L.G. ELECTRONICS INDIA LTD., NOIDA vs. ITO, WARD- 2(2)(1)(INT. TAXATION), NEW DELHI

Ground no. 1 is general ground, hence, does not required specific adjudication.

In ground nos. 2 and 3, the assessee has challenged the orders 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.

At the outset, we propose to deal with the legal issue raised by 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, to 7930/Del/2018 AYs: 2005-06 to 2011-12 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 to 7930/Del/2018 AYs: 2005-06 to 2011-12 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.

In pursuance to the directions of the Hon’ble High Court, the 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.

Against the orders passed under section 201(1)(201)(1A) of the 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.

Learned first appellate authority rejected all the contentions of 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 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.

Before us, learned counsel appearing for the assessee, at the 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 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.

In reply, learned Departmental Representative (DR) submitted 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).

In rejoinder, learned counsel appearing for the assessee 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.

The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused the 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.

While concluding the proceedings under section 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 to 7930/Del/2018 AYs: 2005-06 to 2011-12 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.

It will be relevant to observe, simultaneously with the 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 to 7930/Del/2018 AYs: 2005-06 to 2011-12 (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.

Thus, from the aforesaid facts it becomes absolutely clear that 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/-.

Thus, as could be seen from the aforesaid facts, the basis of attribution of profit to the payee, LG Korea is purely notional as it is 11 | P a g e to 7930/Del/2018 AYs: 2005-06 to 2011-12 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.

In a case of similar nature, the Hon’ble Delhi High Court in case of Samsung India Electronics Pvt. Ltd. Vs. DCIT [2014] 364 ITR 103 (Del), has held as under:

The ratio laid down in the aforesaid decision of the jurisdictional High Court clearly applies to the present appeals.

In view of our decision on merits, the grounds raised by the assessee on validity of the orders passed u/s 201(1)/201(1A), being to 7930/Del/2018 AYs: 2005-06 to 2011-12 barred by limitation, has become academic, hence, not required to be adjudicated upon.

In the result, appeals are allowed, as indicated above.