2024 (8) TMI 1358 - AT - Income Tax

Irish company wins appeal as tax authorities fail to prove permanent establishment existence in India

ITAT Delhi allowed the appeal of an Irish tax resident company, deleting additions made by the AO regarding existence of PE in India. The Tribunal ... Accrual of income in India - Existence of PE in India - case of assessee is that Adobe Systems Software Ireland Limited is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with the DTAA or tax treaty between India and Ireland - HELD THAT:- Issue of existence of PE is fully and squarely covered by the order of the Co-ordinate Bench where vide a common order [2022 (7) TMI 1365 - ITAT DELHI], the coordinate Bench has deleted the additions made by the Ld. AO. It has been held that no addition had been proposed by the Ld. Transfer Pricing Officer in the case of Adobe India with respect to marketing support services. In such circumstances, further attribution of profits to the alleged PE i.e. Adobe India will be contrary to the settled position of law as laid down by the Hon’ble Apex Court in the case of Morgan Stanley [2007 (7) TMI 201 - SUPREME COURT] and E-Funds [2017 (10) TMI 1011 - SUPREME COURT] On the issue of existence of a PE, it was held that the finding itself of existence of a PE is without any cogent reasons. Tribunal has rejected the reasons and conclusions on which the findings of the AO and Hon’ble DRP were premised. Accordingly, the additions made by the Ld. AO in the impugned case deserve to be deleted on the merit for the year under consideration. Thus, the grounds raised are allowed and appeal of asseessee is allowed. Issues Involved:1. Stay of demand for AY 2021-22.2. Determination of Permanent Establishment (PE) in India.3. Attribution of profits to the alleged PE.4. Taxability of interest on income-tax refund.Issue-wise Detailed Analysis:1. Stay of Demand for AY 2021-22:The Stay Application was filed for the stay of demand for AY 2021-22. During the arguments, it was submitted by the appellant's representative that the issues in the appeal were fully covered in favor of the appellant by the Tribunal's orders for AY 2010-11 to 2015-16, where the additions were deleted. The respondent could not dispute this and did not cite any distinction of facts. Thus, with the consent of the representatives, the Tribunal decided to address the appeal on merits instead of restricting to the stay application alone.2. Determination of Permanent Establishment (PE) in India:The appellant, Adobe Systems Software Ireland Limited (ADIR), claimed that it is a tax resident of Ireland and entitled to the beneficial provisions of the India-Ireland DTAA. The appellant argued that Adobe Systems India Private Limited (Adobe India) does not constitute a PE in India as it does not enter into contracts, negotiate, accept orders, or hold stock on behalf of the appellant. However, the Assistant Commissioner of Income-tax (Ld. AO) alleged that the appellant has a dependent agent PE in India in the form of Adobe India and attributed 35% of revenue earned by the appellant from India to its PE in India. The Dispute Resolution Panel (DRP) affirmed the allegation that Adobe India constitutes the appellant's PE in India, presuming that Adobe India habitually and regularly concludes contracts and secures orders for the appellant.3. Attribution of Profits to the Alleged PE:The Tribunal referred to its previous orders for AY 2010-11 to 2015-16, where it was held that no addition had been proposed by the Transfer Pricing Officer (TPO) in the case of Adobe India with respect to marketing support services. The Tribunal cited the Hon'ble Supreme Court's decisions in Morgan Stanley and E-Funds, which established that once a transfer pricing analysis has been undertaken and transactions are found to be at Arm's Length Price (ALP), no further attribution of profits to the alleged PE is required. The Tribunal found that the Revenue's contention that Adobe India performs functions wider than those in the agreement and transfer pricing analysis was not cogent enough to warrant further attribution of profits. Consequently, the Tribunal held that the finding of PE was without cogent reasons and deleted the additions made by the Ld. AO.4. Taxability of Interest on Income-tax Refund:The Ld. AO had taxed the interest on income-tax refund amounting to Rs. 16,26,89,778/- at the normal rates prescribed under the provisions of the Act, as opposed to the beneficial tax rate of 10% provided under Article 11 of the India-Ireland DTAA. The DRP directed that the interest paid under section 244A of the Act on the refunds determined for previous years should be taxed at 10% as per the rate provided under the India-Ireland DTAA. The Tribunal upheld this direction, aligning with the beneficial provisions of the DTAA.Conclusion:The Tribunal concluded that the issues of existence of PE and attribution of profits were fully covered by its previous orders and the Hon'ble Supreme Court's decisions. It rejected the reasons and conclusions of the Ld. AO and the DRP, deleted the additions made, and allowed the appeal of the assessee. The Stay Application was rendered infructuous and dismissed. The order was pronounced in the open court on 09.02.2024.