ZSCALER, INC.,UNITED STATES V. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAX, CIRCLE 3(1)(1), DELHI, DELHI

ITA 3376/DEL/2023

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The case involves Zscaler Inc., a US-based company, appealing against the final assessment orders passed by the Deputy Commissioner of Income-tax, which held that Zscaler India, its Indian subsidiary, constituted a DAPE and attributed certain income to it. The main legal contention was whether Zscaler India had the characteristics of a DAPE under the India-US DTAA, which would subject the income to Indian taxation. The tribunal examined the nature of the relationship between Zscaler Inc. and Zscaler India, the roles and responsibilities outlined in their agreements, and the actual business operations conducted in India.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 653089 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Other Referred Cases: DIT (International Taxation) v. Morgan Stanley & Co., Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax, Bharti Cellular Limited vs. ACIT, Circle 57, Kolkata and Anr., Progress Rail Locomotive Inc. vs. DCIT, DIT vs. Western Union Financial Services Inc., SFDC Ireland vs. CIT, Siemens Mobile Communications SPA vs. DCIT
• Laws Referred To: Income Tax Act, 1961, DTAA between India and USA
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: EKTA JAIN
• Assessee Lawyers: AJAY VOHRA
• Keywords: Business income; Opportunity of being heard; Transfer pricing; International transaction; Onus to prove; Principle of natural justice; Diversion of income; TDS; Double taxation relief; Permanent establishment
• Section: 143(3); 142(1); 11; 234B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: D : NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER AND SHRI MANISH AGARWAL, CCOUNTANT MEMBER ITA No.3376/Del/2023 Assessment Year: 2021-22 ITA No.928/Del/2025 Assessment Year : 2022-23 Zscaler Inc., 120, Holger Way San Jose, California, USA, USA 95134. PAN: AAACZ4350P Vs DCIT, International Tax Circle 3(1)(1), Delhi. (Appellant) (Respondent) Assessee by : Shri Ajay Vohra, Sr. Advocate; Shri Kishore Kunal, Advocate; Ms Ankita Prakash, Advocate; & Shri Govind Gupta, Advocate Revenue by : Ms Ekta Jain, CIT-DR Date of Hearing : 05.05.2025 Date of Pronouncement : 18.06.2025 ORDER PER ANUBHAV SHARMA, JM: These appeals are preferred by the Assessee against the final assessment orders dated 31.10.2023 and 22.01.2025 passed by the Dy. Commissioner of Income-tax, International Tax Circle 3(1)(1), Delhi (hereinafter referred to as the Ld. AO) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ITA No.3376/Del/2023 ITA No.928/Del/2025 2 (hereinafter referred to as ‘the Act’) for AYs 2021-22 and 2022-23, respectively. Since the issues are common appeal, for AY 2021-2022 is considered lead year appeal and facts or orders wherever relevant are picked or referred from appeal for AY 2021-2022. 2. Heard and perused the record. The relevant facts as picked from record and submissions are that 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 delivers following four integrated and comprehensive solutions to customers using cloud platform, the Zscaler Zero Trust Exchange: (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 IoT, devices with Zscaler Cloud Protection or ZCP. 2.1 Further, the assessee has submitted that., the assessee is the patent owner of the above softwares. The software are sold through distributors/resellers in India and assessee has a subsidiary in India i.e., ZSCALER Softech India Pvt ITA No.3376/Del/2023 ITA No.928/Del/2025 3 Ltd, which provides Information technology, IT support, sales support and marketing services. 3. The said company (hereinafter referred as “the assessee” or “the assessee company”) filed its return of income for Assessment Year (“AY\") 2021-22 on 15.03.2022 declaring ‘Nil’ income. As per the ITR, the assessee is in receipt of Rs.1.31,38.71,018/- and the same was claimed to be exempt from tax in India as per the DTAA between India and USA, thus claiming refund of Rs.12,01,53,910/- on account of TDS and Advance Tax. The case was selected for complete scrutiny under CASS. The statutory notice under section 143(2) of the Act was issued on 27.06.2022 followed by notices u/s 142(1) of the Act calling for details and documents. In response to such statutory notices, the assessee furnished responses from time to time. The total receipts of the assessee during the financial year 2020-21 relevant to A.Y. 2021-22 from the provision of software-based information security solutions is Rs. 1,31,38,71,018/-. 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-USA DTAA. 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.\" ITA No.3376/Del/2023 ITA No.928/Del/2025 4 4. Ld. AO has considered the taxability of these receipts under India-USA DTAA, holding M/s ZSCALER Softech India Pvt. Ltd., constitutes a Dependant Agent Permanent Establishment (DAPE) in India. Examining the transactions from the angle of applicability of Article 5(4) and clause (c) of said Article of the India-USA DTAA concluded that in the instant case, M/s ZSCALER Softech India Pvt. Ltd., the India subsidiary of the assessee company provides sales/marketing support to assessee company for securing of orders for selling/licensing of Zscaler Software products to Indian distributors. M/s ZSCALER Softech India Pvt. Ltd is earning its entire income from the assessee company i.e.Zsclaer Inc, thus, economically dependent on the assessee. 4.1 Further, as an independent agent falling out of the scope of dependent agent as per paragraph 5 of Article 5 of India-USA DTA, M/s ZSCALER Softech India Pvt. Ltd., acts wholly for Zscaler Software products for distribution of software in India. Therefore, in view of the aforesaid provisions, M/s ZSCALER Softech India Pvt. Ltd., would not be excluded from the definition of DAPE as it is not an independent agent. 5. Accordingly, relying Article 7 of Indian DTAA, the ld. AO concluded that in the instant case, M/s ZSCALER Softech India Pvt. Ltd., the PE is engaged in licensing/ selling of software in India for which the PE has provided marketing and sales support. Accordingly, the profit of the PE would be profit from distribution of software and commission income for intermediation. ITA No.3376/Del/2023 ITA No.928/Del/2025 5 6. The assessee vide its reply to show cause also stated that it has paid equalisation levy on the total receipts and hence the receipts should be exempt under section 10(50) of the Income Tax Act. However, that was not sustained by the ld. AO for following reasons; “Firstly, the assessee the assessee deliberately did not disclose this information in the proceedings earlier and submitted it in the last response. The assessee by paying equalisation levy at the rate of 2% on the receipts wants to avoid paying taxes at the rate of 40% on the profit attributed to business connection in India as business Income. As per the form no. 1 submitted by assessee, it is observed that assessee has filed the said form on 20th October, 2022, when the assessment proceedings for the year under consideration were underway. The entire payment of equalisation levy has been made on 27th September, 2022. The notice under section 142(1) was already sent on 09.09.2022. Only after the case was selected for scrutiny, the assessee to avoid paying taxes at the rate of 40%, paid equalisation levy at the rate of 2% of the receipts as an afterthought. It is important to first ascertain whether assessee and the consideration received during the year falls under the purview of Equalisation Levy Act or not. CHAPTER VIII EQUALISATION LEVY Charge of equalisation levy on e-commerce supply of services. 165A. (1) On and from the 1st day of April, 2020, there shall be charged an equalisation levy at the rate of two per cent. of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it- (i) to a person resident in India; or (ii) to a non-resident in the specified circumstances as referred to in sub- (ii) section (3); or (iii) to a person who buys such goods or services or both using internet protocol (ii) address located in India. ITA No.3376/Del/2023 ITA No.928/Del/2025 6 (2) The equalisation levy under sub-section (1) shall not be charged – (i) where the e-commerce operator making or providing or facilitating ecommerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment; Hence, section 165A clearly states that E-Commerce operator who has a PE in India does not come under the purview of Equalisation levy. In the instant case, PE has been established in assessee's case by treating ZSCALER Softech India Pvt. Ltd as dependent agent PE discussed in detail above. Hence, the assessee does not fall under section 165А. As clearly discussed above, the assessee's receipts falls under business income having PE in India. Hence, these receipts don't fall under the chapter of equalisation levy and hence are not eligible for exemption under section 10(50) of the Act.” 7. The objections filed by the assessee were dismissed by the Dispute Resolution Panel (DRP), for which the assessee is in appeal and the grounds as cover the issues for both years are reproduced below from appeal for AY 2021- 2022:- “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 32,84,67,754 as against Nil returned income 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 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, the Ld. AO has erred in holding Zscaler Softeeh India Private Limited (‘Zscaler India’) as Dependent Agent Permanent Establishment (‘DAPE’) of the Appellant without issuing show cause notice and without providing 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. ITA No.3376/Del/2023 ITA No.928/Del/2025 7 4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that Zscaler India constitutes Permanent Establishment (‘PE’) by way of DAPE as per the provisions of Article 5 of Double Taxation Avoidance Agreement (‘DTAA’) between India and USA (India-USA DTAA’). 5. 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. (284 ITR 260). 6. That on the facts and circumstances of the case and in law and without prejudice to the above, the Ld. AO has erred in attributing entire receipts earned from India to be the income from operations of the alleged PE in India. 7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in arbitrarily adopting a profit margin of 25% without appreciating that the Assessee has reported losses from global operations and therefore, no attribution of profit can be made. 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 denying exemption under section 10(50) of the Act without appreciating the factual matrix of the case. 9. That on the facts and circumstances of the case and in law, the Ld. AO, has erred in not allowing the credit of equalization levy paid by the appellant without following the express directions of Hon’ble Dispute Resolution Panel to give credit of the equalization levy paid while determining tax liability of the Appellant. 10. That on the facts and circumstances of the case and in law, the Ld. AO, has erred in charging interest under section 234A and 234B of the Act. 11. 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. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the hearing before the Hon’ble Tribunal. Further, the aforesaid grounds are mutually exclusive mid without prejudice to each other.” ITA No.3376/Del/2023 ITA No.928/Del/2025 8 8. Now based on the rival contentions, and considering that ld. Sr. Counsel as well as the ld. DR have heavily relied the various clauses of Reseller Agreement and Service agreement, we consider it expeditious to reproduce certain extracts from the relevant Reseller Agreement entered by assessee with one of its Partners, M/s Tech Mahindra Ltd., copy of which is made available at pages 1-19 of PB, and pertinent is to mention that such agreements with other Partners like Infoysys Ltd. and other companies are made available at pages 20- 64 of the PB. “1.4 “End User Subscription Agreement\" or \"FUSA\" means the terms of service by and between End User and Zscaler governing the use of the Services by such End User. “1.10 “Services\" means those Zscaler products and services provided to an End User pursuant to a valid Purchase Order accepted by Zscaler. 2.1 Grant of Rights for Managed Service. Subject to the terms of this Agreement, Zscaler hereby grants Partner a non-exclusive, non- transferable, non-assignable, right during the Term of the Agreement and in the Territory to permit End Users to access and use the Services during the applicable Subscription Term and for the number purchased Seats and/or Locations (as specified in the relevant Purchase Order). Partner is not authorized to, and shall not, sell, market, promote or offer for sale the Services to resellers, distributors, OEMs, other service providers or other channel partners. End Users shall have no right to sell or transfer the Services to any third party. 2.3 Restrictions. Title to the Services, including without limitation all copies of software made available in connection with the Services, retained by Zscaler. Except to the extent such restrictions are not permitted under applicable law, Partner agrees not to decompile, disassemble, or otherwise reverse engineer the Services or any software made available in connection with the Services. For the term of this Agreement, Partner may not use the Zscaler Confidential information that it may acquire in connection with this Agreement to develop any service or product which would be in direct competition with the Zscaler services. Zscaler remains the owner and grantor of the Services, and the provider of the Services. Partner is not ITA No.3376/Del/2023 ITA No.928/Del/2025 9 Zscaler’s agent for purposes of any other contracts, and has no authority to negotiate such contracts on Zscaler’s behalf. 3.5 End User Subscription Agreement (for Resale). Partner acknowledges that each End User must agree to a \"click-through\" EUSA with Zscaler which is built into the Services and End User's access and use of the Services is conditioned on End User's acceptance of the EUSA. If the End User requests a hard copy of the EUSA to review and/or sign, Partner agrees to either get the latest version from wwww.zscaler.com/legal or request the latest version from Zscaler, Partner further agrees to promptly inform Zscaler of all known breaches of the EUSA by an End User. 5.1 Purchase Orders. A valid Purchase Order must include the information listed in Exhibit B. Each Purchase Order is subject to written acceptance (or rejection) by Zscaler in its sole discretion, and no Purchase Order shall be deemed accepted by Zscaler unless Zscaler has delivered written acceptance to Partner. Any Purchase Order submitted by Partner shall be governed by the terms and conditions of this Agreement. The parties agree that any conflict between the provisions of a Purchase Order and the terms contained in this Agreement will be resolved in favor of the terms contained in this Agreement. By entering into this Agreement, Partner waives any preprinted terms and conditions set forth in its Purchase Order (or any other Partner document) that may be accepted by Zscaler for Partner's convenience. Zscaler shall invoice Partner pursuant an accepted Purchase Order following the scheduling of the activation of Services for an End User. Partner is responsible for invoicing the End User for any applicable fees that Partner charges to the End User, and Partner is solely responsible for collection from End User of such fees. 5.2 Prices for Services: Partner shall receive a discount off of Zscaler's Retail Price List for the Services based on Partner's Partner Level as agreed to separately by the parties. Prices do not include sales, use, VAT, excise, export, withholding or similar taxes or fees. Zscaler reserves the right to change the Retail List Prices for the Services at any time with at least thirty (30) days prior written notice; however, any such price change will not affect orders in progress or orders that have already been quoted to Partner. Partner is solely responsible for any errors in the pricing for the Services communicated to End Users. Mark-up rate means the percentage set forth in Appendix A, as may be amended in writing by the Parties from time to time.” ITA No.3376/Del/2023 ITA No.928/Del/2025 10 9. Further the relevant extracts of clauses from Service agreement dated 1/7/2017, between appellant and Indian subsidiary, copy of which is available at page 65-102 of PB are reproduced below; “2.1 Provision of Services: Subject to the terms and conditions of this Agreement, Service Provider shall perform the Services as set forth in Appendix B. Service Provider shall employ qualified persons, purchase or lease property, and acquire or construct such equipment and facilities as are necessary for the proper performance of the Services. 2.12 Conclusion of contract: The Service Provider shall not conclude contracts on behalf of the Service Recipient. 2.13 Execution of Contracts and Authority to Bind Service Recipient. The Parties expressly agree and understand that in performing the Services hereunder, neither Service Provider nor its employees shall execute any contracts of any nature whatsoever on behalf of, or in the name of, Service Recipient. It is clarified that the ultimate decision to accept/reject a client partner shall always vests with Service Recipient. Service Provider shall only identify and recommend a client partner if required by Service Recipient. Service Provider in no way shall bind the Service Recipient to accept the identified client/ partner. Service Provider shall at all times not convey any contrary impression to the clients. 2.14 Nature of Relationship: Nothing contained in this Agreement shall be construed to a. give either Party the power to direct and control the day-to-day activities of the other Party; b. allow Service Provider to create or assume obligations on behalf of Service Recipient except as provided herein. A. Service Fees: The Service Recipient shall, for each Fiscal year, pay the Service Provider a fee (the \"Service Fee) for providing the Services during such year equal to the sum of the cost of the Service Provider along with a Mark-up rate multiplied by such Costs. Service Provider will also bill out of pocket expenses incurred during provision of services on actual basis and will obtain prior approval. Service Provider shall mention Service Fee separately for each category of service as mentioned in Appendix-B for which invoice is raised. Service Provider shall send a monthly invoice to Service Recipient ITA No.3376/Del/2023 ITA No.928/Del/2025 11 Section 8: Intellectual Property 8.1 Disclose: Service Provider hereby agrees that all Innovations and Work Product that are made, conceived, developed, reduced to practice, discovered or created (in each case, whether or not during regular business hours) by Service Provider and its employees (solely or in collaboration with others) arising from or relating to the provision of any Services, including without limitation any Work Product and Innovations that relate to any products of Service Recipient and predecessors and earlier versions thereof, shall be disclosed in writing promptly to Service Recipient and shall be the sole and exclusive property of Service Recipient. 8.10 Attorney-in-Fact: Service Provider irrevocably appoints Service Recipient to be its attorney-in-fact, and on its behalf to sign execute or make any such instrument, and generally to use its name, for the purpose of giving-to-Service Recipient (or its nominee) the full benefit of the provisions of this Section 8. 8.11 Limited License: Service Provider shall have a limited license to use Service Recipient's Intellectual Property, solely for the term of this Agreement and only for fulfillment of Service Provider's obligations contained herein. Such license to use Service Recipient's Intellectual Property shall be non-exclusive and royalty free. The grant of license to Service Provider shall not be construed to grant Service Provider the right to use any Intellectual Property of Service Recipient for any other purpose. Service Provider shall not do, or cause or permit to be done, anything so as to create any Third Party interest in any Intellectual Property of Service Recipient.” 10. Now we find that the said Reseller Agreements lays down the terms and conditions of providing the aforesaid narrated solutions to Indian customers who are End Users and Zscaler Softech India Pvt. Ltd. which had entered into a marketing support agreement on 01.07.2017 with the Appellant and is engaged in providing back-end support services to the Appellant. The role of Zscaler India is merely limited to providing Information technology Service, Information Technology enabled services and marketing support services such as the product marketing, undertaking product demos, identification of potential ITA No.3376/Del/2023 ITA No.928/Del/2025 12 customer leads and providing relevant information to the Appellant on customer preferences/ expectations, etc. 11. Interestingly, as ld. Sr. Counsel has pointed out, we find that for same set of services, pprior to AY 2021-22, the Appellant paid tax by considering the receipts from customers as Royalty @ 10% for AY 2019-20 and AY 2020-21. However, once the position of law was settled by the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax,[2021] 125 taxmann.com 42 (SC) holding that the revenues earned from provision of software-based solutions are not chargeable to tax as ‘royalty’, the Appellant started treating its receipts earned by way of subscription towards provision of software-based information security solutions as business profits, not chargeable to tax in India in the absence of permanent establishment (“PE”) and also claimed refund of the taxes deducted by the payers. The Appellant also paid Equalization Levy while treating provision of software-based information security solutions as E-commerce supply or services. With change of law, now the revenue has changed its stance and has alleged Zscaler India is a Dependent Agent Permanent Establishment of the Appellant as per Article 5(4) of the India USA DTAA and attributed revenue earned by same to appellant. ITA No.3376/Del/2023 ITA No.928/Del/2025 13 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 ITA No.3376/Del/2023 ITA No.928/Del/2025 14 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 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 ITA No.3376/Del/2023 ITA No.928/Del/2025 15 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 ITA No.3376/Del/2023 ITA No.928/Del/2025 16 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'. 17. Further reliance can be placed on the judgment of the Hon’ble Delhi High Court in DIT vs. Western Union Financial Services Inc. [2025] 472 ITR 220, wherein, while 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 ITA No.3376/Del/2023 ITA No.928/Del/2025 17 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 ITA No.3376/Del/2023 ITA No.928/Del/2025 18 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. Order pronounced in the open court on 18.06.2025. Sd/- Sd/- (MANISH AGARWAL) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 18th June, 2025. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "