Permanent Establishment (PE) taxable as Independent Entity: Delhi HC in Hyatt International Case [Read Order]

The Delhi High Court has held that a Permanent Establishment (PE) should be taxed as an independent entity, regardless of the global financial performance of the enterprise to which the PE belongs.

The case revolved around whether income could be attributed to a PE in India if the parent entity suffered losses globally. The appellant argued that no income should be attributed to the PE if the overall entity had incurred a loss. However, the court disagreed, ruling that profits attributable to the PE in India must be determined independently, and that even if the global entity incurred a loss, the income generated by the PE in India remains taxable.

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This ruling departs from earlier views, particularly the interpretation in Nokia Solutions and Networks OY, where the court held that profit attribution to a PE would not be warranted if the enterprise, as a whole, incurred losses. On the contrary, the court in the Hyatt case found that income earned by the PE in India must be taxed, regardless of the parent entity's global financial condition.

The Division Bench, while referring the question for consideration of the full bench had doubted the view expressed in Nokia Solutions that profit attribution to a Permanent Establishment would be warranted only if the enterprise as a whole, and the PE constituting merely a component had earned profits.

The Division Bench had observed that the issue of attribution of profits to a PE in India would have to be determined on the basis of the latter being considered to be an independent taxable entity. It thus opined, prima facie, that once it is found that the assessee has a PE in India, it would be liable to pay tax on such income in India notwithstanding the losses that the enterprise as a whole may have suffered in other jurisdictions.

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The Full Bench of Justices Yashwant Varma, Sanjeev Narula and Purushaindra Kumar Kaurav noted that, “The profits attributable to the Assessee’s PE in India are required to be determined on the footing that the PE is an independent taxable entity. It is, thus, possible that an Assessee makes a net loss at an entity level on account of losses suffered in other jurisdictions, which is partly offset by profits arising from India.”

It was also observed that, “If it is held that the Assessee has a PE in India, prima facie the Assessee would be liable to pay tax on the income attributable to its PE in India notwithstanding the losses suffered in other jurisdictions.”

This judgement has significant implications for foreign enterprises operating in India through PEs. It clarifies that Indian tax authorities are entitled to tax the income generated by a PE in India, even if the parent company incurs losses globally. The PE is thus seen as an independent taxable entity within the Indian tax framework.

The decision reaffirms that the activities of the PE in India should be considered separately for tax purposes, reflecting the entity's economic activities in India rather than the consolidated global financial results.

To Read the full text of the Order CLICK HERE

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