2025 (1) TMI 1412 - HC - Income Tax

Delhi HC confirms no additional PE attribution needed when income already taxed at arm's length under transfer pricing

The Delhi HC upheld the Tribunal's decision on Fixed Place Permanent Establishment (PE) and Deemed Agency PE matters. The court found that since income ... Fixed Place Permanent Establishment [PE] as well as DAPE -Income deemed to accrue or arise in India - Attribution of profit can be made to the AE when it is renumerated at arm's length - HELD THAT:- While dealing with the principal question of a Fixed Place PE as well as DAPE, the Tribunal has taken note of the Transfer Pricing Analysis which was undertaken by the Transfer Pricing Officer [TPO] and has thus taken the view that since the income attributable to the PE had already been subjected to tax, no further exercise was liable to be undertaken. The submission essentially proceeds on the basis that since all the functions performed and risks assumed by Adobe India had not formed subject matter of examination in the course of the Transfer Pricing Analysis, the mere attribution of profits to the PE would have not justified the Tribunal in proceeding to interfere with the views that were expressed by the AO as well as the CIT(A). We, however, find that although it appears to have been urged before the Tribunal that Adobe India was performing functions which were “wider in scope” and also stretched to matters which had not formed subject matter of examination in the Transfer Pricing Report, the Tribunal on facts has found that the said conclusions were wholly unjustified and were merely assumptions made by the appellants and were not founded on any material or evidence which formed part of the record. Double Irish model of Corporate Structuring and a perceived scheme of tax avoidance - Double Irish model which is spoken of by various authors essentially alludes to advantages that may be taken by certain entities of a “loophole” existing in the Irish law so as to escape taxation in that nation. We, however, fail to comprehend or appreciate how that principle could have had any relevance to income which was asserted by the appellants themselves to have arisen or accrued in India. ISSUES PRESENTED and CONSIDEREDThe judgment considered the following core legal issues:i) Whether the Income Tax Appellate Tribunal (ITAT) erred in holding that no further attribution of profit can be made to the Associated Enterprise (AE) when it is remunerated at arm's length, especially considering that the actual functions performed by the AE might extend beyond those covered under the agreement with the Assessee.ii) Whether the Assessee Company has a Dependent Agent Permanent Establishment (DAPE) or a Fixed Place Permanent Establishment (PE) in India under Article 7 of the India-Ireland Double Taxation Avoidance Agreement (DTAA).iii) Whether the ITAT erred in not adjudicating the existence of DAPE in the form of Adobe Systems India Pvt. Ltd. and a fixed place PE as per Article 7 of the India-Ireland DTAA, without contesting the findings of the Assessing Officer (AO) that indicated the existence of a PE.iv) Whether the ITAT erred in not considering the findings of the Commissioner of Income Tax (Appeals) [CIT(A)] that the facts suggest a Double Irish Model of corporate structuring aimed at tax avoidance.ISSUE-WISE DETAILED ANALYSISIssue i: Attribution of Profit at Arm's LengthRelevant Legal Framework and Precedents:The court referred to the Supreme Court decision in DIT v. Morgan Stanley & Co. Inc., which held that if a PE is compensated at arm's length, no further profits should be attributable to the PE.Court's Interpretation and Reasoning:The court noted that the ITAT had relied on the Transfer Pricing Analysis, which showed that the income attributable to the PE had already been taxed. The court found that the Tribunal's conclusion was justified as the functions performed and risks assumed by Adobe India were adequately covered in the Transfer Pricing Analysis.Key Evidence and Findings:The Tribunal found that the functions attributed to Adobe India by the Revenue were not supported by substantial evidence and were based on assumptions.Application of Law to Facts:The court applied the arm's length principle, as articulated in the Supreme Court's ruling, to determine that no further attribution of profits was necessary.Treatment of Competing Arguments:The appellants argued that Adobe India performed functions beyond those considered in the Transfer Pricing Analysis. However, the court found these claims to be unsubstantiated.Conclusions:The court concluded that the ITAT was correct in its decision that no further attribution of profit was required.Issue ii and iii: Existence of DAPE and Fixed Place PERelevant Legal Framework and Precedents:Article 7 of the India-Ireland DTAA was central to determining the existence of a PE.Court's Interpretation and Reasoning:The court noted that the Tribunal found no evidence to support the claim that Adobe India constituted a DAPE or a Fixed Place PE.Key Evidence and Findings:The Tribunal found that the Revenue's claims were based on assumptions and not on concrete evidence.Application of Law to Facts:The court found that the Tribunal correctly applied the legal standards for determining the existence of a PE, as no substantial evidence was provided to support the Revenue's claims.Treatment of Competing Arguments:The appellants argued for the existence of a PE based on certain functions performed by Adobe India, but the court found these arguments to be without merit.Conclusions:The court upheld the Tribunal's finding that no DAPE or Fixed Place PE existed.Issue iv: Double Irish Model and Tax AvoidanceRelevant Legal Framework and Precedents:The Double Irish model involves using Irish tax laws to minimize tax liabilities, but its relevance to Indian tax law was questioned.Court's Interpretation and Reasoning:The court found that the CIT(A)'s observations on the Double Irish model were irrelevant to the income asserted to have arisen in India.Key Evidence and Findings:The CIT(A) had hypothesized about the Double Irish model without linking it to the specific tax liabilities in India.Application of Law to Facts:The court found no connection between the Double Irish model and the tax issues in India.Treatment of Competing Arguments:The appellants failed to demonstrate how the Double Irish model was relevant to the case at hand.Conclusions:The court dismissed the relevance of the Double Irish model to the case.SIGNIFICANT HOLDINGSThe court upheld the ITAT's decision, finding no justification for further attribution of profits to the PE beyond what was determined at arm's length. The court emphasized the importance of the arm's length principle as articulated in the Supreme Court's ruling in DIT v. Morgan Stanley & Co. Inc.The court dismissed the appeals, affirming that the Tribunal correctly applied the legal standards and that the appellants failed to provide substantial evidence to support their claims regarding the existence of a PE or the relevance of the Double Irish model.