PE under Indo-US DTAA-Adobe India not PE of Adobe Systems USA as agent must have authority to conclude contracts on behalf of the enterprise-Delhi High Court
Case Details:
WP(C) 2384, 2385, 2390 of 2013
Adobe Systems Incorporated (Petitioner) vs. Assistant Director of Income Tax & Anr (Respondents)
Date of Judgment: 16-05-2016
Important Judgments Cited:
DIT (International Taxation) v. Morgan Stanley & Company Inc.: (2007) 292 ITR 416 (SC)
Director of Income Tax v. E-Funds IT Solution: [2014] 364 ITR 256 (Delhi)
The Question:
whether Adobe Systems India Private Limited (an Indian subsidiary of the Assessee) could be considered as its Permanent Establishment (PE). And if so, whether any part of the Assessee’s income, could be attributed to such PE in respect of the activities carried out by Adobe India, income from which had been subjected to transfer pricing scrutiny/adjustment.
Revenue’s Contentions:
That the activities carried out by the Adobe India were the core business activities of the Assessee; Adobe India was the Assessee’s PE in India; the cost plus basis on which Adobe India was remunerated by the Assessee does not capture the fair share of Assessee’s income attributable to its PE; and that a part of the Assessee‟s income, computed on profit split method, was chargeable to tax under the Act.
Assessee’s Contentions:
It was stated by the assessee that Adobe India provided software related Research and Development (R&D) services to the assessee and the assessee does not have any business operations in India. The R&D services rendered by Adobe India, were paid for by the assessee on cost plus basis in terms of an agreement entered into between the assessee and adobe India which was on principal to principal basis and Adobe India can not be regarded its agent. Thus the Assessee disputed that it had a PE in India and further contended that since the income of Adobe India had been assessed at Arm’s Length Prices (ALP), no part of Assessee’s income could be attributed to Adobe India even if it was assumed to be the Assessee’s PE in India.
Brief Facts of the Case:
The Assessee was a company incorporated under the laws of Delaware, USA. The Assessee providesd software solutions for network publishing including web, print, video, wireless and broadband applications. The Assessee has a wholly owned subsidiary in India, namely, Adobe India. The Assessing Officer issued notice u/s 147 after recording the following reasons:
(a) Adobe India develops software for the Assessee for which Adobe India has been compensated on a ‘cost plus profit basis’;
(b) the ownership of the software developed by Adobe India is the sole property of the Assessee and Adobe India does not retain any intellectual property rights in respect of the software developed by it; (c) the Assessee makes substantial profits by selling the software developed in India abroad for which no taxes have been paid by the Assessee in India;
(d) Adobe India has been working wholly and exclusively for the Assessee and does not develop software for any other concern; and
(e) the Assessee’s transaction with Adobe India are not isolated transactions “but a continuous business connection as Adobe India is connected to the Assessee through a network of lease lines and other technological means”.
Important Excerpts from High Court Judgment:
A subsidiary company is an independent tax entity and is separately taxed for its income in the country of its domicile. In the present case, Adobe India is a separate assessee and is liable to pay tax on its income. The fact that a holding company in another contracting state exercises certain control and management over a subsidiary would not render the subsidiary as a PE of the holding company. This is expressly spelt out in paragraph 6 of Article 5 of the Indo-US DTAA,
we must also clarify that the fact that a subsidiary company is a separate tax entity does not mean that it could never constitute a PE of its holding company. In certain circumstances, where the specified parameters defining PE – in the present case Article 5 of the Indo-US DTAA – are met, a subsidiary would constitute a PE of its holding company. However, in determining whether the requisite parameters are met, it is necessary to bear in mind that a subsidiary is a separate legal entity and its activities, the income from which are assessed in its hands at arm‟s length pricing, cannot be the sole basis for the purposes of imputing the subsidiary to be a PE of its holding company. This is so because, a subsidiary is liable to pay tax on its income and a foreign holding company is liable to pay tax on its income and the same set of activities cannot be construed as that of a holding company through its PE and that of the subsidiary as its own activity resulting in income from the same activities being taxed twice over; once in the hands of the subsidiary and again in the hands of the holding company. In cases where a subsidiary acts as an agent of its holding company, the income from the activities conducted by the subsidiary for and on behalf of its principal would be assessed in the hands of the principal – that is, the holding company – and not in the hands of the subsidiary. The subsidiary would only be liable to pay tax on the remuneration receivable as an agent and such remuneration would clearly be deductable while computing the income in the hands of the holding company.
In the present case, there is no allegation that the Assessee has any Branch Office or any other office or establishment through which it is carrying on any business other than simply stating that Adobe India’s constitutes the Assessee’s PE. There is no evidence that the Assessee has any right to use the premises or any fixed place at its disposal. The AO has simply proceeded on the basis that the R&D services performed by Adobe India are an integral part of the business of the Assessee and therefore, the offices of Adobe India represent the Assessee‟s fixed place of business. Thus, clearly the right to use test or the disposal test is not satisfied for holding that the Assessee has a PE in India in terms of Article 5(1) of the Indo-US DTAA.
We also find that there is no material to hold that the Assessee’s employees constitute a Service PE in terms of Article 5(2)(l) of the IndoUS DTAA. The Assessee has denied that any of its employees has rendered any service in India. There is no material available with the AO that would contradict the same
In the present case, there is no material to form a view that Adobe India acts as an agent for and on behalf of the Assessee …………… One of the necessary conditions for holding that an agent constitutes a PE of an enterprise is that the agent must have an authority to conclude contracts or should have been found to be habitually entering into or concluding contracts on behalf of the enterprise. In the present case, there is no allegation that Adobe India is authorised to conclude contracts on behalf of the Assessee or has been habitually doing so.
Insofar as Article 5(5) of the Indo-US DTAA is concerned, the same postulates that any business carried through a broker, commission agent or any other agent of an independent status acting in its normal course would not constitute a PE of an enterprise. The exception to this being that if activities of such agent are devoted wholly or almost wholly on behalf of the enterprise and the transactions between enterprise and the agent are not made under arm’s length conditions. In such case, the agent would not be considered as an agent of independent status. In the present case, apart from the AO stating so, there is no reason to assume that Adobe India is an agent of the Assessee; there is neither any agreement which states so nor any material which indicates that Adobe India acts as such. More importantly, it is not disputed that Adobe India is assessed on its income determined at ALP and, therefore, there is no occasion for the AO to assume that Adobe India constitutes the Assessee’s PE under Article 5(5) of the Indo-US DTAA.
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