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SAMSUNG INDIA ELECTRONICS PVT. LTD Vs. DY DIRECTOR OF INCOME TAX, CIRCLE-2(2) INTERNATION
May, 14th 2014
*            IN THE HIGH COURT OF DELHI AT NEW DELHI

                                              Reserved on: 19th March, 2014
%                                        Date of Decision: 25th April, 2014

+      W.P.(C) 3891/2013
       SAMSUNG INDIA ELECTRONICS PVT. LTD                  ..... Petitioner

                               Through   Mr. S.E.Dastur, Sr. Adv. with
                                         Mr. Satyen Sethi,Mr. Madhur
                                         Aggarwal,Mr.A. Trana Panda,
                                         Advs.
                    versus
       DY DIRECTOR OF INCOME TAX, CIRCLE-2(2)
       INTERNATIONAL TAXATION               ..... Respondent

                               Through   Mr. Sanjeev Sabharwal, Sr.
                                         Standing Counsel
                                         Mr. Roshan Lal Goel, Adv. for R-2
+      W.P.(C) 999/2014
       SAMSUNG INDIA ELECTRONICS PVT LTD                   ..... Petitioner

                               Through   Mr. S.E.Dastur, Sr. Adv. with
                                         Mr. Satyen Sethi,Mr. Madhur
                                         Aggarwal,Mr.A. Trana Panda,
                                         Advs.
                    versus
       DY. COMMISSIONER OF INCOME
       TAX & ORS.                                          ..... Respondent

                               Through   Ms. Suruchi Aggarwal, Sr.
                                         Standing Counsel for R-1
                                         Mr. Aditya Malhotra,Adv. for R-4
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR



W.P.(C) Nos.3891/2013 & 999/2014                            Page 1 of 16
R.V. EASWAR, J.

       These are two writ petitions filed under Art. 226 of the

Constitution of India, challenging the jurisdiction of the first respondent

to (i) reopen the assessment by issue of a notice under section 148 of the

Income Tax Act, 1961 ("the Act") and (ii) to treat the pet itioner as an

"assessee in default" under section 201(1) for not deducting tax under

section 195(2) and consequently recover interest under section 201(1A)

of the Act.


FACTS :

2.     The petitioner is a private limited company incorporated in India. It

is a wholly-owned subsidiary of Samsung Electronics Ltd. ("SEC")

incorporated in South Korea. It is engaged in the manufacture and trading

of electronic items in India under the brand name "Samsung". The raw

materials and spares were imported from the holding company. The sales

were "high-seas sales", completed outside the territory of India. The

petitioner's stand was that it was not liable to deduct tax from the

payments made to the SEC for the goods, the contention being that since

the property in the goods was transferred outside the territory of India no

income accrued or arose to SEC in India; correspondingly, there was no

W.P.(C) Nos.3891/2013 & 999/2014                           Page 2 of 16
liability on the petitioner's part to deduct tax from the payments as

required by section 195(2). It was also its stand in the return of income

filed for the assessment year 2006-07 that since no tax was deductible

from the payments, the payments could not be disallowed in the

assessment by invoking section 40(a)(i) of the Act.


3.     The return of income for the assessment year 2006-07, relevant for

the financial year ended 31-3-2006, was filed on 29-11-2006 along with

Form No. 3 CEB, declaring a total income of Rs. 36,26,44,434/-. The

details of the transactions with the associated enterprises were furnished,

including the transactions with SEC. A reference was made to the

Transfer Pricing Officer ("TPO") who made upward adjustments

amounting to Rs. 1,27,58,65,045/- by order passed on 30-10-2009, which

was later rectified by an order passed on 12-11-2009 under section 154

reducing the adjustment to Rs. 1,24,86,79,414/-. The respondent proposed

a draft assessment order under section 144C of the Act on 22-12-2009

computing the total income at Rs. 1,62,44,65,280/-; no disallowance of

the payments made to SEC was proposed under section 40(a)(i) in the

draft order. The petitioner filed its objections to the draft order before the

Disputes Resolution Panel ("DRP"). The DRP issued directions to the


W.P.(C) Nos.3891/2013 & 999/2014                             Page 3 of 16
respondent vide order dated 30-9-2010 and the respondent completed the

assessment of the petitioner under section 143(3) of the Act by order

dated 19-10-2010, after making an adjustment of Rs. 1,24,86,79,414/- to

the international transactions with the associated enterprises as originally

proposed in the draft assessment order read with the rectification order

dated 12-11-2009.


4.     During the pendency of the objections before the DRP, a survey

under section 133A was conducted in the premises of the petitioner on

24-6-2010, in the course of which statements from some of the

employees, including expatriate-employees, were recorded. Certain

directions would appear to have been issued on 30-9-2010 by the DRP

under section 144C(5). Thereafter, on 28-3-2011 the respondent issued a

notice under section 148 to SEC reopening its assessment for the

assessment year 2006-07 on the ground that SEC had a "fixed place PE"

and a "dependent agent PE" in India, the income from which had not

been disclosed in its return of income and thus such income had escaped

assessment. Apparently the notice was issued on the basis of the material

gathered during the survey of the premises of the petitioner, and

particularly the statements of the expatriate-employees. The survey also





W.P.(C) Nos.3891/2013 & 999/2014                           Page 4 of 16
triggered a notice (undated) from the Income-tax Officer, TDS-

International Taxation which was received by the petitioner on 25-4-2011

seeking details of the payments made by it to SEC and other associated

enterprises during the past ten years, and seeking the petitioner's

explanation as to why it should not be treated as an "assessee in default",

for not deducting tax from the payments.


5.     We will now turn to the progress made in the case of SEC pursuant

to the notice issued to it under section 148 on 28-3-2011. A draft

assessment order was passed by the assessing officer on 30-12-2011,

holding that SEC had a fixed place PE in India as its employees who were

deputed to the petitioner had a fixed place allotted to them in the office of

the petitioner. In the draft assessment order, the view taken was that 10%

of the salary paid (by the petitioner) to the expat-employees was

attributable to the fixed place PE and was taxable in India. It needs to be

mentioned that no part of the sales made by the SEC to the petitioner

(high-seas sales) was held attributable to the PE (permanent

establishment) and chargeable to tax on that basis. SEC filed its

objections to the draft assessment order to the DRP under section 144C of

the Act. The DRP called for a remand report from the assessing officer on


W.P.(C) Nos.3891/2013 & 999/2014                            Page 5 of 16
the submissions made by SEC. In the remand report dated 7-9-2012 by

the assessing officer (of SEC), he reiterated that SEC had a fixed place

PE in India and submitted that (a) there was such a continuity of dealings

between the petitioner and SEC as would amount to a "business

connection" between them; (b) SEC was carrying on business in Ind ia

through its employees seconded to the petitioner and that the business of

supply of equipment, raw materials etc. is intertwined with the supply of

technology and marketing of the products and (iii) the petitioner, though

incorporated in India as a company, is an agent of SEC. On the basis of

these submissions, it was contended by the assessing officer in the

remand report that all the sales made by the petitioner were sales made by

SEC in India. In its order dated 29-9-2012, the DRP agreed with the

assessing officer that SEC had a fixed place PE in India but rejected the

plea that the petitioner is the agency PE of SEC in India and hence the

(income from the) sales by SEC in India are chargeable to tax in India.

That order of the DRP would appear to have attained finality. An

assessment order was accordingly passed on SEC on 18-10-2012

computing its income at Rs. 1,07,22,431/-; needless to add that no income

from its sales made in India was brought to tax.



W.P.(C) Nos.3891/2013 & 999/2014                          Page 6 of 16
6.     Turning back to the petitioner's case, on 30 -3-2013 a notice was

issued to it under section 201(1) and (1A) of the Act proposing to treat it

as an assessee in default for not deducting tax from the payments made to

SEC and other associated enterprises and to charge interest for the

default. On the same day (i.e., 30-3-2013), the respondent also issued a

notice under section 148 reopening the petitioner's assessment for the

assessment year 2006-07 and calling upon it to file a return of income.

The reasons recorded for reopening the assessment under section 148(2)

of the Act are as below:

                                                            "Annexure P-9
Form for recording the reasons for initiating proceedings under section
148 for obtaining the approved of the Commissioner of Income tax.
1.      Name and address of the assessee           M/s Samsung India
                                                   Electronics Pvt. Ltd.
                                                   3rd Floor, Vipul Tech
                                                   Square, Golf Course
                                                   Road, Sector-43
                                                   Gurgaon-122009
2       PAN/GIR                                    AAACS5123K
3       Status                                     Company
4       Distt/Circle                               Circle 7(1).New Delhi
5       Assessment year in respect of which it is 2006-07
        proposed to issue notice under section
        148


W.P.(C) Nos.3891/2013 & 999/2014                           Page 7 of 16
6       The quantum of income which has 1139.21 cores
        escaped assessment:
7       Whether the provisions of section 147(a) NO
        or, 147(b) or 147 (c) are applicable or
        both the section are applicable
8       Whether the assessment is proposed to No
        be made for the first time. If the reply is
        in the affirmative, please state:-
            (a) Whether any voluntary return had
                already been filed, and
            (b) If so, the date of filing the said
               return
9       If the answer to item 8 is in the negative
        please state:-
                                                     Rs. 1,62,24,03,720/ u/s
            (a) The income originally assessed       143(3)
            (b) Whether it is a case of under Yes
               assessment as to low a rate,
               assessment which has been made
               the subject of excessive relief or
               allowing of excessive loss or
               depreciation.
10      Whether the provisions of section 150(1) No
        are applicable. If the reply is in
        affirmative, the relevant facts may be
        stated against item No. And it may be
        brought out that the provisions of
        sections 150 (2) would not stand in the
        way of initiating proceedings under
        section 148 of the Income tax Act.
11      Reasons for the belief that income has escaped assessment:
        "That information has been received from DDIT, International
        Taxation, Circle2(2), New Delhi that a TDS survey was conducted

W.P.(C) Nos.3891/2013 & 999/2014                            Page 8 of 16
        on Samsung Electronics India Pvt. Ltd and liaison office of M/s
        Samsung Electronics Co. Ltd., Korea on 24.06.2010. After that
        notices u/s 148 were issued for AYrs. 2004-05 to 2009-10 in the
        case of Samsung Electronics Co. Ltd. Korea            and Draft
        assessment order u/s 148 read with section 144c were passed on
        30.12.2011 wherein, 10% mark up was taken on remuneration to
        expatriate employee after holding that the assessee company has
        service PE in India. On the basis of re-examination of copies of
        documents found during survey and on further analysis of
        statements recorded during survey and post survey it was
        concluded that Samsung Electronics Corporation has:
            i) Permanent Establishment alongwith it there is
            ii) Fixed Place PE and
            iii) May be dependent agent PE
            The DRP has confirmed the order of AO in this regard. Final
            order was passed by AO of Samsung Electronics Corporation
            on 18.10.2012.
            A show cause dated 30.03.2013 in the proceedings u/s
            201/201(1A) read with section 195 of the Income Tax Act,
            1961 in the case of Samsung India Electronics Pvt. Ltd has
            been issued by DDIT, International Tax, Circle 2(2) , New
            Delhi, in the light of judgment of Hon'ble Supreme Court in
            the case of Transmission Corpn of AP and GE Technology Cen
            Pvt. Ltd. The assessee company was liable to deduct tax on
            appropriate portion of the total payments which were
            chargeable to tax under the provisions of the IT Act,1961. As
            the assessee company has failed to withheld tax on payments
            made to Samsung Electronics Corporation, the expenditure
            claimed in this account is not allowable in view of provisions
            of section 40(a)(i) of the Income Tax , 1961. It is observed
            from assessment record that M/s Samsung India Electronics
            has made huge payments to its parent company M/s Samsung
            Electronics Corporations without deducting tax u/s 195 of the
            Act which are to be disallowed and added back to the taxable
            income of the assessee company. There is failure on the part


W.P.(C) Nos.3891/2013 & 999/2014                          Page 9 of 16
            of the assessee company to disclose fully and truly all the
            material facts necessary for the assessment of its correct
            taxable income.
           I have therefore, reason to believe that an amount of
           Rs.1139.21 crores have escaped assessment within the
           meaning of section 147(c) of the IT Act, 1961. The escapement
           of income has been by reason of failure on the part of the
           assessee to disclose fully and truly, all material fact necessary
           for assessment. Since the assessment has been completed u/s
           143(3) of the IT Act, 1961 and 4 years have since elapsed. The
           assessment record is being submitted for kind perusal and
           approval u/s 151 of the IT Act, 1961 for issuance of notice u/s
           148 of the IT Act, 1961.
                                                                         Sd/-
                                                                   30.3.2013
                                                    (Pankaj Kumar Saxena)
                                         Dy. Commissioner of Income Tax.
                                                     Circle 7(1), New Delhi.
i)      Whether the Addl. CIT is Recommended accordingly
        satisfied on the reasons
        recorded by the DICT that it is
        a fit case for issue of a notice Sd/-
        under section 148
                                           (Sukhveer Chaudhary)
                                           Add.Commissioner of Income
                                           tax, Range-7, New Delhi
13      Whether the CIT is satisfied on    I have perused the reasons to
        the reasons recorded by the        believe recorded by the
        ACIT/Addl.CIT, that it is a fit    Assessing Officer.          I am
        case for issue of a notice under   satisfied that it is a fit case for
        section 148.                       issue of notice under section
                                           148 of the Act.
                                           Sd/-
                                           30.3.2013
                                           (Rajnish Kumar)
                                           Commissioner of Income tax,

W.P.(C) Nos.3891/2013 & 999/2014                            Page 10 of 16
                                           Delhi-III, New Delhi

                                   Deputy Commissioner of Income tax,
                                   Room No.313, C.R. Building,
                                   I.P.Estate, New Delhi-110002."


In response to the notice, the petitioner filed a letter dated 8-4-2013

stating that the return of income originally filed by it may be treated as

the return filed in response to the notice of reopening. Thereafter, on

22.11.2013 the petitioner filed its objections with the assessing officer.

These objections were rejected and disposed of by the assessing officer

by order dated 20.1.2014, which is impugned herein.


RIVAL CONTENTIONS:

7.     The common contention taken on behalf of the petitioner is that

since the revenue itself took a decision in the reassessment proceedings of

SEC that no income accrued or arose to SEC from sales made by the

petitioner in India, the petitioner was not liable to deduct tax from the

payments made to SEC under section 195(2) with the consequence that:

(i) it cannot be treated as an assessee in default under section 201(1) and

therefore no interest was chargeable under section 201(1A) and (ii) the

payments made to SEC were rightly allowed in the original assessment as






W.P.(C) Nos.3891/2013 & 999/2014                           Page 11 of 16
deduction and the notice issued under section 148 to disallow them under

section 40(a)(i) is without jurisdiction. Strong reliance is placed on the

order of the DRP dated 29-9-2012 in the case of SEC which rejected the

claim for enhancement of the income made by the assessing officer on the

ground that SEC had a PE in India and hence assessable on the sales

made through the petitioner in India. It is contended that since the DRP' s

order has attained finality, the revenue cannot now take a contrary

position and contend that there was an income element in the payments

made by the petitioner to SEC on which it (petitioner) ought to have

deducted tax; and if there is no liability to deduct tax, there can be no

failure to deduct tax and no disallowance can be made by invoking

section 40(a)(i). It is pointed out that the original assessment of the

petitioner was concluded on 19-10-2010, after the survey was conducted

(on 24-6-2010) in the course of which statements were obtained from the

seconded expat-employees and other material was gathered, on the basis

of which SEC's assessment for the assessment year 2006 -07 was

reopened by notice issued on 28-3-2011 under section 148. There was

thus no fresh or tangible material which came into the possession of the

revenue after the completion of the original assessment which would



W.P.(C) Nos.3891/2013 & 999/2014                          Page 12 of 16
implicate the petitioner with failure to furnish full and true particulars at

the time of the original assessment proceedings. The respondent, it is

contended, has not alleged any such failure on the part of the petitioner

which he is required to do, as this is a case where the proviso to section

147 applies, and the assessment is sought to be reopened after four years

from the end of the assessment year (i.e., assessment year 2006-07 &

notice issued on 30-3-2013). In support of these submissions, a written

synopsis was filed. In this, the aforesaid contentions have been elaborated

with reference to the case-law.


8.     The further contentions against the notice under section 201(1) and

(1A) are that: (i) it is contrary to the directions of the DRP in the case of

SEC; (ii) there is no application of mind on the part of the respondent

No.1 and (iii) it is barred by limitation.


9.     The contention of the revenue is based on a judgment of this court

in CIT V. Amadeus India Pvt. Ltd. (2013) 351 ITR 92. The learned

standing counsel has also filed an additional affidavit on 12-12-2013. He

has further relied on a judgment of a Full Bench of this court in CIT v.

Sardari Lal & Co. (2001) 251 ITR 864. Besides, he has strongly

contended that the disclosure made by the petitioner in the course of the


W.P.(C) Nos.3891/2013 & 999/2014                            Page 13 of 16
original assessment proceedings vis-a-vis payments made to SEC was not

full and true; the petitioner did not disclose that it did not deduct the tax

on such payments. The order of the DRP in the reassessment proceedings

of SEC, in his submission, is irrelevant as it is passed in proceedings

relating to the recipient of the money and those findings should not be

projected into the petitioner's case.


DECISION:

10.    The key to the decision is the answer to the question whether any

income arose or accrued to SEC through its PE in India in respect of the

sales made in India. If the answer is in the affirmative, both the notices

would be good notices; if the answer is in the negative, both the notices

would be bad. The answer in our opinion should be in the negative,

because even as per the revenue, as reflected in the order passed by the

DRP in the reassessment proceedings of SEC, no income accrued to SEC

in India. In this regard, the DRP rejected the specific request made by that

assessing officer in his remand report that the petitioner be treated as the

permanent establishment (PE) of SEC and the income of SEC be

computed on that basis. The DRP however held that as regards attribution

of income to the "fixed place PE", a rough and ready basis would be to


W.P.(C) Nos.3891/2013 & 999/2014                            Page 14 of 16
estimate 10% of the salary paid to the expat-employees of the petitioner

as the mark-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

deductible under section 195(2) and hence they were rightly allowed as


W.P.(C) Nos.3891/2013 & 999/2014                          Page 15 of 16
deduction in the original assessment of the petitioner and (ii) the assessee

cannot be treated as one in default under section 201(1) and no interest

can be charged under section 201(1A). It needs mention here that the

notice under section 201 is a verbatim reproduction of the remand report

of the assessing officer in SEC's case filed before the DRP.


12.    In the view we have taken, it is not necessary to deal with the

contention that the notice issued under section 201 is barred by limitation.


13.    The notices, both under section 148 and section 201(1)/(1A) are

accordingly quashed. The writ petitions are allowed. There shall however

be no order as to costs.



                                                    (R.V. EASWAR)
                                                        JUDGE



                                                (S. RAVINDRA BHAT)
                                                       JUDGE
APRIL 25, 2014
//vld




W.P.(C) Nos.3891/2013 & 999/2014                           Page 16 of 16

 
 
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