Profit Attribution To A Permanent Establishment In India – A Vexed Issue

Background

Foreign companies in India are often subjected to a tax audit scrutiny by the Indian tax authorities ("ITA") to check if they have a Permanent Establishment ("PE") in India and what will be the profits attributable to such a PE. The issue of attribution of business profits to a PE is a highly litigated issue.

In the Motorola case, the books of accounts of the India PE had huge losses although Motorola, at a global level, was making big profits. The Commissioner of Income-tax (the "CIT(A)"), in this case, rejected the accounts of the taxpayer and invoked Rule 10 of the Income-tax Rules, 1962 (the "IT Rules") to calculate the profits attributable to the PE. The Special Bench of the Delhi Income-tax Appellate Tribunal upheld the profit attribution method applied by the CIT(A) under which the profit percentage was calculated based on global accounts and applied to the Indian revenue to determine the profits attributable to PE in India.