2024 (1) TMI 995

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....nder section 201(1)/201(1A) of the Act as invalid, being barred by limitation. Whereas, ground nos. 4, 5 and 6 are on merits. 4. 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, 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 ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ndia, 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. 7. 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 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. 8. 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 pro....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....espect 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 discharged in India, the assesse....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

.... 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 (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. 16. 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 ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ark-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. 11. Thus the basis of both the notices (section 148 and 201) has been knocked out of existence by the DRP's order in the reassessment proceedings of SEC for the same assessment year. On the date on which notices were issued to the petitioner under Sections 148 and 201(1)/(1A), there was an uncontested finding by the revenue authorities (i.e., the DRP) in the case of SEC that SEC cannot be taxed in respect of the sales made in India through the petitioner on the footing that the petitioner is its PE. If no income arose to SEC on account of sales in India since the petitioner cannot be held to be its PE in India, two consequences follow: (i) the payments made by the petitioner to SEC for the goods are not tax de....