Hyatt PE in India be taxed even if global entity earns losses: Delhi HC

Overturns division bench verdict on Nokia Solutions

The Delhi High Court has upheld the plea of the authorities to tax the permanent establishment (PE) of Hyatt International in India even if the global company incurs losses.

The full Bench of the court overturned an earlier verdict given by its Division Bench in the Nokia Solutions case.

The petitioner, Hyatt International Southwest Asia Ltd (Hyatt International), argued that Article 7 of the India-United Arab Emirates double taxation avoidance agreement (DTAA) allowed taxing 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.

On the other hand, the tax authorities’ position was that a PE should be treated as a distinct and separate entity for tax.

They argued the profits of a PE should be assessed independently, regardless of the financial performance of the foreign enterprise.

The full Bench observed it would be incorrect for the court to ignore the income of the PE in one of the contracting states. It would also be wrong to see it to be dependent on the profits or the income that the enterprise may earn as an entity.

Yeshu Sehgal, head of tax markets at consulting firm AKM Global, said the ruling had provided clarity for both taxpayers and tax authorities by emphasising the global income of the multinational enterprise was not the only determining factor while evaluating a PE’s taxable income.

An independent assessment by treating a PE as a separate entity for tax should be done for attribution based on its activities within the country and affirming the source-based taxation rule at the same time, he said.

The full Bench was constituted because the Division Bench doubted the view expressed on the Nokia Solutions and Networks case.

In this case, the 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 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.