ACIT, DELHI vs. M/S AVECTO INC., USA

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI Before Sh. Vikas Awasthy, Judicial Member & Smt. Renu Jauhri, Accountant Member IT(IT)A No. 4/Del/2025 : Asstt. Year : 2017-18 ACIT, Vs M/a Avecto Inc. E-2 Block, Civic Centre, 450, Artisan Way, Suite 330, New Delhi-110002 Somerville, MA 02145, USA (APPELLANT) (RESPONDENT) PAN No. AAOCA3559R Assessee by : Sh. K. M. Gupta, Adv. & M.s Kashish Gupta, CA Revenue by : Sh. Saroj Kumar Dubey, CIT-DR Date of Hearing: 16.03.2026 Date of Pronouncement: 16.03.2026 ORDER Per Renu Jauhri, Accountant Member: The above captioned appeal is preferred by the Revenue against the order dated 08.07.2025, passed by CIT(A)-42, Delhi u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for A.Y. 2017-18.

“1. Whether on the facts and circumstances of the case, the ld. CIT(A) erred in deleting the income of Assessee Company on account of income of royalty, without deciding upon the nature of such income and its taxability. 2. Whether on the facts and circumstances of the case, the ld. CIT(A) erred in deleting the income of Assessee Company without bringing anything in order to state if the income so arising was exempt and not taxable at all in the hands of the assessee.”

2 IT(IT)A No. 4/Del/2025 Avecto Inc. 3. Brief facts are that the assessee filed its return for A.Y. 2017-18 on 31.03.2018 declaring Nil income. The case was selected for scrutiny. In response to multiple notices issued by the AO, the assessee filed only one reply giving partial details. It was submitted by the assessee that it is a company incorporated in the USA and is engaged in the business of distribution of software products and provision of related services in India. During the year, it had received an amount of Rs.11,92,45,855/- from its customer in India. The amount received on sale of software was not offered to tax by the assessee as the same was treated as not taxable in India in view of the provisions of India-USA Double Taxation Avoidance Agreement (DTAA). Since the assessee did not furnish the copy of contract or any other documentary evidence in support of its claim, the AO taxed the receipts under the head ‘income from other sources’. Accordingly, the assessment was completed at an income of Rs.11,92,45,855/- to be taxed @40% vide order u/s 143(3) r.w.s. 144C(13) dated 31.10.2020.

3.1 Aggrieved, the assessee preferred an appeal before ld. CIT(A). The assessee requested for admission of additional evidence before ld. CIT(A) on the ground that these could not be filed before the AO as the financial controller of the company, who handled compliance responsibilities, left in July 2019, as a result of which, the notices issued by the AO could

3 IT(IT)A No. 4/Del/2025 Avecto Inc. not be complied with. The application alongwith additional evidences were forwarded to the AO in response to which a remand report dated 17.03.2021 was submitted by the AO. After considering the assessee’s rejoinder thereon, ld. CIT(A) admitted the additional evidence. Thereafter ld. CIT(A) proceeded to decide the issues on merits and allowed the assessee’s appeal. Aggrieved, the revenue is in appeal before the Tribunal.

4.1 We have heard the rival submissions and perused the material placed on record. We note that the ld. CIT(A) has carefully examined the additional evidences filed by the assessee and sought a remand report of the AO. Further, the comments of the assessee on the remand report dated 17.03.2021 were also obtained before giving elaborate findings on the merits of the issues involved. After examining the agreement entered by the assessee with its customer, M/s Cognizant Technology Solutions India Pvt. Ltd., ld. CIT(A) has held as under: 10.6 From the above, the case of the appellant is found to be squarely covered in favour of the appellant by the

4 IT(IT)A No. 4/Del/2025 Avecto Inc. judgement of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (supra) as far as the issue of software license (Category- 1 payment) is concerned. Accordingly, the receipts from Cognizant for the software license do not fall within the definition of “royalty” under Article 12(3) of the India- USA DTAA. The payments are for the use of a copyrighted article, not for the use of copyright. It is pertinent to note that the definition of ‘Royalty’ in the India-USA treaty is far more restrictive than the one in Section 9(1)(vi) of the Act and therefore, the appellant being tax resident of USA, the provisions of treaty will apply being more beneficial and, therefore, the Explanation 2 to section 9(1)(vi) which includes grant of a license within the definition of the term ‘Royalty’ cannot be read into the treaty, as well settled by various judicial pronouncements. 10.7 It is further noted that even subsequent to the judgment in Engineering Analysis case (supra), Hon’ble Apex court has reiterated and followed this judgment in a no. of other cases too, e.g. Commissioner of Income-tax (International Taxation) v. Microsoft Regional Sales Pte. Ltd [2024] 167 taxmann.com 45 (SC), dated 20.09.2024; Commissioner Of Income Tax (International Taxation)-? V. Net App B V, dated 27.09.2024, etc. Various High Courts as well as ITAT benches, including jurisdictional Delhi ITAT, have also followed the above judgment in Engineering Analysis case in a long line of subsequent cases. Thus, the law is conclusively settled that a non- exclusive, non-transferable license to use software does not amount to transfer of copyright or the right to use copyright, but only a limited right to use the copyrighted material and that such payments are not “royalty” under Article 12 of the India-USA DTAA. Thus, the AO’s position in the Remand Report that the grant of software license constitutes Royalty is not found to be sustainable. Accordingly, the consideration, amounting to USD 1209000 (equivalent to INR 8,03,50,140) (Category-1), received against grant of software license, is hereby held to be not taxable in India in the hands of the appellant as ‘Royalty’ under Article 12(3) of the India-USA DTAA.”

4.2 Further, with regard to the maintenance and support services for which payment of USD 575250 (Rs.38231,115) was received, the detailed findings of the ld. CIT(A) are as under: “11.5 Rival contentions of the AO and the appellant have been given due consideration. To decide the issue, it is

5 IT(IT)A No. 4/Del/2025 Avecto Inc. relevant to refer to clause 4 of the Master Agreement between Avecto and Cognizant explaining the scope of the provision of software support. The relevant snapshot thereof is as under – 4 Software Support 4.1 Term. Subject to the terms and conditions of this Agreement Software Support will initially commence upon delivery of the software license key for the applicable Software or, if later, upon acceptance of the Order Form for the Software Support and will automatically expire at the end of the period of time for which the applicable fees have been paid. 4.2 Scope of Software Support. Software Support shall comprise the following services: (i) Technical Hotline Support. Avecto shall provide help desk technical support to Licensee during the times and in accordance with the service levels that are applicable for the level of Software Support purchased by Licensee. (ii) Maintenance. Avecto shall make available to Licensee and generally available updates, patches, upgrades and modifications to the Software that Avecto generally releases at no additional cost to Avecto’s other customers subscribing to the same level of Software Support. A more detailed description of the Software Support for the level purchased by Licensee (the “Support Description”) shall be as displayed at www.avecto.com/support or otherwise may be attached to the Order Form. 4.3 Support Lifecycle: Avecto shall provide Software Support in accordance with the Avecto’s support lifecycle policy set out in the Support Description. A withdrawal of Software Support per the lifecycle policy, shall not affect Licensee’s right to continue use of that version of the Software under this Agreement and Licensee will receive a prorated refund of any charges for such Software Support that have been paid in advance by Licensee for that Software. 11.6 From the above it is noted that the support & maintenance services part of the agreement broadly covers two elements:  Helpdesk services for technical support

6 IT(IT)A No. 4/Del/2025 Avecto Inc.  Maintenance support including updates, patches, upgrades and modifications to the licensed software 11.7 As far as the ‘Maintenance’ support is concerned, the same includes updates, upgrades, patches, modifications, etc. made available by the appellant to all customers having the license to the software. These are essentially found to be of the same nature as the software license itself. Thus, it is noted that the activities covered under Category-2 are also partly towards software support and not for providing technical ‘services’ alone. However, neither any separate consideration is found fixed for the above two components nor any basis for such separate allocation of consideration is indicated anywhere in the agreement. As the supply of software license has already been held in the preceding paragraphs to be not constituting ‘Royalty’ under article 12(3) of the India-USA DTAA, therefore, the software maintenance support services, being in the form of updates, upgrades, patches, bug fixes, modifications, etc. to the originally licensed software itself, are clearly of the same nature as the Software itself and are ancillary and subsidiary to the software license granted (category 1), and, therefore, also fall outside the ambit of Article 12(4)(a) of the DTAA as a natural corollary. For the sake of clarity, Article 12(4) of the DTAA is reproduced below: 4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 11.8 As far as the technical support services are concerned, it is noted that as per the agreement, technical support, including customized troubleshooting and helpdesk services, are provided by Avecto to Cognizant throughout the tenure of the software license agreement. In this regard, the AO has held the same to be taxable as FIS making two-fold contentions:

7 IT(IT)A No. 4/Del/2025 Avecto Inc. (i) that these services are ancillary and subsidiary to the software license which constitutes as ‘royalty’ under article 12(3), thus the services constitute ‘FIS’ under Article 12(4)(a) of the DTAA; (ii) that even otherwise these services lead to capacity building of Cognizant’s employees and hence ‘make available’ technical knowledge, experience, skill, know how etc. and, hence, fall within the definition of FIS under Article 12(4)(b). 11.9 The first contention of the AO invoking Article 12(4)(a) is found to be not sustainable in view of the findings already given at para 10.7 above whereby grant of software license is held to be not covered under Article 12(3) as ‘Royalty’ and, therefore, the support & maintenance services, being ancillary & subsidiary to grant of software license, also consequentially fall outside the ambit of Article 12(4)(a). 11.10 As far as the second contention of the AO is concerned, as per Article 12(4)(b) of the India-US DTAA, “fees for included services” means payments for technical or consultancy services only if such services make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or design. The phrase “make available” has been judicially interpreted to imply that the recipient of the service must be enabled to apply the technical knowledge or skill independently in future, without recourse to the service provider. 11.11 In the present case, the provision for helpdesk and troubleshooting services is found available to the licensee (Cognizant) over an extended period of time (by default for three years initially, further extendable), which shows that the licensee is continuously dependent on the service provider for the troubleshooting services. The technical knowledge remains with the service provider, and the service recipient is not equipped to resolve similar issues on its own, thereby negating the condition of “making available” knowledge or skill. The continuous need for helpdesk support supports the position that there is no transfer of enduring technical know-how or skill to the licensee. The services are reactive and issue-specific, rather than instructional or educative. This position is also supported by several judicial precedents including decision, dated 17.10.2024, of Hon’ble ITAT, Delhi in the case of Attachmate Corporation v. ACIT, International Taxation [2024] 168 taxmann.com 152 (Delhi -Trib.).

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11.12 The Hon’ble Supreme Court, various High Courts and ITATs have consistently upheld this interpretation that technical services by itself do not constitute ‘FIS’ under DTAA, if they do not “make available” technical knowledge. Notably, in DIT v. Guy Carpenter & Co. Ltd. [2012] 346 ITR 504 (Delhi HC), the Court held that unless the recipient is enabled to apply the technology independently, the “make available” condition is not satisfied. Similarly, in De Beers India Minerals (P) Ltd. v. CIT (2012) 346 ITR 467 (Karnataka HC) and Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC), it was held that mere provision of technical services, without imparting technical knowledge or skill to the recipient, does not satisfy the “make available” test. 11.13 Thus, even though the troubleshooting and helpdesk services may involve technical inputs and constitute ‘technical services’, they do not equip the licensee to handle such issues independently in the future, nor is there any transfer of proprietary processes or know-how. Customer support & helpdesk services are routinely provided by all software suppliers to resolve technical queries in relation to day-to-day use of the software provided and are clearly ancillary and inextricably linked to the principal supply of software license. The AO has not brought on record any cogent evidence to substantiate its contrary contention. The clauses of the Agreement highlighted by the AO in a piecemeal fashion in the Remand Report have satisfactorily been rebutted by the appellant in its Rejoinder reproduced at para 11.4 above. 11.14 In light of the above facts and judicial authorities, it is held that the troubleshooting and helpdesk services provided by the appellant to Cognizant do not satisfy the “make available” clause of Article 12(4)(b) of the India-US DTAA. Therefore, the payments made for such services, i.e. USD 5,75,25( (equivalent to INR 3,82,31,115) (Category-2), do not constitute fees for included services and are not taxable in India under the said DTAA.” 4.3 Finally, with regard to the training services provided by assessee to Cognizant for which payment of USD 10,000/- (Rs.6,64,600) was received, ld. CIT(A) has held as under: “12.3 The rival contentions have been considered. On perusal of the Master Agreement, no specific terms or

9 IT(IT)A No. 4/Del/2025 Avecto Inc. details regarding this training component could be gathered, except Exhibit B thereof giving details of charges totaling to USD 1,794,250 which includes USD 10,000 on account of “Avecto training (onsite/remote cert training)”. However, keeping in view the miniscule proportion of the total consideration attributed to the training component (i.e. USD 10,000 only out of total consideration of USD 1,794,250 which comes to just above 0.5%), the contention of the appellant that the training service provided is ancillary, routine and standardized which is typically designed to make the user conversant with the licensed software’s product features, installation procedures, configuration steps and day to day operational use and is not tailored to meet any specific or unique requirements of Cognizant, is found to be tenable and in accordance with the industry standard and typical of software licensing arrangements. The training services are structured to support Cognizant’s, ^internal deployment and use of Avecto’s proprietary software product ensuring that Cognizant’s personnel are equipped to operate the software efficiently and in accordance with its intended business purposes. On perusal of the software license and service agreement, the training is not found to be a standalone or independent service but closely linked to and dependent upon the software license itself. The sheer miniscule amount of consideration attributed to this training qua the overall cost of the software substantiates the appellant’s contention that the training is provided in a standardized and routine manner solely to facilitate cognizance effective internal use of the licensed software and is not intended to ‘make available’ the expertise to enable cognizant to modify, adapt, reverse engineer or create derivative works from the software. This position is also found directly supported by Example 8 of the India-USA tax treaty, illustrating that the fees for installation assistance and initial training is not fees for included services, since these services are not the predominant purpose of the arrangement. 12.4 The appellant’s contentions are also found supported by the judgment, dated 11.03.2024, of the Hon’ble Delhi High Court in the case of SFDC Ireland Ltd. v. CIT [2024] 160 taxmann.com 328 (Delhi) wherein the Hon’ble Court has reaffirmed that training and technical assistance, when provided as a concomitant to the sale of principal products and not as a core or foundational service, do not amount to FIS. Relevant part of the said judgment is quoted below: “41. The technical assistance and training imparted to SFDC India staff appears to be aimed at enabling them

10 IT(IT)A No. 4/Del/2025 Avecto Inc. to understand the various attributes and capabilities of SFDC Products so as to be informed when interacting with prospective customers in the territory. The technical assistance and training which is spoken of in Section 4.3 of the Reseller Agreement does not appear to bear the characteristics of a conferral of specialized or exclusive technical service. In any case, the training and assistance proffered by SFDC was a concomitant to the sale of its principal products in the territory and fundamentally aimed at readying SFDC India to undertake the marketing of those products. The technical assistance and training did not constitute either the core or the foundational basis of the consideration which was received by SFDC Ireland. 42. Insofar as the products for SFDC India’s internal use were concerned, they stood restricted to those which would enable SFDC India to demonstrate the functionality of SFDC products in trade shows and exhibitions, to train its customers and employees on the use of those products and products to administer and manage customer accounts. None of these aspects would appear to be imbued with a technical hue. Imparting training or educating a person with respect to the functionality and attributes of a software or application would clearly not amount to the rendering of technical service under the DTA.A...” [Emphasis supplied] 12.5 Following the above discussions, Example 8 of the DTAA and the judgment of the Hon’ble Delhi High Court, it is hereby held that the training in question provided by the appellant to cognizant is not a standalone or independent service but is ancillary and subsidiary, as well as inextricably and essentially linked, to the grant of software license itself and, therefore, the same is excluded from the category of included services, under paragraph 5(a) of Article 12 of the India-US DTAA, and hence, the corresponding Category-3 receipts amounting to USD 10,000 (equivalent to INR 6,64,600) are not liable to be taxed as FIS. 13. It is further noted that income from supply of software license and support services, being business income of the appellant, is not taxable in India in the absence of PE as per Article 7 of the DTAA. No finding has been given by the AO regarding presence of any permanent establishment of the appellant in India nor any such argument has been pressed by the AO in the remand proceedings. Therefore, the receipts in question are not found taxable in India even under Article 7 of the DTAA as Business income in the absence of any PE.”

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4.2 We, therefore, note that the ld. CIT(A) has passed a reasoned and speaking order on merits considering the entire facts and the submission of the assessee as well as the remand report submitted by the AO. Accordingly, we hold that the Revenue is not justified in contending that the appeal was allowed by ld. CIT(A) without deciding upon the nature and taxability of income. Thus appeal of the Revenue is hereby dismissed.