The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that capital gains of ₹497.74 crore arising from the transfer of ownership in a foreign company were not taxable in India under the India–Ireland Double Taxation Avoidance Agreement (DTAA), even though the foreign entity held an Indian subsidiary.

The bench of Anubhav Sharma (Judicial Member) and Krinwant Sahay (Accountant Member) ruled that ₹52.07 crore received from the sale of standard cybersecurity software and related support was not taxable as royalty or fees for technical services (FTS). The domestic provisions deeming an offshore transaction to involve the transfer of Indian assets could not be imported into the treaty to enlarge India’s taxing rights. It further rejected the Revenue’s allegation of treaty abuse, finding that no specific enquiry or supporting evidence established such abuse.

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The appellant/assessee is an Irish tax resident, supplying cybersecurity solutions to customers outside the Americas, including India. Its offerings included standard software, incidental updates and support, consulting services, accessories and appliances.

For the relevant year, its aggregate revenue from sales to Indian customers was approximately ₹81.12 crore. The company offered its consulting income to tax in India. It furnished a tax residency certificate and maintained that it had no physical presence or permanent establishment in India.

The Assessing Officer treated ₹52,06,95,065 received from software sales and related services as FTS. Separately, the officer brought ₹4,97,73,79,939 to tax as capital gains arising from the transfer of ownership in a foreign group entity.

Following the Dispute Resolution Panel’s directions, the final assessment order dated January 16, 2025 assessed total income at ₹562,93,02,990, against returned income of ₹13,12,27,990, and determined a demand of ₹75,27,76,170. The company challenged both additions before the Tribunal. 

The software dispute concerned standard FireEye cybersecurity products supplied through restricted user licences or subscriptions.

The company relied on the Supreme Court’s decision in Engineering Analysis Centre of Excellence, along with the decisions in SFDC Ireland Limited and Kotak Securities, to contest the taxation of these receipts.

The Tribunal noted that a coordinate bench had already decided the same issue in the company’s favour for Assessment Years 2020–21 and 2021–22 through an order dated June 5, 2026.

The Revenue failed to identify any substantial difference in the nature of the services or receipts for the year under appeal. The Tribunal also observed that the Dispute Resolution Panel had relied on its findings for the earlier years, which had subsequently been set aside.

Following the earlier ruling, the bench held that the consideration from software sales and related support was not taxable as royalty or FTS under the Income Tax Act and the India–Ireland DTAA.

The capital gains dispute arose from an internal restructuring of the appellant.

Under a share purchase agreement dated July 23, 2021, the appellant transferred its ownership in various entities to Mandiant Ireland Limited, another Irish group company. One of the entities transferred was appellant, a US entity that held Mandiant Cybersecurity Private Limited, an Indian company.

The appellant disclosed the resulting capital gains in its return but claimed that they were not taxable in India under Article 13(6) of the India–Ireland treaty. It also submitted that the transaction qualified for an intra-group transfer exemption under Irish domestic law.

The Revenue argued that the offshore transaction resulted in an indirect transfer of shares in the Indian subsidiary. According to the department, Explanation 5 to Section 9 of the Income Tax Act applied because the foreign entity derived substantial value from the Indian company.

The Assessing Officer sought to tax the gains under Article 13(5) of the treaty and invoked the Multilateral Instrument (MLI), reasoning that treaty provisions should prevent double taxation without creating opportunities for double non-taxation.

The Tribunal examined the transaction against the different categories of capital gains covered by Article 13.

It found that the ownership transferred was in a US entity, rather than an Indian resident company. Consequently, Article 13(5), dealing with the alienation of shares in a company resident in a contracting state, did not apply to the transaction.

The bench held that the gains fell within the residuary provision in Article 13(6). That provision allocates taxing rights over gains from property outside the preceding categories exclusively to the contracting state in which the alienator is resident.

Since the appellant was an Irish resident, the Tribunal concluded that the transaction did not trigger an income tax liability in India under Article 13(6). 

A central issue was whether the domestic definition of “transfer” in Section 2(47) could be used to expand the meaning of “alienation” in the treaty.

The Tribunal rejected the tax authorities’ approach. It held that treaty terminology must be interpreted according to its ordinary meaning, context, object and purpose. The inclusive domestic definition of “transfer” could not be used to extend the treaty provision to an indirect transfer of underlying Indian assets.

The bench explained that Article 3(2), concerning undefined treaty terms, could not be invoked to alter substantive taxing rights where no genuine ambiguity existed.

Relying on the principles discussed in Telstra Singapore, Sanofi Pasteur Holding and Sofina S.A., the Tribunal held that a domestic deeming fiction could not create a “look-through” approach under a treaty provision that did not permit it.

Accordingly, Explanation 5 to Section 9 remained confined to the domestic statute and could not be read into the India–Ireland DTAA to tax the disputed gains.

The Tribunal also rejected the Revenue’s reliance on Article 6(1) of the MLI to allege abuse of the treaty.

It found that the allegation lacked supporting evidence or a specific enquiry establishing abuse. The company had been established in 2013, maintained substantial business operations and employees, and held investments in several entities.

The share purchase agreement covered the transfer of ownership in seventeen entities. In these circumstances, the Tribunal found substance in the company’s argument that the global restructuring could not narrowly be characterised as an arrangement undertaken only to transfer the Indian subsidiary indirectly.

The bench therefore held that the MLI provisions had been invoked on an incorrect basis.

The Tribunal allowed the company’s appeal, ruling in its favour on both the software receipts and offshore capital gains issues, with consequential relief to follow.

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