Facts of the Case:

The assessee, M/s Samsung India Electronics Ltd., is a joint venture company with 74% equity held by Samsung Electronics Company (SEC), Korea, and 26% by Indian associates. The assessee imported raw materials from SEC, Korea, for manufacturing consumer electronics. The Assessing Officer (AO) invoked Section 40A(2)(b), claiming that 2% of the import cost was excessive due to the parent-subsidiary relationship and treated it as disallowable expenditure. The assessee contended that the imports were at arm’s length prices, corroborated by Customs authorities and Special Valuation Bench (SVB) reports.

Issues Involved:

  1. Whether the Assessing Officer was justified in invoking Section 40A(2)(b) on imports from the parent company.
  2. Whether the assessee had discharged the onus to prove that the prices paid were reasonable and not exclusive.
  3. Applicability of Section 40A(2)(b) when factual findings establish arm’s length pricing.

Petitioner’s Arguments (CIT/Revenue):

  • Section 40A(2)(b) should apply as SEC, Korea, was a related party controlling the assessee.
  • The assessee did not provide sufficient material to show that the prices were reasonable.

Respondent’s Arguments (Assessee):

  • The prices were at arm’s length, supported by original orders of Customs authorities and SVB reports.
  • The assessee had discharged the initial onus by submitting comprehensive material, including comparative charts and validation from customs.
  • Application of Section 40A(2)(b) was not warranted because the factual record demonstrated that the prices were reasonable and competitive.

Court Order / Findings:

  • The High Court observed that the AO ignored substantial material showing that the imports were at reasonable prices.
  • Factual findings of the CIT(A) and ITAT confirmed that prices were neither excessive nor unreasonable.
  • Citing Upper India Publishing House P. Ltd. v. CIT (1979) 117 ITR 569 (SC) and Shriram Pistons & Rings Ltd. (1990) 181 ITR 230 Del, the court held that disallowance under Section 40A(2)(b) was inapplicable when the factual determination of price reasonableness exists.
  • Even if Section 40A(2)(b) were to apply, the assessee had discharged the initial onus, and therefore, the appeal of the Revenue was dismissed.

Important Clarifications:

  • Section 40A(2)(b) cannot be invoked merely based on the existence of a parent-subsidiary relationship if arm’s length pricing is substantiated.
  • Initial onus is on the assessee to present supporting material; thereafter, the burden shifts to the department.
  • Prior case law establishes that factual findings of reasonableness in expenditure are not overridden by legal provisions unless proven otherwise.

Section involved

·         Section 40A(2)(b) of the Income Tax Act, 1961 – which deals with the disallowance of expenditure made to a “related party” if such expenditure is considered excessive or not at arm’s length.


Link to download the order https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:2231-DB/MLM20042011ITA392010.pdf

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