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No PE when the branch office in India of a US subsidiary is paying salary to employees seconded to an Indian subsidiary In brief
In a recent ruling, the Delhi bench of the Income-tax Appellate Tribunal (“the Tribunal”), in the case of Whirlpool India Holdings Ltd.1 (“the assessee”), held that even though the assessee has a fixed place of business in the form of branch, it would not constitute a Permanent Establishment (“PE”) since this branch was merely used as a conduit to remunerate employees seconded by the assessee’s parent company to work for the parent company’s Indian subsidiary.
1 Whirlpool India Holdings Ltd. v. DDIT [2011-TII-15-ITAT-DEL-INTL]
Facts
The assessee is a US-based wholly owned subsidiary of Whirlpool Corporation, USA (“WC”). The assessee also has a branch in India. WC, the holding company, also has an Indian subsidiary, Whirlpool India Ltd.
(“WIL”), engaged in the manufacture and sale of consumer durable goods.
For the year under appeal, i.e. Assessment Year (“AY”) 2002-03, the assessee filed a ‘Nil’ tax return stating that no business operation had been conducted by the branch in India. Further, the assessee explained that the www.pwc.com/in
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4 February, 2011
PwC News Alert February 2011
2 main activity of the branch is to protect and safeguard the interest of parent
company in India.
In order to efficiently manage the affairs of WIL, WC placed some top level employees under the management of WIL. Due to restrictions under the Companies Act, 1956, these persons cannot be adequately remunerated by WIL as it incurred losses continuously. In view of this, WC paid remuneration of these persons through the branch of the assessee.
The Assessing Officer (“AO”) held that the assessee was acting as a consultant to the parent company by managing the affairs of WIL through its branch. The operations were substantive business operations for which the assessee has been incorporated and, therefore, the income of the assessee is taxable in India and some portion of the turnover of WIL was attributed as the income of the assessee. The Commissioner of Income-tax (Appeals) also upheld the AO’s contentions.
Aggrieved, the assessee preferred an appeal before the Tribunal.
Issue
Whether or not the assessee has a PE in India, in view of the fact that the branch was remunerating employees of assessee’s parent company seconded to its Indian subsidiary for managing its affairs.
Assessee’s contentions
• No employees of the assessee were deputed to WIL. Rather, the employees were seconded by the parent company to WIL, based on
which they become the employees of WIL. These employees were not on the roll of the assessee but of WIL.
• The assessee had merely acted as a conduit for the transfer of money from the parent company to WIL for the payment of remuneration.
• The loss reported by the assessee in the tax return consisted only of salary payments it made by a merely acting as conduit. This loss has not been claimed.
• The assessee was acting as a consultant and the purpose/activities for which the assessee was incorporated in the USA was not provided for the year under consideration.
• Transfer pricing (“TP”) regulations come into effect only when profit earned by an assessee is to be allocated in two jurisdictions, which is not so the present case. These regulations cannot be used for deeming a certain amount as income.
• The TP adjustment (if any) can only be made in the case of parent company which provided free services by top level employees to WIL.
Revenue’s contentions
• The assessee was incorporated in USA as a special purpose vehicle to facilitate safeguarding of investments made in WIL. Employees of the parent company, WC, were seconded, and the assessee was intended to
PwC News Alert February 2011
3 protect and enhance the interests of WC, through the branch office in
India.
• Since top level employees were seconded to manage the affairs of WIL, it can be said that, under this secondment arrangement, the assessee provided services to the parent company.
• The salary and benefits of these employees were borne by the assessee out of funds received from the parent company.
• Article 7 of the India-USA tax treaty (“tax treaty”) is applicable for the purpose of attributing profits to the India branch.
• Even if the arrangement of paying salaries by the assessee is given a different legal form, it was a fit case to lift the veil and examine the true nature of the services rendered by the assessee.
Tribunal - Observations and Ruling
• The note to the profit and loss account states that the main activity of the branch is to watch and safeguard the interests of the parent company in India and since there was no business activity in India, the business loss was not claimed.
• The assessee has a fixed place of business in India in the form of a branch office. However, there was nothing on record to show that the business of the assessee was conducted wholly or partly through this branch.
• As per Board resolutions of WIL, the seconded employees were under the control and superintendence of the Board of Directors of WIL and, therefore, they are employees of WIL. Also, salaries have been paid by the parent company, the economic reality overtakes the legal reality and thus, the seconded employees are those of the parent company. It is difficult to conclude that the employees are employees of the assessee.
• The argument made by revenue, that the monies paid by way of salaries were reimbursed to the assessee by the parent company, was not proved conclusively.
• It is the revenue’s responsibility to establish that assessee has a PE in India before it is taxed in India on its business profits which has not been done in the present case.
• The revenue relied on the statement taken under oath during the assessment/survey proceedings, on the basis of which it was argued that the branch office is taking up all the activities which are generally managerial in nature for the benefit of the parent company. However, the assessee contended that these activities constitute the purposes for which it was incorporated; these activities have not been undertaken in the year under question. Finally, the Tribunal ruled in favour of the assessee, and held as follows:
− The branch office, though a fixed place of business, had not carried out business of the assessee wholly or partly and, therefore, it did not constitute a PE.
PwC News Alert February 2011
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− Since there was no PE in India, the question of computing profits either under Article 7 or Article 9 of the tax treaty did not arise.
− Since there was no profit, there was no question of any TP adjustment. Thus, the assessee was not liable to pay tax in India in the year under consideration.
Conclusion
Although the assessee had a branch office in India, it did not constitute a PE since its India branch was only acting as a conduit for remunerating the employees of the assessee’s parent company, seconded to its Indian subsidiary for managing its affairs.
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