TMI Blog2022 (7) TMI 1365X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income earned by Adobe Ireland from India, we remit the issue to the file of the Assessing Officer to decide this issue accordingly. - ITA Nos.5024 to 5029/DEL/2017; ITA Nos.3079 & 3080/DEL/2019; ITA No.7922/DEL/2019; ITA Nos.4921 TO 4923/DEL/2017; ITA No.1978 & 1979/DEL/2019 AND ITA No.55 & 7460/DEL/2019 - - - Dated:- 27-7-2022 - SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER Revenue by Ms. Meenakshi Singh, CIT-DR Assessee by Sh. Ajay Vohra, Sr. Adv; Sh. Rishabh Malhotra, AR ORDER PER BENCH, These are cross appeals by the assessee and Revenue arising out of the separate appellate orders. Since, the issues are common and connected and all the appeals were heard together these are being consolidated and disposed off together for the sake of convenience. 2. Brief facts of the case are that Adobe Systems Software Ireland Limited ( the company or ADIR ) is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with Double Taxation Avoidance Agreement ( DTAA or tax treaty ) between India and Ireland. Therefore, it is entitled to the beneficial provisions of the India Irela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements are not the payment of royalty for the purpose of copyright in the computer software, and the same do not give rise to any income taxable in India. Further, the ld. counsel for the assessee stated that apart from the above, in assessee s own matters for AY 2008-09 and AY 2009-10, the ITAT has considered similar facts and decided the issue in favour of the assessee. The Ld. Counsel for the assessee further submitted that in subsequent assessment years after the pronouncement of the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra) i.e. for AY 2016-17, AY 2017-18, AY 2018-19, AY 2019-20 and AY 2020-21, the Assessing Officer has not alleged that the receipts of the assessee from distribution/supply of software are taxable royalty in India. 6. The Ld. CIT-DR did not dispute the above proposition either in the Court or in the written submission filed subsequently. Accordingly, we find tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be noted that in the assessment/ reassessment orders passed by the Ld. AO after the pronouncement of the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra) i.e. for AY 2016-17, AY 2017-18, AY 2018-19, AY 2019- 20 and AY 2020-21, the Ld. AO has not alleged that the receipts of the Assessee from distribution/supply of software are not taxable royalty in India. Lastly, even during the course of the hearings before the Hon ble bench, the Ld. CIT DR mentioned that they do not have any contentions on software royalty and they agree that the Appellant s income from sale of software should not be taxed as Royalty under the India - Ireland Double Taxation Avoidance Agreement ( DTAA ) 2. Existence of a dependent agent PE in India Adobe Systems India Private Limited ( Adobe India ) does not qualify as an agent of the Appellant In order to understand the meaning of the term agent, one has to rely upon the provisions of Indian Contract Act, 1872 ( ICA ). Section 182 of the ICA defines an agent as a person who is employed to do any act for another or to represent another in dealings with third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be India is legally independent from the Appellant In this regard, reliance is placed upon the decision of the Delhi ITAT in the case of Net App B.V. v. DDIT [2017] 78 taxmann.com 97 (Delhi - Trib.) (please refer to pages 227 to 272 of the case law compilation), wherein it has been held that legal independence must be tested on the lines of the agent s obligations. Accordingly, in order to constitute legal dependence, it is imperative for the Revenue to establish that the agent must tie subject to detailed instructions and comprehensive control. In the instant case, Adobe India is not subject to any detailed instructions and comprehensive control by Adobe Ireland in the conduct of its business, i.e. providing marketing support services in India and is acting in an independent manner. Therefore, it cannot be said to be legally dependent upon Adobe Ireland. A chart depicting the similarities between the facts of the instant case and Net App B.V. (supra) is enclosed as Annexure 1 to this note. Adobe India is economically independent from the Appellant The Ld. Assessing Officer ( Ld. AO ) and the Ld. Commissioner of Income-tax (Appeals) [ CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia is not an independent agent, it does not negotiate contracts, conclude contracts or secure orders in India and hence, is not covered under the specific dependent agent PE activities clause provided in the India-Ireland tax treaty. The Appellant s main distributors, Ingram and Redington (being unrelated multinational organisations), were old existing distributors of the Appellant since 2002 . Furthermore , the process of selection and onboarding of new distributors is handled directly by Adobe Ireland with no participation from Adobe India (please refer to the powerpoint presentation explaining the details of the on boarding process for distributors along with role of Adobe India enclosed at pages 205 to 211 of the convenience compilation). The Appellant had complete control over the negotiation process and concludes the agreements for the purposes of the conducting business with customers in India . The entire process is carried out without any intervention from Adobe India [as alleged by the Ld.AO and subsequently Ld. CIT(A)] even the orders are placed directly by the distributors on the portal of the Appellant (please refer to clause 2.2 Nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omers until delivery of the orders. Therefore, it cannot be said that the above-mentioned activities constitute concluding of contracts or securing of orders on behalf of Adobe Ireland and these are merely allegations without any basis. With regard to the above points, please refer to clause 3.3.1 Nature of Relationship of the marketing support services agreement between Adobe Ireland and Adobe India enclosed at pages 158 to 198 of the convenience compilation, slides 4 and 5 of the powerpoint presentation enclosed at pages 199 to 204 and slides 2 and 3 of the powerpoint presentation enclosed at pages 205 to 211 of the convenience compilation wherein the detailed order placing process has been explained. It is to be appreciated that Article 5(6) of the IndiaIreland tax treaty that deals with dependent agent permanent establishment mandates that the agent in India should habitually exercise an authority to conclude contracts or should habitually secure orders on behalf of the Irish entity for the Irish entity to have a permanent establishment in India.. This principal is also supported by paragraph 33 of the OECD Model Commentary 2010 on Article 5. concerni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inference drawn by the Ld. CIT(A) that the activities actually performed by Adobe India are wider in nature as against the activities pointed out in the contract between Adobe Ireland and Adobe India and Adobe India s transfer pricing report is based on an incorrect interpretation of the emails between Adobe India and Adobe Ireland s distributors It is humbly submitted that the Ld. CIT(A) has relied upon copies of email correspondences between Adobe India and the distributors of the Appellant to erroneously draw a negative conclusion that the Appellant has a dependent agent PE in India in the form of Adobe India. However, the email trails referred to by the Ld. CIT(A) do not at all correspond to the findings of the Ld. CIT(A) and the same were mere conjectures and surmises. As mentioned earlier, the Appellant s agreements with its main distributors, Ingram and Redington had already been concluded early as the year 2002. Furthermore, the on boarding of distributors was being handled directly by Adobe Ireland with no participation from Adobe India. All prices were standard and listed on the distributor portal/website for the distributors/resellers and the end custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re his plan for achieving the given target [please refer to para 7.11 at page 35 of the order passed by the CIT(A)for AY 2010-11 enclosed as a part of the appeal file]. However, it should be noted that whilst coming to this conclusion, the Ld. CIT(A) has ignored the fact that following up with the customers regarding poor achievements of targets was within the defined functions of Adobe India for which it was being duly compensated by the Appellant. Further, nowhere in the appellate order, the Ld. CIT(A) has thrown light on how discharging this function would tantamount to 'concluding contracts, securing orders' or 'maintaining stock' on behalf of the Appellant, the three activities which must be performed by an alleged agent for it to be held as a dependent agent PE of its principle In addition to the above, in the appellate order, the Ld. CIT(A) has mentioned that Adobe India was kept in the loop through alerts/mails at each stage of order process and delivery process and the function of follow up till delivery is mainly in the form of a guise to allow Adobe India to involve in sourcing and conclusion of order with end customers [please refer to para 7.13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the alleged PE Functions, Assets and Risk ( FAR ) profile of Adobe India captured in the transfer pricing documentation already accepted by the tax authorities The FAR profile of Adobe India has been appropriately captured in its transfer pricing documentation and the same has been accepted by the tax authorities during the course of transfer pricing assessment of Adobe India (please refer to the relevant orders passed in the case of the Appellant and Adobe India for AY 2010-11 enclosed at pages 377 to 380 and 253 to 361 of the convenience compilation). Accordingly, the additional FAR assigned by the CIT(A) to Adobe India are incorrect. A detailed rebuttal to the incorrect conclusions drawn by the CIT(A) regarding the FAR profile of Adobe India [please refer to para 7.30 at page 43 of the order passed by the CIT(A) for AY 2010-11 enclosed as a part of the appeal file] is enclosed at pages 373 to 376 of the convenience compilation. In addition to the above, it may be noted that the Ld. TPO, in the case of the Appellant for all the years under consideration have held that no adverse inference could be drawn in respect of international transactions und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Attribution Methodology With respect to the above, it is humbly submitted that:- ❖ As per Article 7 of the India-Ireland DTAA, only profits (and not revenue) of an assessee can be attributed to its PE in India . Therefore, without prejudice to the above, it is humbly submitted that if any profits are required to be attributed to the alleged PE of Adobe Ireland in India, the same should be determined keeping in mind its global net profit margins since the existing methodology adopted by the tax officer leads to the irrational and illogical conclusion that Adobe Ireland has been earning profits as high as 65-70%. A chart depicting the profits that would be attributable to the alleged PE in this scenario for the years under consideration is enclosed at page 447 of the convenience compilation. Furthermore, please refer to the Global accounts the Company for AY 2010-11 captured on pages 381 to 446 of the convenience compilation. ❖ It maybe noted that the Delhi ITAT in the case of Motorola Inc. v. DCIT [2005] 95 ITD 269 (Delhi) (Special Bench), had followed a similar methodology wherein the global net profit percentage was applied to the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Adobe India was rendering services to Adobe Ireland does not tantamount to making available a fixed place of business to Adobe Ireland. No evidence has been brought on record by the Revenue to prove that the premises of Adobe India were at the disposal of Adobe Ireland . In fact, in all the years under consideration, there is no finding from the Ld. AO that employees of Adobe Ireland were present in India to conduct business through the alleged fixed place. It may be noted that the burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue [ADIT v. E-Funds IT Solution Inc. (supra)] . On the basis of the above, for AY 2007-08, AY 2010-11, AY 2011-12, AY 2012-13, AY 2013-14 and AY 2015-16, the Ld. CIT(A) has held that Adobe Ireland did not have a fixed place PE in India and the Revenue has not challenged the CIT(A) orders for AY 07-08, AY 13-14 and AY 15-16 as far as the issue of Fixed Place PE is concerned. In addition to the above, it is humbly submitted that during the hearing before this Hon ble Bench of the ITAT, the Ld. Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by applying the relevant provisions of the DTAA read with Rule 10 of the Income Tax Rules, 1962. A detailed submission has been made in this regard, which has been summarised as under:- a. The assessee has not discharged its onus to provide complete details about email ids and copies of emails as asked from it by the Assessing Officer and the Ld. CIT(A) during the assessment and the appellate proceedings. The assessee has not provided such documents even before the Hon ble ITAT. b. The assessee has not submitted copies of all agreements entered into by with all the distributors in India. The assessee has submitted copy of the agreement entered into with only one distributor, i.e. Ingram Micro India Pvt. Ltd. and not any of the other distributor, including Redington (India) Ltd. Further, it cannot be verified from the records whether there is any other agreement entered into by the assessee company with Adobe India or any other entity that was applicable during the years under consideration. c. On the basis of the analysis of the sample emails provided by the assessee selectively, it has been found that Adobe India is performing functions which are wider in scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market support services. In view of the completely different facts, the reliance placed by the assessee on the above ruling to contend that Adobe India does not constitute a PE is misplaced. g. ' In relation to Fixed Place PE, the observation of the Ld. CIT(A) that no employees of the assessee visited India is inconsistent with the assessee s own replies during the assessment proceedings before the AO wherein it has been stated that certain employees of the assessee visited India for official purposes. h. In relation to profit attribution to PE. it is submitted that since the functions performed by the PE. i.e. Adobe India, is much wider than the scope of the agreement and the TP Study, further attribution is required to be done in the instant case. On detailed analysis of the FAR of the PE as compared to the FAR of the AE, the Ld. CIT(A) in the case of AY 2010-11 has accepted the attribution done by the AO during assessment proceedings. i. Without prejudice to the above, it is submitted that the FAR approach to profit attribution has not been accepted by India in its DTAAs and the attribution of profit has to be done by applying Rule 10 as done by the AO duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business profit as is 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, carryforward 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 dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuted 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 judicial decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal 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 e-mails 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 e-mails 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 transfer pricing report. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussed 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. 18. Another ground in Revenue s appeal is with reference to levy of 234B interest. 19. We may gainfully refer to the submissions of Ld. AR on this issue as under:- 5. Interest levied under section 234B of the Act (ground taken in appeals filed by the tax authorities) The Ld. AO has levied interest under section 234B of the Act on the Appellant s assessed income for AY 2007-08 and AY 2010-11 to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
