AI Drafter 
TaxTMI 
TaxTMI 
2023 (10) TMI 699
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....ent establishment ("PE") in India in terms of Article 5(6) of the Double Taxation Avoidance Agreement between India and Ireland. 1.2 That the Ld. AO and Hon'ble DRP grossly erred in completely disregarding the fact that Adobe Systems India Private Limited ("Adobe India") is not an agent of the Appellant and is a legally and economically independent entity. 1.3 That the Ld. AO and Hon'ble DRP grossly erred on the facts by concluding that Adobe India is a 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. AO and Hon'ble DRP erred in law in holding Adobe India to be a Dependent Agent PE of the Appellant without bringing any cogent documentary evidence on record to substantiate the above statement. 1.5 That the Ld. AO erred in law by not acting in accordance with the directions of the Hon'ble DRP wherein it had directed the Ld. AO to pass the final assessment order after considering the orders passed by the Hon'ble Income Tax....
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....ished by the Appellant. 3- On the facts and circumstances of the case & in law, the Ld. AO grossly erred in levying tax on interest on the income-tax refund received by the Appellant during the year under consideration @40% (plus applicable surcharge and cess), as per the provisions of the Act, as opposed to applying the beneficial tax rate of 10% provided under Article 11 of the India- Ireland Double Taxation Avoidance Agreement ("DTAA" or "Tax treaty"). 4. That on the facts and in circumstances in law, the Ld. AO erred in not allowing credit of taxes deducted at source ("TDS") amounting to INR 2,48,86,907/- whilst computing the tax liability of the Appellant for the year under consideration. 5. That on the facts and in circumstances of the case and in law, the Ld. AO has grossly erred in levying an additional tax of INR 4,58,03.533/- on 'Special Income Other Than Section 115BBE' whilst computing the tax liability of the Appellate for the year under consideration. 6. That on the facts and in circumstances in law, the Ld. AO erred in mechanically initiating proceedings under section 270A of the Act." 3. Briefly stated, the assessee is ....
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....lso held that the premises of Adobe India form a fixed place PE for the assessee in India. In view of this finding, the Ld. AO attributed 35% of revenue earned by the assessee from India to its PE in India (after allowing deduction for payments made by the assessee to Adobe India on account of obtaining marketing support services) amounting to Rs. 1,74,64,31,465/-. Further, the Ld. AO brought to tax interest on income tax refund amounting to Rs. 5,76,03,211/- as per the normal rates described under the provisions of the Act as opposed to the beneficial tax rate of 10% provided under Article 11 of the India-Ireland DTAA that was applied by the assessee in its return of income. 4. Aggrieved, the assessee filed objections before the Ld. Dispute Resolution Panel ("DRP") against the draft assessment order passed by the Ld. AO wherein the Ld. AO proposed to assess the income of the assessee at Rs. 1,80,40,34,676/- (Rs. 1,74,64,31,465/- + Rs. 5,76,03,211/-) as against the returned income of Rs. 45,80,35,330/- of the assessee. Vide its order dated 02.12.2022, the Ld. DRP issued the following directions to the Ld. AO: "4.4 Ground no. 3 & 5- These relate to issue of attributing a....
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....sively devoted to the foreign enterprise and the agent's services are being remunerated at arm's length, then the agent would be considered as an independent agent. 4.4.2 All the facts above have been analyzed in light of provisions of India-Ireland DTAA by the AO and the view thereon is recorded as under- "Adobe India is working for Adobe Ireland as an agent. Though the detailed agreement is framed in a manner that it wants to show case as if the action conducted by Adobe India shall not be a binding on Adobe Ireland, in actuality Adobe India is the sole representative of Assessee Company in India. All the actions performed by Adobe India in the garb of marketing support activities are nothing but pure marketing and promotion of the Adobe software in India. Adobe India in the capacity of DAPE is the only touch point of Adobe Ireland in India and performing functions to secure orders from customers and distributors. From the perusal of the Group structure, it is seen that Adobe USA is the ultimate holding company of the assessee as well as Adobe India. Hence, Adobe India, which is found to be an agent of the assessee is legally and economically dependent o....
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....in order to decide whether a PE stood constituted, one had to undertake a functional and factual analysis of each of the activities to be undertaken by the enterprise. The OECD commentaries have established criteria for a PE constituting business activity of being, a "core business activity", as opposed to an "auxiliary or preparatory activity". The decisive aspect for the commentaries is whether the activity forms an essential and significant part of the activity of the enterprise as a whole. All business activities which contribute to the business earnings of the enterprise are core business activities. 4.4.5 In view of above discussion, AO has proposed to attribute 35% of the revenues to India @ Rs. 1,74,64,31,465/- as per Rule 10 D by allowing payments made to Adobe India for marketing support services@ Rs. 1,39,98,33 453/- DRP's Direction In the instant case, Dependent Agency Permanent Establishment DAPE is performing core business function which has direct impact on revenues from sales/services of the assessee. If a person residing in India represents or acts on behalf of a foreign enterprise, his presence in India may be construed as the foreign enterpr....
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....al of the order reveals that the Hon'ble Tribunal has passed a combined order in the following assessment years: * ITA Nos 5024 to 5029/Del/2017 [Assessment Years: 2004-05 to 2006-07 & 2010-11 to 2012- 13] * ITA Nos 3079 & 3080/Del/2019 [Assessment Years: 2007-08 & 2013-14] * ITA Nos 7922/Del/2019 [Assessment Year: 2015-16] * ITA Nos 4921 to 4923/Del/2017 [Assessment Years: 2010-11 to 2012-13] * ITA Nos 1978 & 1979/Del/2019 (Assessment Year: 2007-08 & 2013-14] * ITA no. 55 & 7460/Del/2019 [Assessment Year: 2014-15 & 2015-16] However, AO is directed to complete the assessment after considering the Tribunal's order as to whether the same is acceptable or otherwise to the revenue." 5. Consequent to the above directions of the Ld. DRP, the Ld. AO passed the final assessment order dated 30.01.2023 holding as under: "12. Consequently, the assessee was asked the following vide Notice u/s 142(1) dated 9/03/2022: As per your earlier submission, there is no change in the factual matrix as compared to earlier years. In the previous years, it has been held that Adobe India is a dependent agent PE and Fi....
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....65 5.1 The Ld. AO therefore made the assessment on the total income of the assessee at Rs. 1,80,40,34,676/- which includes business income of Rs. 1,74,64,31,465/- to be taxed @ 40% plus surcharge and taxes as per the Act and income tax refund of 5,76,03,211/- offered by the assessee to tax in its return of income to be taxed at normal rates and credit for pre-paid taxes to be allowed after due verification. 6. Dissatisfied, the assessee is in appeal before the Tribunal and all the grounds of appeal relate thereto. Ground Nos. 1 to 2.5 7. With respect to existence of a DAPE in form of Adobe India and further attribution to the alleged PE, the Ld. AR at the outset of the hearing submitted that the Ld. AO/DRP have relied upon their own orders/directions for previous years i.e. for AY 2010-11 to AY 2019-20 and held that there is no change in the facts of the instant case. He further submitted that the impugned issue is squarely covered by the decision of the Delhi Tribunal in assessee's own case for earlier AYs. The Tribunal vide its order dated July 27, 2022 in ITA Nos. 4921 to 4923/Del/2017, ITA No. 1978 and 1979/Del/2019 and ITA No. 55 and 7460/Del/2019 has deleted the a....
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.... 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 ie. 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 cases. 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 a....
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....aid scenario, the issue which arises for consideration is, in a case where the transaction between the assessee and its AE in India has been found to be at arm's length, whether further profit can be attributed to the dependent agent PE in India, if at all, such a PE exists in India. In the facts of the present appeal, in assessment year 2018-19, though, the TPO has proposed transfer pricing adjustment in relation to the international transactions between the assessee and its Indian AE, however, learned DRP has deleted such adjustment. In other words, the transaction between the assessee and its Indian AE has been found to be at arm's length. In assessment year 2019- 20, no reference was made to the TPO, which effectively means, the Assessing Officer himself accepted the transactions between the assessee and the AE to be at arm's length. 10. Keeping in view the aforesaid factual scenario, if we examine the issue at hand, it can be seen that while deciding identical issue in assessment years 2004-05, 2006-07 and 2010-11 to 2015- 16, the Tribunal in ITA Nos. 5024/Del/2017 and Ors., dated 27.07.2022 has held that when the transaction between the assessee and its Indian AE is ....
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....e 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 attri....
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.... 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 & Co.(supra). To the same effect is the order of the ADIT v. EFunds 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 cases. The Revenue has tried to distinguish the order of the Hon'ble Supreme Court decisi....
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....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 cert....
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....nd 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 basis. 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 analysing 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 ....
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....sions (supra) of the Hon'ble Supreme Court in Morgan Stanley & Co. Inc. and E-Funds IT Solution Inc., we are of the considered view that once transfer pricing analysis of Adobe India has been undertaken and the ALP has been determined which has been accepted by the Ld. AO, nothing further would be left to be attributed to Adobe India as the alleged PE of the assessee in India and that accordingly would extinguish the need for attribution of any additional profits to the alleged PE of the assessee. It is however to be noted that the issue relating to the existence or otherwise of the DAPE of the assessee in the form of Adobe India is left open following the decision (supra) of the Co-ordinate Bench for AY 2018-19 and 2019-20. Accordingly, ground Nos. 1 to 2.5 of the assessee is allowed to the extent indicated above. Ground No. 3 12. The next grievance of the assessee is with respect to higher rate of tax imposed on the interest income on the income tax refund. The facts of the impugned issue are that the Ld. AO levied tax on interest on the income tax refund received by the assessee during the relevant AY @ 40% (plus surcharge and cess) as per the provisions of the Act as oppo....
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....extent they are more beneficial to the tax payer. By virtue of the provisions of section 90(2) of the Act, the provisions of the Act are sub-servient to the provisions of the tax treaty entered into by India with various countries. In the present case, the assessee is a tax resident of Ireland which fact has neither been disputed by the Ld. AO nor DRP. Nothing has been brought on record by the Revenue to disregard the claim of the assessee and hence in our view the assessee is rightly entitled to the beneficial rate of tax of 10% on interest as per the provisions of Article 11 of the India-Ireland DTAA. We have also perused the order of the Ld. CIT(A), Delhi - 42 for the present AY passed on 03.02.2023 in the appeal filed by the assessee before him against the intimation order of the Ld. AO passed under section 143(1) of the Act. The Ld. CIT(A) has concluded that the interest on income tax refund should be charged to tax at the beneficial rate of 10% provided under the India-Ireland DTAA subject to verification by the Ld. AO as to the entitlement of the assessee to claim DTAA benefits based on TRC etc. The relevant observations and findings of the Ld. CIT(A) are reproduced below: ....