M/S. LG ELECTRONICS INC., KOREA (LGEK),NOIDA vs. DCIT (INTERNATIONAL TAXATION), NOIDA

PER BENCH 1. These are 9 appeals of the assessee namely L G Electronics Inc., Korea, (The Appellant or The Assessee) involving similar issues for AY 2004-05 to AY 2014-15 except AY 2011-12 and 2012-13. The counsel for the parties also argued them together and therefore same is disposed of by this common order. While the Assessment order for AY 2004-05 to 2010-11 arise out of reassessment proceedings, the orders for AY 2013-14 & 2014-15 are assessment orders pursuant to assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).Grounds of appeal of various years are reproduced hereunder to appreciate that the issues are common. 2. The assessee has raised the following grounds of appeal in ITA No. 4559/Del/2018 for the Assessment Year 2004-05:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO)/Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. 2. That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act when initiation of proceedings did not satisfy necessary requisites contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act even though all the transaction between LGIL and Assessee were held to be at arm’s length by the Ld. Transfer Pricing Officer (‘TPO’) and thus there could not be any ‘escapement of income’ 2.2 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. Page | 2

2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the judgment of the Hon’ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 3.3 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant. 3.4 That the AO/DRP completely failed to appreciate that in terms of Article 5(7) of the Double Tax Avoidance Agreement between India and Korea(‘DTAA’) control of holding company over subsidiary does not in itself create a Permanent Establishment of the non-resident. 3.4. That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact that in terms of Article 10 of the DTAA, shifting of any profits arising to a non-resident is prohibited if the transactions between the two

enterprises have met the arm’s length test. In the present case all the transactions between the Appellant and LGIL have been subjected to transfer pricing proceedings and have been found to be at arm’s length. 5. That without prejudice the AO / DRP also miserably failed to appreciate that the function to have been allegedly performed by the expatriates in the PE was the import of raw material/ finished goods and parts which function was already captured in the Transfer Pricing Assessment of the Indian subsidiary and hence there arose no occasion to allocate any further profits to such PE. 6. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India the AO/DRP grossly erred in attributing profits to India. 7. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and is based on surmises and conjectures. 8. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under sections 234B and 234C of the Act without appreciating that the Appellant is a non-resident and tax is deductible from the income of the Appellant. 9. That the AO/DRP has grossly erred in law and facts in levying interest under section 234A of the Act. 10. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 11. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271 (1) (c) of the Act and alleging that the Appellant has concealed 3. The assessee has raised the following grounds of appeal in ITA No. 4560/Del/2018 for the Assessment Year 2005-06:- Page | 4

“1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. 2. That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act when initiation of proceedings did not satisfy necessary requisites contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act even though all the transaction between LGIL and Assessee were held to be at arm’s length by the Ld. Transfer Pricing Officer (‘TPO’) and thus there could not be any ‘escapement of income’ 2.2 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. 2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India

solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the judgment of the Hon’ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 3.2 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant. 3.3 That the AO/DRP completely failed to appreciate that in terms of Article 5(7) of the Double Tax Avoidance Agreement between India and Korea (‘DTAA’) control of holding company over subsidiary does not in itself create a Permanent Establishment of the non-resident. 3.4 That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact that in terms of Article 10 of the DTAA, shifting of any profits arising to a non-resident is prohibited if the transactions between the two enterprises have met the arm’s length test. In the present case all the transactions between the Appellant and LGIL have been subjected to transfer pricing proceedings and have been found to be at arm’s length. 5. Without prejudice to the above grounds, the AO/DRP erred in bringing to tax the salary cost of expatriate employees of LGIL to the Appellant in absence of the PE of the Appellant in India and hence no income of Appellant could be brought to tax in India. 6. That without prejudice the AO/ DRP also miserably failed to appreciate that the function to have been allegedly performed by the expatriates in the PE was the import of raw material/ finished goods and parts which function was already captured in the Transfer Pricing assessment of the Indian subsidiary and Page | 6

hence there arose no occasion to allocate any further profits to such PE. 7. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India that AO / DRP grossly erred in attributing profits to India. 8. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and is based on surmises and conjectures. 9. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under sections 234B and 234C of the Act without appreciating that the Appellant is a non-resident and tax is deductible from the income of the Appellant. 10. That the AO/DRP has grossly erred in law and facts in levying interest under section 234A of the Act. 11. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 12. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271(1 )(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income.” 4. The assessee has raised the following grounds of appeal in ITA No. 4561/Del/2018 for the Assessment Year 2006-07:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. 2. That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act when initiation of proceedings did not satisfy necessary requisites Page | 7

contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act even though all the transaction between LGIL and Assessee were held to be at arm’s length by the Ld. Transfer Pricing Officer (‘TPO’) and thus there could not be any ‘escapement of income’ 2.2 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. 2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. ( hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the judgment of the Hon’ble Supreme Court in .S'. Qadar Khan & Sons (254 CTR 228)

3.2 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant. 3.3 That the AO/DRP completely failed to appreciate that in terms of Article 5(7) of the Double Tax Avoidance Agreement between India and Korea (‘DTAA’) control of holding company over subsidiary does not in itself create a Permanent Establishment of the non-resident. 3.4 That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact that in terms of Article 10 of the DTAA, shifting of any profits arising to a non-resident is prohibited if the transactions between the two enterprises have met the arm’s length test. In the present case all the transactions between the Appellant and LGIL have been subjected to transfer pricing proceedings and have been found to be at arm’s length. 5. That without prejudice the AO/DRP also miserably failed to appreciate that the function to have been performed by the expatriates in the PE was the import of raw material/ finished goods and parts which function was already captured in the Transfer Pricing Assessment of the Indian Subsidiary' and hence there arose no occasion to allocate any further profits to such PE. 6. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and is based on surmises and conjectures. 7. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under sections 234B and 234C of the Act without appreciating that the Appellant is a non- Page | 9

resident and tax is deductible from the income of the Appellant. 8. That the AO/DRP has grossly erred in law and facts in levying interest under section 234A of the Act. 9. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 10. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271(1 )(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income.” 5. The assessee has raised the following grounds of appeal in ITA No. 1946/Del/2017 for the Assessment Year 2007-08:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant are bad in law and void ab- initio. On Reassessment 2 That the AO erred in initiating reassessment proceedings and the DRP erred in confirming the same without the satisfaction of the necessary requisites for taking such action in terms of Section 147 of the Act. 2.1 That the AO/ DRP erred in not appreciating that for initiating reassessment proceedings there has to be a valid “reason to believe” that any income chargeable to tax has escaped assessment. 2.2 That without prejudice at best the formation of belief by the Assessing Officer is a borrowed belief relying on the survey findings without any independent application of mind.

2.3 That without prejudice even the approval granted by the Commissioner for initiating such proceedings suffers from the same deficiency reflecting complete non application of mind. 2.4 That the AO further erred in initiating the reassessment proceedings while relying on the statements of the expatriate employees of the Indian subsidiary when such statements in the absence of any material were not admissible in law to form any such belief. 2.5 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey conducted in 2010 which were not even relevant for the AY 2007-08, which in the absence of any material are not admissible in law. 2.6 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and the formation of the belief that income chargeable to tax had escaped assessment. On the existence of Permanent Establishment 3. That the AO / DRP grossly erred in law in coming to the conclusion that the Indian subsidiary of the Appellant constituted a fixed place of business under Article 5(1) of the DTAA between India and Korea. 3.1 That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were lacking in the present case. 3.2 That the AO / DRP grossly erred in law in allowing themselves to be influenced for the conclusion relating to

existence of a PE merely on account of the alleged control of the Appellant over the Indian subsidiary. 3.3 That the AO / DRP completely failed to take note of Article 5(7) of the DTAA which prohibits the conclusion of a PE merely because of control of one company over and another. 3.4 That the AO / DRP erred in selectively relying on, the statements of the expatriate employees of the Indian subsidiary to demonstrate control of the Appellant over the Indian subsidiary. 3.5 That the AO/ DRP has erred in recording that the Appellant had conceded the existence of PE in India. 3.6 That the AO/DRP erred in making assessment on the assumption that there existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. ( hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the settled position of law. 3.7 That the AO/DRP erred in coming to the conclusion that expatriate employees working in LGIL were working on behalf of the Appellant, ignoring the fact that the expatriate employees were employees of LGIL working under direct supervision and control of LGIL. 3.8 That without prejudice, the conclusions of the AO / DRP are patently erroneous given that all the transactions between the two companies were uninfluenced by their relationship, and had met the Arm’s Length Price test in terms of Transfer Pricing Assessments made on both the companies. 3.9 That without prejudice the AO / DRP also erred in ignoring the provision of Article 10 of the DTAA which neutralizes the tax position in respect of the non-resident assessee, once the transactions between the two related parties has met the Arm’s Length Price.

the same deficiency reflecting complete non application of mind. 2.4 That the AO further erred in initiating the reassessment proceedings while relying on the statements of the expatriate employees of the Indian subsidiary when such statements in the absence of any material were not admissible in law to form any such belief. 2.5 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey conducted in 2010 which were not even relevant for the AY 2008-09, which in the absence of any material are not admissible in law. 2.6 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and the formation of the belief that income chargeable to tax had escaped assessment. On the existence of Permanent Establishment 3. That the AO / DRP grossly erred in law in coming to the conclusion that the Indian subsidiary of the Appellant constituted a fixed place of business under Article 5(1) of the DTAA between India and Korea. 3.1 That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were lacking in the present case. 3.2 That the AO/ DRP grossly erred in law in allowing themselves to be influenced for the conclusion relating to existence of a PE merely on account of the alleged control of the Appellant over the Indian subsidiary.

3.3 That the AO / DRP completely failed to take note of Article 5(7) of the DTAA which prohibits the conclusion of a PE merely because of control of one company over and another. 3.4 That the AO/ DRP erred in placing relying on, selectively, the statements of the expatriate employees of the Indian subsidiary to demonstrate control of the Appellant over the Indian subsidiary. 3.5 That the AO/ DRP has erred in recording that the Appellant had conceded the existence of PE in India. 3.6 That the AO/DRP erred in making assessment on the assumption that there existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. ( hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the settled position of law. 3.7 That the AO/DRP erred in coming to the conclusion that expatriate employees working in LGIL were working on behalf of the Appellant, ignoring the fact that the expatriate employees were employees of LGIL working under direct supervision and control of LGIL. 3.8 That without prejudice the conclusions of the AO / DRP which patently erroneous given that all transactions between the two companies were uninfluenced by their relationship and had met the Arm’s Length Price test in terms of Transfer Pricing Assessments made on both the companies. 3.9 That without prejudice the AO / DRP also erred in ignoring the provision of Article 10 of the DTAA which neutralizes the tax position in respect of the non-resident assessee, once the transactions between the two related parties has met the Arm’s Length Price.

without appreciating that no refund was granted to the Appellant. 11. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271(1 )(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income.” 7. The assessee has raised the following grounds of appeal in ITA No. 5020/Del/2018 for the Assessment Year 2009-10:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO)/Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. 2. That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act when initiation of proceedings did not satisfy necessary requisites contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act even though all the transaction between LGIL and Assessee were held to be at arm’s length by the Ld. Transfer Pricing Officer (‘TPO’) and thus there could not be any ‘escapement of income’ 2.2 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. 2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and

the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the judgment of the Hon’ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 3.2 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant. 3.3 That the AO/DRP completely failed to appreciate that in terms of Article 5(7) of the Double Tax Avoidance Agreement between India and Korea(‘DTAA’) control of holding company over subsidiary does not in itself create a Permanent Establishment of the non- resident. 3.4 That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact that in terms of Article 10 of the DTAA, shifting of any profits arising to a non-resident is prohibited if the transactions between the two enterprises have met the arm’s length test. In the present case all the transactions between the Appellant and LGIL have been subjected to transfer pricing proceedings and have been found to be at arm’s length.

“1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO)/Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. 2. That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act when initiation of proceedings did not satisfy necessary requisites contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the AO/DRP erred in upholding the validity of the re- assessment proceedings under Section 147 of the Act even though all the transaction between LGIL and Assessee were held to be at arm’s length by the Ld. Transfer Pricing Officer (‘TPO’) and thus there could not be any ‘escapement of income’ 2.2 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. 2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the ‘information’ and the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely

relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the judgment of the Hon'ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 3.2 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant. 3.3 That the AO/DRP completely failed to appreciate that in terms of Article 5(7) of the Double Tax Avoidance Agreement between India and Korea(‘DTAA’) control of holding company over subsidiary does not in itself create a Permanent Establishment of the non-resident. 3.4 That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact those in terms of Article 10 of the DTAA. shifting of any profits arising to a non-resident is prohibited if the transactions between the two enterprises have met the arm’s length test. In the present case all the transactions between the Appellant and LGIL have been subjected to transfer pricing proceedings and have been found to be at arm’s length. 5. That without prejudice the AO/DRP also miserably failed to appreciate that the function to have been performed by the expatriates in the PE was the import of raw material/ finished goods and parts which function was already captured in the Transfer Pricing Assessment of the Indian Subsidiary and hence there arose no occasion to allocate any further profits to such PE. 6. That the AO/ DRP miserably failed to appreciate that the case of the Appellant is now completely covered by the Judgment of the Hon’ble Supreme Court in Civil Appeal No. 2833 of 2018 titled

“Honda Motor Company Ltd., Japan Vs. Asst. Director of Income Tax” dated 14th March 2018. 7. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India the AO/DRP grossly erred in attributing profits to India. 8. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and is based on surmises and conjectures. 9. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under sections 234A, 234B and 234C of the Act without appreciating that the Appellant is a non-resident and tax is deductible from the income of the Appellant. 10. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 11. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271 (1 )(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income.” 9. The assessee has raised the following grounds of appeal in ITA No. 3327/Del/2018 for the Assessment Year 2013-14:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO)/Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant are bad in law and void ab- initio. On the existence of Permanent Establishment 2. That the AO / DRP grossly erred in law in coming to the conclusion that the Indian subsidiary of the Appellant constituted a fixed place of business under Article 5(1) of the DTAA between India and Korea.

2.1 That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment (“PE”) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were lacking in the present case. 2.2 That the AO / DRP grossly erred in law in allowing themselves to be influenced for the conclusion relating to existence of a PE merely on account of the alleged control of the Appellant over the Indian subsidiary. 2.3 That the AO/ DRP completely failed to take note of Article 5(7) of the DTAA which prohibits the conclusion of a PE merely because of control of one company over and another. 2.4 That the AO/ DRP erred in placing relying on, selectively, the statements of the expatriate employees of the Indian subsidiary to demonstrate control of the Appellant over the Indian subsidiary. 2.5 That the AO/DRP erred in making assessment on the assumption that there existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. ( hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the settled position of law. 2.6 That the AO/ DRP has erred in relying on the statements of the expat employees recorded during financial year 2010-11 in coming to the conclusion that the Appellant has PE in India for the year under consideration.. 2.7 That the AO/DRP erred in coming to the conclusion that expatriate employees working in LGIL were working on behalf of the Appellant, ignoring the fact that the expatriate employees were employees of LGIL working under direct supervision and control of LGIL.

2.8 That the case of the Appellant is squarely covered by the order of this Hon'ble Tribunal in Samsung Electronics Co. Ltd. Vs. DCIT [2018] 92 taxmann.com 171 (Delhi - Trib.). 2.9 That without prejudice the conclusions of the AO / DRP are patently erroneous given that all transactions between the two companies were uninfluenced by their relationship and had met the Arm’s Length Price test in terms of Transfer Pricing Assessments made on both the companies. 2.10 That without prejudice the AO / DRP also erred in ignoring the provision of Article 10 of the DTAA which neutralizes the tax position in respect of the non-resident assessee, once the transactions between the two related parties has met the Arm’s Length Price. 2.11 That the issue of existence of permanent establishment has become academic in view of the law laid down by the Hon’ble Supreme Court in Honda Motor Company Japan vide its order dated 14.03.2018 in Civil Appeal No.(s). 2833 of 2018. 2.12 That without prejudice the AO / DRP also miserably failed to appreciate that the function to have been allegedly performed by the expatriates in the PE was the import of raw material and parts which function was already captured in the Transfer Pricing Assessment of the Indian subsidiary and hence there arose no occasion to allocate any further profits to such PE. 2.13 That without prejudice the AO/ DRP has erred on facts and in law, in relying on the Foreign Collaboration Agreement entered between the appellant and LGIL (which was approved by the Department of Industrial Policy and Promotion, Government of India) to allege a PE for the appellant in India. On Attribution 3. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India the AO/DRP grossly erred in attributing profits to India.

General 4. That the AO/DRP has erred in relying upon incorrect finding of facts in arriving at the conclusion that the Appellant has a PE in India. 5. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and are based on surmises and conjectures. 6. That the AO/DRP has grossly erred in law in levying interest under sections 234B/C of the Act without appreciating that the Appellant is a non-resident and in terms of section 209 there arose no liability of the Assessee to pay advance tax being “deductible”. 7. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234A of the Act. 8. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 9. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271(1 )(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income.” 10. The assessee has raised the following grounds of appeal in ITA No. 5022/Del/2018 for the Assessment Year 2014-15:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO)/Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. On the existence of Permanent Establishment 2. That the AO / DRP grossly erred in law in coming to the conclusion that the Indian subsidiary of the Appellant constituted a fixed place of business under Article 5(1) of the Page | 26

DTAA between India and Korea, given the fact that necessary requisites of creating a PE under Article 5 of DTAA were lacking in the present case. 2.1 That the AO / DRP grossly erred in law in allowing themselves to be influenced for the conclusion relating to existence of a PE merely on account of the alleged control of the Appellant over the Indian subsidiary. 2.2 That the AO / DRP completely failed to take note of Article 5(7) of the DTAA which prohibits the conclusion of a PE merely because of control of one company over and another. 2.3 That the AO/ DRP erred in placing relying on, selectively, the statements of the expatriate employees of the Indian subsidiary to demonstrate control of the Appellant over the Indian subsidiary. 2.4 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the judgment of the Hon’ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 2.5 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant 2.6 That the AO/DRP erred in making assessment on the assumption that there existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. ( hereinafter referred to as “LGIL”) which were inadmissible evidence in terms of the settled position of law. 2.7 That the AO/DRP erred in coming to the conclusion that expatriate employees working in LGIL were working on behalf

of the Appellant, ignoring the fact that the expatriate employees were employees of LGIL working under direct supervision and control of LGIL. 2.8 That the case of the Appellant is squarely covered by the order of this Hon’ble Tribunal in Samsung Electronics Co. Ltd. Vs. DCIT [2018] 92 taxmann.com 171 (Delhi - Trib.). 3. That without prejudice to the above the conclusions of the AO / DRP are patently erroneous given that all transactions between the two companies were uninfluenced by their relationship and had met the Arm’s Length Price test in terms of Transfer Pricing Assessment. 4. That without prejudice the AO / DRP also erred in ignoring the provision of Article 10 of the DTAA which neutralizes the tax position in respect of the non-resident assessee, once the transactions between the two related parties has met the Arm’s Length Price. 4.1 That the issue of existence of permanent establishment has become academic in view of the law laid down by the Hon’ble Supreme Court in Honda Motor Company Japan vide its order dated 14.03.2018 in Civil Appeal No.(s). 2833 of 2018. 4.2 That without prejudice the AO / DRP also miserably failed to appreciate that the function to have been allegedly performed by the expatriates in the PE was the import of raw material and parts which function was already captured in the Transfer Pricing Assessment and hence there arose no occasion to allocate any further profits to such PE. 5. That without prejudice the AO/ DRP has erred on facts and in law, in relying on the Foreign Collaboration Agreement entered between the appellant and LGIL (which was approved by the Department of Industrial Policy and Promotion, Government of India) to allege a PE for the appellant in India.

for the relevant period, as according to assessee no portion of its income arose in India on account of off-shore supplies and since tax had already been deducted on other payments. In AY 2007-08, the Appellant had entered into the following transactions with its Indian subsidiary/ Associated Enterprise (‘AE’), i.e., LG India:

S. Nature of transaction Amount (INR) No. 1. Sale of raw material and 4,54,89,84,783 consumables 2. Sale of finished goods 3,74,47,63,325 3. Sale of capital goods 2,43,22,114

(hereinafter referred to as ‘TPO’). The TPO vide order dated 29.10.2010 (page no. 745) made adjustments, inter alia, for relevant segment of import of raw material, components and spares and finished goods from the Appellant. The said adjustments were deleted by the Dispute Resolution Panel (hereinafter referred to as ‘DRP’) pursuant to which TPO passed appeal effect order on 18.10.2011 13. On 24/06/2010, survey was conducted at the premises of the LG India under section 133A of the Act. During the course of survey, statement of the expat employees of LG India was recorded by the department. Based on it Appellant was issued notice under section 148 of the Act on 24.03.2014. Pursuant to the said notice, Appellant filed return for the subject AY on 02.05.2014 declaring income of INR 156,97,45,016. The Appellant also requested for copy of reasons recorded for initiating the reassessment proceedings which were provided vide letter dated 21.11.2014. In the reasons recorded for initiating reassessment proceedings, it was observed that on the basis of statements of key officials recorded and materials impounded during the course of survey conducted under section 133A of the Act in premises of LG India on 24.06.2010, the AO had reasons to believe that the Appellant has a ‘permanent establishment’ in India in terms of Article 5(1) of the India-Korea DTAA and that the Appellant also has a ‘business connection’ in terms of section 9(1) of the Act. On the basis of these findings, it was alleged that profit arising in the transactions of sale of raw material, capital goods, finished goods etc. undertaken between the Appellant and LG India was attributable to the alleged PE of the Appellant and hence chargeable to tax in India. Aggrieved by the initiation of reassessment proceedings, the Appellant along with the other group companies filed writ petitions before the Hon’ble Allahabad High Court challenging the validity of reassessment proceedings. The Hon’ble Allahabad High Court vide order dated 23.02.2015 upheld the initiation of reassessment proceedings. Thereafter, the AO passed draft assessment order dated 28.03.2016 (Page 253) under section 144C/147/143(3) of the Act holding that the Appellant has a PE in India in form of LG India and proposed to assess the income of the Appellant at an amount of INR 8,15,54,053 in addition to the returned income as business profits

attributable to the alleged PE. The details of the additions as proposed by the AO are tabulated as under:

Particulars Amount (Rs.) Export of raw material and consumables 454,89,84,783 Export of finished goods 374,47,63,325 Export of capital goods 2,43,22,114 Sales Commission 11,11,67,130 Sale of parts (sample and testing) 1,22,137 Total 8,42,93,59,489 Applying NP ratio @ 3.87% 32,62,16,212 Attribution of Income @ 25% 8,15,54,053 14. The Appellant filed objections against the draft assessment order before the DRP on 29.04.2016 (Page 103). On 05.12.2016 the Appellant furnished letter submitting without prejudice that though the Appellant did not concede the existence of fixed place PE, income attributable to the alleged PE be determined at 10% (profit margin) of 50% of salary cost of expatriates. The DRP treated the said letter as a concession and recorded a finding that the Appellant had conceded the existence of a Fixed Place Permanent Establishment. Thus, DRP came to the conclusion that income of the PE could be ascertained by imputing costs in terms of salary paid to the employees of the AE and applying a reasonable mark-up on such costs. Thus, vide direction dated 21.12.2016 , the DRP set-aside the attribution done by the AO and directed the AO to attribute the cost of salary paid to employees and adding a mark-up of 20% as against 10% submitted by the Appellant. The AO passed the final assessment order dated 24.01.2017 under section 143(3) r/w section 144C of the Act (Page 9)attributing income to the PE taxable in India, as per DRP’s direction in the following manner: Particulars Amount (INR)

16,29,91,064 Total Salary cost of the expatriates employees (as per Form 16 issued by LG India) 25% Profits to be attributed to the India PE 4,07,47,766 Attribution of profits 20% Profit Margin 81,49,553 Total profits attributed to the India PE

“8. In these matters the DRP/Assessing Officer have come to the conclusion that the petitioner has a PE in India. However, the petitioner prays for permission to withdraw these five special leave petitions and to pursue the statutory remedy under the Income Tax Act, 1961. These special leave petitions are, accordingly, dismissed as withdrawn with liberty to the petitioner to pursue its statutory remedies. 9. It is also made clear that the Appellate Authority will examine the matter uninfluenced by any observation/finding of the High Court regarding the existence of a permanent establishment of the petitioner in India.” 17. Pursuant to the order passed by the Hon’ble Supreme Court, the Appellant did not press grounds assailing the legality of the reassessment and restricted itself to the addition on merits. Thus for AY 2004-05 to 2010-11 , all the grounds relating to challenge to reopening proceedings are dismissed as not pressed. 18. On merits the assessing officer has held that the Appellant has a business connection in India in terms of section 9(1)(i) as also a fixed place PE in India in terms of Article 5(1) and 5(2) of the Indo-South Korea Double Tax Avoidance Agreement (“DTAA”). In coming to the aforesaid conclusion, the Page | 33

assessing officer has held that LG Electronics India Ltd. (“LGEIL”), the Indian subsidiary, was legal and economically dependent on the Appellant and that the Appellant exercised total control over the Indian subsidiary inasmuch as, i.e., (i) Technology is provided to the Indian subsidiary by the Appellant under the Technology Assistance and Royalty Agreement; (ii) The purchase of raw material, finished goods and other consumables from the parent company and its AEs is without any price negotiation and without any search of non-resident vendors by LGEIL; (iii) The key positions in the Indian subsidiary are staffed by expatriates seconded by the Appellant; (iv) Such expatriates are controlling positions where critical decision making is involved and supervising the affairs of the Indian subsidiary and looking after the interest of the Appellant; (v) Several short term expatriates have been repeatedly visiting India for business purposes, i.e., to promote the business of the Appellant company. In view of the above, the assessing officer concluded that a fixed place in business premises of LGEIL is available to the expatriates seconded by the Appellant and short term expatriates visiting India, which would constitute PE of the Appellant in India.

i. the existence of a ‘place of business’, i.e. a facility such as premises or in certain cases, machinery or equipment; ii. this place of business must be ‘fixed’, i.e. it must be established at a distinct place with a certain degree of permanence; and iii. the ‘carrying on of the business’ of the enterprise through this fixed place of business.

enterprise in that other contracting State. He submitted that in order that the foreign enterprise resident of a Contracting State can be said to have a fixed place PE in the other Contracting State, it is essential to demonstrate that the foreign enterprise has a fixed place available at its disposal in the other Contracting State, which is used for purposes of business of that foreign enterprise n that other contracting State. He further referred to several judicial precedents on above principles and stated that courts have in the undernoted cases emphasized the importance of disposal test, i.e., the fixed place must be available to the foreign enterprise for its use without any hindrance and further that such fixed place must be used for carrying on the core business of the foreign enterprise in the other contracting State:

the business carried on by that entity. LGEIL is a separate income-tax assessee and assessed to tax in India with respect to the profits earned from the business carried on, after transfer pricing analysis by the Revenue authorities qua international transactions entered into by LGEIL with its associated enterprises (including the Appellant). He submitted fact that the Appellant own 100% equity in LGEIL and is in a position to appoint majority of directors on the Board of LGEIL, does not ipso facto lead to the conclusion that LGEIL is working under total control of the Appellant company. In terms of the provisions of the Companies Act, 1956, the directors appointed on the Board of the company stand in a fiduciary relationship vis-à-vis the company in which they hold directorship and owe a fiduciary duty to such company. In case of conflict of interest between the company of which they are director and the company which has nominated such person as director on the former company, such director owe a sense of duty to the company of which he is a director and is expected to take a position in the interest of the company of which he is a director. He referred to the decision of Honourable Supreme Court in the case of Vodafone International Holdings BV vs. UOI and Another : [2012] 341 ITR 1 placed at pgs 65-204 of case law paper book Vol. I ( pgs. 101/102/109-110/114- 115/150-152) made the pertinent observations with regard to the status and independence of the legal entities under holding company - subsidiary structures that. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other.. He therefore submitted that a subsidiary does not by itself / ipso facto constitute PE of the parent company. The same is validated by the commentary by the celebrated author, Klaus Vogel on Double Taxation Conventions – 3rd edition placed @ pgs. 514-520 of case law paper book vol. II. The specific observations @ pg 517 were referred to which reads that : “The independence of the subsidiary under Company Law also remains authoritative for Tax purposes if it sub contracts entirely

or partially to associated enterprises or it acquires the means required for the contract’s execution from associated enterprises. The latter is particularly true for the hiring out of employees as temporary workers. If the parent company makes personnel available to the subsidiary for remuneration, than the activity of this ‘hired labour’ is to be attributed to the subsidiary and does not constitute a permanent establishment of the parent doing the hiring-out. This is different, however, as well as, in cases of subcontracts if the parent assumes the economic risk of the contract’s fulfillment in relation to the main customer. In this situation the parent company and the subsidiary have in fact established a company of which they are partners. This will lead to a permanent establishment for the partners if the general preconditions are fulfilled.”

“40. It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by that subsidiary company is managed

by the parent company does not constitute the subsidiary company a permanent establishment of the parent company”

 Close connection between the foreign company and the Indian subsidiary;  The dependency of the Indian subsidiary upon the foreign company for its earnings;  Hiring of employees or equipment by the Indian subsidiary from the foreign company;  A significant proportion of the total employees of the group being sent to India;  Cost plus mark-up form of remuneration, with the basis of mark up being unknown;  Costs considered or ignored for pricing under the agreed ‘cost- plus’ mechanism;  Sufficiency or not of risks borne by the Indian subsidiary;  Assignment or subcontract of work to the Indian subsidiary to save costs;  Whether or not activities performed by the Indian subsidiary were core activities; Page | 39

 Free of cost supply of intangibles by the foreign company(s) to the Indian subsidiary. 26. After showing us above legal position, he referred to the facts of the case and submitted that in the present case, it will be seen that LGEIL is a distinct and independent legal entity carrying on its independent business, as evident from the following:

i. LGEIL purchases almost 67% of its raw material from third party vendors and is not dependent upon the Appellant for raw material and spares (pg 370). ii. The import of finished goods from the Appellant by LGEIL constitutes only 10% of its total sales (pg 389). iii. LGEIL manufactures products in India according to the technology / design and drawings provided by the Appellant and uses the brand name ‘LG’ owned by the Appellant on the products manufactured, in terms of the Technology License Agreement, against payment of royalty. iv. LGEIL employs around 15000 personnel – permanent and temporary, several key positions are held by Indian Nationals v. LGEIL has an indigenous R&D facility, which is duly approved by the Government of India for undertaking research for new products / customization of existing products, according to Indian requirements. vi. In respect of purchase of raw material, the modus operandi followed by LGEIL is that: a) The R&D department prepares bill of material for each product. Such bill of material specifies the nature and type of components; b) After identification of raw materials, LGEIL does a search for vendors, and also undertakes independent valuation of the various alternative sources of supply; c) LGEIL determines periodic sales and production forecast;

d) Thus LGEIL independently decides what to purchase and how to purchase and at what cost;

vii. The board of directors of LGEIL independently takes all important business decisions relating to the business of LGEIL, viii. The reports sent by LGEIL to the Appellant are reports sent to the shareholders; ix. Advice sought by LGEIL from the Appellant is in terms of Technology License Agreement. 27. Coming to the issue of Expatriate employees he submitted that Indian subsidiary is the legal and economic employers of those expat employees. He submitted that based on the requirement / vacancy in LGEIL organizational hierarchy, the HR department of LGEIL floats a request to the Appellant for recruitment of a person suitable to the said job requirement. In case, the suitable candidate is available within the global pool, the Appellant may sound such potential candidate for placement / secondment to LGEIL. The recruitment of such candidate to fill in the position in LGEIL is pursuant to mutual consultation between LGEIL and the Appellant and, of course, subject to the consent of the potential candidate to relocate to India. Thereafter, the candidate is issued appointment letter by LGEIL and is accordingly seconded to LGEIL by the Appellant. During the term of deputation, the expatriate is an employee of LGEIL inasmuch as (i) the employee occupies position in the organizational hierarchy of LGEIL; (ii) reports to his supervisor in the organizational hierarchy of LGEIL; (iii) performance review and appraisal is done by his supervisor in LGEIL; (iv) works for the business of LGEIL; (v) receives salary from LGEIL; (vi) pays tax in India for the salary earned for services rendered to LGEIL. He submitted that it is important to note that LGEIL has a right to terminate the employment of such employee in case the services are not found to be satisfactory as stipulated in the appointment letter. Further, at the end of the tenure, the expatriate employee, in exercise of lien on employment with the Appellant, has the option to return to the Appellant Company – the same, however, is a matter of individual choice and decision. From the Page | 41

aforesaid, it would be clear that during the period of deputation, LGEIL is both, the legal and economic employer of the expatriate employee(s) and it cannot be said that the Appellant company exercised control over the affairs of LGEIL through the expatriates employees seconded to LGEIL. E supported his arguments by the following judicial precedents .

a) The Delhi bench of the Tribunal in the case of HCL Infosystems Limited vs. DCIT : [2002] 76 TTJ 505 having regard to the fact that the foreign technicians deputed by Hewlett-Packard to the assessee’s joint venture in India - filed application with the Foreigners Regional Registration Office (“FRRO”) for taking employment in India, were holding employment visa, were given designation / position in the assessee company, were given duties and responsibilities as specified by the assessee, were reporting to the assessee’s management and worked under assessee’s supervision and control, were filing tax returns in India, held that the foreign technicians were employees of Indian JV notwithstanding that the salary was disbursed to these technicians by HP in US, who later sought reimbursement from the assessee.

The aforesaid decision rendered by the Tribunal was affirmed by the Delhi High Court and reported as DIT vs. HCL Infosystems Ltd. : [2005] 274 ITR 26.

b) The Bangalore bench of the Tribunal in the case of IDS Software Solutions (India) (P) Ltd. v. ITO (International Taxation) : [2009] 122 TTJ 410 on similar facts held that the managing director nominated by the US Corporation was an employee of the Indian company and, therefore, reimbursement of his salary by the Indian company to the US Corporation did not constitute “fees for technical services”.

c) The Supreme Court in the case of Carborandum Co. vs. CIT : [1977] 108 ITR 336(SC) held that foreign technical personnel whose services were made available to the Indian company outside India and who were employed by the Indian company on the basis of the agreement between the foreign company and the Indian company and were under the latter's control were employees of the Indian company.

d) The Hon’ble Supreme Court in the case of CIT vs. Eli Lilly and Co. (India) Pvt. Ltd. [2009] 312 ITR 225 held that part of the salaries received in Netherlands by the expatriate employees seconded to India were for services rendered in India and, therefore liable, to tax in India. The Appellant is seeking to draw support from the above judgment, notwithstanding that the employees seconded by the Appellant to LGEIL had lien on the employment with the Appellant, (for the proposition that) the same does not lead to the conclusion that the expatriate employees continued to be employees of the Appellant even during the secondment with LGEIL.

e) The Special Bench of the Tribunal in the case of Nokia Networks OY Vs Joint Commissioner of Income Tax [2018 94 taxmann.com 111] ( Delhi – Trib) (SB) vide majority judgment held in para 45 that the expatriate employees assigned to the Indian company were working under the control of the Indian company notwithstanding that the assigned employees had lien on the employment with the foreign assignor company Therefore he submitted that it is clearly evident that the expatriate employees are working exclusively for LGEIL during the tenure of their secondment and have simultaneously is being released for the period in question by the Appellant. He submitted that the assessing officer erred in holding that the expatriate employees during the period of deputation to India continued to be employees of the

Appellant Company and were carrying on business of the Appellant Company in India.

i. CIT vs. S. Khader Khan Son : 210 Taxman 248 (SC) ii. Paul Mathews and Sons v. CIT : 263 ITR 101 (Ker) iii. CIT vs. Dhingra Metal Works : 328 ITR 384 (Del) iv. CIT vs. Subhash Chand : ITA No. 875/2010 (Del) v. CIT vs. Sunil Aggarwal : 379 ITR 367 (Del) vi. ITO vs. Vijay Kumar Kesar : 327 ITR 497 (Chattisgarh) vii. TDI Marketing (P.) Ltd. vs. ACIT : (2009) 28 SOT 215 (Del) viii. Ashok Manilal Thakkar vs. ACIT : 279 ITR 143 (AT)(Ahd) ix. Meeta Gulgutia : 395 ITR 526 (Del) – para 40/41

He submitted that such statements, therefore, needs to be ignored from consideration.

expatriate employees seconded by the Appellant continued to be employees of the Appellant company during the period of their secondment to LGEIL and that such employees carried on business of the Appellant is factually not sustainable. He referred to various statements of expat and other employees to show that all business decision are independently taken by G India, what is the recruitment process of expats, reporting to Korea is just to support the technical assistance and status of expat employments post completion of tenure in India. 30. He referred to those statements with each of his four propositions as under :- I. Business decisions independently taken by LG India:

 Statement of Mr. M.B. Shin (Page 662) “Q.9 Who controls and makes decision regarding imports?”

A. “There is a sourcing team of the manufacturing unit which look after the import as well as local purchase. Imports are major three-CBU, raw material and components. Negotiation regarding the price of the same are taken care by resource and procurement team of LGEIL and they are expected to procure the same at the competitive prices.” …. ….. …. “Q. 10 Who decides what technology should be imported?” (Page 662)

A. “The LGEIL manufacturing departments directly discuss these issues with the product company if and when required. Market surveys are conducted by the sales and marketing and this information is then shared with the product company which further develops the technology. This technology is imported by us in India.”

 Statement of Mr. Yashovardhan Verma, (Page 668-669) “Q.20 Who is responsible for deciding the marketing strategy of LG India?”

A. “Product marketing strategy are decided by me with my team and my MD. LG Korea has no role.” …. …. ….. “Q.21 What is the role of LG Inc.?”

A. “Nothing”

“Q.22 What is the role of LG Inc. Asia in it?”

A. “Subsidiaries like LG India decide their own strategy specific to the market and are accountable for the results.”

“Q.16 In what manner is the supervision and control done by LG Inc. over LG India?”

A. “In the capacity of majority shareholder.”

 Statement of Mr. H.D Rew, (Page 697), “Question: How the rate of items to be procured be decided?”

A. “We negotiate the price when vendors to get the competitive prices.”

“Question: Who decide that the prices are competitive one?” Page | 46

A. “In some big items such as steel, Resin, I decide the price while in most of the case, HOD of the Procurement Team decide the rate. MD has not having any role in deciding the prices.”

 Statement of Mr. Soon Kwang, (Page 699 - 700) “Qn. Do you report to the Director (Mfg) of LGEIL or to the head quarter in Korea or both?”

A. “I report to Director (Mfg) in India. For the import I discuss directly with the concerned suppliers.” “Qn. Please explain the procedure of procurement of material in LGEIL in detail?”

A. “I concerned only with raw material so not aware of finished goods. After receiving parts, development request I decide vendor as well as price and the process for affiliate companies is same as for other vendors.”

 Statement of Mr. Mong Nam Jung, (Page 705) “Qn. Do you obtain any suggestion regarding R & D matters from your head qr. Korea or any other associated concern?”

A. “No we decide our R & D matters.”

 Statement of Mr. Beom Seok Kang, (Page 708) “Qn. Whom do you report for manufacturing progress carried out at LGEIL or to the head quarter in Korea or both?”

A. “I report to Director (Mfg.) in India. I do not report to Head quarter in Korea.”

Qn: “Please explain the procedure of manufacturing work in LGEIL in detail?”

A. “Based on sales forecast for the month, production planning team gives plan quantity to production team.”

 Statement of Mr. Chang Sil Lee, (Page 712) Qn. “What are your responsibilities for other group company?”

A. “No relationship.”

 Statement of Mr. Lakshmikant Gupta, (Page 714) Q. “Who decides which products you are going to market?”

A. “This decision is taken by the Indian management who is based in LGEIL. Usually there are group of people who discuss and decide. It starts from the learning of what is happening in the market, how consumer live what they need from various kind of products. First we do research by the research team which is then fed into product planning process. There is different team for each product. Then the product planning team studies the current portfolio and suggest improvement what can be made.”

 Statement of Mr. Arif M Kootiyat, (Page 716) Q. “The choice of product to be planned is limited or you can diversify into any product?”

A. “LG Global has its own set of PRM (Product Road Map-Menu Card) which is for all the countries in which they have a subsidiary. We in LG India are introduced to this Menu Card, and offered a choice to select from these products. Here we take our pick of the products based on the market dynamics and Indian consumer preferences. This is based on various consumer facing researches which we keep doing time and again.

About selection of product- our choice is limited to the offering made as per the Menu Card and cannot chose any other besides that.”

Qn. “Who decides the import of products for LG India and how is the pricing done?”

A. “As per the PRM (product road map –Menu Card) for India – there are some products which are manufactured in India and some aspirational products cannot be manufactured because of either economies of scale or technology or some other reason. This is where I shortlist the models from the Menu Card. This involves pricing discussions also. The basis of pricing area as follows…what is the price of competitors in the market, what is the amount of money a consumer is willing to pay for a particular model or a feature. This is where we get into discussion in finalizing the price at which we need to launch it.”

 Statement of Mr. Vipin Gupta, (Page 719) Q. “What are the various imports made by your factory give details?”

A. “Generally we import the items where the local substitutes or technology is not available like semi conductor, panels, air conditioner compressor or where the cost competitiveness or quality standard are not as per the LG specification or requirement”

II. Recruitment process of Expats

 Statement of Mr. Jae Hyun Lee, (Page 701) “Question: In LGEIL, to whom you are reporting?”

“Answer: I am reporting to Director (Manufacturing) Mr. H.D. Rew of LGEIL., Noida”

“Question: How you were LGEIL whether it a transfer, reallocation, re-employment?”

“Answer: I visited India in November 2009 on the call of Mr. H.D. Rew and he interviewed me and asked me to join LGEIL to improve the productivity of Air conditioner as I am an AC expert

 Statement of Mr. Umesh Kumar Dhal, (Page 709 - 710) “Qn. Please explain the procedure of employment in LG Electronics India for both Indians as well as expatriates?”

A. “Manpower plan for every year is finalized in consultation with functional head and Managing Director. The skills required is assessed based upon that the requirement whether Indian employees or Koreans required are taken out. The Indian requirements are fulfilled locally and wherever Koreans are required the requirement is communicated to Korea. A list of eligible and suitable employees is forwarded by Korea to us

from where a suitable candidate is selected after interview on video conferencing”

“Qn: Do you have designated post for Koreans and Indians? Answer: There is no thumb rule policy. It is need based

Qn : Who decides the need of expatriate on a particular post?” Answer: Functional head, MD and HR (Head) discuss together the skill and competence required for a particular position based upon that it is decided for what position expatriates are required.

Qn: Once a decision is taken to recruit an expatriate what is the procedure followed for sourcing that employee? Answer: The requirement is forwarded to LG Korea based upon that they send a list of suitable and available persons from which a decision is taken and person is finalized after interview through VC.

Qn: Why is the requisition only send to LG Korea and not to any other concern or recruitment agency? Answer: The requirement is sent to LG Korea because India reports to LG Korea and as a principle first they evaluate the in-house talent available if need then they help in finding from other resources.”

Qn: Who sends the requisition to LG korea and whether probable candidates come for interview to India or not. Also whether the Indian directors visit Korean office for recruitment or not?

Answer: The MD of LG India forwards the requirement of Korean candidates to HR at head quarter. Based upon that they propose the available candidate whose willingness is pre- checked by them. From this list the candidates are interviewed

either through VC or whenever senior person visits Korea they interview them.”

 Statement of Mr. Chang Sil Lee, (Page 712) “Qn. Where were you employed earlier and how did you get your employment in India?”

A. I was employed in corporate planning team in Korea. The corporate HR department in Korea informed me about the position in India. The India HR department corresponds with HR department of Korea and then I was informed about my selection by the HR department of LG Korea. I did not submit any resignation to my earlier employer i.e. LG Korea. It was a transfer of position from Korea to India which was informed to me by the HR department of LG Korea. Normally the term of deputation/transfer for foreign service expatriate is four years which can be extended or reduced in discussion with the MD of LG Electronics India and global CEO through global HR department of LG Korea. After the completion of tenure in India, the next position is also decided by global CEO who informs us through the corporate HR department of Korea Ans: In my case no interview was taken by LG Electronics India. Generally in the case of FSEs when the MD comes for some meetings in Korea he may meet informally to the candidate coming to India. The LG Electronics India HR also did not interview me.

To sum up in the case of FSEs the MD of LG India discusses with corporate HR of Korea and shortlisted candidate is informed by corporate HR about their postings to India”

III Post completion of tenure in LG India  Statement of Mr. H.C. Moon, (Page 676)

“Q. When you are going to complete your tenure of posting in India? Whether after completing your term in India in this company, do you plan to move out of India or would try to remain in India in any company because you have a skill and experience?”

A. “By the end of 2011 or start in 2012, but not sure, I would complete my tenure in India. To leave India or not would depend then and there’s position. I am not sure about my future situation. But I may stay in India even after completion of my tenure in India.”

It is important to point out that Mr. K R Kim who was Managing Director of LG India between 1997 and 2007, decided to stay back in India and joined competition (Videocon Industries) – Refer Page 809 of Paperbook 3. Similarly Mr. Harem Lee, too, did not relocate back to Korea and decided to take up employment in India post completion of his secondment with LG India. Refer Page 811 of Paperbook 3.

IV. Reporting to LGEK is to seek support for technical assistance  Statement of Mr. H.D. Rew, (Page 696-697) “Question: Whether there is any area in which you are reporting to HQ, Korea without informing MD, LGEIL?”

A. “No. There is no such area where without report LGEIL, matter has been discussed with HQ, Korea. But in some case I directly report to HQ where I need to get support such as technical support.”

 Statement of Mr. Soon Kwang, (Page 700)

“Qn. To ensure proper supplies in India and proper distribution related to the supply of finished goods or raw material to people from HQ Korea or affiliate companies visit the Indian Office from time to time?”

A. “If there are any specific issues related their material quality and delivery, they visit India and discussed these with me and my team members. The meetings take place in our office.”

- Ishikawajima-Harima Heavy Industries Ltd. vs. DIT 288 ITR 408 [SC] - DIT vs. Ericsson AB 343 ITR 470 [Delhi High Court] - DIT vs. LG Cable Ltd. 237 CTR 438 [Delhi High Court] - DIT vs. Xelo Pty. Ltd. 203 Taxman 475 [Mumbai High Court]

In light of the above, he submitted that income from offshore supply of goods made by the Appellant is not liable to be taxed in India. ii. Further, he submitted that since the transactions between the Appellant and the LGEIL have been accepted to be at arm’s length in the transfer pricing assessments of, both, the Appellant as well LGEIL, there can be no further attribution of profit to the alleged PE. For this proposition he relied up on Page | 55

Hon. Supreme Court’s decision in the case of Morgan Stanley (292 ITR 416) , Director of Income Tax V. E-Funds IT Solution [2017 (399 ITR 34) (SC)] , order dated 14.03.2018 in CA no. 2833 of 2018 in the case of Honda Motor Company Japan. He submitted that arm’s length principle as the primary basis for attributing profit to PE laid down by the Hon’ble Supreme Court, has been extensively followed High Courts / benches of the Tribunal in the undernoted judicial precedents:

 SET Satellite (307 ITR 205) [Bombay High Court]  BBC Worldwide (307 SOT 253) [Delhi ITAT]  E-fund IT Solutions (364 ITR 256) [Delhi High Court], confirmed by Supreme Court  Rolls Royce Plc (339 ITR 147) [Delhi High Court]  Rolls Royce Singapore (347 ITR 192) [Delhi High Court]  Hyundai Rotem Company (ITA No. 3300 to 3302/DEL/2009) [Delhi ITAT]  Galileo International (114 TTJ 289) [Delhi ITAT]  Ranbaxy Laboratories Limited (114 TTJ 1) [Delhi ITAT] iii. To support his above contention, Ld AR referred to observation of the OECD in Model Tax Convention on Income and on Capital (2014 version) on paragraph 2 to Article 7 as well, which is reproduced as under:

“16. The basic approach incorporated in the paragraph for the purposes of determining what are the profits that are attributable to the permanent establishment is therefore to require the determination of the profits under the fiction that the permanent establishment is a separate enterprise and that such an enterprise is independent from the rest of the enterprise of which it is a part as well as from any other person. The second part of that fiction corresponds to the Page | 56

arm’s length principle which is also applicable, under the provisions of Article 9, for the purpose of adjusting the profits of associated enterprises (see paragraph 1 of the Commentary on Article 9).” (Emphasis supplied) iv. He further submitted that the OECD in its 2010 report on profit attribution to the permanent establishment has observed that:

“52. This language has its origins in the draft convention adopted by the League of Nations in 1933 and is acknowledged as the statement of the arm‘s length principle in the context of PEs. The Commentary on Article 7 confirms that the principle reflected in Article 7(2) - corresponds to the arm‘s length principle which is also applicable, under the provisions of Article 9, for the purpose of adjusting the profits of associated enterprises. The arm‘s length principle has thus always been at the heart of Article 7. v. Thus according to him authorized OECD approach is to apply the arm’s length principle of Article 9, as articulated in the Guidelines, to the attribution of profit to a PE using the arm’s length principle under Article 7(2). Therefore Ld AR submitted that use of arm’s length principle for attributing the profits to the PE is prescribed under the Act as well as under the DTAA. Further, OECD and UN Model Tax Convention have also extensively emphasized on the use of arm’s length principle for determination of profits attributable to the PE 34. Thus he submitted there is no Permanent establishment of assessee in Indian and even otherwise because of arm’s length remuneration accepted by the ld TPO, there cannot be any profit attribution at all. He submitted that merely without prejudice assessee submitted the profit attribution report which has been wrongly construed by the revenue

authorities as the acceptance of PE by the assessee. He strongly objected to this.

“An agreement was entered between LGK and LGI on 10th March 1997, as per which both entered into a mutual foreign collaboration agreement. Thereafter a Technical assistance and royalty agreement was entered into between these two entities on 1-7-2001 by which LGI, in the capacity of a licensee, obtained a right to use the technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of the agreed products from the LGK i.e. the licensor.”

Name Section PB-II Reference AO M.B.Shin 133A 660 p.21 YashovardhanVerma 133A 665 H.C.Moon 133A 671 Jae Gyu Cho 133A 677 Woody Nam 133A 680 p.20,22,24,29,33 H.D.Rew 133A 693 H.D.Rew 131 696 p.21,39 Soonkwang 131 699 JAE Hyun Lee 131 701 Mong Nam Jung 131 704 p.36,41 BeomSeok Kang 131 707 Umesh Kumar Dhal 131 709 p.21,23 Chang Sil Lee 131 712 p.20 Lakshmikant Gupta 131 714 A.M.Kootiyat 131 716 p.38,40 Vipin Gupta 131 718

have no evidentiary value. As has already been stated above, most of the statements relied upon by the AO have not been recorded u/s 133A but u/s 131 of the Act. Moreover and without prejudice to this, it can’t be denied that it is information which has corroboratory value and which can be used for corroboration purpose for deciding any issue in favour or against the assessee. Reliance to this effect is placed in the decision of Hon’ble ITAT, Ahmedabad in ITA.No.492/Ahd/2016 dt. 2.9.16 in the case of Sanjay N. Shah

Details called for in respect of Seconded Employees& employees who had visited India and other Agreements- Notice u/s 142(1) dt. 18/2/16 (2007-08, PB-II, p.652) - 10. Please furnish the copy of agreement/contracts with Indian customer or any other party in India from whom payments received during the year& - 45. Please furnish the details of technology provided to the Indian company or India subsidiary along with the details of following- i. Copy of Support Service Agreement ii. Copy of Amendment of Export Agreement iii. Copy of Technical collaboration Agreement iv. Copy of Export Agreement v. Copy of Trading details vi. Copy of First Amendment to Technical Collaboration Agreement Replydt. 11.03.16- Technical Assistance & Royalty Agreement (2007-085, PB-II, p. 606 & 609) Reply dt. 21.03.16- Representation Agreement for export of CTV (export commission) (p.527-534) Design & Development Agreement (p. 535) - 15. Whether Technical services were provided to the Indian customer during the year? If yes, please submit the names of employees and other persons who visited India in this regard…. Reply dt. 21.03.16- In this regard, we wish to submit that details of transactions entered by the assessee with LG India during the FY under consideration has been duly furnished… vide our submissions dt.09.03.16 (p.634-636). Further, we wish to reiterate that the assessee has not Page | 61

executed any projects in India. Accordingly, the above details are not applicable to the assessee. (p.523) - 16. Please furnish the details of all expatriates whose remuneration is charged to the expenses in India who visited India during the year. Reply dt. 11.03.16- In this regard, we wish to submit before your goodself that the assessee does not have any business presence in India. Accordingly, the assessee is not required to maintain any books of accounts in India. Further, we wish to submit that the assessee has not claimed deduction for any expenses in its return filed for the subject AY. Accordingly, the above details are not applicable to the assessee. (2007-085, PB-II, p. 606-607) - 20. Please give names of your employees who visited India ….. purpose of their visit and duration of stay in India & - 21. Please furnish the details of personnel visiting India with their names, profile, period of stay and nature of services rendered. Reply dt. 21.03.16- As desired, the details of expatriate employees visiting India on long term basis is enclosed in Annexure-3 (p.547). In this regard, we wish to submit that these expatriates were employed by LG India and were not working under the direction, supervision and control of the assessee during the deputation period. - 22. Please furnish the above details of the employees of your associated enterprises.(Not furnished) - 23. Please give the names and address of the employees, residents and non-residents who were working for each project. Also give the duration of their stay at each project site. Reply dt. 21.03.16- The above details are not applicable as the assessee has not executed any project in India.(p.525) Page | 62

- 43. Please furnish the Appointment Agreement and the terms and conditions for secondment of expatriates in India.(Not furnished) - 44. Please furnish the copies of the following agreements-(Not furnished) i. Subsisting employment agreement between the expatriate and the foreign company ii. Secondment agreement between the expatriate and the foreign company iii. Agreement between the foreign company and the Indian company regarding secondment of employees and iv. Agreement between the expatriate and the Indian Company (could be in the form of Appointment Letter) Reply dt. 21.03.16- WE wish to submit that the copy of local employment letter between the expatriate employees and LG India is not available with the assessee. The same has been produced by LG India.(p.526) He submitted that when the there is complete non compliance in submission of the details, the ld AO is duty bound to take a view on existence of available facts. He submits that even today the detail of short visits etc is not submitted. 41. Coming to the statement of employees he submitted that expat employees are whose employees is the moot question. He submitted that the contention of the assessee is that those Employees of LGEI are working exclusively for the business of LGEI but available facts shows otherwise. He referred to various statements of expat employees.

 M.B.Shin –(PB-II,p.665-666) 1. “Jan 2005.I was the head of marketing that is the official title given by HQ before I joined LGEIL in Jan 2005. I was working in Seol, South Korea with LGEK. I was looking after the overseas market globally. The HQ of LGEK

decided to send me here as head of marketing of LGEIL. In 2007 the HQ in Korea promoted me as MD, LGEIL. ii. I sometime report to Woody Nam and sometime to CEO of the product companies, sometimes to global CEO iii. My salary is decided by HQ of LG Global in Korea. It is paid by LGEIL.  H.C.Moon-(PB-II,p-672-673) 1. I am working here in the company at Grater Noida since January 2008. Prior to it I was working in this same company at Korea. I was transferred from the HQ to this place by the LGEK. ii. I visited South Korea for so many times, sometimes for official meeting and sometime for personal purposes. Generally, I have to attend the meetings in HQ at Seol, South Korea.  Jae Gyu Cho-(PB-II,p.678) i. Before joining LGEIL I was with LGEK for 23 years and I was transferred to Indiaby LGEK by a letter issued by our HQ Seol, South Korea. ii. I had visited China,Thailand,South Korea in connection with my work.I visited the above country meeting with the Executive of LG.  H.D.Rew-(PB-II,p-693-698) i. I visited several countries…sometime I visit to procure material,sometimes for R&D work.I visited Korea in connection with services meeting with HQ people.(p.695) ii. I am reporting to MD Mr. M.B.Shin of LGEIL &some part to HQ, Korea. There is no clear classification. For LGEIL, I am reporting to MD and whenever I want some support, I report to HQ, Korea. To enhance the manufacturing capability and for technical know-how and manufacturing performance, I report to Korea. Parallel-ly, I am reporting this also to MD, LGEIL as he is overall in-charge of the company…. In some

case I directly report to HQ where I need to get support such as technical support.(p.696-697)  Jay Hyun Lee- (PB-II,p-701) i. I visited India in November 2009 on the call of Mr. H.D.Rew and he interviewed me and asked me to join LGEIL to improve the productivity of AC as I am AC expert.  Mong Nam Jung- (PB-II,p-701-706) i. Since my joining, I have gone abroad (Korea)approx. 6-7 times….we decide our R&D matters (during such visits)… I decide (plan to visit HQ) on my own and I request Korea for time and once I get time I go there…. We are LG and India is also LG. WE use global logo of LG. We write only LG and not LG India.  Umesh Kumar Dhal-(PB-II,p-709) i. Wherever Koreans are required the requirement is communicated to Korea. A list of eligible and suitable employees is forwarded by Korea to us from where a suitable candidate is selected.(p.709) ii. MD of LGEIL forwards the requirement of Korean candidates to HR at HQ….(HQ) pre-check the willingness of candidates who are willing to move out of their parent country….and intimates the salary such candidates are drawing in their parent company….. salary is decided on the basis of existing salary a person is drawing in the parent country plus additional benefits….when they finish their term they go back.(p.710) iii. The MD of LGEIL is recruited by HQ HR (p.711)  Chang Sil Lee- (PB-II,p-712-713) i. I was employed in corporate planning team in Korea. The corporate HR department in Korea informed me about the position in India. The India HR department corresponds with HR department in Korea and then I was informed about my selection by the HR department of LG Korea. I did not submit any resignation to my

earlier employer i.e. LGEK. It was a transfer of position from Korea to India which was informed to me by HR department of LGEK. Normally the term of deputation for Foreign Service expatriate is four years which can be extended or reduced in discussion with the MD LGEIL and Global CEO through Global HR department of LGEK. After the completion of tenure in India, the next position is also decided by global CEO who informs us through corporate HR department of LGEK. ii. In my case no interview was taken by LGEIL. Generally in the case of FSE when MD comes for some meetings in Korea he may meet informally to the candidate coming to India. The LGEIL HR also did not interview me. iii. To sum up in the case of FSEs the MD of LGEIL discusses with corporate HR of LGEK and shortlisted candidate is informed by corporate HR about their postings to India. iv. I submit reports to MD LGEIL but financial statements and summary of results are sent to LGEK. The monthly closing and quarterly closing are sent to global CFO. v. No discussion of price takes place between LGEIL and LGEK or between LGEIL and other LG group companies. 42. He therefore submitted that In the light of the submission of the assessee that there is no written contract/agreement between SGEK & SGEIL governing the terms and conditions of employment of the seconded employees to LGEIL, the entire process of employment of expat personnel with LGEIL can be summed up on the basis of the statements given by the expats themselves as under-

LGEIL intimates its need for expat employees to LGEK

LGEK selects the expat employee to be deputed to LGEIL

LGEK informs LGEIL the salary to be paid to the expat (cannot be less than the salary earlier drawn)

The position of the expat in his/her new employment remains unchanged (cannot be posted to a lower post)

Interview by the LGEIL is not mandatory

The expat need not resign from his earlier post (it is a ‘transfer of position from Korea to India’)

Letter communicating the transfer and posting with LGEIL may be issued by LGEK

The expat’s promotion to a senior position is decided by LGEK

The next posting after completion of the ‘tenure’ of the expat in LGEIL is decided by LGEK.

Expats may report directly to LGEK or seek assistance from LGEK or visit LGEK for discussion and directions

a) Manufacturing-  Manufacturing division of LGEIL reports to ‘Product Company’ (LGEK)(PB-II,p-661)  Process of Product Introduction-(PB-II,p.670) a. Depending upon the market need and consumer service, LGEK ‘Product Company’ develops products through their R&D. The subsidiaries which need take them and those who do not, do not take it. b. The researches are done jointly by local team and Korean team. Core technology are decided in Korea and according to local insights changes are made in consensus with HQ & subsidiary. Page | 68

c. LG Global has its own set of PRM (Product Road Map-Menu Card) which is for all the countries in which they have a subsidiary. We in LG India are introduced to this Menu Card, and offered a choice to select from these products(ONLY). Here we take our pick of the products based on the market dynamics and Indian customer preferences… About selection of product – our choice is limited to the offering made as per the Menu Card and cannot choose any other besides that.(PB-II,p.717) d. In the process of deciding the PRM for India, we do an extensive research of the market and consumers. This is where we get a team of expats who work very closely with us..(PB-II,p.717) e. As per the PRM for India – there are some products which are manufactured in India….this is where I shortlist the models from the Menu card.(PB-II,p.717)  Manufacturing Process- (PB-II,p.719) a. The process starts from the fact that global technology are available in Korea and they want to bring it to India b. The second step is survey of Indian market which is done by experts of Korea and experts from India c. Based on the survey result, Korea decides whether the existing technology will work or some changes are required d. Development agreement is made between India and Korea accordingly. e. LGEIL coordinates with LGEK to define such product development process. f. Product development is a 4 step process- i. Making of Prototype ii. Product Verification iii. Quality Verification iv. Mass Production g. The first two steps are done in Korea and at the time of product verification, LGEK makes bill of material and charges it to LGEIL.  The Indian company is controlled by all the three verticals (CEO, Regional HQs & COO) The MD of the Indian Co reports to the

heads of all the presidents i.e. Heads of Mobiles, Home Ent & also to RHQ. (PB-II,p.692)  Manufacturing Excellence, Global Best Practices, Training etc. supported by ‘Product Company’(LGEK)(PB-II,p.662)  Some expenses are borne by ‘Product Company’(PB-II,p.662)

b) Marketing-  Other divisions i.e. HR, Sales, Marketing, Customer Service, Finance, Supply Chain reports to MD, LGEIL (PB-II,p.662)  The MD of the Indian Co (in turn)reports to the heads of all the presidents i.e. Heads of Mobiles, Home Ent& also to RHQ. (PB- II,p.692)  There is Mr. Gilbert Ahn, VP Marketing and his role is to coordinate marketing inputs between India and Korea for smooth implementation. Next is Mr. D.S.Shin (Appliances), Mr. Joy Seo (TV), Mr. M.J.Jeon (AC), Mr. G.B.Kim (DAV), Mr. Jaesung Choi (GSM Mobile). Their role is assisting in strategy and coordination with Korea. (PB-II,p.715)

backdrop, it is seen that LGEK reimburses certain expenses incurred by LGEIL. (PB-I, p.76 r.w.p.217,233 &240)  “Depreciation during the year includes…. Rs. 7711 thousand (previous year Rs. 8380 thousands) recovered from the holding company.” (p. 217)  “Amounts stated in P&L A/c are net of reimbursements made by Holding Co and fellow subsidiaries” towards Salaries, Wages, Allowances & Bonus, Rent, Power, Fuel & Electricity, and Interest to Banks & Others, Depreciation & Amortization. As can be seen no such amount is payable by LGEK to LGEIL as per the terms of Art.21. Without prejudice to the above, even assuming without admitting that a part of expenses may be incurred for after sale warranty services, the same can be either in the nature of ‘Spare Parts’ and ‘Labor Cost expenses’ (PB-I, p.101, 102..). The assessee has not furnished the copies of agreements between LGEK & LGEI for secondment of employees or the terms and conditions of secondment of employees either during assessment proceedings or before DRP. However, the fact that LGEK reimburses a part of other expenses like ‘Rent’, ‘Depreciation’, ‘Power, fuel & electricity’ leads sufficient credence to the existing and alive business presence of LGEK in India in general and within the premises of LGEIL in particular. To that extent, it also leads to the satisfaction of the ‘Disposal’ and ‘Business’ tests relating to presence of PE under Art-5(1) of the DTAA. 47. On the issue of Legal and Economic Dependence & Influence of LGEK on LGEIL, he submitted that this issue also came up before Hon’ble Special Bench in the case of LGEIL. The observations of Hon’ble ITAT in this regard are reproduced as under- Repercussions of parent AE's influence “11.1. The ld. DR contended that- - The foreign AE exercises complete control and influence over the economic behavior of the assessee because of it being hundred percent subsidiary.

- …… all the arguments advanced by the ld. AR to the effect that it is solely for the assessee to decide on the question of incurring of AMP expenses, are based on the presumption of separate entity concept of the assessee vis-a-vis the foreign AE, which is really not applicable in the present case because of the relation between the two. - Even though the assessee and foreign AE are separate legal entities in two different tax jurisdictions ……. the assessee cannot be regarded as distinct from its foreign AE. (The Hon’ble Bench did not accede to this contention of the Deptt.) - Foreign collaboration agreement dated 10-3-1997 provides through clause 5 that the "L.G. Electronics shall at all times have the right to nominate all or majority of the directors on the board of LGEIL. Clause 6 provides that "L.G. Electronics shall have the right to nominate the Chairman and the Managing Director of LGEIL at all times". These clauses read in conjunction with other relevant clauses amply prove that it is L.G. Korea … exercises complete control over the assessee not only in nominating the Chairman and Managing Director but also all the directors of the assessee company. - Article 4 dealing with royalty payment under the Technical assistance and royalty agreement dated 1-7-2001, whose Clause 1(b) stipulates that the 'licensor will advise the licensee the rate of royalty and payment thereof on Agreed Products other than TVs as and when the concerned division of licensor demands the royalty payment. The licensee then will take necessary steps to take Govt. of India's approval if it so required.' - ……. a perusal of the above clauses indicates that it is only LGK which decides the rate of royalty to be paid by the assessee over the period. On such decision taken by LGK, the assessee is supposed to take necessary steps for obtaining the Govt. of India's approval, if any, required for payment of royalty. This clause was claimed to be proving that there is only one way traffic and there is

no question of any mutual negotiations taking place to finalize any business decisions as happens between two independent entities. - Under this arrangement, it is only LGK, which takes the final call and that, has binding effect on the assessee. - Article 7 of this agreement, which allows the use of "LG" brand name and trademark. This clause provides in second Para that in case at any stage in future the licensor demands any royalty payment on this account, the licensee will take steps to get the Govt. of India's approval for payment of such royalty payment. It was stated that from this Article it was evident that the amount of royalty to be paid by LGI to LGK for use of its brand name falls in the exclusive domain of LGK. The assessee has no role at all to play in such decision, except following the dictate of LGK. - The sum and substance of his contention was that since LGK exercises complete control over the economic decisions of LGI, the separate legal character of the assessee should be overlooked notwithstanding the fact that LGI is a legally separate entity.

11.3. We are convinced with the submissions advanced on behalf of the assessee in this regard but only to the extent of not ignoring the legal character of the Indian AE simply because of the close relationship between the two enterprises. If we proceed with the presumption that since the foreign enterprise has influence over the economic behavior of the assessee and hence the separate legal character of the Indian enterprise should be overlooked, then it would mean that the such separate legal character of the assessee will be lost not for one transaction but for all practical purposes. In that case only the foreign entity will survive as a taxable unit even under the Act. Probably it is not the case of the Revenue also as it is the Indian entity which has been subjected to the present assessment.

11.4. However, we are not agreeable with the remaining part of the contention of the ld. AR that the legal character of one enterprise can

be altered only where the Revenue positively proves the factum of the existence of influence of the foreign AE over the affairs of the Indian AE in general or in respect of specific transactions. In fact, it is due to this close relation between AEs of MNC that Chapter-X has-been enshrined in the Act as an anti-tax avoidance measure. No doubt AEs in India and abroad are two separate legal entities subject to tax in different tax jurisdictions, but the fact that the economic behavior of one depends on the wish of the other, can never be totally lost sight of. Due to this factor, it becomes significant to verify as to whether the decisions taken by the Indian AE are influenced by its foreign AE. If any decision taken by the Indian AE is found to be uninfluenced, then the transaction is accepted as such by the Revenue at its face value. If however it turns out that the behavior of the Indian AE has been influenced by the foreign AE, then there arises a need for adjustment to that extent by removing the effect of such influence.”

Functions & Risks- 12.3 It is further evident from the interview of Mr. M.B. Shin, the Managing Director of the assessee company that it adopted the BOS in India as part of its global strategy. The details as referred to by the ld. DR reveal that the entire marketing strategy of LG group through advertising and promotion was decided globally. The assessee and other AEs of LGK in other countries were supposed to follow the overall strategy made by LGK. When the assessee subscribed to BOS of its foreign AE, it cannot be contended that all the decisions about the timing, areas and quantum of advertisement were taken by the assessee, as was contended by the ld. AR. In fact all such decisions are derivatives of the overall BOS formulated by LGK. Though the ld. AR repeatedly asserted empty handedly that advertisement in India was planned and executed by the assessee alone, but he not only failed to support his contention but also could not place on record any contrary evidence to indicate that either the BOS was not a strategy inter alia for advertising and marketing on a global level or the assessee did not adopt it. Page | 74

12.4 LG Electronics Singapore Pte Ltd's (LGESL) marketing division is responsible for developing a range of marketing and sale strategy. Marketing functions are provided by LGESL to LGEA for establishing consistent and effective marketing and promotion strategies in the respective countries……..In answer to question about the building of brand "LG in India and how LGK controls this brand in India, he replied that "They give us set of guidelines on how to depict the brand in various places like advertising, shops etc". In response to the next question about the names of the expatriates employed in the marketing department and their role and responsibilities, he gave the name of Mr. Gilbert Ahn, Vice President Marketing, by stating his role to coordinate marketing inputs between India and Korea for smooth implementation. He also named four persons with the names Mr. D.S. Shin (Appliances) ; Mr. Joy Seo (TV); Mr. M.J. Jeon (AC.); Mr. G.B. Kim (DAV); and Mr. Jaesung Choi (GSM mobiles) as assisting in the strategy and coordination of marketing development with Korea. From the statement of Shri L.K. Gupta, it is apparent that his assertion was on the advertising policy of the LG as a whole and not specific to the particular year of the recording of such statement. It cannot be said that Shri L.K. Gupta, the Chief Marketing Officer of the assessee was oblivious of the global BOS adopted by LGK in vogue. Not only the assessee was directly helping in brand-building for the foreign AE, but also some of its executives were actively engaged in coordinating with LGK in the marketing development. It can be easily noticed that the entire additional evidence sought to be relied by the ld. DR is nothing but corroboration of the material already existing about the BOS implemented by the assessee in India during the period relevant to the assessment year under consideration. In view of the above discussion, it becomes manifest that all the arguments advanced by ld. AR about the assessee taking suo-motu decision about the advertisement have become unsustainable……… Nothing turns out of the contention of the ld. AR that the BOS is not a strategy devised by the assessee. Even if it is not a strategy devised by LG Korea but still Page | 75

the fact remains that LG Korea adopted this strategy, acting under which it decided the incurring of AMP expenses under a global scheme inter alia for promotion of the brand and logo LG in India through the assessee.

On whether absence of any written agreement is a bar to interpret the intention of the parties- 9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the legislature to define "transaction" u/s 92F inter alia to mean an arrangement or understanding -"(A) whether or not such arrangement, understanding or action is formal or in writing". The incorporation of the words "whether or not" before the words "such arrangement, understanding or action is formal or in writing", is a clear pointer to the fact that the agreement between the two AEs can be formal or in writing on one hand or informal or oral on the other. When there is a formal or written agreement between two AEs, the answer to the question as to the existence of transaction becomes patent. If, however, there is an informal or an oral understanding, the existence of such agreement cannot be specifically found out because of it being not express. However, such an informal or oral agreement, which is latent, can be inferred from the attending facts and circumstances to make it patent. Such inference can be drawn from the conduct of the parties. It follows that a 'transaction' can be both express as well as oral. So long as there exists some sort of understanding between two AEs on particular point, the same shall have to be considered as a transaction, whether or not it has been reduced to writing.

9.12. The ld. AR has vehemently argued that when the assessee incurred AMP expenses for its business purpose and recorded them as such, the Revenue went wrong in re-characterizing this transaction Page | 76

by splitting it into two parts, viz., one towards advertisement expenses for the assessee's business and second towards the brand-building for the foreign AE. He fortified this contention by relying on the judgment of EKL Appliances Ltd. (supra). There is absolutely no doubt that para 17 of the judgment unambiguously lays down that the tax administration should not disregard the actual transaction and substitute other transactions for it. However, it is imperative to note that the proposition laid down in para 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next para no. 18. Two exceptions have been carved out of the general rule against re-characterization of any transaction asset out in para 17, viz. "(i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner." In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transaction are the same, but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The assessee incurred AMP expenses and explicitly showed them as such. Thus the form of showing the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted by independent enterprises behaving in a commercially rational manner. Though the AMP expenses were shown as such but the overt act of showing such expenses as its own is different from what is incurred by independent enterprises behaving in a commercially rational manner, which unearths the covert act of treating the AMP expenses incurred for the brand-building for and on behalf of the foreign AE, as also its own. What is relevant to consider is as to whether an independent enterprise behaving in a commercially rational manner would incur

the expenses to the extent the assessee has incurred. If the answer to this question is in affirmative, then the transaction cannot be re- characterized. If, however, the answer is in negative, then the transaction needs to be probed further for determining as to whether its re-characterization is required. Such re-characterization can be done with the help of the ratio decidendi of this judgment itself, being, making a comparison with what' independent enterprises behaving in a commercially rational manner' would do, tied with the fact of the assessee also simultaneously advertising the brand of its foreign AE.”

“OECD commentary on Model Tax Convention mentions that a general definition of the term 'PE' brings out its essential characteristics, i.e. a distinct "situs", a "fixed place of business". This definition, therefore, contains the following conditions:

- the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment. - this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; - the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

34) The term "place of business" is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business that would also constitute a PE. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a place of business may thus be

constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise.” (Emphasis supplied)

“130. The principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes: "With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with dis-organised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. Page | 80

- The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words 'are to be given their general meaning, general to lawyer and layman alike ... the meaning of the diplomat rather than the lawyer'. [Francis Bennion: Statutory Interpretation, p. 461 [Butterworths,1992 (2nd Edn.)].]"

that this ‘intensity of control’ varies from activity to activity and depends upon the ‘business activity’ carried on by the enterprise from such place. As per Vogel “The degree of control depends on the type of business activity that the taxpayer carries on. It is therefore not necessary that the taxpayer is able to exclude others from entering or using POB.”This approach and methodology was confirmed by Hon’ble SC when it held – “In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are (as in the case of Showa), and the more they allow a parallel use of the same POB by other persons (i.e. employees of LGEK), the lower are the requirements under the control test.”

“In the last decade the tendency to broaden the scope of Article-5(1) by extending the meaning of “at the disposal of” could be observed. The result is lowering of the threshold for the creation of a fixed place, from a right to control a place/ location of business to a more factual based approach, focusing on the ability of the enterprise to use a certain place for its activities. In 2003, the OECD incorporated Page | 82

the painter example in the commentary. According to that example, a painter who, for two years, spends three days a week in the large office building of his main client will constitute a PE. The presence of the painter in that office building where he is performing the most important functions of his business for the client will be enough to establish a PE. That example indeed shows a very broad understanding of the concept of permanent establishment as defined in Article-5(1). It no longer refers to a certain room or location over with the painter can exercise a minimum degree of power or at least can store his equipment. Instead, just the activities and presence at certain place over a sufficiently long period will be the decisive factor to create a PE. This expansion is further strengthened by another example provided, where a company engaged in paving a Road will constitute a PE. Following the OECD commentary, the words “through which” must be given broad interpretation in order to cover all business activities which are carried on at a particular location that is “at the disposal” of the enterprise for the purpose of performing such activities. The painter example does not offer any reference regarding the permission of the painter to enter a building, thus lacking of sufficient control over his assumed place of business. In that context it seems, that the mere performance of the business activity may constitute a PE according to the commentary, as long as an enterprise is exercising its business activity for a sufficiently long period of time. (P.244)”

under the commentary in order to constitute a PE. In such a case a (low) degree of control over a place appears to be sufficient. 54. He submitted that obviously, the Working Party considers the period of presence in the country to be more important than the effective power over a specific place. It even seems that the condition of effective power to use a place is not required when the period of activity is long enough. This view is further supported by the fact that the Term “ effective power to use a location” cannot be found in the first version of the Discussion Drafts and was just added in the revised version. Consequently, the permanence of a business activity at a location is the key factor in determining a PE according to the working party, outweighing the criterion of an effective control over a place.(p.247)” 55. Thus, according to him , the place of disposal should not be tested from the angle of ‘exclusion of others’ but from the perspective of type and duration of business carried on by the taxpayer from such place. Looking from that perspective, the premises of LGEIL were at the disposal of LGEK in view of the length and duration of their use by the assessee and the less invasive activities being carried on there from. It can’t be denied that LGEK had certain amount of space at its disposal and this place of business was situated in the business facilities of LGEIL. 56. He further submitted with respect to “temporal” aspect or the “Permanency Test”, it may not be out of context to highlight the fact that the temporal aspect of this concept has been largely diluted in view of the decision of Hon’ble Supreme Court in the case of Formula One World Championships (Supra). While elaborating the concept, the Hon’ble Supreme Court held- “41. …….. The High Court was also conscious of the fact that such an access or right to access was not permanent in the sense of its being everlasting. However, having regard to the model of commercial transactions, such an access for a period up to six weeks at a time during the F-1 Championship season was sufficient for the purposes of Article 5(1) of DTAA. Further, as the tenure of RPC was five years, it meant that such an access for the period in question was of repetitive nature.”

The Hon’ble Supreme Court once again reiterated the above by observing that “68 (iii)……The appellants are trying to trivialize the issue by harping on the fact that duration of the event was three days and, therefore, control, if at all, would be for that period only.”

The Hon’ble Supreme Court accordingly proceeded to affirm the decision of Hon’ble High Court by observing as under-

“70) We are also of the opinion that the High Court has rightly concluded that having regard to the duration of the event, which was for limited days, and for the entire duration FOWC had full access through its personnel, number of days for which the access was there would not make any difference. This aspect is discussed by the High Court in the following manner, and rightly so:

"52. It is evident that for the duration of the event as well as two weeks prior to it and a week succeeding it, FOWC hand-full access through its personnel, the team contracted to it, both racing as well as spectator teams and could also dictate who were authorized to enter the areas reserved for it. No doubt, in terms of the agreement, i.e. RPC, Jaypee was designated as the promoter or the event host. A look at the RPC and its terms as well as the other terms contained in the agreement between the Jaypee on the one hand and Allsports, Beta Prema 2 as well as FOAM show that Jaypee's capacity to act - though it promoted the event, was extremely restricted. At all material times, FOWC had access - exclusively, to the circuit, and all the spaces where the teams were located. Jaypee created the circuit for the purposes of the event and other events; yet, during the event, i.e. the F1 Championship, no other event was possible.

71) A stand at a trade fair, occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales, was held to constitute a PE. Likewise, a temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PE. Page | 86

72) The High Court has also referred to some of the judgments, which are of relevance. We would like to take note of those judgments as we had agreed with the conclusions of the High Court on this issue: In Universal Furniture Ind. AB v. Government of Norway25, a Swedish company sold furniture abroad that was assembled in Sweden. It hired an individual tax resident of Norway to look after its sales in Norway, including sales to a Swedish company, which used to compensate him for use of a phone and other facilities. Later, the company discontinued such payments and increased his salary. The Norwegian tax authorities said that the Swedish company had its place of business in Norway. The Norwegian court agreed, holding that the salesman's house amounted to a place of business: it was sufficient that the Swedish Company had a place at its disposal, i.e the Norwegian individual's home, which could be regarded as 'fixed'. In Joseph Fowler v. Her Majesty the Queen 1990 (2) CTC 2351, the issue was whether a United States tax resident individual who used to visit and sell his wares in a camper trailer, in fairs, for a number of years had a fixed place of business in Canada. The fairs used to be once a year, approximately for three weeks each. The court observed that the nature of the individual's business was such that he held sales in similar fares, for duration of two or three weeks, in two other locales in the United States. The court held that conceptually, the place was one of business, notwithstanding the short duration, because it amounted to a place of management or a branch having regard to peculiarities of the business.” (emphasis added)

of LGEK as per the terms of contract are only sporadic or one off affairs. In other words, there is a continuity and repetitiveness to it. Moreover, employees of LGEK are part of the management of LGEIL. What is more important in this context is not only the number of days, but the presence almost throughout the year and year after years. The issue is not about the presence of the employees of LGEK for short periods in one year, it’s about the continuity and repetitiveness of such short presence year after year. Accordingly, considering the permanency and frequency of such visits, the temporal aspect of the disposal test is also satisfied and the contention of the assessee in this regard is also deserves to be rejected. 58. On the issue of permanent establishments that whose business is carried out from that place , he submitted that Whether it can be said that the business of enterprise is being wholly or partly being carried on through such place. The term “business” is not fully or exhaustively defined; accordingly, it has the meaning that it has under the domestic law of the state applying the tax treaty, plus professional and independent services, as explicitly provided for in article 3(1)(h) of the OECD Model. This Hon’ble Tribunal in the case of Qualcomm Incorporated (I.T.A. Nos.: 3701 and 3702/Del/2009, 5343/Del/2010 and 4608/Del/11) held that the term “Business” has a wider connotation and must be understood in that context. In that case, the Hon’ble Tribunal had held that “No doubt, manufacturing is an important part of business but the business per se is little more than manufacturing.” Furthermore, as per the amended commentary of UN Model to Art-5 as reproduced by Hon’ble High Court in the case of eFunds IT Solution and others, “….the carrying on of the business of the enterprise through this fixed place of business. This means usually those persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the state in which the fixed place is situated.” In the light of above, the question that needs to be answered is “whether the business of the enterprise is wholly or partly being carried on from such fixed place”. It is the contention of the assessee that the premises of LGEIL and more particularly the place at the disposal of the expat employees of LGEK are EXCLUSIVELY used for business of LGEIL ONLY. In this context, it won’t be out of place to re-

highlight some of the replies of the expat employees relating to the model of business process they are responsible for.  Manufacturing division of LGEIL reports to ‘Product Company’ (LGEK) and not to MD, LGEIL- M.B.Shin, MD, LGEIL (PB-II,p-661)  Sourcing team of manufacturing unit makes decisions regarding imports. - M.B.Shin, MD (PB-II,p-662) Thus, since manufacturing unit reports to LGEK, it necessarily follow that MD LGEIL is not the deciding authority on imports.  No discussion of price takes place between LGEIL & LGEK or other AEs.- Chang Sil Lee, CFO (PB-II, p.713)  In case of finished goods import, we put order through LG customized system….We have Global Supply Chain System developed by HQ, Korea – H.D.Rew, Director (Mfg.) (PB-II, p.697). This further supports the above observations that in respect of imports, LGEIL has no role to play, no negotiation on price takes place since the orders are to be placed electronically with the Global Supply Chain System.  To ensure proper supplies in India and proper distribution and for other business interests related to supply of finished goods and raw materials , people from LGEK visit India. – H.D.Rew, Director (Mfg.) (PB-II, p.697)In other words, short term visits by expats are not for providing technical assistance or training to the staff of LGEIL only. They also conduct and carry out business of LGEK during their visit to India and use the premises of LGEIL for such purposes.  Manufacturing excellence and sharing of global best practices by way of training and sharing of knowledge are supported by LGEK and expenses towards this are at times borne by LGEK. - M.B.Shin, MD, LGEIL (PB-II,p-662)  We are LG and India is also LG. We use global logo of LG. We write only LG and not LG India. – Mong Nam Jung, GM (R&D) (PB-II, p.706) It reflects the perception of LGEIL in the eyes of expats.  The researches are done jointly by local team and Korean team. Core technology are decided in Korea and according to local insights changes are made in consensus with HQ & subsidiary.- Y.Verma, COO (PB-II, p.670)

 LG Global has its own set of PRM (Product Road Map-Menu Card) which is for all the countries in which they have a subsidiary. We in LG India are introduced to this Menu Card, and offered a choice to select from these products(ONLY). Here we take our pick of the products based on the market dynamics and Indian customer preferences… About selection of product – our choice is limited to the offering made as per the Menu Card and cannot choose any other besides that.- A.M. Kootiyat, AGM (PB-II,p.716) This further highlights the fact that it is LGEK which takes all decisions on the products to be offered and LGEIL can only make a choice from such offers by LGEK.  Manufacturing Process starts from the fact that global technology are available in Korea and they want to bring it to India. The second step is survey of Indian market which is done by experts of Korea and experts from India. Based on the survey result, Korea decides whether the existing technology will work or some changes are required Development agreement is made between India and Korea accordingly. LGEIL coordinates with LGEK to define such product development process. Product development is a 4 step process and the first two steps are done in Korea and at the time of product verification, LGEK makes bill of material and charges it to LGEIL. i. Making of Prototype ii. Product Verification iii. Quality Verification iv. Mass Production -Vipin Gupta, Factory Head (PB-II,p.719)  There is Mr. Gilbert Ahn, VP Marketing and his role is to coordinate marketing inputs between India and Korea for smooth implementation. Next is Mr. D.S.Shin (Appliances), Mr. Joy Seo (TV), Mr. M.J.Jeon (AC), Mr. G.B.Kim (DAV), Mr. Jaesung Choi (GSM Mobile). Their role is assisting in strategy and coordination with Korea. – Lakshmikant Gupta, Chief Marketing Officer (PB-II,p.715)

 Influence of LGEK in the sphere of marketing, business promotion & advertisement as held by Hon’ble Spl. Bench in the case of LGEIL as discussed above.

sales, marketing policies and processes also of the assessee. Over and above the visiting employees are also supporting the other functions like markets et cetera. He stated that visiting senior personals also monitor performance and direct interaction with the customers. On top of it is stated that after sales and warranty services are also provided by the assessee. He therefore submitted that which segment of the business of the assessee is not carried out in India is a question. He therefore submitted that there is no doubt that the business of the assessee is carried out from the fixed place of business are available to the assessee in the form of its subsidiary in India where it seconded employees perform all the core functions of the business of the assessee. 61. Ld AR in rebuttal to the arguments of the revenue about evidentiary value of the statement of employees submitted that argument of revenue that even if the statement recorded during the course of survey, the same are in the nature of information which can be taken into account by the assessing officer while framing the assessment, is devoid of any merit. In this connection, the learned CIT DR had placed reliance upon the decision of the Bombay High Court in the case of Pebble Investment as also the fact of dismissal of a SLP against such decision. He submitted that the statement recorded during the course of survey, not being statement recorded on oath, has to be excluded from consideration. The said statement has no evidentiary value and cannot also be relied upon by the AO as in the nature of information. He referred to decision in Andaman Timber Industries vs. CCE: (2015) 62 taxmann.com 3 (SC)/ (2015) 52 GST 355 (SC) and Sona Electric Co. vs. CIT 152 ITR 507 (Del). He submitted that drawing analogy from the aforesaid; it is the submission of the Appellant that the statements recorded during the course of survey have to be excluded from consideration. 62. On the issue of reliance by the ld DR on the decision of Honorable Allahabad High court, where in The ld CIT DR contended that the observations of the Hon’ble Allahabad High Court in the Writ Petition filed by the Appellant challenging initiation of reassessment proceedings, to the effect that the Appellant has PE in India was material and could not be ignored notwithstanding the direction by the Hon’ble Supreme Court to

decide the issue regarding existence of PE uninfluenced by the observation of the Hon’ble Allahabad High Court. For the aforesaid proposition reliance was placed by the CIT DR on para 8.9 of the Special Bench decision in the case of LG Electronics 140 ITD 41. He submitted that Hon apex Court while disposing of the SLP filed by the Appellant categorically observed that- “8. In these matters the DRP/Assessing Officer have come to the conclusion that the petitioner has a PE in India. However, the petitioner prays for permission to withdraw these five special leave petitions and to pursue the statutory remedy under the Income Tax Act, 1961. These special leave petitions are, accordingly, dismissed as withdrawn with liberty to the petitioner to pursue its statutory remedies. 9. It is also made clear that the Appellate Authority will examine the matter uninfluenced by any observation/ finding of the high court regarding the existence of a permanent establishment of the petitioner in India” In that view of the matter, the finding of the Hon’ble Allahabad High Court (while disposing of the Writ Petition) that the Appellant had PE in India had to be considered as non-est in terms of the apex Court direction to take independent decision in the matter regarding existence of PE of the Appellant in India, de hors the observations made by the Allahabad High Court. Furthermore, the reliance placed by the CIT DR on para 8.9 of the decision of the Special Bench in the case of LG Electronics (supra) is clearly misplaced. The aforesaid observation by the majority in the Special Bench decision been reversed by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. Commissioner of Income Tax [2015] 374 ITR 118 (Del) para 156 at page 1072 of paper book 3, Maruti Suzuki India Limited vs. CIT [2016] 381 ITR 117 (Del) para 52 to 55 at page 1137 and 138. Having regard to the aforesaid, the question regarding existence of PE in India has to be looked into by the Tribunal de novo without being influenced by any observation of the Hon’ble Allahabad High Court to the contrary. Page | 93

shared with SCM team, who in discussion with Manufacturing Planning decide the production schedule. The manufacturing in India is undertaken based on the aforesaid schedule and have no interference or control by the Appellant. He further referred decision of the Hon’ble Delhi High Court in the case of Honda Siel Power Products Ltd. Vs. DCIT (2015) 64 taxmann.com 328 (Del) pages 1095 to 1111 of paper book vol. 3, wherein the Hon’ble High Court negated the contention raised by the Revenue that the Indian Company was functioning as a contract manufacturer of the foreign AE having regard to the fact that the Indian assessee was manufacturing products using drawings and designs supplied by the foreign AE, using trademarks owned by the foreign AE on the products manufactured by it, paying royalty to the foreign AE for use of manufacturing drawings and designs and trademarks, importing raw material and components from the foreign AE which were used in the manufacture of finished goods and was, then exporting goods to permitted countries against payment of royalty. He submitted that though Hon Delhi High Court came to the conclusion that the Indian Company was carrying on the business as an independent enterprise; as an independent manufacture, the assessee bore all the risks associated with its products in India and abroad; the assessee planned and executed its own manufacturing strategy as considered necessary and appropriate; the stipulation in the license agreement that the technology would be used for sale of goods in designated jurisdiction or specified territory was not an unusual requirement. On that basis, the Delhi High Court ultimately concluded that the question of recharacterizing the Indian company as a contract manufacturer was unwarranted. Having regard to the aforesaid submissions, it is respectfully submitted that the assessing officer erred in concluding that – (1) the assessee had a fixed place PE in India; and (2) in attributing profit to the alleged PE as percentage of the salary paid to the expatriate employees employed by LGEIL. He submitted that order of the assessing officer therefore calls for being reversed. With regard to the marketing functions, the CIT DR had sought to infer the functional dependence of LGEIL on the Page | 96

Appellant, which is again contrary to the facts of the case as evident from reading of the expatriate statements recorded during survey. 68. With respect to after sales service and warranty issue, he submitted that The CIT DR has referred to Article 21 of the technical assistance agreement dated 01.01.2002 where under the Indian subsidiary has to render warranty service in respect of the products supplied by the Appellant without cost to the Appellant. It is the submission of the CIT DR with reference to the annual accounts of the Indian subsidiary that contrary to the aforesaid Article of the technical assistance agreement, the Appellant has reimbursed the Indian company certain expenses including rent, depreciation, power, fuel and electricity, which, according to the CIT DR leads to the inference that the Appellant was maintaining a fixed place in India for which such reimbursements were made. In rebuttal he submitted that Appellant with the leave of this Hon’ble Tribunal placed additional evidence in the form of copy of service agreement for CDMA terminal between Appellant and LGEIL dated 01.01.2003 where under LGEIL has contracted to render warranty service to the customers of the Appellant for CDMA mobile terminals. The aforesaid reimbursement reflected in the annual accounts of LGEIL is received from the Appellant towards the cost incurred by LGEIL qua warranty obligation of the Appellant discharged by LGEIL under the said agreement. The reimbursement to LGEIL is not for maintenance of any fixed place on behalf of the Appellant, as alleged by the CIT DR for the first time before this Hon’ble Tribunal (even though that was not the case of the assessing officer). It was also shown to the satisfaction of this Hon’ble Tribunal that the warranty reimbursement received by LGEIL was reflected as an international transaction in the transfer pricing study of LGEIL and the same was duly benchmarked applying TNMM. Further the TPO had in the transfer pricing assessments of LGEIL accepted such reimbursement at arm’s length (for assessment year 2007-08 and 2008-09). For the subsequent years, the TPO made adjustment on the ground that LGEIL should have received a mark-up for rendering such service to the customers of the Appellant. The stand taken by the TPO in the proceedings for LGEIL is in direct conflict with the proposition canvassed by the CIT DR. While the TPO had held that LGEIL had rendered service to the Appellant (for which a Page | 97

mark-up was to be received), in the submissions of the CIT DR the expenses incurred by LGEIL is for maintenance of a fixed place on behalf of the Appellant. The aforesaid will expose the fallacy in the arguments raised by the CIT DR for the first time before the Hon’ble Tribunal. In that view of the matter, there is no merit in the submissions of the CIT DR that reimbursement of expenses, inter-alia towards rent, depreciation, and power and fuel point out to existence of fixed place PE in India. 69. On the issue of reliance on the decision of special bench of ITAT in assessee’s own case, he submitted that The CIT DR has referred to the observations in the majority decision of the Special Bench in the case of LG Electronics to the effect that the advertising strategy of LGEIL was dictated and controlled by the Appellant. It is respectfully submitted that reliance placed by the CIT DR on the aforesaid observations contained in paras 9.9, 9.12, 11.1, 11.3, 11.4, 12.3 and 12.4 of the majority decision is completely misplaced. The Special Bench decision (majority view) held that LGEIL was rendering service of brand promotion to the Appellant for which LGEIL was to be compensated. In that view of the matter, if LGEIL order as per the majority decision rendering brand promotion services as per the requirement of the service recipient, the Appellant fails to understand how such observation/ finding can lead to an inference of fixed place PE in India. In a contract of service, where the service recipient issues instructions to the service provider as to the scope of service to be provided, the manner in which the service is to be performed etc., and it does not mean that the service recipient controls the business of the service provider. That apart, the above observations made in the majority decision of the Special Bench are only confined to the expenditure incurred by LGEIL on advertisement and publicity and not related to any other aspects of LGEIL’s business, i.e., manufacturing, sales etc. 70. On the issue of statement of Mr. woody Nan he submitted that The CIT DR has contended that the presence of Mr. Woody Nam, Regional Head of LG Singapore in the premises of LGEIL at the time of survey, for supervising the activities of LGEIL show that the Appellant has fixed place of business in the premises of LGEIL. In rebuttal he submitted that survey of LGEIL took place on 24.06.2010. Prior to that LGEIL and Appellant had entered into

Agreement effective 01.01.2008. Under the said agreement, LG Singapore were to provide the services in respect of finance and accounting, procurement/ supply chain services, global process technology against payment of management fee. The management fees paid by LGEIL were duly reflected in the transfer pricing study for the assessment year 2008-09 and onwards. The TPO also made adjustment of management fee in the transfer pricing assessment for the assessment year 2008-09 and onwards. The presence of Mr. Woody Nam at the premises of LGEIL in June 2010 was to discharge the obligations under the said agreement and towards shareholder functions. The same cannot lead to the inference that the Appellant had fixed place PE in India in the form of premises of LGEIL. 71. On the issue of what constitutes core business according to the ld DR, in submissions of the CIT DR, Article 5 (1) of the DTAA refers to fixed place of business and there is no reference to “core business”. He submitted that OCED Commentary on Article 5(1) clearly states that the fixed place should be available to carry on its own business (emphasis supplied). As stated earlier, even if it is presumed that the Appellant had a fixed place in India, no business of the Appellant was being carried out through such fixed place. That apart, the Delhi High Court in the case of E-funds (supra) in paras 30 and 50 thereof referred to the core business of the foreign enterprise being carried out through the PE in the other Contracting State, to constitute fixed place PE in that other State. The CIT DR was therefore not correct in observing that there is no reference to core business in the DTAA. 72. On the attribution of Profit, he submitted that ld CIT DR has not disputed that the title to the goods exported by the Appellant passed outside India but sought to contend that since the process of importing goods (by LGEIL), started in India and follow up was done in India, attribution of profits to the alleged PE in relation to the sales made by the Appellant to LGEIL was required. In rebuttal he submitted that , the goods exported by the Appellant to LGEIL are against purchase orders placed by LGEIL. The manufacturing of goods takes place outside India and the title of the goods passed outside India. In that view of the matter, the sales being concluded

outside India, no profit in respect thereof is attributable to the alleged PE in India. 73. In reply ld CIT DR further contended that notwithstanding that the transaction of export of goods are accepted at arm’s length by the TPO, there should be further attribution to the alleged PE in view of the fact that the TPO had not considered the functionalities and risk involved in manufacturing. As per the CIT DR, the finding of the TPO was inconclusive and hence could not be relied upon. 74. On no further profit attribution if transaction are at arm’s length he submitted that TPO having accepted the transaction between the Appellant and LGEIL to be at arm’s length in the transfer pricing assessments of both the Appellant and LGEIL, there can be no attribution to the PE in the light of the Supreme Court decisions cited (supra). Furthermore, it is not open to the CIT DR to contend that the TPO order which has become final could not be relied upon on the ground that, according to the CIT DR the TPO had not carried out proper FAR analysis. It is respectfully submitted that the TPO having completed the transfer pricing assessments in the case of, both, the Appellant and LGEIL, after due and proper verification of the facts of the case cannot be disregarded, as held by the Full bench of Hon’ble Delhi High Court in the case of CIT Vs. Kelvinator of India Limited 256 ITR 1 at page 19 as under: “ When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of Indian Evidence Act, judicial and official acts have been regularly performed.” 75. It is also important to point out that the transfer pricing assessment in the case of both the Appellant and LGEIL were completed after the survey on 24.06.2010 when the TPO had the benefit of the findings in the survey. 76. He further submitted that decision of the coordinate bench in case of Samsung (Supra) binds the ITAT and there is no difference in the facts of the case and therefore same view needs to be taken. He referred to the

statements of employees in that case as well as in this case in a tabular form as under :- Comparative chart showcasing similarity in Statements recorded during survey

S.No. Samsung Electronics Co. LG Electronics Inc., Korea Ltd.

issued the appointment Korea or both? letter for working in the I report to Director (Mfg) Samsung electronics in India. For the import I India P. Ltd.? discuss directly with the I have been issued the concerned suppliers. appointment letter by E. How is the rate of item to Samsung electronics be procured decided? Corporate Korea. Based on our target, the E. Who decides the pricing workout detail working of of import? cost of raw material I am guided by the involved in parts and Korean company their conversion cost. Samsung electronics This is compared with the Korea, then I decided the different suppliers and purchase. finally on the basis of right cost, right price and quality, I decide the price. Sometimes I also discuss with factory head and Director (Mfg) of LGEIL. E2. Who decides that the prices are competitive ones and who does the negotiation? Usually I decide and if required, I discuss with the factory head or director (Mfg.). The negotiations are done by my subordinate directly with suppliers. Sometimes some vendors

visit the office if necessary

you been posted in Noida and some part to India? HQ to Korea. It is not fixed. Normally I Whether there is any rea expect to stay for three to in which you are four years. reporting to HQ, Korea without informing MD, F. Can you be replaced LGEIL? back to Samsung Korea, at your wish or would it No. There is no such area be the decision of the where without report head quarters to when to LGEIL, matter has been get you back? discussed with HQ, Korea. But in some case I In two way agreement. directly report to HQ G. What is the mode of where I need to get communication with support such as technical Samsung Korea? support. Over the phone & email L. Please explain the (intranet) . procedure of procurement H. You have the intranet of material in LGEIL in systems installed with detail. the corporation, where is We are having our the server of the intranet production plan on situated? computer software and as I have no idea. Maybe, in and when desired, we can Korea, or in Singapore. find out the list of items to be procured and I. How often do you according to this list, communicate with the order are sent to vendors head quarter in Samsung by the Procurement Korea? Team. Normally daily. Please explain the process J. You communicate of import of finished directly or through your goods and process of Page | 104

GEO? import other material from your HQ, Korea or It depends on issues. any other associated Something which may concerns. affect the business result seriously will be In case of finished goods discussed with my boss, import, we put the order MD but in most cases of through LG customized simple opinion exchange system and in case of the communication is other material, I am not done without MD sure. I will get it back to intervention. you. We have Global Supply Chain System K. To whom do you developed by HQ, Korea generally communicate which is used for in Korea? importing finished goods. Mr. Ryu, Vice President The Global Supply Chain in Mobile System is the proprietary Communication Division of the HQ, Korea. I am not and many other persons. sure about the amount L. From where do you paid by the Indian generally import your company for installation products, please give of the software. details product-wise. (1) Mobile Phone: : Korea, China & Vietnam, (2) Monitor : Malaysia, (3) OMS : Philippines, (4) Printer : China (5) Lap Top Computer : China M. The computers in your

office have operation system installed in Korean, as well as the communication between the heads is in Korean. What is the reason for it? 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.

been made to M/s I am working here in the Samsung Electronics Company at Greater Corporation as Noida since Jan 2008. reimbursement of Prior to it, I was working expenses. in this same company at Korea. I am MBA C. How would you justify (Accounts & Finance) such payment without from America. Presently I deduction of tax thereon? am getting Rs.3.50 Lacs Question asked about approximately (Indian Rs.12,42,25,457 dtd. Rupees) (gross salary). I 09/02/10 was not made. do not remember what Form 15CA was wrongly deductions are from my uploaded on the site and salary but net salary is there is no provision to being credited to my SB sever it or cancel it. A/c with ICICI Bank at Remittance of Greater Noida. I do not Rs.9,63,13481 dtd. 9. remember my Bank A/c Feb 10 was on also No. House rent which is salary paid to the on a/c of my house is Expatriate employees, being paid by the the said salary has been company directly to the offered to tax by the house owner after employers in India. For deducting it from my administration salary. conveyance part of the Are you receiving any salary is paid to amount abroad in the Samsung Korea which in form of salary/payment/ turn paid to expatriate reimbursement/allowance employees all in Korea. etc. by whatever name it The part salary which is is called, other than remitted outside India is salary received or any of the individual payment received by you expatriate and if it has to

beremitted for their in India? conveyance then it No. I am not in receipt of should be in their any type of payment respective South Korea abroad. Bank A/cs and not in the Bank a/c of Samsung Electronics Corporation. Please give reason for this. For Administered conveyance the salaries paid to Samsung Electronics Corporation Korea. D. What is the Administration conveyance in remitting the salary to the A/c of the parent company that is Samsung Electronics Corporation. 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.

E. 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. 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. F. Pls explain why such remittances are termed as reimbursements. 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. G. In reply to Q4 and Q3 you have stated that the above methodology Page | 109

adopted for Administration conveyance of the expatriate employees, where is in reply of Q no. 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. I am not aware. H. The remittance letters sent to Bank of America show that these expatriate are on deputation to your company from SEC, Korea. Where as it has been claimed that such persons are your employees without any

(Not clearly readable) with the parent company. Pis justify your above statement. I am not aware. I. 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. Looks after by treasury department. J. 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 Page | 111

is raised to SIEL India. What do you have to say. I cannot comment because I am not aware of the reason.

either by me or my direct communicated to Korea. reporties. A list of eligible and suitable employees is C. Please refer to question forwarded by Korea to us @ Sr. No. 7 and your from where a suitable reply. Do you have any candidate is selected after such expat experts interview on video working for you at conferencing. present: D. Whether the expatriate We have few expat came employees get any salary, few days back. Normally perquisite or allowance they are here in 2-3 reimbursement, payment months as by whatever name called perrequirement. There outside India during their are 5 persons here: stay in India? 1. Mr. Mahesh - for tech No. support. How is the salary and 2. Mr. Jiho Song - for perquisites of Korean tech marketing expatriates decided? 3. Mr. Shin-for tech For deciding the salary support. there is clear norm that 4. Ms. Cha - for tech whatever salary a person support. is drawing in the parent 5. Mr. Jaewoo Park- country plus the benefit Marketing support. of house + car and driver + education support for Are working to support the children is paid. my local unit as technical experts. They E. When expatriates normally come to impart employees are posted in technical expertise to India whether they have local engineers. They any relationship with the have come here on local parent i.e. LG Korea or unit's request for any of its AE. When the Page | 113

training & some tech employee leves India support. This request is whether they resign or made to the R&D or they are transferred? Technical support Group I need to check and revert bases out of South back on the above Korea. question. However, the D. How are these expats expatriate employees do compensated for their not resign in India when services? their term finishes in India they go back. I do not know. E. 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. F. 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.

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. D. 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.

B. Where had you been B-D, F. Since when are you working before joining working with LGEIL? SIEL? Jan 2005. I was the head I was worked in Mobile of Marketing that is the ….. Division in Samsung official title given by the Korea. HQ before joining LGEIL in Jan 2005. I was C. You were working in the working in Seoul, South parent company before Korea with LG Electronics you joined SIEL? What Korea. I was looking after was your designation in the overseas market Samsung Korea? globally. The head quarter Yes, Director. of LG Electronics Korea D. Since when have you decided to send me here been associated with as head of marketing of Samsung group? LGEIL in 2007. The head quarter in Korea 1990 promoted me as MD, E. What are the duties LGEIL. assigned to you in SIEL? E. What is your role and Managing F/A, A/R, responsibilities as the MD Logistics, Taxation & HR of LGEIL? F. When you joined SIEL, One of the responsibility is was it your decision or to build LG as the best you were simply posted corporate citizen. Building to India? LG as a very good brand Own decision and MD's image, No. 1 after sales order &HQ service, best quality of recommendation. product. G. How often do you F. Which all heads of communicate with the departments report to you Head Quarter? What is here in LGEIL? the most common mode Other than Page | 117

of communication? manufacturing, which reports to the product 2-4 times a week, company, and only internet and mobile indirectly to me by way of phones. sharing information, other H. With whom do you heads such as HR, sales, generally communicate marketing, customer in headquarters at Korea services, finance, supply for official purposes? chain. The product Global support team and company supports the global Biz management. manufacturing excellence and global best practice by I. Please clarify what is way of imparting training global biz management. by sharing knowing and Manage all functions of information of technology specific product all over and best practices. the world. G. Please explain how J. Are there different GBMS expenses are met with? for different products? Are they met by LGEIL or Yes, Mobile-Mobile by the product company? phones & Video Display- Sometimes LGEIL pays, TV, monitor. sometime product K. Do you regularly send company depending on reports to GBMS? How case to case, the details of often are the report sent? which I am not aware of. No, 1-2 times by-yearly. H. Who controls and makes L. Then how do the GBMS decision regarding manage the functioning imports? of different divisions in There is a sourcing team India, as stated by you in of the manufacturing unit answer to question 11? which look after the GBM is more common import as well as local sales they touch more purchase. Imports are Page | 118

sale teams then me major three-CBU, raw material and components. M. Who takes the policy Negotiation regarding the decision regarding the price of the same are financing of various taken care by resource business divisions of and procurement team of SIEL? LGEIL and they are MD&CFO expected to procure the N. How are such policy same at the competitive decisions taken? Are prices. they through the board I. Who decides what meetings or your technology should be independent decisions? imported? Both The LGEIL manufacturing O. But none of the minutes departments directly of board meetings show discuss these issues with any such policy decisions the product company if being taken in board and when required. meetings? Market surveys are conducted by the sales I am not sure because I and marketing and this have joined less than 6 information is then shared month but major issue with the product company show all board members. which further develops the P. Who takes the policy technology. This decision regarding which technology is imported by product/model are to be us in India. manufactured and which are to be purchased and traded? Sales. I just concern Profit & loss Q. In case of major

investment or policy decision of setting up a factory in Chennai etc, is the consent or approval of headquarters at Korea taken? Yes R. 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? Yes

Global consumer's with my team and my MD. requirements; What is the role of LG Inc. - Sales Forecast for Corp.? sales and production; Nothing. - More strategic What is the role of LG Inc. direction setting and also Asia in it? liase with Samsung HQ Subsidiaries like LGEIL for product development decide there own strategy and production; specific to the market and - Also, by meeting are accountable for the Indian customers- try to results. make strategy of sales & Who is responsible for marketing with other purchases and imports? employee of SIEL. Purchase of raw materials B. How do you liase with Manufacturing Setup is Samsung HQ for responsible. For certain products development setup of purchase general and production? affairs is responsible, for By reading Indian imports, imports team is Consumer's insight and responsible. finding the better How are new product product for India, I introduced in India? request HQ to develop Depending upon the Indianized products. In market need and this process, there needs consumer service, LG lots of explanation & Korea Product Company persuasion. Once HQ develop products through decided to develop the their R&Ds. There product by utilizing HQ's …..which need ….then rersource in initial stage and those who do not, do and then factory prepare not take it. its production facilities for material locally and Page | 121

other country's factory. If There…….are done jointly possible, factory is trying by local team and Korea to purchase its material team. locally. Core technologies are C. In the Liasoning decided in Korea and activities with the HQ, according to local insights do-you send information changes are made in collected from India to consonance with HQ and Samsung Korea. So that subsidiary. For e.g. LCD they can develop a technology being global product suitable for platform was developed in India? HQ Korea but ‘Jazz” was developed as per local Definitely insight of India. D. How Often do you Please elaborate how communicate with HQ research is done by and what is the mode of Korean Co. in India i.e. communication? how market need and In General once a week, consumer services are Before communicating I done? hear and discuss with Consumer insight surveys Local people and hear are conducted to the necessities and I understand consumer summarize and preference through communicate with HQ independent agencies and Marketing and Other occasionally by employees Department. of LG India. Final analysis E. Since you are having is jointly done by HQ & R&D centre's in India at LG India or at times by Bangalore and Noida, LG India. Then why is not such About R&D details I am technology develop in not competent to reply. these R&D Centres? Our factories in Noida Page | 122

Basically Samsung's and Pune are basically philosophy is to make assembly factories. localized for operation In case of new core (Sales & Marketing) and technology while production. When local launching in India, at environment is not times people from HQ do ready, Samsung HQ come. support to develop. And Statement of Shri H.D. when all local functions Rew working as Director are ready, whole (Research & Development) development & Material of Manufacturing Deptt. purchase occurs locally. at LG Electronics India In the meantime, Ltd., since Jan. 2007 localization rate is E. What you are doing in increasing year by year. Research & Development F. What is the role of GBM work? (Global Business We have so many Management) at HQ in products. I have a team of deciding which products thousand of persons in R to manufacture or & D and number of teams Trade? are working for each & It is not GBM's decision every products separately. to decide a specific These teams have to models. On SIEL's report their progress to requirement they develop me be, being in-charge of and also SIEL select the the R&D Deptt. at Greater models of local market's Noida. There are demand. GBM has more hundreds of persons and product and strategy not thousands. function from global Whether there is any market perspective they Patent Right on your R & discuss with global D since you are in subsidiaries for manufacturing activities Page | 123

products, price trend, of various products of LG and market development, in Greater Noida? marketing function. But, Yes. We are having our as they are more globally two patents of LG India as dedicated functional per my memory and exact organization, SIEL is number can be told after communicating with HQ going through my to develop the product records. Two Patents have and support marketing been applied but not practice by collecting registered so far and one best practice of Samsung is under progress, out of Global operation. these two. G. 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? 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.

technical input for a specific products specialization are provided by SIEL? Feature Requirements are requested by SIEL. D. What are your duties as Head of Sales, North Region in SIEL? Manage organization and Sales of SIEL products in Northern Region. E. How do you carry out such duties? We have each RM & BMs execute our sales & also get involved in Sales with them. F. Do you have to communicate with Samsung Headquarter to perform your duties? If yes then how after do you communicate with Samsung India? Yes, Once in a week. G. In your communication with HQ what are things/points discussed? They usually ask us about the reason of aging

stock. H. Since most of the items marketed by you, being CE head, are manufactured in India then why is HQ concerned with Ageing Stock? Because of Global performance.

Corp. Suwon South marketing in the Region Korea, my salary is being for which I am paid by Samsung responsible. Electronics approx D. Ever since you took 3200000-3500000 Won charge at your current (net in my salary post, how many times account) in Won. have you held meeting C. What is your scope of here in India? work in Samsung Approximately ten times Electronics South Korea? in the period of 2 and half Incharge for years. interoperational testing E. Can you tell us what between base station and exactly had in the today’s mobile devices, Also take meeting with your care of trail test with colleagues at G. Noida? operators for mobile First was the marketing wimax. strategy, second one was D. Since when have you related with new been in India and what is business. your scope of work in What is this new India? business? Arrived at Bombay on I do not comment on this. 18th June, Scope of work In the area of marketing is to plan POC/proof of in sports events, specially concept trial test with cricket, what has been RIL and assist states your input in determining assets. the strategy of LGEIL? E. Who instructed you to I remember I was proceed to India and help recommended and I was Samsung Electronics Ok with it. India Ltd for wimax? What is your mode of Usually on request from

Indian team and local communication between HQ representatives, we MD of LGEIL and you? get instructions through Sometimes face to face, emails/telephone etc. sometimes over phone F. Who pays you for the and sometimes through e- work done in India for mail. Samsung India F-G. When LG India is not Electronics ltd? paying you any amount, I am paid my monthly why are you looking after salary in Korea, I collect their reports, bills for money that I performances, liaisoning, spread during Stay and employee encouragement get reimbursements in etc.? Korea. I work for the success of G. Why is Samsung LG India, but I am paid Electronics Corporation, by LG Electronics South Korea paying you Singapore which is a for the work you are subsidiary of LG Korea. doing in India for LG Singapore has two Samsung Electronics organization, one is India Ltd. Regional HQ and other is Singapore Domestic I don't know Distribution. Regional HQ is to look after the interest of Asia Region. From where do the Co. LG E Singapore gets the revenue? LG Singapore has the contract with the subsidiaries in Asia including India for the services that we provide Page | 129

as Regional HQ.

B. The Appellant further referred to pages 1125 to 1245 of the paper book volume - 4 to show that all the questions raised in notice dated 11.11.2014 had been duly complied with and all the information sought by the Assessing Officer had been supplied.

C. Thereafter, it was highlighted that the assessment in the case of the Appellant is made under section 143(3) and not a best judgment assessment under section 144 of the Act. It can therefore, reasonably be inferred that the Assessing Officer was also satisfied by the information and details provided by the Appellant and made no grievance of the alleged non-compliance of the notice / questionnaire dated 11.11.2014.

II. Short term Expatriates detail

D. With regard to the details of the short term expatriate employees, the Appellant submitted the details of the current year short term expatriate employees and the purpose for visiting India vide referring to pages 1195 of the paper book volume 3. Pages 1196 to 1224 of the said paper book was referred to show the email communication with the respect to communication between the employees of LG India and the Appellant to schedule such short term visit of the Appellant employees. The email communication clearly establishes the case of the Appellant that the purpose of visit of such short term employees is for technical support.

E. With reference to the aforesaid contemporaneous documentation, it was submitted by the Appellant that information about the visit(s) of the short term expatriates of the appellant company was on the basis of exchange of e- Page | 131

mail correspondence on one-to-one basis between the travelling short term expatriate and his counterpart in the Indian company. No record of such correspondence was maintained / archived at the company level – either in Korea or India. In view thereof, it was not possible to retrieve the details of visits of short term expatriates in the earlier years, as far back as 2004-05.

F. It was further reiterated that the recruitment process of the expat employees had already been explained by the Appellant by referring to the statements recorded during the survey. Specific reference was made to the statement recorded of Mr. U.K. Dhall at page 709 of paper book volume – 2. The relevant portion of the statement at Pg 710 is reproduced as follows:

“Qn: Who sends the requisition to LG korea and whether probable candidates come for interview to India or not. Also whether the Indian directors visit Korean office for recruitment or not? Ans. The MD of LG India forwards the requirement of Korean candidates to HR at head quarter. Based upon that they propose the available candidate whose willingness is pre-checked by them. From this list the candidates are interviewed either through VC or whenever senior person visits Korea they interview them.”

Statement of Mr. H.C. Moon, Vice President at Pg 676 was also referred to the relevant portion is reproduced as follows: “Q: When you are going to complete your tenure of posting in India? Whether after completing your term in India in this company, do you plan to move out of India or

would try to remain in India in any company because you have a skill and experience? Ans: By the end of 2011 or start in 2012, but not sure, I would complete my tenure in India. To leave India or not would depend then and there’s position. I am not sure about my future situation. But I may stay in India even after completion of my tenure in India.”

G. To counter the judgment of CGG VeritasVs. ADIT [2012] 18 taxmann.com 13 (Delhi) relied upon by the department to state that there is no heroism in perpetuating an error, it was submitted that the same is a general principle of law laid down by the Supreme Court in Distributors (Baroda) (P.) Ltd. Vs. Union of India : 155 ITR 120 and there is no quarrel to the said proposition. It was further pointed out that the said judgment has, in any case, been upset by the Hon’bleUttarakhand High Court vide order dated 03.06.2016 in ITA No. 08 of 2012 (copy supplied handout).

III. Attribution to PE H. The Appellant submitted that it had already established that LG India is, both, the legal and economic employer of the expat employees seconded by the appellant. Relying upon the statements recorded during the survey and the legal and factual submissions (refer earlier note), it was reiterated that all the functions performed by the expat employees are for furthering the business cause of LG India and, therefore, the existence of PE of the Appellant in India was not established.

I. Without prejudice, it was submitted that once the transaction has been adjudicated to be at arm’s length, no further attribution can be made to the alleged PE. To support its contention the Appellant relied upon the judgment of Honda Motor Company, Japan [2018] 301 CTR Page | 133

601 (SC), Asstt. DIT v. E-funds IT Solution Inc 399 ITR 34 (SC) &DIT v. Morgan Stanley [2007] 292 ITR 416.

J. It was further submitted that the Ld. TPO in the case of LG India had pursuant to the directions of DRP accepted the transactions pertaining to off shore supplies of spare parts & raw material, etc., to be at arm’s length. Copy of order passed by TPO giving effect to the directions of DRP (in the case of LG India) is at Page 807 of paper book volume – 2. The said order has become final as no appeal has been preferred there against nor has the assessment of LGIL being reopened on the said ground. It is the respectful submission of the Appellant that once one part of the transaction (in the hands of LGIL) has been accepted to be at arm’s length, the other limb of the same transaction (in the hands of the Appellant) cannot be challenged by the Department.

K. Vide referring to page 939 of the paper book Volume – 3, it was submitted that the Appellant had reported all the transactions with LG India to the TPO and, therefore, the TPO was aware of all the transactions between the Appellant and LGIL and consequently applied his mind thereto. Copy of the order of Ld. TPO is at page 254 of the paper book volume – 1.

L. With regard to the submission of the Department that the order of the TPO in case of LGIL was passed prior to survey at the premises of LGIL and prior to the survey report prepared by the survey team, it was submitted that the DRP directions and the TPO’s order giving effect to the directions of DRP, were passed subsequent to the survey at the premises of LGIL and the date of the survey report. In that view of the matter, it could not be presumed that the DRP / TPO were not aware of the findings of the survey team. In

this connection, the Appellant relied upon the judgment of the Full bench of the Hon’ble Delhi High Court in CIT vs. Kelvinator of India 256 ITR 1. The relevant portion of the judgment is reproduced for the convenience of this Hon’ble bench as follows:

“23. We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143, a presumption can be raised that such an order has been passed on application of mind. It is well-known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”

The said judgment has been affirmed by the Supreme Court in CIT vs. Kelvinator of India 320 ITR 561 (SC).

M. Further, in the hands of Appellant, too, the Department has found the said transactions to be at arm’s length. Copy of the order of Ld. TPO is at page 254 of the paper book volume – 1. It is important to note that the order passed by the TPO

in the case of the Appellant is much after the conclusion of survey at the premises of LGIL and the preparation of the survey report. The allegation raised by the Department that the order passed by the TPO was without knowledge of the findings in the survey is, therefore, baseless and unsubstantiated.

N. The Appellant also pointed out the order dated 30.01.2014 passed by the TPO in the case of LG India for AY 2010-11 at page 1256 of the paper book Volume – 4 to buttress the point that the TPO had not made any addition with regard to the transactions between the Appellant and LGIL with regard to sale of spare parts and raw materials, etc., despite noting the factum of survey proceedings (in the first paragraph at internal page 38) and the order being passed subsequent to survey and reassessment order in the case of the Appellant.

O. Thus, it was emphasized that in the present case, despite being fully aware of the survey proceedings and the reassessment proceedings, the AO/ TPO made no adjustments qua the transactions of purchase / sale of goods and rendition of services, In view of the settled legal position, no further attribution could be made to the alleged PE once the transactions between the Appellant and LGIL were held to be at arm’s length in the successive transfer pricing assessments concluded by the TPO, both, in the case of LGIL as well as the Appellant.

P. The decision of the Hon’ble Supreme Court in the case of ITO vs. Techspan India (P.) Ltd. : [2018] 302 CTR 74 (SC)(supra) relied upon by the Department relates to the validity of reassessment proceedings. While dismissing the appeal of the Revenue, the Supreme Court observed as under:

“12. Before interfering with the proposed re-opening of the assessment on the ground that the same is based only on a change in opinion, the court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the assessing officer any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the re-assessment proceedings.”

Q. The aforesaid decision has no application to the present case wherein it is established on facts that the TPO of, both, LGIL and the Appellant had accepted the transaction between the Appellant and LGIL to be at arm’s length, after full and complete disclosure by the respective assessees and due application of mind by the TPO.

IV. Validity of the High Court of Allahabad order

R. With regard to the submission of the Department that the decision of the Hon’ble Allahabad High Court holding that further attribution to the PE was permissible despite the order of the TPO holding the transaction to be at arm’s length, it was submitted that when the Hon’ble Supreme Court directed that ‘It is also made clear that the Appellate Authority will examine the matter uninfluenced by any observation/finding of the High Court regarding the existence of a permanent establishment of the petitioner in Page | 137

India’, the aforesaid observations of the Hon’ble Allahabad High Court have been negated / nullified.

S. It would be appreciated that in terms of sequence, it has to be first established that the foreign company has a PE in India; thereafter, the question of attribution to the said PE would arise. In the present case, the Hon’ble Supreme Court having directed that the appellate authority would decide the question of existence of PE uninfluenced by the observations of the Hon’ble High Court, the finding of the Hon’ble High Court to the effect that there could be further attribution to the PE, notwithstanding the order of the TPO accepting the international transaction to be at arm’s length, could not stand in vacuum.

T. It needs to be appreciated that the finding regarding existence of PE is the substratum / foundation on which the edifice of attribution of income would be built. Once the subtractions (regarding existence of PE) is knocked out by the Hon’ble Supreme Court, the observation regarding attribution of income to the PE (whose existence is yet to be determined by the appellate authority) cannot be allowed to stand. In that view of the matter, the observations of the Hon’ble High Court sought to be relied upon by the Department are rendered non est and are no longer good law.

U. To support its contention the Appellant had relied upon its earlier note and the judgments relied thereupon.

V. Reimbursement:

V. The original Technical Collaboration agreement was entered into between the Appellant and LG India on 01.07.2001

which is filed at pages 901 of paper book Vol – 3. The said agreement was amended on 01.01.2002 to bring in Article 21 (at page 921 of the paper book Vol – 3).

W. With regard to Article 21, it was pointed out that the said Article was in the context of manufacture and sale of air conditioners / washing machines in India. It was further pointed out that notwithstanding that the original agreement did not contemplate reimbursement of warranty expenses, it was open to the parties to modify the terms of the contract as per section 62 of the Indian Contract Act and that it is amended contract which would govern the parties thereafter.

X. It was further pointed out that the Appellant had entered into Service agreement with LG India on 01.01.2003. As per this agreement LG India was to provide after sales services. Clause 1-7 of the said agreement was pointed out to refer that the ‘total cost’ included the landed cost of the material purchased from the Appellant (including freight, custom duty, customs clearance expenses and incidental expenses related to material purchase).

Y. Thereafter clause 2-1 which deals with parts supply was referred. It was shown that LG India is responsible for smooth and efficient supply of parts to servicers, parts distributors, or consumers, by purchasing and maintaining reasonable level of Inventory of parts from Appellant. Thus, it was submitted that the inventory of spares was maintained by LG India for itself, as the service provider, in order to comply with the obligation under the said agreement and not on behalf of the Appellant.

Z. Clause 4 of the said agreement was also referred to show that it was obligatory upon LG India to maintain adequate

facilities and organization in order to comply with the contractual duties.

AA. Thereafter clause 7 at page 820 of the paper book volume 3 was referred to show that Appellant was to reimburse the amount of expenses of the Appellant along with certain markup to be decided by the parties from time to time.

BB. Further it was pointed out that the said transaction was duly reported by LG India and pursuant to the directions of DRP, TPO had accepted the said transaction to be at arm’s length. The said transaction was also duly reported by the Appellant at page 939 of the paper book vol – 3.

CC. To sum up, it was submitted that in view of the detailed submissions advanced the Appellant did not have any fixed place of business in India in form of LG India. It was further submitted that the assumption of the Department that the Appellant had conceded to the existence of PE by filing a letter on attribution as mentioned in DRP order is also misplaced, as the offer in the said letter was without prejudice to the objection of the Appellant qua existence of PE. Further, the offer was not accepted by the DRP as the margin suggested by the Appellant (without prejudice) was enhanced by the DRP. Thus the said order cannot, by any standard, be said to be binding upon the Appellant. Accordingly, the appellant is not estopped from challenging the attribution made by the assessing officer to the alleged permanent establishment (“PE”).

issue has been considered by the honourable Delhi High Court in that particular case which covers the issue against the assessee. The learned authorised representative vehemently stated that there is a substantial difference between the facts of the case before the honourable Delhi High Court and before us. He extensively referred to the business structure in the case of GE parts incorporation as well as the assessee. He extensively referred to various paragraphs of the order of the honourable Delhi High Court specifically para number 73 and 74 of that order. He submitted a seven-page note to say that the facts of the decision before the honourable Delhi High Court are quite distinct. He also referred to a pictorial representation of the business model of the appellant and GE energy. He therefore submitted that the decision of the honourable Delhi High Court does not have any implication on the facts of the present case. He also referred to the decision of the coordinate bench in the case of LG Electronics India private limited vs Asst Commissioner of income tax in ITA number 6253/del/2012 dated 14/1/2019 for assessment year 2008 – 09 on the attribution issue where the learned transfer pricing officer has accepted the international transaction at arm’s-length. Therefore he submitted that there cannot be further attribution. He extensively referred to paragraph number 78 of the order of the honourable Delhi High Court in GE parts incorporation and stated that in fact it supports the argument of the assessee on the issue of the profit attribution. 80. The coordinate bench also drew attention of the parties to the decision of the honourable Delhi High Court in case of [2014] 364 ITR 336W (Del) CENTRICA INDIA OFFSHORE PVT. LTD. v. COMMISSIONER OF INCOME-TAX AND OTHERS specifically para no 36 of the order where in it is held as under :- 36. In this context, the decision of the Supreme Court in Morgan Stanley & Co. Inc. (supra) offers support for the Authority's viewpoint, rather than the contrary stance. In that case, the Court considered various forms of PEs, agency, service etc, each of which contemplate a different characteristic and link between the deputed employee/organization and the parent. In the context Page | 141

with which we are presently concerned, the following observations are critical: "15. As regards the question of deputation, we are of the view that an employee of MSCO when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCO. As long as the lien remains with the MSCO the said company retains control over the deputationist's terms and employment. … It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of "the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. … A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCO as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(1). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCO is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed." In fact, even the OECD Commentary on Article 15 of the Model Convention, on which learned counsel for CIOP has placed great reliance, interestingly notes that "[t]he situation is different if the Page | 142

employee works exclusively for the enterprise in the state of employment and was released for the period in question by the enterprise in his state of residence." This was clearly, and critically, not done in this case.

shareholders meeting, number of shareholder’s or other persons attending such meeting, reason why so frequent shareholder’s meeting (as claimed by the assessee while furnishing the reason for visit for short-term expatriates) are being carried out in India though all the shareholders are sitting outside India and so on. 13. The contention of the assessee that LGEIL is economically, technically and in term of human resources is independent of LG Electronics Inc, Korea is factually incorrect is not supported by its own submission, where it has been stated that: a. Technology is provided under the technology assistance and royalty agreement which is a separate agreement and income from the same has been duly offered to tax. Can having a separate agreement or paying of taxes on these incomes change the very nature of technological dependence on the parent. b. The list of key personnel’s hold by the expatriates furnished by the assessee itself reveals the dependence in term of human resources on the parent company. c. The purchase of raw material, finished goods and other consumables from the parent company and its AEs without any price negotiation and without any search of non-resident vendors by LGEIL reveals the economic dependence of the subsidiary on its parent. d. These facts have been revealed to the assessee many times. The assessee’s version of the human resources dependence of a subsidiary over parent is not forthcoming. The assessee has tried to point out the events by singling them and stating that it is not a relevant criteria for Permanent Establishment. It may appear from a bare reading of independent paras that the assessee may or may not have any Permanent Establishment in India, but when the whole scenario is considered taking each and every point starting from the secondment of the expatriates, frequent visit by short-term Page | 146

expatriates, purchase of material mainly from parent company, reporting to the authorities in LG Electronics Inc, Korea, appreciation certificates given by the authorities at places other than India and in a better position in hierarchy, providing after sales services and warranty on behalf of the parent company, all the factors when combined together clearly establishes the existence of Permanent Establishment of the assessee in India as per the provision Article 5(1) and 5(2) of the IT Act, 1961. Therefore, assessee’s contention that the statements, when read in their entirety give a conclusion contrary to the above is not acceptable. The assessee has further contended that the services performed by it are in the nature of stewardship activities in order to meet the contractual obligations in terms of Technical Assistance and Royalty Agreement with LGEIL. The discussion above clearly establishes that the type of control the parent company exercise over the Indian entity is such that it cannot be treated as that of a shareholder performing its stewardship activities. The Indian company is economically, technically and in term of human resources dependent on the assessee and is engaged in furthering the business interest of the parent company and the whole LG Group. The assessee’s contention is, therefore, not acceptable. From the above discussion and keeping in view the whole business arrangements amongst the various entities of LG group, it has emerged that the seconded expatriates work for furthering the business interest of the whole LG group and the assessee is also an essential part of the same. Therefore, LGEIL constitutes permanent establishment of the assessee. The panel heard the Ld AR in this regard. The issue of the PE was discussed. The assessee has filed following letter to reach closure of the dispute conceding factual points in matter. Decembers, 2016 The Secretariat Page | 147

Dispute Resolution Panel New Delhi Hon'ble Sir, RE: LG Electronics Inc. (‘LG Korea’ or the ‘assessee’) Permanent Account Number (‘PAN’): AAACL7929E Assessment Year (‘AY5) 2007-08

SUB: Objections filed before the Hon’blc Dispute Resolution Panel (‘Hon’ble Panel’) against the draft assessment order dated 28 March 2016 passed under section 147/ 143(3)/ 144C of the Income-tax Act, 1961 (the ‘Act’) This is with reference to the hearing before the Hon’ble Dispute Resolution Panel (‘Hon'ble Panel') on 30 November, 2016 wherein the captioned matter was argued. The objections have been filed by the assessee before your goodself inter alia on the issue of alleged Permanent Establishment (PE) in India and related attribution. In this regard, as discussed with the Hon'ble Panel, the assessee submits that without prejudice to the assessee's view towards the non existence of PE in India, from the limited perspective of attribution of income to the alleged PE, it is being acceptable to the assessee that the taxable income of the assessee in India is directed to be determined at 10% (Profit Margin) of 50% of salary cost of expatriates in India during the relevant year. To clarify, where the salary cost of expatriates in India during the relevant year is Rs. too, the assessed income of the assessee will be computed at Rs. 5. The aforesaid is without prejudice to assessee right' to challenge existence of PE in India for the relevant year or any other years and other grounds raised by the assessee or its associated enterprise in India viz. LG Electronics India Private Limited in various other proceedings in India. We trust that you would find the above in order. Page | 148

Thanking you,

Yours faithfully,

For LG Electronics Inc. , Korea, Authorised Signatory Enc: As above.

The Assessee has a Permanent Establishment (‘PE’) in India. As per the provisions in India- Japan Double Taxation Avoidance Agreement (‘DTAA’), the income attributable to such PE is required to be determined in terms of Article 7(2) of the treaty which provides as under: “2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. ” The Article provides for (i) Separate entity approach to the PE and (ii) arm’s length price by use of the words “engaged in the same or similar activities under the same or similar conditions” The arm’s length principle is regulated per Chapter-X of the Income Tax Act, 1961 and Income Tax Rules, 1962. PE has to be considered a separate and distinct entity different from its head office for attributing incomes there from. The

definition of “enterprise” as in section 92F(iii) is to mean a person (including a permanent establishment of such person). This supports the above conclusion. Circular 14 (para 55.16) dated 12 December 2001 provides that transactions between foreign enterprise and its PE are subject to transfer pricing. Relevant extract provides as under: “The definition of enterprise is broad and includes a permanent establishment, even though a PE is not a separate legal entity. Consequently, transactions between a foreign enterprise and its PE, for example, between the head office abroad and a branch in India, are also subject to these transfer pricing regulations. Also, the regulations would apply to transactions between a foreign enterprise and a PE of another foreign enterprise. The term permanent establishment has not been defined in the provisions but its meaning may be understood with reference to the tax treaties entered into by India." During the course of presentation of the Finance Act, Hon’ble FM had stated in his speech dated 25/04/2001 asunder: “Transfer pricing provisions are proposed to be modified to clarify that these regulations shall also apply to transaction between the Head Office and its branch and that adjustment made to the transfer price in the case of one enterprise shall not by itself form the basis of a consequential adjustment in the case of the other enterprise." The transactions with an overt branch office or a group of key employees placed strategically in the AE establishment would be examined and the TP norms shall apply on such transactions also. Determination of income attributable to a PE (having regard to provisions contained in India-Japan DTAA i.e. separate and distinct entity approach) would hence require application of transfer pricing methodology. Rules 10A to 10E deal with mechanism for determination of arm’s length. The cases of business connection as in the instant matter require to be tested Page | 150

as per the TP regulations if there is some international transaction with the AEs. The legislation intended to cover the transactions between Head Office and Permanent Establishment within the ambit of Section 92 and this position is in sync with the provisions of the India-Japan DTAA that advocates a separate entity and arm’s length approach for attribution of income of the assesse to its PE. A perusal of the aforesaid Rule stipulates that for its application, it is mandatory that income accruing or arising to any non- resident from any business connection must be such as cannot be ascertained. In the instant case, the aforesaid condition remains unsatisfied. The profits of the PE in this case are ascertainable by application of the methodology provided in TP Regulations. It may, therefore, be kindly appreciated that Rule 10 could possibly apply in following scenarios: where there is no tax treaty between India and respective foreign country; and, • where the foreign enterprise has a “business connection” in India; or In the instant case, the Assessing officer had determined the income attributable to PE by applying Rule 10 instead of applying a prescribed method. Having regard to the Article 7(2) of India-Japan tax treaty (separate and distinct entity approach), the Assessing Officer must determine the ALP by invoking the' transfer pricing methodology prescribed under the Act. This position is also in line with the principle laid down by Apex Court in case of DIT vs Morgan Stanley & Co. (292 ITR 416) and followed by Delhi High Court in case of Rolls Royce Singapore (P) Ltd. vs ADIT (202 Taxman 45). Rules 10B to Rule 10D flow directly from powers delegated under the provisions of the statute (sections 92C and 92B). Thus, basis above the income of the PE can be reasonably ascertained by imputing the costs in terms of salary paid to the Page | 151

employees of the AE and applying a reasonable markup on such costs to determine the income of the PE in Indian jurisdiction. The assessee has given written submissions in this regard, conceding this position. The factual history of the matter is in the assessment records with the AO. The panel accepts the same in view of the facts of the case. The action of the TPO/AO is upheld, subject to charge on the wages/ remuneration paid to the seconded employees at the cost-plus margin of 20% on ‘salary attributed to India operations’ (being a reasonable attribution basis the work performed for the AE-though the assessee seeks only 10%) and existence of PE conceded by the assessee. The assessee has agreed to the issue of PE and the attribution because salary is charged to the PE. The rate offer is not reasonable as the extents of activities performed are substantially more than the quantum conceded by the assessee. As it is clear that these employees exercise significant influence on the business decisions benefitting the parent AE. The panel directs as above. The objections are disposed of as above.” 83. Therefore it is apparent that the learned dispute resolution panel has gone under the presumption that assessee has conceded the aspect of the existence of the permanent establishment in India of the assessee. The assessee now denies the above fact and says that it has never considered the issue of the existence of the permanent establishment. On careful analysis of the letter dated 05/12/2016 submitted by the assessee before the learned dispute resolution panel it states in para number 3 of that letter that assessee submits that without prejudice to the assessee’s view towards the nonexistence of permanent establishment in India, from the limited perspective of the attribution of income to the alleged PE, it is being acceptable to the assessee that the taxable income of the assessee in India is directed to be determined at 10% (profit margin) of 50% of salary cost of expatriates in India during the relevant year. It further says that the clarify, where the salary cost of expatriates in India during the relevant year is rupees hundred, the assessed income of the assessee will be computed at INR 5. It further says in the next paragraph that the aforesaid is without Page | 152

prejudice to the assessee’s right to challenge existence of permanent establishment in India for the relevant year or any other years and other grounds raised by the assessee or its associated enterprise in India viz. LG Electronics India private limited in various other proceedings in India. Thus this letter has been accepted by the learned dispute resolution panel and straightway went on to attribute the profit to the permanent establishment. 84. In the direction of the learned dispute resolution panel for assessment year 2008 – 09 there is also a reference to another letter submitted by the assessee dated 02/08/2017 which is placed at page number 14 of the order of the learned dispute resolution panel which states “This is with reference to the captioned matter which was heard by the honourable panel on 26/07/2017. As mentioned by the assessee during the course of hearing, it is submitted that in respect of preceding year (i.e. Assessment Year 2007 – 08), the assessee has not appeal before the honourable income tax appellate tribunal (ITAT) against the quantum of attribution arrived at by the learned assessing officer (AO) in the final order of assessment year 2007 – 08 based on the direction of the honourable DRP. Further the assessee submits that the attribution made by the learned assessing officer in the draft order for the year under consideration (i.e. Assessment Year 2008 – 09) is in line with the order for the assessment year 2007 – 08. 85. Further for assessment year 2008 – 09, the assessee before the learned dispute resolution panel on 02/08/2017 has stated that the assessee has not appeal before the ITAT against the quantum of attribution arrived at by the learned assessing officer, however assessee has filed appeal for assessment year 2007 – 08 in ITA number 1946/del/2017 on 31/03/2017 before the income tax appellate tribunal. Therefore there is a sharp contradiction in the submission of the assessee before the learned dispute resolution panel and before us for the reason that the assessee is contesting before us the existence of permanent establishment as well as the profit attribution for assessment year 2007 – 08 and all other years except few but

before the learned dispute resolution panel it has made a statement of fact on 02/08/2017 that assessee has not filed any appeal for assessment year 2007 – 08 which was in fact filed before us on 31st of March 2017. 86. In view of the above facts it is apparent that as per the letters of the assessee mentioned in the direction of the learned dispute resolution panel, the assessee has reserved its right to challenge the existence of the PE at various forums and in case of other associated concerns also for relevant year or any other assessment year. Therefore there is no clear-cut admission of the assessee of the existence of the PE before the learned dispute resolution panel. Therefore, apparently, in all these years, the learned dispute resolution panel has not at all given any finding on the existence of the permanent establishment of the assessee in India. In almost all the cases the learned dispute resolution panel has referred the above two letters submitted by the assessee and based on that has upheld the action of the learned assessing officer except to the small extent of adjustment of the profit attribution for assessment year 2007 – 08 from the suggested lines by the assessee. 87. Though we have recorded the complete arguments of both the parties with respect to the existence of the permanent establishment, however, in view of the submission of the assessee before the learned dispute resolution panel and consequent understanding of the learned dispute resolution panel that the assessee has conceded the existence of the permanent establishment, we have refrained from giving our findings on the existence of the permanent establishment as it will prejudice the interest of the assessee to the extent that it will not be able to avail the benefit of the direction of the learned dispute resolution panel on the existence of the permanent establishment. In normal circumstances, as necessary facts are laid down before us, we would have decided the issue but the specific letters before the ld DRP, where DRP in its own understanding, rightly or wrongly, considered the concession by the assessee on this issue and has not directed the ld AO on its merit about the existence of PE. The Object of the incorporation of the provision of Dispute Resolution Panel is to ‘resolve a dispute’ by directing the ld AO on a specific issue. If that right of the

assessee is not allowed to be exercised, then it may cause irreparable damage to the assessee. 88. In view of above facts, we set aside all the appeals of the assessee back to the file of the learned dispute resolution panel with a direction to first ascertain the fact about the admission of the assessee with respect to acceptance of the assessee of the existence of the permanent establishment. If it is found that there is an admission on part of the assessee about the existence of the permanent establishment, then, the learned dispute resolution panel will decide the issue in accordance with the law considering the above admission. However, if it is found that there is no admission on this aspect, then to decide the issue of existence of the permanent establishment and consequent profit attribution thereto with respect to each of the assessment years. Needless to say, the learned Dispute Resolution Panel will afford reasonable opportunity of hearing to the assessee. The learned dispute resolution panel, then, will direct the learned assessing officer to pass the final assessment order incorporating its direction in accordance with the law. Under those circumstances, in absence of any admission about the existence of the PE by the assessee, all issues, with respect to the existence of the permanent establishment as well as the profit attribution thereto would be open before the learned dispute resolution panel. 89. In the result all the 9 appeals filed by the assessee are allowed with above direction for statistical purposes. Order pronounced in the open court on 02/09/2019. -Sd/- -Sd/- (DIVA SINGH) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 02/09/2019 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) Page | 155

Date of dictation Date on which the typed draft is placed before the dictating member Date on which the typed draft is placed before the other member Date on which the approved draft comes to the Sr. PS/ PS Date on which the fair order is placed before the dictating member for pronouncement Date on which the fair order comes back to the Sr. PS/ PS Date on which the final order is uploaded on the website of ITAT date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order