ADOBE SYSTEMS SOFTWARE IRELAND LIMITED,DUBLIN (IRELAND) vs. ACIT CIRCLE 1(1)(1), INTERNATIONAL TAXATION, NEW DELHI
Facts
Adobe Systems Software Ireland Limited (ADIR), an Irish tax resident, distributes software globally, including India, with all contracting and invoicing occurring outside India. Its Indian subsidiary, Adobe India, provides marketing support services. The Assessing Officer alleged that ADIR had a Permanent Establishment (PE) in India through Adobe India and attributed 35% of ADIR's revenue to this PE, also taxing interest on income-tax refunds at normal rates, despite ADIR declaring income taxable under the India-Ireland DTAA.
Held
The Tribunal, relying on its own consistent past decisions for prior assessment years and Supreme Court precedents (Morgan Stanley, E-Funds), held that since the transactions between ADIR and Adobe India were found to be at arm's length, no further profit attribution could be made to the alleged PE. It also found the very existence of a PE was without cogent reasons. Consequently, the additions made by the Assessing Officer were deleted.
Key Issues
Whether a foreign company has a Permanent Establishment (PE) in India through its Indian subsidiary, and if so, whether additional profits can be attributed to such PE when transactions between them are at arm's length. Also, the taxability of interest on income-tax refunds.
Sections Cited
Section 139(1), Section 144C, Section 244A, Section 143(1), Article 11 of India-Ireland DTAA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES : D : NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI ANUBHAV SHARMA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : D : NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE VICE PRESIDENT AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER Stay Application No.52/Del/2024 (ITA No.3672/Del/2023) Assessment Year: 2021-22 And ITA No.3672/Del/2023 Assessment Year: 2021-22 Adobe Systems Software Ireland Vs ACIT, Limited, Circle-1(1)(1), Dublin (Ireland), International Taxation, 4-6, Riverwalk, Citywest Business New Delhi. Campus, Saggart, Dublin 24, Ireland. PAN: AAHCA7203M (Applicant) (Respondent) Assessee by : Shri Ravi Sharma, Advocate & Ms Shruti Khimta, AR Revenue by : Shri Om Parkash, Sr. DR Date of Hearing : 09.02.2024 Date of Pronouncement : 09.02.2024 ORDER PER ANUBHAV SHARMA, JM: Heard and perused the records. 2. The Stay Application in hand has been filed for the stay of demand in regard to AY 2021-22 and, during the course of argument, it was submitted by
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the ld. AR on behalf of the applicant/appellant that the issues in the appeal are fully and squarely covered in favour of the appellant by the orders of the Tribunal for AY 2010-11 to 2015-16 and the additions stand deleted. Ld. DR could not dispute aforesaid and also did not cite any distinction of facts in regard to what is now a legacy issue. Thus, with consent of ld. Representatives of the parties, we consider it justified to decided the appeal on merits, instead of restricting to disposal of stay application alone.
The case of assesse is that Adobe Systems Software Ireland Limited (“Appellant” or “ADIR”) is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with the Double Taxation Avoidance Agreement (“DTAA” or “tax treaty”) between India and Ireland. Therefore, it is entitled to the beneficial provisions of the India-Ireland DTAA. During the year under consideration, ADIR was a wholly owned subsidiary of Adobe Software Trading Company Limited (“ASTCL”). Adobe Systems Incorporated (“Adobe USA”) was the ultimate parent company of ADIR. Adobe USA has a subsidiary in India known as Adobe Systems India Private Limited (“Adobe India”) that provides marketing support services to ADIR. ADIR is primarily engaged in the distribution/supply of shrink-wrapped/off-the- shelf/electronically downloadable/ subscription-based computer software and services (“Adobe products”) outside of North America, including India. During the year under consideration, it purchased the software from third-party turnkey
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manufacturers/ASTCL and supplied the Adobe products its non-exclusive Indian distributors/resellers/end-customers on a principal-to-principal basis, outside India. No further customization or modification is done by the Appellant. It is clarified that the Appellant itself does not undertake any R&D, development and manufacturing of software. It then supplies the Adobe products to its non- exclusive Indian distributors/resellers and end-customers on a principal-to- principal basis, outside India. The Indian distributors/resellers/end-customers take possession of the shrink-wrapped software at a warehouse in Singapore and are responsible for importation of such software into India. For electronic delivery of software (“ESD”), once the orders are placed and confirmed, via online systems, owned and operated by the Appellant outside of India (servers are located outside India), a notification email is sent to the customer to confirm the ESD product is available for download along with the serial number/tag and download instructions. It is claimed that whilst the Appellant still provides shrink wrapped software in some regions, a major portion of Adobe products is delivered electronically or via subscription of cloud-based offerings. The contracting and invoicing functions between ADIR and its Indian distributors/resellers and end-customers take place outside India. Furthermore, the sales consideration for supply of Adobe products is also received by ADIR directly in Ireland i.e. outside India. Therefore, all the business activities pertaining to contracting, purchase, sale and invoicing take place outside India. It is claimed that Adobe India is not involved in the sale and supply of software 3
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belonging to the Appellant. Adobe India does not enter into contracts with the distributors/resellers/end-customers on behalf of the Appellant. Adobe India is not authorised to negotiate contracts on behalf of the Appellant. Furthermore, Adobe India does not accept orders or execute agreements in the name of the Appellantor on its own behalf. Furthermore, Adobe India does not hold stock of any items provided to the distributors/resellers.
3.1 In relevant AY, the Appellant had filed its return of income under section 139(1) of the Act on March 12, 2022, declaring an income of Rs. 65,29,00,600/- (rounded off), taxable on a gross basis @ 10% in accordance with the provisions of India-Ireland DTAA. The break-up of the income offered to tax by the Appellant in its return of income is as follows:- Tax as per India- S. Particulars Income (in Rs.) Ireland DTAA (in No. Rs.) Income in the nature of fees for technical 1 49,02,10,818 4,90,21,082 services Interest on income- 2 16,26,89,778 1,62,68,978 tax refund Total 65,29,00,596 6,52,90,060
3.2 Assessee claims that the transaction entered by the Appellant with Adobe India has always been accepted at Arm’s Length Price (“ALP”) by the preceding transfer pricing officers so the case of the Appellant for the year under
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consideration was consciously not referred to the transfer pricing officer by the Ld. AO.
3.3 During the course of assessment proceedings, the Assistant Commissioner of Income-tax, Circle 1(1)(1), International Taxation, New Delhi (“Ld. AO”) had asked the Appellant to show cause as to why the assessment may not be completed on similar lines as earlier years wherein it was held that the Appellant has a permanent establishment (“PE”) in India.
3.4 Thereafter, the Ld. AO had passed a draft assessment order dated December 30, 2022(“impugned order”) under section 144C of the Act, wherein it was alleged for the very first time that the Appellant is a conduit entity which is not entitled to the benefits under India-Ireland tax treaty and therefore, its income should be taxed as per India’s domestic tax law.
3.5 Ld. AO had held that even as per the provisions of the India-Ireland tax treaty, the Appellant has a dependent agent PE in India in the form of Adobe India and that the premises of Adobe India also form a fixed place PE for the Appellant in India. In view of the above, the Ld. AO had attributed 35% of revenue earned by the Appellant from India to its PE in India (after allowing deduction for payments made by the Appellant to Adobe India on account of obtaining marketing support services). In addition to the above, the Ld. AO had also taxed the interest on income-tax refund amounting to Rs.16,26,89,778/- as per the normal rates prescribed under the provisions of the Act as opposed to the 5
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beneficial tax rate of 10% provided under Article 11 of the India-Ireland Double Taxation Avoidance Agreement (“DTAA” or “tax treaty”) that was applied by the Appellant whilst filing its return of income.
3.6 Assessee approached Ld. DRP where in its directions dated September 29, 2023, DRP had allowed the benefit of the India-Ireland tax treaty to the Appellant by holding that the contention of the Ld. AO regarding the Appellant being a conduit entity was baseless.
3.7 However, the allegation that Adobe India constitutes the Appellant’s PE in India was affirmed on the presumption that Adobe India habitually and regularly concludes contracts and secures orders for the Appellant. Additionally, the interest paid under section 244A of the Act on the refunds determined for previous years was directed to be taxed at 10% as per the rate provided under the India-Ireland DTAA.
3.8 Consequently, a final assessment order has been passed by the Ld. AO, wherein, an addition of INR 2,34,77,36,435/- has been made to the income of the Appellant and a consequential demand of INR 1,20,61,40,640/- has been determined as payable by it [the refund for this year was previously issued to the Appellant persuant to the processing of the tax return under section 143(1) of the Act/adjustment with the outstanding demands for other assessment years.
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Referring to para 20 on page no 40 of the Assessment Order and para 8.4(i) of the DRP Directions, Ld. AR has pointed out that Ld. AO and the Ld. DRP have relied upon the orders of the prior years’ orders i.e. AY 2010-11 to AY 2020-21 and held there is no change in the facts of the instant case .
Now what comes up is that the issue of existence of PE is fully and squarely covered by the order of the Co-ordinate Bench where vide a common order dated July 27, 2022 for AY 2010-11 to AY 2015-16 in ITA No. 4921 to 4923/DEL/2017 and others, 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 and E-Funds. Relevant findings are reproduced below :-
“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 Morgan Stanley & Co.(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.
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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 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.” 5.1 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. Relevant extracts is reproduced below:-
“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 8
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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 documentation.” 5.2 The aforesaid order has also been followed by a coordinate bench of this Hon’ble Tribunal for AY 2016-17 in ITA 804/DEL/2023 order dated 22/12/23, for 2017-18 in ITA No. 774/DEL/2022 order dated 21/10/22, for AY 2018-19 & AY 2019-20 vide ITA no 1929 and 1930/ DEL/ 2022 order dated 28/2/23 and for AY 2020-21 vide ITA No. 913/DEL/2023 order dated 12/10/23. Relevant extracts of the aforesaid orders are also reproduced below:-
AY 2016-17 (supra) 7. The Revenue has not pointed any change into facts and circumstances ofthe case in the year under appeal. Hence, we do not see any reason to deviatefrom the decision taken by coordinate bench in ITA No. 774/Del/2022. Wetherefore respectfully following the same hereby direct the AO to delete theimpugned addition. AY 2017-18 (supra) 10. There is no gain saying 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. AY 2018-19 and AY 2019-20 (supra) “9. In the aforesaid 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 9
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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 found to be at arm’s length, no further attribution of profit can be made to the dependent agent PE in India. While considering identical issue in assessee’s own case for assessment year 2017-18, the Tribunal in ITA No.774/Del/222, dated 21.10.2022 followed its earlier decision and held as under:…. 11. As discussed earlier, the factual position in the impugned assessment years are identical to past assessment years wherein the Tribunal has decided the issue. This is further evident from the fact that both the Assessing Officer and learned DRP have relied upon their earlier decisions while deciding the issue. That being the case, in our considered opinion, the issue relating to taxability of the Revenue earned from supply of software and automated services stands squarely covered in favour of the assessee by the earlier decisions of the Tribunal, referred to above. 13. Thus, respectfully following the decisions of the Coordinate Bench in assessee’s own case, as discussed above, as well as the ratio laid down by the Hon’ble Supreme Court in the decision cited before us, we delete the additions made in both the assessment years under dispute on the reasoning that the transactions between the assessee and its AE in Indian having been found to be at arm’s length, no further profit can be attributed to the PE……..” AY 2020-21 (supra) “11. For the relevant AY, the case of the assesee was not referred to the TPO by the Ld. AO and hence it can be concluded that the transaction between the assessee and Adobe India is found to be at ALP which is 10
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confirmed from the transfer pricing study and transfer pricing report of Adobe India. Considering the factual matrix of the case and respectfully following the decisions (supra) of the Co-ordinate Bench of the Tribunal for earlier AYs as well as decisions (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…” 6. On basis of aforesaid it comes up that Tribunal has rejected the reasons and conclusions on which the findings of the Ld. 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. The Stay Application is rendered infructuous and the same is accordingly dismissed.
Order pronounced in the open court on 09.02.2024. Sd/- Sd/- (G.S. PANNU) (ANUBHAV SHARMA) VICE PRESIDENT JUDICIAL MEMBER Dated: 09th February, 2024. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi 11
