The Delhi High Court has ruled in favour of the authorities to tax the permanent establishment (PE) of Hyatt International in India even if the global company incurred losses.
In this respect, the full bench of the court overturned an earlier verdict given by its division bench on the Nokia Solutions case.
The petitioner, Hyatt International Southwest Asia Ltd (Hyatt International), argued that Article 7 of the India-UAE Double Taxation Avoidance Agreement (DTAA) allowed taxation of the PE’s profits in India only when the foreign enterprise was profitable overall.
It contended that if the enterprise incurred a global loss, there would be no profits to attribute to the PE, and hence no tax liability would arise in India.
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The tax authorities, on the other hand, asserted that a PE should be treated as a distinct and separate entity for tax purposes. They argued that the profits of a PE should be assessed independently, regardless of the overall financial performance of the foreign enterprise.
The full bench of the court observed that it would be incorrect to interpret Article 7 as requiring it to ignore the income that may be generated pursuant to activities undertaken by a PE in one of the contracting states and making the exercise of attribution dependent upon the profits or the income that the enterprise may otherwise earn at an entity level.
The bench said that the article in clear and unequivocal terms constructs a dichotomy between the profits that may be earned by an enterprise on a global scale and those which are attributable to a PE situated in the contracting state.
The bench further said the article cannot possibly be viewed as restricting the right of the source state to allocate or attribute income to the PE based on the global income or loss that may have been earned or incurred by a cross-border entity.
Yeshu Sehgal, head of tax markets at consulting firm AKM Global, said the ruling has provided clarity for both taxpayers and tax authorities by placing emphasis on the fact that the global income of the multinational enterprise is not the only determining factor while evaluating a PE’s taxable income.
As such, an independent assessment by treating the PE as a separate entity for tax purposes should be done for attribution based on its actual activities within the country and affirming the source-based taxation rule at the same time, he said.
The full bench was constituted as a division bench of the court doubted the correctness of the view expressed on the Nokia Solutions and Networks case.
In this case, the earlier division bench had affirmed the ruling by the Income Tax Appellate Tribunal (ITAT). The ITAT ruling, relying on the special bench decision on the Motorola case, had held that the issue of taxability could arise only if profits had accrued to the assessee and that too only to the extent attributable to its PE in India.
First Published: Sep 20 2024 | 7:21 PM IST
