2011 (1) TMI 529 - AT - Income Tax

International taxation - Estimation of income on notional basis - DTAA with USA - due to legal restrictions under the Companies Act, these persons cannot be adequately remunerated by WIL as it has incurred losses continuously. Therefore, the parent company has paid remuneration of these persons through the branch of the assessee - it is held that the assessee company is acting as a consultant to the parent company and in this role it is the guiding force for managing the affairs of WIL - The additional evidence consists of economic analysis report, in which it has been opined that the net profit ratio should be in the vicinity of 17.19%. Therefore, taking the variation of 5% into account, it should be fixed at 12.19% - no employee of the assessee company has been deputed to the WIL as all the employees have been deputed by the parent company to the WIL, which on such appointment become the employees of the WIL - he transfer pricing regulations come into effect only when profit earned by an assessee is to be allocated in two jurisdictions, which is not the case here. Therefore, these regulations cannot be used for deeming certain amount as income whether, the branch office of the assessee in India constitutes PE in India - The position becomes a little more confused as according to US laws, the accounts of the parent company and the assessee company have to be merged and, thus, the distinction between the assessee and the parent company becomes blurred - it is argued that the branch office is taking up all the activities which are generally managerial in nature and these activities are undertaken for the benefit of the parent company, being the purpose for which the company has been incorporated - it is held that the assessee company does not have a PE in India as understood under paragraph No. 1 of Article 5 As the assessee is not chargeable to tax in India in terms of the provision contained in Article 5 of the tax treaty, it is not necessary for us to go into the question whether transfer pricing adjustment could be made in determining such profit - Decided in favour of the assessee

Issues Involved:

1. Validity of the orders passed by the Assessing Officer (AO) and Commissioner of Income-tax (Appeals) [CIT(A)].
2. Applicability of Section 92 of the Income-tax Act, 1961.
3. Estimation of income at Rs. 15,558,463 by CIT(A).
4. Applicability of Sections 5(2) and 9(1) of the Income-tax Act, 1961, and Article 9 of the Indo-USA Tax Treaty.
5. Allegation of commercial activities carried out in India by the appellant.
6. Role of the appellant as a consultant to Whirlpool Corporation, USA.
7. Applicability of Transfer Pricing regulations.
8. Charging of interest under sections 234A, 234B, and 234C of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Orders Passed by AO and CIT(A):

The appellant contended that the orders passed by the AO and CIT(A) were bad in law and void ab-initio. However, the tribunal did not specifically address this issue as the primary focus was on the substantive issues of taxability and income estimation.

2. Applicability of Section 92 of the Income-tax Act, 1961:

The AO invoked Section 92, asserting that the appellant was liable to tax under the Act. The appellant argued that it did not conduct any business operations in India and merely acted as a conduit for salary payments. The tribunal concluded that the appellant did not have a Permanent Establishment (PE) in India, as it did not conduct any business operations, thus Section 92 was not applicable.

3. Estimation of Income at Rs. 15,558,463 by CIT(A):

The CIT(A) estimated the income of the appellant at Rs. 15,558,463 on a notional basis, applying a 25% Net Cost Plus (NCP) margin. The tribunal found that the appellant did not earn any income in India and thus, the estimation by CIT(A) was not justified.

4. Applicability of Sections 5(2) and 9(1) of the Income-tax Act, 1961, and Article 9 of the Indo-USA Tax Treaty:

The CIT(A) held that Sections 5(2) and 9(1) of the Act and Article 9 of the Indo-USA Tax Treaty were applicable. The tribunal, however, concluded that the appellant did not have a PE in India as per Article 5 of the treaty and thus, the provisions of Sections 5(2) and 9(1) and Article 9 were not attracted.

5. Allegation of Commercial Activities Carried Out in India by the Appellant:

The AO and CIT(A) concluded that the appellant carried out various commercial activities in India. The tribunal found that the appellant's branch office did not conduct any business operations and merely facilitated the payment of salaries, thus rejecting the conclusion of commercial activities.

6. Role of the Appellant as a Consultant to Whirlpool Corporation, USA:

The AO and CIT(A) concluded that the appellant acted as a consultant to Whirlpool Corporation, USA. The tribunal found that the appellant did not render any services to Whirlpool Corporation or Whirlpool of India Ltd. (WIL) and thus, was not acting as a consultant.

7. Applicability of Transfer Pricing Regulations:

The CIT(A) applied a 25% NCP margin for computing the appellant's income. The tribunal concluded that since the appellant did not earn any income in India, the Transfer Pricing regulations were not applicable.

8. Charging of Interest Under Sections 234A, 234B, and 234C:

The AO directed to charge interest under sections 234A, 234B, and 234C. The tribunal concluded that as the appellant was not liable to be taxed in India, the ground regarding charging of interest did not survive.

Conclusion:

The tribunal allowed the appeal, concluding that the appellant did not have a PE in India, did not conduct any business operations, and was not liable to pay tax in India. Consequently, the orders of the AO and CIT(A) were set aside, and the appellant was not liable for interest under sections 234A, 234B, and 234C.

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