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2024 Supreme(Online)(DEL) 16081
HIGH COURT OF DELHI
Yashwant Varma, Sanjeev Narula, Purushaindra Kumar Kaurav, JJ
HYATT INTERNATIONAL SOUTHWEST ASIA LTD – Appellant
Versus
ADDITIONAL DIRECTOR OF INCOME TAX – Respondent
ITA-216/2020
Mr. S. Ganesh, Sr. Adv. with Mr. U.A. Rana, Mr. Himanshu Mehta, Advs.
Taxation of a Permanent Establishment (PE) is independent of the overall profitability of the enterprise; profits attributable to the PE can be taxed even if the enterprise incurs a global loss.
Headnote:(A) Income Tax Act, 1961 - Article 7 of the Double Taxation Avoidance Agreement (DTAA) - Permanent Establishment (PE) - The court examined whether taxable income can be attributed to a PE in India if the overseas entity incurs a loss in the relevant assessment years. The court noted that profit attribution to a PE is warranted only if the enterprise as a whole has earned profits. (Paras 1, 5, 33-36)
(B) Taxation Principles - The court emphasized that the existence of a PE allows for taxation of profits attributable to it, independent of the overall profitability of the enterprise. The PE is treated as a separate entity for tax purposes. (Paras 66-67)
(C) Legal Interpretation - The court clarified that Article 7 of the DTAA does not permit taxation based on global profits or losses of the enterprise, but solely on the income attributable to the PE. (Paras 66-67)
Facts of the case:
The case involved appeals questioning the attribution of income to a PE in India when the overseas entity reported a global loss. The appellants argued that no income could be attributed to the PE under Article 7 of the DTAA if the enterprise incurred a loss.
Findings of Court:
The court found that the PE must be treated as an independent taxable entity, and income attributable to it can be taxed regardless of the overall losses of the enterprise.
Issues: The main issues included whether the Tribunal misdirected itself in attributing service charges as royalty and the applicability of Article 7 of the DTAA in light of the entity's losses.
Ratio Decidendi: The court ruled that the PE's income must be assessed independently, and the existence of a loss at the entity level does not preclude the taxation of profits attributable to the PE.
Result: The court upheld the Tribunal's findings on the first three questions and referred the fourth question for further consideration.
J U D G M E N T
YASHWANT VARMA, J.
1. This Full Bench has been constituted as a consequence of a Division Bench of the Court doubting the correctness of the view expressed in Commissioner of Income-tax (international taxation) vs. Nokia Solutions and Networks OY1. The Division Bench, while referring the question for our consideration had doubted the view expressed in Nokia Solutions that profit attribution to a Permanent Establishment2 would be warranted only if the enterprise as a whole, and the PE constituting merely a component thereof, had earned profits. 2. The appellants appear to have argued that in case the enterprise at an entity level had suffered a loss in the relevant Assessment Year3, no profit or income attribution would be warranted insofar as the PE is concerned. When these batch of appeals were initially considered by 1 2022 SCC OnLine Del 5088 2 PE 3 AY the Court on 16 January 2023, the following order came to be passed:-
―1. One of the questions arising in the present petitions is whether any taxable income can be attributed to the Permanent Establishment (hereafter ―PE‖) in India if the overseas entity has incurred a loss in the relevant assessment years.
2. Mr. S. Ganesh, learned Senior Counsel appearing for the appellant, submits that Article 7 of the Double Taxation Avoidance Agreement (hereafter ―DTAA‖) entered into between the Government of United Arab Emirates and the Republic of India applies only in cases where the assessee earns profit.
3. If it is accepted that Article 7 of the DTAA doesn‘t apply; the questions that would next follow are whether DTAA applies in the context where there is a loss, and whether recourse to DTAA is necessary for taxing the income of a permanent establishment in India as an independent assessee.
4. According to the respondent, notwithstanding that an overseas entity incurs a loss, if there is positive income attributable to the PE, the same would be taxable notwithstanding Article 7(1) of the DTAA.
5. Mr. Ganesh submits that the aforesaid questions are squarely covered by the decision of the coordinate Bench of this Court Commissioner of Income Tax (International Taxation)-2 v. M/s Nokia Solutions And Networks OY; ITA 503 of 2022, decided on 02.12.2022. He has also drawn the attention of this Court to Paragraph 11, 13 and 13.1 of the said decision, which read as under:
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―11. The Tribunal has returned a finding of fact, that the respondent/assessee recorded a ―global net loss‖ in the relevant assessment year, and therefore no profit been attributed to it.
13. We may also note, that a plain reading of the Article 7 of the Double Taxation Avoidance Agreement between India and Finland also persuades us to take the same view as that which is taken by the Tribunal.
13.1 A plain reading of the Article 7(1) would show, that the issue of taxability would arise qua the respondent/assessee only if profits accrue to the respondent/assessee, and that too only to the extent they can be attributed to its PE in India.‖
6. He submits that in view of the said decision, the question whether any taxable income could be attributed to PE, would not arise in the event, the assessee incurs a loss.
7. It is noted that although the observations made in the said decision appear to be squarely in favour of the appellant, it is also apparent that various other contentions relevant for addressing the said question have not been considered. This is also perhaps because the Court had not framed any question regarding the applicability of Article 7 of the DTAA.
8. Prima facie, this Court is of the view that if Article 7(1) of the DTAA – which concerns with the attribution of profits of the assessee – is not applicable in case the assesse incurs a loss, the other provisions of the Income Tax Act, 1961 , would be applicable and any income arises or accrues within the territories of India would be chargeable to tax.
9. Prima facie, if the establishment in India is generating profits, but the other entities
