Thursday, May 19, 2016

Indian subsidiary won’t form PE of foreign parent Co even if latter has right to audit subsidiary

Facts:
a) Adobe Systems Incorporated (“assessee”) is a company incorporated outside India having a wholly owned subsidiary in India (Adobe India).

b) Adobe India provides software related Research and Development (R&D) and is paid on cost plus basis in terms of an agreement entered into between the Assessee and Adobe India.

c) Assessee claimed that such income received from Adobe India was not assessable in India as assessee did not have any business operations in India, thus he did not file return in India.

d) Assessing O􀁹icer (AO) issued notice under section 148 on observation that as per the agreement between assessee and Adobe India, it was obliged to audit the facilities of Adobe India for maintenance of the requisite standards. Therefore, it had a Service PE in India in terms of Article 5(2)(l) of the Indo-US DTAA and was liable to file return of income and pay taxes in India.


e) Assessee filed writ petition before the High Court, challenging the issuance of notice under section 148.

High Court held in favour of assessee as under:

1) The agreement between the Assessee and Adobe India entails that the Assessee would provide specifications, assistance and supervision for the R&D services procured by the Assessee.

2) Assessee is authorized to audit the Indian subsidiary (Adobe India), to ensure that Adobe India adheres to the standards required by the Assessee. The same cannot possibly lead to the inference that the Assessee had been rendering services to Adobe India.

3) The stipulation to provide specification and further assistance is only for the purpose of ensuring that the Assessee procures the service it had contracted for from Adobe India.

4) Such clauses in the agreement cannot lead to an inference that the Assessee has a PE in India for rendering services, that is, a Service PE in terms of Article 5(2)(l) of the Indo-US DTAA.

5) Therefore, notice issued under section 148 was liable to quashed. [2016] 69 taxmann.com 228 (Delhi)
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