Case Law Details
One of the necessary conditions for holding that an agent constitutes a PE of an enterprise is that the agent must have an authority to conclude contracts or should have been found to be habitually entering into or concluding contracts on behalf of the enterprise. In the present case, there is no allegation that Adobe India is authorised to conclude contracts on behalf of the Assessee or has been habitually doing so. In the present case, there is no allegation that Adobe India is authorised to conclude contracts on behalf of the Assessee or has been habitually doing so. In view of the Same Adobe India cannot be termed as PF of dobe Systems USA under India-USA DTAA.
Briefly stated, the controversy in these petitions involves the question whether Adobe Systems India Private Limited (an Indian subsidiary of the Assessee and hereafter referred to as Adobe India) could be considered as its Permanent Establishment (PE). And if so, whether any part of the Assessee’s income, could be attributed to such PE in respect of the activities carried out by Adobe India, income from which had been subjected to transfer pricing scrutiny/adjustment.
A subsidiary company is an independent tax entity and is separately taxed for its income in the country of its domicile. In the present case, Adobe India is a separate assessee and is liable to pay tax on its income. The fact that a holding company in another contracting state exercises certain control and management over a subsidiary would not render the subsidiary as a PE of the holding company. This is expressly spelt out in paragraph 6 of Article 5 of the Indo-US DTAA.
The aforesaid principle is also stated in Klaus Vogel on Double Taxation Conventions, Third Edition in the following words:-
“40. [Principle] It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by the subsidiary company is managed by the parent company does not constitute the subsidiary company a permanent establishment of the parent company.”
Having stated the above, we must also clarify that the fact that a subsidiary company is a separate tax entity does not mean that it could never constitute a PE of its holding company. In certain circumstances, where the specified parameters defining PE – in the present case Article 5 of the Indo-US DTAA – are met, a subsidiary would constitute a PE of its holding company. However, in determining whether the requisite parameters are met, it is necessary to bear in mind that a subsidiary is a separate legal entity and its activities, the income from which are assessed in its hands at arm‟s length pricing, cannot be the sole basis for the purposes of imputing the subsidiary to be a PE of its holding company. This is so because, a subsidiary is liable to pay tax on its income and a foreign holding company is liable to pay tax on its income and the same set of activities cannot be construed as that of a holding company through its PE and that of the subsidiary as its own activity resulting in income from the same activities being taxed twice over; once in the hands of the subsidiary and again in the hands of the holding company. In cases where a subsidiary acts as an agent of its holding company, the income from the activities conducted by the subsidiary for and on behalf of its principal would be assessed in the hands of the principal – that is, the holding company – and not in the hands of the subsidiary. The subsidiary would only be liable to pay tax on the remuneration receivable as an agent and such remuneration would clearly be deductable while computing the income in the hands of the holding company.
Keeping the aforesaid principles in mind, we may now examine whether the AO had any reason to hold that the Assessee has a PE in India in terms of Article 5(1), 5(2)(l) or Article 5(5) of the Indo-US DTAA.
Para (1) of Article 5 defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term ‘fixed place of business’ includes premises, facilities, offices which are used by an enterprise for carrying on its business. The fixed place must be at the disposal of an enterprise through which it carries on its business wholly or partly. Although, the word ‘through’ has been interpreted liberally but the very least, it indicates that the particular location should be at the disposal of an Assessee for it to carry on its business through it. These attributes of a PE under Article 5(1) of the Indo-US DTAA were elucidated by the Supreme Court in Morgan Stanley (supra). In a recent decision, a Division Bench of this Court in Director of Income Tax v. E-Funds IT Solution: [2014] 364 ITR 256 (Delhi) reiterated the above-stated attributes; after quoting from various authors, this Court held that “The term ‘through’ postulates that the taxpayer should have the power or liberty to control the place and, hence, the right to determine the conditions according to its needs”. In the present case, there is no allegation that the Assessee has any Branch Office or any other office or establishment through which it is carrying on any business other than simply stating that Adobe India’s constitutes the Assessee’s PE. There is no evidence that the Assessee has any right to use the premises or any fixed place at its disposal. The AO has simply proceeded on the basis that the R&D services performed by Adobe India are an integral part of the business of the Assessee and therefore, the offices of Adobe India represent the Assessee‟s fixed place of business.Thus, clearly the right to use test or the disposal test is not satisfied for holding that the Assessee has a PE in India in terms of Article 5(1) of the Indo-US DTAA.
In E-Funds IT Solution (supra), this Court had expressly negated that an assignment or a sub-contract of any work to a subsidiary in India could be a factor for determining the applicability of Article 5(1) of the Indo-US DTAA. The Court had further expressly held that :
“Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location permanent establishment. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place permanent establishment exists.
Reference to core of auxiliary or preliminary activity is relevant when we apply paragraph 3 of Article 5 or when sub-clause (a) to paragraph 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place permanent establishment.”
Thus, the AO’s view that Adobe India constituted the Assessee’s PE in terms of paragraph 1 of Article 5 of the Indo-US DTAA is palpably erroneous and not sustainable on the basis of the facts as recorded by him.
It is further noted d that there is no material to hold that the Assessee’s employees constitute a Service PE in terms of Article 5(2)(l) of the IndoUS DTAA. The Assessee has denied that any of its employees has rendered any service in India. There is no material available with the AO that would contradict the same. The AO has concluded that the Assessee has a PE in India in terms of Article 5(2)(l) of the Indo-US DTAA, only on the basis that the Assessee has a right to audit Adobe India and that the agreement between the Assessee and Adobe India entails that the Assessee would provide specifications, assistance and supervision for the R&D services procured by the Assessee. The said terms of the agreement do not in any manner indicate that the Assessee has been providing services in India. Clause 5.5 of the agreement referred to by the AO indicates that the Assessee is authorized to audit the Indian subsidiary (Adobe India), so as to ensure that Adobe India adheres to the standards required by the Assessee. The same cannot possibly lead to the inference that the Assessee has been rendering services to Adobe India. The stipulation as to provide specification and further assistance is only for the purpose of ensuring that the Assessee procures the service that it has contracted for from Adobe India. Such clauses in the agreement cannot lead to an inference that the Assessee has a PE in India for rendering services, that is, a Service PE in terms of Article 5(2)(l) of the Indo-US DTAA. This has also been authoritatively held by Supreme Court in Morgan Stanley (supra).
It is also noteworthy that the AO while computing the income that is alleged to have escaped assessment has also not alluded or attributed any income to the services alleged to have been rendered by the Assessee to Adobe India. In terms of Article 7(1) of the Indo-US DTAA, only such income as is attributable to the PE can be taxed in the State where the PE is located.
The AO’s view that Adobe India constitutes the Assessee’s PE under Article 5(5) of the Indo-US DTAA is also wholly unsustainable. Article 5(5) of the Indo-US DTAA provides for an exclusion to Article 5(4) of the Indo-US DTAA. In terms of Article 5(4), where a person acts in a contracting state on behalf of an enterprise of the other contracting state, the enterprise shall be deemed to have a Permanent Establishment in the first mentioned state. In other words, a dependent agent of an enterprise would constitute its PE. In the present case, there is no material to form a view that Adobe India acts as an agent for and on behalf of the Assessee. Further, there is no allegation that any of the other conditions specified under clauses (a), (b) or (c) of paragraph 4 of Article 5 of the Indo-US DTAA are applicable to Adobe India. One of the necessary conditions for holding that an agent constitutes a PE of an enterprise is that the agent must have an authority to conclude contracts or should have been found to be habitually entering into or concluding contracts on behalf of the enterprise. In the present case, there is no allegation that Adobe India is authorised to conclude contracts on behalf of the Assessee or has been habitually doing so.
Insofar as Article 5(5) of the Indo-US DTAA is concerned, the same postulates that any business carried through a broker, commission agent or any other agent of an independent status acting in its normal course would not constitute a PE of an enterprise. The exception to this being that if activities of such agent are devoted wholly or almost wholly on behalf of the enterprise and the transactions between enterprise and the agent are not made under arm’s length conditions. In such case, the agent would not be considered as an agent of independent status. In the present case, apart from the AO stating so, there is no reason to assume that Adobe India is an agent of the Assessee; there is neither any agreement which states so nor any material which indicates that Adobe India acts as such. More importantly, it is not disputed that Adobe India is assessed on its income determined at ALP and, therefore, there is no occasion for the AO to assume that Adobe India constitutes the Assessee’s PE under Article 5(5) of the Indo-US DTAA.
