The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that where the assessee grants only a restricted right to access and use standardised software/cloud-based offerings, without transferring source code, proprietary rights, or any right to commercially exploit intellectual property, and where the support provided is merely incidental to the use of such offerings, the consideration cannot be treated as fees for technical services merely because the underlying platform uses sophisticated technology such as AI, machine learning or threat analytics.
Following the Delhi High Court’s ruling in Commissioner of Income-tax, International Taxation-1 v. Amazon Web Services Inc [2025] 174 taxmann.com 1188 (Del.), the ITAT held that the facts and issues in FireEye’s case were similar, and therefore the AO had erred in characterising the receipts as FTS taxable in India under Article 12(3)(b) of the DTAA and section 9(1)(vii) of the Act. The Tribunal thus held that the impugned software-related receipts were not taxable as Fees for Technical Services (FTS). Accordingly, the Tribunal deleted the addition of Rs. 53.39 crores made by treating the software sale consideration as FTS.
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The Division Bench comprising Vikas Awasthy (Judicial Member) and Renu Jauhri (Accountant Member) noted the assessee’s case that it sold standard software products mainly through distributors, that the distributor agreement and EULA only granted a limited, non-exclusive, non-sublicensable and non-transferable right to distribute/use the offerings, and that title, ownership and intellectual property rights always remained with FireEye or its licensors. It also noted the assessee’s submission that customers/distributors were not permitted to copy, modify, reverse engineer, decompile, sublicense, or otherwise obtain proprietary rights in the software, and that the support services were primarily updates/upgradations and incidental support linked to the sale of software products.
The Tribunal further recorded the Revenue’s argument that the offerings were advanced AI- and ML-based cybersecurity solutions amounting to high-end technical or consultancy services, and that the India-Ireland DTAA did not contain a “make available” requirement. After considering rival submissions, the Tribunal relied on the Delhi High Court’s decision in Commissioner of Income-tax, International Taxation-1 v. Amazon Web Services Inc. and extracted the High Court’s reasoning that standardised and automated cloud/computing services, accompanied by limited access rights and incidental support, do not confer any right to commercially exploit IPR, do not transfer technical know-how or process, and remain standard automated services availed by customers according to their needs.
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Briefly, the appellant, an Ireland-incorporated tax resident under the India-Ireland DTAA, was engaged in selling standard cyber security software products by granting restricted user licences/subscriptions, along with related support services. For AY 2020-21, it filed its return declaring income of Rs. 22.07 crores and did not offer to tax Rs. 53.39 crores received from sale of standard FireEye software products. The Assessing Officer proposed to treat this amount as fees for technical services (FTS). The DRP directed the AO to pass a speaking and reasoned order on the applicability of Engineering Analysis.
The AO thereafter held that the assessee’s SaaS offerings involved machine-learning, behavioural analysis, threat intelligence and similar functions, and concluded that the services were customized, individualized and specific to customers, and therefore not covered by Engineering Analysis; the amount was accordingly taxed as FTS under Article 12(3)(b) of the India-Ireland DTAA and section 9(1)(vii) of the Act.
