International Tax Updates

published on 30 July 2025 I reading time approx. 4 minutes

1. Mumbai ITAT allows setting off Permanent Establishment (‘PE’) losses of foreign company in India against interest earned from External Commercial Borrowings (‘ECB’) loans

In the instant case, taxpayer was a non-resident banking company based out of United Arab Emirates (‘UAE’) and had opened two branches in India to carry out its business activities. The Indian branches constituted taxpayers’ PE in India. As a part of its business activity, taxpayer had advanced ECB loans to Indian customers/clients directly through head office without the involvement Indian branches i.e. the PE of taxpayer in India. Taxpayer offered the interest income earned on ECB loans to tax in India on gross basis, as per Art. 11(2) of India-UAE Double Taxation Avoidance Agreement (‘DTAA’). Thus ECB interest was offered to tax in India at concessional rate of 5 per cent as ‘Income from Other Sources’. However, the taxpayer’s PE in India suffered losses under the head ‘business and profession’. While computing the income in the return of income (‘ROI’), taxpayer set off the business losses of PE against the interest income and on the balance interest income, the taxpayer computed tax at 5 per cent in terms of Art. 11(2) of India-UAE DTAA.

Revenue authorities were of the view that once the interest income is taxable on gross basis in terms of Art. 11(2) of DTAA, no further deduction, including set off of loss against such income is permissible. Revenue authorities relied upon CBDT Circular No. 333 dated 2 April 1982 to emphasize that where the DTAA provides for a particular mode of computation of income, the same has to be followed irrespective of the provisions in ITA. Thus, stating that once the taxpayer had chosen to be governed by DTAA, it cannot again go back to the provisions of ITA for computation of income, the Revenue Authorities observed since the DTAA does not provide for set off of loss, the taxpayer could not claim such benefit. The Dispute Resolution Panel (‘DRP’) authority in principle agreed with the view expressed by the Revenue authority.

Taxpayers’ main contention was that the word “gross” used in Art. 11(2) of India-UAE DTAA only refers to the amount without claiming deduction towards expenses and hence set off for PE losses against the gross interest income from ECB loan was permissible in law. Mumbai ITAT while rendering the decision in favour of taxpayer has made following important observations:

Interest income earned from ECB loans is taxable under the head ‘income from other sources
Taxability of interest income must be determined in terms of the domestic law of the source country. Only after the income is computed in terms of domestic law, then one must again revert to DTAA provisions for applicable tax rate on such income.
Inter-head set-off of losses is permissible under relevant provisions of ITA, except in case of capital gains.
Art. 11(2) of the India-UAE DTAA itself provides for computation and taxability of income in terms of the provisions of ITA. Therefore, it cannot be said that the taxpayer cannot adopt hybrid approach and claim inter-head set off of loss. Thus, taxpayer can claim set off current year business loss of PE against the interest income, since the DTAA itself provides for taxability of income in terms of domestic law provisions.
In the absence of any definition of word “gross” either in the DTAA or ITA, a reference to the meaning ascribed in commentary to OECD Model Tax Convention 2017 can be made. As per para 7.1 of the Commentary on Art. 11(2), gross amount of interest means the amount regardless of expenses incurred to earn such interest. Accordingly, denying the benefit of set off on the ground that Art. 11(2)(a) provides for “gross” interest is not correct since the term “gross” here means interest without claiming deduction towards any expenditure.

2. Delhi ITAT holds marketing support services alone don’t create PE in India

In the instant case, the taxpayer was a USA-based entity engaged in the business of providing software-based information security solution to various customers in India and around the globe. The software is sold through distributors/resellers in India and taxpayer has a subsidiary in India which provides Information technology, IT support, sales support and marketing services.

The receipts of the taxpayer from India were claimed as business income and treated as exempt as per the provisions of India-USA DTAA, in the absence of a PE of the taxpayer in India. Revenue authority alleged that the Indian subsidiary constituted a Dependent Agent PE (‘DAPE’) of the taxpayer in India, since the Indian subsidiary provides sales/marketing support for securing of orders for selling/licensing of software products to Indian distributors and the Indian subsidiary was earning its entire income from the taxpayer implying that the Indian subsidiary was economically dependent on the taxpayer. Accordingly, the profit of the DAPE would be profit from distribution of software and commission income for intermediation.

The objections filed by the taxpayer were dismissed by the DRP. Basis perusal of various Reseller Agreements, Delhi ITAT observed that the Indian subsidiary’s role was limited to providing Information technology services, information technology enabled services and marketing support services such as product marketing, undertaking product demos, identification of potential customer leads and providing relevant information to the taxpayer on customer preferences/expectations etc. ITAT held that the taxpayer and the Indian subsidiary apparently transact on a principal-to-principal basis and there is no element of agency involved.

It was observed that when the compensation received by the Indian subsidiary is established for valuable services, then without there being direct evidence by way of an agreement that the contract is one of agency, based on contract orders received by taxpayer, there can be no justification to hold Indian subsidiary to be an agent of the taxpayer. To establish such status of principal and agent, the Revenue authority was under obligation to show by reference to specific clauses of Service Agreement or agreements by reseller/channel partners, that the Indian subsidiary had authority to conclude contracts on behalf of the taxpayer. Thus, ITAT rendered the decision in favour of the taxpayer by holding that there was no DAPE of taxpayer in India.

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