Income Tax Appellate Tribunal - Delhi
Samsung Electronics Company Ltd., ... vs Dcit, Circle- 3(1)(2), New Delhi on 22 March, 2018
ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'G' NEW DELHI
BEFORE SHRI G.D. AGRAWAL, HON'BLE PRESIDENT
&
SHRI K.N. CHARY, JUDICIAL MEMBER
ITA Nos.- 65 to 70/Del/2013
(Assessment Years: 2004-05 to 2009-10)
Samsung Electronics Co. Ltd. DCIT (Int.
C/o Samsung India Electronics Pvt. Ltd. s Taxation)
Ground Floor, Tower-C, Vipul Tech Room No. 418,
Square, Sector-43, Golf Course Road, Block-E2,
Gurgaon. Civic Cenre,
AACCS8960N J.L. Nehru Marg,
New Delhi.
ITA No.- 315/Del/2016
(Assessment Year: 2011-12)
Samsung Electronics Co. Ltd. DCIT (Int.
C/o Samsung India Electronics Pvt. Ltd. s Taxation)
Ground Floor, Tower-C, Vipul Tech Room No. 418,
Square, Sector-43, Golf Course Road, Block-E2,
Gurgaon. Civic Cenre,
AACCS8960N J.L. Nehru Marg,
New Delhi.
1
ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
ITA Nos.- 4705 & 4706/Del/2017
(Assessment Years: 2012-13 & 2014-15)
Samsung Electronics Co. Ltd. DCIT (Int.
C/o Samsung India Electronics Pvt. Ltd. s Taxation)
Ground Floor, Tower-C, Vipul Tech Room No. 418,
Square, Sector-43, Golf Course Road, Block-E2,
Gurgaon. Civic Cenre,
AACCS8960N J.L. Nehru Marg,
New Delhi.
&
ITA No.- 982/Del/2016
(Assessment Year: 2011-12)
DCIT (Int. Taxation) Samsung Electronics Co. Ltd.
Room No. 418, s C/o Samsung India Electronics Pvt. Ltd.
Block-E2, Ground Floor, Tower-C, Vipul Tech
Civic Cenre, Square, Sector-43, Golf Course Road,
J.L. Nehru Marg, Gurgaon.
New Delhi. AACCS8960N
Assessee by Sh. Himanshu Sinha, Adv.
Ms. Vrinda Tulshan, Adv.
Revenue by Sh. T.M. Shivakumar, CIT DR (Int.
Taxation)
Date of Hearing 27.02.2018
Date of Pronouncement 22 03.2018
2
ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
ORDER
PER BENCH:
ITA Nos 65 to 70/Del/2013, 315/Del/2016, and 4705 and 4706/ Del/2017 are filed by the assessee in respect of AY 2004-05 to 2009-10, 2011-12, 2012-13, and 2014-15 respectively. ITA No. 982/Del/2016 is preferred by the Revenue. Since parties and the issues involved in all these appeals are similar, we deem it just and convenient to dispose of these appeals by way of a common order.
2. Relevant facts, in brief, are that the Samsung Electronics Co. Ltd (SEC) i.e. assessee is a company established in Republic of Korea on 01.12.1969 and is a tax resident of South Korea and the principal activity of the company is manufacturing and sales of various categories of televisions, home appliances, telecommunication terminals, semi-conductors as well as other state of the art IT products for global markets. It has two wholly owned subsidiaries in India i.e. Samsung India Electronics Private Limited ('SIEL') and Samsung India Software Operations Private Limited (now known as Samsung R&D Institute India Bangalore Private Limited) ('Samsung R&D'). Pursuant to the survey conducted on the premises of SIEL on 24-06-10, Ld. AO issued a notice dated 28-03-11 to SEC under section 148 for initiating re- assessment proceedings under section 147 of the Act for six AYs from AY 2004-05 to 2009-10. In response to the above notice, SEC filed its tax returns on 09-Sep-11for all these years declaring income from branch activities for AY's 2004-08 to 2008-09 which 3 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 was declared in the original return as well and also royalty/fee for technical services which was not declared in the original return for any year.
3. At the request of the assessee through their letter dated 14.9.2011 before the tax officer requesting the reasons for issuance of notice under section 148 for AY 2004-05 to AY 2009-10, Ld. AO, on 21.09.2011 furnished the following Reasons: -
"A survey in this case was conducted on 24.06.2010. During the course of survey it was found that M/s Samsung India Electronics Ltd is a subsidiary of M/s Samsung Electronics Co.. Ltd., South Korea.
M/s Samsung India Electronics Ltd is in the business of manufacturing as well as trading of consumer electronics. The items manufactured by the company are washing machine, televisions, air-conditioners, refrigerators and mobile phones. These items are manufactured under the technical assistance of the present company for which the parent company receives fees for technical services. The parent company M/s Samsung Electronics Co Ltd, South Korea has not paid any royalty for use of its brand name 'SAMSUNG' by the subsidiary company. Thus, income of the Korean company in the form of royalty has escaped assessment. As per information available on internet, the sales of M/s Samsung India Electronics were Rs. 5,000 Crores during the previous year relevant to A.Y. 2004-05. The amount of royalty can be taken as Rs. 100 Crores by taking the figure of royalty @ 2% of sales.
Further, during post survey proceedings, statements of Mr. Jung Soo Shin, President & CEO of the Indian company was recorded on 14.07.2010. It was observed that he is also head of South l/Vest Asia operations of the parent company. Thus he is representing not only Samsung India but also Samsung Korea in his capacity as South West Asia head. The countries covered India, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives. He is not paid anything extra to perform his duties in the capacity of South West Asia Head. In addition to statement of Mr. Jung Soo Shin, the statements of the following employees of Samsung India 4 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Electronics Ltd were recorded.
i. B D Park, Director Mobile Biz & IT Biz ii. Sachin Baweja, Company Secretary iii. C S Choi, Vice President, Corporate Marketing iv. Y H Cho, Vice President, Sales, North Region v. HK Seo, Vice President, CE Sales & Marketing vi. J H Kyung, Director, CEO A close analysis of these statements further reveals that:
(i) There is no evidence in the minutes of the board meetings showing any. important policy decisions being taken by the board members in India.
(ii) The Indian company has to regularly update the reasons for ageing stock to the parent company. The parent company regularly overviews the performance of the Indian company.
(iii) The team at Indian company collects information from Indian consumers and sends that information to the parent company so as to develop Indianised Product e.g. two vegetable boxes in refrigerators, sound focused LCD TVs and Semi Automatic Washing Machines are some of the products which has been Indianised by the parent company on the request of the Indian company.
(iv) Samsung Korea has different Global Business Managements (GBMs) to look after the different categories of products. Each GBM develops new products which are initially marketed from Samsung Korea and then later on localized to be manufactured in the different global subsidiaries.
(v) In deciding which product is to be imported or traded a confirmation is required from the parent company.
(vi) The purchase price of an imported item is decided by a reverse calculation in which first a tentative sale price is determined there after taking into account the dealer margins and the Indian company's overhead the purchase price is negotiated with the headquarters i.e. Samsung Korea.
(vii) Even the sale price of the products manufactured in India is decided after discussion with the headquarters.
From the above it can be seen that the Indian company's office is being used as place of management for South Asia operations by the parent company M/s Samsung Electronics Co. Ltd, South 5 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Korea therefore the Indian company would constitute PE of the foreign parent company under Article 5(2)(a) of the DTAA and a part of income from sales in South Asian countries such as Bangladesh, Nepal, Bhutan and Maldives should be attributed to Samsung Electronics, Korea.
Further, it can be inferred from the above that the Indian company is acting as a dependent agent of the foreign company in terms of Article 5(5) of the DTAA, and the transactions between the two are not at arm's length. Hence an adjustment is needed in this regard.
A perusal of records shows that the assessee has not filed its return of income in India forA.Ys. 2004-05.
In view of the above, I have reasons to believe that income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully & truly all material facts necessary for its assessment. The short levy of tax exceeds f 1,00,000/-. 4s such the case is covered by provision of clause (c) of Explanation 2 of section 147 of the IT Act, 1961."
4. Assessee filed their objections on 03-11-2011 refuting the reasons and submitted that the FIPB regulations prohibit payment of brand royalty, hence first reason for issue of notice is not valid, and since South-west Asia operations were not carried out through SIEL during the period under consideration, question of PE does not arise. Assessee further asserted that, based on analysis of employee statements it is not a case of Dependent Agent PE also. By way of communication dated 18.11.2011, Ld. AO disposed the objections raised by the assessee, rejecting the contentions except in respect of payment of brand royalty. Ld. AO passed draft Assessment order in respect of the AY 2004-05 to 2009-10 holding that the seconded expatriate employees are rendering services to SIEL on behalf of the assessee and, therefore, created a PE of SEC in India under 6 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Articles 5 of the India-Korea DTAA. Ld. AO passed draft assessment order dated 30.12.2011, holding that expatriates employees create a PE of the assessee in India by rendering services to SIEL through its employees basis, and added an estimated income of 10% on the remuneration paid to such expatriate employees during the years under consideration to determine the profits attributable to tax in India by applying Clause (iii) of Rule 10 of the Income Tax Rules, 1962.
5. In respect of AY 2011-12, 2012-13 & 2014-15, Ld. AO issued scrutiny notice u/s 143(2) of the Act and also referred the case to the Ld. Transfer Pricing Officer for determination of the arm's length price of the international transactions entered by the assessee. Ld. TPO passed orders, but has not drawn any adverse inference. Ld. AO passed the Draft Assessment Order, on similar lines as for AY 2004-05 to 2009-10, holding that the seconded employees are providing services on behalf of the assessee and constitute its fixed place PE in India in accordance with Article 5 of the tax treaty. Ld. AO further held that the decision of Delhi High Court in the case of Centrica India Offshore (P.) Ltd. vs. CIT [2014] [364 ITR 336] (Delhi) shall apply to the case of assessee also, and proceeded to add an ad hoc 10% on the remuneration paid to such expatriate employees during the financial year under consideration to determine the profits attributable to tax in India by applying Clause (iii) of Rule 10 of the Income Tax Rules, 1962.
7ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
6. Accordingly, the Ld. AO made the following additions to the returned income:
S. Assessment Returned Amount of Assessed No Year income (in addition (in income (in INR) INR) INR)
1. AY 2004-05 183,792,647 6,639,512 190,432,159
2. AY 2005-06 180,897,736 9,894,848 190,792,584
3. AY 2006-07 229,261,833 10,722,431 239,984,264
4. AY 2007-08 354,257,732 44,789,046 399,046,778
5. AY 2008-09 564,889,589 57,863,051 622,752,640
6. AY 2009-10 727,560,470 80,918,894 808,479,364
7. AY 2011-12 1,480,742,857 84,758,114 1,565,500,971
8. AY 2012-13 1,976,164,087 111,836,425 2,088,000,512
9. AY 2014-15 6,210,353,870 167,753,195 6,378,107,065
7. Against the Draft Assessment Order, Assessee filed its objections before the Hon'ble DRP, and during the course of proceedings before Ld. DRP, the Ld. AO was asked to submit a remand report.
8. The Ld. Assessing Officer on an analysis of the statements that were recorded during the survey, found that there was continuity of business between the Indian company and the non-resident, the non-resident is doing business in India through its employees who are heading various divisions in the Indian company and also 8 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 through employees visiting India regularly, that there is a close business connection in terms of the dependence of the Indian company on the non-resident's for all imports because the Indian entity does not have the authority to make imports from any other conference other than Samsung affiliates, that the whole transaction is so intermixed that supply of equipment cannot be segregated from the supply of technology and marketing of products, the foreign parent and the Indian subsidiary work as partners in business, that the transactions between both the parties are so interlinked that the Indian company cannot move an inch without the support and supplies of the non-resident, the postings and a recruitment of senior employees is decided by Korea, the Korean expatriates who work in India are working and under the complete guidance, control and supervision under the Korean buses and, therefore, they have a lion in their employment with the parent company.
9. Basing on these observations Ld. AO proposed to treat SIEL in its entirety as permanent establishment of the assessee, also agency PE, as a place of management for Southeast operations, and also service PE. He further proposed to treat it this particular receipt on account of services of the seconded employees as royalty and fees for technical services only attributed to the PE.
By way of Order dt. 29.09.2012, Ld. DRP reached a conclusion that SIEL be treated as a deemed fixed place PE of the assessee.
9ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Pursuant to these directions, the Ld. AO passed final assessment order.
10. Though the addition of estimated 10% of income on the total remuneration cost of expatriate employees seconded to SIEL in India, Levy of interest under section 234 A and 234B and short credit of taxes withheld by SIEL as against the credit of taxes claimed by the assessee in the return of income or forming part of the grounds, the prime dispute that requires adjudication in this batch of matters is mainly revolving around two aspects, namely, the reopening of the assessment relating to Asst Years 2004-05 to 2009-10 under section 147/148 of the Act, and the existence of permanent establishment in India in the form of seconded expatriate employees operating from the premises of Samsung India Electronics Private Limited. We shall therefore proceed to deal with these prime issues at length.
REASSESSMENT PROCEEDINGS UNDER SECTION 147/148 OF THE ACT IS INVOLVED IN ASSESSEE'S APPEALS FOR AY 2004-05 TO 2009-10
11. On this aspect the argument of the Ld.AR is threefold. Firstly, he submits that the apart from the statements of the employees, no independent material revealing any prima facie ground to believe that there is escapement of income is there. He submits that the statements alone cannot be relied upon for reopening the assessment. Secondly he submits that if after issuing the notice under section 148, Ld. AO accepts the contention of the taxpayer and holds that the income for which he had forwarded a reason to believe in respect of escapement of income. From assessment, no 10 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 roving enquiry in the garb on section 148 is impermissible. Lastly he submits that the Ld. AO travelled beyond his jurisdiction to reassess issues other than the issues in respect of which proceedings were initiated especially when the reasons for the latter ceased to exist. In support of his contentions he placed reliance on the decisions of the Hon'ble jurisdictional High Court and other high courts.
12. Per contra, Ld. DR contended that the assessee cannot take any objection to the legality of the reopening proceedings, having not disputed them before the 1st appellate authority. Placing reliance on the decision of the Hon'ble Bombay High Court in Vodafone India services Private Limited versus UOI (2013) 37 taxmann.com 250 (Bombay) he submits that the Ld. DRP had jurisdiction to entertain the issues relating to the legality or otherwise of the proceedings under section 147 of the Act.
13. Now we shall proceed to deal with the objection of the assessee to the reopening proceedings. First of all, from the reasons recorded, we understand that this is not a matter of reopening proposed solely basing on the statements of the expatriate employees. Apart from the statements, the non disclosure of receipt of royalty as disclosed by the tax returns of the branch indicated that the royalty received from SIEL was not disclosed. Ld. AO considered the explanation of the assessee and observed in letter dated 18.11.2011 (page No 45 of the Paper book) that the manufacturing Royalty/FTS received by the assessee from the 11 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Indian subsidiary as reflected in the tax returns filed by the SIEL was not reported by the assessee, and it is only in the returns filed in response to the notices issued u/s 148 of the Act, such an income was reported. Assessee admitted the fact that they did not declare this income in the original return of income. This fact is borne by the Assessment order dated 18.10.2012 vide paragraph No.7.1 to 7.3, wherein Ld.AO recorded that, to the notice issued u/s 148 of the Act, the assessee replied that the royalty/FTS received from SIEL was omitted by the assessee due to inadvertence to be declared in the original tax return u/s 139(1) of the Act.
14. Following are the details relating to the income as per original return of income, income as per return filed under section 148, furnished by the assessee :
Income as per Income as per Amount of
Assessment original return return filed addition Assessed
Year of income (in under section made by AO income (in INR)
INR) 148 (in INR) (in INR)
AY 2004-05 NIL 183,792,647 6,639,512 190,432,159
86,592 was
offered to tax
AY 2005-06 180,897,736 9,894,848 190,792,584
under "Other
Income"
MAT paid on
Book Profits
AY 2006-07 229,261,833 10,722,431 239,984,264
(13,10,35,049)
u/s 115JB
NIL (operations
AY 2007-08 354,257,732 44,789,046 399,046,778
ceased to exist)
12
ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 NIL (operations AY 2008-09 564,889,589 57,863,051 622,752,640 ceased to exist) No return filed AY 2009-10 (Branch was 727,560,470 80,918,894 808,479,364 closed) AY 2011-12 1,480,742,857 N.A. 84,758,114 1,565,500,971 AY 2012-13 1,976,164,087 N.A. 111,836,425 2,088,000,512 AY 2014-15 6,210,353,870 N.A. 167,753,195 6,378,107,065
15. A perusal of the figures in the statement furnished in respect of the income as reported in the original return of income and the return furnished u/s 148 of the Act leaves no doubt that there is huge difference and in this context it cannot be said that the notice u/s 148 of the Act is not supported by any valid reason or reasons proposing to re-open the assessment for the assessment years between 2004-05 and 2009-10. It is only after re-opening the matter and verification of the re-conciliation of royalty and FTS income as declared in the return u/s 147 of the Act with the TDS details of SIEL, the AO recorded that the Royalty/FTS income as offered to tax in such returns was acceptable. It cannot be said that there is no escapement of income from computation in the original returns of income filed by the assessee for the Assessment Years 2004-05 to 2009-10. It is only because the SIEL affected TDS on such Royalty, FTS income, whose benefit was availed by the assessee in the revised returns that no further tax liability was incurred though income escaping assessment got taxed in fresh proceedings.
13ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
16. We, therefore, find that this aspect of non-reporting of the receipt of income on account of royalty is a valid ground for the Ld. AO to propose the reopening of the assessment, and it cannot be said that there was no escapement of income merely because tax was deducted at source on such income.
17. When it is open under Explanation 3 to section 147 of the Act for the Ld. AO to reassess the income on any issue which newly comes to his notice subsequent to the issuance of notice under section 148 of the Act, it cannot be said that mere wrong mentioning of the provision of law relating to the other issues in the reasons recorded would vitiate the proceedings. We, therefore, reject the contention of the assessee that the reopening proceedings are bad under law.
'FIXED PLACE' PERMANENT ESTABLISHMENT IN INDIA IN THE FORM OF SECONDED EXPATRIATE EMPLOYEES OPERATING FROM THE PREMISES OF SAMSUNG INDIA ELECTRONICS PRIVATE LIMITED (SIEL)
18. At the outset, we would like to refer to relevant portion of Article 5 of the Indo-South Korean treaty, which deals with the concept of Permanent Establishment, in different forms.
ARTICLE 5 PERMANENT ESTABLISHMENT
1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially:
(a) a place of management;
14ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a sales outlet;
(g) a warehouse in relation to a person providing storage facilities for others;
(h) a farm, plantation or other place where agricultural, forestry, plantation or related
activities are carried on; and
(i) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
3. The term "permanent establishment" also encompasses:
(a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, only if such site, project or activities last more than 183 days;
(b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within the country for a period or periods aggregating more than 183 days within any 12-
month period.
4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;15
ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;
(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
... ... ...
... ... ..."
18. Insofar as the present case is concerned, the entire dispute on this issue revolves around the status of the expatriate employees working with the SIEL and the nature of functions they are performing - whether they are actually the employees of the assessee and placed with the subsidiary to run the business of the assessee, or they are assessee's employees who are seconded to SIEL and the SIEL is the economic employer who exercises full control over them.
19. Proper appreciation of the rival contentions requires reference to relevant portion of such statements, which are extracted hereunder:
Statement of Sh. Kyoung Soo Kim s/o Shri Jong Suk Kim Q1. Please identify yourself?
Ans. I am Kyoung Soo Kim s/o Jong Suk Kim aged 40 yrs, work-
ing with Samsung India Electronics as Deputy General Manager (Purchasing).
Q2. Since when you use working in this organisation?
Q7. Being the purchase incharge do you get any direction from Samsung electronics Korea regarding import of raw 16 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 materials?
Ans. Korean company gives me information on quality, delivery & cost of raw materials.
Q8. Who are you reporting here?
Ans. I am reporting K W Cho M D. Q9. By whom have you been issued the appointment letter for working in the Samsung electronics India P. Ltd.?
Ans. I have been issued the appointment letter by Samsung electronics Corporate Korea.
Q10. Who decides the pricing of import?
Ans. I am guided by the Korean company Samsung electronics Korea, then I decided the purchase.
Statement of Mr. B.D. Park, Director, Samsung India Electronics Ltd.
Q1. Please identify yourself?
Ans. Name Byong Dae Park, working as a Director in Samsung India Electronics Ltd. Looking after the Mobile business & IT Business.
Q2. Since when have you been with M/s SIEL?
Ans. Since middle of the year200 Q5. What is your present Salary approximately?
Ans. Approximately US 200 K a year.
Q6. You are working in India, why is it convenient for you to remember your salary in US currency especially when you are getting your salary in INR?
Ans. I am more comfortable in calculating in US Dollars.
Q9. For how much time have you been posted in India?
Ans. It is not fixed. Normally I expect to stay for three to four 17 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 years.
Q10. Can you be replaced back to Samsung Korea, at your wish or would it be the decision of the head quarters to when to get you back?
Ans. In two way agreement.
Q16. What is the mode of communication with Samsung Korea?
Ans. Over the phone & email (intranet) .
Q17. You have the intranet systems installed with the corporation, where is the server of the intranet situated?
Ans. I have no idea. Maybe, in Korea, or in Singapore.
Ql8. How often do you communicate with the head quarter in Samsung Korea?
Ans. Normally daily.
Q19. You communicate directly or through your GEO?
Ans. It depends on issues. Something which may affect the business result seriously will be discussed with my boss, MD but in most cases of simple opinion exchange the communication is done without MD intervention.
Q20. To whom do you generally communicate in Korea?
Ans. Mr. Ryu, Vice President in Mobile Communication Division and many other persons.
Q21. From where do you generally import your products, please give details product-wise.
1) Mobile Phone : Korea, China & Vietnam,
2) Monitor : Malaysia,
3) OMS : Philippines,
4) Printer : China
5) Lap Top Computer : China
Q25. The computers in your office have operation system installed 18 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 in Korean, as well as the communication between the heads is in Korean. What is the reason for it?
Ans. Sometimes in Korean. Sometimes in English. Communication between only Koreans is done in Korean normally. But when any Indian or non-korean is involved we use English.
Statement of Shri Anuj Pareek, Sr. Manager Accounts Q. Please introduce yourself.
Ans. Myself is Anuj Pareek, working in Samsung (SIEL) since July ... At present working in the capacity of Sr. Manager- Accounts.
Q. I am showing you the remittances of Rs. 9,63,134 dtd.
10/02/10 and Rs. 12,42,25,457 dtd.9/02/10 in which these payments have been made to M/s Samsung Electronics Corporation as reimbursement of expenses. How would you justify such payment without deduction of tax thereon?
Ans. Question asked about Rs. 12,42,25,457 dtd. 09/02/10 was not made. Form 15CA was wrongly uploaded on the site and there is no provision to sever it or cancel it. Remittance of Rs. 9,63,13481 dtd. 9. Feb 10 was on also salary paid to the Expatriate employees, the said salary has been offered to tax by the employers in India. For administration conveyance part of the salary is paid to Samsung Korea which in turn paid to expatriate employees all in Korea.
Q3. The part salary which is remitted outside India is of the individual expatriate and if it has to beremitted for their conveyance then it should be in their respective South Korea Bank A/cs and not in the Bank a/c of Samsung Electronics Corporation. Please give reason for this.
Ans. For Administered conveyance the salaries paid to Samsung Electronics Corporation Korea.
Q4. What is the Administration conveyance in remitting the salary 19 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 to the A/c of the parent company that is Samsung Electronics Corporation.
Ans. The expatriate employees have personal obligations in Korea.
To avoid any inconvenience for their personal obligation in Korea the salaries paid by Samsung Electronics Korea to expatriate Bank A/c and same is reimbursed by Samsung India Electronics Pvt. Ltd.
Q5. Does this reply in Q4 mean that the salaries of the employees of Samsung India Electronics Pvt. Ltd is paid by SEC South Korea and the same is reimbursed by SIEL.
Ans. No. Samsung Electronics is only a conduit for the payments in expatriate Bank a/cs in Korea. Salary expenses are incurred in SIEL India and proper income tax on the salaries deducted from individual of expatriate employees salary and deposited.
Q6. Pls explain why such remittances are termed as reimbursements.
Ans. The salary paid is expense of SIEL, India as stated above.
Just for Administration purpose the amount is paid to SEC Korea which in turn paid to expatriate personal bank a/cs.
Q7. In reply to Q4 and Q3 you have stated that the above methodology adopted for Administration conveyance of the expatriate employees, where is in reply of Qno. 6 you have stated that SEC paid this amount to personal Bank a/c of the employees when such amount is remitted to SEC.since the remittance of salaries are made to SEC on Qtrly basis, this would mean that a person I would get his salary in his South Korea Bank after 3months of the receipt of salary in India.How would you term this as a conveyance of such employee.
Ans. I am not aware.
Q8. The remittance letters sent to Bank of America show that these expatriate are on deputation toyour company from SEC, Korea. Where as it has been claimed that such persons are your 20 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 employees without any (Not clearly readable) with the parent company. Pis justify your above statement.
Ans. I am not aware.
Q9. Details available show that sometimes the remittance is credited to (Not clearly readable) Bank Branch whereas sometime to Korea Exchange Bank. Who gives direction regarding Bank Branch in which this amount has to be credited.
Ans. Looks after by treasury department.
Q10. The details available show that Debit note has been raised by SEC, Korea and their after payment is made from SIEL India. This implies the salaries are not paid to the employees of SIEL after the payment has been received from India but the salaries are paid as if such expats were their own employees and then a debit note in respect of such salaries is raised to SIEL India. What do you have to say.
Ans. I cannot comment because I am not aware of the reason.
Statement of Mr. Anshuman Sah
1) Please identify yourself I am Anshuman Sah working as Vice-President (Sales & Marketing) for Telecom Systems inSamsung Electronics India Ltd. I have been working here for 7 months.
7) How frequently do you deal with the expats while carrying out your duties as VP-Sales & Marketing? Please give a detailed note on it.
We are a technology Company & sometimes like whenever there is a new launch, we need oneor two experts to come and train us and & sometime explain to our otential client. The requestfor such expat experts can be sent either by me or my direct reporties.
10) Please refer to question @ Sr. No. 7 and your reply. Do you have any such expat experts working for you at present:
21ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 We have few expat came few days back. Normally they are here in 2-3 months as perrequirement.
There are 5 persons here:
1. Mr. Mahesh - for tech support.
2. Mr: Jiho Song - for tech marketing
3. Mr. Shin-for tech support.
4. Ms. Cha - for tech support.
5. Mr. Jaewoo Park-Marketing support.
Are working to support my local unit as technical experts. They normally come to impart technical expertise to local engineers. They have come here on local unit's request for training & some tech support. This request is made to the R&D or Technical support Group bases out of South Korea.
11) How are these expats compensated for their services?
I do not know.
12) For how long these expats would be in India?
There is no fixed tenure but generally they come for 3-4 days & go back by weekend.
13) Please refer to the question @ Sr. No. 10 and your subsequent reply to that. You have said that these expats "come to impart technical expertise to local engineers". Please elaborate on this.
To impart technical details of new technology or products, expat engineers are required once the local engineers acquire requisite knowledge & expertise the local support' is, handled by them. Some such supports also is arranged through tele conferencing.
Statement of Sh Kyong Yeol Kim, vice President, HA marketing, Q1. Please identify yourself and your nationality. Ans. I am Sh. Kyung Yeol Kim, Vice President, Samsung Electronics Pvt, Ltd, HA (home appliance) marketing. I am a national of Republic of Korea.
Q8. How often do you travel back to Korea?
22ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 I travel back to Korea 1-2 times a year for business trip and family visits. My family is in Delhi with me and my parents are in Korea.
Q9. What is the agenda for meetings in Korea?
Produce line in India is discussed along with business strategy. The main product line and R&D is in Korea. At the address: 413 Mactan- Dong, Young Tong - ku, Suwan Ciy, Korea.
This is the office of R&D and marketing.
Q10. Who do you report to here?
CEO - Jung Soo Shin, Deputy MD - Ravindra Zuithi They are both at present in South Korea on a Global Strategy meeting being held from 22nd June to 24th June at office premises 4B Mactan - Dong, Young Tong - Ku Suwan City, Korea of Samsung Electronics Ltd. All the country heads of Samsung Electronics ....coming for this meeting.
Statement of Mr. J H Kyung, Ql. Please identify yourself.
Ans. I am JH Kyung as CFO & Director SIEL since Jan 2010.
Q2. Where had you been working before joining SIEL? Ans. I was worked in Mobile ..... Division in Samsung Korea.
Q3. You were working in the parent company before you joined SIEL? What was your designation in Samsung Korea? Ans. Yes, Director.
Q4. Since when have you been associated with Samsung group? Ans. 1990 Q6. What are the duties assigned to you in SIEL? Ans. Managing F/A, A/R, Logistics, Taxation & HR Q7. When you joined SIEL, was it your decision or you were simply posted to India?
Ans. Own decision and MD's order & HQ recommendation.
23ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Q9. How often do you communicate with the Head Quarter? What is the most common mode of communication?
Ans. 2-4 times a week, internet and mobile phones.
Q10. With whom do you generally communicate in headquarters at Korea for official purposes?
Ans. Global support team and global Biz management.
Q1 1. Please clarify what is global biz management. Ans. Manage all functions of specific product all over the world.
Q12. Are there different GBMS for different products? Ans. Yes, Mobile-Mobile phones & Video Display-TV, monitor.
Q13. Do you regularly send reports to GBMS? How often are the report sent?
Ans. No, 1-2 times by-yearly.
Q14. Then how do the GBMS manage the functioning of different divisions in India, as stated by you in answer to question 11?
Ans. GBM is more common sales they touch more sale teams then me Q15. Who takes the policy decision regarding the financing of various business divisions of SIEL?
Ans. MD&CFO Q16. How are such policy decisions taken? Are they through the board meetings or your independent decisions? Ans. Both Q17. But none of the minutes of board meetings show any such policy decisions being taken in board meetings? Ans. I am not sure because I have joined less than 6 month but major issue show all board members.
Q20. Who takes the policy decision regarding which product/model are to be manufactured and which are to be purchased and traded?
Ans. Sales. I just concern Profit & loss Q26. In case of major investment or policy decision of setting up a 24 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 factory in Chennai etc, is the consent or approval of headquarters at Korea taken?
Ans. Yes Q27. Is this approval necessary? Say if you have your own funds and you want to launch a manufacturing unit of new product, still you would require approval from headquarter at Korea? Ans. Yes Statement of Mr. H.K. Seo, Vice President- CE Sales & Marketing in M/s Samsung India electronics (P) Ltd. (SIEL) Q5. What are the duties assigned to you in current posting?
Ans. Sales & Marketing related job:
- Involve local sales & marketing in SIEL's strategic direction. For example: to introduce Samsung products on Global consumer's requirements;
- Sales Forecast for sales and production;
- More strategic direction setting and also liase with Samsung HQ for product development and production;
- Also, by meeting Indian customers- try to make strategy of sales & marketing with other employee of SIEL.
Q6. How do you liase with Samsung HQ for products development and production?
Ans. By reading Indian Consumer's insight and finding the better product for India, I request HQ to develop Indianized products. In this process, there needs lots of explanation & persuasion. Once HQ decided to develop the product by utilizing HQ's rersource in initial stage and then factory prepare its production facilities for material locally and other country's factory. If possible, factory is trying to purchase its material locally.
Q7. In the Liasoning activities with the HQ, do-you send information collected from India to Samsung Korea. So that they can develop a product suitable for India?
Ans. Definitely Q8. How Often do you communicate with HQ and what is the mode of communication?
25ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Ans. In General once a week, Before communicating I hear and discuss with Local people and hear the necessities and I summarize and communicate with HQ Marketing and Other Department.
Q9. Since you are having R&D centre's in India at Bangalore and Noida, Then why is not such technology develop in these R&D Centres?
Ans. Basically Samsung's philosophy is to make localized for operation (Sales & Marketing) and production. When local environment is not ready, Samsung HQ support to develop.
And when all local functions are ready, whole development & Material purchase occurs locally. In the meantime, localization rate is increasing year by year.
Q10. What is the role of GBM (Global Business Management) at HQ in deciding which products to manufacture or Trade? Ans. It is not GBM's decision to decide a specific models. On SIEL's requirement they develop and also SIEL select the models of local market's demand. GBM has more product and strategy function from global market perspective they discuss with global subsidiaries for products, price trend, and market development, marketing function. But, as they are more globally dedicated functional organization, SIEL is communicating with HQ to develop the product and support marketing practice by collecting best practice of Samsung Global operation.
Q11. What is gathered from your replies is that after market research of Indian Market & coordination with GBM, a new product is developed in Korea. Later on this technology is transformed to SIEL for domestic production. Is it true?
Ans. Yes. Market research is done two ways, a,) by SIEL alone b) by the request of SIEL together with GBM. As recent research, MWO, it is found that Indian consumers prefer more small oavity of MWO, and more black colour. This is done by Focus group Interview. As results it was sent to HQ and it is under progress of Development.
Statement of Mr. Y.H. Cho, VP Sales -North Region in M/s Samsung India electronics (P) Ltd. (SIEL) 26 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Q5. How did you carry product marketing as GBM GM in India? Ans. Discussion about, proper USP with each country subsidiary.
We don't arrange direct marketing, which will be done by Subsidiary. GBM is focusing on developing special features for each market subsidiary.
Q6. How do you get technical input to develop special features for Indian Market?
Ans. SIEL sends each requirement of USP to GBM. We discuss on these Requirements with internal R & D Department in GBM.
Q7. This means that the technical input for a specific products specialization are provided by SIEL?
Ans. Feature Requirements are requested by SIEL.
Q8. What are your duties as Head of Sales, North Region in SIEL? Ans. Manage organization and Sales of SIEL products in Northern Region.
Q9. How do you carry out such duties?
Ans. We have each RM & BMs execute our sales & also get involved in Sales with them.
Q10. Do you have to communicate with Samsung Headquarter to perform your duties? If yes then how after do you communicate with Samsung India?
Ans. Yes, Once in a week.
Ql 1. In your communication with HQ what are things/points discussed?
Ans. They usually ask us about the reason of aging stock.
Q12. Since most of the items marketed by you, being CE head, are manufactured in India then why is HQ concerned with Ageing Stock?
Ans. Because of Global performance.
Statement of Mr. Mahesh Sutagatti Ql. Please give your introduction?
Ans. Working as Manager in Samsung Electronics since 2004 27 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Oct 15 at their HQ R&D in Suwon, before this I had taken a sabbatical of approx. 1 year, before this worked with L&T Infotech (Bangalore) for 3 years approx. as Project Leader, before that worked in Arvind Mills (Pune) for approx. 8 yr.
Q2. You are drawing your salary from which company and what is the amount of salary?
Ans. Samsung Electronics Corp. Suwon South Korea, my salary is being paid by Samsung Electronics approx 3200000-3500000 Won (net in my salary account) in Won.
Q3. What is your scope of work in Samsung Electronics South Korea?
Ans. Incharge for interoperational testing between base station and mobile devices, Also take care of trail test with operators for mobile wimax.
Q4. Since when have you been in India and what is your scope of work in India?
Ans. Arrived at Bombay on 18th June, Scope of work is to plan POC/proof of concept trial test with RIL and assist states assets.
Q7. Who instructed you to proceed to India and help Samsung Electronics India Ltd for wimax?
Ans. Usually on request from Indian team and local HQ representatives, we get instructions through emails/telephone etc. Q8. Who pays you for the work done in India for Samsung India Electronics ltd?
Ans. I am paid my monthly salary in Korea, I collect bills for money that I spread during Stay and get reimbursements in Korea.
Q9. Why is Samsung Electronics Corporation, South Korea paying you for the work you are doing in India for Samsung Electronics India Ltd.
Ans. I don't know 28 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Statement of Mr. Chungseop Song Q13. Do you receive the Guidelines from Korea regarding Purchases? Ans. Yes, Sometimes I receive guideline from Korea.
Q14. What type of Guidelines you receive?
Ans. Regarding Vendors (Foreign Suppliers)
20. It is the argument on behalf of the assessee that the assessee is the holding company of the Indian subsidiary, (SIEL) in a highly globalised and competitive business environment, it is essential for group companies spread across the globe to communicate with each other to sustain its supply chain management, without which exchange of information on the aspects as to what sort of models/designs are preferred by the customers in the market on mid-term to long-term basis, relevant forecast, plan strategy to sell the products, detailed stock/Logistics status etc it would not be possible for any company to place optimized purchase orders at a right timing nor to acquire most promising manufacturing technologies. In this case also, as is evident from the statements recorded by the assessing officer, there is a constant exchange of information between the subsidiary and the Global Business Management ("GBM") to perform the product/strategy functions from a global market perspective.
21. Learned AR submitted that it is to be noted that none of the statements of the employees reveal that the key decisions with regard to the products, pricing, launching etc are taken by the assessee but they are well within the realm of the Indian subsidiary. He submits that none of the statements recorded by the assessing 29 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 officer would show that any activity of the GBM is done in India. He further submitted that the assessee does not carry out any market survey in India, but whatever the market survey that was spoken by the employees was in relation to the business of the subsidiary to understand the business of the Indian customers and provide India specific information to GBM's which in turn then carry out research and development to develop India specific products.
22. It is further submitted on behalf of the assessee that is not the case of even the assessing officer that any core management decision relating to the assessee business was taken in India and the involvement of the seconded expatriate employees working under the control of the Indian subsidiary in the decision-making process with regard to product and pricing, marketing, strategizing etc one taken in respect of the business of the Indian subsidiary and not for the business of the assessee. According to the ld. counsel for the assessee, all the communication between the employees of the assessee in Korea and the seconded employees in India relate only to the business of the Indian subsidiary and the seconded employees were discharging the duties of the subsidiary towards the holding company. He submits that no business of assessee is carried out by the seconded employees according to the statements recorded by the Ld. assessing officer. He, therefore, submitted that there is no basis for the authorities below to conclude that the seconded employees were acting in furtherance of the business of the assessee by sitting in the premises of the Indian 30 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 subsidiary, thereby they constitute a fix replace permanent Establishment.
23. Per contra, it is argument of the Ld. DR that it is evident from the statements of the expatriate employees well corroborated by the material that the amount was paid to the foreign parent but not to the account of the employees and if it all shouldn't be any convenience as pleaded by the assessee, the part of the salary should've been limited to a foreign account of the expatriate employee but not to the account of the foreign parent. Further, as could be seen even from the mode of payment the salaries are not paid to the expatriate employees after it is received from the SIL. As a matter of fact it was confronted to one of the employees with reference to the bank accounts that SEC paid the amount to personal bank account of the employees when such amount is limited to SEC, however the remittance of salaries are made to SEC on quarterly basis, which means that a person would get his salary in the his South Korean bank after 3 months of the receipt of salary in India and certainly it's not the to the convenience of such person.
24. Ld. DR further argued that the details are available show that the debit note has been raised by SEC, Korea and then after payment is made from SIL India, which implies the salaries are not paid to the employees of SIL after the payment has been received from India but the salaries are paid as if such expats were their own employees and then a debit note in respect of such salaries is raised by SIL India. Basing on this he argues that the expatriate 31 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 employees are in fact the employees of the Korean entity and the beneficiary of the payments from SIL is the Korean entity.
25. Ld. DR further drew our attention to Point No. 9 of the letter of appointment of Mr K W Cho, wherein it is stated that, -
"your services may be utilized in any of the offices of the branches of the company or in any department of the company or in any of the associated companies as may be required from time to time. Your services can be transferred to any of the branches of the company located in India, whether in existence at the time of your appointment are set at a later date at the sole discretion of the management without detriment to your status and emoluments."
and to point No 12 where it is stated that,-
during your appointment with a company, since you are on depredation, you will be governed by service as rules as applicable to Samsung India Electronics Co Ltd Korea employees.
26. He lastly submitted that the expatriate employees, as revealed by their statements, are working in furtherance of the business interests of the Korean entity and their work description does not fit in the description of preparatory or auxiliary in nature as such there is no employer to employer relationship between the Korean parent and Indian subsidiary.
27. It is pertinent to note that having gone through the statements and also some other material relating to the aspects as to who pays the salary, whom the senior employees reported to, frequency of communication with headquarters in Korea etc, ld. DRP dealt with almost all the aspects argued by the ld. DR before us. They found that the assessee is not exercising that kind of absolute control over posting 32 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 of employees to the Indian subsidiary, but the assessee has been posting the employees only pursuant to the Triparte agreements between the assessee, Indian subsidiary and the concerned employee. Ld. DRP further held that the Indian subsidiary is a company incorporated under the laws governing the companies in India and is confirming to all the rules and regulations that govern the operations of a corporate body in the country, by filing its returns and paying the taxes under the income tax at and other statutes. It was further observed by the library DRP that the international transactions have been reported under the transfer pricing regulations and examined by the TPO.
28. Ld. DRP vide paragraph No. 5.4.4.2 recorded that the observations of the Ld. AO in respect of the assertion as to the subsidiary as PE, the conclusions made by the AO are based on the statement of the various employees of SIEL during the survey conducted at its premises. Since SIEL is a company incorporated under the laws governing the companies in India and is confirming to all the rules and regulations that govern the operations of a cooperate body, filing its returns of income and paying taxes by reporting the international transactions under Transfer Pricing Regulations, it cannot be said that the SIEL which is subsidiary company is a PE and rejected the findings of the AO on that aspect.
29. So also the Ld. DRP by paragraph no. 5.4.4.4 rejected the 33 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 contention of the AO that SIEL may be treated as a dependent agent for the purpose of Article 5. Ld. DRP also rejected the view of the AO that SIEL is a place of management for south east operations and held that no PE of the assessee exists under Article 5(2)(a) of the treaty with regard to south east operations.
30. Vide paragraph no. 5.4.4.6, Ld. DRP rejected the suggestion of the Ld. AO that SIEL can be considered as a service PE of the assessee. Lastly Ld. DRP held that the SIEL had nothing to do with the provision for royalty and fee for technical services.
31. Having rejected all the grounds pleaded by the AO, Ld. DRP reached a conclusion that SIEL be treated as a deemed fixed place PE of the assessee, and the relevant observation is to the effect that,-
"Although they derive their remuneration from SIEL, their formal contract of employment is with the Parent company. The statements of some of these employees report frequently to SEC. Sh. B. D Park, Director (Mobile and I.T business), who is at number two position in SIEL has acknowledged that he communicates with SEC almost daily. Sh. J. H Kyung, Chief Financial Officer has stated that he is in touch with SEC two to three times a week. Sh. H. K Seo, President Marketing and Sales also stated that he communicates with SEC once a week in general. Sh. Yong Hee Cho, who is in charge of sales has stated that he communicates with SEC once a week. Statements of some of these officers who are of the rank of Division Heads, also show that they continue to be under some control of the SEC for certain activities like research and development of products for the Indian market, development of marketing strategy, decisions relating to pricing of product, exploration and development of new markets in the 34 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 neighboring countries. These are the functions that would normally have been performed by SEC through its own employees, or such functions would have been outsourced by it to some third party, in which case the third party would be entitled to some remuneration for these services. However in the present case it is the seconded employees of SEC are performing these functions jn addition to their own duties performed by them for SIEL. For performing the above functions of SEC these employees have a 'fixed place of business' i.e the premises of SEiL available to them. Moreover, it is an admitted fact that apart from these 'seconded employees' who are in the payroll of SIEL, other employees of SEC also come from time to time to India and use the premises of SIEL for the functions performed by them for SEC. This is quite evident from the statement of Sh. Mahesh Sutagatti and Sh. Anshuman Sah, VP (Sales & Marketing). Sh. Suttagati is himself an employee of SEC who was in India for the development of assessee's Wi-max business in India. Sh. Sah has admitted that the employees of SEC come from time to time and work with the local personnel."
32. We have considered the observations of ld. DRP in the light of the above statements. There is no doubt that there is seemless information exchange between the employees of the assessee and the expat employees. However, on a careful consideration of the entire matter including the statements of the expatriate employees, extracted supra, we are of the considered opinion that the statements show that such information exchange relates to the models/designs to the liking of the Indian consumers, plans and strategies relating to the sale of the products, detailed stock/logistical status, the market strategies both the mid and long terms etc.
33. As rightly argued by the Ld. AR that none of the statement would go to show that the any activity of the global business management (GBM) has ever been conducted in India or that the market survey that is conducted in India, as spoken by the 35 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 expatriate employees has nothing to do with the business of the Indian subsidiary and it is solely for the benefit of the assessee. All the activities that are spoken by the expatriate employees related to the specificity of the products, stock verification, they designs according to the preferences of the Indian consumers, the market strategies to be adopted etc are clearly within the ambit of the business of the Indian subsidiary. Such a communication would primarily benefit the Indian subsidiary, and would help the assessee in its GBM to sustain its supply chain management and to place optimized purchase orders at a right timing or to acquire the most promising manufacturing technologies, as is submitted on behalf of the assessee.
34. At the best, the statements and other material relied upon by the revenue show that by way of the seamless communication between the Indian subsidiary and the assessee, the expatriate employees were only discharging the duties of the subsidiary company towards the holding company. Whatever the benefits that are derived by the Indian subsidiary by such communication are offer to tax in India. We therefore find that the activities spoken by the expatriate employees in their statements are in the nature of reporting required in the course of discharge of the functions of the subsidiary company towards the holding company, and such activities do not constitute a PE under Article 5(4)(d), (e) and (f) of the DTAA.
36ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
35. As rightly pointed out by the Ld. AR, even if the impugned activities of seconded employees amount to rendering of services to subsidiary by the assessee, in view of the fact that there is no provision for a service PE in India-South Korea DTAA, no question of Service PE arises in this matter. As a matter of fact, Ld. DRP vide paragraph No 5.4.4.6 of their Order observed the same.
36. From a reading of Art.5 of the DTAA, we understand that in order to constitute a PE, there must be a fixed place of business available to the assessee, through which the business of assessee is wholly or partly carried on. In the preceding paragraphs we held that what the expat employees are doing is only the discharge of the functions of subsidiary towards the holding company, which is for the benefit of the business of the subsidiary to make the GBM understand the priorities and preferences of the Indian customers by providing India specific information to GBM's which in turn then carry out research and development to develop India specific products. By no stretch of imagination could it be said that it is in furtherance of the business of the assessee de hors the business of the subsidiary.
37. In the absence of proof as to any management activity of the assessee being conducted in India or that it is established that the decisions relating to the products to be manufactured, pricing in the domestic markets, or the decisions relating to the launch of such products in India is taken by the assessee, we find it difficult to agree with the authorities below that through the expatriate 37 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 employees the assessee has been conducting the business of assessee in India. Further, except stating that 10% of the remuneration of these employees has to be assumed as the income of the assessee, absolutely there is no evidence that is placed on record by the assessing officer to show that by way of business through these expatriate and seconded employees, the assessee derived any business income in India.
38. For these reasons, we are of the considered opinion that there is neither any business conducted by the assessee in India through the expatriated employees nor any income is derived by them though the activities of the employees. Consequently we hold that there is no fixed place PE of the assessee constituted through the expatriated employees. Issue is, therefore, answered in favour of the assessee.
ADDITION OF 10% ESTIMATED INCOME ON THE TOTAL REMUNERATION COST OF EXPATRIATE EMPLOYEES SECONDED TO SIEL IN INDIA,
40. Ld. AO, in the assessment order, proceeded to attribute income in respect of such permanent establishment as per Article 7 of the Indo South Korean treaty. While making recourse to clause
(iii) of Rule 10 of the Income Tax Rules, 1962, he took the remuneration cost of the expatriate employees seconded to SIEL as the basis for attributing income and added an estimated income of 10% on the understanding that had such services been rendered by an unrelated entity to SIEL, 10% would be a reasonable markup that would have been earned by it. Ld. DRP confirmed this finding of the Ld. AO. However, in view of our finding that there is no 38 ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 business activity that is conducted by the assessee through the expatriate employees, the question of estimated income does not arise.
LEVY OF INTEREST UNDER SECTION 234B AND 234A OF THE ACT.
41. Inasmuch as we held in the preceding paragraphs that there is no business activity that is conducted by the assessee through the expatriate employees, the question of estimated income does not arise and consequently the liability of the assessee to deduct TDS or interest liability under section 234 A and B does not arise. This issue is, therefore, answered in favour of the assessee in all the assessment years, and against the revenue in ITA No 982 of 2016.
SHORT CREDIT OF TAXES
42. Short credit of taxes withheld by SIEL as against the credit of taxes claimed by assessee in its return of income is challenged in the assessee's appeal for AY 2011-12
43. In respect of the assessment year 2011-12, it is submitted on behalf of the assessee that a sum of Rs. 18,15,99,203/-was withheld by the SIEL and it is lying to their credit. It is further submitted that the Ld. AO allowed credit of taxes only to the extent of Rs. 17, 79, 07, 391/-, thereby there is an offence of short credit of taxes to a tune of Rs. 36, 91, 812/-. Assessee is aggrieved by this alliance of short credit. In the circumstances, we direct the Ld. AO to grant credit of the TDS to the assessee if they fulfilled the requisite conditions of possessing a valid certificate as per the Act.
39ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017
44. In the result, all the appeals of the assessee are allowed and the appeal of the Revenue is dismissed.
Order pronounced in the open court on 22 .03.2018 Sd/- sd/-
(G.D. AGRAWAL) (K. NARASIMHA CHARY)
PRESIDENT JUDICIAL MEMBER
Dated: 22.03.2018
*Vijay
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
TRUE COPY
ASSISTANT REGISTRAR
ITAT NEW DELHI
40
ITA Nos. 65 to 70/Del/2013, 315, 982/D/2016 & 4705, 4706/Del/2017 Draft dictated on 22.12.2017 Draft placed before author Draft proposed & placed before the second member Draft discussed/approved by Second Member.
Approved Draft comes to the Sr.PS/PS Kept for pronouncement on File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk.
Date of dispatch of Order.
41