2023 (1) TMI 14 - AT - Income Tax

Income taxable in India - Existence or otherwise of a Permanent Establishment (PE) of the assessee in India and in case there is a PE, attribution of profit to the PE - assessee is a non-resident corporate entity incorporated in Ireland wholly owned subsidiary of Adobe System, USA and is engaged in licensing of software in India through distributors to the end users - HELD THAT - There is no gainsaying that factually the issue stands on identical footing in relation to preceding assessment years, as, both AO 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.

Issues Involved:
1. Existence of a Dependent Agent Permanent Establishment (DAPE) in India.
2. Attribution of business profits to the alleged DAPE.
3. Computation of tax liability.
4. Credit for taxes deducted at source (TDS).
5. Initiation of proceedings under Section 274 read with Section 270A of the Income-Tax Act.

Issue-wise Detailed Analysis:

1. Existence of a Dependent Agent Permanent Establishment (DAPE) in India:
The primary dispute revolves around whether the assessee, a non-resident corporate entity incorporated in Ireland, has a DAPE in India through its Indian subsidiary, Adobe Systems India Pvt. Ltd. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) concluded that Adobe India constitutes a DAPE of the assessee in India under Article 5(6) of the Double Taxation Avoidance Agreement (DTAA) between India and Ireland. This conclusion was based on the premise that Adobe India is actively involved in the sales and supply of software distributed by the assessee. However, the assessee argued that Adobe India is an independent entity and that the sales and supply were conducted by independent third-party distributors. The Tribunal noted that in previous assessment years, the transactions between the assessee and Adobe India were found to be at arm's length, and thus, no further attribution of profit to the PE was warranted.

2. Attribution of Business Profits to the Alleged DAPE:
The AO attributed a sum of INR 1,04,22,80,978 as business profits to the alleged DAPE in India. The assessee contended that the attribution of profits to the PE is a transfer pricing issue and that once an arm's length price has been determined for Adobe India, no further profits should be attributed to the PE. The Tribunal referenced the decision in the case of DIT v. Morgan Stanley & Co. Inc, where it was held that if the transactions between the foreign entity and the Indian AE are at arm's length, no further profits can be attributed to the PE. The Tribunal found that the AO and DRP had erred in attributing profits to the PE without considering that the transactions were already at arm's length.

3. Computation of Tax Liability:
The assessee argued that the AO erred in computing the tax liability by attributing revenue instead of profits to the alleged AE, resulting in an erroneous profitability calculation of 77.5%, while the appellant's global profit was only 2.67%. The Tribunal held that since the transactions between the assessee and its Indian AE were found to be at arm's length, no further attribution of profit could be made to the PE, thus impacting the computation of tax liability.

4. Credit for Taxes Deducted at Source (TDS):
The assessee claimed that the AO erred in not allowing credit for taxes deducted at source amounting to INR 12,68,394. The Tribunal directed the AO to verify the assessee's claim and allow TDS credit in accordance with the law.

5. Initiation of Proceedings under Section 274 read with Section 270A of the Income-Tax Act:
The assessee contended that the AO erred in mechanically initiating penalty proceedings under Section 274 read with Section 270A of the Act. The Tribunal did not specifically address this issue in the detailed analysis but allowed the appeal in favor of the assessee, implicitly negating the basis for such proceedings.

Conclusion:
The Tribunal concluded that the amount received by the assessee from the supply of software and automated services is not taxable in India, as the transactions between the assessee and its Indian AE were at arm's length. Consequently, the AO was directed to delete the additions. Additionally, the AO was instructed to verify and allow the TDS credit claimed by the assessee. The appeal was allowed in favor of the assessee.

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