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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.

Reasons to believe that income had escaped assessment.

12. In the reasons recorded by the AO for issuance of the impugned notices, the AO had recorded that: (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".

35. 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 Indo- US 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. The AO has concluded that the Assessee has a PE in India in terms of Article 5(2)(l) of the Indo-US DTAA, only on the basis that the Assessee has a right to audit Adobe India and that 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. The said terms of the agreement do not in any manner indicate that the Assessee has been providing services in India. Clause 5.5 of the agreement referred to by the AO indicates that the Assessee is authorized to audit the Indian subsidiary (Adobe India), so as to ensure that Adobe India adheres to the standards required by the Assessee. The same cannot possibly lead to the inference that the Assessee has been rendering services to Adobe India. The stipulation as to provide specification and further assistance is only for the purpose of ensuring that the Assessee procures the service that it has contracted for from Adobe India. 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. This has also been authoritatively held by Supreme Court in Morgan Stanley (supra).