Standardized Cybersecurity Software Offerings Are Not Taxable As Fees For Technical Services: ITAT Delhi

On 5 June, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that consideration received from the sale of standard cybersecurity software licences, subscriptions, and related support services does not qualify as Fees for Technical Services (FTS), as FireEye Ireland Limited did not render any customised technical or consultancy services.

Judicial Member Vikas Awasthy and Accountant Member Renu Jauhari partly allowed the appeals filed by FireEye Ireland Limited for Assessment Years 2020–21 and 2021–22. The Bench held:

“The services offered by the Assessee does not entail transferring of any skill, knowledge, technology or process to its customers.”

FireEye Ireland Limited, a tax resident of Ireland, sold cybersecurity software products and related support services in India through distributors. For Assessment Year 2020–21, it earned Rs.53.39 crore from software offerings and did not offer the amount to tax, relying on the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd.

The Assessing Officer treated the receipts as FTS, holding that the software incorporated advanced technologies such as machine learning, behavioural analysis, and artificial intelligence, and brought the income within Article 12(3)(b) of the India–Ireland DTAA and Section 9(1)(vii) of the Income-tax Act.

FireEye Ireland argued before the Tribunal that it supplied only standardised software under restricted licences and did not transfer any proprietary rights or intellectual property, and it submitted that the support services remained incidental to software sales.

The Tribunal relied on the Delhi High Court's decision in Commissioner of Income-tax, International Taxation-1 v. Amazon Web Services Inc., which held that receipts from standardised cloud computing services do not qualify as royalty or FTS. It held that customers received only non-exclusive and non-transferable rights to use the software and did not acquire any right to commercially exploit the underlying intellectual property.

Accordingly, the ITAT set aside the Assessing Officer's view and held that the receipts do not qualify as FTS under Article 12(3)(b) of the DTAA or Section 9(1)(vii) of the Act. It deleted the addition of Rs.53.39 crore for Assessment Year 2020–21 and applied the same reasoning to Assessment Year 2021–22. It also remanded the issue relating to adjustment of refund already issued to the Assessing Officer for limited verification.