TaxTMI 
TaxTMI 
2018 (3) TMI 1206
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....s a tax resident of South Korea and the principal activity of the company is manufacturing and sales of various categories of televisions, home appliances, telecommunication terminals, semi-conductors as well as other state of the art IT products for global markets. It has two wholly owned subsidiaries in India i.e. Samsung India Electronics Private Limited ('SIEL') and Samsung India Software Operations Private Limited (now known as Samsung R&D Institute India Bangalore Private Limited) ('Samsung R&D'). Pursuant to the survey conducted on the premises of SIEL on 24-06-10, Ld. AO issued a notice dated 28-03-11 to SEC under section 148 for initiating reassessment proceedings under section 147 of the Act for six AYs from AY 2004-05 to 2009-10. In response to the above notice, SEC filed its tax returns on 09-Sep-11for all these years declaring income from branch activities for AY's 2004-08 to 2008-09 which was declared in the original return as well and also royalty/fee for technical services which was not declared in the original return for any year. 3. At the request of the assessee through their letter dated 14.9.2011 before the tax officer requesting the reasons for issuance of ....
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.... (ii) The Indian company has to regularly update the reasons for ageing stock to the parent company. The parent company regularly overviews the performance of the Indian company. (iii) The team at Indian company collects information from Indian consumers and sends that information to the parent company so as to develop Indianised Product e.g. two vegetable boxes in refrigerators, sound focused LCD TVs and Semi Automatic Washing Machines are some of the products which has been Indianised by the parent company on the request of the Indian company. (iv) Samsung Korea has different Global Business Managements (GBMs) to look after the different categories of products. Each GBM develops new products which are initially marketed from Samsung Korea and then later on localized to be manufactured in the different global subsidiaries. (v) In deciding which product is to be imported or traded a confirmation is required from the parent company. (vi) The purchase price of an imported item is decided by a reverse calculation in which first a tentative sale price is determined there after taking into account the dealer margins and the Indian company'....
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....dated 30.12.2011, holding that expatriates employees create a PE of the assessee in India by rendering services to SIEL through its employees basis, and added an estimated income of 10% on the remuneration paid to such expatriate employees during the years under consideration to determine the profits attributable to tax in India by applying Clause (iii) of Rule 10 of the Income Tax Rules, 1962. 5. In respect of AY 2011-12, 2012-13 & 2014-15, Ld. AO issued scrutiny notice u/s 143(2) of the Act and also referred the case to the Ld. Transfer Pricing Officer for determination of the arm's length price of the international transactions entered by the assessee. Ld. TPO passed orders, but has not drawn any adverse inference. Ld. AO passed the Draft Assessment Order, on similar lines as for AY 2004-05 to 2009-10, holding that the seconded employees are providing services on behalf of the assessee and constitute its fixed place PE in India in accordance with Article 5 of the tax treaty. Ld. AO further held that the decision of Delhi High Court in the case of Centrica India Offshore (P.) Ltd. vs. CIT [2014] [364 ITR 336] (Delhi) shall apply to the case of assessee also, and proceeded to a....
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....and supervision under the Korean buses and, therefore, they have a lion in their employment with the parent company. 9. Basing on these observations Ld. AO proposed to treat SIEL in its entirety as permanent establishment of the assessee, also agency PE, as a place of management for Southeast operations, and also service PE. He further proposed to treat it this particular receipt on account of services of the seconded employees as royalty and fees for technical services only attributed to the PE. By way of Order dt. 29.09.2012, Ld. DRP reached a conclusion that SIEL be treated as a deemed fixed place PE of the assessee. Pursuant to these directions, the Ld. AO passed final assessment order. 10. Though the addition of estimated 10% of income on the total remuneration cost of expatriate employees seconded to SIEL in India, Levy of interest under section 234 A and 234B and short credit of taxes withheld by SIEL as against the credit of taxes claimed by the assessee in the return of income or forming part of the grounds, the prime dispute that requires adjudication in this batch of matters is mainly revolving around two aspects, namely, the reopening of the assessment relating....
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....ion of the assessee and observed in letter dated 18.11.2011 (page No 45 of the Paper book) that the manufacturing Royalty/FTS received by the assessee from the Indian subsidiary as reflected in the tax returns filed by the SIEL was not reported by the assessee, and it is only in the returns filed in response to the notices issued u/s 148 of the Act, such an income was reported. Assessee admitted the fact that they did not declare this income in the original return of income. This fact is borne by the Assessment order dated 18.10.2012 vide paragraph No.7.1 to 7.3, wherein Ld.AO recorded that, to the notice issued u/s 148 of the Act, the assessee replied that the royalty/FTS received from SIEL was omitted by the assessee due to inadvertence to be declared in the original tax return u/s 139(1) of the Act. 14. Following are the details relating to the income as per original return of income, income as per return filed under section 148, furnished by the assessee : Assessment Year Income as per original return of income (in INR) Income as per return filed under section 148 (in INR) Amount of addition made by AO (in INR) Assessed income (in INR) AY 2004-05 NIL ....
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....it cannot be said that mere wrong mentioning of the provision of law relating to the other issues in the reasons recorded would vitiate the proceedings. We, therefore, reject the contention of the assessee that the reopening proceedings are bad under law. 'FIXED PLACE' PERMANENT ESTABLISHMENT IN INDIA IN THE FORM OF SECONDED EXPATRIATE EMPLOYEES OPERATING FROM THE PREMISES OF SAMSUNG INDIA ELECTRONICS PRIVATE LIMITED (SIEL) 18. At the outset, we would like to refer to relevant portion of Article 5 of the Indo-South Korean treaty, which deals with the concept of Permanent Establishment, in different forms. ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a sales outlet; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, ....
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....he assessee, or they are assessee's employees who are seconded to SIEL and the SIEL is the economic employer who exercises full control over them. 19. Proper appreciation of the rival contentions requires reference to relevant portion of such statements, which are extracted hereunder: Statement of Sh. Kyoung Soo Kim s/o Shri Jong Suk Kim Q1. Please identify yourself? Ans. I am Kyoung Soo Kim s/o Jong Suk Kim aged 40 yrs, working with Samsung India Electronics as Deputy General Manager (Purchasing). Q2. Since when you use working in this organisation? Q7. Being the purchase incharge do you get any direction from Samsung electronics Korea regarding import of raw materials? Ans. Korean company gives me information on quality, delivery & cost of raw materials. Q8. Who are you reporting here? Ans. I am reporting K W Cho M D. Q9. By whom have you been issued the appointment letter for working in the Samsung electronics India P. Ltd.? Ans. I have been issued the appointment letter by Samsung electronics Corporate Korea. Q10. Who decides the pricing of import? Ans. I am guided by the Korea....
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.... for it? Ans. 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. Statement of Shri Anuj Pareek, Sr. Manager Accounts Q. Please introduce yourself. Ans. Myself is Anuj Pareek, working in Samsung (SIEL) since July ... At present working in the capacity of Sr. Manager- Accounts. Q. I am showing you the remittances of Rs. 9,63,134 dtd. 10/02/10 and Rs. 12,42,25,457 dtd.9/02/10 in which these payments have been made to M/s Samsung Electronics Corporation as reimbursement of expenses. How would you justify such payment without deduction of tax thereon? Ans. Question asked about Rs. 12,42,25,457 dtd. 09/02/10 was not made. Form 15CA was wrongly uploaded on the site and there is no provision to sever it or cancel it. Remittance of Rs. 9,63,13481 dtd. 9. Feb 10 was on also salary paid to the Expatriate employees, the said salary has been offered to tax by the employers in India. For administration conveyance part of the salary is paid to Samsung Korea which in turn paid to expatriate employees all in Korea. Q3. Th....
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.... Q9. 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. Ans. Looks after by treasury department. Q10. 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 is raised to SIEL India. What do you have to say. Ans. I cannot comment because I am not aware of the reason. Statement of Mr. Anshuman Sah 1) Please identify yourself I am Anshuman Sah working as Vice-President (Sales & Marketing) for Telecom Systems inSamsung Electronics India Ltd. I have been working here for 7 months. 7) How frequently do you deal with the expats while carrying out your duties as VP-Sales & Marketing? Please give a detailed note on it. We are a technology Company & sometimes lik....
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...., Korea. This is the office of R&D and marketing. Q10. 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. Statement of Mr. J H Kyung, Ql. Please identify yourself. Ans. I am JH Kyung as CFO & Director SIEL since Jan 2010. Q2. Where had you been working before joining SIEL? Ans. I was worked in Mobile ..... Division in Samsung Korea. Q3. You were working in the parent company before you joined SIEL? What was your designation in Samsung Korea? Ans. Yes, Director. Q4. Since when have you been associated with Samsung group? Ans. 1990 Q6. What are the duties assigned to you in SIEL? Ans. Managing F/A, A/R, Logistics, Taxation & HR Q7. When you joined SIEL, was it your decision or you were simply posted to India? Ans. Own decisi....
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....nsumer's requirements; -Sales Forecast for sales and production; - More strategic direction setting and also liase with Samsung HQ for product development and production; - Also, by meeting Indian customers- try to make strategy of sales & marketing with other employee of SIEL. Q6. How do you liase with Samsung HQ for products development and production? Ans. By reading Indian Consumer's insight and finding the better product for India, I request HQ to develop Indianized products. In this process, there needs lots of explanation & persuasion. Once HQ decided to develop the product by utilizing HQ's rersource in initial stage and then factory prepare its production facilities for material locally and other country's factory. If possible, factory is trying to purchase its material locally. Q7. In the Liasoning activities with the HQ, do-you send information collected from India to Samsung Korea. So that they can develop a product suitable for India? Ans. Definitely Q8. How Often do you communicate with HQ and what is the mode of communication? Ans. In General once a week, Before ....
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....Market? Ans. SIEL sends each requirement of USP to GBM. We discuss on these Requirements with internal R & D Department in GBM. Q7. This means that the technical input for a specific products specialization are provided by SIEL? Ans. Feature Requirements are requested by SIEL. Q8. What are your duties as Head of Sales, North Region in SIEL? Ans. Manage organization and Sales of SIEL products in Northern Region. Q9. How do you carry out such duties? Ans. We have each RM & BMs execute our sales & also get involved in Sales with them. Q10. Do you have to communicate with Samsung Headquarter to perform your duties? If yes then how after do you communicate with Samsung India? Ans. Yes, Once in a week. Ql 1. In your communication with HQ what are things/points discussed? Ans. They usually ask us about the reason of aging stock. Q12. Since most of the items marketed by you, being CE head, are manufactured in India then why is HQ concerned with Ageing Stock? Ans. Because of Global performance. Statement of Mr. Mahesh Sutagatti Ql. Please give your introduct....
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.... basis, relevant forecast, plan strategy to sell the products, detailed stock/Logistics status etc it would not be possible for any company to place optimized purchase orders at a right timing nor to acquire most promising manufacturing technologies. In this case also, as is evident from the statements recorded by the assessing officer, there is a constant exchange of information between the subsidiary and the Global Business Management ("GBM") to perform the product/strategy functions from a global market perspective. 21. Learned AR submitted that it is to be noted that none of the statements of the employees reveal that the key decisions with regard to the products, pricing, launching etc are taken by the assessee but they are well within the realm of the Indian subsidiary. He submits that none of the statements recorded by the assessing officer would show that any activity of the GBM is done in India. He further submitted that the assessee does not carry out any market survey in India, but whatever the market survey that was spoken by the employees was in relation to the business of the subsidiary to understand the business of the Indian customers and provide India specific i....
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....erson. 24. Ld. DR further argued that the details are available show that the debit note has been raised by SEC, Korea and then after payment is made from SIL India, which implies the salaries are not paid to the employees of SIL 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 is raised by SIL India. Basing on this he argues that the expatriate employees are in fact the employees of the Korean entity and the beneficiary of the payments from SIL is the Korean entity. 25. Ld. DR further drew our attention to Point No. 9 of the letter of appointment of Mr K W Cho, wherein it is stated that, - "your services may be utilized in any of the offices of the branches of the company or in any department of the company or in any of the associated companies as may be required from time to time. Your services can be transferred to any of the branches of the company located in India, whether in existence at the time of your appointment are set at a later date at the sole discretion of the management without detriment to your status and emoluments." and to point N....
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.... the Ld. DRP by paragraph no. 5.4.4.4 rejected the contention of the AO that SIEL may be treated as a dependent agent for the purpose of Article 5. Ld. DRP also rejected the view of the AO that SIEL is a place of management for south east operations and held that no PE of the assessee exists under Article 5(2)(a) of the treaty with regard to south east operations. 30. Vide paragraph no. 5.4.4.6, Ld. DRP rejected the suggestion of the Ld. AO that SIEL can be considered as a service PE of the assessee. Lastly Ld. DRP held that the SIEL had nothing to do with the provision for royalty and fee for technical services. 31. Having rejected all the grounds pleaded by the AO, Ld. DRP reached a conclusion that SIEL be treated as a deemed fixed place PE of the assessee, and the relevant observation is to the effect that,- "Although they derive their remuneration from SIEL, their formal contract of employment is with the Parent company. The statements of some of these employees report frequently to SEC. Sh. B. D Park, Director (Mobile and I.T business), who is at number two position in SIEL has acknowledged that he communicates with SEC almost daily. Sh. J. H Kyung, Chief Financ....
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....al status, the market strategies both the mid and long terms etc. 33. As rightly argued by the Ld. AR that none of the statement would go to show that the any activity of the global business management (GBM) has ever been conducted in India or that the market survey that is conducted in India, as spoken by the expatriate employees has nothing to do with the business of the Indian subsidiary and it is solely for the benefit of the assessee. All the activities that are spoken by the expatriate employees related to the specificity of the products, stock verification, they designs according to the preferences of the Indian consumers, the market strategies to be adopted etc are clearly within the ambit of the business of the Indian subsidiary. Such a communication would primarily benefit the Indian subsidiary, and would help the assessee in its GBM to sustain its supply chain management and to place optimized purchase orders at a right timing or to acquire the most promising manufacturing technologies, as is submitted on behalf of the assessee. 34. At the best, the statements and other material relied upon by the revenue show that by way of the seamless communication between the I....
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....here is no evidence that is placed on record by the assessing officer to show that by way of business through these expatriate and seconded employees, the assessee derived any business income in India. 38. For these reasons, we are of the considered opinion that there is neither any business conducted by the assessee in India through the expatriated employees nor any income is derived by them though the activities of the employees. Consequently we hold that there is no fixed place PE of the assessee constituted through the expatriated employees. Issue is, therefore, answered in favour of the assessee. ADDITION OF 10% ESTIMATED INCOME ON THE TOTAL REMUNERATION COST OF EXPATRIATE EMPLOYEES SECONDED TO SIEL IN INDIA, 40. Ld. AO, in the assessment order, proceeded to attribute income in respect of such permanent establishment as per Article 7 of the Indo South Korean treaty. While making recourse to clause (iii) of Rule 10 of the Income Tax Rules, 1962, he took the remuneration cost of the expatriate employees seconded to SIEL as the basis for attributing income and added an estimated income of 10% on the understanding that had such services been rendered by an unrelated entit....