Indian Tax Tribunal holds Revenue's finding on DAPE not cogent, no profit attribution given ALP

Adobe Systems Software Ireland Ltd. (Adobe-Ireland) received marketing support services and distribution services in relation to the distribution of shrink-wrapped computer software from its Indian AE (Adobe-India) on a principal-to-principal basis. The ITAT held the receipts to be in the nature of royalty in the context of the India-Ireland bilateral tax treaty.

Alternatively, it was Revenue’s contention that Adobe-India acted as Adobe-Ireland’s agent, which constituted a fixed-place PE or dependent agent PE (DAPE) and, accordingly, attributed certain profit from India as business profit taxable in India in the hands of Adobe-Ireland, which was confirmed by the Commissioner of Indian Income Tax (Appeals) [CIT(A)].

As regards the taxability of revenue from the distribution of shrink-wrapped software, the ITAT accepts the submission that in view of the Indian Supreme Court’s ruling in the Engineering Analysis case, the revenue could not be taxed as royalty. It disagrees with CIT(A)'s view that on acceptance of the international transaction at arm's length price between the foreign company and AE, the FAR analysis for DAPE does not automatically become subsumed and that there lies a distinction between FAR analyses for AE and DAPE. 

It holds that the issue of attribution where the transaction is found to be an arm’s length price between the foreign party and the Indian AE is settled and no further attribution is required as per the Indian Supreme Court ruling in Morgan Stanley, followed in E-Funds and other cases. It rejects Revenue’s contention that activities/functions performed by Adobe-India were wider than those described in the contract/ transfer pricing report based on sample e-mails between Adobe-Ireland and Adobe India, notes that Revenue arrived at the conclusion that quotes offered by the distributors to channel partners are after discussion with Adobe India, since the orders are delivered after seeking confirmation from Adobe- India resources.

It acknowledges Adobe-Ireland’s submission that the said observation was cogently rebutted explaining that the few e-mails that have been referred were also just for the attention of Adobe-India personnel, only for the sake of keeping the Adobe-India in the loop. It observes “In none of the email 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 emails are not at all enlarging the scope of actual functions performed by the AE than as per the agreement and the transfer pricing report.”

With regard to Revenue’s plea that Adobe-Ireland failed to provide the e-mail dump between them and Adobe India, the ITAT states that it is a very peculiar plea and notes that in the TP analysis of Adobe-India, no such issue has been recorded. It points out that “It is common knowledge e-mail correspondence is a two-way process. So when everything was found in order in Adobe India TP Adjustment, hence, it cannot be said that Revenue did not have complete access to all the e-mails between Adobe India and Adobe Ireland.” It also rejects the CIT(A)’s allegation that legal dispute infringement of copyright in India was being looked after by Adobe India, thus forming a PE, and states that Adobe USA, the IP owner, handles the legal matters relating to infringement of brand, copyright matters and other related actions to be undertaken in all jurisdictions in which Adobe operates, including India.