The Hon’ble Bench of ITAT, Delhi addressed the issue related to the set off of losses of Permanent Establishment (“PE”) in India against the income earned from Fees for Technical Services (‘FTS’)  which is not effectively connected with the PE in India. Hon’ble ITAT has held that, losses of PE can be set off against FTS income subject to tax at special rate under section 115A of the Income-tax Act, 1961 (the Act) in the absence of any bar on such set-off under section 115A or section 71 of the Act.

The Hon’ble ITAT also noted that two sources or streams of income governed by the different articles (Article 7 – Business Income and Article 12- Fees for Technical Services) of the tax treaty is merely an interplay or classification between two different articles and both the income is to be treated as one income for the purpose of taxation. Further, the judgment reiterates the principle that in cases where the tax treaties are silent, the taxpayer is entitled to apply the relevant provision of the Act to the extent it is beneficial.

The judgment provides clarity and guidance on the determination of taxable income and set off of losses in case of Foreign Company. 

We trust you find the same useful.

RSM India - Delhi ITAT allows set off of PE's business loss against HO's Technical Service Income.pdf