Case Law Details

Case Name : Samsung India Electronics Pvt. Ltd. Vs Additional CIT National E-Assessment Centre (ITAT Delhi)
Appeal Number : S.A. No.50/DEL/2021
Date of Judgement/Order : 24/09/2021
Related Assessment Year : 2016-17

Samsung India Electronics Pvt. Ltd. Vs Additional CIT National E-Assessment Centre (ITAT Delhi)

From the report of the Assessing Officer as well as the clarification given by the ld. counsel it is seen that there are a huge refunds which are due to the assessee and as per the report of the Assessing Officer, substantial refund has been adjusted against the demand for Assessment Year 2010-11 for which already favourable order has been passed by this Tribunal order dated 4th October, 2019, even when there was a stay on collection of tax during the pendency of the appeal. Looking to the entirety of the facts that, once a huge refund are due to the assessee the Revenue cannot enforce the payment of demand especially when substantial issues are covered in favour of the assessee. However, in line with the earlier stay orders for Assessment Year 2015-16 as pointed out by the ld. counsel and in all fairness, we direct the Assessing Officer to adjust amount of Rs.50 crore (fifty crore) from the refund due to the assessee, against the outstanding demand and the balance demand shall be stayed for a period of six months or till passing of the order, whichever is earlier. Registry is also directed to fix the appeal on priority basis on 10th November, 2021.

FULL TEXT OF THE ORDER OF ITAT DELHI

By way of aforesaid Stay Application, the applicant-assessee seeks for stay of outstanding demand of Rs.2714.03 crore for the aforementioned assessment year which are arising out of various additions made in the final assessment order in pursuance of DRP direction.

2. Before us, ld. counsel has given detail of the issues involved, amount of tax determined on the adjustment/AMP made on whether it is a covered issue or whether the assessee has a strong prima facie case.

S. No Issues Involved Tax (Rs.) Grounds for strong prima facie case
1 Transfer Pricing
adjustment on account
of Advertising and
Marketing Promotion
(AMP) expenses using
intensity-based
approach in
manufacturing segment
(Rs. 863,18,68,537/-)
and networking
segment (Rs.
475,63,50,713/-)(Total=1338,82,19,250
/-)Transfer Pricing
adjustment on account
of Advertising and
Marketing Promotion
(AMP) expenses using
BLT method in trading segment (Rs.
339,23,89,070/-).
Apart from this, Ld.
TPO also made a
protective adjustment
on account of AMP
expenditure in
manufacturing segment using BLT method (Rs. 1783, 92,66,237/-)
574.83cr COVERED ISSUE

The issue of AMP has been decided in Applicant’s favour by this Hon’ble Tribunal in its own case for 10 prior years:

  • AY 2005-06 to 2011-12 vide order dated 4th October,2019(Page 33 to 62 of the Hon’ble ITAT’s order)
  • AY 2012-13 vide order dated 7th January, 2020 (Para6-7 of the Hon’ble ITAT’s order)
  • AY 2013-14 vide order dated
    14thDecember, 2020 (Para 8 of the
    Hon’ble ITAT’s order)
  • AY 2014-15 vide order dated 31stAugust, 2020 (Pages 21-25 of the Hon’ble ITAT’s order)
2. Transfer pricing
adjustment in
manufacturing segment
amounting to Rs.
817,29,76,086/-TPO rejected 6 out of
8comparables and
introduced 1 new
comparable and arrived
at a set of 3 comparable
companies. DRP did not give any relief to the Applicant.
Finally,3comparables
with mean profit margin of 13.44% was taken as the arm’s length profit
margin. Assessee’s
margin was recomputed
at 8.67% as against
10.75% without giving
any reason. Working
capitaladjustment was
denied.
279.97 cr STRONG PRIMA FACIE CASE

Applicant has a strong prima facie case as the entire adjustment would stand completely deleted if only one comparable viz. Frog Cellstat Ltd is excluded. Brief arguments for its exclusion are:

  • FrogCellstat sells its telecommunication equipment products under B2B model to customers like Vodafone, Airtel, MTNL etc. whereas the Applicant works under B2C model and sells its consumer electronic products to  customers  in    the   retail
    market.
  • Frog Cellstat sells its telecommunication
    equipment products under B2B model to customers like Vodafone, Airtel, MTNL etc. whereas the Applicant works under B2C model and sells its consumer electronic
    products to customers in the retail
    market.
  • FrogCellstat has significantly lower cost and revenue as compared to the Applicant. The Applicant has turnover of over 377 times and expenditure of over 2,126 times as compared to this company
  • The issue of working capital is decided in favour of the Applicant by this Hon’ble Tribunal in Applicant’s own case for AY 2007-08 to 2009-10 and AY 2014-15.
3. Transfer pricing
adjustment in
networking segment
amounting to Rs.
436,80,85,062/-TPO rejected 2 out of 5 comparables and
introduced 10 new
comparable and arrived
at a set of 13
comparable companies.
DRP did not give anyrelief to the Applicant.
Finally, 13 comparables
with mean profit margin of 10.41% was taken as the arm’s length profit
margin. Assessee’s
margin was recomputed
at 3.44% as against
6.08% without giving
any reason. Working
capital adjustment was denied.
149.63 STRONG PRIMA FACIE CASE

  • Comparables chosen by the Ld. TPO in this segment are service companies which are not functionally comparable to the Applicant since it is a trader of networking equipment. The Applicant derives 92% of its revenues from trading – only 8% of its revenues are from services. However, the TPO, to justify the comparables chosen by her, has perversely and arbitrarily re-classified the Applicant as a service provider;
  • Applicant operates under a B2B model catering to a single customer i.e. Reliance Jio, thereby does not incur any risk. Whereas, the comparable companies chosen by Ld. TPO are full risk bearing entities
  • The issue of working capital is decided in favour of the Applicant by this Hon’ble Tribunal in Applicant’s own case for AY 2007-08 to 2009-10 and AY 2014-15
4. Transfer pricing
adjustment of Rs.
1732,93,94,316/- on
account of royalty
payment.Ld. TPO by simplicitor
relying on the DRP
Directions for
immediately preceding
year i.e. AY 2015-16,
rejected the Applicant’s
methodology of
aggregating payment of royalty under TNMM
and benchmarked the
transaction of payment
of royalty under CUP
and made an
adjustment of Rs.
1732,93,94,316/-. For
benchmarking, the Ld.
TPO took 3 comparable
companies namely,
Rosetta Inpharmatics
INC., Monsanto Co. and Paradigm Genetics Inc.
as taken in the
preceding year and
calculated the average
royalty rate of 1.50%
and made the
adjustment.
593.63 STRONG PRIMA FACIE CASE and COVERED BY PRIOR YEAR’S STAY ORDER

  • Applicant has consistently aggregated the payment of royalty with its manufacturing function and has applied TNMM which has been accepted by the TPO since the
    year 2004-05. However, Ld. TPO for the first time in immediately preceding AY i.e. 2015-16, without any change in facts and circumstances and there being no change in the manner in which the Applicant’s manufacturing business is organized and
    operated, made an adjustment on
    account of Royalty payment by rejecting TNMM and applying CUP method. Same methodology has been applied by the Ld. TPO in the instant AY i.e. 2016-17 and made adjustment on account of Royalty payment, violating the ratio laid down in Radhasaomi Satsang v. CIT [1992] 193 ITR 321(SC)
  • It is further submitted that once TNMM is accepted as the most appropriate method for transactions aggregated together in the manufacturing segment and other segments, it is not open to the TPO to subject a single element to an entirely different method i.e. CUP. Reliance is placed on the judgment of the Hon’ble Delhi High Court in the case of Magneti Marelli Powertrain India Pvt. Ltd vs. DCIT 389 ITR 469 (Delhi) which has been affirmed by the Hon’ble Supreme Court vide order dated November 3, 2017 in SLP (C) No. 15244 of 2017
  • Further, comparable companies taken by the TPO and confirmed by the DRP belong to a completely different industry, i.e. agricultural industry. All the entities chosen by the TPO are engaged in developing products and tools in relation to seeds development which help farmers/ crop-growers make more efficient use of resources such as energy/ water/ land etc.
  • This Hon’ble ITAT while granting stay for the immediately preceding year observed that the Applicant has a strong primafacie case as far as issue of Royalty is concerned. Since, the facts and circumstances and comparables in
    dispute are identical in the present AY, the Applicant has a strong prima facie case in the present year as well.
5. Corporate tax addition Rs. 193,80,45,100/- on account of expat salary under section 37(1) of the Act. 66.41cr COVERED ISSUE

The issue is squarely covered in favour of the Applicant  by    the   decision  of    this    Hon’ble Tribunal in Applicant’s own case for AY 2014-15 and in the case of Applicant’s holding company, Samsung  Electronics    Corporation,    Korea  v DCIT:[2018] 92 taxmann.com 171, wherein it was held that expatriate employees seconded in India on behalf of SEC, Korea do not constitute permanent establishment in India. It was also observed  that   activities   undertaken by    the expatriate employees were in the course of discharge of functions of the Applicant towards SEC, Korea.

Total Tax 1664.47cr
Plus Interest 1049.56cr
Total Demand 2714.03cr

3. Apart from that, the ld. counsel pointed out that there are various refunds due to the assessee in the prior years based on the favourable order of the Hon’ble Tribunal. The details of which was given in the following manner:

A/Y Refund Receivable Order
passed by
TPO
Remarks
Tax (in Rs.) Interest
(till
application
filed) (in
Rs.)
Total (in Rs.)
2005- 06 70.13 58.95 129.08 12 Mar 20 Refund of Rs. 113.42 crore has been determined by the AO vide order dated 22 Oct 2020

However, till date the refund has not been issued to the Applicant assessee

2006- 07 70.22 37.30 107.52 12 March 2020 and 31 March 2021 TPO has granted full relief vide orders dated 12 March 2020 and 31 March 2021 passed in pursuance to (giving effect) ITAT’s order which are binding on the AO

However, AO has not yet passed the final order determining the refund, most likely taking the benefit of extension of time-limits till June 30, 2021/September 30, 2021 by the CBDT

2007- 08 105.76 51.07 156.83 12 March 2020 and 31 March 2021 TPO has granted full relief vide orders dated 12 March 2020 and 31 March 2021 passed in pursuance to (giving effect) ITAT’s order which are binding on the AO

However, AO has not yet passed the final order determining the refund, most likely taking the benefit of extension of time-limits till June 30, 2021/September 30, 2021 by the CBDT

2008- 09 100.00 47.48 147.48 12 March 2020 and 31 March 2021 TPO has granted full relief vide orders dated 12 March 2020 and 31 March 2021 passed in pursuance to (giving effect) ITAT’s order which are binding on the AO

However, AO has not yet passed the final order determining the refund, most likely taking the benefit of extension of time-limits till June 30, 2021/September 30, 2021 by the CBDT

2009- 10 123.81 25.35 149.16 12 March 2020 Refund of Rs. 120.31 crore has been determined by the AO vide order dated 10 Nov 2020

However, till date the refund has not been issued to the Applicant assessee

2010- 11 3.55 1.10 4.65 12 March 2020 TPO has granted full relief vide order dated 12 March 2020 passed in pursuance to (giving effect) ITAT’s order which are binding on the AO

However, AO has not yet passed the final order determining the refund, most likely taking the benefit of extension of time-limits till June 30, 2021/September 30, 2021 by the CBDT

2011­12 7.00 1.42 8.42 12 March 2020 Refund received on 7 Nov 20
2012-13 5.00 0.68 5.68 21 July 2020 However, TPO has granted full relief vide order dated 21 July 2020 passed in pursuance to (giving effect) ITAT’s order which are binding on the AO

AO has not yet passed the final order determining the refund, most likely taking the benefit of extension of time-limits till June 30, 2021/September 30, 2021 by the CBDT

2013-14 2.50 0.30 2.80 Pending with TPO
2014- 15 20.00 507.96 9.50233.14 29.50 741.11 Pending with TPO

4. In view of the aforesaid statement of the assessee, a report was called from the Assessing Officer through the office of the DR, wherein we had directed the Assessing Officer to give the status and the affect of appeal orders passed by the Tribunal in the preceding years and pending refunds which has been stated to be more than Rs. 741 crore. In compliance thereof, the Assessing Officer has submitted the following report.

F. No DCIT/Cir. 22(2)/ITAT/Samsung/2021-22/ Dated: 02.09.2021

To

The Senior Departmental

Representative ITAT,

Friday Bench, New Delhi

(Through Proper Channel)

Respected Sir,

Sub.: Stay in the case of M/s Samsung India Electronics Pvt

Limited (PAN AAACS5123K) vide S.A. No. 50/Del/2021 for the A.Y. 2016-17-Reg.

Ref: (i) Sr. (DR)/ITAT/Friday-Bench/2021-22/83 dated 02.07.2021

(ii) Sr. (DR)/ITAT/Friday-Bench/2021-22/83 dated 24.08.2021

Kindly refer to the above mentioned subject. The above mentioned letters have not been received at this office. However, the undersigned regrets the delay in the submission of report in the matter.

2. It is submitted that as per the direction of the Hon’ble ITAT, the requisite appeal effect orders are to be passed for AY. 2005-06 to 2011-1.2 and subsequently the status report of the actual demand for the AY 2016-­17 is to be informed accordingly to the Bench for deciding the aforesaid stay petition of the assessee company.

3. In view of the above, as per the direction of the Hon’ble ITAT in the case of the assessee company for AY 2005-06 to 2011-12, following appeal effects have been given to the combined orders passed the appeal effect:

S. NO. A.Y. DATE OF APPEAL EFFECT REFUND
1 2005-06 22.10.2020 113,42,84,128
2.           2006-07 29.07.2021 95,49,998
3.           2007-08 27.08.2021 224,42,01,941
4.           2009-10 10.11.2020 120,31,40,722
5.           2011-12 04.11.2020 8,32,82,230

4. Submitted for your kind consideration.

Regards,
Joint Commissioner of Income Tax (OSD)
Circle 22(2),
O/o Pr. CIT 7
New Delhi.

5. In response to the above said report, the ld. counsel on behalf of the assessee had stated that certain claims made by the Assessing Officer are incorrect and does not reflect true and pending refunds. Vide reply dated 21st September, 2021, the assessee has filed following rejoinder to the said report.

“The Report was received by SIEL on September 10, 2021. Relevant extract of the AO report is as under:

S.no A.Y. Appeal effect Refund issued Dated
1 2005-06 113,42,84,128 113,42,84,128 22.10.2020
2 2006-07 95,49,998 95,49,998
3 2007-08 224,42,01,941 224,42,01,941 27.08.2021
4 2008-09 20,00,00,000 Pending
5 2009-10 120,31,40,722 120,31,40,722
6 2010-11 251,57,87,808 Pending
7 2011-12 8,32,82,230 8,32,82,230 04.11.2020

Total 739,02,46,827 467,44,59,019

In his Report, the Ld. AO has made certain claims which are incorrect and does not reflect true and fair picture of the pending refunds. For instance, the AO has claimed that he has issued refunds amounting to Rs. 234.69 crores (approx.) for three (3) assessment years i.e. 2005-06, 2006-07 and 2009-10. However, refunds determined for these years have not been issued to SIEL but instead illegally adjusted against AY 2010-11. Moreover, the AO has not made any comments on the refund status of AY 2012-13, 2013-14 and 2014-15. A table summarizing the refund status and SIEL’s comments is summarized below:

A/Y Refund Claimed as computed by SIEL) Refund Determined as per AO’s report Remarks
(INR Cr) (INR Cr)
2005-06 129.08 113.43 The AO has wrongly stated in his report that refund has been issued. The refund has been illegally adjusted against the demand for AY 2010-11 without issuing notice u/s 245 of the Income Tax Act, 1961. We have downloaded the latest Form 26AS which demonstrates the same. Copy attached.
2006-07 107.52 0.95 The AO has wrongly stated in his report that refund has been issued. The refund has been illegally adjusted against the demand for AY 2010-11 without issuing notice u/s 245 of the Income Tax Act, 1961. We have downloaded the latest Form 26AS which demonstrates the same. Copy attached.
2007-08 156.83 224.42 Refund determined but not yet granted
2008-09 147.48 Refund yet to be determined by the AO even though TPO has passed the appeal effect order on March 31, 2021.
2009-10 149.16 120.31 The AO has wrongly stated in his report that refund has been issued. The refund has been illegally adjusted against the demand for AY 2010-11 without issuing notice u/s 245 of the Income Tax Act, 1961. We have downloaded the latest Form 26AS which demonstrates the same. Copy attached.
2010-11 4.65 (234.69) AO has illegally adjusted refunds of AY 2005-06, 2006-­07 and 2009- 10 totalling to Rs. 234.70 crores against the demand for this AY. On the contrary, a refund of Rs. 4.65 crores is due, basis the favourable order dated October 4, 2019 passed by the ITAT. In his report the AO has shown this year to be pending. Accordingly, once the appeal is given for this year, a refund of Rs.239.34 crores will arise.
2011-12 8.42 8.33 Refund received by SIEL
2012-13 5.68 No comments given by the AO in his report. Refund yet to be determined by the AO even though TPO has passed the appeal effect order on June 25, 2021
2013-14 2.80 No comments given by the AO in his report. Refund yet to be determined by the AO even though TPO has passed the appeal effect order on June 25, 2021
2014-15 20.95 No comments given by the AO in this report. Refund yet to be determined by the AO given though TPO has passed the appeal effect order on June 25, 2021.
Total 732.56 9.28

As evident from the above table, we have received refund only for AY 2011-12. In respect of AY 2005-06, 2006-07 and 2009-10, AO has determined refund of Rs. 234.69 crores against actual refund of Rs. 385.76 (plus interest) which is due to SIEL. Moreover, the refund which has been determined has been illegally adjusted against the alleged demand for AY 2010-11 (for which a favourable order has been passed by the Hon’ble ITAT on October 4, 2019 and there was a stay on the collection of demand during the pendency of the appeal).

It is also important to note that AO did not issue notice u/s 245 of the Act before adjusting the alleged outstanding demand for AY 2010-11. Thus, the adjustment made by the AO in AY 2010- 11 is completely illegal and contrary to the principles of judicial discipline since it is against the binding order of the Hon’ble Tribunal and Transfer Pricing Officer.

In view of the above, we pray before this Hon’ble ITAT to take our submissions on record, pass appropriate orders and grant stay for AY 2016-17.”

6. Ld. Counsel further submitted that in the Assessment Year 2015-16, wherein the similar issues were involved wherein almost demand of more than Rs.3000 crore was created, this Tribunal had granted stay looking to the prima facie case and directed the assessee to deposit Rs. 40 crore. This year also despite most of the issues are either covered or assessee has a very strong prima facie case, similar direction can be given. Apart from that, he submitted that in so far as AMP adjustment in manufacturing segment, networking segment and on account of royalty payment, even if one comparable is excluded out of many, then there would be no adjustment at all and even for exclusion of such comparable there are various judgments in favour of the assessee that on FAR analysis same are likely to be rejected.

7. On the other hand, ld. DR strongly opposing the granting of stay and submitted that here in this case there is a substantial demand which are arising out of uncovered issues, also i.e., they are not directly covered by the decision of the Tribunal in assessee’s own case, therefore, in so far as uncovered issues are concerned, assessee should be directed to pay 20% of the demand.

8. After considering the aforesaid submission and the prima facie issues involved in the appeal, we find that in so far as TP adjustment on account of AMP expenses and corporate tax addition on account of EXPAT salaries disallowed u/s. 37(1) are concerned, same are covered by the decision of the Tribunal in favour in assessee’s own case in the preceding years.

9. In so far as TP adjustment on account of manufacturing segment and networking segment, the ld. counsel has pointed out that even if one comparable are removed out of various comparables chosen by the TPO, then there would be no ALP adjustment. Similarly with regard to royalty adjustment on account of royalty payment, we find that the applicant has consistently aggregating the payment of royalty with its manufacturing functions under TNNM which has been accepted by the TPO in the earlier years. Thus, prima facie assessee does have a balance of convenience in favour for granting of stay.

10. Moreover from the report of the Assessing Officer as well as the clarification given by the ld. counsel it is seen that there are a huge refunds which are due to the assessee and as per the report of the Assessing Officer, substantial refund has been adjusted against the demand for Assessment Year 2010-11 for which already favourable order has been passed by this Tribunal order dated 4th October, 2019, even when there was a stay on collection of tax during the pendency of the appeal. Looking to the entirety of the facts that, once a huge refund are due to the assessee the Revenue cannot enforce the payment of demand especially when substantial issues are covered in favour of the assessee. However, in line with the earlier stay orders for Assessment Year 2015-16 as pointed out by the ld. counsel and in all fairness, we direct the Assessing Officer to adjust amount of Rs.50 crore (fifty crore) from the refund due to the assessee, against the outstanding demand and the balance demand shall be stayed for a period of six months or till passing of the order, whichever is earlier. Registry is also directed to fix the appeal on priority basis on 10th November, 2021. Both the parties informed.

11. In the result, the Stay Application of the assessee is partly allowed.

Order pronounced in the open Court on 24th September, 2021.

Download Judgment/Order

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