Facts of the Case

The petitioner, SFDC Ireland Limited, is a tax resident of the Republic of Ireland and is engaged in the business of providing standardized customer relationship management software products. It entered into an Amended and Restated Reseller Agreement dated 01.02.2023 with Salesforce.com India Private Limited, appointing the Indian entity as a non-exclusive reseller for resale of its products in India on a principal-to-principal basis.

For Financial Year 2024–25 relevant to Assessment Year 2025–26, the petitioner estimated receipts of approximately ₹6,33,34,44,669 from SFDC India. Accordingly, it filed an application under Section 197 of the Income-tax Act, 1961 seeking issuance of a certificate for nil deduction of tax at source, asserting that the receipts constituted business profits taxable only in Ireland under Article 7 of the India–Ireland DTAA in absence of any permanent establishment in India.

In the immediately preceding year, a nil withholding certificate had been granted pursuant to a judgment of the Delhi High Court in the petitioner’s own case. However, the Assessing Officer rejected the application for AY 2025–26 and issued a certificate prescribing withholding tax at 2%.

Issues Involved

Whether the Assessing Officer was justified in denying a nil withholding tax certificate under Section 197 on the basis of alleged dependency and possible existence of a permanent establishment, despite absence of a prima facie finding of taxability and notwithstanding consistency with prior years.

Petitioner’s Arguments

The petitioner contended that the Reseller Agreement clearly established a principal-to-principal relationship and that SFDC India neither concluded contracts on behalf of the petitioner nor constituted a dependent agent. It was argued that the software products were standardized, not customized, and no fees for technical services or royalty arose.

The petitioner further submitted that Rule 28AA mandated consideration of assessed income and withholding position of earlier years, and denial of nil withholding certificate despite a favourable order in the immediately preceding year was arbitrary and contrary to law.

Respondents’ Arguments

The Revenue argued that SFDC India performed functions beyond mere resale, including involvement in pricing and customer contracts, indicating dependency and possible permanent establishment. It was contended that Section 197 proceedings are summary in nature and the Assessing Officer was justified in adopting a conservative approach to protect revenue. The Revenue further argued that each assessment year is independent and prior year orders are not binding.

Court Order / Findings

The Delhi High Court held that Section 197 requires the Assessing Officer to undertake a prima facie analysis of chargeability and not to deny relief merely on conjectures or suspicion. The Court observed that the impugned order did not record any prima facie finding that the petitioner had a permanent establishment in India, nor did it conclude that the receipts were taxable as royalty or fees for technical services.

The Court found that the Reseller Agreement expressly established a principal-to-principal relationship and that SFDC India did not have authority to bind the petitioner. The Court further held that mere involvement in marketing, resale, or customer onboarding does not ipso facto constitute a dependent agent permanent establishment.

The Court emphasised that Rule 28AA obligates the Assessing Officer to give due regard to tax treatment and withholding in prior years and that departure from an immediately preceding year’s position, without material change in facts, was unsustainable. The denial of a nil withholding certificate on the ground of incomplete enquiry was held to be legally impermissible.

Important Clarification

The Court clarified that proceedings under Section 197 are not intended to be revenue-protective measures based on uncertainty or suspicion. Where receipts are prima facie not chargeable to tax under the Act read with the applicable DTAA, withholding tax cannot be imposed merely to defer determination to assessment proceedings.

Final Outcome

The writ petition was allowed. The Delhi High Court quashed the impugned order and certificate dated 09.07.2024 and directed the Revenue to issue a certificate under Section 197 permitting receipt of payments by SFDC Ireland Limited from SFDC India without deduction of tax at source for Financial Year 2024–25 relevant to Assessment Year 2025–26.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770017128_SFDCIRELANDLIMITEDVsCOMMISSIONEROFINCOMETAXANR..pdf

 

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