ITAT Delhi Deletes Over ₹7,800 Crore Tax Adjustments Against Samsung India

The Delhi bench of the Income Tax Appellate Tribunal has deleted about ₹3,605 crore in adjustments for AY 2016-17 and ₹4,211 crore for AY 2017-18 in the case of Samsung India Electronics Pvt. Ltd.

The tribunal also excluded Verizon Communications Pvt. Ltd. as a comparable for Samsung India's networking segment and upheld its use of the Berry Ratio for benchmarking distribution transactions.

The bench comprising Judicial Member Anubhav Sharma and Accountant Member Naveen Chandra found Verizon functionally different from Samsung India's networking business. About 92% of Samsung India's networking revenue came from trading, while Verizon derived 99.99% of its revenue from services.

“The principle laid down is equally applicable that a company primarily engaged in provision of services cannot be regarded as a valid comparable for benchmarking Assessee's pre-dominantly trading-based networking business.”, the tribunal observed.

For AY 2016-17, Samsung India faced transfer pricing adjustments of ₹4,665.10 crore. These comprised ₹817.29 crore in manufacturing, ₹436.80 crore in networking, ₹1,678.06 crore in AMP adjustments and ₹1,732.93 crore towards royalty.

The tribunal deleted the AMP adjustments after finding that the expenditure could not be treated as an international transaction without an arrangement, understanding or agreement requiring Samsung India to incur it for brand promotion on behalf of its Korean parent.

“In the absence of an international transaction as defined under the Act, no benchmarking of AMP can be undertaken.”

The tribunal also deleted the ₹1,732.93 crore royalty adjustment. Samsung India had benchmarked royalty with other manufacturing transactions under TNMM, while the Transfer Pricing Officer separately applied CUP using agreements involving agricultural and biotechnology companies.

The tribunal found those agreements unsuitable because of substantial differences in industries, products and economic circumstances. It also found that separately benchmarking royalty under CUP after accepting TNMM for manufacturing resulted in an impermissible double adjustment.

Samsung India was also allowed working capital adjustments for its manufacturing and networking segments. The tribunal noted that such adjustments had consistently been granted in earlier years.

For AY 2017-18, Samsung India benchmarked purchases of finished goods and software under the Other Method using the Berry Ratio. Network support services were separately benchmarked under TNMM, with SEC Project Office as the tested party and OP/OC as the profit level indicator.

The tribunal upheld this approach, finding that Samsung India's networking equipment business operated on a low-risk merchanting model. The goods moved directly from the supplier to customers, with Samsung India obtaining only a “flash title” to them.

For AY 2017-18, the tribunal also deleted the ₹1,813.71 crore AMP adjustment, ₹2,172.68 crore royalty adjustment and ₹224.65 crore expatriate salary disallowance.

Both appeals were allowed, with re-computation wherever required. The stay applications were dismissed as infructuous.

For Assessee: Advocates Himanshu S. Sinha, Prashant Meharchandani and Jainender Kataria, 

For Revenue: Dharm Veer Singh, CIT(DR)