Profits of PE Are to Be Independently Evaluated & Ascertained; Not Dependent Upon Overall Financials of Co. | HC

Case Details: Hyatt International Southwest vs. Additional Director Of Income Tax - [2024] 166 taxmann.com 466 (Delhi)

Judiciary and Counsel Details

• Yashwant Varma, Sanjeev Narula & Purushaindra Kumar Kaurav, JJ.

Facts of the Case

In the given case, the Full Bench of Delhi High Court was 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 OY [2023] 147 taxmann.com 165 (Delhi).

The question before the Court was whether the profits of a foreign company having a PE in India are taxable in India on the basis that the foreign company is earning income in India through its PE, irrespective of whether the foreign company is earning profits or losses globally.

High Court Held

The Delhi High Court held that the concept of a PE is based upon the undertaking of economic activity in a particular State irrespective of the residence of an enterprise and the same being understood to be in the nature of a conglomerate or an entity which may have many arms or independent functional units situate in various fiscal jurisdictions. Any entrepreneurial activity that gives rise to income or profit thus becomes liable to be taxed at the source, irrespective of the ultimate recipient or owner of that income. Source here would mean the location which gives rise to the accrual of profits or income or which is the location where the same arises.

The PE concept creates a functional relationship and connects the principal entity and the place of business whose activities give rise to income or profit. This fictional creation of an independent economic center in a Contracting State informs the allocation of taxing rights. Once the DTAA confers an independent identity upon the PE, it would be wholly erroneous to answer the question of taxability based on either the activities or profitability of the parent or the entity that seeds and sustains the PE.

The Contracting State in which this imagined entity is domiciled and undertakes business thus becomes identified as an independent profit or revenue earning center liable to be taxed. The activities of PE are liable to be independently evaluated and ascertained. The taxability of income earned by a PE existing in a Contracting State is not even remotely linked or coupled to the overall operations of the enterprise of which it may be a part. The argument of worldwide income is thus rendered wholly untenable. Article 7 of the DTAA postulates that the profits of an enterprise shall be taxable only in that State.

Accordingly, the profits attributable to the assessee’s PE in India must be determined as if the PE were a distinct and independent entity. Profits can be attributed to the PE even if the enterprise has never generated profits.

List of Cases Reviewed

• Commissioner of Income-tax (international taxation) v. Nokia Solutions and Networks OY [2023] 147 taxmann.com 165 (Delhi) (para 67) overruled.

List of Cases Referred to

• Commissioner of Income-tax (international taxation) v. Nokia Solutions and Networks OY [2023] 147 taxmann.com 165 (Delhi) (para 1),
• DIT (International Taxation) v. Morgan Stanley & Co. Inc. (2007) 7 SCC 1 (para 35),
• Ishikawajma-Harima Heavy Industries Ltd. v. DIT (2007) 3 SCC 481 (para 49)
• GVK Industries Limited and Another v. ITO and Another (2015) 11 SCC 734 (para 50).