2014 (12) TMI 1106 - AT - Income Tax

Establishment of PE in terms of Indo-USA DTM Services rendered by company liable to be taxed in India or not - Held that - Following the decision in assessee s own case as decided in Whirlpool India Holdings Ltd. Versus Dy. DIT (IT) 2011 (1) TMI 529 - ITAT, DELHI - The term PE in general terms to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on - the assessee has a fixed place of business in India in the form of the branch office - there seems to be nothing on record to show that the business of the assessee has been conducted wholly or partly through this branch - The reason is that only expenditure debited to profit and loss account is payment of salaries, stated to have been reimbursed by the parent company - The employees are the employees of WIL and look after its business - The conclusion which can be drawn is that the employees are that of the parent company which has disbursed the payment of salaries through the assessee - the employees are those of the WIL - It is equally plausible to argue that since salaries have been paid by the parent company, the economic reality overtakes the legal reality - the employees are those of the parent company - it will be difficult to come to a conclusion that the employees are those of the assessee company. Before bringing a foreign company to tax in India on its business profits, it is for the revenue to establish that it has PE in India - This has not been done the branch office of the assessee is responsible for formulating policy and taking strategic decision for operations of WIL in India, Nepal, Sri Lanka, Bangladesh and Pakistan - The manufacturing operations of Whirlpool group extend to more than 11 countries and the products are being sold in more than 125 countries - The branch office creates export opportunities for raw material, components and finished products for overseas requirements and would ultimately generate export revenue for the assessee company - It is also responsible for identifying supplier of goods etc. both for export and local consumption of the group companies - the parent company and the Indian branch assist the suppliers to introduce new technologies etc. - The branch office acts as a coordinating agency between the parent company and the assessee for providing latest management information in respect of technology, legal, commercial and political fields. The assessee has made payment to WIL of the salaries of the seconded employees - it has not been established in any manner that these employees are those of the assessee company - it cannot be said that the assessee has rendered any service either to WIL or to the parent company - 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 to go into the question whether transfer pricing adjustment could be made in determining such profit - since there is no profit, there would be no question of transfer pricing adjustment it is not necessary to go into Rule 10 of the Income-tax Rules, recognized methods of determining arm s length profits - the assessee is not liable to pay tax in India in the year Decided against revenue.

Summary

Issues Involved:
1. Reliance on ITAT's previous order for AY 2002-03.
2. Determination of Permanent Establishment (PE) in India under Indo-USA DTM.
3. Taxability of services rendered by the branch office.
4. Arm's length transactions with Associated Enterprise.
5. Legality of reopening the assessment under section 147/143 (3).

Issue-wise Detailed Analysis:

1. Reliance on ITAT's Previous Order for AY 2002-03:
The revenue contended that the CIT(A) erred in relying on the ITAT's order for AY 2002-03, which the department had not accepted. The ITAT reiterated that the issue and facts for the current assessment years were exactly the same as those in AY 2002-03. The ITAT upheld its previous decision, dismissing the revenue's appeals based on consistency and judicial discipline.

2. Determination of Permanent Establishment (PE) in India under Indo-USA DTM:
The primary issue was whether the branch office of the assessee in India constituted a PE under Article 5 of the Indo-USA Double Taxation Avoidance Agreement (DTAA). The ITAT noted that the branch office was established with RBI's permission for activities such as import/export, service support, and promoting collaborations, but no business operations were conducted. The branch office's expenses, mainly salaries, were reimbursed by the parent company. The ITAT concluded that the branch office did not constitute a PE as it did not carry out any business activities in India.

3. Taxability of Services Rendered by the Branch Office:
The revenue argued that the branch office rendered services to the parent company, which should be taxable. However, the ITAT found no evidence that the branch office conducted any business or rendered services in India. The employees were seconded to WIL, and their salaries were paid by the parent company. The ITAT held that the branch office did not render any taxable services, and thus, no income accrued in India.

4. Arm's Length Transactions with Associated Enterprise:
The revenue claimed that the transactions between the assessee and its associated enterprise, WIL, were not at arm's length, leading to income adjustments. The ITAT emphasized that since there was no PE in India, the question of computing profits or making transfer pricing adjustments did not arise. The ITAT dismissed the revenue's argument, stating that the branch office did not carry out any business activities, and therefore, no profits were attributable to it.

5. Legality of Reopening the Assessment under Section 147/143 (3):
The assessee's cross objections included a challenge to the reopening of the assessment as bad in law. However, during the hearing, the assessee's representative did not press these objections. Consequently, the ITAT dismissed the cross objections as not pressed.

Conclusion:
The ITAT dismissed all seven appeals filed by the revenue, holding that the branch office did not constitute a PE in India and did not render any taxable services. The ITAT also dismissed the assessee's cross objections regarding the reopening of the assessment. The decision was pronounced in open court on December 23, 2014.