https://www.taxtmi.com/css/info/rss_sitemap/rss_feed.css?v=1746094055 https://www.taxtmi.com Business/Tax/Law/GST/India/Taxation/Policies/Legal/Corporate Tax/Personal Tax/Vat Law/Legal Information/Tax Information/Legal Services/Tax Services Tax Management India. Com / MS Knowledge Processing Pvt. Ltd. All rights reserved. One stop solution for Direct Taxes and Indirect Taxes https://www.taxtmi.com/caselaws?id=755629 https://www.taxtmi.com/caselaws?id=755629 TP adjustments - payment of royalty - payments made by STI[India] to Samsung Korea - Samsung Telecommunications India [STI], the respondent-assessee, was incorporated as a wholly owned subsidiary of Samsung Electronics Co. Ltd., Korea [Samsung Korea] Sale of goods manufactured by STI to its AEs - DRP concluded that STI was acting as a contract manufacturer because it had not been remunerated as if it were an independent manufacturer that utilized intangibles in the form of technical know-how in its own right to independently manufacture goods which would eventually be sold to group entities - ITAT deleted addition HELD THAT:- STI was operating as a contract manufacturer on behalf of Samsung Korea for the following reasons. A perusal of the facts on the record reveals that STI was a wholly owned subsidiary of Samsung Korea and which was engaged in the manufacture and sale of mobile handsets under the brand name of Samsung in the Indian and overseas market and which would invariably involve sale of the said goods to its AEs as well. The transfer of technical know-how and licensing of technology was essential to enable STI to undertake its activities independently. Neither the TPO nor the DRP engaged in a recharacterization of the transaction entered into between the parties nor was there any material existing on the record to demonstrate that the transaction entered into between STI and its AEs was distinguishable from those which would have been entered into by independent enterprises behaving in a commercially rational manner. Neither the TPO nor the DRP rested their opinion on any material or evidence which may have tended to indicate that the transactions undertaken by STI would not satisfy the test of commercial expediency or prudence. Neither the production of the goods in question nor the supply thereof was shown to be motivated or based upon directives of Samsung Korea. Those transactions clearly appear to have been guided and informed by STI s business and commercial interests. The mere factum of STI being a wholly owned subsidiary of Samsung Korea does not necessarily entail that it was engaged in the manufacture and sale of mobile handsets solely at the behest and directives of Samsung Korea or having undertaken that exercise as a contract manufacturer. Samsung Korea, during A.Y. 2008-09, was stated to have been in receipt of a technical assistance fee and royalty from STI necessary for the latter to engage in its manufacturing activities. There was no material placed on the record to show that the manufacture and sale of the aforenoted goods by STI was dependent on directives issued by Samsung Korea or even that STI was contractually obliged to manufacture goods on behalf of Samsung Korea. STI does not fall under the ambit of a contract manufacturer either in terms of the OECD Guidelines, 1995 or for that matter the OECD Guidelines, 2022. There has been no material adduced on the record to demonstrate that STI receives any extensive instructions about what to produce, in what quantity and of what quality or that it is performing any low risk service for Samsung Korea or any of the AEs . Unable to agree the entire transaction between STI and its AEs was meant to operate as a profit shifting mechanism, merely because independent entities were charged a higher price in comparison with the AEs of STI. In our view, it would be erroneous to conclude that the sale of goods manufactured by STI to its AEs was done with a view to shift profits across jurisdictions, even if the price of royalty was embedded in the sale price of the goods sold to its AEs. STI was engaged in the manufacture of goods as per its own volition and not as per the directives of Samsung Korea and undertook decisions related to the manufacture and sale of goods independent of Samsung Korea. As a result, Samsung Korea cannot be deprived of the right to obtain an arms length return on the utilization of its patented or proprietary technology and know-how. This in light of the undisputed fact that the latter could not have engaged in the manufacture and sale of goods without the technological know-how provided by Samsung Korea. In our considered opinion, the observations rendered by the DRP with regard to the contrast between the gross profit earned by STI on export sales to AEs and to other independent entities ought to be appreciated while bearing in mind the distinguishable characteristics underlying those sale transactions and which would have in turn been dependent upon the nature of the products, features of the mobile phones, the individual value of the mobile handsets and other distinguishing factors. In the absence of specific data pertaining to the said transactions or of any evidence suggesting that Samsung Korea was in control of the overseas sales by STI to AEs or unrelated parties, we find ourselves unable to conclude that the AEs of STI had not been charged for the cost of technological know-how obtained or that STI had not been renumerated as an independent manufacturer by its AEs . TPO as well as the DRP clearly appear to have misconstrued the agreement in terms of which know-how and expertise stood licensed to STI. Decided against revenue. Case-Laws Income Tax Thu, 11 Jul 2024 00:00:00 +0530