ITAT rules Cloudera Inc's software subscription revenue not taxable as royalty

In a relief for U.S.-based Cloudera Inc., the New Delhi bench of the Income Tax Appellate Tribunal (ITAT) has ruled that software subscription fees earned by the company from Indian customers are not taxable in India as royalty or fees for technical services (FTS). However, the tribunal has clarified that a separate stream of professional services provided by the company is taxable as technical services.

The division bench of judicial member Vikas Awasthy and an accountant member Renu Jauhri ruled this while partly allowing an appeal filed by the US company for the assessment years 2020-21, 2021-22 and 2022-23.

The order is expected to clarify the taxation of software subscriptions and related services, according to tax experts.


In this case, the tribunal held that receipts of about Rs. 56.63 crore from software subscriptions did not involve the transfer of technology or intellectual property and therefore could not be treated as royalties or FTS under the Income-tax Act or the India-U.S. tax treaty. However, the tribunal upheld the taxability of Rs. 3.05 crore received during assessment year 2022-23 for professional services, finding that those services went beyond routine implementation support.

The bench observed that while some customers purchased only software subscriptions, others paid substantial additional amounts for professional services, with the scale of payments varying significantly across customers. That suggested the services were customised and customer-specific rather than incidental to software use, the tribunal said.

“The service fee paid by certain Indian customers was disproportionately high compared to the licensing fee; the Tribunal held such services to be specialised and customised customer-specific technical services qualifying as FIS. Interestingly, while holding the fee for professional services to be in the nature of FIS, the ITAT has not elaborated how such services satisfy the 'make-available' condition under Article 12 of the India-USA DTAA,” said Hitesh Sawhney, partner, Price Waterhouse & Co. LLP.

“Going forward, companies must carefully structure, document, and segregate standard software subscriptions from value-added professional services, supported by robust contemporaneous documentation, to defend their tax positions before Indian revenue authorities,” added Sawhney.

It concluded that those professional services constituted fees for technical services under both domestic tax law and the India-U.S. Double Taxation Avoidance Agreement, and would be taxable at 10%.

The tribunal also directed the tax department to refund the proportionate equalisation levy paid by Cloudera on receipts ultimately held to be FTS, while granting consequential relief on surcharge, cess, and interest.