In a significant judgment, the Delhi High Court clarified the tax liability concerning Permanent Establishments (PE) under the India-UAE Double Taxation Avoidance Agreement (DTAA). The court held that where an enterprise has a PE in India, the PE will be liable to pay tax on the income attributable to it, even if the enterprise at a global level incurs a loss.
Legal Framework:
- Section 9 of the Income Tax Act, 1961: Deemed income accruing or arising in India.
- Article 5 and 7 of the India-UAE DTAA: Pertains to the definition of PE and the apportionment of income to the PE.
Highlights of the Ruling:
1. Attribution of Income to Pe:
Article 7(1) of the India-UAE DTAA establishes a clear distinction between the global profits of an enterprise and the profits attributable to a PE located in another contracting state.
2. Separate Entity Principle:
Article 7(2) treats a PE as a distinct and independent enterprise, engaging in similar activities separate from the parent entity, allowing for income to be attributed to it irrespective of the overall global financial position of the enterprise.
3. Independent Taxable Entity:
The fact that a PE is considered an independent taxable entity cannot be questioned. The source state (India) retains the right to tax the income attributable to the PE, regardless of the global income or losses incurred by the cross-border enterprise.
4. Taxation Despite Global Losses:
The court ruled that an enterprise with a PE in India would be liable to pay taxes on income attributable to that PE, even if the enterprise as a whole suffered a loss.
Conclusion:
The Delhi High Court upheld the principle that a Permanent Establishment in India is liable to pay tax on its attributable income, regardless of the entity's global profits or losses. This ruling underscore the autonomy of the source state in taxing the income arising within its jurisdiction under the DTAA provisions. The decision is a win for the revenue authorities, reaffirming the distinct tax treatment of PEs.
