ZSCALER, INC.,USA vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE 3(1)(1), NEW DELHI, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, D: NEW DELHI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER IT(IT)A No.- 68/Del/2026 [Assessment Year: 2023-24] Zscaler, Inc., Deputy Commissioner of Income 120, Holger Way San Jose, Tax, California, Foreign, United States, Vs International Taxation, USA-999999. Circle 3(1)(1), New Delhi. PAN- AAACZ4350P Assessee Revenue Assessee by Shri Kishor Kunal, Adv. Ms. Ankita Prakash, Adv. & Shri Anuj Kumar, Adv. Revenue by Shri M.S. Nethrapal, CIT(DR) Date of Hearing 21.04.2026 Date of Pronouncement 21.04.2026 ORDER PER BRAJESH KUMAR SINGH, AM,

This appeal filed by the assessee is directed against the Final Assessment Order (FAO) passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 27.01.2026 pursuant to the directions of

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. the Hon’ble Dispute Resolution Panel (DRP) vide order dated 16.12.2025 u/s 144C(5) of the Act for Assessment Year (AY.) 2023-24. 2. Ground nos. 1 to 3 of the appeal are reproduced as under: “1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in determining the taxable income of the Appellant for the subject year at INR 30,52,27,225 as against the returned income of INR 98,01,625 and accordingly, the impugned order passed by the Ld. AO is bad in law and void ab initio 2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in passing the impugned order without appreciating the correct factual position and legal principles brought on record by the Appellant. 3. That on the facts and circumstances of the case and in law, impugned order passed by the Ld. AO is beyond the statutory time limit prescribed under section 153 of the Act, and therefore same is bad in law, barred by limitation and liable to be quashed.” 2.1 Ground nos. 1 and 2 are general in nature and need no separate adjudication. Ground no. 3 of appeal was not pressed by the assessee. Hence, ground no. 3 of the appeal is dismissed as not pressed. 3. Brief facts of the case: The assessee is a company incorporated under the laws of USA and is stated to be engaged in the business of providing software-based information security solution to various customers in India and around the globe. The assessee company filed its return of income for Assessment Year ("AY") 2023- 24 on 30.10.2023 declaring income of Rs 98,01,625/-. This case was selected for complete scrutiny under CASS. The statutory notice under section 143(2) of the IT Act, 1961. was issued on 23.06.2024 which was duly served upon the assessee. Thereafter, notices u/s 142(1) of the Income tax Act 1961 was issued and duly served

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. on the assessee calling for details and documents. In response to such statutory notices, the assessee furnished responses from time to time. 3.1 The AO noted that the total receipts of the assessee during the financial year 2022-23 relevant to A.Y. 2023-24 from the provision of software-based information security solutions was Rs. 472,68,09,612/- and the same was claimed to be exempt from tax in India as per the DTAA between India and USA. Further, the AO noted that the assessee has not offered these receipts for tax by stating as follows: "It is submitted that the Assessee is a company incorporated under the Laws of USA and qualifies as a tax resident of USA within the meaning of Article 4 of India-USADTAA Further, the Assessee does not have any presence in India so as to constitute a Permanent Establishment within the meaning of Article 5 of the DTAA. Accordingly, receipts from rendering software based information security solutions to various Indian customers being in the nature of business income are not taxable in India in the absence of any presence in India in the form of a Permanent Establishment, under the beneficial provisions of India- USA DTAA”. 3.2 Further, the AO noted that the assessee delivers four integrated and comprehensive solutions to customers using cloud platform, the Zscaler Zero Trust Exchange as under: (i) Secure access to the internet and SaaS with Zscaler Internet Access or ZIA (ii) Secure access to internal applications with Zscaler Private Access or ZPA (iii) Management and enhancement of the user-to-application experience with Zscaler Digital Experience or ZDX: and (iv) Protection for public cloud workloads, servers and internet of things. or lot. devices with Zscaler Cloud Protection or ZCP.

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. 3.3 Further, the AO noted that the assessee was the patent owner of the above software and the software was sold through distributors/resellers in India. The AO also noted that the assessee had a subsidiary in India i.e. Zscaler Softech India Pvt. Ltd, which provided Information technology, IT support, sales support and marketing services to the assessee. 3.4 Further, the AO for the reasons given in the draft assessment order held that M/s Zscaler Softech India Pvt. Ltd., constitutes a DAPE for the assessee company under the India-USA DTAA. Further, the AO treated 25% of Rs. 472,68,09,612/- i.e. Rs. 118,17,02,403/- as profit earned by the assessee and proposed an addition of Rs. 118,17,02,403/- as business income of the assessee in the draft assessment order. 3.5 Aggrieved with the above findings of the AO, the assessee filed objections before the Ld. DRP. The Ld. DRP noted that no new evidence, documents, or fresh facts were submitted by the assessee during the proceedings and the facts remain identical to AY 2022-23. Thereafter, the Ld. DRP held that the earlier DRP directions for AV 2022-23 shall apply mutatis mutandis to the present year in respect of objections filed by the assessee on this issue. Further, the Panel held that attributing 100% of Indian receipts to the PE was unjustified, as Zscaler India was a captive service provider performing limited functions such as software development and back-office support directed the AO to adopt 25% receipts earned from India by the assessee as income of the PE and the profit rate @ 25% determined by the AO was

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. acceptable. Further, the Ld. DRP held that global losses of the assessee were irrelevant, since the PE was treated as a distinct entity. Accordingly, the AO in the final assessment order dated 27.01.2026 treated 25% of Rs. 472,68,09,612/- i.e.118,17,02,403/- being attributed to PE and 25% of 118,17,02,403/- i.e. Rs.29,54,25,600/- as profit earned by the assessee and made an addition of Rs. 29,54,25,600/- as business income of the assessee. 4. Aggrieved with the above findings of the AO/Ld. DRP assessee has filed an appeal before us on the following grounds of appeal. “4. That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in passing the impugned order in complete disregard of the favourable and binding decisions of this Hon'ble Income Tax Appellate Tribunal ('Hon'ble Tribunal') rendered in the Assessee's own case for AY 2021-22 and AX2022-23 5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that Zscaler Softech India Private Limited ('Zscaler India') is a Dependent Agent Permanent Establishment ('DAPE') of the Appellant without issuing show cause notice and without providing an opportunity of being heard, therefore, the impugned order passed by the Ld. AO is against the principles of natural justice and ought to be quashed for this reason alone 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that Zscaler India constitutes a Permanent Establishment by way of DAPE as per the provisions of Article 5 of Double Taxation Avoidance Agreement ('DTAA') between India and USA ('India-USA DTAA'). 7. Without prejudice to above, on the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating that Zscaler India or the alleged PE has been remunerated at arm's length price and therefore, no further income could be attributed and assessed to tax in India in view of principle laid down by Hon'ble Supreme Court in case of DIT (International Taxation) v. Morgan Stanley & Co (292 ITR 416)”. 8. That on the facts and circumstances of the case and in law and without prejudice to the above, the Ld. AO has erred in arbitrarily attributing 25% of receipts earned from India to the alleged PE without appreciating the actual activities undertaken by such alleged PE in India. 5

IT(IT)A No.- 68/Del/2026 Zscaler, Inc.

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. 5. At the outset, the Ld. Counsel for the assessee submitted that the main issue involved in the present appeal is squarely covered in assessee’s favour in assessee’s own case passed by the Co- ordinate Bench of the Tribunal vide common order dated 18/06/2025 in ITA No. 3376/Del/2023 and ITS No. 928/Del/2025 for AY 2021-22 and AY 2022-23 respectively and thus sought for allowing the appeal in favour of the assessee. The ld AR submitted that in the said order the Tribunal held that the Zscaler India does not constitute DAPE of the Appellant and it was only providing marketing support services to the Appellant and allowed the appeal of the assessee. 6. Per contra, the Ld. DR supported the orders of the lower authorities but was fair enough to submit that the above issue was squarely covered in assessee’s favour in the abovementioned order. 7. We have heard both the parties and perused the material on record. In this appeal, the main issue in dispute is as to whether that M/s Zscaler Softech India Pvt. Ltd., constitutes a DAPE for the assessee company under the India-USA DTAA for the year under consideration. In this regard, the Ld. DRP vide its order dated 16.12.2025 u/s 144C(5) of the Act for the present assessment year i.e. noted that the facts remain identical to AY 2022-23 and, therefore, the earlier DRP directions for AV 2022-23 shall apply mutatis mutandis to the present year in respect of objections filed by the assessee on this issue. In this regard on identical facts, the Co- ordinate Bench of the Tribunal in ITA No. 3376/Del/2023 and ITS No. 928/Del/2025 for AY

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. 2021-22 and AY 2022-23 respectively held that Zscaler India does not constitute DAPE of the Appellant and was only providing marketing support services to the Appellant and allowed the appeal of the assessee. The relevant extracts of the said order are reproduced as under: “12. Now to examine the issue as to how far the assertion of Revenue is sustainable we find that as per Article 5(4) of the India-US DTAA, DAPE is established subject to fulfillment of the following pre-conditions: i. Existence of a principal-agent relationship between the concerned entities; ii. Agent having authority to conclude contracts on behalf of the foreign enterprise; iii. Agent maintains stock of goods or merchandise; iv. Agent secures orders on behalf of the foreign enterprise; 13. The relevant clauses of the two agreements referred above nowhere categorically provide at for principal agent relationship between the Appellant and Zscaler India. They apparently transact on a principal-to-principal basis and there is no element of agency as defined under the Indian Contract Act, 1862. Reliance is rightly placed by ld. Sr. Counsel on decision of Hon’ble Supreme Court in Bharti Cellular Limited vs. ACIT, Circle 57, Kolkata and Anr. [2024] 160 taxmann.com 12 (SC), wherein it was held that: “Agency in terms of Section 182 exists when the principal employs another person, who is not his employee, to act or represent him in dealings with a third person. An agent renders services to the principal. The agent does what has been entrusted to him by the principal to do. It is the principal he represents before third parties, and not himself. As the transaction by the agent is on behalf of the principal whom the agent represents, the contract is between the principal and the third party.” 14. Admittedly, Zscaler India is being remunerated at Arm’s Length Price by the Appellant. This aspect is crucial as the very intent of examining the issue is to see if there is diversion of income by an International Transaction. When compensation received by Zscaler India is established for valuable services, then without there being direct evidence by way of an agreement that the contract is one of agency, on the basis of contract orders received by appellant, there can be no justification to hold Zscaler India to be agent. To establish such status of principal and agent the revenue was under obligation to show by reference to specific clauses of Service agreement or agreements by reseller/channel partners, that Zscaler India had authority to conclude contracts on behalf of appellant. No such clause exists where by Zscaler India is given the authority to conclude contracts relating to provisions of software-based solutions on behalf of the Appellant in India and we find from the record that reseller or channel partners were only authorised to enter into agreements with the Indian customers. There is no receipt of subscription revenue through Zscaler India. Then as with regard to the maintenance of stock by Zscaler India, we find 8

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. from the financials of Zscaler India, there is no material to show that Zscaler India was making any expenditure for maintaining any stock of the appellant for being consigned to any Indian customer out of obligation under the Reseller agreements. Appellant enters into reseller agreements and the product sold to these resellers, who in turn sell such solutions to the end users. The end user enters into end user subscription agreement with the Appellant for the said software-based security solutions. Revenue is unable to show that if at all throughout the this process Zscaler India does have any involvement in the capacity of an agent maintaining any stock of goods or merchandise pr procuring any orders on behalf of the Appellant. 15. The services extended by Zscaler India to Indian customers is by way of updates to clients on benefits received from the Appellant’s product and also understands that if the customers are interested in renewal of Contracts. Same merely amounts to marketing support services to the Appellant. Thus, it is sufficiently made evident by ld. Sr. Counsel that none of the conditions stipulated in Article 5(4) of the India USA DTAA are met in the present case inasmuch as, there is neither any principal agent relationship between the Appellant and Zscaler Indian or Zscaler India has any authority to conclude contracts on behalf of the Appellant and has not secured orders on behalf of the Appellant. 16. In this regard the law is settled where the jurisdictional High Court in Progress Rail Locomotive Inc. vs. DCIT, (2024) 163 taxman.com[See Pg. 243/Compilation], has held in the context of DAPE, as follows: “111. It is pertinent to recall that in order to fall within the scope of Article 5(4), it was imperative for the respondents to have found that the Indian subsidiary not only stood conferred with the 'authority to conclude contracts' but also that it was in fact 'habitually' engaged in acting in discharge of that authority. The issue of a habitual or recurrent exercise of authority does not arise at all since we have already found that an 'authority to conclude contracts' never stood conferred. Suffice it to observe that there is not an iota of evidence which may have even remotely justified Article 5(4)(a) being invoked. 112. Similar is the position which emerges when the case as set up against the petitioner is examined on the anvil of Article 5(4)(c) of the India-USA DTAA. This would have required the respondents to have established or found, as a matter of fact, that the Indian subsidiary was engaged or created solely for the purpose of securing orders for the petitioner. Clause (c) of Article 5(4) would have been attracted if the respondents had, even on a prima facie examination, found that the Indian subsidiary was concerned primarily with securing orders for the petitioner. This, in light of the said clause using the expression 'wholly or almost wholly for the enterprise'. Clause (c) not only alludes to aspects of an enterprise being exclusively concerned with working for the fulfilment of the business interests of another, it would also have to be additionally proven that it does so 'habitually'.

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. following the aforesaid principles, it has been held that if the conditions provided under Article 5(4) of the India-US DTAA are not met, the Liaison Office cannot be classified as DAPE. Then in SFDC Ireland vs. CIT, (2025) 171 taxman.com 731, decision heavealy relied by ld. Sr. Counsel, the Hon’ble High Court has held that in absence of any prima facie finding that the agent habitually exercises authority to conclude contracts in the name of the foreign company or habitually maintains a state of stock of goods or merchandise or habitually secure orders, the same cannot be deemed to be a PE/DAPE. 18. The two-fold submissions made by the Departmental Representative during the course of the argument were: i) Zscaler India is a DAPE of the Appellant as the Appellant failed to produce any evidence such as email record, travel itinerary etc. to satisfy that it is the Appellant who was directly involved with the contract negotiation and conclusion; ii) the Tribunal needs to consider substance over form in this case and relied upon the judgment of Daikin Industries Ltd. vs. ACIT, [2018] 65 ITR(T) 693 (Delhi - Trib.)and Rolls Royce Singapore (P.) Ltd. vs. ADIT, [2012] 347 ITR 192 (Delhi). 19. We are of the considered view that the burden to prove, that assessee has a PE in India lies initially on the Revenue as held by the Hon’ble apex Court in Assistant Director of Income-tax-1, New Delhi vs. E-Funds IT Solution Inc. [2017] 399 ITR 34 (SC). As discussed above there was no discussion of ld. Tax authorites on basis of any material available in the form of two agreements, we have discussed to show that anyelement of agency was there in the respective rights and obligations of two parties. Evidence such as email record, travel itinerary etc. would not have mattered much. Further, the reliance placed on the judgment of Daikin Industries Ltd. vs. ACIT, [2018] 65 ITR(T) 693 (Delhi - Trib.) is differentiated by ld. Sr. Counel submitting in the said case, the Indian entity involved was finalizing products sold by it in the capacity of a distributor as well by the non-resident entity therein, which is not the case herein. In any case, the above principles have been distinguished by this Tribunal in in the case of Siemens Mobile Communications SPA vs. DCIT, [2020] 182 ITD 479 (Delhi - Trib.). Secondly, the reliance placed on the judgment of Rolls Royce Singapore (P.) Ltd. vs. ADIT, [2012] 347 ITR 192 (Delhi), is also misplaced inasmuch as, in that case the Tribunal had given a factual finding that there existed DAPE and the Hon’ble High Court after concluding that the Tribunal had arrived on wrong conclusion, remanded the matter back to reconsider the issue. In the present case, it has been sufficiently demonstrated above that Zscaler India does not constitute DAPE of the Appellant and is only providing marketing support services to the Appellant. 20. Consequently we are inclined to sustain the ground no 4. The remaining grounds are general or consequential, so need no separate adjudication. The appeals are allowed.” (emphasis supplied by us) 7.1 As the Revenue could not bring any material on record in order to distinguish the above order of the Tribunal, by following the above order of the Tribunal, we hold that India Zscaler Softech India Pvt Ltd. does not constitute a Permanent 10

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. Establishment of the assessee by way of DAPE as per the provisions of Article 5 of Double Taxation Avoidance Agreement ('DTAA') between India and USA ('India- USA DTAA'). Accordingly, we hold that attributing 25% of receipts earned from India to the alleged DAPE and determining 25% of the said receipts i.e. Rs.29,54,25,600/- as profit earned by the assessee is not sustainable and the same is deleted. Ground Nos. 4 to 8 of the appeal are allowed. 8. In view of ground nos. 4 to 8 of the appeal being allowed, ground nos. 9 to 11 become academic and are left open in this case. 9. Ground No. 12 of the appeal is reproduced as under: “12. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act.” 9.1 This ground is premature in nature and hence dismissed. 10. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 21.04.2026.

Sd/- Sd/- [VIKAS AWASTHY] [BRAJESH KUMAR SINGH] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated- 10.07.2026. Pooja, Sr. PS/ Aamir, PS

IT(IT)A No.- 68/Del/2026 Zscaler, Inc. Copy forwarded to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi,