Attribution of profit to a permanent establishment (‘PE’) and computation of the total taxable income of such an entity having PE in India is yet another area that remains uncertain and involves several roadblocks, owing to a complex mechanism coupled with inconsistent interpretations adopted by the Income Tax Department (‘ITD’). However, the Double Tax Avoidance Agreement (‘DTAA’), does not contain any provision which deals with computation of income of a non-resident.

In this context, an issue which arises for consideration is if there exists a PE of a non-resident, which has incurred losses and such non-resident has earned “other income” in the nature of fee for technical services (‘FTS’), which is not connected with such PE, whether such losses can be adjusted / set-off against the “other income” in light of the DTAA as well as the Income-tax Act, 1961 (‘IT Act’), for taxation purposes.

This issue recently came up for consideration before the Delhi bench of the Income Tax Appellate Tribunal (‘Tribunal’).^[1] Firstly, the Tribunal reiterated the settled position of law that in terms of Section 90(2) of the IT Act, in case of a non-resident, the provisions of the IT Act would be applicable to the extent the same are beneficial to such non-resident. Further, the Tribunal noted that the DTAA is silent on the aspect of computation of total income of a non-resident. Thereafter, the Tribunal lucidly explained the mechanism of computation of total income under the IT Act, wherein the taxpayer is required to first ascertain its income under the different heads (i.e., salary, income from house property, profit or gains from business or profession, capital gains or income from other sources) provided under Section 14 of the IT Act. Post ascertainment, the taxpayer can adjust / set-off its income earned under one of the heads against the loss incurred under the other heads, subject to restrictions as envisaged under Sections 70 and 71 of the IT Act.

After explaining such mechanism, the Tribunal noted that in terms of Section 71 of the IT Act, if there exists a loss under a particular head of income, other than “capital gains”, then such loss can be adjusted against income from other heads of income. Thus, the Tribunal concluded that there is no restriction on the adjustment of loss incurred by a PE against the “other income” earned by such non-resident, not being connected with such PE. Therefore, the Tribunal while ruling in favour of the taxpayer held that the beneficial provisions of the IT Act would be applicable on the present issue and as such, loss incurred by a PE can be set-off against the income earned in the nature of FTS.

The judgement rendered by the Tribunal is a first of its kind, wherein the losses incurred by a PE of a non-resident entity has been allowed to be adjusted / set-off against the income earned by such non-resident from other sources such as FTS. It would be interesting to see the fate of the judgement, if challenged before the High Court.

[1]               Hyosung Corporation v. ACIT, Order dated 23.04.2025 in ITA No. 2943/Del/2023 (Delhi Tribunal).