2025 (7) TMI 1301 - AT - Income Tax

PE losses can be set off against Head Office income as single entity under one PAN

The ITAT Delhi dismissed revenue appeals challenging the disallowance of set-off between PE losses and HO income. The case involved an assessee operating ... Disallowance of set off current years and brought forward losses against income earned by assessee through its HO - disallowance of set-off of losses of Permanent Establishment (PE) with the Royalty and FTS earned by the Head Office (HO) HELD THAT:- Assessee has a single PAN Number, i.e. AABCI2013D and the Ld. AO’s contention of segregating the company into two entitles, thereby disallowing the set off of losses, is incorrect and is not according to law. Appeals of the appellant/revenue are dismissed. ISSUES: Whether losses incurred by a Permanent Establishment (PE) can be set off against income earned by the Head Office (HO) under the Income-Tax Act, 1961 and the India-Thailand Double Taxation Avoidance Agreement (DTAA).Whether the principle of res judicata applies to assessment years under the Income-Tax Act, 1961.Whether the ownership and activity tests under Article 7 and Article 12 of the India-Thailand DTAA preclude set off of losses of PE with income earned by HO when PE has no role in generating such income.Whether prior acceptance by Assessing Officers of the set off of losses against income in earlier assessment years estops the Revenue from disallowing such set off in subsequent years. RULINGS / HOLDINGS: The Court held that there is 'no provision under the DTAA for disallowing set off of losses of PE with income earned by HO' and that the appellant, having a single PAN and filing returns accordingly, cannot be segregated into two separate entities for the purpose of disallowing set off of losses.The principle of res judicata is not applicable as 'every year is treated as separate in Income Tax Act, 1961,' but prior consistent acceptance of set off by Assessing Officers is a relevant factor in determining the correctness of disallowance.The Court rejected the argument that the PE's lack of ownership of the trademark or non-involvement in technical services income precludes set off, noting that the 'income producing activities should be connected with PE not only economically but also in substance' and found no basis to disallow set off on this ground.The Court upheld the decision of the Commissioner of Income Tax (Appeals) that the AO's attempt to treat the PE and HO as separate entities for set off purposes was 'incorrect and is not according to law.' RATIONALE: The Court applied provisions of the Income-Tax Act, 1961, particularly sections 70-80 relating to set off and carry forward of losses, and the India-Thailand DTAA, specifically Articles 7 and 12, which treat PE and HO as separate entities but do not provide for disallowance of set off of losses of PE with HO income.The Court relied on the consistent treatment of the appellant under a single PAN across multiple assessment years where set off was allowed, emphasizing the principle of consistency and settled position in tax assessments.The Court distinguished the facts from precedents cited by the AO, noting that those decisions were silent on the issue of set off of current or brought forward losses against income earned by HO.The Court acknowledged that while res judicata does not apply across different assessment years, the settled position in prior years is a relevant consideration for the current dispute.