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INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
SAMSUNG INDIA ELECTRONICS PVT. LTD. GURGAON – Appellant
Versus
DCIT CIRCLE-22(2) NEW DELHI – Respondent
ITA 9482/DEL/2019
Transfer pricing adjustments must be substantiated by clear evidence of agreements between parties for adjustments to be upheld, including for AMP expenditures and royalty payments.
Headnote:(A) Income Tax Act, 1961 - Section 144C(13) - Transfer Pricing - Appeal against assessment order - Assessment year 2015-16 - The Deputy Commissioner of Income Tax passed an assessment order based on the Dispute Resolution Panel's directions. The assessee, a subsidiary of a foreign parent company, contested several adjustments regarding arm's length pricing and disallowances including advertising, marketing, promotion expenses, royalty payments, and salary to expatriates. (Paras 1-36)
(B) Transfer Pricing Adjustments - The court upheld previous tribunal rulings that AMP expenditure cannot be classified as international transactions without established agreements and that adjustments for excessive AMP expenditure are not valid in the absence of proof of understanding with the parent company. The method of benchmarking through TNMM should remain as analogous transactions are not established. (Paras 4-16)
(C) Royalty Adjustment - The adjustment disallowing excessive royalty paid to the parent was held invalid when the TNMM was already applied to the segment, and separate benchmarking without evidence is untenable. (Paras 52-64)
(D) Disallowance of Salary Expenditure - The tribunal ruled in favor of the appellant, determining expatriate employees were solely working for the Indian entity without creating a permanent establishment for the Korean parent and thus, their salaries were deductible expenses. (Paras 66-70)
Findings of Court:
The adjustments made by the tax authorities were ruled invalid as there was insufficient evidence suggesting the AMP expenditures and royalty adjustments fell under international transactions as defined by law.
Result: Appeal partly allowed.
| Table of Content |
|---|
| 1. background and details of assessment. (Para 1 , 2 , 3 , 4 , 5) |
| 2. arguments regarding amp expense classification. (Para 6 , 8 , 10 , 11 , 17 , 18) |
| 3. court's reasoning on amp transaction classification. (Para 7 , 9 , 12 , 14) |
| 4. analysis of adjustments in trading and networking segments. (Para 15 , 20 , 22 , 23) |
| 5. disallowances on royalty payment for expatriate employees. (Para 29 , 30 , 33 , 35 , 36) |
| 6. decision regarding royalty adjustments and est. (Para 42 , 45 , 68) |
| 7. final decision of the appeal. (Para 70) |
ORDER
PER YOGESH KUMAR U.S., JM The assessee has filed this appeal against the assessment order dated 20/11/2019 passed by Deputy Commissioner of Income Tax, Circle- 22(2), New Delhi (hereinafter referred as “AO”) u/s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred as “Act”), which was issued in pursuance to the directions dated 23.09.2019 issued by the Ld. Dispute Resolution Panel-1, New Delhi (hereinafter referred as “DRP”), pertaining to assessment year 2015-16.
2. The assessee, an Indian company, is a wholly owned subsidiary of the Korean conglomerate Samsung Electronics Co. Ltd and engaged in the business of manufacturing and trading of consumer electronics, home appliances, mobile phones, and information technology products. It also carries out contract software development activities for its Korean parent and is also engaged in trading of telecommunication networking equipment whereby network equipment purchased from its Korean parent were sold to a 3rd party customer (Reliance) in India.
3. The assessee filed its return of income for the AY 2015-16 on 29.10.2015 declaring an income of Rs. 2415,02,39,200/- through e-filing mode and also filed its revised Income Tax Return on 14.03.2017 keeping the same income at Rs. 2415,02,39,200. The case of the assessee was selected under limited scrutiny and notice u/s. 143(2) was issued on 21.6.2016 and another notice u/s. 143(2) was issued on 27.7.2016. A detailed questionnaire alongwith notice u/s. 142(1) of the Act was issued on 27.9.2016. The AO initiated scrutiny proceedings under section 143(2) of the Act and referred the case to the Transfer Pricing Officer (hereinafter referred as “TPO”) u/s. 92CA of the Act for the examination of the arm's length price of its various international transactions.
4. The TPO in her order dated 31.10.2018 passed u/s 92CA(3) of the Act proposed adjustments under the following heads: (a) Advertisement, Marketing and Promotion (AMP) expenses; and (b) International transactions in the trading, manufacturing and networking segments. These adjustments were adopted by the AO in her draft assessment order dated 28.12.2018 issued u/s. 144C(1) of the Act. Besides these, the AO proposed following additions: (a) disallowance of salary expenditure incurred on expatriate employees on secondment; and (b) disallowance of royalty paid to the parent entity.
5. The assessee filed objections against the aforesaid proposed adjustments and disallowances before the Ld. DRP-1, New Delhi which were examined and disposed of vide DRP’s order dated 23/09/2019. Thereafter the AO has issued the final assessment order on 20/11/2019. The final adjustments and additions made by the AO following the issuance of directions of the DRP are as under: (a) AMP expenditure incurred in manufacturing, trading and networking segments of the assessee - on substantive basis by applying the Transaction Net Margin Method (TNMM) and on protective basis applying the Bright Line Test (BLT); (b) Adjustments to the arm’s length price of the international transactions in the (i) manufacturing; (ii) trading; and (iii) networking segments; (c) disallowance of royalty paid to the parent entity; and (d) disallowance of the salary expenditure pertaining to expatriate employees on secondment from the parent entity.
6. The assessee has challenged the aforesaid adjustments and disallowances made in the final assessment order by preferring the present appeal on the following
