Loss-making MNCs liable to pay tax on India setup
As per the recent ruling from Delhi HighCourt, Multinational Companies (MNCs) using various outfits in India or engaging people to promote, operate and grow their businesses from the Indian market will have to pay tax attributable to such setups even if these MNCs report losses in their global balance-sheet. The judgement would impact several MNCs using liaison office, subsidiary, or a fixed place like a hotel room --- arrangements which are considered as 'permanent establishment' or PEs in tax parlance --- to meet customers, negotiate prices, and market products and services.
This important judgement is in consonance with the language and core principle of Article 7 of Tax treaties dealing with taxation of permanent establishments. The key principle of article 7(1) is that profits of a foreign enterprise having a PE in the source country would be taxable in that country (source country) to the extent of 'profits' attributable' to the PE. Hence, whether at an 'entity level' the foreign enterprises concerned have profits or losses, should not really matter. This is an important and detailed ruling that relies on multiple commentaries such as OECD and UN Model conventions and other key Supreme Court decisions which could restrict chances of a reversal at the apex court.
The profits attributable to such PEs are the earnings generated from India but booked in the global accounts of the parent, and not in the books of the Indian arms or outfits of the MNCs.
