9911796707
TMI Blog2023 (10) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors. 1.4 That the Ld. AO and Hon'ble DRP erred in law in holding Adobe India to be a Dependent Agent PE of the Appellant without bringing any cogent documentary evidence on record to substantiate the above statement. 1.5 That the Ld. AO erred in law by not acting in accordance with the directions of the Hon'ble DRP wherein it had directed the Ld. AO to pass the final assessment order after considering the orders passed by the Hon'ble Income Tax Appellate Tribunal ( ITAT ) in the Appellant's own cases for earlier years, wherein based on similar facts, it has been held that the Appellant does not have a Dependent Agent PE in India. 2.1 That on the facts and circumstances of the case and in law, the Ld. AO erred in attributing a sum of INR 1,74.64.31,465/- as business profits to the alleged Dependent Agent PE of the Appellant in India. 2.2 Without prejudice to the above grounds, the Ld. AO and Hon'ble DRP failed to appreciate that attribution of profits to the alleged PE is a transfer pricing issue and grossly erred on facts and in law in disregarding established judicial pronouncements in India, including the orders of the Hon'ble ITAT in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case and in law, the Ld. AO has grossly erred in levying an additional tax of INR 4,58,03.533/- on 'Special Income Other Than Section 115BBE' whilst computing the tax liability of the Appellate for the year under consideration. 6. That on the facts and in circumstances in law, the Ld. AO erred in mechanically initiating proceedings under section 270A of the Act. 3. Briefly stated, the assessee is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with the Double Taxation Avoidance Agreement between India and Ireland ( India-Ireland DTAA ). It is therefore entitled to the beneficial provisions of the India- Ireland DTAA. The assessee is engaged in licensing of software in India through distributors to the end user. It filed its return of income for AY 2020-21 on 12.02.2021 declaring total income of Rs. 45,80,35,330/- to be taxed at special rate. The assessee s case was selected for scrutiny under CASS. Statutory notice(s) under section 143(2) and 142(1) of the Act were issued to the assessee on various dates. In response thereto, the assessee submitted details of revenue received by it during the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel ( DRP ) against the draft assessment order passed by the Ld. AO wherein the Ld. AO proposed to assess the income of the assessee at Rs. 1,80,40,34,676/- (Rs. 1,74,64,31,465/- + Rs. 5,76,03,211/-) as against the returned income of Rs. 45,80,35,330/- of the assessee. Vide its order dated 02.12.2022, the Ld. DRP issued the following directions to the Ld. AO: 4.4 Ground no. 3 5- These relate to issue of attributing a sum of Rs. 1,74,64,31,465/- as business profits to the alleged PE of the Assessee in India. 4.4.1 The AO has discussed about this issue in detail in his order from page no 3 to 12. Crux of the AO's findings are re-produced below- As per para 8 of the order, AO has discussed about the Article no 7 of India Ireland DTAA pertaining to charging of business profits. It has also mentioned about Article 5 of the DTAA defining scope of the PE. AO is of the view that the Agency PE of a foreign enterprise in India will be attracting only if the agent in India is a dependent agent. The various judicial pronouncements provides certain guidelines to test the dependency i.e. 'binding test and 'dependency test' Binding Test-If the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia in the capacity of DAPE is the only touch point of Adobe Ireland in India and performing functions to secure orders from customers and distributors. From the perusal of the Group structure, it is seen that Adobe USA is the ultimate holding company of the assessee as well as Adobe India. Hence, Adobe India, which is found to be an agent of the assessee is legally and economically dependent on Adobe USA as well as the assessee in question. To substantiate this fact, if Adobe USA or the assessee closes its manufacturing and distribution functions abroad, Adobe India would not survive. Therefore, it cannot be said that Adobe India has an independent status. 4.4.3 The AO has recorded his observation in respect of Adobe India having being performed core business activity for assessee at page no 7-11 of the order. Crux is reproduced below- It is extremely important for any organization to have good support services to succeed in their business. Support services are important for the immediate relief of the customers and the clients. Support services are not just limited to phone calls nowadays email, chat, web forms, and social communications, as well as self-service sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- DRP's Direction In the instant case, Dependent Agency Permanent Establishment DAPE is performing core business function which has direct impact on revenues from sales/services of the assessee. If a person residing in India represents or acts on behalf of a foreign enterprise, his presence in India may be construed as the foreign enterprise's presence in India, triggering the establishment of a PE in India. PE is the most crucial concept to understand for any enterprise that operates across borders. This is the principal means through which an enterprise may be exposed to corporate income tax, value-added tax, filing tax returns, and compliance with a range of other obligations in the country of source. Even without a fixed place of business in a treaty country, an enterprise may have a permanent establishment in a treaty country to the extent that an agent in that country conducts activities on behalf of the enterprise. An agent in one country may be considered a permanent establishment of an enterprise of another country if: The agent is a dependent agent The agent has and continues to habitually exercise an authority to conclude contracts in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee was asked the following vide Notice u/s 142(1) dated 9/03/2022: As per your earlier submission, there is no change in the factual matrix as compared to earlier years. In the previous years, it has been held that Adobe India is a dependent agent PE and Fixed Place PE of the assessee in India. Hence you are requested to explain as to why the assessment may not be completed on the similar lines with regards to PE of the assessee in India, as was completed for earlier years. You are also given an opportunity to furnish any documentary evidences that you wish to present in the support of your explanations. The reply of the assessee dated 21/03/2022 in reply to the above has been perused and not found tenable. The issue was examined in detail in AYs-2010-11, 2011- 12,2012-13, 2013-14, 2014-15, 2015-16, 2017-18, 2018-19 and 2019-20 and it was found that Adobe India has no independent sources of income except providing market support services to the assessee and software development services to Adobe USA. Keeping in view the facts and the circumstances and the discussions as above hold that the assessee has a Dependent Agent PE in India in the form of Adobe India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to existence of a DAPE in form of Adobe India and further attribution to the alleged PE, the Ld. AR at the outset of the hearing submitted that the Ld. AO/DRP have relied upon their own orders/directions for previous years i.e. for AY 2010-11 to AY 2019-20 and held that there is no change in the facts of the instant case. He further submitted that the impugned issue is squarely covered by the decision of the Delhi Tribunal in assessee s own case for earlier AYs. The Tribunal vide its order dated July 27, 2022 in ITA Nos. 4921 to 4923/Del/2017, ITA No. 1978 and 1979/Del/2019 and ITA No. 55 and 7460/Del/2019 has deleted the additions made by the Ld. AO for AY 2010-11 to AY 2015-16. It has been held that no addition had been proposed by the Ld. TPO 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 Supreme Court in the case of DIT vs. Morgan Stanley Co. Inc. (2007) 292 ITR 416 and ADIT vs. E-Funds IT Solution Inc. (2017) 399 ITR 34 (SC). The Tribunal has also held that the very finding regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring 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 Govemment and the profit has to be determined by apply of provisions of DTAA rws. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween 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: 9. Undisputedly, in the transfer pricing proceedings, the TPO, in order dated 18.02.2022, has observed that the international transaction between the assessee and the Indian AE are at arm s length and has not proposed any further adjustment, in so far as, it relates to trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of Act. All provisions of Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set-off losses, etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are also made under the Act for example: Sections 44BB, 44BBA etc.). Under the impugned riding delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 13. 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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to attribute 35% of the total Revenue pertaining to India for this year. 15. Further, functions attributed to the Adobe India by the Revenue is also based upon the observations of the Ld. CIT(A) for Assessment Year 2010-11 primarily. The allegation of the Revenue is that the assessee was asked to produce dump of the emails correspondence between Adobe India and Adobe Ireland to deep dive to the activities so as to ascertain the clear cut facts to decide about PE. However, it was noted by the Ld. CIT(A) that after couple of months of gap, the assessee produced only sample certain e-mails. On the basis of these emails of few instances, the Ld. CIT(A) inferred that quotes offered by the distributors to channel partners are after discussion with Adobe India. The reasoning was that orders are delivered after seeking confirmation from Adobe India resources. Further, one of the emails is said to be demonstrating, the control and monitoring by Adobe India of distributors in meeting assigned targets. Basing upon such few e-mails, the Revenue has concluded that activities actually performed by Adobe India are wider in nature as against the activities pointed out in the contract and tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lysis. 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 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. 10. 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia 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. Ground No. 3 12. The next grievance of the assessee is with respect to higher rate of tax imposed on the interest income on the income tax refund. The facts of the impugned issue are that the Ld. 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. 13. The Ld. AR submitted that the impugned issue now stands covered by the order of the Ld. Commissioner of Income Tax (Appeal) ( CIT(A) ) in assessee s own case for the AY under consideration i.e. AY 2020-21 in the appeal filed by the assessee against the intimation passed under section 143(1) of the Act wherein the Ld. CIT(A) has upheld the applicability of the rate of 10% provided under Article 11 of the India-Ireland DTAA. The Ld. CIT(A), however has directed the Ld. AO to verify the claim of treaty benefit made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the order of the Ld. CIT(A), Delhi 42 for the present AY passed on 03.02.2023 in the appeal filed by the assessee before him against the intimation order of the Ld. AO passed under section 143(1) of the Act. The Ld. CIT(A) has concluded that the interest on income tax refund should be charged to tax at the beneficial rate of 10% provided under the India-Ireland DTAA subject to verification by the Ld. AO as to the entitlement of the assessee to claim DTAA benefits based on TRC etc. The relevant observations and findings of the Ld. CIT(A) are reproduced below: 10.5 Regarding taxability of interest on income-tax refunds under the India-Ireland tax treaty, it is submitted that taxability of interest income earned by a tax resident of Ireland is dealt with by Article 11 of the India-Ireland tax treaty which inter alia provides that interest arising in India and paid to a resident of Ireland may be taxed in India, but the tax so charged shall not exceed 10% of the gross amount of the interest. 10.6 The interest on income tax refund is covered under Article 11 as the term interest used in the said article has been defined in paragraph 4 as income from debt claims of eve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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