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2019 (9) TMI 232 - AT - Income TaxIncome accrued in India - Income allocable to the Appellant s PE in India - direction issued by DRP upon conditional admission by the assessee - business connection in India - short term visits 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 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 prejudice to the assessee s right to challenge existence of permanent establishment 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. Thus this letter has been accepted by the learned dispute resolution panel and straightway went on to attribute the profit to the permanent establishment. 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. 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 the learned dispute resolution panel and consequent understanding of the learned dispute resolution panel that the assessee has conceded the existence of the permanent establishment, we have refrained from giving our findings on the existence of the permanent establishment as it will prejudice the interest of the assessee to the extent that it will not be able to avail the benefit of the direction of the learned dispute resolution panel on the existence of the permanent establishment. In normal circumstances, as necessary facts are laid down before us, we would have decided the issue but the specific letters before the ld DRP, where DRP in its 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, the learned Dispute Resolution Panel will afford reasonable opportunity of hearing to the assessee. The learned dispute resolution panel, then, will direct the learned assessing officer to pass the final assessment order incorporating its direction in accordance with the law. In absence of any admission about the existence of the PE by the assessee, all issues, with respect to the existence of the permanent establishment as well as the profit attribution thereto would be open before the learned dispute resolution panel. - Appeals filed by the assessee are allowed with above direction for statistical purposes.
Issues Involved:
1. Validity of the reassessment proceedings under Section 147 of the Income Tax Act. 2. Existence of a Permanent Establishment (PE) under Article 5 of the India-Korea DTAA. 3. Attribution of profits to the alleged PE. 4. Levy of interest under Sections 234A, 234B, 234C, and 234D of the Act. 5. Initiation of penalty under Section 271(1)(c) of the Act. Detailed Analysis: 1. Validity of the Reassessment Proceedings under Section 147 of the Income Tax Act: The assessee challenged the reassessment proceedings initiated under Section 147 of the Act, arguing that the initiation did not satisfy the necessary requisites and there was no reason to believe that any income chargeable to tax had escaped assessment. The assessee contended that all transactions between LGIL and the assessee were held to be at arm’s length by the Transfer Pricing Officer (TPO), thus negating any 'escapement of income'. The reassessment proceedings were also challenged on the basis that they were initiated solely on the basis of statements of expatriate employees recorded during a survey, which were not relevant for the assessment year under consideration. The Tribunal noted that the Supreme Court had directed that the appellate authority would examine the matter uninfluenced by any observation/finding of the High Court regarding the existence of a permanent establishment of the petitioner in India. Consequently, the Tribunal dismissed the grounds relating to the challenge to reopening proceedings as not pressed for AY 2004-05 to 2010-11. 2. Existence of a Permanent Establishment (PE) under Article 5 of the India-Korea DTAA: The primary contention was whether LG Electronics Inc. (the assessee) had a PE in India under Article 5 of the India-Korea DTAA. The Assessing Officer (AO) concluded that the assessee had a fixed place PE in India in the form of LG Electronics India Ltd. (LGEIL). The AO's conclusion was based on several factors, including the control exercised by the assessee over LGEIL, the presence of expatriate employees in key positions, and the role of these employees in furthering the business of the assessee. The Tribunal noted that the DRP had accepted the existence of a PE based on a letter from the assessee, which suggested a method for attributing profits to the alleged PE. However, the Tribunal found that the DRP had not independently examined the issue of the existence of a PE and had instead relied on the assessee's letter. The Tribunal directed the DRP to re-examine the issue of the existence of a PE and, if necessary, the attribution of profits thereto. 3. Attribution of Profits to the Alleged PE: The AO attributed profits to the alleged PE by applying a profit margin to the salary cost of expatriate employees. The DRP directed the AO to attribute the cost of salary paid to employees and add a mark-up of 20%. The Tribunal noted that the assessee had contested the attribution of profits, arguing that the transactions between the assessee and LGEIL were at arm's length and had been accepted as such in the transfer pricing assessments of both entities. The Tribunal observed that the DRP had not independently examined the issue of profit attribution and had instead relied on the assessee's letter. The Tribunal directed the DRP to re-examine the issue of profit attribution if it found that the assessee had a PE in India. 4. Levy of Interest under Sections 234A, 234B, 234C, and 234D of the Act: The assessee contended that the AO/DRP had erred in directing the levy of interest under Sections 234A, 234B, 234C, and 234D of the Act without appreciating that the assessee is a non-resident and tax is deductible from its income. The Tribunal did not specifically address this issue in its order, as it primarily focused on the issues of reassessment, existence of PE, and profit attribution. 5. Initiation of Penalty under Section 271(1)(c) of the Act: The assessee challenged the initiation of penalty under Section 271(1)(c) of the Act, alleging that the AO/DRP had erred in initiating penalty proceedings by alleging that the assessee had concealed the true and correct particulars of its taxable income and furnished inaccurate particulars of its income. The Tribunal did not specifically address this issue in its order, as it primarily focused on the issues of reassessment, existence of PE, and profit attribution. Conclusion: The Tribunal set aside the appeals to the file of the DRP with a direction to first ascertain the fact about the admission of the assessee with respect to the existence of the PE. If it is found that there is an admission on part of the assessee about the existence of the PE, the DRP will decide the issue accordingly. However, if it is found that there is no admission on this aspect, the DRP is directed to decide the issue of existence of the PE and consequent profit attribution thereto with respect to each of the assessment years. The Tribunal allowed the appeals for statistical purposes, directing the DRP to re-examine the issues in accordance with the law.
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