PE loss set-off against royalty and FTS income upheld where no treaty bar or separate entity treatment was shown.

A foreign company's Permanent Establishment losses were considered capable of being set off against royalty and fees for technical services income earned by its Head Office under the Income-tax Act and the India-Thailand DTAA, because the Revenue could not justify splitting the assessee into two separate entities for this purpose. The assessee was assessed under a single PAN, prior regular assessments had accepted the same set-off treatment, and the statutory computation and set-off provisions continued to apply. As no treaty bar to such set-off was shown, the disallowance was held unsustainable.

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Issues: Whether the losses of the Permanent Establishment could be set off against royalty and fees for technical services income earned by the Head Office of the same foreign company under the Income-tax Act, 1961 and the India-Thailand DTAA.

Analysis: The appeals turned on a single substantive question, namely whether the Revenue could segregate the assessee into two entities for the purpose of denying set-off of losses. The assessee had a single PAN and its income had consistently been assessed in that status in earlier years, where the set-off of losses against royalty and FTS income had been accepted in regular assessments. It was also noted that the provisions relating to computation of income, including the set-off mechanism under the Income-tax Act, continued to apply to the assessee, and nothing in the DTAA was shown to bar set-off of PE losses against income earned by the Head Office. The prior assessments and the statutory framework were treated as supporting the assessee's position.

Conclusion: The disallowance of set-off was unsustainable and the issue was decided in favour of the assessee.

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