2024 (1) TMI 995 - AT - Income Tax

TDS u/s 195 - Validity of the orders passed u/s 201(1)/201(1A) - TDS default on the payments made to the parent company and other overseas AEs - PE in India - AO held that the payments made by the assessee towards purchase of raw-materials, finished goods, capital goods to LG Korea and other non-resident associated companies, are taxable in India, as, all those entities have PE in India, Therefore, the assessee was liable to deduct tax at source under section 195 - HELD THAT - The basis of attribution of profit to the payee, LG Korea is purely notional as it is the specific case of the assessee that it has not paid any salary cost of expatriate employees to LG Korea. It is the case of the assessee that on the salary cost paid to the expatriate employees, the assessee has deducted tax at source under section 192 of the Act. The aforesaid claim of the assessee remains uncontroverted. Thus, when the assessee has not made any direct payment to the LG Korea towards the salary cost of expatriate employees, in our view, there was no liability on the assessee to deduct tax on such notional payment. Moreso, when the assessee has already deducted tax under section 192 of the Act in respect of salary cost of expatriate employees. Thus, when the basis of attribution of profit to the PE is a notional income, that too, based on a methodology adopted by DRP in case of payee, the assessee cannot be expected to perform an impossible act of computing TDS on a notional payment, a part of which, is to be attributed towards profit of PE of LG Korea. As decided in Samsung India Electronics Pvt. Ltd. 2014 (4) TMI 976 - DELHI HIGH COURT payments made by the petitioner to SEC for the goods are not tax deductible under section 195(2) and hence they were rightly allowed as deduction in the original assessment of the petitioner and (ii) the assessee cannot be treated as one in default under section 201(1) and no interest can be charged under section 201(1A) as no income arose on account of sales in India since the petitioner cannot be held to be its PE in India. Thus we hold that, there being no obligation of the assessee to withhold tax under section 195 of the Act, the assessee cannot be treated as an assessee in default under section 201 of the Act. Therefore, we direct the Assessing Officer to delete the demands raised under section 201(1)/201(1A) of the Act for the impugned assessment years. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of orders passed under section 201(1)/201(1A) of the Income-tax Act, 1961, being barred by limitation.
2. Merits of the case regarding the assessee's liability to deduct tax at source under section 195(1) of the Act.

Summary:

Issue 1: Validity of Orders Passed Under Section 201(1)/201(1A) - Limitation
The assessee challenged the validity of the orders passed under section 201(1)/201(1A) of the Act as being barred by limitation. The initial orders passed by the Assessing Officer were set aside by the Hon'ble Allahabad High Court for violating the Rules of Natural Justice. The High Court directed the Assessing Officer to issue fresh show-cause notices and decide the issue after providing all materials to the assessee. The Assessing Officer issued fresh notices on 12.07.2011, but the final orders were passed on 24.02.2015. The assessee argued that the orders should have been passed within one year from the end of the financial year in which proceedings were initiated, i.e., by 31.03.2012. The Tribunal did not adjudicate this issue as it became academic due to the decision on merits.

Issue 2: Merits of the Case - TDS Liability Under Section 195(1)
The assessee, a wholly owned subsidiary of LG Electronics, Korea, was engaged in trading, assembly, manufacturing, marketing, and sales of electronics and home appliances. A survey operation revealed that LG Korea and its associated companies had a Permanent Establishment (PE) in India. The Assessing Officer held the assessee liable to deduct tax at source under section 195(1) for payments made to these entities and raised demands under section 201(1)/201(1A).

Upon appeal, the first appellate authority reduced the demand significantly by attributing profit to the PE only to the extent of a 20% markup over 50% of the salary paid to expatriate employees. The assessee argued that it had not made any payment to LG Korea for expatriate employees' salaries and had already deducted tax under section 192 for such salaries. The Tribunal found that the attribution of profit to the PE was purely notional and not based on actual payments. Therefore, the assessee could not be deemed an assessee in default for not withholding tax on notional payments.

The Tribunal also noted that the final assessment orders in the case of LG Korea were quashed, and there was no tax liability on LG Korea for the relevant assessment years. Consequently, the assessee had no obligation to withhold tax under section 195, and the demands raised under section 201(1)/201(1A) were directed to be deleted.

Conclusion:
The appeals were allowed, and the demands raised under section 201(1)/201(1A) were deleted. The issue of limitation was not adjudicated upon as it became academic in light of the decision on merits.