Foreign Company Can Offset PE Losses Against Technical Service Income: ITAT Ruling Explained
When a foreign company has a Permanent Establishment (PE) in India, questions often arise about how its Indian losses and foreign earnings interact under tax laws.
Recently, the Income Tax Appellate Tribunal (ITAT) has ruled that foreign companies can offset losses of their Indian PE against technical service income under Section 71 of the Income Tax Act, 1961.
This decision clears a major doubt for many foreign businesses operating in India.
What Does Section 71 of Income Tax Act Say?
Section 71 allows the adjustment of a loss from one head of income against income from another head in the same assessment year, subject to certain conditions.
Key points:
- Business losses can be set off against income under other heads (like “Income from Other Sources”) unless restricted.
- Losses specifically under “Capital Gains” have stricter set-off rules.
- No set-off is allowed against income taxed at special rates (e.g., lottery winnings).
Case Details: What the ITAT Said
- A foreign company had losses in its Indian PE operations.
- It also earned fees for technical services (FTS) taxed in India.
- The Assessing Officer disallowed the set-off claim.
- On appeal, ITAT ruled in favour of the taxpayer, confirming:
- Losses of the PE are business losses.
- Technical services income is “business income” if connected to PE activities.
- Set-off is allowed under Section 71.
Practical Impact for Foreign Companies
If you are a foreign business with a PE in India:
- PE losses can now cushion your tax liability from technical service fees.
- This helps optimise cash flow and avoids paying high taxes on isolated income streams.
- Proper documentation and PE attribution will be critical to claim benefits smoothly.
| Aspect | Earlier Uncertainty | After ITAT Ruling |
|---|---|---|
| PE Loss Treatment | May not be allowed against FTS income | Allowed if FTS relates to PE |
| Tax Computation | Higher taxable income | Lower taxable income |
| Filing Position | Conservative | Aggressive (with legal backing) |
Conclusion
This ITAT ruling is a major win for foreign companies operating in India through a PE structure. However, the actual benefit depends on smart documentation and careful income classification.