SERVICENOW NEDERLAND BV,NETHERLAND vs. ACIT, CIRCLE- INT. TAXATION 3(1)(2), DELHI

ORDER PER M. BALAGANESH AM: This appeal is preferred by the Assessee against the final assessment order dated 15/07/2022 passed u/s 143(3) r.w.s.144C of the Income Tax Act, 1961 (hereinafter called ‘the Act’)

Service Now Nederland BV vs. ACIT subsequent to the direction of the Ld. Dispute Resolution Panel

(DRP) vide direction dated 16/06/2022 for Asst. Year 2011-12.

3.1. The income from subscription services is for use of software applications (offerings) i.e. Software as a Service . There is no transfer of all or any rights in respect of, or the use of or the rights to use underlying copyrights of such software application to the customers. Accordingly, it was pleaded that such software services do not fall within the definition of ‘royalty’ as per Article 12(4) of India – Netherlands DTAA.

3.2. As a part of professional and training services rendered by the assessee, the technical knowledge, knowhow etc is not made available to the customers. Also, the said services are ancillary to royalty. Therefore, such services do not fall within the definition of ‘fees for technical services’ as per Article 12(5) of India Netherlands Tax Treaty.

3.3. Further, the company does not have a Permanent Establishment (PE) in India. Hence the aforesaid services rendered are not taxable as business profits as per Article 7 of India Netherlands Tax Treaty. Accordingly, income earned by the assessee from aforesaid subscription, professional and training Page 3 of 16 Service Now Nederland BV vs. ACIT services has not been offered to tax in the revised return of income filed by the company.

3.4. The details of total receipts of Rs 125,11,22,698/- are enclosed in Pages 1 to 6 of the paper book filed before us. Out of this, total receipts on account of subscription services amount to Rs 119,15,25,786/- and receipts on account of professional and training services amount to Rs 5,95,96,912/-. The assessee pleaded that with regard to the aforesaid services, the same were provided from Netherlands and not from India and therefore such services cannot be taxed in India by virtue of Most Favoured Nation (MFN) Clause provided in India Netherlands DTAA read with Indian Finland DTAA.

3.5. The assessee clarified that the platform in operation is not a service per se but a model where the software is hosted at one particular place and is licensed by way of subscription to its customers. The assessee under this model is able to quickly address the routine maintenance / updates effectively and efficiently. Thus, the subscription provided by the company to its customers in India is not a service but only a revenue model. It is software solutions provided through a subscription. Further, the Page 4 of 16 Service Now Nederland BV vs. ACIT company grants only the right to use various standard ServiceNow Solutions delivered over the solutions platform to the customers.

The customers are only granted a non-exclusive and non- transferable license to access the software / platform for the limited purpose of availing the access for its applications / software. The customer does not have the right to use or commercial exploit the IPR. They only get a right to access or use the applications / software. Similarly, the assessee is not granted any access or right to any IPR of its customers. A customer only gains access to use the copyrighted software applications of the assessee and has no access / rights in the copyright so created. Hence it was pleaded that the impugned receipts are in the nature of payments received for the sale of software and squarely fall within the ratio decidendi of the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs CIT in Civil Appeal Nos. 8733 -8734 of 2018 and hence is neither liable to tax under the provisions of the Act or under the India Netherlands DTAA.

4. The ld./ AO concluded that the receipts in question are services of a technical nature and hence taxable as FTS. Page 5 of 16 Service Now Nederland BV vs. ACIT 5. It was submitted ServiceNow Software Development India Private Limited is an Associated Enterprise (AE) of the assessee and works on a cost-plus model wherein it provides support services to the assessee. It was clarified that the disputed receipts have no bearing whatsoever on the payments made by the assessee to its AE.

5.1. The entire understanding of the ld. AO in terms of the business model and the nature of services rendered in India is based on information available on the assessee’s website which pertains to its activities the world over. The illustrations of Airbus and Weslayen University cited at para 7 on Page Nos. 5 & 6 of the order of the ld. AO have no link with the impugned receipts as both Airbus and Weslayen University were not Indian clinets to begin with.

5.2. It was submitted that the ld. AO completely misconstrued the nature of services / product developed by the assessee. In this regard, it was clarified that under this model, access to the application is provided to the customer over the assessee’s cloud infrastructure. A customer in India can acess said applications via a web browser. In other words, there is no specific need to install and run the software application in a customer’s own infrastructure / server. The assessee simply hosts the software Page 6 of 16 Service Now Nederland BV vs. ACIT application which can be used by the customer when required. The customer can access to the solutions which are in standard format.

The customers are granted a right to use or access the software application i.e. through a user ID and password for an annual subscription fee.

5.3. Further the ld. AO had accepted the contentions of the assessee and characterized the application / facility as a ‘product’ in para 8 Page 5 of his order. The assessee is merely selling its product on a subscription basis unlike the traditional method of selling the produce on a one-time payment basis and accordingly it was pleaded that the revenue model can in no way change the character of the impugned receipts. It was further submitted that the assessee renders services which only helps to create a work flow so as to increase efficiency of internal operations for the customers.

5.4. Further it was submitted that subscription , professional and training services rendered by the assessee does not make available any technology, knowhow etc to the service recipient and hence the same does not fall within the definition of FTS under Article 12(5) of India Netherlands DTAA. It was further submitted since the coming into foce of the India Netherlands DTAA on 21.01.1989, Page 7 of 16 Service Now Nederland BV vs. ACIT India has also signed a DTAA with Finland ( a member of the OECD since 1969) which has come into effect from 01.04.2011. In this regard, the assessee had submitted that the first sentence of Article 12(5) of India Finland DTAA states that FTS shall be deemed to arise in India when the payer is a resident of India and thus, may be taxed in India. However, the second sentence in Article 12(5) of India Finland DTAA qualifies the first sentence and states that where FTS relates to services performed in Finland, then such FTS shall be deemed to arise in Finland and accordingly, shall be taxable in Finland and shall not be taxable in India. Accordingly, it was submitted that where fees relate to services performed in Finland, the second sentence in Article 12(5) of India Finland DTAA would override the first sentence and thus the income from such services shall be deemed to arise in Finland only.

5.5. The assessee submitted that in the instant case, the services were provided by the company in Netherlands. Accordingly, in terms of Article 12 of India Netherlands DTAA (as modified by the MFN clause present in the Protocol forming part of the DTAA read with Article 12 of India Finland DTAA) , the amount received by the company from its customers in India for provision of such services Page 8 of 16 Service Now Nederland BV vs. ACIT shall be deemed to arise in Netherlands and thus, should not be taxed in India.

7. We find that the Master Agreement of ServiceNow was placed on record and the same was also furnished before the lower authorities. It would be relevant to address some of the clauses in the said contract :-

Definitions: Clause 1.14: “Intellectual Property Rights” means all intellectual property rights throughout the world, including, without limitation, patents, copyrights, trademarks, trade secrets and contractual or other rights in confidential information , moral rights, rights of privacy and publicity , and any other intellectual and industrial property and proprietary rights including registrations, applications, renewals and extensions of such rights worldwide. Clause 1.29: “ServiceNow Professional Services” means consulting, training, implementation integration or other professional services provided by ServiceNow, including: (a) standardized and branded professional services as published by ServiceNow; or (b) customized professional services including the production of any related deliverables, performed y ServiceNow pursuant to a statement of work. Clause 1.32: “Subscription Service” means the ServiceNow subscription services and the Technology used by the ServiceNow or its affiliates to deliver such subscription services, including Configurable Elements and APIs, but excluding Ancillary Software.

2. PARTNERNOW OVERVIEW 2.1. Enrollment in PartnerNow. PartnerNow consists of Programs, including the Sales Partner Program and Services Partner Program, described in the applicable Program Terms and Guides. Participant shall be deemed enrolled in PartnerNow, subject to the terms of this Agreement, when it is initially appointed to one or more Programs as evidenced by an Appointment Confirmation. 2.3. Benefits. Upon appointment to a Program, Participant may access certain ServiceNow Technology, including one or more Partner Instances, all subject to and in accordance with the Licenses and use authorizations granted under Section 4 (Licenses to Participant) below and the other terms and conditions of this Agreement.

PROGRAM TERMS (APPENDIX 1 to the aforesaid Agreement) FOR THE PARTNERNOW SALES PARTNER PROGRAM 3. RESLLER RIGHTS 3.1. Appointment. An Appointment Confirmation that appoints Participant to the Program alone does not constitute an authorization for Participant to resell the Subscription Services, ServiceNow Professional Services or any other products or services of ServiceNow. Such resale authorization may only be granted pursuant to an Appointment Confirmation that expressly appoints Participant as ServiceNow’s authorized reseller (which may be provided separately or in the same communication that appoints Participant to the Program). Upon Participant’s receipt of such Appointment Confirmation, Participant may resell ServiceNow products and packaged professional services as provided in the Guide.

8. We find that this is no different than a copyrighted article. The revenue had all along been treating the same as Royalty and during the year under consideration, the same is sought to be treated as Fee for Technical Services (FTS).

Service Now Nederland BV vs. ACIT 7. It would be pertinent to examine the FTS clause in Article 12 of India Netherlands Treaty which reads as under:-

ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1…….. 2[2……. 3. ……. 1[4………..

7.1. We find that Article 12(5)(a) above is not applicable in the instant case. Article 12(5)(b) insist on make available clause to fall within the ambit of FTS. In the instant case, the assessee has only access to software. There is no transfer of technology by the assessee. We are unable to persuade ourselves to accept to the argument of the ld. DR in this regard wherein it was argued that services provided by assessee are standard and customized services and that ‘make available’ clause is not relevant for the second part of Article 12(5)(b) i.e it is not relevant for development and transfer Page 12 of 16 Service Now Nederland BV vs. ACIT of a technical plan or technical design. In our considered opinion, ‘make available’ is for the entire expressions mentioned in Article 12(5)(b) of the India Netherlands Treaty. In this regard, it would be relevant to address the decision of Hon’ble Karnataka High Court in the case of CIT vs De Beers India Minerals (P) Ltd reported in 346 ITR 467 (Kar) to understand the meaning of expression ‘make available’. The relevant operative portion of the judgement of Hon’ble Karnataka High Court is reproduced hereunder:-

7.2. In the instant case, as stated earlier, we find that the assessee had merely granted only access to software and there is no transfer of technology by the assessee. Hence we have no hesitation to hold that the services rendered by the assessee does not fall within the definition of FTS as per the Treaty. In any case, we find that the since assessee had merely granted access to software, it does not fall within the definition of FTS even as per the Act. In this regard, analogy could be drawn from the decision of Hon’ble Supreme Court in the case of CIT vs Kotak Securities Ltd reported in 383 ITR 1 (SC)

Service Now Nederland BV vs. ACIT wherein it was held that service made available by Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which transaction charges are paid by members of BSE are common services that every member of Stock Exchange is necessarily required to avail of to carry out trading in securities in Stock Exchange; such services do not amount to 'technical services' provided by Stock Exchange, not being services specifically sought for by user or consumer and, therefore, no TDS would be deductible under section 194J on payments made for such services.

Order pronounced in the open court on 29th August, 2023.