2023 (12) TMI 1120 - AT - Income Tax

Income taxable in India - existence of dependent agent PE - amount received by the assessee from supply of software and automated services - HELD THAT - The issue in question in AY 2017-18, the Co-ordinate Bench of the Tribunal in assessee own case 2023 (1) TMI 14 - ITAT DELHI as held we find that the issue of attribution to profit when the transaction has been found to at Arm's Length between foreign party and the Indian AE, then no further attribution is required has already been decided by the decision of the Hon'ble Supreme Court in the case of DIT v. Morgan Stanley Co. Inc 2007 (7) TMI 201 - SUPREME COURT As 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. There is no gainsaying 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. Levying tax on interest on the income-tax refund received by the Appellant during the year under consideration - India-Ireland Double Taxation Avoidance Agreement - Revenue has not brought to our notice any binding precedent on this issue. Therefore, the Assessing Officer is directed to tax the interest @10% as prescribed in the Indo-Ireland Tax Treaty. Credit of TDS whilst computing the tax liability of the Appellant for the year under consideration - We hereby direct the Assessing Officer verify the claim and grant the credit of taxes deducted at source in accordance with law. Levying interest u/s 234A whilst computing the tax liability of the Appellate for the year under consideration - When the return of the income has been held to be validly filed then all consequent action related to levy of interest u/s. 234A would follow as prescribed under the law. We therefore direct the AO to verify and levy the interest u/s. 234A as per the provisions of the Act as if it is a valid return. This ground of the assessee appeal is allowed in terms indicate above.

Summary

Issues Involved:
1. Existence of Dependent Agent Permanent Establishment (PE)
2. Attribution of Business Profits to Dependent Agent PE
3. Tax Rate on Interest from Income-Tax Refund
4. Credit of Taxes Deducted at Source (TDS)
5. Levy of Interest under Section 234A
6. Initiation of Proceedings under Section 271(1)(c)

Summary:

1. Existence of Dependent Agent Permanent Establishment (PE):
The assessee contended that Adobe Systems India Private Limited ("Adobe India") is not an agent of the Appellant and is a legally and economically independent entity. The Tribunal noted that in previous years, it was established that the transactions between the assessee and its Indian AE were at arm's length, and no further attribution was required as per the Hon'ble Supreme Court's decision in DIT v. Morgan Stanley & Co. Inc. The Tribunal held that since the transactions were at arm's length, no additional profits needed to be attributed to the PE, and the AO was directed to delete the impugned addition.

2. Attribution of Business Profits to Dependent Agent PE:
The AO attributed a sum of INR 71,90,98,265/- as business profits to the alleged Dependent Agent PE. The Tribunal, following the decision in the assessee's own case for earlier years, held that once the associated enterprise has been remunerated on an arm's length basis, nothing further can be attributed to the PE. The Tribunal directed the AO to delete the addition.

3. Tax Rate on Interest from Income-Tax Refund:
The AO levied tax on interest from the income-tax refund at 40% instead of the beneficial tax rate of 10% provided under Article 11 of the India-Ireland DTAA. The Tribunal, following the decision in the assessee's own case for AY 2020-21, directed the AO to apply the tax rate of 10% on the interest on income tax refund as per the provisions of Article 11 of the India-Ireland DTAA.

4. Credit of Taxes Deducted at Source (TDS):
The assessee claimed that the AO erred in not allowing credit of TDS amounting to INR 73,97,849/-. The Tribunal directed the AO to verify the claim and grant the credit of taxes deducted at source in accordance with the law.

5. Levy of Interest under Section 234A:
The AO levied interest under section 234A, treating the return of income as invalid. However, the Commissioner of Income Tax quashed the order passed by CPC and directed that the return of income filed by the assessee be treated as valid. The Tribunal directed the AO to verify and levy the interest under section 234A as per the provisions of the Act, treating the return as valid.

6. Initiation of Proceedings under Section 271(1)(c):
The Tribunal did not address this issue separately in the judgment, implying that it was not a primary focus of the appeal.

Conclusion:
The appeal of the assessee was partly allowed, with directions to the AO to delete the additions related to the Dependent Agent PE and to apply the correct tax rate on interest from the income-tax refund, verify and grant TDS credit, and correctly levy interest under section 234A.