INDIA Trends and Developments Contributed by: Mukesh Butani, Seema Kejriwal, Pranoy Goswami and Mansi Mathur, BMR Legal
ing overall losses. This juxtaposition of global losses and local profits has led to considerable litigation. The Delhi High Court in the case of Hyatt International Southwest Asia Ltd. v Addi - tional Director of Income Tax (ITA 216/2020 & others) addressed this conundrum. The Court ruled that Article 7 of the tax treaty clarifies that the taxability of a PE’s income is unrelated to the overall operations of the enterprise. Article 7 emphasises a separate entity approach for determining profits attributable to a PE. Further, they concluded that Article 7(1) and Article 7(2) collectively indicate that global profit or loss is irrelevant for profit allocation to a PE. Notably, accepting the taxpayer’s contentions could have resulted in PEs being taxed even when incur - ring losses in the source state, provided they maintained global profits, contrary to Article 7 and tax commentaries emphasising the distinct nature of PEs. This judgment signifies a shift in the legal paradigm, capturing MNEs that previ - ously avoided tax liability due to group losses. Progress Rail Locomotive Inc [2024] 163 tax - mann.com 52 (Delhi) is another paramount case, which reiterates the trite law that the mere pres - ence of a subsidiary of a foreign entity would not amount to a PE. The primary deciding factor is whether the conditions under the relevant treaty are satisfied. Augmenting the holding-subsidi - ary’s relation, the court observed that it is rea - sonable that the parent entity would deploy rep - resentatives on the Board of the wholly owned subsidiary. Additionally, it is prudent that both the entities would function in a collaborative fashion; however, that does not infer the exist - ence of a PE when the activities do not amount to a significant portion of the parent company’s core business activities.
Option to file cross-objections Another avenue introduced to create uncertain - ty for taxpayers is the powers given to the tax administration to file cross-objections against the findings of the Dispute Resolution Panel (DRP). The DRP was an optional process intro - duced to prevent the appellate system from getting clogged with transfer pricing appeals, and to reduce instances of raising high-pitched demands on taxpayers pursuant to audits. Orders passed by the DRP have to be manda - torily factored in by the officer before passing the final order. The taxpayer is at liberty to appeal the order before the tribunal. However, now the tax office has been given the option to file cross- objections against such an order. This could virtually lead to relief given by the DRP being challenged by the tax office and is completely contrary to the intent of introducing the DRP. Advance Pricing Agreement (APA) The APA programme was introduced in India in 2012 with effect from 1 July 2012. India’s Cen - tral Board of Direct Taxes (CBDT) released its Annual APA Report for financial year (FY) 2023– 24 in November 2024. The CBDT entered into 641 APAs until March 2024. This year, the IRA signed the highest number of APAs adding up to signing a total of 125 APAs. The IRA also signed the highest number of Bilateral APAs (BAPAs) in any financial year to date, with the signing on 39 BAPAs. The highest number of APAs in FY 2023–24 have been signed in the information technology sector (49), followed by services (13) and pharmaceuticals (5). India’s leading treaty partners for APA signing in the same year were the USA (43), the UK (7), Germany (5) and Sin - gapore (6). Though the APA programme has been success - ful in enabling a positive economic environment for multinationals doing business in India, the
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