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TMI Blog2011 (1) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 X X X X Extracts X X X X X X X X Extracts X X X X ..... der any kind of services to any person. 5. That on the facts and in the circumstances of the case and in law, the ld. CIT(A) gravely erred in agreeing with the conclusion of the ld. AO that the appellant was working as a consultant to Whirlpool Corporation, USA by giving directional inputs vis-a-vis management of Whirlpool of India Ltd., such conclusion being erroneous and contrary to the facts. 5.1 That both the ld. AO and the ld. CIT(A) had failed to appreciate the fact that the only activity undertaken by the appellant was to facilitate payment of salary and related emoluments on behalf of its parent company [Whirlpool Corporation, USA], (received in advance) to a few personnel working with Whirlpool of India Ltd. in the capacity of Executive Director/Managing Director. 6. That on the facts and in the circumstances of the case and in law, both the ld. AO and the ld. CIT(A) failed to appreciate that even for the sake of assumption, if the appellant is deemed to have rendered services to Whirlpool Corporation, USA by facilitating payment of salary and other related emoluments (received in advance) to a few Senior Executives of Whirlpool of India, even then under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation, USA? The case of the assessee before the AO is that no business operation has been conducted by the branch in India and, therefore, it is not liable to be assessed in India. It is for this reason that the assessee has filed nil return. However, the case of the AO is that the assessee is rendering services to the parent company in the following fields:-- l "Formulation of policy and taking strategic decisions for the operations of Whirlpool of India Ltd.; l creation of export opportunities for raw-materials, components and finished products for Whirlpool Corporation's overseas requirements; l responsible for identifying goods suppliers for quality products for both export and local purposes; l assistance to suppliers to introduce new technologies and support local supplier for development of quality raw-material, components and furnished products; l provide technical know-how and assistance to Whirlpool of India Ltd. in development of new products and up-gradation of existing production capabilities, adherence to strict quality control process and standard as required by world-class companies and local market; l acts as a coordinating agency between Whirlpool ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anch office of the assessee company in India provided various services to the parent company. He analyzed the provisions contained in sections 5(1)(b) and 9(1)(i) of the Income-tax Act. He also analyzed the provision contained in Article 5 of the DTAA between India and the USA. It has been held that all these provisions are attracted and, therefore, the assessee is liable to be assessed to tax in India. For the sake of ready reference, paragraph 4 of his order is reproduced below :-- "4. I have considered the submissions of ld. AR and have perused the material on record. From the facts on record, it is clearly established that the BO of WIHL had carried out various activities in India which has not been denied by the appellant company. The same was also admitted by Shri S.K. Pradhan, AR of the appellant company his statement which was recorded by the AO during the course of assessment proceedings for the A.Y. 2000-01. The appellant's claim is that these services were simply mentioned in the letter to the RBI for seeking its approval for carrying out comprehensive activities in the long run and these services had actually not been provided. This argument of the appellant is a self- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the instant case the appellant is having branch office (PE) in India which is doing commercial activities for Whirlpool Corporation and is managing all the affairs of WC in India. This is an associated enterprise of Whirlpool Corporation and is transacting in a manner which cannot be termed at 'Arm Length'. They have managed their affairs in such a fashion that no profit for the activities rendered by the appellant in India is shown to accrue in India and, therefore, no income has been declared in India. I agree with the AO that in such situation provisions of Article 9 of DTAA between India and USA get attracted. Therefore, as per these facts and legal position, the income/profit of appellant is liable to be taxed in India. In view of above, the question arises as to how much remuneration/amount would have been payable by Whirlpool Corporation if an independent enterprise other than the appellant would have carried out such activities in India including complete management of WIL. Such amount or remuneration would be attributable or accruing in India and would be chargeable to tax in India in view of sections 5(1) and 9(1) of the IT Act coupled with the provisions of Article 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermission to set up a branch office in India. He also made reference to page Nos. 6 to 8 of the paper book, which is the approval of the Reserve Bank of India dated 10.4.1995. The assessee has been permitted to open a branch office for undertaking following activities :-- (i) "To import/export goods etc. to/from India. (ii) To provide service support to local supplier for development of good quality raw-material, components and finished products for local and overseas requirements. (iii) To promote technical/financial collaboration and other incidental activity mentioned in your application, which are not of manufacturing/processing nature." 4.1 Our attention is also drawn to page nos.9 and 16 of the paper book, which contain resolutions of the Annual General Meeting of WIL for appointment of Mr. Raj Jain as Managing Director, Mr. Rajiv Verma as the Director of the company, Mr. John Pinto as whole-time director of the company and Mr. Ashok Khanna as whole-time director. Our attention has also been drawn towards answer to question No. 7 furnished by Mr. S.K. Pradhan, Manager Taxation on oath. The question and answer read as under :-- "Q. 7. Please read out the submission agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st suppliers to introduce new technologies and support local supplier for development of quality raw-material, components and furnished products. Provide technical know-how and assistance and development of new products and up-gradation of existing production capabilities, adherence to strict quality control process and standard as required by world-class companies and local market. The Branch office (Whirlpool India Holdings) works as a coordinating agency between Whirlpool Corporation, USA and its South Asia Regional office (Whirlpool India Holdings) and provides latest management information in respect of technology, legal, commercial and political developments in Asia region which enables the management to take effective business decision. The Branch office (Whirlpool India Holdings) advise and assist on staff training, education, development and implementation of human resources management and procedure. The Branch office (Whirlpool India Holdings) dedicated personnel actively scout for investment opportunities in consumer durable appliances and are promoting the Indian collaboration, namely, Whirlpool of India Ltd." 4.2 Page nos. 20 and 21 contain the replies furnished b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the learned CIT, DR summarized the submissions of the ld. counsel that -(i) the assessee has not been conducting any business operation in India, (ii) the persons are the employees of WIL although the payment is made by the parent company through the branch office of the assessee-company, and (iii) if at all any service has been rendered, it has been rendered to the Indian company. 5.1 It is submitted that Whirlpool Corporation, USA, is the parent company of the assessee company with 100% equity participation. The parent company has also various subsidiaries in Mauritius, whose names have not been furnished. The Mauritian companies have invested 82.33% in the equity of WIL directly or indirectly. According to the assessee, the parent company transferred a sum of about Rs. 6.22 crores to the branch office of the assessee-company in India, which was paid to the WIL for the salaries of the employees. This begs a question- what is the purpose of incorporation of the assessee-company in the USA? The ld. CIT(Appeals) has mentioned in paragraph 2 that the assessee company has been incorporated in the USA as a special purpose vehicle to facilitate the safeguarding of investment made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the assessee's Indian branch and the expenditure on that account was paid by the parent company, as mentioned in paragraph 3.1 of the impugned order. The assessee has now taken a totally different stand before the Tribunal that it is merely a conduit for transfer of money for payment of salaries from the parent company to the WIL. Thus, he relied on the findings of the ld. CIT(Appeals) furnished in paragraph No.4, which has already been reproduced by us. 5.2 Coming to taxation of profits in India, it is submitted that the admitted position is that the assessee has a branch in India. Therefore, the provision contained in article 5 is clearly applicable. Employees have been seconded to the WIL for protecting the interest of the parent company and, therefore, article 7 is also applicable for the purpose of attributing profits to the Indian branch. It is argued that economic reality is that the assessee has paid the salaries of the seconded employees. Therefore, even if the arrangement is given some different legal form, it is a fit case to lift the veil and examine the true nature of the services rendered by the assessee company. Coming to Article 9, it is submitted that it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the answer to question No. 7 is only in respect of intendment of incorporation of the assessee company and opening its branch office in India. 7. We have considered the facts of the case and submissions made before us. The facts are that the assessee is a company incorporated in the USA and it has opened a branch office in India with the permission of Reserve Bank of India inter-alia for undertaking the activities of- (a) import/export of goods to and from India; (b) providing service support to local suppliers for development of good quality raw-material, components and finished products for local and overseas requirements; and (c) promoting technical/financial collaboration and other incidental activities mentioned in the application which are not in the nature of manufacturing or processing activities. The assessee filed its return declaring nil income. It was accompanied by statement of income which showed loss of about Rs. 6.22 crores. This amount represents payment of salaries to the employees seconded by the parent company. The expenses were met out of repatriation of foreign exchange from the USA and it is the case of the assessee that such foreign exchange was received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id, the case of the ld. DR is that the branch office constitutes PE in India, from which services have been rendered to the parent company for safeguarding the interest of the latter, consisting primarily the investment made by it through Mauritian companies in WIL. For this purpose, the employees of the assessee have been seconded, on which expenditure has been incurred. 7.2 We may examine the rival contentions in terms of paragraph Nos. 1 and 2 of Article 5. Paragraph No. 1 defines 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. It is true that the assessee has a fixed place of business in India in the form of the branch office. However, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tunities 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. For this purpose, 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. It also advises on the matters of staff training, education, development and implementation of human resources. It also scouts for investment opportunities in consumer durable goods in collaboration with WIL. On the basis of this answer, 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. On the other hand, the argument of the ld. counsel is that these are the purposes for which the assessee company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly in the management, control or capital of an enterprise of a contracting State and an enterprise of the other contracting State and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly. It is fairly submitted by the ld. DR that Article 9 is an extension of Article 7 regarding determination of arm's length profits. Such a computation will arise only if there is a PE in India. Since there is no PE in India, the question of computing profits either under Article 7 or Article 9 does not arise. 7.5 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. Since there is no profit, there would be no question of transfer pricing adjustment. Thus, we do not think it necessary to go into Rule 10 of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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