TaxTMI 
TaxTMI 
2011 (1) TMI 529
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....facts and in the circumstances of the case and in law, the ld. CIT(A) further erred in estimating the income at Rs. 15,558,463 on a notional basis as against nil income returned by the appellant. 3.1 That the ld. CIT(A) also erred in holding that the provisions of sections 5(2) and 9(1) of the Act read with Article 9 of the Indo-USA Tax Treaty [Double Taxation Avoidance Agreement] were attracted. 4. That on the facts and in the circumstances of the case and in law, the ld. CIT(A) gravely erred in concluding that the appellant had carried out various commercial activities in India and had neither denied the same nor placed on record any evidence to prove that said activities were not carried on by the appellant, such conclusions being erroneous and contrary to the facts. 4.1 That in coming to the above conclusion, the ld. CIT(A) erred in relying on part contents of the statement of Shri S.K. Pradhan, AR of the appellant as reproduced by the ld. AO in the assessment order, without considering the full contents of the statement placed on record. 4.2 That the ld. CIT(A) had failed to properly peruse the averments/material placed on record to substantiate the fact that the appellant....
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....he holding company in India. The expenses are met out of the funds received from the head office. The parent company, Whirlpool Corporation, USA, also has a subsidiary company in India, Whirlpool of India Ltd. ('WIL' for short). This company is engaged in the business of manufacture and sale of consumer durable goods. In the course of assessment proceedings, it has been explained that the main activity of the branch of the assessee-company in India is to protect and safeguard the interest of the parent company in India, which has made investment in equity capital of WIL through its subsidiary companies in Mauritius. The parent company wants to ensure that some top level employees are placed in WIL to manage its affairs. However, 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. In connection with its activities, the statement of Shri S.K. Pradhan, Manager Taxation, has been recorded on 13.3.2003, which has been substantially reproduced at pages 3 to 5 of the order. 2.2 In the context ....
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....ndia. Ltd." Thus, 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 operations are substantive business operations for which the assessee company has been incorporated and, therefore, the income is taxable in India. 2.3 Coming to the quantification of the income, it is mentioned that the paid employees of the assessee-company are managing the affairs of WIL. Therefore, it would be fair to estimate the consideration accruing to the assessee for these services at 6% of the turnover of WIL. Accordingly, the income of the assessee has been computed at Rs. 54,70,88,850 as under :- Turnover of Whirlpool India Ltd. for F.Y. 1999-00 =Rs. 1015.51 crore Estimated consideration as discussed above @ 6% =Rs. 60,93,06,000 Less: Expenses claimed in P&L account of the Indian branch Rs. 6,22,33,850 Expenses not allowable Charity and donation - Rs. 8,000 Wealth-tax - Rs. 8,700 Rs. 16,700 = Rs. 6,22,17,150 Total taxable income = Rs. 54,70,88,850 ....
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....in WIL. Therefore, the three key departments of WIL, namely, manufacturing operations, finance department and HR department were being handed by the senior executives who were deputed by the appellant company to WIL. This clearly shows that the key operations of WIL were being supervised and controlled only by WIHL. By appointing its own employees to the key strategic positions of WIL, the appellant company is virtually running WIL on behalf of the parent company, namely, WC. It is also relevant to mention here that these senior executives were not given any remuneration by WIL and the salaries and other benefits to them were provided by the appellant company only. Therefore, it is clear that the appellant company through its BO in India had provided various services to Whirlpool Corporation, USA. It has also been admitted before the AO that no amount has been paid to WHIL either by Whirlpool of India Ltd. or by Whirlpool Corporation, USA. The appellant company has carried on various activities in India by giving critical and comprehensive services to Whirlpool Corporation of USA. I agree with the conclusion of the AO that appellant is working as consultant, the guiding force for W....
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....re, taking the variation of 5% into account, it should be fixed at 12.19%. Thus, profits were computed at Rs. 75,86,306 as under:- Total expenditure incurred during the year under consideration Rs. 6,22,33,850 If business advisory services rendered the NCP margin of 12.19% to be applied Rs. 75,86,306 Total receipts Rs. 6,98,20,156 Less: Expenditure Rs. 6,22,33,850 Profit Rs. 75,86,306 3.2 The ld. CIT(A) considered this matter after obtaining the remand report from the AO. It has been mentioned that the assessment made by the AO at 6%, based upon the order of CIT(Appeals) for assessment year 2000-01, is not correct. Firstly, the order of the CIT(A) has been reversed by the Tribunal although on a different issue. Secondly, the WIL did not pay any royalty to the parent company because of continued losses, in view of which the agreement between these two parties has been novated by another agreement in 1997 under which royalty is payable only when WIL earns profits. Therefore, he changed the basis of computation of income. He also did not agree with the assessee that the NCP margin should be taken at 12.19%. He is of the view that the margin of 25% would be fair and reasonab....
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....sis with present turnover in excess of USD 8 billion. It is one of the global market leader in the white good industry and is involved in the manufacturing and marketing of consumer durable appliances. The company currently manufactures in 11 countries and market its products in more than 120 countries under the brand names such as Whirlpool, Kitchen aid, Roper, Estate, Baun echt, Laden and Inglis. The management of Whirlpool (Corporation) has identified Asia as one of its focus area of expansion. For this purpose Whirlpool Corporation has tied up with Whirlpool of India Ltd. (formerly known as Kelvinator of India Ltd.) and has invested Rs. 300 crores in acquiring majority stake in Indian Venture. In this context Whirlpool (India Holdings) has opened a branch office in India, which is the Whirlpool Corporation's regional office for south east Asia. This branch office (Whirlpool India Holdings) is responsible for formulating policy and taking strategic decisions for operations of the Whirlpool (Corporation) in India, Nepal, Sri Lanka, Bangladesh and Pakistan. Activities of the Whirlpool branch office (Whirlpool India Holdings) in India. Whirlpool branch office (Whirlpool India H....
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....loyees of the WIL. The assessee has merely acted as a conduit for transfer of money from the parent company to the WIL for payment of remuneration. No income can be said to be attributed to such transfer of money through the assessee. Therefore, the assessee is not liable to be assessed in India. 4.4 In order to support the aforesaid contentions, reliance has been placed on Articles 5 and 9 of the treaty. It is argued that none of these articles are applicable to the facts of the case. Further, reliance has been placed on the decision of Hon'ble Delhi High Court in the case of Director of Income-tax v. HCL Infosystems Ltd. (2005) 274 ITR 261. Reliance has also been placed on the decision of "A" Bench of the Bangalore Tribunal in the case of IDS Software Solution (India) Pvt. Ltd. v. ITO, dated 21.01.2009, a copy of which has been placed in the case law paper book on pages 1 to 9. 4.5 Coming to the quantification of income, it has been submitted that the assessee has not earned any income in India. The 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 regulation....
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....o open a branch office in India. The assessee and the parent company are not taxed separately in the USA and, therefore, the accounts of these two companies have been merged. It has also been submitted that the secondment of employees of the parent company and the assessee company is aimed at protecting and enhancing the interest of the parent company and this work was carried through the branch office in India. The expenditure was wholly met by the parent company. The assessee, however, did not carry on any business in India and never earned any income from the branch office. The parent company manufactured goods in more than 11 countries and sold them in more than 120 countries. The vastness of operations necessitated incorporation of the assessee company as a separate company. The operations in India necessitated opening a branch office in India. In order to ensure implementation of the policies of the parent company, the assessee seconded the employees to the WIL to work in key positions. This was done at the instructions of the parent company. The salary and benefits to these employees were borne by the assessee out of the funds received from the parent company. In this connec....
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....income between two jurisdictions, one of them being India, it is submitted that the same is in contradiction with the decision of Mumbai Bench of the Tribunal in the case of VVF Limited v. Dy. CIT 2010-TII-04-ITAT and Perot Systems TSI India Ltd. v. Dy. CIT 2010-TII-03-ITAT-DEL, copies of which have been placed on record. In respect of determination of the total income, the ld. DR submitted that while the AO took recourse to Rule 10 of the Income-tax Rules, 1962, the ld. CIT(Appeals) determined the same on cost plus method. 6. In the rejoinder, the ld. counsel submitted that the seconded employees were not the employees of the assessee company but those of the parent company. The assessee was merely used as a conduit for transfer of money from the parent company to the WIL. These employees were not borne on the rolls of the assessee but on the rolls of WIL. In such a circumstance, no service could have been rendered by the assessee to the parent company except the transfer of money. Even otherwise, if the Indian branch is said to have earned any income in India, its profit and loss account will have to be drawn, which has not been done by the AO. The adjustment, if any, can only b....
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....eciding this issue. These paragraphs read as under :- 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources. (g) a warehouse, in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or premises used as a sales outlet; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period; ....
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....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 economic reality overtakes the legal reality. Therefore, the employees are those of the parent company. Nonetheless, it will be difficult to come to a conclusion that the employees are those of the assessee company. There could be another argument advanced in this behalf by the ld. DR that it has not been proved conclusively that the monies paid by way of salaries were reimbursed to the assessee company by the parent company. This stand is taken only by way of an argument. 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. We have considered this matter also. We are of the view ....
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....nswer 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 salaries of the seconded employees. We have already concluded that it has not been established in any manner that these employees are those of the assessee company. By such secondment, it cannot be said that the assessee has rendered any service either to WIL or to the parent company. Therefore, answer to question No. 7 is only in respect of intended activities and answer to question No. 3 is in respect of actual activities. Thus, it is held that the assessee company does not have a PE in India as understood under paragraph No. 1 of Article 5. 7.3 Paragraph No. 2 includes certain places within the ambit of the PE such as a place of management, a branch, an office, a factory, a workshop etc. These places are mentioned in clauses (a) to (e) of paragraph No. 2....