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2019 (9) TMI 232

..... isits of expatriates who visited India came for purposes - whether the assessee has a permanent establishment in India and if yes what is the amount of the profit that can be attributed to the permanent establishment? - HELD THAT:- Dispute resolution panel has gone under the presumption that assessee has conceded the aspect of the existence of the permanent establishment in India of the assessee. The assessee now denies the above fact and says that it has never considered the issue of the existence of the permanent establishment. On careful analysis of the letter dated 05/12/2016 submitted by the assessee before the learned dispute resolution panel it states in para number 3 of that letter that assessee submits that without prejudice to the assessee’s view towards the non-existence of permanent establishment in India, from the limited perspective of the attribution of income to the alleged PE, it is being acceptable to the assessee that the taxable income of the assessee in India is directed to be determined at 10% (profit margin) of 50% of salary cost of expatriates in India during the relevant year. Says that the clarify, where the salary cost of expatriates in India during .....

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..... s own understanding, rightly or wrongly, considered the concession by the assessee on this issue and has not directed the AO on its merit about the existence of PE. The Object of the incorporation of the provision of Dispute Resolution Panel is to ‘resolve a dispute’ by directing the ld AO on a specific issue. If that right of the assessee is not allowed to be exercised, then it may cause irreparable damage to the assessee. We set aside all the appeals of the assessee back to the file of the learned dispute resolution panel with a direction to first ascertain the fact about the admission of the assessee with respect to acceptance of the assessee of the existence of the permanent establishment. If it is found that there is an admission on part of the assessee about the existence of the permanent establishment, then, the learned dispute resolution panel will decide the issue in accordance with the law considering the above admission. However, if it is found that there is no admission on this aspect, then to decide the issue of existence of the permanent establishment and consequent profit attribution thereto with respect to each of the assessment years. Needless to say, t .....

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..... essment proceedings under Section 147 of the Act even though all the transaction between LGIL and Assessee were held to be at arm s length by the Ld. Transfer Pricing Officer ( TPO ) and thus there could not be any escapement of income 2.2 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. 2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the information and the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment ( PE ) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate emp .....

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..... the Act. 10. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 11. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271 (1) (c) of the Act and alleging that the Appellant has concealed 3. The assessee has raised the following grounds of appeal in ITA No. 4560/Del/2018 for the Assessment Year 2005-06:- 1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant, are bad in law and void ab- initio. 2. That the AO/DRP erred in upholding the validity of the reassessment proceedings under Section 147 of the Act when initiation of proceedings did not satisfy necessary requisites contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the AO/DRP erred in upholding the validity of the reassessment proceedings under Section 147 of the Act even though all the transaction between LGIL and Asses .....

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..... thout prejudice to the above grounds, the AO/DRP erred in bringing to tax the salary cost of expatriate employees of LGIL to the Appellant in absence of the PE of the Appellant in India and hence no income of Appellant could be brought to tax in India. 6. That without prejudice the AO/ DRP also miserably failed to appreciate that the function to have been allegedly performed by the expatriates in the PE was the import of raw material/ finished goods and parts which function was already captured in the Transfer Pricing assessment of the Indian subsidiary and hence there arose no occasion to allocate any further profits to such PE. 7. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India that AO / DRP grossly erred in attributing profits to India. 8. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and is based on surmises and conjectures. 9. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under sections 234B and 234C of the Act without appreciating that the Appellant is a non-resi .....

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..... hat the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as LGIL ) which were inadmissible evidence in terms of the judgment of the Hon ble Supreme Court in. S'. Qadar Khan & Sons (254 CTR 228) 3.2 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant. 3.3 That the AO/DRP completely failed to appreciate that in terms of Article 5(7) of the Double Tax Avoidance Agreement between India and Korea ( DTAA ) control of holding company over subsidiary does not in itself create a Permanent Establishment of the non-resident. 3.4 That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact that in terms of Article 10 of the DTAA, shifting of any profits arising to a non-reside .....

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..... escaped assessment. 2.2 That without prejudice at best the formation of belief by the Assessing Officer is a borrowed belief relying on the survey findings without any independent application of mind. 2.3 That without prejudice even the approval granted by the Commissioner for initiating such proceedings suffers from the same deficiency reflecting complete non application of mind. 2.4 That the AO further erred in initiating the reassessment proceedings while relying on the statements of the expatriate employees of the Indian subsidiary when such statements in the absence of any material were not admissible in law to form any such belief. 2.5 That the AO/DRP has erred in initiating reassessment proceedings against the Appellant solely on the basis of statements of expatriate employees of LGIL recorded at the time of survey conducted in 2010 which were not even relevant for the AY 2007-08, which in the absence of any material are not admissible in law. 2.6 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the information and the formation of the belief that income chargeabl .....

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..... AO / DRP also miserably failed to appreciate that the functions which are allegedly performed by the expatriates in the PE was the import of raw material and parts which function was already captured in the Transfer Pricing Assessment of the Indian subsidiary and hence there arose no occasion to allocate any further profits to such PE. 5. That without prejudice the AO/ DRP has erred on facts and in law, in relying on the Foreign Collaboration Agreement entered between the appellant and LGIL (which was approved by the Department of Industrial Policy and Promotion, Government of India) to allege a PE for the appellant in India. On Attribution 6. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India the AO/DRP grossly erred in attributing profits to India. General 7. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and are based on surmises and conjectures. 8. That the AO/DRP has grossly erred in law in levying interest under sections 234B/C of the Act without appreciating that the Appellant is a non-resident and in te .....

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..... ely on the basis of statements of expatriate employees of LGIL recorded at the time of survey conducted in 2010 which were not even relevant for the AY 2008-09, which in the absence of any material are not admissible in law. 2.6 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the information and the formation of the belief that income chargeable to tax had escaped assessment. On the existence of Permanent Establishment 3. That the AO / DRP grossly erred in law in coming to the conclusion that the Indian subsidiary of the Appellant constituted a fixed place of business under Article 5(1) of the DTAA between India and Korea. 3.1 That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment ( PE ) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were lacking in the present case. 3.2 That the AO/ DRP grossly erred in law in allowing themselves to be influenced for the conclusion relating to existence of a PE merely on account of the alleged control of the Appellant over the Indi .....

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..... or any activity' carried out in India the AO/DRP grossly erred in attributing profits to India. General 7. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and are based on surmises and conjectures. 8. That the AO/DRP has grossly erred in law in levying interest under sections 234B/C of the Act without appreciating that the Appellant is a non-resident and in terms of section 209 there arose no liability of the Assessee to pay advance tax being deductible . 9. That the AO/DRP has grossly erred in law and facts in levying interest under section 234A of the Act. 10. That the AO/DRP has grossly erred in law and facts in directing the levy of interest under section 234D of the Act without appreciating that no refund was granted to the Appellant. 11. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271(1)(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income. 7. The assessee has raised the following grounds of appeal in ITA No. 5020/ .....

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..... control of holding company over subsidiary does not in itself create a Permanent Establishment of the nonresident. 3.4 That the AO/DRP erred in law in selectively relying on the statement of expatriate employees and failed to appreciate the true intention of the statements which evidenced that the expatriates were working only for LGIL in India. 4. That the AO/ DRP has erred in not appreciating the fact that in terms of Article 10 of the DTAA, shifting of any profits arising to a non-resident is prohibited if the transactions between the two enterprises have met the arm s length test. In the present case all the transactions between the Appellant and LGIL have been subjected to transfer pricing proceedings and have been found to be at arm s length. 5. That without prejudice the AO/DRP also miserably failed to appreciate that the function to have been performed by the expatriates in the PE was the import of raw material/ finished goods and parts which function was already captured in the Transfer Pricing Assessment of the Indian Subsidiary and hence there arose no occasion to allocate any further profits to such PE. 6. That the AO/ DRP miserably failed to appreciate that the case of .....

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..... atements of expatriate employees of LGIL recorded at the time of survey which were not even relevant for the assessment year under consideration. 2.3 That the AO/DRP has erred in sustaining the initiation of reassessment proceedings under section 147 of the Act in the absence of any live link or nexus between the information and the formation of the belief that income chargeable to tax had escaped assessment. Without prejudice 3. That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment ( PE ) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were absent in the present case. 3.1 That the AO/DRP erred in making assessment on the assumption that their existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. (hereinafter referred to as LGIL ) which were inadmissible evidence in terms of the judgment of the Hon'ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 3.2 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of .....

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..... the Appellant. 11. That the AO/DRP has grossly erred in law and facts in initiating the penalty under section 271 (1)(c) of the Act and alleging that the Appellant has concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income. 9. The assessee has raised the following grounds of appeal in ITA No. 3327/Del/2018 for the Assessment Year 2013-14:- 1. That on the facts and in the circumstances of the case and in law, the orders passed by the Assessing Officer (AO)/Dispute Resolution Panel (DRP) to the extent prejudicial to the interest of the appellant are bad in law and void ab- initio. On the existence of Permanent Establishment 2. That the AO / DRP grossly erred in law in coming to the conclusion that the Indian subsidiary of the Appellant constituted a fixed place of business under Article 5(1) of the DTAA between India and Korea. 2.1 That the AO/DRP erred in concluding that the Appellant had a Permanent Establishment ( PE ) under Article 5 of the India - Korea DTAA given the fact that necessary requisites of creating a PE under Article 5 of DTAA were lacking in the present case. 2.2 That the AO / DRP grossly erred in law in .....

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..... the function to have been allegedly performed by the expatriates in the PE was the import of raw material and parts which function was already captured in the Transfer Pricing Assessment of the Indian subsidiary and hence there arose no occasion to allocate any further profits to such PE. 2.13 That without prejudice the AO/ DRP has erred on facts and in law, in relying on the Foreign Collaboration Agreement entered between the appellant and LGIL (which was approved by the Department of Industrial Policy and Promotion, Government of India) to allege a PE for the appellant in India. On Attribution 3. Without prejudice to the above grounds, in absence of a PE of the Appellant in India, or any activity carried out in India the AO/DRP grossly erred in attributing profits to India. General 4. That the AO/DRP has erred in relying upon incorrect finding of facts in arriving at the conclusion that the Appellant has a PE in India. 5. That on the facts and in the circumstances of the case, the orders passed by the Assessing Officer (AO) /Dispute Resolution Panel (DRP) are perverse and are based on surmises and conjectures. 6. That the AO/DRP has grossly erred in law in levying interest under .....

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..... Hon ble Supreme Court in S. Qadar Khan & Sons (254 CTR 228) 2.5 That the AO/DRP erred in not appreciating the fact that the expatriate employees of LGIL were working for and furthering the business of LGIL and not that of the Appellant 2.6 That the AO/DRP erred in making assessment on the assumption that there existed a PE of the Appellant in India solely relying on the statements of expatriate employees of LG Electronics India Private Ltd. ( hereinafter referred to as LGIL ) which were inadmissible evidence in terms of the settled position of law. 2.7 That the AO/DRP erred in coming to the conclusion that expatriate employees working in LGIL were working on behalf of the Appellant, ignoring the fact that the expatriate employees were employees of LGIL working under direct supervision and control of LGIL. 2.8 That the case of the Appellant is squarely covered by the order of this Hon ble Tribunal in Samsung Electronics Co. Ltd. Vs. DCIT [2018] 92 taxmann.com 171 (Delhi - Trib.). 3. That without prejudice to the above the conclusions of the AO / DRP are patently erroneous given that all transactions between the two companies were uninfluenced by their relationship and had met th .....

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..... cessary to be appreciated. They also rest their arguments on the facts stated in the orders for that year. Facts for AY 2007-08 shows that appellant is a Company incorporated under the laws of South Korea and is engaged in the business of manufacture and sale of refrigerators, washing machines, air conditioners and other household appliances. The Appellant has a wholly owned subsidiary (Indian AE) in India, viz., LG Electronics India Private Ltd. (hereinafter referred to as LG India ) and has entered into several transactions relating to sale of raw materials, finished goods, receipt of royalty income and fees for technical services. No tax was deducted by LG India, the payer, on off shore supplies since no portion of income arising from such supplies arose in India while applicable taxes were deducted on royalty and technical services receipts. The Appellant did not file any return for the relevant period, as according to assessee no portion of its income arose in India on account of off-shore supplies and since tax had already been deducted on other payments. In AY 2007-08, the Appellant had entered into the following transactions with its Indian subsidiary/ Associated Enterprise .....

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..... chargeable to tax in India. Aggrieved by the initiation of reassessment proceedings, the Appellant along with the other group companies filed writ petitions before the Hon ble Allahabad High Court challenging the validity of reassessment proceedings. The Hon ble Allahabad High Court vide order dated 23.02.2015 upheld the initiation of reassessment proceedings. Thereafter, the AO passed draft assessment order dated 28.03.2016 (Page 253) under section 144C/147/143(3) of the Act holding that the Appellant has a PE in India in form of LG India and proposed to assess the income of the Appellant at an amount of INR 8,15,54,053 in addition to the returned income as business profits attributable to the alleged PE. The details of the additions as proposed by the AO are tabulated as under: Particulars Amount (Rs.) Export of raw material and consumables 454,89,84,783 Export of finished goods 374,47,63,325 Export of capital goods 2,43,22,114 Sales Commission 11,11,67,130 Sale of parts (sample and testing) 1,22,137 Total 8,42,93,59,489 Applying NP ratio @ 3.87% 32,62,16,212 Attribution of Income @ 25% 8,15,54,053 14. The Appellant filed objections against the draft assessment order before the .....

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..... ishment of the petitioner in India. 17. Pursuant to the order passed by the Hon ble Supreme Court, the Appellant did not press grounds assailing the legality of the reassessment and restricted itself to the addition on merits. Thus for AY 2004-05 to 2010-11, all the grounds relating to challenge to reopening proceedings are dismissed as not pressed. 18. On merits the assessing officer has held that the Appellant has a business connection in India in terms of section 9(1)(i) as also a fixed place PE in India in terms of Article 5(1) and 5(2) of the Indo-South Korea Double Tax Avoidance Agreement ( DTAA ). In coming to the aforesaid conclusion, the assessing officer has held that LG Electronics India Ltd. ( LGEIL ), the Indian subsidiary, was legal and economically dependent on the Appellant and that the Appellant exercised total control over the Indian subsidiary inasmuch as, i.e., (i) Technology is provided to the Indian subsidiary by the Appellant under the Technology Assistance and Royalty Agreement; (ii) The purchase of raw material, finished goods and other consumables from the parent company and its AEs is without any price negotiation and without any search of non-resident ve .....

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..... the enterprise through this fixed place of business. 22. He submitted that no formal legal right to use a particular place is required for that place to constitute a PE. However, the term fixed envisages that a certain degree of permanency should be associated with the place of business through which the business in whole or in part is carried out. It is further submitted that the DTAAs characterize a fixed place of business as a PE only if the enterprise undertakes a business activity through the place of business. This is referred to as the business activity test. However, an exception is carved out in Article 5(4)(f) excluding preparatory and auxiliary activities. The core business of the foreign enterprise should be conducted through the place of business. Thus, there should be a nexus between the place of business and carrying on of business. In order that the foreign enterprise resident of a Contracting State can be said to have a fixed place PE in the other Contracting State, it is essential to demonstrate that the foreign enterprise has a fixed place available at its disposal in the other Contracting State, which is used for purposes of business of that foreign enterprise i .....

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..... ied on, after transfer pricing analysis by the Revenue authorities qua international transactions entered into by LGEIL with its associated enterprises (including the Appellant). He submitted fact that the Appellant own 100% equity in LGEIL and is in a position to appoint majority of directors on the Board of LGEIL, does not ipso facto lead to the conclusion that LGEIL is working under total control of the Appellant company. In terms of the provisions of the Companies Act, 1956, the directors appointed on the Board of the company stand in a fiduciary relationship vis-à-vis the company in which they hold directorship and owe a fiduciary duty to such company. In case of conflict of interest between the company of which they are director and the company which has nominated such person as director on the former company, such director owe a sense of duty to the company of which he is a director and is expected to take a position in the interest of the company of which he is a director. He referred to the decision of Honourable Supreme Court in the case of Vodafone International Holdings BV vs. UOI and Another : [2012] 341 ITR 1 placed at pgs 65-204 of case law paper book Vol. I ( .....

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..... he subsidiary company a permanent establishment of the parent company. Relevant extracts from Para 40 of the OECD commentary on Article 5 are reproduced as under: 40. It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by that subsidiary company is managed by the parent company does not constitute the subsidiary company a permanent establishment of the parent company 25. He further placed reliance on AAR ruling in the case of TVM Ltd (237 ITR 230) and the decision of the Hon ble Mumbai Tribunal in the case of Daimler Chrysler AG (133 TTJ 766) wherein it was held that an Indian company controlled by a foreign company, being the parent company, cannot be held to constitute PE merely on this account. He further referred to the decision of the Hon ble Delhi High Court in the case of DIT vs. E Funds IT Solution (364 ITR 256) (affirmed by the Supreme Court), wherein it was observed that .....

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..... f material for each product. Such bill of material specifies the nature and type of components; b) After identification of raw materials, LGEIL does a search for vendors, and also undertakes independent valuation of the various alternative sources of supply; c) LGEIL determines periodic sales and production forecast; d) Thus LGEIL independently decides what to purchase and how to purchase and at what cost; vii. The board of directors of LGEIL independently takes all important business decisions relating to the business of LGEIL, viii. The reports sent by LGEIL to the Appellant are reports sent to the shareholders; ix. Advice sought by LGEIL from the Appellant is in terms of Technology License Agreement. 27. Coming to the issue of Expatriate employees he submitted that Indian subsidiary is the legal and economic employers of those expat employees. He submitted that based on the requirement / vacancy in LGEIL organizational hierarchy, the HR department of LGEIL floats a request to the Appellant for recruitment of a person suitable to the said job requirement. In case, the suitable candidate is available within the global pool, the Appellant may sound such potential candidate for plac .....

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..... sought reimbursement from the assessee. The aforesaid decision rendered by the Tribunal was affirmed by the Delhi High Court and reported as DIT vs. HCL Infosystems Ltd. : [2005] 274 ITR 26. b) The Bangalore bench of the Tribunal in the case of IDS Software Solutions (India) (P) Ltd. v. ITO (International Taxation) : [2009] 122 TTJ 410 on similar facts held that the managing director nominated by the US Corporation was an employee of the Indian company and, therefore, reimbursement of his salary by the Indian company to the US Corporation did not constitute fees for technical services . c) The Supreme Court in the case of Carborandum Co. vs. CIT : [1977] 108 ITR 336(SC) held that foreign technical personnel whose services were made available to the Indian company outside India and who were employed by the Indian company on the basis of the agreement between the foreign company and the Indian company and were under the latter's control were employees of the Indian company. d) The Hon ble Supreme Court in the case of CIT vs. Eli Lilly and Co. (India) Pvt. Ltd. [2009] 312 ITR 225 held that part of the salaries received in Netherlands by the expatriate employees seconded to India .....

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..... CIT vs. S. Khader Khan Son : 210 Taxman 248 (SC) ii. Paul Mathews and Sons v. CIT : 263 ITR 101 (Ker) iii. CIT vs. Dhingra Metal Works : 328 ITR 384 (Del) iv. CIT vs. Subhash Chand : ITA No. 875/2010 (Del) v. CIT vs. Sunil Aggarwal : 379 ITR 367 (Del) vi. ITO vs. Vijay Kumar Kesar : 327 ITR 497 (Chattisgarh) vii. TDI Marketing (P.) Ltd. vs. ACIT : (2009) 28 SOT 215 (Del) viii. Ashok Manilal Thakkar vs. ACIT : 279 ITR 143 (AT)(Ahd) ix. Meeta Gulgutia : 395 ITR 526 (Del) - para 40/41 He submitted that such statements, therefore, needs to be ignored from consideration. 29. Even otherwise he submitted that analysis of the statements hereunder would show that the inference drawn by the assessing officer that the expatriate employees seconded by the Appellant continued to be employees of the Appellant company during the period of their secondment to LGEIL and that such employees carried on business of the Appellant is factually not sustainable. He referred to various statements of expat and other employees to show that all business decision are independently taken by G India, what is the recruitment process of expats, reporting to Korea is just to support the technical assistance and st .....

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..... ware of finished goods. After receiving parts, development request I decide vendor as well as price and the process for affiliate companies is same as for other vendors. Statement of Mr. Mong Nam Jung, (Page 705) Qn. Do you obtain any suggestion regarding R & D matters from your head qr. Korea or any other associated concern? A. No we decide our R & D matters. Statement of Mr. Beom Seok Kang, (Page 708) Qn. Whom do you report for manufacturing progress carried out at LGEIL or to the head quarter in Korea or both? A. I report to Director (Mfg.) in India. I do not report to Head quarter in Korea. Qn: Please explain the procedure of manufacturing work in LGEIL in detail? A. Based on sales forecast for the month, production planning team gives plan quantity to production team. Statement of Mr. Chang Sil Lee, (Page 712) Qn. What are your responsibilities for other group company? A. No relationship. Statement of Mr. Lakshmikant Gupta, (Page 714) Q. Who decides which products you are going to market? A. This decision is taken by the Indian management who is based in LGEIL. Usually there are group of people who discuss and decide. It starts from the learning of what is happening in .....

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..... r. H.D. Rew and he interviewed me and asked me to join LGEIL to improve the productivity of Air conditioner as I am an AC expert Statement of Mr. Umesh Kumar Dhal, (Page 709 - 710) Qn. Please explain the procedure of employment in LG Electronics India for both Indians as well as expatriates? A. Manpower plan for every year is finalized in consultation with functional head and Managing Director. The skills required is assessed based upon that the requirement whether Indian employees or Koreans required are taken out. The Indian requirements are fulfilled locally and wherever Koreans are required the requirement is communicated to Korea. A list of eligible and suitable employees is forwarded by Korea to us from where a suitable candidate is selected after interview on video conferencing Qn: Do you have designated post for Koreans and Indians? Answer: There is no thumb rule policy. It is need based Qn : Who decides the need of expatriate on a particular post? Answer: Functional head, MD and HR (Head) discuss together the skill and competence required for a particular position based upon that it is decided for what position expatriates are required. Qn: Once a decision is taken to recr .....

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..... s informed by corporate HR about their postings to India III Post completion of tenure in LG India Statement of Mr. H.C. Moon, (Page 676) Q. When you are going to complete your tenure of posting in India? Whether after completing your term in India in this company, do you plan to move out of India or would try to remain in India in any company because you have a skill and experience? A. By the end of 2011 or start in 2012, but not sure, I would complete my tenure in India. To leave India or not would depend then and there s position. I am not sure about my future situation. But I may stay in India even after completion of my tenure in India. It is important to point out that Mr. K R Kim who was Managing Director of LG India between 1997 and 2007, decided to stay back in India and joined competition (Videocon Industries) - Refer Page 809 of Paperbook 3. Similarly Mr. Harem Lee, too, did not relocate back to Korea and decided to take up employment in India post completion of his secondment with LG India. Refer Page 811 of Paperbook 3. IV. Reporting to LGEK is to seek support for technical assistance Statement of Mr. H.D. Rew, (Page 696-697) Question: Whether there is any area in whic .....

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..... nt and needs to be followed. 33. On the issue of attribution of profit , he submitted that even otherwise there can be no attribution to the alleged PE for the following reasons: i. The Appellant has earned income from LGEIL from sale of raw material, finished goods, spares, etc., which has taken place outside India. The title to the goods passed outside India and the alleged PE played no role in consummation of the sale transaction. Further, the service / income received from LGEIL in the form of royalty, technical service fee is for services rendered outside India, for which, too, the alleged PE had no contribution. In that view of the matter, it is the respectful submission of the Appellant that no income can be attributed to the alleged PE in India. In the present case, the Appellant is making sales to LG India outside India and LG India is making sales subsequently in India on its own account without any control from its suppliers. Accordingly, the profit from offshore supplies of raw material and consumables, finished goods and capital goods would not be liable to tax in India, in the hands of the Appellant, as held in the following judicial pronouncements: - Ishikawajima-Har .....

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..... iated enterprises (see paragraph 1 of the Commentary on Article 9). (Emphasis supplied) iv. He further submitted that the OECD in its 2010 report on profit attribution to the permanent establishment has observed that: 52. This language has its origins in the draft convention adopted by the League of Nations in 1933 and is acknowledged as the statement of the arm s length principle in the context of PEs. The Commentary on Article 7 confirms that the principle reflected in Article 7(2) - corresponds to the arm s length principle which is also applicable, under the provisions of Article 9, for the purpose of adjusting the profits of associated enterprises. The arm s length principle has thus always been at the heart of Article 7. v. Thus according to him authorized OECD approach is to apply the arm s length principle of Article 9, as articulated in the Guidelines, to the attribution of profit to a PE using the arm s length principle under Article 7(2). Therefore Ld AR submitted that use of arm s length principle for attributing the profits to the PE is prescribed under the Act as well as under the DTAA. Further, OECD and UN Model Tax Convention have also extensively emphasized on the .....

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..... YashovardhanVerma 133A 665 H.C.Moon 133A 671 Jae Gyu Cho 133A 677 Woody Nam 133A 680 p.20,22,24,29,33 H.D.Rew 133A 693 H.D.Rew 131 696 p.21,39 Soonkwang 131 699 JAE Hyun Lee 131 701 Mong Nam Jung 131 704 p.36,41 BeomSeok Kang 131 707 Umesh Kumar Dhal 131 709 p.21,23 Chang Sil Lee 131 712 p.20 Lakshmikant Gupta 131 714 A.M.Kootiyat 131 716 p.38,40 Vipin Gupta 131 718 38. It is reiterated that the statements recorded during the survey are used only to explain the various process, which are being followed to conduct the business of SGEIL only and not to ascribe any criminality. It is not the case of the assessee that the statements cannot be used for the purpose of any proceedings under the IT Act. What is contended by the assessee and held by the decisions relied upon by it is that a statement on oath taken u/s 133A(3)(iii) has no evidentiary value. It is not the case of the assessee that the statements given by the employees are wrong or incorrect. What the assessee submits is that statements recorded during the course of survey have no evidentiary value. As has already been stated above, most of the statements relied upon by the AO have not been recorded u/s 133A but u/s 131 of th .....

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..... company or India subsidiary along with the details of following- i. Copy of Support Service Agreement ii. Copy of Amendment of Export Agreement iii. Copy of Technical collaboration Agreement iv. Copy of Export Agreement v. Copy of Trading details vi. Copy of First Amendment to Technical Collaboration Agreement Reply dt. 11.03.16- Technical Assistance & Royalty Agreement (2007-085, PB-II, p. 606 & 609) Reply dt. 21.03.16- Representation Agreement for export of CTV (export commission) (p.527-534) Design & Development Agreement (p. 535) - 15. Whether Technical services were provided to the Indian customer during the year? If yes, please submit the names of employees and other persons who visited India in this regard…. Reply dt. 21.03.16- In this regard, we wish to submit that details of transactions entered by the assessee with LG India during the FY under consideration has been duly furnished… vide our submissions dt.09.03.16 (p.634-636). Further, we wish to reiterate that the assessee has not executed any projects in India. Accordingly, the above details are not applicable to the assessee. (p.523) - 16. Please furnish the details of all expatriates whose r .....

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..... ls, the ld AO is duty bound to take a view on existence of available facts. He submits that even today the detail of short visits etc is not submitted. 41. Coming to the statement of employees he submitted that expat employees are whose employees is the moot question. He submitted that the contention of the assessee is that those Employees of LGEI are working exclusively for the business of LGEI but available facts shows otherwise. He referred to various statements of expat employees. M.B.Shin -(PB-II,p.665-666) 1. Jan 2005.I was the head of marketing that is the official title given by HQ before I joined LGEIL in Jan 2005. I was working in Seol, South Korea with LGEK. I was looking after the overseas market globally. The HQ of LGEK decided to send me here as head of marketing of LGEIL. In 2007 the HQ in Korea promoted me as MD, LGEIL. ii. I sometime report to Woody Nam and sometime to CEO of the product companies, sometimes to global CEO iii. My salary is decided by HQ of LG Global in Korea. It is paid by LGEIL. H.C.Moon-(PB-II,p-672-673) 1. I am working here in the company at Grater Noida since January 2008. Prior to it I was working in this same company at Korea. I was transferr .....

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..... y plus additional benefits….when they finish their term they go back.(p.710) iii. The MD of LGEIL is recruited by HQ HR (p.711) Chang Sil Lee- (PB-II,p-712-713) i. I was employed in corporate planning team in Korea. The corporate HR department in Korea informed me about the position in India. The India HR department corresponds with HR department in Korea and then I was informed about my selection by the HR department of LG Korea. I did not submit any resignation to my earlier employer i.e. LGEK. It was a transfer of position from Korea to India which was informed to me by HR department of LGEK. Normally the term of deputation for Foreign Service expatriate is four years which can be extended or reduced in discussion with the MD LGEIL and Global CEO through Global HR department of LGEK. After the completion of tenure in India, the next position is also decided by global CEO who informs us through corporate HR department of LGEK. ii. In my case no interview was taken by LGEIL. Generally in the case of FSE when MD comes for some meetings in Korea he may meet informally to the candidate coming to India. The LGEIL HR also did not interview me. iii. To sum up in the case of FSEs .....

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..... of Product Introduction-(PB-II,p.670) a. Depending upon the market need and consumer service, LGEK Product Company develops products through their R&D. The subsidiaries which need take them and those who do not, do not take it. b. The researches are done jointly by local team and Korean team. Core technology are decided in Korea and according to local insights changes are made in consensus with HQ & subsidiary. c. LG Global has its own set of PRM (Product Road Map-Menu Card) which is for all the countries in which they have a subsidiary. We in LG India are introduced to this Menu Card, and offered a choice to select from these products(ONLY). Here we take our pick of the products based on the market dynamics and Indian customer preferences… About selection of product - our choice is limited to the offering made as per the Menu Card and cannot choose any other besides that.(PB-II,p.717) d. In the process of deciding the PRM for India, we do an extensive research of the market and consumers. This is where we get a team of expats who work very closely with us..(PB-II,p.717) e. As per the PRM for India - there are some products which are manufactured in India….thi .....

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..... supplied by the licensor to the customers in the licensed territory under the terms and conditions of the warrantee without any cost to the licensor, and also for the products manufactured and sold by the licensee. This article remains unchanged under subsequent amendments. In the above backdrop, it is seen that LGEK reimburses certain expenses incurred by LGEIL. (PB-I, p.76 r.w.p.217,233 &240) Depreciation during the year includes…. ₹ 7711 thousand (previous year ₹ 8380 thousands) recovered from the holding company. (p. 217) Amounts stated in P&L A/c are net of reimbursements made by Holding Co and fellow subsidiaries towards Salaries, Wages, Allowances & Bonus, Rent, Power, Fuel & Electricity, and Interest to Banks & Others, Depreciation & Amortization. As can be seen no such amount is payable by LGEK to LGEIL as per the terms of Art.21. Without prejudice to the above, even assuming without admitting that a part of expenses may be incurred for after sale warranty services, the same can be either in the nature of Spare Parts and Labor Cost expenses (PB-I, p.101, 102..). The assessee has not furnished the copies of agreements between LGEK .....

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..... e 'licensor will advise the licensee the rate of royalty and payment thereof on Agreed Products other than TVs as and when the concerned division of licensor demands the royalty payment. The licensee then will take necessary steps to take Govt. of India's approval if it so required.' - ……. a perusal of the above clauses indicates that it is only LGK which decides the rate of royalty to be paid by the assessee over the period. On such decision taken by LGK, the assessee is supposed to take necessary steps for obtaining the Govt. of India's approval, if any, required for payment of royalty. This clause was claimed to be proving that there is only one way traffic and there is no question of any mutual negotiations taking place to finalize any business decisions as happens between two independent entities. - Under this arrangement, it is only LGK, which takes the final call and that, has binding effect on the assessee. - Article 7 of this agreement, which allows the use of "LG" brand name and trademark. This clause provides in second Para that in case at any stage in future the licensor demands any royalty payment on this account, the licensee wi .....

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..... ue. If however it turns out that the behavior of the Indian AE has been influenced by the foreign AE, then there arises a need for adjustment to that extent by removing the effect of such influence. Functions & Risks- 12.3 It is further evident from the interview of Mr. M.B. Shin, the Managing Director of the assessee company that it adopted the BOS in India as part of its global strategy. The details as referred to by the ld. DR reveal that the entire marketing strategy of LG group through advertising and promotion was decided globally. The assessee and other AEs of LGK in other countries were supposed to follow the overall strategy made by LGK. When the assessee subscribed to BOS of its foreign AE, it cannot be contended that all the decisions about the timing, areas and quantum of advertisement were taken by the assessee, as was contended by the ld. AR. In fact all such decisions are derivatives of the overall BOS formulated by LGK. Though the ld. AR repeatedly asserted empty handedly that advertisement in India was planned and executed by the assessee alone, but he not only failed to support his contention but also could not place on record any contrary evidence to indicate .....

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..... y devised by LG Korea but still the fact remains that LG Korea adopted this strategy, acting under which it decided the incurring of AMP expenses under a global scheme inter alia for promotion of the brand and logo LG in India through the assessee. On whether absence of any written agreement is a bar to interpret the intention of the parties- 9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the legislature to define "transaction" u/s 92F inter alia to mean an arrangement or understanding -"(A) whether or not such arrangement, understanding or action is formal or in writing". The incorporation of the words "whether or not" before the words "such arrangement, understanding or action is formal or in writing", is a clear pointer to the fact that the agreement between the two AEs can be formal or in writing on one hand or informal or oral on the other. When there is a formal or written agreement between two AEs, the answer to the question as to the existence of transaction .....

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..... ng the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted by independent enterprises behaving in a commercially rational manner. Though the AMP expenses were shown as such but the overt act of showing such expenses as its own is different from what is incurred by independent enterprises behaving in a commercially rational manner, which unearths the covert act of treating the AMP expenses incurred for the brand-building for and on behalf of the foreign AE, as also its own. What is relevant to consider is as to whether an independent enterprise behaving in a commercially rational manner would incur the expenses to the extent the assessee has incurred. If the answer to this question is in affirmative, then the transaction cannot be recharacterized. If, however, the answer is in negative, then the transaction needs to be probed further for determining as to whether its re-characterization is required. Such re-characterization can be done with the help of the ratio decidendi of this judgment itself, being, making a comparison with what' independent enterprise .....

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..... lace of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. 34) The term "place of business" is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business that would also constitute a PE. Some of the examples where premises are treated at the disposal of the enterpr .....

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..... en their general meaning, general to lawyer and layman alike ... the meaning of the diplomat rather than the lawyer'. [Francis Bennion: Statutory Interpretation, p. 461 [Butterworths,1992 (2nd Edn.)].]" 51. He further submitted that this is why a work-bench in a caravan, restaurants on a permanently anchored river boats, a transformer or generator on board a former railway wagon qualify as places. Taking the issue further, I may add, that s why a computer terminal (as in the case of Galilio/Travelport) or a computer server (as in the case of or Areva T&D AAR/876/2010) constitutes a PE whereas a Satellite transponder is not. Hon ble SC further elaborated this concept with reference to another competing enterprise. (para-37, FOWC) The question is whether at the disposal denotes an absolute legal right/control over a place /room/cabin/space or it connotes only the right to access and use such place. Once the Hon ble SC identified and clarified the dichotomy between the legalistic interpretation of the term Place as a (bundle of rights of ownership to the exclusion of others, use, transfer as allowed by law) as against the interpretation as per OECD/DTAA and the characteri .....

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..... The OECD-Model- Convention and its update 2014 (Michael Lang and others, (edited) IFBD, Linde) observes- In the last decade the tendency to broaden the scope of Article-5(1) by extending the meaning of at the disposal of could be observed. The result is lowering of the threshold for the creation of a fixed place, from a right to control a place/ location of business to a more factual based approach, focusing on the ability of the enterprise to use a certain place for its activities. In 2003, the OECD incorporated the painter example in the commentary. According to that example, a painter who, for two years, spends three days a week in the large office building of his main client will constitute a PE. The presence of the painter in that office building where he is performing the most important functions of his business for the client will be enough to establish a PE. That example indeed shows a very broad understanding of the concept of permanent establishment as defined in Article-5(1). It no longer refers to a certain room or location over with the painter can exercise a minimum degree of power or at least can store his equipment. Instead, just the activities and presence at certa .....

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..... of disposal should not be tested from the angle of exclusion of others but from the perspective of type and duration of business carried on by the taxpayer from such place. Looking from that perspective, the premises of LGEIL were at the disposal of LGEK in view of the length and duration of their use by the assessee and the less invasive activities being carried on there from. It can t be denied that LGEK had certain amount of space at its disposal and this place of business was situated in the business facilities of LGEIL. 56. He further submitted with respect to temporal aspect or the Permanency Test , it may not be out of context to highlight the fact that the temporal aspect of this concept has been largely diluted in view of the decision of Hon ble Supreme Court in the case of Formula One World Championships (Supra). While elaborating the concept, the Hon ble Supreme Court held- 41. …….. The High Court was also conscious of the fact that such an access or right to access was not permanent in the sense of its being everlasting. However, having regard to the model of commercial transactions, such an access for a period up to six weeks at a time during the F-1 Cha .....

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..... all the bundle of rights the FOWC had as CRH, meant that it was a shifting or moving presence: the teams competed in the race in a given place and after its conclusion, moved on to another locale where a similar race is conducted. Now with this kind of activity, although there may not be substantiality in an absolute sense with regard to the time period, both the exclusive nature of the access and the period for which it is accessed, in the opinion of the Court, makes the presence of a kind contemplated under Article 5(1), i.e. it is fixed. In other words, the presence is neither ephemeral or fleeting, or sporadic. The fact that RPC-2011's tenure is of five years, meant that there was a repetition; furthermore, FOWC was entitled even in the event of a termination, to two years' payment of the assured consideration of US$ 40 million (Clause 24 of the RPC). Having regard to the OECD commentary and Klaus Vogel's commentary on the general principles applicable that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business, it is hereby held that the circuit itself const .....

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..... and repetitiveness to it. Moreover, employees of LGEK are part of the management of LGEIL. What is more important in this context is not only the number of days, but the presence almost throughout the year and year after years. The issue is not about the presence of the employees of LGEK for short periods in one year, it s about the continuity and repetitiveness of such short presence year after year. Accordingly, considering the permanency and frequency of such visits, the temporal aspect of the disposal test is also satisfied and the contention of the assessee in this regard is also deserves to be rejected. 58. On the issue of permanent establishments that whose business is carried out from that place , he submitted that Whether it can be said that the business of enterprise is being wholly or partly being carried on through such place. The term business is not fully or exhaustively defined; accordingly, it has the meaning that it has under the domestic law of the state applying the tax treaty, plus professional and independent services, as explicitly provided for in article 3(1)(h) of the OECD Model. This Hon ble Tribunal in the case of Qualcomm Incorporated (I.T.A. Nos.: 3701 .....

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..... re not for providing technical assistance or training to the staff of LGEIL only. They also conduct and carry out business of LGEK during their visit to India and use the premises of LGEIL for such purposes. Manufacturing excellence and sharing of global best practices by way of training and sharing of knowledge are supported by LGEK and expenses towards this are at times borne by LGEK. - M.B.Shin, MD, LGEIL (PB-II,p-662) We are LG and India is also LG. We use global logo of LG. We write only LG and not LG India. - Mong Nam Jung, GM (R&D) (PB-II, p.706) It reflects the perception of LGEIL in the eyes of expats. The researches are done jointly by local team and Korean team. Core technology are decided in Korea and according to local insights changes are made in consensus with HQ & subsidiary.- Y.Verma, COO (PB-II, p.670) LG Global has its own set of PRM (Product Road Map-Menu Card) which is for all the countries in which they have a subsidiary. We in LG India are introduced to this Menu Card, and offered a choice to select from these products(ONLY). Here we take our pick of the products based on the market dynamics and Indian customer preferences… About selection of p .....

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..... nce to the above. 60. In the end the learned CIT DR submitted that there is an existence of the complete business apparatus of LG courier in the form of fixed place at its disposal in the form of the premises of its subsidiary which is provided to the 2nd and employees and a space for which rent paid is reimbursed. He submitted that these expats employees, and discuss with the members of the Indian subsidiaries and sometimes they also go to the market, sometimes they meet the customers, sometimes the common discussing the office, they go to the market and meet the customers because they are supplying finished goods in India and they have to ensure quality and consumer satisfaction. He further stated that there is a plant and machinery in respect of which depreciation is reimbursed. He further stated that capital employed for which interest paid and other business expenses are also reimbursed. He further submitted that the reimbursement of total cost did not include all these expenditure which are also not reported by the assessee is an international transactions. He further submitted that there is maintenance of inventory at the facilities. He further stated that 2nd and employees .....

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..... initiation of reassessment proceedings, to the effect that the Appellant has PE in India was material and could not be ignored notwithstanding the direction by the Hon ble Supreme Court to decide the issue regarding existence of PE uninfluenced by the observation of the Hon ble Allahabad High Court. For the aforesaid proposition reliance was placed by the CIT DR on para 8.9 of the Special Bench decision in the case of LG Electronics 140 ITD 41. He submitted that Hon apex Court while disposing of the SLP filed by the Appellant categorically observed that- 8. In these matters the DRP/Assessing Officer have come to the conclusion that the petitioner has a PE in India. However, the petitioner prays for permission to withdraw these five special leave petitions and to pursue the statutory remedy under the Income Tax Act, 1961. These special leave petitions are, accordingly, dismissed as withdrawn with liberty to the petitioner to pursue its statutory remedies. 9. It is also made clear that the Appellate Authority will examine the matter uninfluenced by any observation/ finding of the high court regarding the existence of a permanent establishment of the petitioner in India In that view .....

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..... ms of employment were controlled by the Appellant; ii. Such employees continued to have lien on their employment with the Appellant; iii. Such employees had parallel reporting to LGEIL and the Appellant; iv. Such employees enjoyed functional independence vis-à-vis LGEIL management. 65. In response to this he submitted that ex-patriate employees deputed by the Appellant to LGEIL become employees of LGEIL during the term of their secondment/ deputation, i.e., LGEIL was their legal and economic employer. The reading of the statements does not lead to the inference that the seconded employees continued to be employees of the Appellant and working for the business of the Appellant, during the period of their secondment. 66. On the issue of short visits of employees he submitted that merely because the Appellant has not been able to give details of the visit of short term expatriates, in absence of any documentation being maintained, it is sought to be inferred that the short term expatriates have a fixed place available in India and are visiting India for furtherance of the Appellant s business so as to constitute fixed place PE in India. He submitted that the short term expatria .....

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..... DCIT (2015) 64 taxmann.com 328 (Del) pages 1095 to 1111 of paper book vol. 3, wherein the Hon ble High Court negated the contention raised by the Revenue that the Indian Company was functioning as a contract manufacturer of the foreign AE having regard to the fact that the Indian assessee was manufacturing products using drawings and designs supplied by the foreign AE, using trademarks owned by the foreign AE on the products manufactured by it, paying royalty to the foreign AE for use of manufacturing drawings and designs and trademarks, importing raw material and components from the foreign AE which were used in the manufacture of finished goods and was, then exporting goods to permitted countries against payment of royalty. He submitted that though Hon Delhi High Court came to the conclusion that the Indian Company was carrying on the business as an independent enterprise; as an independent manufacture, the assessee bore all the risks associated with its products in India and abroad; the assessee planned and executed its own manufacturing strategy as considered necessary and appropriate; the stipulation in the license agreement that the technology would be used for sale of goods .....

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..... ot the case of the assessing officer). It was also shown to the satisfaction of this Hon ble Tribunal that the warranty reimbursement received by LGEIL was reflected as an international transaction in the transfer pricing study of LGEIL and the same was duly benchmarked applying TNMM. Further the TPO had in the transfer pricing assessments of LGEIL accepted such reimbursement at arm s length (for assessment year 2007-08 and 2008-09). For the subsequent years, the TPO made adjustment on the ground that LGEIL should have received a mark-up for rendering such service to the customers of the Appellant. The stand taken by the TPO in the proceedings for LGEIL is in direct conflict with the proposition canvassed by the CIT DR. While the TPO had held that LGEIL had rendered service to the Appellant (for which a mark-up was to be received), in the submissions of the CIT DR the expenses incurred by LGEIL is for maintenance of a fixed place on behalf of the Appellant. The aforesaid will expose the fallacy in the arguments raised by the CIT DR for the first time before the Hon ble Tribunal. In that view of the matter, there is no merit in the submissions of the CIT DR that reimbursement of exp .....

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..... for the assessment year 2008-09 and onwards. The TPO also made adjustment of management fee in the transfer pricing assessment for the assessment year 2008-09 and onwards. The presence of Mr. Woody Nam at the premises of LGEIL in June 2010 was to discharge the obligations under the said agreement and towards shareholder functions. The same cannot lead to the inference that the Appellant had fixed place PE in India in the form of premises of LGEIL. 71. On the issue of what constitutes core business according to the ld DR, in submissions of the CIT DR, Article 5 (1) of the DTAA refers to fixed place of business and there is no reference to core business . He submitted that OCED Commentary on Article 5(1) clearly states that the fixed place should be available to carry on its own business (emphasis supplied). As stated earlier, even if it is presumed that the Appellant had a fixed place in India, no business of the Appellant was being carried out through such fixed place. That apart, the Delhi High Court in the case of E-funds (supra) in paras 30 and 50 thereof referred to the core business of the foreign enterprise being carried out through the PE in the other Contracting State, to .....

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..... n of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of Indian Evidence Act, judicial and official acts have been regularly performed. 75. It is also important to point out that the transfer pricing assessment in the case of both the Appellant and LGEIL were completed after the survey on 24.06.2010 when the TPO had the benefit of the findings in the survey. 76. He further submitted that decision of the coordinate bench in case of Samsung (Supra) binds the ITAT and there is no difference in the facts of the case and therefore same view needs to be taken. He referred to the statements of employees in that case as well as in this case in a tabular form as under :- Comparative chart showcasing similarity in Statements recorded during survey S.No. Samsung Electronics Co. Ltd. LG Electronics Inc., Korea 1. Statement of Sh. Kyoung Soo Kim s/o Shri Jong Suk Kim A. Please identify yourself? I am Kyoung Soo Kim s/o Jong Suk Kim aged 40 yrs, working with Samsung India Electronics as Deputy General Manager (Purchasing). B. Being the purchase incharge do you get any direction from Samsung electronics Korea regarding import of .....

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..... ing in US Dollars. E. For how much time have you been posted in India? It is not fixed. Normally I expect to stay for three to four years. F. Can you be replaced back to Samsung Korea, at your wish or would it be the decision of the head quarters to when to get you back? In two way agreement. G. What is the mode of communication with Samsung Korea? Over the phone & email (intranet). H. You have the intranet systems installed with the corporation, where is the server of the intranet situated? I have no idea. Maybe, in Korea, or in Singapore. I. How often do you communicate with the head quarter in Samsung Korea? Normally daily. J. You communicate directly or through your GEO? It depends on issues. Something which may affect the business result seriously will be discussed with my boss, MD but in most cases of simple opinion exchange the communication is done without MD intervention. K. To whom do you generally communicate in Korea? Mr. Ryu, Vice President in Mobile Communication Division and many other persons. L. From where do you generally import your products, please give details product-wise. (1) Mobile Phone: : Korea, China & Vietnam, (2) Monitor : Malaysia, (3) OMS : Ph .....

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..... owing you the remittances of ₹ 9,63,134 dtd. 10/02/10 and ₹ 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. C. How would you justify such payment without deduction of tax thereon? Question asked about ₹ 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 ₹ 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. The part salary which is remitted outside India is of the individual expatriate and if it has to be-remitted for their conveyance then it should be in their respective South Korea Bank A/cs and not in the Bank a/c of Samsung Electronics Corporation. Please give reason for this. For Administered conveyance the salaries paid to Samsung Electronics Corporation Korea. D. What is the Administration conveyance in remitting the salary to the A/c of the parent co .....

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..... te in respect of such salaries is raised to SIEL India. What do you have to say. I cannot comment because I am not aware of the reason. Statement of Mr. H.C.Moon, Son of Mr. Myong Ki Moon A. Please give your identification? I am H.C. Moon and am working as Vice President in LG Electronics India Ltd. looking after the Finance Accounts of the Company at NOIDA. B-J. Since when you are working here and prior to it, where you were working and give the details of your educational qualification with salary being received presently and in the past? I am working here in the Company at Greater Noida since Jan 2008. Prior to it, I was working in this same company at Korea. I am MBA (Accounts & Finance) from America. Presently I am getting ₹ 3.50 Lacs approximately (Indian Rupees) (gross salary). I do not remember what deductions are from my salary but net salary is being credited to my SB A/c with ICICI Bank at Greater Noida. I do not remember my Bank A/c No. House rent which is on a/c of my house is being paid by the company directly to the house owner after deducting it from my salary. Are you receiving any amount abroad in the form of salary/payment/ reimbursement/allowance etc. .....

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..... onics India for both Indians as well as expatriates? Manpower plan for every year is finalized in consultation with functional head and Managing Director. The skills required is assessed based upon that the requirement whether Indian employees or Koreans required are taken out. The Indian requirements are fulfilled locally and wherever Koreans are required the requirement is communicated to Korea. A list of eligible and suitable employees is forwarded by Korea to us from where a suitable candidate is selected after interview on video conferencing. D. Whether the expatriate employees get any salary, perquisite or allowance reimbursement, payment by whatever name called outside India during their stay in India? No. How is the salary and perquisites of Korean expatriates decided? For deciding the salary there is clear norm that whatever salary a person is drawing in the parent country plus the benefit of house + car and driver + education support for the children is paid. E. When expatriates employees are posted in India whether they have any relationship with the parent i.e. LG Korea or any of its AE. When the employee leves India whether they resign or they are transferred? I need t .....

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..... Please clarify what is global biz management. Manage all functions of specific product all over the world. J. Are there different GBMS for different products? Yes, Mobile-Mobile phones & Video Display- TV, monitor. K. Do you regularly send reports to GBMS? How often are the report sent? No, 1-2 times by-yearly. L. Then how do the GBMS manage the functioning of different divisions in India, as stated by you in answer to question 11? GBM is more common sales they touch more sale teams then me M. Who takes the policy decision regarding the financing of various business divisions of SIEL? MD&CFO N. How are such policy decisions taken? Are they through the board meetings or your independent decisions? Both O. But none of the minutes of board meetings show any such policy decisions being taken in board meetings? I am not sure because I have joined less than 6 month but major issue show all board members. P. Who takes the policy decision regarding which product/model are to be manufactured and which are to be purchased and traded? Sales. I just concern Profit & loss Q. In case of major investment or policy decision of setting up a factory in Chennai etc, is the consent or appr .....

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..... y. This technology is imported by us in India. 7. Statement of Mr. H.K. Seo, Vice President- CE Sales & Marketing in M/s Samsung India electronics (P) Ltd. (SIEL) A. What are the duties assigned to you in current posting? Sales & Marketing related job: - Involve local sales & marketing in SIEL's strategic direction. For example: to introduce Samsung products on Global consumer'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. B. How do you liase with Samsung HQ for products development and production? 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 lo .....

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..... IL? Product Marketing strategy are decided by me with my team and my MD. What is the role of LG Inc. Corp.? Nothing. What is the role of LG Inc. Asia in it? Subsidiaries like LGEIL decide there own strategy specific to the market and are accountable for the results. Who is responsible for purchases and imports? Purchase of raw materials Manufacturing Setup is responsible. For certain setup of purchase general affairs is responsible, for imports, imports team is responsible. How are new product introduced in India? Depending upon the market need and consumer service, LG Korea Product Company develop products through their R&Ds. There …..which need ….then and those who do not, do not take it. There…….are done jointly by local team and Korea team. Core technologies are decided in Korea and according to local insights changes are made in consonance with HQ and subsidiary. For e.g. LCD technology being global platform was developed in HQ Korea but Jazz was developed as per local insight of India. Please elaborate how research is done by Korean Co. in India i.e. how market need and consumer services are done? Consumer insight surveys are conducted to under .....

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..... mmunication with HQ what are things/points discussed? They usually ask us about the reason of aging stock. H. Since most of the items marketed by you, being CE head, are manufactured in India then why is HQ concerned with Ageing Stock? Because of Global performance. 9. Statement of Mr. Mahesh Sutagatti A. Please give your introduction? Working as Manager in Samsung Electronics since 2004 Oct 15 at their HQ R&D in Suwon, before this I had taken a sabbatical of approx. 1 year, before this worked with L&T Infotech (Bangalore) for 3 years approx. as Project Leader, before that worked in Arvind Mills (Pune) for approx. 8 yr. B. You are drawing your salary from which company and what is the amount of salary? Samsung Electronics Corp. Suwon South Korea, my salary is being paid by Samsung Electronics approx 3200000-3500000 Won (net in my salary account) in Won. C. What is your scope of work in Samsung Electronics South Korea? Incharge for interoperational testing between base station and mobile devices, Also take care of trail test with operators for mobile wimax. D. Since when have you been in India and what is your scope of work in India? Arrived at Bombay on 18th June, Scope of .....

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..... ct with the subsidiaries in Asia including India for the services that we provide as Regional HQ. 10. Statement of Mr. Chungseop Song Q13. Do you receive the Guidelines from Korea regarding Purchases? Ans. Yes, Sometimes I receive guideline from Korea. Q14. What type of Guidelines you receive? Ans. Regarding Vendors (Foreign Suppliers) 77. To this ld CIT DR submitted that there is major difference in the facts of that case as well as in the impugned case. He submitted that there is complete information available with AO and there is no allegation that any information is withheld. In the preset case assessee till to date has not given many details, therefore that decision cannot be applied. 78. The ld AR also placed on record rebuttal note to various other oral submissions made by the ld CIT DR which is as under :- I. Non Compliance A. To meet the argument of the Department that there has been a non compliance by the Appellant to the notice dated 11.11.2014 under section 142(1) of the Act, the Appellant firstly referred to pages 1191 - 1193 of the paper book volume - 4. The said pages contain the list of dates and events to show the manner in which the reassessment proceedings proce .....

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..... Pg 710 is reproduced as follows: Qn: Who sends the requisition to LG korea and whether probable candidates come for interview to India or not. Also whether the Indian directors visit Korean office for recruitment or not? Ans. The MD of LG India forwards the requirement of Korean candidates to HR at head quarter. Based upon that they propose the available candidate whose willingness is pre-checked by them. From this list the candidates are interviewed either through VC or whenever senior person visits Korea they interview them. Statement of Mr. H.C. Moon, Vice President at Pg 676 was also referred to the relevant portion is reproduced as follows: Q: When you are going to complete your tenure of posting in India? Whether after completing your term in India in this company, do you plan to move out of India or would try to remain in India in any company because you have a skill and experience? Ans: By the end of 2011 or start in 2012, but not sure, I would complete my tenure in India. To leave India or not would depend then and there s position. I am not sure about my future situation. But I may stay in India even after completion of my tenure in India. G. To counter the judgment of CG .....

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..... ll the transactions between the Appellant and LGIL and consequently applied his mind thereto. Copy of the order of Ld. TPO is at page 254 of the paper book volume - 1. L. With regard to the submission of the Department that the order of the TPO in case of LGIL was passed prior to survey at the premises of LGIL and prior to the survey report prepared by the survey team, it was submitted that the DRP directions and the TPO s order giving effect to the directions of DRP, were passed subsequent to the survey at the premises of LGIL and the date of the survey report. In that view of the matter, it could not be presumed that the DRP / TPO were not aware of the findings of the survey team. In this connection, the Appellant relied upon the judgment of the Full bench of the Hon ble Delhi High Court in CIT vs. Kelvinator of India 256 ITR 1. The relevant portion of the judgment is reproduced for the convenience of this Hon ble bench as follows: 23. We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proc .....

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..... ld be made to the alleged PE once the transactions between the Appellant and LGIL were held to be at arm s length in the successive transfer pricing assessments concluded by the TPO, both, in the case of LGIL as well as the Appellant. P. The decision of the Hon ble Supreme Court in the case of ITO vs. Techspan India (P.) Ltd. : [2018] 302 CTR 74 (SC)(supra) relied upon by the Department relates to the validity of reassessment proceedings. While dismissing the appeal of the Revenue, the Supreme Court observed as under: 12. Before interfering with the proposed re-opening of the assessment on the ground that the same is based only on a change in opinion, the court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the assessing officer any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial inte .....

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..... s contention the Appellant had relied upon its earlier note and the judgments relied thereupon. V. Reimbursement: V. The original Technical Collaboration agreement was entered into between the Appellant and LG India on 01.07.2001 which is filed at pages 901 of paper book Vol - 3. The said agreement was amended on 01.01.2002 to bring in Article 21 (at page 921 of the paper book Vol - 3). W. With regard to Article 21, it was pointed out that the said Article was in the context of manufacture and sale of air conditioners / washing machines in India. It was further pointed out that notwithstanding that the original agreement did not contemplate reimbursement of warranty expenses, it was open to the parties to modify the terms of the contract as per section 62 of the Indian Contract Act and that it is amended contract which would govern the parties thereafter. X. It was further pointed out that the Appellant had entered into Service agreement with LG India on 01.01.2003. As per this agreement LG India was to provide after sales services. Clause 1-7 of the said agreement was pointed out to refer that the total cost included the landed cost of the material purchased from the Appellant (in .....

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..... similar. The learned CIT DR vehemently stated that the identical issue has been considered by the honourable Delhi High Court in that particular case which covers the issue against the assessee. The learned authorised representative vehemently stated that there is a substantial difference between the facts of the case before the honourable Delhi High Court and before us. He extensively referred to the business structure in the case of GE parts incorporation as well as the assessee. He extensively referred to various paragraphs of the order of the honourable Delhi High Court specifically para number 73 and 74 of that order. He submitted a seven-page note to say that the facts of the decision before the honourable Delhi High Court are quite distinct. He also referred to a pictorial representation of the business model of the appellant and GE energy. He therefore submitted that the decision of the honourable Delhi High Court does not have any implication on the facts of the present case. He also referred to the decision of the coordinate bench in the case of LG Electronics India private limited vs Asst Commissioner of income tax in ITA number 6253/del/2012 dated 14/1/2019 for assessm .....

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..... efore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed." In fact, even the OECD Commentary on Article 15 of the Model Convention, on which learned counsel for CIOP has placed great reliance, interestingly notes that "[t]he situation is different if the employee works exclusively for the enterprise in the state of employment and was released for the period in question by the enterprise in his state of residence." This was clearly, and critically, not done in this case. 81. The ld AR submitted that decision of the Delhi High Court in the case of Centrica (2014) 364 ITR 336 Delhi is distinguishable on facts. In that case the issue for consideration was whether the amounts reimbursed by the Indian company to the overseas parent company in terms of secondment agreement amounted to fees for technical services liable to tax in India . In that case, the Hon ble High Court having regard to the findings recorded by the Authority for Advance Ruling that the seconded employees were paid salary and other allowances as also service benefit .....

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..... nder the total control of the parent i.e. LG Electronics Inc, Korea and the control is such which cannot be treated as shareholder s control. 2. All the purchases from so called third parties are finalized by the parent in Korea itself and the Indian entity has no power to interfere in these purchases. 3. The raw materials, finished goods and other consumables purchased by LGEIL are through the parent company or other AEs for which there is no price negotiation between seller i.e. LG Electronics Inc, Korea and its AEs and purchaser i.e. LGEIL. 4. No single instance or evidence has been furnished by the assessee that could reflect that the contract for the sale from the parent or its AEs has been cancelled on account of price negotiation. 5. The purchase of raw material, finished goods and other consumables from the parent, other AEs and third parties, all are managed and controlled by LG Electronics Inc, Korea. It reflects that the interest of the parent is perpetrated and protected by seconding the expatriates to India which accept the offers without any sort of hindrance. 6. The contention of the assessee that all the purchases are at Arm s Length Price do not support assessee s .....

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..... als the dependence in term of human resources on the parent company. c. The purchase of raw material, finished goods and other consumables from the parent company and its AEs without any price negotiation and without any search of non-resident vendors by LGEIL reveals the economic dependence of the subsidiary on its parent. d. These facts have been revealed to the assessee many times. The assessee s version of the human resources dependence of a subsidiary over parent is not forthcoming. The assessee has tried to point out the events by singling them and stating that it is not a relevant criteria for Permanent Establishment. It may appear from a bare reading of independent paras that the assessee may or may not have any Permanent Establishment in India, but when the whole scenario is considered taking each and every point starting from the secondment of the expatriates, frequent visit by short-term expatriates, purchase of material mainly from parent company, reporting to the authorities in LG Electronics Inc, Korea, appreciation certificates given by the authorities at places other than India and in a better position in hierarchy, providing after sales services and warranty on beh .....

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..... Hon'ble Panel, the assessee submits that without prejudice to the assessee's view towards the non existence of PE in India, from the limited perspective of attribution of income to the alleged PE, it is being acceptable to the assessee that the taxable income of the assessee in India is directed to be determined at 10% (Profit Margin) of 50% of salary cost of expatriates in India during the relevant year. To clarify, where the salary cost of expatriates in India during the relevant year is Rs. too, the assessed income of the assessee will be computed at ₹ 5. The aforesaid is without prejudice to assessee right' to challenge existence of PE in India for the relevant year or any other years and other grounds raised by the assessee or its associated enterprise in India viz. LG Electronics India Private Limited in various other proceedings in India. We trust that you would find the above in order. Thanking you, Yours faithfully, For LG Electronics Inc. , Korea, Authorised Signatory Enc: As above. The Assessee has a Permanent Establishment ( PE ) in India. As per the provisions in India- Japan Double Taxation Avoidance Agreement ( DTAA ), the income attributable to suc .....

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..... asis of a consequential adjustment in the case of the other enterprise." The transactions with an overt branch office or a group of key employees placed strategically in the AE establishment would be examined and the TP norms shall apply on such transactions also. Determination of income attributable to a PE (having regard to provisions contained in India-Japan DTAA i.e. separate and distinct entity approach) would hence require application of transfer pricing methodology. Rules 10A to 10E deal with mechanism for determination of arm s length. The cases of business connection as in the instant matter require to be tested as per the TP regulations if there is some international transaction with the AEs. The legislation intended to cover the transactions between Head Office and Permanent Establishment within the ambit of Section 92 and this position is in sync with the provisions of the India-Japan DTAA that advocates a separate entity and arm s length approach for attribution of income of the assesse to its PE. A perusal of the aforesaid Rule stipulates that for its application, it is mandatory that income accruing or arising to any nonresident from any business connection must .....

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..... as above. 83. Therefore it is apparent that the learned dispute resolution panel has gone under the presumption that assessee has conceded the aspect of the existence of the permanent establishment in India of the assessee. The assessee now denies the above fact and says that it has never considered the issue of the existence of the permanent establishment. On careful analysis of the letter dated 05/12/2016 submitted by the assessee before the learned dispute resolution panel it states in para number 3 of that letter that assessee submits that without prejudice to the assessee s view towards the nonexistence of permanent establishment in India, from the limited perspective of the attribution of income to the alleged PE, it is being acceptable to the assessee that the taxable income of the assessee in India is directed to be determined at 10% (profit margin) of 50% of salary cost of expatriates in India during the relevant year. It further says that the clarify, where the salary cost of expatriates in India during the relevant year is rupees hundred, the assessed income of the assessee will be computed at INR 5. It further says in the next paragraph that the aforesaid is without pr .....

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..... t of March 2017. 86. In view of the above facts it is apparent that as per the letters of the assessee mentioned in the direction of the learned dispute resolution panel, the assessee has reserved its right to challenge the existence of the PE at various forums and in case of other associated concerns also for relevant year or any other assessment year. Therefore there is no clear-cut admission of the assessee of the existence of the PE before the learned dispute resolution panel. Therefore, apparently, in all these years, the learned dispute resolution panel has not at all given any finding on the existence of the permanent establishment of the assessee in India. In almost all the cases the learned dispute resolution panel has referred the above two letters submitted by the assessee and based on that has upheld the action of the learned assessing officer except to the small extent of adjustment of the profit attribution for assessment year 2007 - 08 from the suggested lines by the assessee. 87. Though we have recorded the complete arguments of both the parties with respect to the existence of the permanent establishment, however, in view of the submission of the assessee before th .....

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