Facts of the Case

Hyatt International Southwest Asia Ltd., a tax resident of the United Arab Emirates, carried on business in India through arrangements including Strategic Oversight Services Agreements (SOSA) with Indian entities. The Revenue alleged that the assessee had a Permanent Establishment (PE) in India under Article 5 of the India–UAE DTAA.

For several assessment years, the Income Tax Appellate Tribunal held that while a PE existed, no profits could be attributed to it because the assessee had incurred global losses at the enterprise level. This view relied heavily on the Delhi High Court decision in CIT (International Taxation) v. Nokia Solutions and Networks OY.

When the Revenue challenged these findings, a Division Bench doubted the correctness of Nokia Solutions and referred the issue to a Full Bench, specifically on whether profit attribution to a PE is impermissible when the foreign enterprise suffers overall losses.

 

Issues Involved

Whether profits can be attributed to an Indian Permanent Establishment when the foreign enterprise has incurred global losses.

Whether Article 7 of the DTAA mandates consideration of entity-level profitability for PE taxation.

Whether the decision in CIT v. Nokia Solutions and Networks OY lays down correct law.

 

Petitioner’s Arguments

The assessee contended that:

Article 7(1) of the DTAA permits taxation only if the enterprise earns profits at a global level.

If the enterprise as a whole has incurred losses, no question arises of attributing profits to a PE.

The issue was squarely covered by Nokia Solutions, which had attained finality.

The Special Bench decision in Motorola Inc. supported attribution based on global net profit margins.

 

Respondent’s Arguments

The Revenue argued that:

A PE is treated as a distinct and independent enterprise for taxation purposes under Article 7(2).

Profit attribution must be based on the functions, assets and risks of the PE, irrespective of global losses.

Nokia Solutions misconstrued Motorola Inc. and Article 7 of the DTAA.

OECD Commentary supports attribution even where the enterprise as a whole has not made profits.

 

Court Order / Findings

The Full Bench of the Delhi High Court held that:

Article 7(2) mandates treating the PE as a separate and independent enterprise for profit attribution.

The existence of global losses does not preclude attribution of profits to a PE if the PE itself performs profit-generating functions.

The decision in Nokia Solutions incorrectly interpreted Motorola Inc. and Article 7 of the DTAA and is overruled.

Global profits or losses are not determinative; what matters is the profitability of the PE on a standalone basis.

OECD Commentary and international tax principles support attribution independent of entity-level results.

 

Important Clarification

The Court clarified that:

Res judicata does not apply to questions of law in tax matters.

Prior acceptance of a legal position by the Revenue does not prevent it from urging the correct position of law.

Attribution must be undertaken consistently year-by-year unless there is a material change in facts.

 

Final Outcome

Appeals of the Assessee Dismissed on the Referred Question Full Bench Holds Profit Attribution to PE Valid Despite Global Losses
Decision in CIT v. Nokia Solutions and Networks OY Overruled
Article 7 DTAA Interpreted to Treat PE as Independent Profit Centre

 

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770193478_HYATTINTERNATIONALSOUTHWESTASIALTDVsDEPUTYCOMMISSIONEROFINCOMETAX.pdf

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