No TDS liability under section 195 on payments to overseas parent company for goods when PE profit attribution purely notional

ITAT Delhi held that assessee was not liable to deduct TDS under section 195 on payments made to parent company LG Korea and other overseas associated entities for purchase of raw materials, finished goods, and capital goods. The tribunal found that profit attribution to the alleged PE was purely notional, and assessee had already deducted TDS under section 192 on expatriate employee salaries. Since no direct payment was made to LG Korea for salary costs and the PE profit attribution was based on notional income, assessee could not be expected to compute TDS on notional payments. Following Samsung India Electronics precedent, demands under sections 201(1)/201(1A) were deleted.

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Issues Involved:
1. Validity of orders passed under section 201(1)/201(1A) of the Income-tax Act, 1961, being barred by limitation.
2. Merits of the case regarding the assessee's liability to deduct tax at source under section 195(1) of the Act.

Summary:

Issue 1: Validity of Orders Passed Under Section 201(1)/201(1A) - Limitation
The assessee challenged the validity of the orders passed under section 201(1)/201(1A) of the Act as being barred by limitation. The initial orders passed by the Assessing Officer were set aside by the Hon'ble Allahabad High Court for violating the Rules of Natural Justice. The High Court directed the Assessing Officer to issue fresh show-cause notices and decide the issue after providing all materials to the assessee. The Assessing Officer issued fresh notices on 12.07.2011, but the final orders were passed on 24.02.2015. The assessee argued that the orders should have been passed within one year from the end of the financial year in which proceedings were initiated, i.e., by 31.03.2012. The Tribunal did not adjudicate this issue as it became academic due to the decision on merits.

Issue 2: Merits of the Case - TDS Liability Under Section 195(1)
The assessee, a wholly owned subsidiary of LG Electronics, Korea, was engaged in trading, assembly, manufacturing, marketing, and sales of electronics and home appliances. A survey operation revealed that LG Korea and its associated companies had a Permanent Establishment (PE) in India. The Assessing Officer held the assessee liable to deduct tax at source under section 195(1) for payments made to these entities and raised demands under section 201(1)/201(1A).

Upon appeal, the first appellate authority reduced the demand significantly by attributing profit to the PE only to the extent of a 20% markup over 50% of the salary paid to expatriate employees. The assessee argued that it had not made any payment to LG Korea for expatriate employees' salaries and had already deducted tax under section 192 for such salaries. The Tribunal found that the attribution of profit to the PE was purely notional and not based on actual payments. Therefore, the assessee could not be deemed an assessee in default for not withholding tax on notional payments.

The Tribunal also noted that the final assessment orders in the case of LG Korea were quashed, and there was no tax liability on LG Korea for the relevant assessment years. Consequently, the assessee had no obligation to withhold tax under section 195, and the demands raised under section 201(1)/201(1A) were directed to be deleted.

Conclusion:
The appeals were allowed, and the demands raised under section 201(1)/201(1A) were deleted. The issue of limitation was not adjudicated upon as it became academic in light of the decision on merits.

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