Case Law Details
Adobe Systems Software Ireland Ltd Vs ACIT (ITAT Delhi)
ITAT Delhi held that amount received from the supply of software and automated services, are not taxable in India.
Facts- The assessee is a non-resident corporate entity incorporated in Ireland. The assessee is a wholly owned subsidiary of Adobe System, USA and is engaged in licensing software in India through distributors to the end users. In the return of income filed for the impugned assessment year, the assessee offered an income of Rs.12,36,13,520, being in the nature of fee for technical services (FTS). However, couple of other receipts from software supply and automated services were not offered to tax in India as the assessee claimed that they are not taxable in India.
AO, while examining the aforesaid claim of the assessee, found that while dealing with identical nature of receipts in earlier years, it was held that the assessee has a dependent agent PE and fixed place PE in India in the form of an Indian Subsidiary viz. Adobe Systems India Pvt. Ltd., which provides marketing support services to the assessee. Thus, the Assessing Officer concluded that Adobe India is a dependent agent/fixed place PE of the assessee in India. Therefore, AO held that the receipts from software supply and automated services, being attributable to the PE, are taxable in India. DRP upheld the additions made by AO.
Conclusion- In the transfer pricing proceedings, the TPO, has observed that the international transaction between the assessee and the Indian AE are at arm’s length and has not proposed any further adjustment, in so far as, it relates to transaction of business support services. Therefore, the question which arises for consideration is, whether in such a scenario, still, profit can be attributed to the PE in India. As we find, while deciding identical issue in assessee’s own case in preceding assessment years, the Tribunal in the order has held that the finding of PE is also without cogent basis. Be that as it may issue of PE becomes academic and we are not engaging further into it.
We hold that the amount received by the assessee from the supply of software and automated services, are not taxable in India. The AO is directed to delete the additions.
FULL TEXT OF THE ORDER OF ITAT DELHI
The assessee has filed the captioned appeal assailing the final assessment order dated 26.02.2022 passed under Section 143(3) read with section 144C(1)(3)of the Income-Tax Act, 1961 for the assessment year 2017-18, in pursuance to the directions of learned Dispute Panel (DRP).
2. The grounds raised by the assessee are as under:
1.1 That on the facts and circumstances of the case and in law, the Ld. Assistant Commissioner of Income-Tax, Circle 1(1)(1), International Taxation, Delhi (“Ld. AO”) as well as the Hon’ble Dispute Resolution Panel – 1 (“DRP”) erred in holding that the Appellant has a dependent agent permanent establishment (“DRP”) in India in terms of Article 5(6) of the Double Taxation Avoidance Agreement between India and Ireland.
1.2 That the Ld. A.O and Hon’ble DRP grossly erred in completely disregarding the fact that Adobe India is an independent entity.
1.3 That the Ld. A.O and Hon’ble DRP grossly erred on the facts by concluding that Adobe India is dependent agent PE of the Appellant and the agent is actively involved in sales and supply of software distributed by the Appellant, without appreciating that the sales and supply of software were done by independent third-party distributors.
1.4 That the Ld. A.O and Hon’ble DRP grossly erred in law in holding Adobe India to be dependent agent PE of the Appellant without bringing any documentary evidence on record to substantiate the above statement.
2.1 That on the facts and circumstances of the case and in law, the Ld. A.O erred in attributing a sum of INR 1,04,22,80,978/- as business profits to the alleged DAPE of the Appellant in India.
2.2 Without prejudice to the above grounds, the Ld. A.O and Hon’ble DRP failed to appreciate that attribution of profits to the PE is a transfer pricing issue and grossly erred on facts and in law in disregarding established judicial pronouncement in India on the issue that once an arm’s length price has been determined for the Indian association enterprise [Adobe Systems India Private Limited (“Adobe India”) in the present case] which subsumes the functions, assets and risk (“FAR”) profile of the alleged PE, nothing further can be attributed to the PE.
2.3 Without prejudice to the above grounds, the Ld. A.O and Hon’ble DRP grossly erred in disregarding the fact that the amount paid by the appellant to Adobe India on account of marketing support services has been found to be at arm’s length during the assessment proceedings of Adobe India and the Appellant. Therefore, the Ld. A.O and Hon’ble DRP erred in further attributing profits to the Appellant’s alleged PE in India, without bringing any material on record to suggest that the alleged PE has been carrying out any other activity on behalf of Appellant, apart from marketing support services.
2.4 Without prejudice to the above grounds, the Ld. AO and Hon’ble DRP failed to appreciate that even if any profits for additional functions were required to be attributed, then the same should have been done in the hands of Adobe India.
2.5 Without prejudice to the above grounds, the Ld. A.O and Hon’ble DRP grossly erred in attributing revenue (instead of profits) to the alleged AE and thereby, erroneously arriving at a profitability of 77.5% whilst Appellant’s global profit during the year under consideration were 2.67% as corroborated by global audited accounts furnished by the Appellant.
3. That on the facts and in circumstances of the case in law, the Ld. A.O erred whilst computing the tax liability of the Appellant.
4. That on the facts and in circumstances in law, the Ld. O erred in not allowing credit of taxes deducted at source (“TDS”) amounting to INR 12,68,394 whilst computing the tax payable by the Appellant.
5. That on the facts and circumstances in law, the Ld. A.O erred in mechanically initiating proceedings under Section 274 red with 270A of the Act.
3. The dispute in the present appeal concerns existence or otherwise of a Permanent Establishment (PE) of the assessee in India and in case there is a PE, attribution of profit to the PE.
4. Briefly, the facts are, the assessee is a non-resident corporate entity incorporated in Ireland. The assessee is a wholly owned subsidiary of Adobe System, USA and is engaged in licensing of software in India through distributors to the end users. In the return of income filed for the impugned assessment year, the assessee offered income of Rs.12,36,13,520, being in the nature of fee for technical services (FTS). However, couple of other receipts from software supply and automated services were not offered to tax in India as the assessee claimed that they are not taxable in India.
5. In course of assessment proceedings, the Assessing Officer, while examining the aforesaid claim of the assessee, found that while dealing with identical nature of receipts in earlier years, it was held that the assessee has a dependent agent PE and fixed place PE in India in the form of an Indian Subsidiary viz. Adobe System India Pvt. Ltd., which provides marketing support services to the assessee. Thus, following the approach adopted in the earlier assessment years, the Assessing Officer concluded that Adobe India is a dependent agent/fixed place PE of the assessee in India. Therefore, he held that the receipts from software supply and automated services, being attributable to the PE, is taxable in India. Accordingly, he brought them to tax at the hands of the assessee. Though, the assessee raised objections before learned DRP against the draft assessment order, however, following their directions in the preceding assessment years, in assessee’ s own case, learned DRP upheld the additions made by the Assessing Officer.
6. Before us, learned counsel appearing for the assessee submitted that the issue is squarely covered by the decision of the Tribunal in earlier assessment years, wherein, it was held that, since, the transactions between the assessee and the India AE were at arm’s length, no further attribution can be made to the PE. In this context, he drew our attention to the decision of the Tribunal in ITA No.4921/Del/1017 & Ors. dated 27.08.2022 pertaining to assessment years 2007-08, 2010-11 to 2015-16. He submitted, in the facts of the present appeal, the transactions between the assessee and the Indian AE were found to be at arm’s length by the learned TPO. Therefore, no further attribution of profit can be made to the PE in India. Thus, he submitted, the additions made are to be deleted.
7. Learned Departmental Representative, though, agreed that the issue is covered by the decision of the Tribunal in earlier assessment years, however, she relied upon the observations of the Assessing Officer and learned DRP.
8. We have considered rival submissions and perused the material available on record.
9. Undisputedly, in the transfer pricing proceedings, the TPO, in order dated 18.02.2022, has observed that the international transaction between the assessee and the Indian AE are at arm’s length and has not proposed any further adjustment, in so far as, it relates to transaction of business support services. Therefore, the question which arises for consideration is, whether in such a scenario, still, profit can be attributed to the PE in India. As we find, while deciding identical issue in assessee’s own case in preceding assessment years, the Tribunal in the order, referred to above, has held as under:
“10. Upon careful consideration, we find that the issue of attribution to profit when the transaction has been found to at Arm’s Length between foreign party and the Indian AE, then no further attribution is required has already been decided by the decision of the Hon ‘ble Supreme Court in the case of DIT v. Morgan Stanley & Co. Inc [2007] 292 ITR 416 (SC). This aspect was very much before the Ld. CIT(A) and he has dealt with the same as under:-
“As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm’s length principle Article 7(2) is relevant. According to the AAR where there is an international transaction under which a non- resident compensates a PE at arm’s length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 also issued by CBDT. [Para 29] Article 7 of the U.N. Model Convention inter alia provides that only that portion of business profits is taxable in the source country which is attributable to the PE. It specifies how such business profits should be ascertained. Under the said Article, a PE is treated as if it is an independent enterprise (profit centre) dehors the head office and which deals with the head office at arm’s length. Therefore, its profits are determined on the basis as if it is an independent enterprise. The profits of the PE are determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own. Article 7(2) of the U.N. Model Convention advocates the arm’s length approach for attribution of profits to a PE. [Para 31] The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of Act. All provisions of Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set-off losses, etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are also made under the Act for example: Sections 44BB, 44BBA etc.). Under the impugned riding delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm’s length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm’s length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case.”
11. The Ld. CIT(A) in this regard held that the argument of the appellant is that if the international transactions between the parent entity (HO) and associated entity (AE) stand accepted at an Arm’s length based on FAR analysis, in that case, the question of appropriation of profit to DAPE does not arise. That his argument sans the concept of separate entity approach as provided in article 7 of India Ireland DTAA to distinguish between PE and parent entity (HO). That if the international transactions between India AE and HO have been accepted at an arm’s length by TPO, it does not automatically mean that FAR of DAPE stands subsumed in the same. That it is important to distinguish between the benchmarking analysis for the transactions between HO and associated enterprise (AE) vis-à-vis that of HO and its PE. That it may be important to make a distinction between the FAR of the parent entity (Head Office (HO) in Ireland) and AR of the DAPE (India). Further, it is also important to note that FAR of the DAPE is distinct from FAR of the associate enterprise (AE) in India. That so, practically, it is a interplay of FAR amongst three entities i.e. parent entity (HO) in Ireland, DAPE in India and Associated Entity (AE) in India.
12. We find the above view of the Ld. CIT(A) is not sustainable in the light of the decision of the Hon’ble Supreme Court as above in the case of DIT vs Morgain Stanley & (supra). To the same effect is the order of the ADIT v. E-Funds IT Solution Inc. [2017] 399 ITR 34(SC), Honda Motor Co. Ltd vs. ADIT (301 CTR 601)(SC) and of the Hon’ble Delhi High Court in the case of Adobe Systems Inc. v. ADIT [WP(C)2384, 2385, 2390 of 2013] and DIT v.BBC Worldwide Ltd.[2011] 203 Taxman 554 (Delhi), 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.
13. In all these cases, 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. In such a situation, the decision of the Hon ‘ble Apex Court as above applies on all fours in these The Revenue has tried to distinguish the order of the Hon ‘ble Supreme Court decision by firstly referring by submitting that the Adobe India is performing functions which are wider in scope of the agreement entered with the assessee and in the TP study report of Adobe India. For this purpose, reliance has been placed on the order of the Ld. CIT(A) in this case for AY 2010-11. We find that the above submission by no stretch of imagination can be said to be distinguishing the decision of the Hon ‘ble Apex Court from being applicable from the facts of the present case. Very well understanding this proposition, the Revenue itself urged that without prejudice to the above, the judicial decision of the attribution of profit by applying FAR analysis has not been accepted by the Indian Government and the profit has to be determined by apply of provisions of DTAA r.w.s.10A of the Income Tax Rules, 1962. In view of the above, we are of the opinion that the decision of the Hon ‘ble Apex Court as above squarely applies in this case. Hence holding that 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 needs to be decided in favour of the assessee.
14. We further find the above view of the Ld. CIT(A) is not sustainable in the light of the Hon’ble Supreme Court decision as The Ld. CIT(A) has opined that Adobe India while discharging the functions as assigned by Adobe Ireland has the right to use the intangible asset in the form of “brand, trademark and logo” but there is cost paid for the same to the assessee.
Further he observed that there is persistent risk of violation of copyright of software product and unauthorized use of copies of the software product in Indian market. In this regard, he has referred to case against the particular person filed by Adobe Systems, Inc. & Ors. The Ld. CIT(A) hypothesized that Adobe Systems, Inc. & Ors. would come to know about the instances of infringement of copyright only through the local presence of Adobe India Resources. The Ld. CIT(A) further opined that the function of the India AE of identification of potential customers and continuous engagement of registered customers goes into development of market of intangibles and no compensation has been made to the Indian AE for all such functions to develop market intangible asset. From this, the ld. CIT(A) opines that Adobe India is responsible for protecting, development & maintenance of the intangible assets (copyright, brand, patent & confidential data of customers) of Adobe group in India. Further, the Ld. CIT(A) opined that risk of receivables from distributors also exist in India but there is no compensation made for such functions. Keeping the above in view, the Ld. CIT(A) held that Adobe India is dependent PE of the assessee company and in order to compensate for the FAR assigned to DAPE, he has no reason to defer from the view of the Assessing Officer to attribute 35% of the total Revenue pertaining to India for this year.
15. Further, functions attributed to the Adobe India by the Revenue is also based upon the observations of the Ld. CIT(A) for Assessment Year 2010-11 primarily. The allegation of the Revenue is that the assessee was asked to produce dump of the emails correspondence between Adobe India and Adobe Ireland to deep dive to the activities so as to ascertain the clear cut facts to decide about PE. However, it was noted by the Ld. CIT(A) that after couple of months of gap, the assessee produced only sample certain e-mails. On the basis of these e-mails of few instances, the Ld. CIT(A) inferred that quotes offered by the distributors to channel partners are after discussion with Adobe India. The reasoning was that orders are delivered after seeking confirmation from Adobe India resources. Further, one of the e-mails is said to be demonstrating, the control and monitoring by Adobe India of distributors in meeting assigned targets. Basing upon such few e-mails, the Revenue has concluded that activities actually performed by Adobe India are wider in nature as against the activities pointed out in the contract and transfer pricing report. We find that the above observations have been cogently rebutted by the ld. counsel for the assessee. As regards the few e-mails that have been referred they are only also marked to the Adobe India personnel which has been said to be done only for the sake of keeping the Adobe India in the loop. In none of the e-mail referred Adobe India has actually provided guidance and directions regarding the quotes. This is a fiction of imagination by the Revenue. Hence, the functions attributed on the basis of these e-mails are not at all enlarging the scope of actual functions performed by the AE than as per the agreement and the transfer pricing report. The plea that the email dump has not been provided is a peculiar plea. In Adobe India T.P. adjustment no such issue has been recorded. It is common knowledge e-mail correspondence is a two way process. So when everything was found in order in Adobe India T.P. Adjustment, hence, it cannot be said that Revenue did not have complete access to all the e-mails between Adobe India and Adobe Ireland. The Ld. CIT(A) is also of view that the assets client list gives rise to in intangible assets has also no basis. No cogent case has been made out that Adobe India was provided with right to any intangible asset belonging to the assessee i.e. Adobe Ireland. The issue raised by the Ld. CIT(A) by relying upon legal dispute infringement of copy right in India being looked after by Adobe India/Adobe Ireland is also without any basis as it is Adobe USA, the IP owner which handles the legal matters relating to infringement of brand, copy right matters and other related actions to be undertaken in all jurisdiction in which the Adobe operates including India. Adobe USA is authorised in monitoring to Indian operations and their legal counsels handles the matters there from.
16. As regards the risk recoverable from distributors, the hypothesis that the risk is borne by Adobe India has also no The documents clearly show that the collection from the customers is managed by the team Adobe Ireland. Thus, from the above, it is apparent that only on hypothesis and guess work and assigning of all sorts of imaginary motives by a few e-mails, the Ld. CIT(A) and therefore the Revenue is contending that the functions performed by Adobe India are much wider than the that as per the agreement and the transfer pricing analysis. We find that as discussed by us hereinabove these submissions are not at all cogent enough to warrant a view that the transfer pricing analyzing done in the case of Adobe India does not adequately reflects functions performed and the risk assumed by the enterprise. In such a situation as held by Hon ‘ble Apex Court as above, there is no need to attribute any further profit as all functions and risk have been considered in the computation of Arm’s Length Price in the case of Adobe India.
17. As such, it follows that the finding of PE is also without cogent basis. Be that as it may issue of PE becomes academic and we are not engaging further into it. We have already found that functions performed by Adobe India are actually not different than the agreement and transfer pricing ”
10. There is no gainsaying that factually the issue stands on identical footing in relation to preceding assessment years, as, both the Assessing Officer and learned DRP have decided the issue following their earlier decisions. That being the case, respectfully following the decision of the coordinate Bench, as referred to above, we hold that the amount received by the assessee from supply of software and automated services, are not taxable in India. The Assessing Officer is directed to delete the additions.
11. There is one more issue raised by the assessee in the present appeal relating to short grant of TDS amounting to Rs,12,68,394.
12. Having considered rival submissions, we direct the Assessing Officer to factually verify assessee’ s claim and allow TDS credit in accordance with law.
13. In the result, the appeal is allowed.
Order pronounced in the open court on 21st September, 2022.
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