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2. Briefly stated, the controversy in these petitions involves the question whether Adobe Systems India Private Limited (an Indian subsidiary of the Assessee and hereafter referred to as „Adobe India‟) 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. 2.1 The Assessee disputes that it has a PE in India. It further contends that since the income of Adobe India has 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. On the other hand, it is the Revenue's case that the activities carried out by the Adobe India are the core business activities of the Assessee; Adobe India is the Assessee's PE in India; the cost plus basis on which Adobe India is 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, is chargeable to tax under the Act. 2.2 Whilst the Assessee claims that there is no tangible material for the AO to have any reason to believe that the Assessee's income has escaped assessment, the Revenue contends that the transfer pricing report as submitted by Adobe India provides sufficient reason to form a belief that the Assessee's income had escaped assessment.

4. The Assessee claims that during the Previous Years relevant to the AYs in question, it was not assessable under the Act in respect of any of its income other than interest on advance fees paid to Adobe India. And since, Adobe India had withheld the applicable taxes (TDS) on such interest, the Assessee was not obliged to file its return of income under the Act by virtue of Section 115A(5) of the Act.

5. Adobe India is assessed to tax in India in respect of its income. As stated earlier, Adobe India is mainly engaged in the business of providing software related R&D services to the Assessee. It is stated by the Assessee that R&D activities carried out by Adobe India are on assignment basis and does not entail end to end software development. Since Adobe India provides R&D services to its holding company, an Associated Enterprise (AE), its transaction with the Assessee have been subjected to examination by the Transfer Pricing Officer (TPO). It is stated that for AYs 2004-05 and 2005-06, the AO and the TPO accepted the fees paid by the Assessee on cost plus 15% basis as being on ALP and Adobe India's assessment was made accordingly. The assessment orders for AYs 2004-05 and 2005-06 have become final and are not subject matter of any further proceedings. It is stated that in Adobe India‟s assessment for AY 2006-07, the TPO/AO did not accept the Transfer Pricing Study submitted by the Assessee therein as he did not accept the set of comparables used by the Adobe India to determine the ALP. However, Adobe India succeeded in its appeal before the Income Tax Appellate Tribunal and this Court is informed that the Revenue has assailed the Tribunal's order in this Court which as yet is pending. The Assessee further informs that for AY 2007-08, the Transfer Pricing Study furnished by Adobe India was not accepted by the TPO, who sought to apply Profit Split Method (PSM) for determining the ALP instead of Transactional Net Marginal Method (TNMM) used in the preceding years. Adobe India successfully challenged the TPO's order for AY 2007-08 before the Dispute Resolution Panel (DRP) and the DRP has held that ALP be determined by applying TNMM as in the preceding years.

14. The AO reasoned that since the Assessee had a PE in India, a part of the profit accruing to the Assessee which is attributable to the activities in India was chargeable to tax under the Act.

15. The AO further observed that the transaction between the Assessee and Adobe India involved transfer of intangibles and multiple inter- related transactions which could not be evaluated separately for the purposes of determining ALP by any one transaction. The AO also recorded that development and customisation of software was a highly technical job and the same could not be restricted to computation on cost plus basis. In his view, cost plus basis was not a suitable method for intangibles like software services and the Profit Split Method was applicable in terms of Rule 10B of the Income Tax Rules. Finally, the AO took note of the global profits reported by the Assessee and held that the same should be apportioned in the ratio of the R&D expenses incurred by the Assessee. On the aforesaid basis, the AO computed Assessee's taxable profits for AY 2006-07 as under: