TaxTMI 
TaxTMI 
TaxTMI 
2022 (7) TMI 1365
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.... 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 un....
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....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 * Issue covered in favour of the Appellant by the recent ruling of the Hon'ble Supreme Court > With regard to the above, it is humbly submitted that the case of the Appellant is squarely covered 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 endusers/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software throug....
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....s'. Thus, The relationship of an agency exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal and third parties. The essential feature of an agent is his power of making the principal answerable to third persons viz. enabling the principal to sue third parties directly or render him liable to be sued directly by the third party. In this regard, the Appellant would like to humbly submit that Adobe India does not qualify as an agent since:- Adobe India's relationship with Adobe Ireland is that of an independent contractor and not that of a partnership, joint venture, sales agency or principal and agent (please refer to clause 3.3.1 "Nature of Relationship" of the marketing support services agreement between Adobe Ireland and Adobe India enclosed at pages 158 to 198 of the convenience compilation); Adobe India does not have any power or authority to bind Adobe Ireland contractually (please refer to clause 3.3.1 "Nature of Relationship" of the marketing support services agreement between Adobe Ireland and Adobe India enclosed at pages 158 to 198 of the convenience compilation); Adobe Ireland do....
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.... of Adobe India are completely sourced from Adobe Group (Adobe US and Adobe Ireland), it is economically dependent upon the Appellant. > In this regard, reliance may again be placed upon the decision of the Delhi ITAT in the case of Net App B.V. v. DDIT (supra) wherein it has been held that dependence has to be seen with respect to the foreign Assessee and not the entire group. > In the instant case, since the Adobe India's revenue from Adobe Ireland does not exceed 10% of its total revenue in any of the years under consideration, it cannot be said to be economically dependent upon the Appellant (please refer to Form 3CEB obtained by Adobe India for AY 2010-11 enclosed at pages 240 to 252 of the convenience compilation). > Additionally, it may also be noted wherever tax treaty partners have deemed necessary to expand the scope of these deeming provisions, specific language to that effect has been inserted into the tax treaties. For example, Article 5(9) of the India-Singapore tax treaty specifically mentions that when the activities of an agent of a foreign enterprise are devoted wholly or almost wholly on behalf of that enterprise and other enterprises controlling, contro....
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....rders", clause 4.7 "Shipments", clause 6.1 "License Fees" and clause 8.1 "Payment" of the distribution agreement between Adobe Ireland and its distributor Ingram Micro India Pvt. Ltd enclosed at pages 5 to 77 of the convenience compilation) > Adobe India does not have any authority to conclude contracts or accept orders on behalf of Adobe Ireland, (please refer to clause 3.3.1 "Nature of Relationship" of the marketing support services agreement between Adobe Ireland and Adobe India enclosed at pages 158 to 198 of the convenience compilation and slides 2 and 3 of the powerpoint presentation enclosed at pages 205 to 211 of the convenience compilation wherein the detailed order placing process has been explained) > All prices are standard and listed on the distributor portal/website for the distributors/resellers and the end customers to view. Accordingly, there is no requirement of price discussions or approvals. In the limited cases where negotiation is required, the same is done by Adobe Ireland directly. > The orders are placed directly on the online portal by distributors of Adobe Ireland and accepted only after due validation/review by the Sales Order Management Group o....
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....ontracts has to be habitually exercised in the other State. In this regard, it may be noted that the Revenue authorities have not brought on record even a single instance that will prove that Adobe India was concluding contracts or securing orders on behalf of the Appellant, let alone doing so habitually. The allegations of the Ld. CIT(A) had been rebutted in a detailed manner at pages 373 to 376 of the convenience compilation. > It may also be noted that as per paragraph 33 of the OECD Model Commentary 2010 on Article 5, concerning the definition of permanent establishment, the mere fact that a person has attended or even participated in negotiations in a State between an enterprise and a client will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise. This would hold good even if the Indian agent participates in all the negotiations but does not play any principal role in it. > Furthermore, it may also be noted that paragraph 1 of Article 12 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI") specifies tha....
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....s required, the same was done by Adobe Ireland directly. Even the orders were placed directly on the online portal by distributors of Adobe Ireland and accepted only after due validation/review by the Sales Order Management Group of Adobe Ireland situated outside India. > For instance, in the appellate order, the Ld. CIT(A) has alleged that the quotes offered by Adobe Ireland's distributors to the customers/ resellers are after due discussion with Adobe India resources. The Ld. CIT(A) has based this finding upon two sets of emails; one where Mr. Barun Bhattacharya from Ingram (Adobe Ireland's distributor) had provided a quote for a product to Amrik of Expert Systems Solution (Adobe Ireland's customer/ reseller) by stating "as discussed with Alekh from Adobe, please find belovj quote for the same'' [please refer to para 7.11 at page 35 of the order passed by the CIT(A)forAY 2010-11 enclosed as a part of the appeal file]. The second email is where Navneet Sah from Adobe India had requested Sumant Mishra from Ingram (Adobe Ireland's distributor) to provide quotes for a product to Sonal Gupta from Wipro Infotech (Adobe Ireland's customer/ reseller) on priority and in response, Suman....
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....he reason behind Adobe India being kept in loop throughout the order processing and delivery process was for it to be to be able to provide support to the distributors and act as a liaison if they have escalation issues/ administration changes, queries with orders or technical issues on the portal. However, Adobe India did not have the authority to either conclude contracts or secure orders on behalf of the Appellant. Accordingly, the allegation that the function of follow up till delivery is mainly in the form of a guise to allow Adobe India to involve in sourcing and conclusion of order with end customers was factually incorrect. It is humbly submitted that these activities have been specifically mentioned in the agreement and the TP Study of Adobe India (please refer to page 520 of the convenience compilation) and the company is duly compensated by the Appellant for the same on an arm's Length basis [No adjustment by the TPO in the TP Proceedings in the case of Adobe India]. > Furthermore, to substantiate the contention of the Appellant that the negotiation and conclusion of contracts between the Appellant and its distributors took place outside India without any involvement ....
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....e assessment orders framed in the case of the Appellant for the previous years. Thus, it is only after perusal of the said assessment orders (wherein Adobe India has been alleged to be a dependent agent PE of the Appellant in India) that the Ld. TPO has come to the conclusion that no adverse inference is to be drawn in the hands of t he Appellant. It is humbly submitted that the order of the Ld. TPO in terms of section 92CA(4) of the Act is binding on the Ld. AO. Accordingly, no further profits can be attributed to the alleged PE of the Appellant. A copy of the TP order passed in the case of the Appellant is enclosed at pages 377 to 380 of the convenience compilation. Furthermore, a copy of notice issued by the Ld. TPO for AY 2010- 11 is enclosed as Annexure 3 to this note. * Once a transfer pricing analysis has been undertaken, no further profits would be attributable to the alleged PE > As per the judgements of the Hon'ble Supreme Court in the case of DIT v. Morgan Stanley Co. Inc [2007] 292 ITR416 (SC), 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 In....
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.... \ITA 4.QOQ/Del-2Qi8. Furthermore, this methodology has also been followed bv the Ld. CITfA) in Appellant's own case for AY 2007-08. AY 2013- 14 and AY 2015-16. Please note, the revenue has not contested/appealed against the attribution methodology followed bv the Ld. CIT (A) in its order for AY 2015-16. ❖ Without prejudice to the above, it is humbly submitted that even if Adobe Ireland's global net profit margins are computed by adding back the payments made to Adobe India for marketing support services and thereafter, allowing deduction for expenses attributable to the Indian PE, there'll be nothing left to attribute to the alleged Indian PE. A chart depicting the calculations of the profits that would be attributable to the alleged PE in this scenario for the years under consideration is enclosed as Annexure 4 to this note. ❖ Similarly, without prejudice to the above, it is humbly submitted that if the profits that are required to be attributed to the alleged PE of Adobe Ireland in India have to be determined in accordance with the global gross profit margins of the Appellant, as contended in the appeals filed by the Department for AY 07-08 and AY 13-14, ....
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....come for AY 2007-08 and AY 2010-11 to AY 2012-13, despite of the fact that tax was 'deductible' at source on the entire income earned by it in those years. * However, on the basis of the decision of the Hon'ble Delhi High Court in the case of DIT v. Jacabs Civil Incorporated/ Mitsubhishi Corporation [2011] 330 ITR 578 (Delhi), and DIT v. GE Packaged Power Inc. [2015] 373 ITR 65 (Delhi) (please refer to pages 533 to 550 of the case law compilation), the CIT(A) has held that interest under section 234B of the Act should not be applied for until AY 2012-13. * Relying upon the above-mentioned judicial precedents, it may be contended that for AY 2007-08, AY 2010-11, AY 2011-12 and AY 2012-13, no interest should have been levied under section 234B of the Act for delay in payment of advance tax since as per the law, as it existed then, tax was 'deductible' at source on the entire income earned by Adobe Ireland from India. Accordingly, no advance tax was payable by the Appellant on such income and therefore, no interest under section 234B of the Act should have been charged on its income. * In addition to the above, it is humbly submitted that during the hearing before this Hon'bl....
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.... to provide complete set of emails to substantiate its claims that Adobe India is merely providing the services mentioned in the agreement and nothing beyond that. d. The contention of the assessee that since less than 10% of the revenue of Adobe India is earned from the assessee for providing Market Support Services, it is not economically dependent on the assessee is incorrect. Relying on the commentary by Prof. Klaus Vogel, it is submitted that to determine if an entity is economically dependent, what has to be seen is only the revenue from those functions which constitute a PF. In the instant case, since the rest of the revenue of Adobe India is from Software Development Services, the same shall not be considered to determine the economic dependence test. The revenue from the market support functions is earned only from the assessee and not any other entity and therefore, Adobe India is economically dependent on the assessee. e. The assessee failed to provide copies of any emails between itself and Adobe India even though the same were specifically asked by the Ld. CIT(A). Further, it did not submit even the details of the email ids of its concerned employees before the A....
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....s further reproduction /changes in the earlier submissions. 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 nonresident 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 busine....
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....ayer 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-a-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....
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.... 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 above. 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 ....
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.... 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 handle....
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....3 ITR 65 (Delhi) (please refer to pages 533 to 550 of the case law compilation), the CIT(A) has held that interest under section 234B of the Act should not be applied for until AY 2012-13. * Relying upon the above-mentioned judicial precedents, it may be contended that for AY 2007-08, AY 2010-11, AY 2011-12 and AY 2012-13, no interest should have been levied under section 234B of the Act for delay in payment of advance tax since as per the law, as it existed then, tax was 'deductible' at source on the entire income earned by Adobe Ireland from India. Accordingly, no advance tax was payable by the Appellant on such income and therefore, no interest under section 234B of the Act should have been charged on its income. * In addition to the above, it is humbly submitted that during the hearing before this Hon'ble Bench of the ITAT, the Ld. Departmental Representative had conceded on this issue." 20. Accordingly, in the light of above, we remit the issue to the file of the Assessing Officer to decide this issue in accordance with case laws as mentioned above. 21. The above adjudication disposes off all the appeals receipt Revenue's appeals for Assessment Year 2004-05, 2005-06 &....