Delhi High Court Full Bench Rules: “Permanent Establishment (PE) in India Liable to Pay Tax on Profits Attributable to Indian Operations Under Double Taxation Avoidance Agreement (DTAA), Even if Global Losses are Recorded”

Court’s Decision: The Full Bench of the Delhi High Court, constituted following a Division Bench’s referral, held that a Permanent Establishment (PE) in India is liable to pay tax on profits attributable to its operations in India, even if the enterprise as a whole recorded losses at a global level. The court rejected the appellant’s argument that no profits could be attributed to the PE if the overall enterprise incurred losses, ruling that the PE is an independent taxable entity.

Facts of the Case: The appeals arose from a tax dispute concerning Hyatt International Southwest Asia Ltd. The appellant, operating a PE in India, contended that since it recorded a global net loss during the relevant assessment year, no taxable income should be attributed to its PE in India. The appellant invoked Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and the United Arab Emirates (UAE), arguing that profits could only be attributed to a PE if the entire enterprise earned profits.

Issues:

1. Whether the Tribunal erred in attributing profits to the PE in India, despite the appellant’s global losses.
2. Whether service charges received under various agreements were taxable as royalty under Indian tax laws.
3. Whether Article 7 of the DTAA applied in the case of global losses.

Petitioner’s Arguments: The petitioner contended that under Article 7 of the DTAA, no profits could be attributed to its Indian PE if the overall business suffered a loss. The appellant further argued that the tax authorities had misinterpreted the SOSA agreements as imposing a royalty obligation, leading to an erroneous tax liability.

Respondent’s Arguments: The tax authorities, represented by the Additional Director of Income Tax, contended that the profits attributable to the Indian PE must be taxed independently of the global financial performance of the enterprise. They argued that the DTAA provisions did not exempt the PE from taxation based on global losses.

Analysis of the Law: The Full Bench analyzed the principles of international taxation, focusing on the attribution of profits to PEs under the DTAA. The court noted that while global losses might impact the enterprise’s overall financial health, they do not negate the profitability of the Indian operations. Therefore, the Indian PE must be taxed as a separate entity, liable for its operations’ attributable profits.

Precedent Analysis: The court reviewed prior decisions, including the case of Nokia Solutions and Networks OY, which involved similar facts. The court upheld the principle that a PE is taxable on profits arising from its operations in India, irrespective of the overall financial performance of the enterprise.

Court’s Reasoning: The court emphasized that the Indian PE should be treated as an independent entity for tax purposes. The court rejected the appellant’s reliance on the DTAA provisions, clarifying that Article 7 does not exempt a PE from taxation solely because the enterprise recorded global losses. The court reasoned that the PE must be taxed on the profits it generates from its operations within India.

Conclusion: The Delhi High Court dismissed the appeals, holding that the Indian PE of Hyatt International Southwest Asia Ltd was liable to pay tax on its attributable profits, despite the enterprise’s global losses. The court also upheld the Tribunal’s decision to treat certain service charges as taxable royalty under Indian tax laws.

Implications: This ruling affirms the principle that PEs in India are subject to tax on profits attributable to their Indian operations, regardless of the global financial performance of the enterprise. It also clarifies the application of DTAA provisions concerning profit attribution and reinforces India’s stance on taxing PEs based on their economic activities within the country.

Legal Representation:

• For Petitioner: Mr. S. Ganesh, Senior Advocate, with Mr. U.A. Rana and Mr. Himanshu Mehta.
• For Respondent: Mr. Sanjay Kumar and Ms. Easha, Advocates.

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