LG ELECTRONICS INDIA LTD.,GR. NOIDA vs. ITO (TDS) INTERNATIONAL TAXATION, NOIDA

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI

BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND SHRI SAKTIJIT DEY, VICE-PRESIDENT

ITA No.7926/Del/2018 Assessment Year: 2005-06 With ITA No.7927/Del/2018 Assessment Year: 2006-07 With ITA No.7928/Del/2018 Assessment Year: 2007-08 With ITA No.7929/Del/2018 Assessment Year: 2008-09 With ITA No.7930/Del/2018 Assessment Year: 2009-10 With ITA No.7931/Del/2018 Assessment Year: 2010-11 With ITA No.7932/Del/2018 Assessment Year: 2011-12 M/s. LG Electronics India Ltd., Vs. ITO (TDS), Plot No.51, Udyog Vihar, International Taxation, Surajpur Industrial Area, Noida Greater Noida (UP) PAN :AAACL1745Q (Appellant) (Respondent)

Assessee by Sh. Deepak Chopra, Adv. Sh. Ankul Goel, Adv. Department by Sh. Virendra Singh, Sr. DR Sh. Sanjay Kumar, Sr. DR Date of hearing 25.08.2023 Date of pronouncement 21.11.2023

ITA Nos.7926 to 7930/Del/2018 AYs: 2005-06 to 2011-12

ORDER Captioned appeals by the assessee arise out of a common

order dated 04.09.2018 of learned Commissioner of Income Tax

(Appeals)-43, New Delhi, which in turn, arises out of orders passed

under section 201(1)/201(1A) of the Income-tax Act, 1961 (in short

‘the Act’) pertaining to assessment years 2005-06, 2006-07, 2007-

08, 2008-09, 2009-10, 2010-11 and 2011-12. Since, facts and

issues in all the appeals are more or less common, we propose to

deal with the facts involved in appeal for assessment year 2005-06

for the sake of brevity.

specific adjudication.

passed under section 201(1)/201(1A) of the Act as invalid, being

barred by limitation. Whereas, ground nos. 4, 5 and 6 are on

merits.

the assessee, challenging the validity of the orders passed under

section 201(1)/201(1A) of the Act. Briefly the fact are, the assessee

is a resident corporate entity stated to be engaged in trading,

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assembly, manufacturing, marketing and sales of electronics and

home appliances. As stated, the assessee is a wholly owned

subsidiary of L.G. Electronics, Korea. A survey operation under

section 133A of the Act was conducted in the business premises of

the assessee on 24.06.2010 to verify the compliance with Tax

Deducted at Source (TDS) provision. In course of survey operation,

certain papers and documents were impounded. Based on

statements recorded from certain expatriate employees, the

Assessing Officer formed a belief that the parent company in Korea

i.e. LG Korea and other associated companies had a business

connection and Permanent Establishment (PE) in India. Hence, the

income derived by the parent company and other group entities is

taxable as business income in India. Therefore, the assessee was

liable to deduct tax at source in terms of section 195(1) of the Act

while making payments to them. Since, the assessee had not

deducted tax at source on such payments, the Assessing Officer

initiated proceedings under section 201 of the Act, and thereafter,

holding the assessee as an assessee in default for not deducting tax

at source, passed order under section 201(1)/201(1A) of the Act for

assessment years 2005-06 to 2010-11 on 31.03.2011 raising

demands against the assessee. Against the orders so passed, the 3 | P a g e

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assessee preferred Writ Applications before the Hon’ble Allahabad

High Court. While disposing of the said Writ Applications, the

Hon’ble High Court set aside the orders passed by the Assessing

Officer, by holding them to have been passed in violation of Rules of

Natural Justice. The Hon’ble High Court further directed that the

Assessing Officer may issue fresh show-cause notice to the assessee

and decide the issue after providing all the materials to the

assessee.

Assessing Officer issued fresh show-cause notices under section

201 on 12.07.2011, to which the assessee submitted its reply on

17.08.2011. Thereafter, as it appears, no further steps were taken

by the Assessing Officer. Again after almost four years, the

Assessing officer issued another show-cause notice on 09.01.2015.

In response to the show-cause notice, the assessee filed a detailed

reply objecting to the initiation of proceedings, firstly as being

barred by limitation and thereafter on various other grounds,

including merits. The objections of the assessee, however, did not

find favour with the Assessing Officer and ultimately he passed

orders under section 201(1)/201(1A) of the Act for assessment years

2005-06 to 2010-11, holding the assessee as an assessee in default 4 | P a g e

ITA Nos.7926 to 7930/Del/2018 AYs: 2005-06 to 2011-12

and raised demands. For assessment years 2011-12, he passed an

order under section 201(1)/201(1A) on 18.06.2015. The aggregate

demand raised by him in respect of assessment years 2005-06 to

2011-12 was to the tune of Rs. 103,36,73,824/-.

Act, the assessee preferred appeals before learned first appellate

authority, inter alia, on the ground that the orders passed under

section 201(1)/201(1A) are barred by limitation, the payments made

to the parent company is not taxable in India, assuming that the

parent company has a PE in India, since, the transactions between

the parent company and the Associated Enterprise (AE) in India

were found by the TPO to be at arm’s length, no further profit can

be attributed to the PE etc. Further, relying upon the decision taken

by learned DRP in case of LG Korea and other non-resident

companies, assessee submitted that attribution of profit to the PE

can be made only to the extent of 20% markup on 50% of the salary

paid to the expatriate employees.

the assessee, except the submission made with regard to attribution

of profit to the PE only to the extent of 20% markup over 50% of the

salary paid to expatriate employees. As a result of the directions of 5 | P a g e

ITA Nos.7926 to 7930/Del/2018 AYs: 2005-06 to 2011-12

learned first appellate authority, the demand raised for assessment

years 2005-06 to 2011-12 under section 201(1)/201(1A) was

reduced to Rs. 12,36,44,260/-, while giving effect to the directions

of learned first appellate authority.

very outset, submitted that he has not challenged the issue of

limitation in respect of initiation of proceedings under section 201 of

the Act, but qua completion of proceedings under section 201 of the

Act. He submitted, since, the provision under section 201 does not

provide any time limit for passing the order, once proceedings have

been initiated order has to be passed in terms of section 153(2) of

the Act, which is within one year from the end of the financial year,

in which such proceeding was initiated. He submitted, in the facts

of the present appeals particularly for assessment years 2005-06 to

2010-11, after the initial orders were set aside by Hon’ble Allahabad

High Court, the Assessing Officer initiated proceedings on

12.07.2011. Therefore, he had time limit in terms of section 153(2)

of the Act to pass the orders on or before 31.03.2012. Whereas, he

has actually passed the orders on 24.02.2015. In support of such

contention, he relied upon the decision of ITAT, Special Bench, in

case of Mahindra & Mahindra Ltd. Vs. DCIT [2009] 30 SOT 374 6 | P a g e

ITA Nos.7926 to 7930/Del/2018 AYs: 2005-06 to 2011-12

(Mumbai)(SB). He submitted, the aforesaid decision of the Special

Bench has been upheld by the Hon’ble Jurisdictional High Court in

case of DIT Vs. Mahindra & Mahindra [2014] 48 taxmann.com 150

(Bombay). Thus, he submitted, the issue is squarely covered by the

decision of the Special Bench and Hon’ble Bombay High Court.

that, since, section 201 does not prescribe any time limit for passing

the order, no such time limit can be read into the provision. In

support, he relied upon the decision of the Hon’ble Allahabad High

Court in case of Mass Awas Pvt. Ltd. Vs. CIT (decision dated

10.07.2017 in Misc. Bench No.1088 of 2016).

submitted that the decision cited by learned DR is, not at all,

applicable, as, it is only on the issue of time limit for initiation of

proceedings and not passing of the orders.

submitted, though, the Assessing Officer has passed the orders

under section 201(1)/201(1A) by computing the TDS default on the

payments made to the parent company and other overseas AEs,

however, the CIT(A) has changed the manner of attribution of profit

to PE by restricting it to 20% markup over 50% of the salary of the 7 | P a g e

ITA Nos.7926 to 7930/Del/2018 AYs: 2005-06 to 2011-12

expatriate employees. He submitted, since, the assessee has not

made any payment to the parent company in respect of salary of

expatriate employees, the provisions of section 195 cannot be

attracted. Thus, he submitted, the assessee cannot be deemed to be

an assessee in default in absence of any payment made to the

parent company. He submitted, the attribution of profit to the PE as

computed by the Assessing Officer is purely on notional basis,

based on the directions of DRP in case of the parent company, to

whom the payment has been made. He submitted, the attribution of

profit to the PE has not been made on account of payments towards

goods purchased, but based on mechanism of allocation of cost of

expatriates and thereafter applying a markup of 20%. He submitted,

since, such attribution has been made on notional basis and not

based on any actual payment, the assessee cannot be deemed to be

an assessee in default for not withholding tax. Finally, he

submitted, in case of parent company, assessments for assessment

years 2005-06 to 2010-11 have been quashed by the Tribunal for

non-implementation of directions of learned DRP and for

assessment year 2011-12, no assessment has been made. Thus, he

submitted, when the parent company has no tax liability to be

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discharged in India, the assessee cannot be deemed to be an

assessee in default for not withholding tax at source.

the observations of the Assessing Officer and learned Commissioner

(Appeals).

materials on record. We have also applied our mind to the decisions

cited before us. At the outset, we deem it appropriate to address the

issue on merits. Facts on record reveal that in the assessment years

under dispute, the assessee had entered into various international

transactions with LG Korea and other associated non-resident

companies for the purchase of raw materials, finished goods, capital

goods etc.

201(1)/201(1A) of the Act, the Assessing Officer held that the

payments made by the assessee towards purchase of raw-materials,

finished goods, capital goods to LG Korea and other non-resident

associated companies, are taxable in India, as, all those entities

have PE in India. Therefore, the assessee was liable to deduct tax at

source under section 195 of the Act. Accordingly, he proceeded to

treat the assessee as an assessee in default and by considering the 9 | P a g e

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payments made by the assessee to LG Korea and other non-resident

group entities towards purchase of raw materials, finished goods,

capital goods etc., computed the default of the assessee and raised

demands under section 201(1)/201(1A) of the Act.

proceedings under section 201(1)/201(1A) of the Act against the

assessee, assessment proceedings in case of LG Korea and other

non-resident group entities were also taken up and assessment

orders were passed holding that LG Korea and other non-resident

group entities had PE in India. Accordingly, the Assessing Officer

completed assessments by attributing profit to the PE in respect of

payments made towards purchase of raw materials, finished goods,

capital goods etc. When the dispute reached DRP, it was held that,

except LG Korea, no other non-resident group entities had any PE

in India. Even, in respect of LG Korea, the DRP directed that the

income attributable to the PE has to be determined by taking a

portion of the salary cost of expatriate employees and applying an

appropriate mark-up. Accordingly, as per direction of the DRP,

profits from 20% markup on 50% salary cost of the expatriate

employees were attributed to the PE of LG Korea. Basis the

aforesaid directions of learned DRP, learned Commissioner 10 | P a g e

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(Appeals), while deciding assessee’s appeals against orders passed,

held that assessee’s TDS default has to be determined on the basis

of income computed on a cost plus basis 20% on the payments

made as salaries attributed to India operatiors.

while passing orders under section 201(1)/201(1A) of the Act, the

basis for computation of TDS default was payment to LG Korea and

other non-resident group entities towards purchase of raw

materials, capital goods, spare parts etc. However, subsequently,

the position changed substantially as in case of payee entities the

DRP held that only LG Korea had PE and no other non-resident

group entities had any PE in India. Even, the method of attribution

of profit to the PE of LG Korea was changed from payment made

towards purchase of raw material, finished goods, spare parts etc.

to a notional payment of 20% mark-up on 50% salary cost of

expatriate employees. As a result of the change in manner of

attribution of profit to the PE by learned first appellate authority the

demand raised by the Assessing Officer got substantially reduced

from more than 100 crores to 12,36,44,260/-.

attribution of profit to the payee, LG Korea is purely notional as it is 11 | P a g e

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the specific case of the assessee that it has not paid any salary cost

of expatriate employees to LG Korea. It is the case of the assessee

that on the salary cost paid to the expatriate employees, the

assessee has deducted tax at source under section 192 of the Act.

The aforesaid claim of the assessee remains uncontroverted. Thus,

when the assessee has not made any direct payment to the LG

Korea towards the salary cost of expatriate employees, in our view,

there was no liability on the assessee to deduct tax on such notional

payment. Moreso, when the assessee has already deducted tax

under section 192 of the Act in respect of salary cost of expatriate

employees. Thus, when the basis of attribution of profit to the PE is

a notional income, that too, based on a methodology adopted by

DRP in case of payee, the assessee cannot be expected to perform

an impossible act of computing TDS on a notional payment, a part

of which, is to be attributed towards profit of PE of LG Korea.

case of Samsung India Electronics Pvt. Ltd. Vs. DCIT [2014] 364

ITR 103 (Del), has held as under:

“10. The key to the decision is the answer to the question whether any income arose or accrued to SEC through its PE in India in respect of the sales made in India. If the answer is in the affirmative, both the notices 12 | P a g e

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would be good notices; if the answer is in the negative, both the notices would be bad. The answer in our opinion should be in the negative, because even as per the revenue, as reflected in the order passed by the DRP in the reassessment proceedings of SEC, no income accrued to SEC in India. In this regard, the DRP rejected the specific request made by that assessing officer in his remand report that the petitioner be treated as the permanent establishment (PE) of SEC and the income of SEC be computed on that basis. The DRP however held that as regards attribution of income to the “fixed place PE”, a rough and ready basis would be to estimate 10% of the salary paid to the expat-employees of the petitioner as the mark-up, as was done by the assessing officer in the draft assessment order. The remuneration cost in respect of such employees seconded to the petitioner amounted to Rs. 10,72,24,310; this was taken as the base and a mark-up of 10% had been applied by the assessing officer and the income was taken as Rs.1,07,22,431/-. This was approved by the DRP in its order dated 29-9-2012; the other claims made by the assessing officer in the remand report were rejected.

(i) the payments made by the petitioner to SEC for the goods are not tax deductible under section 195(2) and hence they were rightly allowed as deduction in the original assessment of the petitioner and (ii) the assessee cannot be treated as one in default under section 201(1) and no interest can be charged under section 201(1A). It needs mention here that the notice under section 201 is a verbatim reproduction of the remand report of the assessing officer in SEC’s case filed before the DRP.”

jurisdictional High Court clearly applies to the present appeals.

Thus, in our view, in the peculiar facts and circumstances of the

present appeals, the assessee cannot be treated as an assessee in

default in terms of section 201(1)/201(1A) of the Act. At this stage, 13 | P a g e

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we must observe, against the final assessment orders passed in

case of payee, viz., LG Korea, appeals were preferred before the

Tribunal. While deciding the appeals, in case of LG Korea, the

Tribunal in ITA No. 4559/Del/2018 and others dated 07.02.2022,

has quashed the final assessment orders for non-implementation of

directions of learned DRP. At the time of hearing, learned counsel

for the assessee has made a statement at bar that owing to low tax

effect, Revenue has not filed any appeal for assessment years 2005-

06 to 2010-11 and for assessment year 2011-12 no separate

assessment was framed in case of LG Korea. Thus, the factual

position as on date is, there is no tax liability on the payee, viz., LG

Korea in the impugned assessment years. Thus, on overall

consideration of facts and materials on record, we hold that, there

being no obligation of the assessee to withhold tax under section

195 of the Act, the assessee cannot be treated as an assessee in

default under section 201 of the Act. Therefore, we direct the

Assessing Officer to delete the demands raised under section

201(1)/201(1A) of the Act for the impugned assessment years.

assessee on validity of the orders passed u/s 201(1)/201(1A), being

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barred by limitation, has become academic, hence, not required to

be adjudicated upon.

Order pronounced in the open court on 21st November, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) VICE-PRESIDENT VICE-PRESIDENT Dated: 21st November, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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