Recently, the Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Whirlpool India Holdings Ltd. v. DDIT [201 1-TII-15-ITAT-DEL-INTL] held that Branch Office set up in India which merely remunerated employees seconded by US group company does not constitute a Permanent Establishment (PE) in accordance with Article 5 of India- USA tax treaty (the tax treaty) and therefore was not taxable in India.
Further, the Tribunal held that since the taxpayer was not chargeable to tax in India in terms of Article 5 of the tax treaty, it was unnecessary to go into the question whether any transfer pricing adjustment could be made in determining such profit.
Facts of the case
• The taxpayer, a company incorporated in USA, is a wholly owned subsidiary of Whirlpool Corporation, USA (Whirlpool USA). The taxpayer’s main object was to watch and safeguard the interest of the parent company in India and accordingly, it had opened a branch in India.
• Whirlpool Corporation, USA, also has a subsidiary company in India, Whirlpool of India Ltd (WIL) engaged in the business of manufacture and sale of consumer durable goods.
• The taxpayer opened a branch office and sought RBI approval for undertaking the following activities:
-import/export of goods to and from India;
-providing service support to local suppliers for development of good quality raw material, components and finished products for local and overseas requirements; and
-promoting technical/ financial collaboration and other incidental activities not being in the nature of manufacturing or processing activities.
• Whirlpool USA wanted to ensure that some top level employees were placed in WIL to manage its affairs. However, due to legal restrictions under the Companies Act, these persons could not be adequately remunerated by WIL as it incurred losses continuously. Therefore, the Whirlpool USA paid remuneration of these persons through the branch of the taxpayer. The employees were on the payroll of WIL and the remuneration which was paid through the taxpayer was fully reimbursed by Whirlpool USA.
• The taxpayer filed its return of income declaring nil income and loss since it had no business operations in India.
• The Assessing Officer (AO), however, held that the taxpayer was acting as a consultant to Whirlpool USA and in this role it was a guiding force for managing affairs of WIL. It was held that the taxpayer carried out substantive operations in India through the branch office such as formulating policies and taking strategic decisions, identifying good suppliers, creating export opportunities, etc. and hence its income was taxable in India.
• Further, the AO applied Transfer Pricing provisions to quantify income taxable in India.
• All the employees have been deputed by Whirlpool USA to the WIL, who on appointment become the employees of WIL. No employee of the taxpayer company has been deputed to WIL. The taxpayer has merely acted as a conduit for transfer of money from Whirlpool USA to WIL for payment of remuneration. Accordingly, no income can be said to be attributed to such transfer of money through the taxpayer.
• Even though the Taxpayer has a fixed place of business in India in the form of the branch office there seemed to be nothing on record to reflect that the business of the taxpayer has been conducted wholly or partly through this branch.
• The only expenditure debited to profit and loss account is payment of salaries, which have been reimbursed by Whirlpool USA.
• The employees could be either of WIL (on the ground that they were under the supervision and control of the Board of Directors of WIL) or of Whirlpool USA (on the ground that salaries were paid by them), but it was difficult to come to a conclusion that the employees are those of the taxpayer.
• Since it has not been established that the seconded employees are those of the taxpayer, no services were furnished by the taxpayer either to WIL or to Whirlpool USA. The branch office, although a fixed place of business, has not carried out the business of the taxpayer wholly or partly and it would not constitute a PE in India. Accordingly, the taxpayer was not chargeable to tax in India in terms of Article 5 of the tax treaty.
• In order to bring a foreign company to tax in India on its business profits, the tax department should establish that it has PE in India. The tax department in the case under consideration could not prove that the taxpayer had a PE in India.
• Since the taxpayer is not chargeable to tax in India in terms of the provision contained in Article 5 of the tax treaty, it was unnecessary to go into the question whether any transfer pricing adjustment could be made in determining such profit.
It is pertinent to note that the branch office sought permission of RBI to import/export of goods to and from India; providing service support to local suppliers etc. However during the year the taxpayer did not engage in any of these services. The only expenditure debited to profit and loss account is payment of salaries, which have been reimbursed by Whirlpool USA.
The Tribunal has concluded that since the branch office of the taxpayer was used only for the purpose of remunerating employees seconded in India, such branch could not be considered as rendering any service and would not be considered to constitute a PE in India.
Further, the taxpayer was not chargeable to tax in India, therefore, the Tribunal did not examine the Transfer Pricing provisions.