LG has found itself once again in the cross-hairs of the Income-tax Department – this time, on the PE front.

Pursuant to a survey carried on at the premises of the Indian subsidiary  (LG India)  of the Korean Multinational, the Tax Department claims to have gathered enough material to take a view that the Indian subsidiary was effectively acting as a “Permanent Establishment” of the foreign parent.

A notice under section 148 was issued calling upon LG (the parent company) to file a return in India in respect of the PE. A notice under this section is issued when the Revenue believes that income has escaped the tax net.

The notice was sought to be challenged on the preliminary, jurisdictional grounds to the effect that all the transactions between the parent and its Indian subsidiary were reported by the subsidiary and also accepted by the Revenue to be at arm’s length – and therefore there was no basis to take a view that any income of the parent has escaped taxation.

Disagreeing with the Taxpayer’s challenge to the notice, the Court ruled that the aspect existence of Permanent Establishment was a new development and upheld the initiation of the proceeding against LG.

It would be relevant to note that the ruling does not mean that the Court has conclusively accepted the Revenue stand on existence of the PE. What it only means that the Court was satisfied that the Revenue have not acted unreasonably while initiating the tax proceeding, and there was sufficient prima facie evidence in support of their concern that income liable to be taxed had escaped tax.

However, the facts which were cited by the Revenue in support of its suspicion that the parent company had a PE did leave much to be desired to support the Revenue’s case. The Revenue cited various facts to suggest that the parent company may have played a significant role in managing the affairs of the Indian company. Would that translate to a PE exposure to the parent ? and even if it did, would it amount to all the transactions between the parent and subsidiaries being attributed to the PE ? these are issues where the Revenues case is likely to be scrutinized more closely in the second round of legal battle which would inevitably follow once the audit by Revenue is completed.

LG’s case also highlights one more instance of a seemingly innocuous survey operation by the Revenue leading  to a significant Tax risk. The need of the hour for the Taxpayers is to pre-empt such unwarranted risks by strengthening their preparedness for such surprise visits, to ensure that they don’t find themselves dragged into needless Tax controversies.