DCIT Vs Adobe Systems Software Ireland Ltd. (ITAT Delhi)
Conclusion: In present facts of the case, the Hon’ble ITAT by relying upon the Judgment of Hon’ble Supreme Court on the issue of Royalty observed that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements are not the payment of Royalty for the purpose of copyright in the computer software, and the same do not give rise to any income taxable in India.
Facts: Adobe Systems Software Ireland Limited is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with Double Taxation Avoidance Agreemen between India and Ireland. Therefore, it is entitled to the beneficial provisions of the India Ireland DTAA. ADIR is a wholly owned subsidiary of Adobe Software Trading Company Limited, Adobe Systems Incorporated is the ultimate parent company of ADIR. Adobe USA has a subsidiary in India known as Adobe Systems India Pvt. Ltd. (‘Adobe India’) that provides marketing support services to ADIR. The assessee is engaged in the distribution of shrink-wrapped/off the shelf/electronic download computer software (‘Adobe Products’) outside of North America including India and it supplies the Adobe Products to its non-exclusive Indian distributors on a principal to principal basis. As per the submission of the assessee, it purchases the software built by the third party turnkey manufacturers. No further customization or modification takes place by the assessee. The assessee itself does not undertake any R & D, development and manufacturing of software. The distributors act as the supplier of the assessee in India for selling the Adobe products in India. The AO treated the amount received by ADIR from sale of software to Indian distributors as royalty income u/s 9(1)(vi) of the Act as well as under Article 12(3) of India Ireland tax treaty and taxed the same at the rates applicable with receipt as royalty income.
In the alternate, the AO also held Adobe India is working for the assessee as an agent. He observed that the assessee was having fixed place PE/dependent agent PE. On this basis, he attributed certain profit as revenue receipt from India as business profit taxable in India in the hands of the assessee.
The Hon’ble Tribunal on the issue of Royalty, observed that in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos.8733-8734 of 2018), wherein, it has been held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements are not the payment of royalty for the purpose of copyright in the computer software, and the same do not give rise to any income taxable in India. Therefore, the said issue was decided in favor of the assessee.
The next issue raised in these appeals relates to the existence of dependent PE in India/fixed place PE in India and the attribution of income as the case may be. To this the Hon’ble Tribunal held that once a transfer pricing analysis has been undertaken in respect of the Indian AE, nothing further would be left to be attributed to it as the alleged PE of Adobe Ireland and that, accordingly, would automatically extinguish the need for attribution of any additional profits to the alleged PE.
After relying upon some of the Judgments of Hon’ble High Courts and Hon’ble Supreme Court, it has found that the transactions have been found to be at Arm’s Length by the Transfer Pricing Officer in the Transfer pricing order of the AE i.e. Adobe India. This is not disputed by the Revenue. Since the transactions between the assessee and its Indian AE has been found to be at Arm’s Length in the transfer pricing adjustment, no further attribution can be made to the PE of the appellant as claimed. Hence, this issue was decided in favour of the assessee.
FULL TEXT OF THE ORDER OF ITAT DELHI
These are cross appeals by the assessee and Revenue arising out of the separate appellate orders. Since, the issues are common and connected and all the appeals were heard together these are being consolidated and disposed off together for the sake of convenience.
2. Brief facts of the case are that Adobe Systems Software Ireland Limited (‘the company or ‘ADIR’) is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with Double Taxation Avoidance Agreement (‘DTAA’ or ‘tax treaty’) between India and Ireland. Therefore, it is entitled to the beneficial provisions of the India Ireland DTAA. ADIR is a wholly owned subsidiary of Adobe Software Trading Company Limited (‘ASTCL’) Adobe Systems Incorporated (‘Adobe USA’) is the ultimate parent company of ADIR. Adobe USA has a subsidiary in India known as Adobe Systems India Pvt. Ltd. (‘Adobe India’) that provides marketing support services to ADIR. The assessee is engaged in the distribution of shrink-wrapped/off the shelf/electronic download computer software (‘Adobe Products’) outside of North America including India and it supplies the Adobe Products to its non-exclusive Indian distributors on a principal to principal basis. As per the submission of the assessee, it purchases the software built by the third party turnkey manufacturers. No further customization or modification takes place by the assessee. The assessee itself does not undertake any R & D, development and manufacturing of software. The distributors act as the supplier of the assessee in India for selling the Adobe products in India.
3. The Assessing Officer treated the amount received by ADIR from sale of software to Indian distributors as royalty income u/s 9(1)(vi) of the Act as well as under Article 12(3) of India Ireland tax treaty and taxed the same at the rates applicable with receipt as royalty income.
4. In the alternate, the Assessing Officer also held Adobe India is working for the assessee as an agent. He held that the assessee was having fixed place PE/dependent agent PE. On this basis, he attributed certain profit as revenue receipt from India as business profit taxable in India in the hands of the assessee. In some of the cases before us, this issue has been raised either by the Revenue or the assessee consequent upon the order of the First Appellate Authority in different case as above. A nutshell chart of the issues as recorded above is summarized hereunder as given by the ld. counsel for the assessee. The same is not disputed by the Revenue. The same duly captures the issues in dispute in the appeals here.
5. As regards, the receipt from the distribution/ supply of software as royalty, the Ld. Counsel for the assessee at threshold submitted that this issue is already covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos.8733-8734 of 2018) and other civil appeals, wherein, it has been held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements are not the payment of royalty for the purpose of copyright in the computer software, and the same do not give rise to any income taxable in India. Further, the ld. counsel for the assessee stated that apart from the above, in assessee’s own matters for AY 2008-09 and AY 2009-10, the ITAT has considered similar facts and decided the issue in favour of the assessee. The Ld. Counsel for the assessee further submitted that in subsequent assessment years after the pronouncement of the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra) i.e. for AY 2016-17, AY 2017-18, AY 2018-19, AY 2019-20 and AY 2020-21, the Assessing Officer has not alleged that the receipts of the assessee from distribution/supply of software are taxable royalty in India.
6. The Ld. CIT-DR did not dispute the above proposition either in the Court or in the written submission filed subsequently. Accordingly, we find that the issue involved is squarely covered in favour of the assessee by the decision of the Hon’ble Apex Court as above. We decide this issue in favour of the assessee.
7. The next issue raised in these appeals relates to the existence of dependent PE in India/fixed place PE in India and the attribution of income as the case may be as emanating out of the chart hereinabove. A broad submission by the Ld. Counsel for the assessee has been filed in this regard, which are summarized as under:-
“1. Receipts from distribution/supply of software as royalty
