Samsung Electronics Co. Ltd vs Deputy Commissioner Of Income Tax (Int. Tax)

,,,,

SANJIV KHANNA, J. (ORAL):",,,,

The afore-captioned appeal under Section 260A of the Income Tax Act, 1961 (the Act, for short) has been filed by Samsung Electronics Co. Ltd., a",,,,

non-resident company and resident of Republic of South Korea. The appeal relates to Assessment Year 2007-08 and impugns a common order dated,,,,

22nd March, 2018 passed by the Income Tax Appellate Tribunal (Tribunal).Â",,,,

The appeal challenges findings of the Tribunal upholding initiation of proceedings by the Assessing Officer under Section 147 read with Section 148,,,,

of the Act.,,,,

The appellant-assessee, who has substantially succeeded before the Tribunal on the questions of permanent establishment in India and attribution of",,,,

income has not challenged the said findings.,,,,

For convenience and to examine the contentions raised, we would reproduce the “reasons to believe†recorded by the Assessing Officer for",,,,

the Assessment Year 2007-08. The ""reasons to believe"" for the Assessment Year 2007-08 read as under:-Â Â Â Â",,,,

“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 (sic. parent) company for which the parent company receives fees for technical services. The parent company M/s,,,,

Samsung Electronics Co Ltd, South Korea has not been 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.8,000 Crores during the previous year relevant to A.Y.2007-08. The amount of royalty can be taken as Rs.160 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 West 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 Electronics Ltd were recorded.,,,,

(i) B D Park, Director Mobile Biz & IT Biz",,,,

(ii) Sachin Baweja, Company Secretary",,,,

(ii) C S Choi, Vice President, Corporate Marketing",,,,

(iv) Y H Cho, Vice President, Sales, North Region",,,,

(v) HK Seo, Vice President, CE Sales &Â 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) (vii) Even the sale price of the products manufactured in India is decided after discussion with the headquarters.,,,,

(viii) 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 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.",,,,

(ix) 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.",,,,

(x) A perusal of records shows that the assessee has not filed its return of income in India for AY 2007-08.,,,,

(xi) 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",,,,

“Assessment

Year","Income as per

original

return

of income (in

INR)","Income as

per return

filed under

section 148

(in INR)","Amount of

addition

m a d e by

AO

(in INR)","Assessed

income (in

INR)

AY 2004-05,NIL,"183,792,647","6,639,512","190,432,159

AY 2005-06,"86,592 was

offered to tax

under ""Other

Income""","180,897,736","9,894,848","190,792,584

AY 2006-07,"MAT paid on

Book Profits

(13,10,35,049)

u/s 115JB","229,261,833","10,722,431","239,984,264

AY 2007-08,"NIL

(operations

ceased to

exist)","354,257,732","44,789,046","399,046,778

AY 2008-09,"NIL (operations

ceased to exist)","564,889,589","57,863,051","622,752,640

AY 2009-10,"No return filed

(Branch was

closed)","727,560,470","80,918,894","808,479,364

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