The question to be decided by the Full Bench of the High Court was whether a permanent establishment (PE) could have positive income notwithstanding losses incurred by the company – of which it is part – in other jurisdictions.
This issue was left unresolved in the High Court’s December 2023 judgment, as the Division Bench questioned the view expressed in previous case law that attribution of profits to a PE would only be justified if the company as a whole, and the PE being merely a part of it, had made profits.
Hyatt International, on the other hand, argued that if the company had suffered a loss in the relevant assessment year, no profit or income attribution would be warranted as far as the PE was concerned.
Judgment
The Full Bench of the High Court rejected Hyatt International’s contention and held that the cautious view expressed by the Division Bench of the High Court and the doubts expressed with respect to the findings made in previous cases were well founded and correct.
Excerpts
“65. Regard must also be had to the fact that Article 7 does not expand its gaze or reach to the overall operations or profitability of a transnational enterprise. It is concerned solely with the profits or income attributable to the PE. 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 world-wide income is thus rendered wholly untenable.
66. On an overall consideration of the above, we come to the firm conclusion that the submission of global income being determinative of the question which stood referred, is wholly unsustainable. The activities of a PE are liable to be independently evaluated and ascertained in light of the plain language in which Article 7 stands couched. The fact that a PE is conceived to be an independent taxable entity cannot possibly be doubted or questioned. The wealth of authority referred to hereinabove clearly negates the contention to the contrary and which was commended for our consideration by the appellants. Bearing in mind the well-established rule of source which applies and informs the underlying theory of taxation, we find ourselves unable to countenance the submission of the source State being deprived of its right to tax a PE or that right being dependent upon the overall and global financials of an entity. The Division Bench in these appeals rightly doubted the correctness of taxation being dependent upon profits or income being earned at the ―entity level‖. The decision of the Special Bench in Motorola Inc. has clearly been misconstrued and it, in any case, cannot be viewed to be an authority for the proposition which was canvassed on behalf of the appellants. Article 7 cannot possibly be viewed as restricting the right of the source State to allocate or attribute income to the PE based on the global income or loss that may have been earned or incurred by a cross border entity.”
67. We would thus answer the Reference by holding that the tentative view expressed by the Division Bench in these set of appeals as well as the doubt expressed with respect to the findings rendered in Nokia Solutions was well founded and correct. The Reference stands answered in terms of our conclusions set forth in paragraph 66 above.”