Permanent Establishment attribution under DTAA depends on Indian-source profits, not the enterprise's global profit or loss.

Article 7 of the DTAA is analysed as taxing only profits attributable to an Indian Permanent Establishment, which must be treated as a separate and independent enterprise for attribution purposes. The relevant inquiry is the income arising or accruing through the Permanent Establishment in India, not the foreign enterprise's global profit or loss. The commentary rejects any general force of attraction principle and applies the separate enterprise fiction, arm's length approach, and source rule. It also states that Nokia Solutions does not support the view that a global loss prevents attribution to the Permanent Establishment; profits attributable to the Permanent Establishment remain taxable in India.

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Issues: Whether, under Article 7 of the DTAA, attribution of profits to a Permanent Establishment in India depends on the foreign enterprise making a global profit, or whether the Permanent Establishment is to be assessed as a separate and independent taxable unit irrespective of the enterprise's overall profit or loss.

Analysis: Article 7 was read as allocating taxing rights to the source State only in respect of profits attributable to the Permanent Establishment, and paragraph 2 was treated as requiring the Permanent Establishment to be viewed as a distinct and separate enterprise for attribution purposes. The analysis rejected the proposition that the enterprise's global profit or loss controls taxability in India, holding instead that the relevant inquiry is the income arising or accruing in India through the Permanent Establishment. The Court relied on the separate and independent enterprise fiction, the arm's length approach, the source rule, and the rejection of any general force of attraction principle. The earlier decision in Nokia Solutions was held not to support the contrary view that a global loss prevents attribution to the Permanent Establishment.

Conclusion: Attribution of profits to a Permanent Establishment does not depend on the foreign enterprise earning a global profit, and the Permanent Establishment remains independently taxable in India to the extent of profits attributable to it. The answer is against the assessee and in favour of the Revenue.

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