Judgment summary
This batch of appeals before the Delhi High Court arose from orders of the Income Tax Appellate Tribunal dated 22 March 2018, 14 December 2018 and 22 March 2021, which had allowed composite appeals filed by Samsung Electronics Co. Ltd. (Samsung Korea) for Assessment Years 2007-08 to 2009-10, 2011-12 to 2015-16 and 2017-18 (paras 1-2).
The appeals were admitted on 09 August 2024 on two questions of law concerning whether the Tribunal erred in holding that Samsung Korea had no Fixed Place Permanent Establishment in India within the meaning of Article 5 of the India-Korea DTAA, and whether the Tribunal erred in treating the assessee's activities in India as falling within Article 5(4) of the DTAA despite alleged evidence of critical business decisions being taken in India (para 3).
The Court, after reviewing the facts, the DRP's findings, the Tribunal's analysis of employee statements, and relevant precedent including its own decisions in Hyatt International Southwest Asia Ltd. v. CIT and Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax, upheld the Tribunal's conclusion that no PE existed and dismissed the appeals (paras 30-31).
Background
Samsung Korea, a company incorporated in South Korea and a tax resident of that country, had two wholly owned Indian subsidiaries: Samsung India Electronics Pvt. Ltd. (SIEL) and Samsung India Software Operations Pvt. Ltd. (Samsung R&D) (para 4).
A survey was conducted on the premises of SIEL on 24 June 2010, which led to notices under Section 148 being issued for six Assessment Years, namely 2004-05 to 2009-10 (para 4).
The Assessing Officer held that SIEL's premises constituted a Fixed Place Permanent Establishment under Article 5 of the India-Korea DTAA, that SIEL was per se a PE by virtue of being a subsidiary of Samsung Korea, and that SIEL also met the tests of a Dependent Agent Permanent Establishment (DAPE) and a Service PE (para 5).
The Dispute Resolution Panel (DRP), in its order dated 29 September 2012, rejected the AO's conclusions on subsidiary-as-PE, DAPE and Service PE, but held that the secondment of employees by Samsung Korea to SIEL resulted in a deemed Fixed Place PE (paras 6-7).
The Tribunal, in its order of 22 March 2018 (followed in later orders of 14 December 2018 and 22 March 2021), reviewed extensive statements of expatriate employees recorded during the survey and concluded that no PE existed, overturning the DRP's finding on deemed PE (paras 8-10, 27-37).
Core dispute
The dispute concerned whether Samsung Korea had a Permanent Establishment in India under Article 5 of the India-Korea DTAA, specifically through the premises of its subsidiary SIEL, by virtue of the secondment of expatriate employees to SIEL (paras 3, 7).
The Revenue contended that critical business decisions, such as decisions relating to the product to be manufactured, pricing of the product and launch of new products, were being taken in India through the seconded employees, and that this activity went beyond what is excluded under Article 5(4) of the DTAA (para 3(B)).
The Revenue also relied on statements recorded from various expatriate employees of SIEL during the survey, arguing that these showed a high degree of control and communication with Samsung Korea sufficient to establish a Fixed Place PE (paras 8-9, 11).
Samsung Korea contended that the seconded employees were posted to SIEL pursuant to tripartite agreements between Samsung Korea, SIEL and the concerned employees, that they performed functions for the benefit of SIEL, and that no PE arose merely from information exchange or discussion of marketing strategies (paras 11-12).
Court findings
The Court agreed with the Tribunal that the statements of seconded and visiting expatriate employees showed information exchange relating to product designs, market strategies, stock and logistics, but did not establish that any activity of Samsung Korea's global business was being conducted in India (paras 32-34, Tribunal).
The Court found that the seconded employees were posted to SIEL under tripartite agreements between Samsung Korea, SIEL and the employees concerned, and that their placement was to facilitate the activities of SIEL rather than to further Samsung Korea's own business (paras 11, 22, 29).
Applying the tests established in Hyatt International Southwest Asia Ltd. v. CIT and Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax, the Court held that a Fixed Place PE requires a place at the disposal of, and under the control of, the foreign enterprise, meeting the tests of stability, productivity and dependence, and that no such control was established over SIEL's premises by Samsung Korea (paras 14-20).
The Court referred to the OECD Model Commentary 2017 and the UN Model Commentary 2021 on secondment of employees, noting that secondment does not create a PE unless the seconded employees are found to be carrying on the business of the seconding enterprise rather than that of the host enterprise (paras 26-29).
The Court found no evidence that Samsung Korea derived business income in India through the seconded employees, and noted that the AO had merely assumed 10% of the remuneration of these employees to be attributable as income of Samsung Korea without evidentiary support (para 10, quoting Tribunal para 37).
The Court concluded that Article 5(3)(b) of the DTAA (service PE) was also inapplicable since it was not the Revenue's case that Samsung Korea rendered consultancy or other services to SIEL through the seconded employees (para 24).
Outcome
The Court answered both questions of law in the negative and against the appellant Revenue authorities. It upheld the judgments of the Tribunal dated 22 March 2018, 14 December 2018 and 22 March 2021, and dismissed all the appeals in the batch (para 31).
Major issues / areas of contention
- Whether Samsung Korea had a Fixed Place Permanent Establishment in India under Article 5 of the India-Korea DTAA through the premises of its subsidiary SIEL.
- Whether the secondment of expatriate employees by Samsung Korea to SIEL resulted in a deemed Fixed Place PE, as held by the DRP.
- Whether critical business decisions relating to products, pricing and product launches were being taken in India, as alleged by the Revenue.
- Whether SIEL could be treated as a subsidiary-PE, Dependent Agent PE, or Service PE of Samsung Korea (issues rejected by the DRP and not disturbed on further appeal).
- Whether the statements of expatriate employees recorded during the 2010 survey established the requisite control, disposal and dependence for a PE to exist.