ITAT Rules Cybersecurity Software Subscription Receipts Not Taxable as FTS

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that consideration received by FireEye Ireland Limited from the sale of standard cybersecurity software products, software subscriptions, and related support services cannot be taxed as Fees for Technical Services (FTS) under the India–Ireland Double Taxation Avoidance Agreement (DTAA) or the Income Tax Act. A Bench comprising Judicial Member Vikas Awasthy and Accountant Member Renu Jauhri deleted additions made for AYs 2020-21 and 2021-22.

FireEye Ireland Limited, a tax resident of Ireland, is engaged in the business of supplying cybersecurity software products through distributors and direct sales. During AY 2020-21, the company received Rs.53.39 crore from sale of software licences, subscriptions, and related support services in India. While the Assessing Officer accepted income from consulting services as taxable, he treated receipts from software offerings as FTS, holding that the products involved advanced technologies such as machine learning, behavioural analysis, threat intelligence, artificial intelligence and automated threat detection systems.

The assessee contended that it merely supplied standard software products under restricted user licences and subscriptions. It argued that customers were granted only a limited right to use the software and did not acquire any ownership, source code, intellectual property rights, sublicensing rights, or rights to modify or commercially exploit the software. Reliance was placed on the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT.

Before the Tribunal, the assessee further submitted that the related support services were only incidental to the software products and primarily consisted of updates, upgrades and troubleshooting assistance necessary for effective use of the software.

“The software sold is a standard software by way of grant of restricted license/subscription to use for the use of end-users only.”

The Revenue argued that FireEye’s cybersecurity platform provided highly sophisticated and customer-specific solutions involving artificial intelligence, machine learning, threat analytics and behavioural detection technologies. According to the department, such offerings constituted technical and consultancy services taxable as FTS under Article 12(3)(b) of the India-Ireland DTAA, which does not contain a “make available” requirement.

The Tribunal, however, noted that the issue stood substantially covered by the Delhi High Court’s decision in Commissioner of Income-tax (International Taxation)-1 v. Amazon Web Services Inc., where receipts from standardised cloud computing services were held not taxable as royalty or technical service fees. It observed that FireEye’s customers merely received access to standard software products and services without obtaining any proprietary rights, source code, technical know-how or rights to commercially exploit the underlying intellectual property.

“The customers are granted only a non-exclusive and non-transferable licence to access the standard automated services offered by the assessee.”

Relying on the principles laid down by the Delhi High Court, the Tribunal held that the software offerings did not amount to managerial, technical or consultancy services and could not be characterised as FTS under either the Act or the India-Ireland DTAA.

Thus, the Tribunal deleted the addition of Rs.53.39 crore made for AY 2020-21 and directed similar relief for AY 2021-22. The issue relating to adjustment of refund already issued was remanded to the Assessing Officer for limited verification. Both appeals were partly allowed in favour of the assessee.

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