2020 (11) TMI 209 - AT - Income Tax

Re-opening of assessment u/s 147 - whether the non-resident entities had Permanent Establishment ( PE ) in India and if the PE existed what would be the income attributable to such alleged PE - case of the assessee is that where the transactions between the assessee and LGIEL has been found to be at arm s length by the TPO then there cannot be further profit attribution to a person even if it has PE in India - As per AO there was real and intimate business connection as per section 9(1)(i) of the Act as there was continuity of business between Indian business and its AEs - non-resident companies were doing business in India through the employees of the parent company, who were heading various divisions in the Indian Companies and also through employees visiting India regularly - HELD THAT - Consequent fall out is the case of the assessee, which in turn were re-opened u/s 147 of the Act consequent to survey u/s 133A of the Act on LGEIL. The basis for initiation of re-assessment proceedings falls as in the hands of LGEIL by the order dated 04.09.2018, the CIT(A) has given a finding that none of the AEs apart from L.G.Korea had PE in India for Assessment Years 2005-06 to 2010-11. Copy of the said order is placed at pages 39 to 105 of the Convenience Paperbook. In these circumstances and applying the ratio laid down by the Hon ble Supreme Court in L.G.Group of companies . 2018 (1) TMI 1611 - SUPREME COURT AND Honda Motors Co.Ltd. 2019 (7) TMI 1146 - SC ORDER wherein it has been held that since, the DRP has given the finding that the AEs of LGEIL i.e. assessee before us do not have PE in India; the basis for initiating the re-assessment proceedings fail and the same are held to be infructuous. Profit attribution - Transaction between the assessee and LGEIL has been found at arm s length by the TPO and hence, no merit in any profit attribution to a person even if there was PE in India. The Hon ble Supreme Court in Honda Motors Co. Ltd. 2019 (7) TMI 1146 - SC ORDER had held that once the international transactions were held to be at arm s length price, even if there was PE in India, no profit could be attributed to it. It has been laid down by the Hon ble Supreme Court (supra) that where once the arm s length principle has been satisfied then there could be no further profit attributable to a person, even if it had PE in India. Therefore, it was further held that where notice was issued to the assessee for re-assessment based only on allegation that it had PE in India, said notice could not be sustained, once arm s length procedure has been followed. Accordingly we hold that in any case, transaction has been found to arm s length then the entire question of PE becomes academic and there is no merit in the re-assessment proceedings initiated u/s 147 of the Act. As far as the objections of the Ld.DR for the Revenue is concerned, existence of PE of the assessee in India under Article 5(1)(i) of the DTAA i.e. fixed place of business or place of management is available to the assessee in India, then also the consequent reassessment proceedings initiated against the assessee u/s 147 of the Act do not survive. Thus, the preliminary issue raised by the assessee is allowed. The issue raised in Assessment Years 2005-06 and 2006- 07 in the case of PT. LP. Display Indonesia is similar and following the same parity of reasoning, the said issue is allowed.

Issues Involved:
1. Re-opening of assessment under section 147 of the Income Tax Act.
2. Existence of Permanent Establishment (PE) in India.
3. Attribution of income to the alleged PE.
4. Validity of reassessment proceedings for non-resident entities.
5. Arm’s Length Price (ALP) determination and its impact on profit attribution.
6. Technical grounds for dismissal of appeals by CIT(A).

Issue-wise Detailed Analysis:

1. Re-opening of Assessment under Section 147 of the Income Tax Act:
The preliminary issue raised was against the re-opening of assessment under section 147 of the Act. The Assessing Officer issued re-assessment notices under section 148 based on a TDS survey conducted at L.G. Electronics India Pvt. Ltd. (LGEIL). The survey aimed to ascertain TDS compliance on payments made by LGEIL to non-resident associated companies. The Revenue concluded that non-resident companies, including PT LP Indonesia, had a Permanent Establishment (PE) in India. The assessee argued that the reasons for re-opening the assessment were not tenable or sustainable. However, the Assessing Officer maintained that the conditions for assuming jurisdiction under section 147 were fully satisfied and that the initiation of re-assessment proceedings was lawful.

2. Existence of Permanent Establishment (PE) in India:
The core issue was whether the non-resident entities had a PE in India. The Assessing Officer concluded that PT LP Indonesia had a business connection and a fixed place of business in India, constituting a PE under Article 5(1) of the India-Indonesia Treaty. The expatriate employees of L.G. Korea were observed to work for its affiliates, including PT LP Indonesia, thus establishing a PE. The DRP and the Assessing Officer held that the PE existed and attributed profits to it.

3. Attribution of Income to the Alleged PE:
The DRP directed that the attribution rate of profits to the PE should be reduced to 30%. The Assessing Officer applied a profit rate of 25% to the global account of the assessee, resulting in an addition of ?9,47,21,910/-. The assessee argued that since the international transactions were held to be at Arm’s Length Price (ALP) by the TPO, no further profit attribution was warranted. The Hon’ble Supreme Court in Honda Motors Co. Ltd. vs ADIT held that once the international transactions were at ALP, no further profit could be attributed even if there was a PE in India.

4. Validity of Reassessment Proceedings for Non-resident Entities:
The reassessment proceedings were initiated based on the findings of the TDS survey at LGEIL. The Hon’ble Supreme Court in Principal Officer, Honda Access Asia and Oceania Co. Ltd. vs ADIT held that if the DRP found no PE in India, the reassessment proceedings should be dropped. Applying this ratio, the Tribunal held that the reassessment proceedings against PT LP Indonesia and L.G. Philips Korea were invalid, as the basis for initiation failed.

5. Arm’s Length Price (ALP) Determination and its Impact on Profit Attribution:
The TPO had determined that the international transactions between the assessee and LGEIL were at ALP. The Hon’ble Supreme Court in Honda Motors Co. Ltd. vs ADIT reiterated that if transactions were at ALP, no further profit attribution to the PE was necessary. The Tribunal followed this principle, concluding that the issue of PE became academic once ALP was established, and reassessment proceedings could not be sustained.

6. Technical Grounds for Dismissal of Appeals by CIT(A):
The CIT(A) dismissed the appeals for Assessment Years 2007-08 and 2009-10 on the technical ground that the PAN quoted in the Memo of appeal was not that of the assessee but of the authorized signatory. The Hon’ble Supreme Court in CIT vs Ashoka Engg. Co. held that the right of appeal should be read in a reasonable manner. The Tribunal found no merit in the summary dismissal by CIT(A) and allowed the appeals.

Conclusion:
The appeals of PT LP Indonesia for Assessment Years 2004-05 to 2006-07 were allowed, and the appeals of the Revenue for Assessment Years 2004-05 and 2005-06 were dismissed. The cross-objections filed by L.G. Philips Korea for Assessment Years 2005-06 and 2006-07 were allowed, and the appeals of the Revenue were dismissed. The appeals of L.G. Philips Korea for Assessment Years 2007-08 and 2009-10 were also allowed, setting aside the technical dismissal by CIT(A). The Tribunal held that the reassessment proceedings were invalid, and no further profit attribution was required once ALP was established.

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