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TMI Blog2014 (12) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. However, due to legal restrictions under the Companies Act, these persons could not be adequately remunerated by WIL as it was incurring loss continuously. Therefore, the parent company has paid remuneration of these persons through the branch office in India. The assessee s claim before the Assessing Officer is that no business operation has been conducted by the branch office in India, therefore, it is not liable to be assessed to tax in India. This issue has been discussed elaborately by the ITAT in its order for assessment year 2002-03. 2. In all these revenues appeal, the grounds taken by the revenue are common and read as under :- 1. Whether on facts and circumstances of the case while giving relief to the assessee, the CIT(A) had erred in placing reliance upon the orders of the ITAT in assessee's case for A.Y. 2002-03, which have not been accepted by the department. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) had erred in holding that the assessee did not have any PE in India in terms of Indo-USA DTM. 3. Whether on facts and circumstances of the case, the Ld. CIT(A) has erred in holding that the Branch Office of the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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 ₹ 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 from the parent company. The note to the profit and loss account states that the main activity of the branch is to watch and safeguard the interest of the parent company in India. Since there is no business activity in India, the loss is not claimed. The main question is-whether, the branch office of the assessee in India constitutes PE in India? It appears to us that paragraph nos. 1 and 2 of Article 5 of the treaty between the USA and India are material for deciding this issue. These paragraphs read as under:- 1. For the purposes of this Convention, the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 the payment of salaries through the assessee. That, however, does not make the personnel to be the employees of the assessee company. There could be a valid dispute whether the employees are of the WIL or that of the parent company. It is possible to argue that in terms of resolutions of the Board of the WIL, the employees were under control and suprintendence of the Board of Directors of the WIL. Therefore, the employees are those of the WIL. It is equally plausible to argue that since salaries have been paid by the parent company, the economi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnology, 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 been incorporated. These activities have not been undertaken in the year under question. The same is clear from answer to question no. 3, which clearly states that the assessee is not rendering any kind of services to any company. Therefore, reading the statement as a whole would prove beyond doubt that no business activity has been undertaken by the branch office. In this connection, we have considered the return of income and the statement of Mr. S.K. Pradhan. From these, it becomes clear that the assessee has made payment to WIL of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ension 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 Rules, recognized methods of determining arm s length profits or the cases relied upon by the ld. DR in this matter. In view of the aforesaid finding, it is also not necessary to go into the decision in the case of HCL Infosystems Ltd. (Del) and Vanunburg Group BV (AR) (supra). 7.6 The result of aforesaid discussion is that the assessee is not liable to pay tax in India in this year. 8. As the assessee is not liable to be taxed under the Income-tax Act, 1961, the ground regarding charging of interest u/s 234B does not survive and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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