Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 09.02.2024 passed by the Income Tax Appellate Tribunal in the case of Adobe Systems Software Ireland Ltd. for Assessment Year 2021–22.

The assessee, a tax resident of Ireland, carried on business in India through its Indian affiliate, Adobe India. The Assessing Officer sought to attribute additional profits to the alleged Permanent Establishment of the assessee in India, contending that Adobe India was performing functions wider than those captured in the inter-company agreement and transfer pricing study.

Issues Involved

Whether, despite acceptance of arm’s length remuneration to the Indian entity, further profits could be attributed to the alleged Permanent Establishment of Adobe Systems Software Ireland Ltd. in India, and whether the ITAT erred in applying the principles laid down by the Supreme Court in DIT vs. Morgan Stanley & Co.

Appellant’s Arguments

The Revenue contended that the ITAT erred in holding that the case was squarely covered by Morgan Stanley. It was argued that Adobe India performed functions beyond those recorded in the agreement and transfer pricing documentation and that the assessee failed to discharge its onus of providing complete information for determining profit attribution to the PE. The Revenue also alleged that the ITAT failed to pass a speaking order on the existence of a PE.

Respondent’s Arguments

The assessee relied on consistent judicial precedents in its own case for earlier assessment years, wherein it was held that once Adobe India was remunerated at arm’s length, no further profits could be attributed to the alleged PE. It was contended that the issues raised by the Revenue were fully covered by binding decisions of the Delhi High Court and the Supreme Court.

Court Order / Findings

At the outset, the Revenue fairly conceded that all the substantial questions of law raised in the appeal were no longer res integra and stood decided against it by a coordinate Bench of the Delhi High Court in Commissioner of Income Tax (International Taxation)-1 vs. Adobe Systems Software Ireland Ltd., reported as 2025 SCC OnLine Del 411, which covered Assessment Years 2013–14 to 2017–18.

The Court noted that the parties in the earlier batch of matters and the present appeal were the same, and the only difference was the assessment year involved. Applying the settled principle that once the Indian entity is remunerated at arm’s length, no further profit attribution to the foreign entity’s PE is warranted, the Court held that no substantial question of law arose for consideration.

Important Clarification

The Court reaffirmed that the principle laid down by the Supreme Court in Morgan Stanley continues to govern profit attribution in PE cases, and once transfer pricing adjustments ensure arm’s length remuneration to the Indian entity, further attribution is impermissible in absence of exceptional circumstances.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court held that no substantial question of law arose for consideration for Assessment Year 2021–22 and disposed of the appeal in favour of Adobe Systems Software Ireland Ltd. and against the Revenue.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770017168_THECOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION1VsADOBESYSTEMSSOFTWAREIRELANDLTD.pdf

 

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