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2022 (7) TMI 1365 - AT - Income TaxIncome deemed to accrue or arise in India - Royalty receipts - Receipts from distribution/supply of software - attribution to profit when the transaction has been found to at Arm s Length between foreign party and the Indian AE - amount received by ADIR from sale of software to Indian distributors as royalty income u/s 9(1)(vi) as well as under Article 12(3) of India Ireland tax treaty and taxed the same at the rates applicable with receipt as royalty income - Whether assessee was having fixed place PE/dependent agent PE? - HELD THAT - We are of the opinion that the decision of Morgain Stanley Co. 2007 (7) TMI 201 - SUPREME COURT 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. Functions attributed to the Adobe India by the Revenue - As regards the few e-mails that have been referred they are only also marked to the Adobe India personnel which has been said to be done only for the sake of keeping the Adobe India in the loop. In none of the e-mail referred 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. 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 handles the legal matters relating to infringement of brand, copy right matters and other related actions to be undertaken in all jurisdiction in which the Adobe operates including India. Adobe USA is authorised in monitoring to Indian operations and their legal counsels handles the matters there from. 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, 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 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. 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. Levy of 234B interest - HELD THAT - On the basis of the decision of Jacabs Civil Incorporated/ Mitsubhishi Corporation 2010 (8) TMI 37 - DELHI HIGH COURT , and GE Packaged Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT the CIT(A) has held that interest under section 234B of the Act should not be applied for until AY 2012-13. As 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, we remit the issue to the file of the Assessing Officer to decide this issue accordingly.
Issues Involved:
1. Treatment of receipts from distribution/supply of software as royalty. 2. Existence of a dependent agent PE (Permanent Establishment) in India. 3. Attribution of profits to the alleged PE. 4. Existence of a fixed place PE in India. 5. Interest levied under section 234B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Treatment of Receipts from Distribution/Supply of Software as Royalty: The Assessing Officer treated the amount received by the assessee from the sale of software to Indian distributors as royalty income under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the India-Ireland tax treaty. However, the assessee argued that this issue is covered in their favor by the Supreme Court decision in Engineering Analysis Centre of Excellence Private Limited, which held that amounts paid by Indian end-users/distributors to non-resident software suppliers are not royalty and are not taxable in India. The ITAT agreed with the assessee, noting that the Revenue did not dispute this position, and decided the issue in favor of the assessee. 2. Existence of a Dependent Agent PE in India: The Revenue argued that Adobe India acted as a dependent agent PE for the assessee, performing functions beyond those specified in the agreement. The assessee countered that Adobe India operates as an independent contractor and does not have the authority to bind the assessee contractually. The ITAT found that the functions performed by Adobe India were consistent with the agreement and transfer pricing documentation, and there was no substantial evidence to prove otherwise. The ITAT concluded that Adobe India does not constitute a dependent agent PE for the assessee. 3. Attribution of Profits to the Alleged PE: The Revenue contended that profits should be attributed to the PE in India based on the functions performed by Adobe India. The assessee argued that once a transfer pricing analysis has been undertaken and found to be at arm's length, no further profits should be attributed to the PE. The ITAT supported this view, citing the Supreme Court decision in DIT v. Morgan Stanley & Co. Inc., which held that if an associated enterprise is remunerated on an arm's length basis, no further profits need to be attributed to the PE. The ITAT found that the transactions between the assessee and Adobe India were at arm's length, and therefore, no additional profits should be attributed to the PE. 4. Existence of a Fixed Place PE in India: The Revenue claimed that the premises of Adobe India constituted a fixed place PE for the assessee. The assessee argued that the business carried out through Adobe India's premises was independent and did not constitute a fixed place PE. The ITAT noted that there was no evidence to prove that Adobe India's premises were at the disposal of the assessee or that employees of the assessee conducted business through these premises. The ITAT concluded that Adobe Ireland did not have a fixed place PE in India. 5. Interest Levied Under Section 234B of the Income Tax Act: The Revenue levied interest under Section 234B on the assessee's assessed income, despite tax being deductible at source on the entire income. The assessee argued, based on judicial precedents, that no interest should be levied for the relevant assessment years because tax was deductible at source. The ITAT agreed with the assessee and remitted the issue to the Assessing Officer to decide in accordance with the relevant case laws. Conclusion: The ITAT ruled in favor of the assessee on all issues, concluding that the receipts from software distribution are not royalty, Adobe India does not constitute a dependent agent PE, no additional profits need to be attributed to the PE, Adobe Ireland does not have a fixed place PE in India, and interest under Section 234B should not be levied. The appeals by the assessee were allowed, and the Revenue's appeals were dismissed.
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