In a recent judgment pronounced by Delhi High Court, chaired by Justice Rajiv Shakedhar and Justice Tara Vitasta Ganju, upheld the decision of the Income Tax Appellate Tribunal (ITAT) that the no profits attributable to the Permanent Establishment (PE) if it is a global net loss.
This appeal was preferred by the revenue against the order of the ITAT on questioning that ITAT erred in holding that no profits are attributable to the PE of the Assessee.
As a matter of fact, the tribunal found that the respondent/assessee recorded a “Global Net Loss” in the relevant assessment year, and therefore no profit could have possibly been attributed to it.
The bench noted the decision of the ITAT where it was mentioned about the Judgment of the Special Bench in the case of Nokia Corporation for A.Y. 1997-98 and 1998-99. The Special Bench held that the Appellant Company’s world wide Net Profit margins as per its audited accounts are to be applied for determining the quantum of the income to be attributed to the P.E.
Further it was noted that the effect being if the Appellant Company is in net loss as per its audited accounts or the calendar years 2009 and 2010, which relate to the present A.Y. 2010-11, there would be no profit or income attributable to the P.E.
The bench tried to interpret Article 7(1) of the Double Taxation Avoidance Agreement (DTAA), contending that only when the foreign firm is profitable does the issue of attributing profits to the P.E. emerge. There is absolutely no doubt about attributing any profit to the PE, which would be taxable in India, if it is experiencing a loss.
The court further observed that the Assessing Officer (AO) has taken gross profit margins of the Appellant Company for 2009 and 2010 as per its audited accounts instead of the net profit margins.
Further, the gross profits margins of the Appellant Company for 2009 and 2010 were positive, and that was how the AO could attribute profits to the PE. In so adopting the gross profit margins of the Appellant Company, the AO has acted in a manner which is directly contrary to Article 7(1) of the DTAA and also contrary to the said Special Bench Judgment.
Additionally, it is the Net Profits margins which are to be considered for attribution as per the DTAA.
The bench observed that the AO’s calculations in the assessment order are flawed because they did not take into consideration the payments made by the appellant to Nokia Solutions Network India for the services provided by NSN India when calculating the profit attributable to the alleged PE. The resulting total would again be losses if the above mentioned payments are allowed as a deduction from the gross profit figures obtained by the AO.
The division bench held that the Article 7(1) of DTAA would show that the issue of taxability would arise if profits accrue to the assessee, and that too only to the extent they can be attributed to its PE in India.
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