Samsung says 'exploring legal options' on $601-million India tax demand

In addition to the tax liability, authorities imposed fines totalling $81 million on seven of its executives.

The demand represents a substantial chunk of last year's net profit of $955 million for Samsung in India, the report said.

It stems from a notice issued in January 2023. “Samsung was given ample time to respond, but its reply was deemed unsatisfactory,” an official said, adding that a pre-demand notice was subsequently issued. “The original demand was Rs 1,200 crore.”

Lawyers suggest that the substantial tax demand of $601 million raised against Samsung by the Indian tax authorities potentially triggers several significant legal debates and challenges.

They said Samsung may argue that the demand incorrectly classifies its global revenues as taxable within India, given clear definitions provided under the Indian Income Tax Act, 1961. A critical evaluation will be necessary to determine if the income genuinely accrued within India's jurisdiction.

Prateek Bansal, Partner - Taxation at White & Brief - Advocates & Solicitors, told Moneycontrol that Samsung could also strongly rely on the Double Taxation Avoidance Agreement (DTAA) between India and South Korea. Under DTAA provisions, Samsung might contend that certain transactions or incomes are outside India's taxing authority, as clearly outlined in international tax treaties

Prior judicial decisions, such as Union of India vs. Azadi Bachao Andolan (2003), firmly support DTAA protections, establishing the precedence of treaty laws over domestic tax laws.

“The existence of a Permanent Establishment (PE) will likely be another significant contention. As established by landmark rulings such as Formula One World Championship Ltd vs. CIT (2017), establishing a PE requires concrete proof of substantial and enduring economic presence. Samsung may utilize this precedence, emphasizing the absence of such an established economic nexus within Indian borders,” Bansal said.

Procedurally, lawyers believe Samsung may also highlight potential violations of natural justice principles and procedural fairness, underscored by judgments such as Vodafone International Holdings B.V. vs. Union of India (2012), thereby questioning the assessment's validity.

“Addressing the quantum of the $601-million tax demand itself, Samsung could seek judicial reassessment based on claims that the demand is excessive, arbitrary, and disproportionate, thus warranting a more logically calculated reassessment,” Bansal said.

On transfer pricing, Bansal said Samsung is expected to challenge the demand, pointing to globally accepted methodologies, as emphasized by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd vs. CIT (2015). Arbitrary adjustments without solid backing by tax authorities would likely be questioned.

Zubin Morris, Partner, Little & Co, told Moneycontrol that Samsung may challenge the tax demand by arguing that the misclassification of imported equipment was unintentional and lacked fraudulent intent.

"Indian courts have previously ruled that penalties for misclassification require proof of deliberate evasion. Samsung could also cite industry practices and prior customs approvals to justify its classification as a bona fide belief. Additionally, any procedural lapses in the investigation could weaken the tax demand. By leveraging these points and legal precedents, Samsung may build its defense,” Morris added.