CIT International Taxation Vs Salesforce. Com Singapore Pte. Ltd. (Delhi High Court)
Delhi High Court has dismissed a batch of appeals filed by the tax authorities, affirming that the subscription fees received by Salesforce.com Singapore Pte. Ltd. for its Customer Relationship Management (CRM) software services do not constitute “royalty” income under either the India-Singapore Double Taxation Avoidance Agreement (DTAA) or the Indian Income Tax Act, 1961. The judgment, delivered on a common set of questions across multiple assessment years (2011-12 to 2017-18), upholds the earlier decision of the Income Tax Appellate Tribunal (ITAT).
The Revenue, represented by the tax department, had challenged the ITAT’s ruling, contending that the income generated from licensing the CRM software should be treated as royalty. Their arguments primarily revolved around two key aspects: firstly, whether the consideration for the CRM software license falls under Article 12(3) of the India-Singapore DTAA or various clauses of Explanation 2 to Section 9(1)(vi) of the Income Tax Act; and secondly, whether it could be considered “fees for technical services” (FTS) if not royalty.
The Core of the Dispute: CRM Services and Subscription Model
Salesforce.com Singapore Pte. Ltd., a tax resident of Singapore, provides enterprise CRM services. These services allow customers to record, store, and manage business data, track sales, evaluate marketing campaigns, and improve post-sales support. The income under scrutiny arises from subscription fees paid by Indian customers for these CRM-related services.
The transaction flow, as detailed by the Assessing Officer, involves Salesforce Singapore entering into a Master Subscription Agreement with Indian customers. Customers pay subscription fees directly to Salesforce Singapore’s overseas bank account. They access their proprietary data on the Salesforce portal through the CRM application software using a username and password, generating reports for their own business purposes. This access is for a limited duration, corresponding to the subscription period. Salesforce Singapore retains all rights, title, and interest in the services, including intellectual property rights, while customers exclusively own their data. Crucially, Salesforce Singapore operates without a data center or business premises in India.
Salesforce Singapore maintained that the subscription receipts are business profits and, in the absence of a Permanent Establishment (PE) in India, should not be taxable under Article 7 of the DTAA. They further argued that Article 12 (dealing with royalties) would only apply if the subscription fee was for the “use” or “right to use” of any copyright. Their categorical stance was that no transfer of copyright occurs; customers are merely granted web-based online access to data hosted on Salesforce’s Singapore servers and cannot copy, download, or use the CRM application software other than on the company’s server.
Judicial Precedents Guide the Ruling
The Delhi High Court’s decision heavily relied on established judicial precedents that distinguish between the transfer of copyright and the mere right to use copyrighted material or access copyrighted content.
Relx Inc. and Infrasoft Judgments
The court specifically referenced its own judgment in The Commissioner of Income Tax-International Taxation-3 vs. Relx Inc. [ITA 630/2023], delivered on February 7, 2024. In Relx, the court had already held that subscription fees for software would not qualify as royalty unless it was for the use or right to use a copyright, as defined by Article 12(3) of the DTAA. The court reiterated that granting access to a database does not amount to a transfer of copyright; it is merely a right to use and take advantage of copyrighted material.
The Relx judgment, in turn, heavily cited the Delhi High Court’s earlier landmark decision in Director of Income Tax Vs. Infrasoft. The Infrasoft ruling underscored the critical distinction between royalty paid for transferring copyright rights and consideration for transferring copyrighted articles. It clarified that a non-exclusive and non-transferable license, which merely allows the use of a copyrighted product for internal business purposes without transferring any rights inherent in the copyright, does not invoke the royalty definition. The Infrasoft judgment emphasized that the parting of intellectual property rights attached to the software product is what the treaty contemplates, not merely authorizing access to data or instructions without further rights to deal with them independently. It concluded that payment for a copyrighted article, where the copyright remains with the owner, is a purchase price for an article and not royalty.
Engineering Analysis Centre for Excellence vs. CIT
The Supreme Court’s definitive ruling in Engineering Analysis Centre for Excellence Vs. CIT [2021] 432 ITR 471 (SC) was also a cornerstone of the Delhi High Court’s judgment. This Supreme Court decision addressed various categories of computer software transactions and unequivocally held that amounts paid by Indian end-users/distributors to non-resident software manufacturers/suppliers for the resale/use of computer software through End-User License Agreements (EULAs) or distribution agreements are not royalty payments for the use of copyright. The Supreme Court concluded that such payments do not give rise to any income taxable in India, and thus, no Tax Deducted at Source (TDS) is liable under Section 195 of the Income Tax Act.
The Supreme Court in Engineering Analysis Centre explicitly stated that the broader language contained in the Explanations to Section 9(1)(vi) of the Income Tax Act would have no application if it is wider and less beneficial to the assessee than the definition contained in the DTAA, in line with Section 90(2) of the Income Tax Act.
CIT vs. Microsoft Corporation
Further supporting its stance, the Delhi High Court referenced its own judgment in CIT Vs. Microsoft Corporation, which reiterated the principles laid down by the Supreme Court in Engineering Analysis Centre for Excellence. The Microsoft judgment clarified that when an end-user, under a non-exclusive license, gets the right to use computer software, they only receive a right to use the software and none of the rights that the owner retains under the Copyright Act. Therefore, a license for the use of a product under an EULA, which merely imposes restrictive conditions and does not part with any copyright interest, cannot be construed as a license for the use of copyright.
“Make Available” Clause and Fees for Technical Services (FTS)
The Revenue had also argued that if the income wasn’t royalty, it should be treated as “fees for technical services” (FTS) under the DTAA, specifically invoking the “make available” clause. This clause requires that for services to be considered FTS, the service provider must “make available” technical knowledge, experience, skill, know-how, or processes to the recipient, enabling the recipient to apply the technology independently.
The Delhi High Court, again citing its Relx judgment, dismissed this argument. In Relx, the court had affirmed the ITAT’s view that simply providing access to a database does not constitute rendering technical or consultancy services that “make available” technical knowledge or processes. The court referenced Commissioner of Income Tax (International Taxation) v. Bio-Rad Lab (Singapore) Pte. Ltd., which emphasized that the “make available” test requires the transfer of technology and skills to the recipient, such that the recipient can deploy similar technology in the future without continuous dependence on the provider. The court noted that in the present case, similar to Relx, the continued need for the services year after year by the customer indicated that the technology was not “made available” to them to be used independently.
Conclusion
The Delhi High Court concluded that the legal issue in the appeals has been conclusively decided in favor of the assessee by the Supreme Court and its own consistent rulings. The court found no substantial question of law arose for consideration. The previous admission by the tax authorities before the ITAT that the dispute had been decided in favor of Salesforce in earlier years further strengthened the assessee’s position.
Consequently, the appeals filed by the Revenue were dismissed, confirming that the subscription fees received by Salesforce.com Singapore Pte. Ltd. for providing CRM software services to Indian customers are neither royalty income nor fees for technical services under the relevant tax laws and the DTAA. This judgment reinforces the established legal principle differentiating the sale or use of a copyrighted article from the transfer or licensing of copyright itself in the context of software transactions.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
