Samsung Electronics Company Ltd., GURGAON V. ACIT, Circle- 3(1)(2), INTL. TAXATION, New Delhi

ITA 5759/DEL/2018

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8837 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2013-2014
• Appeal Filed On: 06-09-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Permanent establishment
• Section: 271(1)(c); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER I.T.A. NO.5759 & 5760/DEL/2018 ASSESSMENT YEAR: 2013-14 & 2015-16 SAMSUNG ELECTRONICS CO. LTD., C/O SAMSUNG INDIA ELECTRONICS PVT. LTD., 20 TH TO 24 TH FLOOR, TWO HORIZON CENTER, SEC-43, GOLF COURSE ROAD, GURGAON, HARYANA. V. ASST. COMMISSIONER OF INCOME TAX, CIRLCE-3(1)(2), INTERNATIONAL TAXATION, 4 TH FLOOR, E-2 BLOCK, PRATYAKSHAKAR BHAWAN, CIVIC CENTRE, NEW DELHI. TAN/PAN: AACCS 8960N (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SACHIT JOLLY, ADV. RESPONDENT BY: SHRI H.K. CHOUDHARY, CIT-DR DATE OF HEARING: 19 09 2018 DATE OF PRONOUNCEMENT: 14 12 2018 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESS EE AGAINST SEPARATE FINAL ASSESSMENT ORDER OF EVEN DAT E, DATED 03.08.2018 PASSED U/S.143(3) R.W.S. 144C(13) IN PUR SUANCE OF DIRECTIONS GIVEN BY THE DRP VIDE ORDER DATED 20. 07.2018 FOR THE ASSESSMENT YEARS 2013-14 AND 2015-16. 2. SINCE COMMON ISSUES ARE INVOLVED IN BOTH THE A PPEALS, THEREFORE, SAME WERE HEARD TOGETHER AND ARE BEING D ISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER. FOR THE SAKE OF READY I.T.AS. NO.5759 & 5760/DEL/2018 2 REFERENCE, THE GROUNDS OF APPEAL RAISED IN THE ASSE SSMENT YEAR 2013-14, WHICH IS PARI MATERIA WITH GROUNDS OF APPEAL IS TO THE APPEAL FOR THE ASSESSMENT YEAR 2013-14, THER EFORE, OUR FINDING GIVEN HERE WILL APPLY MUTATIS MUTANDIS FOR BOTH THE YEARS:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER (ASSESSING OFFICER) ERRED IN MAKI NG AN ADDITION OF RS.12,60,31,555/- TO THE INCOME OF THE APPELLANT BY HOLDING THAT EXPATRIATE EMPLOYEES SECONDED BY THE APPELLANT TO I TS SUBSIDIARY, VIZ., SAMSUNG INDIA ELECTRONICS PRIVATE LIMITED (SIEL) CONSTITUTED FIXED PLACE PERMANENT ESTABLISHMENT (PE) OF THE APPELLANT IN INDIA UNDER ARTICLE 5(1) OF THE DTAA. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO AND THE DISPUTE RESOLUTION PANEL (DRP) ERRED I N HOLDING THAT THE PRESENCE OF EXPATRIATE EMPLOYEES OF SIEL CONSTITUTE D FIXED PLACE PE OF THE APPELLANT IN INDIA. 3. THAT THE AO AND DRP ERRED IN NOT APPRECIATING T HAT THE DECISION OF THE HONBLE DELHI HIGH COURT IN CENTRICA INDIA OFFS HORE (P) LTD. V. CIT [2014] 364 ITR 336 (DEL) HAD NO APPLICATION IN THE FACTS OF THE PRESENT CASE. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP, HAVING NOTICED THE DECISION OF THE HONBLE TRI BUNAL IN THE APPELLANTS OWN CASE FOR A.YS 2004-05 TO 2009-10, 2 011-12, 2012-13 AND 2014-15, WHEREIN IT HAS BEEN HELD THAT THE APPE LLANT HAS NO PE IN INDIA, IN ANY FORM, ERRED IN STILL HOLDING THAT THE APPELLANT HAD A FIXED PLACE PE IN INDIA SOLELY ON THE GROUND THAT THE REV ENUE WAS IN THE PROCESS OF FILING AN APPEAL TO THE HIGH COURT. 5. THAT THE AO AND DRP ERRED IN NOT APPRECIATING TH AT SINCE THE TRANSFER PRICING OFFICER (TPO) HAD HELD THE TRANS ACTIONS BETWEEN THE APPELLANT AND ITS SUBSIDIARY (SIEL) TO BE AT ARMS LENGTH, NO FURTHER ATTRIBUTION OF PROFIT COULD HAVE BEEN MADE TO THE A LLEGED PE OF THE APPELLANT IN INDIA. 6. THAT THE AO AND DRP ERRED IN ATTRIBUTING 10% OF THE REMUNERATION I.T.AS. NO.5759 & 5760/DEL/2018 3 COST TO THE ALLEGED PE IN INDIA. 7. THAT THE AO ERRED IN LEVYING A UNIFORM RATE OF 15% ON ALL INCOME IN THE NATURE OF ROYALTY AND FEES FOR TECHNICAL SERVIC ES, WITHOUT APPRECIATING THAT MAJORITY OF SUCH INCOME WAS IN RESPECT OF AGRE EMENTS MADE ON OR AFTER 01.06.2005 AND, THEREFORE, THE APPLICABLE RAT E WAS 10% UNDER SECTION 115A(1)(B) OF THE ACT AND NOT 15%. 8. THAT THE AO ERRED IN LEVYING INTEREST UNDER SEC TION 234A AND 234B OF THE ACT AND IN INCORRECTLY COMPUTING THE IN TEREST UNDER SECTION 234B OF THE ACT. 9. THAT THE AO ERRED IN INCORRECTLY COMPUTING SURC HARGE AND CESS LEVIED/LEVIABLE. 10. THAT THE AO ERRED IN INITIATING PENALTY PROCEE DINGS UNDER SECTION 271(1)(C) OF THE ACT. 3. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE, M R. SACHIT JOLLY, SUBMITTED THAT BOTH THE ASSESSING OFFICER AN D DRP HAVE FOLLOWED THE ASSESSMENT ORDERS FOR THE ASSESSM ENT YEARS 2004-05 TO 2009-10, ASSESSMENT YEARS 2011-12 AND 20 14- 15. NOW THESE APPEALS STANDS DECIDED BY THE TRIBUNA L VIDE CONSOLIDATED ORDER DATED 22.03.2018, WHEREIN THE MA TTER HAS BEEN RESOLVED IN FAVOUR OF THE ASSESSEE. 4. ON THE OTHER HAND, LEARNED DEPARTMENT REPRESEN TATIVE HAS STRONGLY RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 5. AFTER CONSIDERING THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS THE ORDER OF THE TRIBUNA L FOR THE EARLIER YEARS, WE FIND THAT THE MAIN ISSUE INVOLVED IS, WHETHER THE EXPATRIATE EMPLOYEES SECONDED BY THE ASSESSEE T O ITS SUBSIDIARY, VIZ., SAMSUNG INDIA ELECTRONICS PVT. LT D. (SIEL) CONSTITUTED FIXED PLACE PERMANENT ESTABLISHMENT (PE ) UNDER ARTICLE 5(1) OF INDIA KOREA DTAA OR NOT. THE ASSESS EE, I.E., I.T.AS. NO.5759 & 5760/DEL/2018 4 SAMSUNG ELECTRONICS CO. LTD. IS A COMPANY ESTABLISH ED IN SOUTH KOREA AND IS TAX RESIDENT OF SOUTH KOREA. IT HAS TWO WHOLLY OWNED SUBSIDIARIES IN INDIA, I.E., SIEL AND SAMSUNG INDIA SOFTWARE OPERATIONS PVT. LTD. THE ASSESSEE CO MPANY HAD ESTABLISHED A PROJECT OFFICE IN INDIA ON 14 TH MARCH, 2013 FOR WHICH NECESSARY PERMISSION FROM THE RBI WAS TAK EN. THE PE WAS SET UP AND CARRIED OUT THE ACTIVITIES REQUIR ED IN PURSUANCE OF THE CONTRACT ENTERED WITH SIEL FOR PRO VIDING TECHNICAL SUPPORT ASSISTANCE IN RELATION TO SYSTEM/ EQUIPMENT USED IN THE OPERATION OF LTE NETWORKS. HOWEVER, THE OPERATIONS COULD NOT BE STARTED TILL 31 ST MARCH, 2013. A SURVEY WAS CONDUCTED IN THE MONTH OF JUNE/JULY, 2010 AT TH E PREMISES OF SIEL AND IN WAKE OF SUCH PROCEEDINGS, T HE NOTICES U/S.131 WERE ISSUED TO THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-05 TO 2009-10. THE ASSESSEES CASE BEFORE THE ASSESSING OFFICER HAD BEEN THAT THE SECO NDED EMPLOYEES TRANSFERRED FROM SEC WORKED UNDER THE SUPERVISION AND CONTROL OF SIEL WHO WAS THE REAL EC ONOMIC EMPLOYER AND HENCE IT CANNOT BE HELD THAT ASSESSEE HAS PE IN INDIA IN THE FORM OF THE EXPATRIATE EMPLOYEES. THE MAIN CONTENTION OF THE ASSESSEE AS INCORPORATED IN THE I MPUGNED ASSESSMENT ORDER IN THIS REGARD READS AS UNDER: IT IS SUBMITTED THAT ALL THE TESTS ENUMERATED ABOV E DO NOT GET SATISFIED ON ACCOUNT OF OUR PRIME CONTENTION THAT T HE EMPLOYEES WORK UNDER THE CONTROL AND SUPERVISION OF THE INDIA N COMPANY I.E. SIEL AND COULD NOT BE HELD TO BE CARRYING OUT BUSIN ESS ACTIVITIES OF SEC IN INDIA OR ON ITS BEHALF. THE SECONDED/TRANSFERRED EMPLOYEES BEING EMPLOYEES OF SIEL PERFORM BUSINESS ACTIVITIES OF SIEL FROM ITS I.T.AS. NO.5759 & 5760/DEL/2018 5 PREMISES. SUCH ACTIVITIES PERFORMED BY SECONDED EMP LOYEES CONSTITUTE BUSINESS ACTIVITIES OF SIEL AND NOT OF S EC. THAT SIEL HAS ENTERED INTO AN ARRANGEMENT FOR TRAN SFER OF EMPLOYEES FROM SEC FOR THE PURPOSE OF CARRYING OUT DAY TO DAY BUSINESS OPERATIONS OF SIEL, THE INDIAN COMPANY. SU CH EXPATRIATE EMPLOYEES WORKED IN THE CAPACITY OF SIEL'S EMPLOYEE S. SIEL HAS ENTERED INTO A LOCAL EMPLOYMENT CONTRACT WITH THE I NDIVIDUAL EXPATRIATE EMPLOYEES FOR TAKING THEM ON EMPLOYMENT, WHEREIN KEY EMPLOYMENT TERMS HAVE BEEN PROVIDED SUCH AS ROLES A ND RESPONSIBILITY, REMUNERATION ENTITLEMENT, REPORTING RELATIONSHIP AND OTHER LEGAL TERMS, ETC. SAMPLE COPY OF EMPLOYMENT C ONTRACTS / LETTER OF APPOINTMENTS ISSUED TO EXPATRIATES BY SIEL ARE E NCLOSED AS ANNEXURE 1. IT IS MOST RESPECTFULLY SUBMITTED BEFORE YOUR GOODS ELF THAT THE ASSESSEE HAS SECONDED CERTAIN SKILLED AND TALENTED PERSONNEL TO SIEL UNDER EMPLOYMENT OF SIEL IN ORDER TO ENABLE TH E LATTER TO CARRY OUT THE BUSINESS OPERATIONS EFFECTIVELY AND EFFICIE NTLY IN INDIA. THE EXPATRIATES WORKED INCLUSIVELY UNDER THE CONTROL AN D SUPERVISION OF SIEL WITHOUT ANY RELATION OR CONNECTION WITH SEC. T HE CONCERNED EXPATS DO NOT ENJOY ANY PRIVILEGE OR AUTHORITY TO E NTER INTO ANY CONTRACT OR NEGOTIATIONS OR OFFERINGS ON BEHALF OF SEC OR CARRY OUT ANY OTHER ACTIVITIES ON BEHALF OF SEC. POST TRANSFE R, SEC DOES NOT BEAR ANY LIABILITY OR RESPONSIBILITY TOWARDS ACTS O R ACTIONS OF THE EXPAT SINCE HE/SHE IS NOW EMPLOYED WITH SIEL AND PE RFORMING HIS/HER OFFICIAL DUTIES UNDER THE GUIDANCE AND INST RUCTIONS OF SIEL'S MANAGEMENT. FURTHER, SIEL BEING THE EMPLOYER APPROP RIATELY WITHHOLD TAXES AGAINST SALARY PAYMENTS MADE TO EXPA TRIATE EMPLOYEES UNDER SECTION 192 OF THE ACT. TO SUM UP THE FOLLOWING IS EVIDENT FROM ABOVE:- THAT THE EXPATRIATES WORK UNDER THE EMPLOYMENT WITH SIEL THAT SIEL'S MANAGEMENT HAS EFFECTIVE CONTROL AND SU PERVISION OF THESE EXPATRIATES. I.T.AS. NO.5759 & 5760/DEL/2018 6 THAT EXPATRIATES WORK UNDER THE DIRECTION AND GUIDA NCE OF SIEL'S MANAGEMENT AND SIEL IS RESPONSIBLE FOR WORK PERFORM ED BY THEM THAT SIEL BEARS/ PAYS SALARY EXPENSE OF THESE EXPAT RIATES AND IS RESPONSIBLE FOR TAX WITHHOLDING REQUIRED UNDER THE ACT. ACCORDINGLY, IT IS EVIDENT THAT SIEL HAS BEEN THE R EAL AND ECONOMIC EMPLOYER OF THE TRANSFERRED EMPLOYEES. IN THIS RESP ECT, IT WOULD BE RELEVANT TO DISCUSS THE CONCEPT OF REAL AND ECONOMI C EMPLOYMENT. 6. HOWEVER, THE LEARNED ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTION ON THE GROUND THAT THE FACTS AND ISSUES HAVE BEEN DECIDED IN THE CASE OF THE ASSESSEE IN TH E EARLIER YEARS WHEREIN IT HAS BEEN HELD THAT ASSESSEE HAS A FIXED PLACE PE IN THE FORM OF EXPATRIATES AND HE ALSO REFERRED TO THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CENTRICA INDIA OFF SHORES PVT. LTD., REPORTED IN (2014) 44 T AXMANN.COM 300 (364 ITR 336). 7. WE FIND THAT THIS ISSUE HAS BEEN DISCUSSED THRE ADBARE BY THE TRIBUNAL RIGHT FROM THE ASSESSMENT YEARS 200 4-05 TO 2014-15 (EXCEPT FOR ASSESSMENT YEAR 2013-14) WHICH IS IMPUGNED BEFORE US ON EXACTLY SIMILAR POINTS. THE R ELEVANT OBSERVATION AND THE DISCUSSION OF THE TRIBUNAL INCL UDING THE STATEMENT OF EXPATRIATES EMPLOYEES ARE AS UNDER:- 20. IT IS THE ARGUMENT ON BEHALF OF THE ASSESSEE T HAT THE ASSESSEE IS THE HOLDING COMPANY OF THE INDIAN SUBSIDIARY, (S IEL) IN A HIGHLY GLOBALISED AND COMPETITIVE BUSINESS ENVIRONMENT, IT IS ESSENTIAL FOR GROUP COMPANIES SPREAD ACROSS THE GLOBE TO COMMUNIC ATE WITH EACH OTHER TO SUSTAIN ITS SUPPLY CHAIN MANAGEMENT, WITHO UT WHICH EXCHANGE OF INFORMATION ON THE ASPECTS AS TO WHAT S ORT OF MODELS/DESIGNS ARE PREFERRED BY THE CUSTOMERS IN TH E MARKET ON I.T.AS. NO.5759 & 5760/DEL/2018 7 MID-TERM TO LONG-TERM BASIS, RELEVANT FORECAST, PLA N STRATEGY TO SELL THE PRODUCTS, DETAILED STOCK/LOGISTICS STATUS ETC I T WOULD NOT BE POSSIBLE FOR ANY COMPANY TO PLACE OPTIMIZED PURCHAS E ORDERS AT A RIGHT TIMING NOR TO ACQUIRE MOST PROMISING MANUFACT URING TECHNOLOGIES. IN THIS CASE ALSO, AS IS EVIDENT FROM THE STATEMENTS RECORDED BY THE ASSESSING OFFICER, THERE IS A CONST ANT EXCHANGE OF INFORMATION BETWEEN THE SUBSIDIARY AND THE GLOBAL B USINESS MANAGEMENT (GBM) TO PERFORM THE PRODUCT/STRATEGY FUNCTIONS FROM A GLOBAL MARKET PERSPECTIVE. 21. LEARNED AR SUBMITTED THAT IT IS TO BE NOTED THA T NONE OF THE STATEMENTS OF THE EMPLOYEES REVEAL THAT THE KEY DEC ISIONS 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 T HE GBM IS DONE IN INDIA. HE FURTHER SUBMITTED THAT THE ASSESSEE DO ES 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 INFORMATION TO GBMS WHICH I N TURN THEN CARRY OUT RESEARCH AND DEVELOPMENT TO DEVELOP INDIA SPECI FIC PRODUCTS. 22. IT IS FURTHER SUBMITTED ON BEHALF OF THE ASSESS EE THAT IS NOT THE CASE OF EVEN THE ASSESSING OFFICER THAT ANY COR E MANAGEMENT DECISION RELATING TO THE ASSESSEE BUSINESS WAS TAKE N IN INDIA AND THE INVOLVEMENT OF THE SECONDED EXPATRIATE EMPLOYEE S WORKING UNDER THE CONTROL OF THE INDIAN SUBSIDIARY IN THE D ECISION-MAKING PROCESS WITH REGARD TO PRODUCT AND PRICING, MARKETI NG, STRATEGIZING ETC ONE TAKEN IN RESPECT OF THE BUSINESS OF THE IND IAN SUBSIDIARY AND NOT FOR THE BUSINESS OF THE ASSESSEE. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE, ALL THE COMMUNICATION BET WEEN THE EMPLOYEES OF THE ASSESSEE IN KOREA AND THE SECONDED EMPLOYEES IN I.T.AS. NO.5759 & 5760/DEL/2018 8 INDIA RELATE ONLY TO THE BUSINESS OF THE INDIAN SUB SIDIARY AND THE SECONDED EMPLOYEES WERE DISCHARGING THE DUTIES OF T HE SUBSIDIARY TOWARDS THE HOLDING COMPANY. HE SUBMITS THAT NO BUS INESS OF ASSESSEE IS CARRIED OUT BY THE SECONDED EMPLOYEES A CCORDING TO THE STATEMENTS RECORDED BY THE LD. ASSESSING OFFICER. H E, THEREFORE, SUBMITTED THAT THERE IS NO BASIS FOR THE AUTHORITIE S BELOW TO CONCLUDE THAT THE SECONDED EMPLOYEES WERE ACTING IN FURTHERANCE OF THE BUSINESS OF THE ASSESSEE BY SITTING IN THE PREM ISES OF THE INDIAN SUBSIDIARY, THEREBY THEY CONSTITUTE A FIX REPLACE P ERMANENT ESTABLISHMENT. 23. PER CONTRA, IT IS ARGUMENT OF THE LD. DR THAT I T IS EVIDENT FROM THE STATEMENTS OF THE EXPATRIATE EMPLOYEES WELL COR ROBORATED BY THE MATERIAL THAT THE AMOUNT WAS PAID TO THE FOREIGN PA RENT BUT NOT TO THE ACCOUNT OF THE EMPLOYEES AND IF IT ALL SHOULDN T BE ANY CONVENIENCE AS PLEADED BY THE ASSESSEE, THE PART OF THE SALARY SHOULDVE BEEN LIMITED TO A FOREIGN ACCOUNT OF THE EXPATRIATE EMPLOYEE BUT NOT TO THE ACCOUNT OF THE FOREIGN PARE NT. FURTHER, AS COULD BE SEEN EVEN FROM THE MODE OF PAYMENT THE SAL ARIES ARE NOT PAID TO THE EXPATRIATE EMPLOYEES AFTER IT IS RECEIV ED FROM THE SIL. AS A MATTER OF FACT IT WAS CONFRONTED TO ONE OF THE EM PLOYEES WITH REFERENCE TO THE BANK ACCOUNTS THAT SEC PAID THE AM OUNT TO PERSONAL BANK ACCOUNT OF THE EMPLOYEES WHEN SUCH AM OUNT IS LIMITED TO SEC, HOWEVER THE REMITTANCE OF SALARIES ARE MADE TO SEC ON QUARTERLY BASIS, WHICH MEANS THAT A PERSON WOULD GET HIS SALARY IN THE HIS SOUTH KOREAN BANK AFTER 3 MONTHS OF THE RECEIPT OF SALARY IN INDIA AND CERTAINLY ITS NOT THE TO THE CONVENIE NCE OF SUCH PERSON. 24. LD. DR FURTHER ARGUED THAT THE DETAILS ARE AVAI LABLE SHOW THAT THE DEBIT NOTE HAS BEEN RAISED BY SEC, KOREA A ND THEN AFTER PAYMENT IS MADE FROM SIL INDIA, WHICH IMPLIES THE S ALARIES ARE NOT PAID TO THE EMPLOYEES OF SIL AFTER THE PAYMENT HAS BEEN RECEIVED FROM INDIA BUT THE SALARIES ARE PAID AS IF SUCH EXP ATS WERE THEIR I.T.AS. NO.5759 & 5760/DEL/2018 9 OWN EMPLOYEES AND THEN A DEBIT NOTE IN RESPECT OF S UCH SALARIES IS RAISED BY SIL INDIA. BASING ON THIS HE ARGUES THAT THE EXPATRIATE EMPLOYEES ARE IN FACT THE EMPLOYEES OF THE KOREAN E NTITY 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 THA T, - YOUR SERVICES MAY BE UTILIZED IN ANY OF THE OFFICE S 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 TI ME TO TIME. YOUR SERVICES CAN BE TRANSFERRED TO ANY OF THE BRAN CHES OF THE COMPANY LOCATED IN INDIA, WHETHER IN EXISTENCE AT T HE TIME OF YOUR APPOINTMENT ARE SET AT A LATER DATE AT THE SOLE DIS CRETION OF THE MANAGEMENT WITHOUT DETRIMENT TO YOUR STATUS AND EMO LUMENTS. AND TO POINT NO 12 WHERE IT IS STATED THAT,- DURING YOUR APPOINTMENT WITH A COMPANY, SINCE YOU A RE ON DEPREDATION, YOU WILL BE GOVERNED BY SERVICE AS RUL ES AS APPLICABLE TO SAMSUNG INDIA ELECTRONICS CO LTD KOREA EMPLOYEES . 26. HE LASTLY SUBMITTED THAT THE EXPATRIATE EMPLOYE ES, AS REVEALED BY THEIR STATEMENTS, ARE WORKING IN FURTHE RANCE OF THE BUSINESS INTERESTS OF THE KOREAN ENTITY AND THEIR W ORK DESCRIPTION DOES NOT FIT IN THE DESCRIPTION OF PREPARATORY OR A UXILIARY IN NATURE AS SUCH THERE IS NO EMPLOYER TO EMPLOYER RELATIONSH IP BETWEEN THE KOREAN PARENT AND INDIAN SUBSIDIARY. 27. IT IS PERTINENT TO NOTE THAT HAVING GONE THROUG H THE STATEMENTS AND ALSO SOME OTHER MATERIAL RELATING TO THE ASPECT S AS TO WHO PAYS THE SALARY, WHOM THE SENIOR EMPLOYEES REPORTED TO, FREQ UENCY OF COMMUNICATION WITH HEADQUARTERS IN KOREA ETC, LD. DRP DEALT WITH ALMOST ALL THE ASPECTS ARGUED BY THE LD. DR BEFORE US. THEY FOUND THAT THE ASSESSEE IS NOT EXERCISING THAT KIND OF ABSOLUT E CONTROL OVER POSTING OF EMPLOYEES TO THE INDIAN SUBSIDIARY, BUT THE ASSE SSEE HAS BEEN POSTING THE EMPLOYEES ONLY PURSUANT TO THE TRIPARTE AGREEMENTS BETWEEN THE ASSESSEE, INDIAN SUBSIDIARY AND THE CON CERNED EMPLOYEE. LD. DRP FURTHER HELD THAT THE INDIAN SUBSIDIARY IS A COMPANY I.T.AS. NO.5759 & 5760/DEL/2018 10 INCORPORATED UNDER THE LAWS GOVERNING THE COMPANIES IN INDIA AND IS CONFIRMING TO ALL THE RULES AND REGULATIONS THAT GO VERN THE OPERATIONS OF A CORPORATE BODY IN THE COUNTRY, BY FILING ITS RETU RNS AND PAYING THE TAXES UNDER THE INCOME TAX AT AND OTHER STATUTES. I T WAS FURTHER OBSERVED BY THE LIBRARY DRP THAT THE INTERNATIONAL TRANSACTIONS HAVE BEEN REPORTED UNDER THE TRANSFER PRICING REGULATION S AND EXAMINED BY THE TPO. 28. LD. DRP VIDE PARAGRAPH NO. 5.4.4.2 RECORDED THA T THE OBSERVATIONS OF THE LD. AO IN RESPECT OF THE ASSERT ION AS TO THE SUBSIDIARY AS PE, THE CONCLUSIONS MADE BY THE AO AR E BASED ON THE STATEMENT OF THE VARIOUS EMPLOYEES OF SIEL DURI NG THE SURVEY CONDUCTED AT ITS PREMISES. SINCE SIEL IS A COMPANY INCORPORATED UNDER THE LAWS GOVERNING THE COMPANIES IN INDIA AND IS CONFIRMING TO ALL THE RULES AND REGULATIONS THAT GOVERN THE OP ERATIONS OF A COOPERATE BODY, FILING ITS RETURNS OF INCOME AND PA YING TAXES BY REPORTING THE INTERNATIONAL TRANSACTIONS UNDER TRAN SFER PRICING REGULATIONS, IT CANNOT BE SAID THAT THE SIEL WHICH IS SUBSIDIARY COMPANY IS A PE AND REJECTED THE FINDINGS OF THE AO ON THAT ASPECT. 29. SO ALSO THE LD. DRP BY PARAGRAPH NO. 5.4.4.4 RE JECTED THE CONTENTION OF THE AO THAT SIEL MAY BE TREATED AS A DEPENDENT AGENT FOR THE PURPOSE OF ARTICLE 5. LD. DRP ALSO R EJECTED THE VIEW OF THE AO THAT SIEL IS A PLACE OF MANAGEMENT FOR SOUTH EAST OPERATIONS AND HELD THAT NO PE OF THE ASSESSEE EXIS TS UNDER ARTICLE 5(2)(A) OF THE TREATY WITH REGARD TO SOUTH EAST OPE RATIONS. 30. VIDE PARAGRAPH NO. 5.4.4.6, LD. DRP REJECTED TH E SUGGESTION OF THE LD. AO THAT SIEL CAN BE CONSIDERED AS A SERV ICE PE OF THE ASSESSEE. LASTLY LD. DRP HELD THAT THE SIEL HAD NO THING TO DO WITH THE PROVISION FOR ROYALTY AND FEE FOR TECHNICA L SERVICES. 31. HAVING REJECTED ALL THE GROUNDS PLEADED BY THE AO, LD. DRP REACHED A CONCLUSION THAT SIEL BE TREATED AS A DEEM ED FIXED PLACE I.T.AS. NO.5759 & 5760/DEL/2018 11 PE OF THE ASSESSEE, AND THE RELEVANT OBSERVATION IS TO THE EFFECT THAT,- A LTHOUGH THEY DERIVE THEIR REMUNERATION FROM SIEL, T HEIR FORMAL CONTRACT OF EMPLOYMENT IS WITH THE PARENT COMPANY. THE STATEMENTS OF SOME OF THESE EMPLOYEES REPORT FREQUENTLY TO SEC. S H. B. D PARK, DIRECTOR (MOBILE AND I.T BUSINESS), WHO IS AT NUMBE R TWO POSITION IN SIEL HAS ACKNOWLEDGED THAT HE COMMUNICATES WITH SEC ALMOST DAILY. SH. J. H KYUNG, CHIEF FINANCIAL OFFICER HAS STATED THAT HE IS IN TOUCH WITH SEC TWO TO THREE TIMES A WEEK. SH. H. K SEO, PRESIDENT MARKETING AND SALES ALSO STATED THAT HE COMMUNICATE S WITH SEC ONCE A WEEK IN GENERAL. SH. YONG HEE CHO, WHO IS IN CHARGE OF SALES HAS STATED THAT HE COMMUNICATES WITH SEC ONCE A WEEK. S TATEMENTS OF SOME OF THESE OFFICERS WHO ARE OF THE RANK OF DIVIS ION HEADS, ALSO SHOW THAT THEY CONTINUE TO BE UNDER SOME CONTROL OF THE SEC FOR CERTAIN ACTIVITIES LIKE RESEARCH AND DEVELOPMENT OF PRODUCT S FOR THE INDIAN MARKET, DEVELOPMENT OF MARKETING STRATEGY, DECISION S RELATING TO PRICING OF PRODUCT, EXPLORATION AND DEVELOPMENT OF NEW MARKETS IN THE NEIGHBORING COUNTRIES. THESE ARE THE FUNCTIONS THAT WOULD NORMALLY HAVE BEEN PERFORMED BY SEC THROUGH ITS OWN EMPLOYEE S, OR SUCH FUNCTIONS WOULD HAVE BEEN OUTSOURCED BY IT TO SOME THIRD PARTY, IN WHICH CASE THE THIRD PARTY WOULD BE ENTITLED TO SOM E REMUNERATION FOR THESE SERVICES. HOWEVER IN THE PRESENT CASE IT IS T HE SECONDED EMPLOYEES OF SEC ARE PERFORMING THESE FUNCTIONS JN ADDITION TO THEIR OWN DUTIES PERFORMED BY THEM FOR SIEL. FOR PERFORMI NG THE ABOVE FUNCTIONS OF SEC THESE EMPLOYEES HAVE A 'FIXED PLAC E OF BUSINESS' I.E THE PREMISES OF SEIL AVAILABLE TO THEM. MOREOVER, I T IS AN ADMITTED FACT THAT APART FROM THESE 'SECONDED EMPLOYEES' WHO ARE IN THE PAYROLL OF SIEL, OTHER EMPLOYEES OF SEC ALSO COME F ROM TIME TO TIME TO INDIA AND USE THE PREMISES OF SIEL FOR THE FUNCTION S PERFORMED BY THEM FOR SEC. THIS IS QUITE EVIDENT FROM THE STATEM ENT OF SH. MAHESH SUTAGATTI AND SH. ANSHUMAN SAH, VP (SALES & MARKETI NG). SH. SUTTAGATI IS HIMSELF AN EMPLOYEE OF SEC WHO WAS IN INDIA FOR THE DEVELOPMENT OF ASSESSEE'S WI-MAX BUSINESS IN INDIA. SH. SAH HAS ADMITTED THAT THE EMPLOYEES OF SEC COME FROM TIME T O TIME AND WORK WITH THE LOCAL PERSONNEL. 32. WE HAVE CONSIDERED THE OBSERVATIONS OF LD. DRP IN THE LIGHT OF THE ABOVE STATEMENTS. THERE IS NO DOUBT THAT THERE IS SEEMLESS INFORMATION EXCHANGE BETWEEN THE EMPLOYEES OF THE A SSESSEE AND THE EXPAT EMPLOYEES. HOWEVER, ON A CAREFUL CONSIDE RATION OF THE ENTIRE MATTER INCLUDING THE STATEMENTS OF THE EXPAT RIATE EMPLOYEES, EXTRACTED SUPRA, WE ARE OF THE CONSIDERED OPINION T HAT THE STATEMENTS SHOW THAT SUCH INFORMATION EXCHANGE RELA TES TO THE I.T.AS. NO.5759 & 5760/DEL/2018 12 MODELS/DESIGNS TO THE LIKING OF THE INDIAN CONSUMER S, PLANS AND STRATEGIES RELATING TO THE SALE OF THE PRODUCTS, DE TAILED STOCK/LOGISTICAL STATUS, THE MARKET STRATEGIES BOTH THE MID AND LONG TERMS ETC. 33. AS RIGHTLY ARGUED BY THE LD. AR THAT NONE OF TH E STATEMENT WOULD GO TO SHOW THAT THE ANY ACTIVITY OF THE GLOBA L BUSINESS MANAGEMENT (GBM) HAS EVER BEEN CONDUCTED IN INDIA O R THAT THE MARKET SURVEY THAT IS CONDUCTED IN INDIA, AS SPOKEN BY THE EXPATRIATE EMPLOYEES HAS NOTHING TO DO WITH THE BUS INESS OF THE INDIAN SUBSIDIARY AND IT IS SOLELY FOR THE BENEFIT OF THE ASSESSEE. ALL THE ACTIVITIES THAT ARE SPOKEN BY THE EXPATRIATE EM PLOYEES RELATED TO THE SPECIFICITY OF THE PRODUCTS, STOCK VERIFICATION , THEY DESIGNS ACCORDING TO THE PREFERENCES OF THE INDIAN CONSUMER S, THE MARKET STRATEGIES TO BE ADOPTED ETC ARE CLEARLY WITHIN THE AMBIT OF THE BUSINESS OF THE INDIAN SUBSIDIARY. SUCH A COMMUNICA TION WOULD PRIMARILY BENEFIT THE INDIAN SUBSIDIARY, AND WOULD HELP THE ASSESSEE IN ITS GBM TO SUSTAIN ITS SUPPLY CHAIN MAN AGEMENT AND TO PLACE OPTIMIZED PURCHASE ORDERS AT A RIGHT TIMING O R TO ACQUIRE THE MOST PROMISING MANUFACTURING TECHNOLOGIES, AS IS SU BMITTED 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 COMMUN ICATION BETWEEN THE INDIAN SUBSIDIARY AND THE ASSESSEE, THE EXPATRIATE EMPLOYEES WERE ONLY DISCHARGING THE DUTIES OF THE S UBSIDIARY COMPANY TOWARDS THE HOLDING COMPANY. WHATEVER THE BENEFITS THAT ARE DERIVED BY THE INDIAN SUBSIDIARY BY SUCH COMMUN ICATION ARE OFFER TO TAX IN INDIA. WE THEREFORE FIND THAT THE A CTIVITIES SPOKEN BY THE EXPATRIATE EMPLOYEES IN THEIR STATEMENTS ARE IN THE NATURE OF REPORTING REQUIRED IN THE COURSE OF DISCHARGE OF TH E FUNCTIONS OF THE SUBSIDIARY COMPANY TOWARDS THE HOLDING COMPANY, AND SUCH I.T.AS. NO.5759 & 5760/DEL/2018 13 ACTIVITIES DO NOT CONSTITUTE A PE UNDER ARTICLE 5(4 )(D), (E) AND (F) OF THE DTAA. 35. AS RIGHTLY POINTED OUT BY THE LD. AR, EVEN IF T HE IMPUGNED ACTIVITIES OF SECONDED EMPLOYEES AMOUNT TO RENDERIN G OF SERVICES TO SUBSIDIARY BY THE ASSESSEE, IN VIEW OF THE FACT THA T THERE IS NO PROVISION FOR A SERVICE PE IN INDIA-SOUTH KOREA DTA A, NO QUESTION OF SERVICE PE ARISES IN THIS MATTER. AS A MATTER OF F ACT, LD. DRP VIDE PARAGRAPH NO 5.4.4.6 OF THEIR ORDER OBSERVED THE SA ME. 36. FROM A READING OF ART.5 OF THE DTAA, WE UNDERST AND THAT IN ORDER TO CONSTITUTE A PE, THERE MUST BE A FIXED PLA CE OF BUSINESS AVAILABLE TO THE ASSESSEE, THROUGH WHICH THE BUSINE SS OF ASSESSEE IS WHOLLY OR PARTLY CARRIED ON. IN THE PRECEDING P ARAGRAPHS WE HELD THAT WHAT THE EXPAT EMPLOYEES ARE DOING IS ONLY THE DISCHARGE OF THE FUNCTIONS OF SUBSIDIARY TOWARDS THE HOLDING COM PANY, WHICH IS FOR THE BENEFIT OF THE BUSINESS OF THE SUBSIDIARY T O MAKE THE GBM UNDERSTAND THE PRIORITIES AND PREFERENCES OF THE IN DIAN CUSTOMERS BY PROVIDING INDIA SPECIFIC INFORMATION TO GBMS WH ICH IN TURN THEN CARRY OUT RESEARCH AND DEVELOPMENT TO DEVELOP INDIA SPECIFIC PRODUCTS. BY NO STRETCH OF IMAGINATION COULD IT BE SAID THAT IT IS IN FURTHERANCE OF THE BUSINESS OF THE ASSESSEE DE HORS THE BUSINESS OF THE SUBSIDIARY. 37. IN THE ABSENCE OF PROOF AS TO ANY MANAGEMENT AC TIVITY OF THE ASSESSEE BEING CONDUCTED IN INDIA OR THAT IT IS EST ABLISHED THAT THE DECISIONS RELATING TO THE PRODUCTS TO BE MANUFACTUR ED, PRICING IN THE DOMESTIC MARKETS, OR THE DECISIONS RELATING TO THE LAUNCH OF SUCH PRODUCTS IN INDIA IS TAKEN BY THE ASSESSEE, WE FIND IT DIFFICULT TO AGREE WITH THE AUTHORITIES BELOW THAT THROUGH THE E XPATRIATE EMPLOYEES THE ASSESSEE HAS BEEN CONDUCTING THE BUSI NESS OF ASSESSEE IN INDIA. FURTHER, EXCEPT STATING THAT 10% OF THE REMUNERATION OF THESE EMPLOYEES HAS TO BE ASSUMED A S THE INCOME I.T.AS. NO.5759 & 5760/DEL/2018 14 OF THE ASSESSEE, ABSOLUTELY THERE IS NO EVIDENCE TH AT IS PLACED ON RECORD BY THE ASSESSING OFFICER TO SHOW THAT BY WAY OF BUSINESS THROUGH THESE EXPATRIATE AND SECONDED EMPLOYEES, TH E ASSESSEE DERIVED ANY BUSINESS INCOME IN INDIA. 38. FOR THESE REASONS, WE ARE OF THE CONSIDERED OPI NION THAT THERE IS NEITHER ANY BUSINESS CONDUCTED BY THE ASSE SSEE IN INDIA THROUGH THE EXPATRIATED EMPLOYEES NOR ANY INCOME IS DERIVED BY THEM THOUGH THE ACTIVITIES OF THE EMPLOYEES. CONSE QUENTLY WE HOLD THAT THERE IS NO FIXED PLACE PE OF THE ASSESSEE CON STITUTED THROUGH THE EXPATRIATED EMPLOYEES. ISSUE IS, THEREFORE, AN SWERED IN FAVOUR OF THE ASSESSEE. ADDITION OF 10% ESTIMATED INCOME ON THE TOTAL REMUN ERATION COST OF EXPATRIATE EMPLOYEES SECONDED TO SIEL IN IN DIA, 40. LD. AO, IN THE ASSESSMENT ORDER, PROCEEDED TO A TTRIBUTE INCOME IN RESPECT OF SUCH PERMANENT ESTABLISHMENT A S PER ARTICLE 7 OF THE INDO SOUTH KOREAN TREATY. WHILE MAKING RECOU RSE TO CLAUSE (III) OF RULE 10 OF THE INCOME TAX RULES, 1962, HE TOOK THE REMUNERATION COST OF THE EXPATRIATE EMPLOYEES SECON DED TO SIEL AS THE BASIS FOR ATTRIBUTING INCOME AND ADDED AN ESTIM ATED INCOME OF 10% ON THE UNDERSTANDING THAT HAD SUCH SERVICES BEE N RENDERED BY AN UNRELATED ENTITY TO SIEL, 10% WOULD BE A REASONA BLE MARKUP THAT WOULD HAVE BEEN EARNED BY IT. LD. DRP CONFIRME D THIS FINDING OF THE LD. AO. HOWEVER, IN VIEW OF OUR FINDING THAT THERE IS NO BUSINESS ACTIVITY THAT IS CONDUCTED BY THE ASSESSEE THROUGH THE EXPATRIATE EMPLOYEES, THE QUESTION OF ESTIMATED INC OME DOES NOT ARISE. 8. THUS, IN VIEW OF THE AFORESAID OBSERVATION AND T HE FINDINGS OF THE TRIBUNAL, THIS IS SQUARELY APPLICAB LE IN THE PRESENT CASE. ADMITTEDLY, THERE IS NO MATERIAL CHAN GE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AS BOTH DRP AND I.T.AS. NO.5759 & 5760/DEL/2018 15 ASSESSING OFFICER HAD FOLLOWED THE EARLIER YEAR ORD ERS. ACCORDINGLY, WE ALSO HOLD THAT THERE IS NO FIXED PL ACE PE THROUGH THE EXPATRIATE EMPLOYEES NOR ANY INCOME IS DERIVED BY THE ASSESSEE TO THE EXPATRIATE EMPLOYEES. FURTHE R, IT HAS BEEN OBSERVED BY THE TRIBUNAL THAT, SINCE THERE IS NO SERVICE PE CLAUSE IN INDIA SOUTH KOREA DTAA, THEREFORE, NO QUESTION OF SERVICE PE ARISES. ACCORDINGLY, THE JUDGMENT OF HON'BLE DELHI HIGH COURT RELIED UPON BY THE ASSESSING OFFIC ER IN THE CASE OF CENTRICA (SUPRA) WOULD NOT BE APPLICABLE BE CAUSE IN THAT CASE SECONDED EMPLOYEES WERE HELD TO CONSTITUT E SERVICE PE. IN THE RESULT, THE GROUNDS RAISED BY THE ASSESS EE ARE ALLOWED AND EVEN THE ATTRIBUTION PART WOULD BE ALLO WED IN FAVOUR OF THE ASSESSEE BECAUSE ONCE THERE IS NO BUS INESS ACTIVITY CONDUCTED BY THE ASSESSEE THROUGH EXPATRIA TE EMPLOYEES, THEN THERE COULD NOT BE QUESTION OF ANY KIND OF ATTRIBUTION OF ESTIMATE. 9. IN SO FAR AS LEVY OF INTEREST U/S.234A AND 234B IS CONCERN, ADMITTEDLY IT WOULD BE CONSEQUENTIAL. 10. THE OTHER ISSUE RAISED IN THE GROUNDS OF THE AP PEAL BY THE ASSESSEE IS REGARDING APPLICABILITY OF RATE OF 15% ON ALL INCOME BY THE ASSESSING OFFICER HELD TO BE IN THE N ATURE OF ROYALTY AND FEE FOR TECHNICAL SERVICES. 11. BEFORE US, THE LEARNED COUNSEL HAS POINTED OU T THAT ASSESSING OFFICER HAS NEITHER DISCUSSED THIS ISSUE IN THE ASSESSMENT ORDER BEFORE APPLYING THE RATE OF 15% NO R THE LD. DRP HAS GIVEN ANY FINDING. DESPITE THE FACT THAT IN THE EARLIER I.T.AS. NO.5759 & 5760/DEL/2018 16 YEARS THE RATE OF TAX PAID BY THE ASSESSEE WAS @10% . ACCORDINGLY, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ASSESSEES CLAIM THAT THE RA TE OF TAX U/S.115A WOULD BE 10% AND NOT 15%. THE ASSESSING OF FICER WILL GIVE ADEQUATE/PROPER OPPORTUNITY TO THE ASSESS EE TO SUBSTANTIATE ITS CASE. 12. THE NEXT ISSUE IS WITH REGARD TO THE COMPUTING OF SURCHARGE AND CESS. IN THIS REGARD, IT HAS BEEN POI NTED OUT BY THE LEARNED COUNSEL THAT NO SURCHARGE AND CESS CAN BE LEVIED BECAUSE THE SAME IS NOT PROVIDED IN THE DTAA. WE AR E IN TANDEM WITH SUCH A CONTENTION RAISED BY THE LEARNED COUNSEL, BECAUSE THE DTAA PROVIDES THE OVERALL RATE WHICH IS ALL INCLUSIVE, AND THEREFORE, NO SURCHARGE OR CESS HAS BEEN LEVIED. ACCORDINGLY, THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 14. SINCE SAME ISSUE HAS BEEN RAISED IN THE ASSESSM ENT YEAR 2015-16, THEREFORE, OUR FINDING GIVEN IN THE A SSESSMENT YEAR 2014-15 WILL APPLY HERE MUTATIS MUTANDIS. 15. IN THE RESULT, THE BOTH APPEAL OF THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH DECEMBER, 2018. SD/- SD/- [L.P. SAHU] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 14 TH DECEMBER, 2018