of Cloud-based services. Once provision of implementation services is completed, the Hosted Services (i.e., the Cloud-based Software) are deployed for the customer which functions automatically without any human intervention. e. The Company provides on-demand recorded trainings or periodic live web- based training sessions to enable usage of Cloud-based services by the end-user customer. Such User trainings help the end-users access the Subscribed Cloud- based services and view the automated reports. Time is generally spent in explaining the end-user on how to generate reports from the Cloud-based service without a technical content therein. i. The provision of User training does not require any expertise in technology and merely involves procedural/operational training relating to use of the services. ii. The training is operational in nature and does not involve any technical knowledge relating to Software but merely trains the users on how to access the Subscribed service and view the reports. iii. The trainings do not involve any technical content which could be considered as technical training.
Blackline Systems Inc.
4. The AO issued notices u/s 133(6) of the Income Tax Act, 1961 was issued to Accenture Solutions Pvt. Ltd., Cipla Ltd., Infosys Ltd. and Infosys BPM Ltd. with same questions on 9th December, 2022.
M/s Cipla Ltd. replied that they have subscribed for the cloud services provided by Blackline which automates finance and accounting analytical reports for internal use by our company. Payment to Blackline is processed annually towards procurement of aforesaid software license. It was replied that the services for cloud based services offered under a “software as a service” model and it helps them in automating various finance and accounting report generation which is otherwise required to be prepared manually. The reply from the other companies were also on the similar lines.
Based on the above functions and the work performed, the Assessing Officer held that the “make available” clause has been met by the assessee and issued a draft order to that extent.
Aggrieved, the assessee filed appeal before the ld. DRP.
The ld. DRP directions are as under: “4. The Grounds of Objections No. 1 to 5 are taken together as they are similar and connected. 4.1 The Panel has heard the assessee, taken the document submitted on record. The Panel has also gone through the Draft Assessment Order. The AO has proposed addition of Rs.5,45,42,749/- to assessee income in the subject assessment year. The proposed addition is on account of following receipts.
Blackline Systems Inc. Particulars Amount (in INR) 1A. Software (Product subscription under SaaS model; 5,30,91,593 also referred to as Cloud-based services) 1B. Ancillary/ incidental services to the subscription of 8,02,094 Software under SaaS model 6,49,062 Implementation services to get the customer set up in BlackLine Hosted Services User Training Total 5,45,42,749 4.2 The assessee has objected to the above proposed addition and his objections are summarized as below: “(i) Nature of services provided during the year a. The Company provides Software on cloud under 5aa5 model (referred to as "Cloud- based services" or "Subscribed services") i. directly to end-users wherein it grants a non-exclusive, non- transferable, worldwide right to use the Hosted Services, solely for their internal business purposes; and ii. through BPO partner wherein it grants non-exclusive, non- transferable and non-sublicensable right to the BPO partner to resell the automated services to end-users in India. b. The Company also provides (i) certain implementation services to get the customer onboarded for the purpose of provision of Cloud- based services; and (ii) user trainings to enable the end-user access the Subscribed services. (ii) Cloud-based services The Cloud-based services automates finance and accounting requirements of the subscribers to the services. Such services are Blackline Systems Inc. completely automated and do not involve human intervention in the provision of such services. Such Cloud-based services include service products viz., Finance transformation, Reconciliation Management, On-demand Professional and Close Process Management etc. which are standard products of the Company, the provision of which is fully automated. The Software on cloud under SaaS model is a standard facility provided by the Company at a pre-defined tariff rate, on a non- exclusive basis, to its customers/end-users. The ownership of the data that is input by the subscriber continues to vest in the subscriber/end-user/customer. The customer has the ability to access the reports automatically generated by the Software and no rights in the copyright of the Software, provided on cloud, is granted to the BPO partner/end- users/customers. Further, none of them have the right to copy, modify or create a derivative work or reverse engineer any part of the Software. The processing of the customer data by the Software is carried out without any human involvement. The only human involvement is during provision of implementation services and in provision user training services to a minimal/limited extent (in web-based user trainings/instructor led trainings). The Software is used for processing of the customer data in an automated manner which is a standard processing of customer data by the Software housed on cloud and no customization in this regard is required to the Software. The Software, as a standard product, has inbuilt functionality to generate reports in varied formats. The functionality for the format, as desired by the client/customer is only enabled by the Company during implementation and there is no Blackline Systems Inc. specific customization which is required to accommodate to the customer's desired format of the end output Le, the reports. (iii) Implementation services The implementation services are services offered by the Company for a new system implementation i.e., implementation services to get the customer set up for BlackLine Cloud-based services. This includes activities viz., a. Implementation kick-off (includes project kick-off call to discuss the data collection templates, project overview and targeted go-live date): b. Data collection (wherein the Company provides data templates and step-by-step instruction guide on the information needed from the Customer's systems); c. Application configuration and data import (includes determining currency requirements, reconciliation thresholds, email alert configuration, data import from data collection phase, etc.); and d. Data validation (to ensure that the data that has been imported into the Blackline application is correct and to verify that all the application settings have been reviewed). These services are ancillary or incidental to the subscription to the Cloud- based services by the customers/end-users. Implementation services are utilized at the time of on-boarding of a new customer or deployment of another standard Software product/another Software module for an existing customer and such services are not rendered throughout the period of provision of Cloud-based services. Once provision of implementation services is completed, the Hosted Services (ie., the Cloud- based Software) are Blackline Systems Inc. deployed for the customer which functions automatically without any human intervention. (iv) User Training The Company provides on-demand recorded trainings or periodic live web- based training sessions to enable usage of Cloud-based services by the end user customer. Such User trainings help the end- users access the Subscribed Cloud- based services and view the automated reports. Time is generally spent in explaining the end- user on how to generate reports from the Cloud-based service without a technical content therein. The provision of User training does not require any expertise in technology and merely involves procedural/operational training relating to use of the services. The training is operational in nature and does not involve any technical knowledge relating to Software but merely trains the users on how to access the Subscribed service and view the reports. The trainings do not involve any technical content which could be considered as technical training. A gist of the solutions provided by BiackLine and activities carried out during implementation stage is enclosed as Annexure 1 for your kind perusal. iv. Erroneous presumption on existence of certain non-existent facts due to erroneous interpretation of the submission of the Company or (ii) that of the responses filed by the customers of the Company under Section 133(6) or (iii) without providing any basis whatsoever, leading to the pressed adjustment
Blackline Systems Inc. The Learned AO passed the Draft Assessment Order on the premise of following incorrect facts either due to misinterpreting the submission made by the Company, or wrong inference drawn from Cipla's response under Section 133(6), or erroneous presumptions, assumptions as regards facts A. Cloud-based Software is not a standard facility The Cloud-based Software is not a standard facility and its company/individual specific, that is customized for each company. (Reference is made to Para No. 7 on Page No. 7 of the Draft Order) The Cloud-based Software provided are customized and optimized services and is not general off the shelf facility since data inputs which are received as part of SaaS are customer specific and also the format of output (reports) are also produced in the format desired by the particular customers. (Reference is made to Para No. 1 on Page No. 15 of the Draft Order) Company's submission-The Company humbly submits that it is an Enterprise Software Company having standard Software products which are offered to customers under Saas model. The Software, as a standard product, has inbuilt functionality to generate reports in varied formats. The functionality for the format, as desired by the client/customer is only enabled by the Company during implementation and there is no specific customization which is required to accommodate to the customer's desired format of the end output i.e., the reports. B. The Cloud-based services involve human element The services rendered involved human element as there is substitution of biological human by machine which is equipped to work like a human. (Reference is made to Para No. 2 on Page No. 15 and Para 10.3 on Page No. 23 of the Draft Order)
Blackline Systems Inc. Company's submission-The aforesaid is presumed by the Learned AD without providing any basis for stating so in the Draft Order. The fees charged is also based upon time spent by Company's personnel. Thus, it is clear that human element is also involved in the service rendered by the Company. (Reference is made to Para No. 3 on Page No. 15 of the Draft Order) Company's submission - The subscription fee towards the Software provided on cloud is not based on the time spent as there is no time spent in provision of Cloud-based services. The Software subscription fee is actually based on the number of users subscribed for and has no relation whatsoever to the time spent by the Company’s personnel in provision of implementation service-relevant snapshots of the invoices raised by the Company with respect to Cloud-based services is captured below:………………… Thus, the Company humbly submits that the Learned AO has erred in concluding the below, basis incorrect linking of responses submitted by Cipla to the receipts from Cloud-based Software subscription earned by the Company: Cloud-based Software subscription (i.e., Cloud-based service) is not a standard facility Human element is involved. The fee charged for Cloud-based Software subscription is basis the time spent by the Company personnel.” 4.2 During the assessment proceedings, the AO had sent notices under section 133 (6) of the Act to one of the vendors M/s CIPLA LTD. who is availing of the services rendered by the assessee. On perusal of the response of M/s CIPLA LTD., which is quoted at page 13 and 14 of the draft assessment order. It is seen that:
Blackline Systems Inc. “1. Not a standard facility: Data inputs which are received as part of Saas are customer specific (in the case of Cipla as it is taken from ERP, not a standard ERP) have been taken by the assessee company and also the format of output (Reports) are also produced in the format desired by the particular customers. It is clear that it is a customized and optimized service including On Demand Professional" for Cipla and not a general off the shelf facility as is being argued by the assessee.
Further its seen that from it is not a standardize service and human element is involved as there is substitution of biological human by the machine which is equipped to work like a human. “To quote further from the reply received from Cipla for notice u/s 133(6) as reproduced below:- "The fee charged by Blackline System Inc. in relation to the time spent by Blackline team to check the application settings and the data import format so that they are aligned to the Blackline Services configuration for automated processing of the data."
The fees charged by the assessee company is also based upon the time spent by the Blackline team (human element). Thus it is clear that human element is also involved in the service rendered by the assessee company. “To quote further from the reply received from Cipla for notice u/s 133(6) as reproduced below:-"Separately, we submit that online training on how to use the software is provided either by Blackline personnel to users or asked to view the relevant standard videos available in their website. Briefly it is operational training on list of available modules in the Blackline software and information on purpose of these module in regular business compliances is provided by Blackline team.”
Blackline Systems Inc. “Variance Analysis refers to the Variance analysis module in the Blackline system where the Blackline team helped Cipla to implement the module integrated with SAP is analyze variances between various financial reporting parameters for comparable periods. Their services included implementation consulting testing and operational training."
Provisions of online training by the assessee again points to involvement of human element as well as satisfaction of Make available clause. In view of the above discussion, it is established that Human Element and Make available assessee company has used it to personnel for providing these services and has provided training to the personnel of its clients (as stated by CIPLA and seen from invoices of Infosys). Thus make available is satisfied in this case. In this case assessee has also provided consultancy services 4.3 It is also clear from the nature of service rendered by the assessee to CIPLA that at every stage there was a personnel from M/s Blackline Systems Inc involved in imparting the operational training and how to use the software, thus providing the make available of the software. 4.4 The nature of services provided by the assesssee are customized, individualized and differentiated in its services to the customer. The service rendered includes capability to mimicking human ability, and human intelligence. Assessee also provides ongoing technical support and on demand professional support to the vendors. Such services are purely technical in nature and as per the source rule under Section 5(2), 9(1)(vii) of the Act read with Article 12(4) of India USA DTAA partakes the nature FIS/FTS. The vendor has also deducted TDS at the rate 10% under Section 195 on the Blackline Systems Inc. payment of Rs.5,44,28,015/- in lieu of payment for such services as Royalty/FIS. Further, since such technical services are made available to the service recipient for continuous technical support and upgradation, such receipts are liable to be taxed as FIS per India USA DTAA. Assesse’s objections on the above issue are rejected.
16. In view of the above discussion and directions u/s 144C(5) issued by the DRP vide its order dated 21.09.2023 received on 22.09.2023, the amount of Rs. 5,44,28,015/- is held to be income from Fee for Included Services and is taxable in India as per provisions of Article-12 of the India-USA DTAA and as per the provisions of section 9 (1) (vii) of Income Tax Act, 1961 and is added back to taxable amount of assessee for the subject AY. Further, I am satisfied that the assessee has under reported his income which is in consequence of misreporting thereof (as discussed in the above paragraphs). Hence, penalty proceedings are proposed to be initiated under section 270A of the Income Tax Act, 1961.”
On going through the order of the ld. DRP, we find that the ld. DRP came to a conclusion that the “make available” clause has been satisfied owing to the nature of the services provided by the assessee which are customized and differentiated in its services to different customers. The ld. DRP held that the services rendered includes capability to mimicking human ability and human intelligence. The ld. DRP also held that the provision of services of on-going technical support and on-demand professional support satisfies the criteria technical support and hence FIS.
Aggrieved, the assessee filed appeal before the Tribunal.
Blackline Systems Inc.
Before us, the ld. AR reiterated the arguments taken before the ld. DRP and the ld. DR supported the directions of the ld. DRP both of which are part of the order of the ld. DRP mentioned above.
Heard the arguments of both the parties and perused the material available on record. Similar issue has also been examined in the case of SNC Lavalin Inc. in by ITAT Delhi.
Article 12(4) of the India-US DTAA defines Fee for Technical Services as: “For the purposes of this Article, 'fees for Technical services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services
a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
Further, as per the above definition, FIS means payment for technical or consultancy services which additionally satisfy the conditions specified under clause (b). In view of the conditions as per clause (b), as per the India-US DTAA, FIS means any payment for technical or consultancy services which make available technical knowledge, skill, know-how or process.
Blackline Systems Inc. Meaning of ‘make available’
The meaning of the term make available has been explained as per the Memorandum of Understanding of the India-USA DTAA concerning FIS in Article 12 (‘MOU’). “Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to “make the technology available.” The concept of ‘make available’ has been interpreted as transmitting the technical knowledge so that the recipient of service can derive an enduring benefit and utilize the technical knowledge or skill in future on his own without the aid of the service provider. In other words, to fit into the terminology "make available", the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end.
Further, various judicial precedents have also dealt with the issue as to what constitutes make available, especially in light of the provisions of the India-USA DTAA and the MOU to the India-USA DTAA. As per the judicial precedents, services are said to be made available when as a result of provision of such services, the recipient of the services is enabled to perform such services in the future on its own without recourse
Blackline Systems Inc. to the service provider. Mere provision of technical services shall not suffice for consideration for services to qualify as FIS.
In this regard, the reliance is being placed on the judgment of the Hon’ble Jurisdictional Delhi High Court in the case of DIT vs. Guy Carpenter & Co. Ltd. (2012) 346 ITR 504 (Delhi) where it has been held as under:
We find that the common thread in all these tax treaties is the requirement of 'make available' clause. As learned counsel rightly puts it, its not simply the rendition of a technical service which is sufficient to invoke the taxability of technical services under the make available clause. Additionally, there has to be a transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. The services provided by non residents did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression 'make available'.
Basis the above, it can be held that the assessee do not “make available” any technical knowledge, experience, skill, know-how or processes to group companies which may enable them to apply any technology contained therein without recourse to the Appellant.
We have considered as to whether the receipts can be considered as royalty as per Article 12 India-US DTAA has also been examined.
Blackline Systems Inc. 20. We find that the facts of the assessee are covered by the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Private Limited vs. CIT (CA Nos. 8733-8734 of 2018), the Hon’ble Supreme Court, after determining various clauses of EULA/ Distribution agreement held that payments made by the Appellant to non-resident vendors shall not be taxable as Royalty under the relevant DTAA, the relevant extract of decision is as under:
“Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the appellant have no application in the facts of these cases.
Our answer to the question posed before us, is that the amounts paid by resident Indian end- users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act.”
Blackline Systems Inc. 21. Reliance is being placed on the following case laws:
CIT vs. Relx Inc., ITA .630/2023 (Delhi HC) CIT vs. Salesforce.com Singapore Pte. Ltd., ITA 144/2023 (Delhi HC) SDFC Ireland Ltd. vs. CIT and Anr., W.P. (C) 14636/2023 (Delhi HC) Microsoft Regional Sales Pte. Ltd. vs. DCIT, ITA 1553/Del/2016 Microsoft Regional Sales Pte. Ltd. vs. DCIT, ITA 1135/Del/2017 Rackspace, US Inc. vs. DCIT, [2020] 113 taxmann.com 382 (Mumbai) Rackspace, US Inc. vs. DCIT, [2021] 124 taxmann.com 92 (Mumbai) Rackspace, US Inc. vs. DCIT,
Hence, we hold that the receipt from subscription of cloud based services is not taxable under Article 12(4)(b) of India-US DTAA.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 26/06/2024.