2023 (1) TMI 1416 - HC - Income Tax

Accrual of income in India - Taxable income attributed to the Permanent Establishment in India if the overseas entity has incurred a loss in the relevant assessment years - as argued application of Article 7 of DTAA entered into between the Government of United Arab Emirates and the Republic of India applies only in cases where the assessee earns profit - whether any taxable income could be attributed to PE, would not arise in the event, the assessee incurs a loss? HELD THAT - As noted that although the observations made in the said decision appear to be squarely in favour of the appellant, it is also apparent that various other contentions relevant for addressing the said question have not been considered. This is also perhaps because the Court had not framed any question regarding the applicability of Article 7 of the DTAA. Prima facie, this Court is of the view that if Article 7(1) of the DTAA which concerns with the attribution of profits of the assessee is not applicable in case the assessee incurs a loss, the other provisions of the Income Tax Act, 1961, would be applicable and any income arises or accrues within the territories of India would be chargeable to tax. Prima facie, if the establishment in India is generating profits, but the other entities of the assessee overseas are incurring a loss, the profits generated by the establishment, if otherwise chargeable under the Income Tax Act, would be required to be assessed and taxed. In this view, we are inclined to observe that the aforesaid issue be referred to a larger Bench. Learned counsel for the respondent states that he is not prepared to argue on the questions as framed earlier and requests for an adjournment. At his request, list on 13.02.2023. The hearing fixed on 31.01.2023 stands cancelled.

Summary

Issues:
1. Taxable income attribution to Permanent Establishment (PE) in India in case of overseas entity incurring a loss.
2. Applicability of Article 7 of the Double Taxation Avoidance Agreement (DTAA) in cases of loss.
3. Necessity of DTAA for taxing PE income as an independent assessee.
4. Interpretation of DTAA provisions in the context of profit and loss.
5. Requirement to assess and tax profits generated by an establishment in India despite overseas entities incurring losses.
6. Consideration of the issue by a larger Bench.
7. Relevance of other questions in the appeal affecting the issue of taxable income attribution to PE.

Analysis:
The judgment addresses the issue of whether taxable income can be attributed to a Permanent Establishment (PE) in India when the overseas entity incurs a loss. The petitioner argues that Article 7 of the DTAA applies only when the assessee earns a profit. However, the respondent contends that if there is positive income attributable to the PE despite the overseas entity's loss, it should be taxable. The petitioner relies on a previous decision where it was held that taxability arises only when profits accrue to the assessee. The court notes that while the previous decision seems favorable, other relevant contentions were not considered due to the absence of a specific question on the DTAA's applicability. The court opines that if Article 7(1) of the DTAA does not apply in case of a loss, income within Indian territories would still be taxable under the Income Tax Act.

The court further observes that if the establishment in India generates profits while overseas entities incur losses, the profits from the Indian establishment should be assessed and taxed. Consequently, the court decides to refer the issue to a larger Bench for further consideration. The petitioner suggests that the resolution of other questions may impact the relevance of the issue at hand, particularly regarding the existence of a Permanent Establishment in India. On the other hand, the respondent requests an adjournment to prepare for arguments on the framed questions. As per the request, the next hearing is scheduled for a later date, while the previously fixed hearing stands canceled.