2023 (10) TMI 699 - AT - Income Tax

Income accrued in India - existence of a DAPE in form of Adobe India and further attribution to the alleged PE - attributing a sum as business profits to the alleged PE of the Assessee in India - HELD THAT - Considering the factual matrix of the case and respectfully following the decisions of the Co-ordinate Bench of the Tribunal for earlier AYs order 2023 (1) TMI 14 - ITAT DELHI AND 2023 (9) TMI 1015 - ITAT DELHI as well as decision of Morgan Stanley Co. Inc 2007 (7) TMI 201 - SUPREME COURT and E-Funds IT Solution Inc 2017 (10) TMI 1011 - SUPREME COURT 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. Higher rate of tax imposed on the interest income on the income tax refund - 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 opposed to beneficial rate of tax of 10% as per the provisions of Article 11 of the India-Ireland DTAA - HELD THAT - Claim of the treaty benefit made by the assessee is not in dispute at all at this stage and hence no verification is required by the Ld. AO with respect to the same. In the light of the above legal position and factual matrix of the case, we set aside the order of the Ld. AO on the impugned issue and direct him to apply the tax rate of 10% on interest on income tax refund as per the provisions of Article 11 of the India-Ireland DTAA. Accordingly, ground No. 3 is decided in favour of the assessee. Short credit of TDS whilst computing the tax liability of the assessee for the year under consideration - We direct the Ld. AO to verify the claim of the assessee and grant TDS credit accordingly as per the law. Levy of an additional tax on Special Income other than Section 115BBE whilst computing the tax liability of the assessee for the year under consideration - AR submitted that no such income exists and that no discussion regarding the same has been made in the assessment order - HELD THAT - Perusal of the assessment order supports the contention of the assessee. Accordingly, we direct the Ld. AO to verify the said claim of the assessee and grant relief to the assessee subject to the outcome of his verification.

Issues Involved:
1. Existence of Dependent Agent Permanent Establishment (DAPE) in India.
2. Attribution of business profits to the alleged DAPE.
3. Tax rate on interest income from income tax refund.
4. Credit of taxes deducted at source (TDS).
5. Levy of additional tax on 'Special Income Other Than Section 115BBE'.
6. Initiation of penalty proceedings under section 270A of the Income Tax Act.

Summary:

1. Existence of Dependent Agent Permanent Establishment (DAPE) in India:
The assessee argued that Adobe Systems India Private Limited (Adobe India) is a legally and economically independent entity and not a Dependent Agent Permanent Establishment (DAPE) of the assessee. The Ld. AO and DRP, however, held that Adobe India is a DAPE of the assessee in India under Article 5(6) of the India-Ireland Double Taxation Avoidance Agreement (DTAA). They concluded that Adobe India is actively involved in the sales and supply of software distributed by the assessee and performs core business functions, thus constituting a DAPE.

2. Attribution of Business Profits to the Alleged DAPE:
The Ld. AO attributed INR 1,74,64,31,465/- as business profits to the alleged DAPE in India. The assessee contended that once the associated enterprise (Adobe India) has been remunerated on an arm's length basis, no further profits should be attributed to the alleged PE. The Tribunal, citing previous decisions and the Supreme Court rulings in DIT vs. Morgan Stanley & Co. Inc. and ADIT vs. E-Funds IT Solution Inc., upheld that no further attribution of profits is required if the transactions are at arm's length. The Tribunal allowed the assessee's appeal on this ground.

3. Tax Rate on Interest Income from Income Tax Refund:
The Ld. AO taxed the interest on income tax refund at 40% plus surcharge and cess, as per the provisions of the Act, instead of the beneficial tax rate of 10% under Article 11 of the India-Ireland DTAA. The Tribunal, agreeing with the Ld. CIT(A)'s order in the assessee's own case, directed the Ld. AO to apply the 10% tax rate on the interest income as per the DTAA.

4. Credit of Taxes Deducted at Source (TDS):
The assessee claimed that the Ld. AO did not allow TDS credit amounting to INR 2,48,86,907/-. The Tribunal directed the Ld. AO to verify the claim and grant the TDS credit as per law.

5. Levy of Additional Tax on 'Special Income Other Than Section 115BBE':
The assessee challenged the levy of additional tax of INR 4,58,03,533/- on 'Special Income Other Than Section 115BBE'. The Tribunal found no discussion regarding this in the assessment order and directed the Ld. AO to verify the claim and grant relief accordingly.

6. Initiation of Penalty Proceedings Under Section 270A:
The assessee contested the initiation of penalty proceedings under section 270A of the Act. The Tribunal deemed this ground premature and did not adjudicate on it.

Conclusion:
The Tribunal allowed the appeal of the assessee on the grounds of DAPE existence and attribution of profits, directed the application of the beneficial tax rate on interest income, and instructed verification and appropriate action on TDS credit and additional tax levy issues. The initiation of penalty proceedings was not adjudicated.

← Previous Next →