2023 (2) TMI 1321 - AT - Income Tax

Computation of income arose to the assessee under the contract - Determination of income from the composite contract taxable in India or not? - Whether the contract was a single composite contract or separate contracts? - HELD THAT - All the activities of the assessee from engineering stage to supply erection, installation, commissioning and completion are inextricably linked and hence, the turnkey contract is a single composite contract between Ford India and Durr Systems GmbH (assessee). Considering the submissions of the assessee that the profit rate was determined by applying adhoc mark-up rate and the down payment invoices were considered as supplies which lead to double taxation and the plea that the income should have been computed on mercantile basis, the bench directed lower authorities to re-determine the computations. Upon perusal of impugned order, it could be seen that the assessee has miserably failed to provide the basic information as to invoices raised by it under all the three categories despite the averment before the Tribunal that computations were erroneous. The complete reconciliation of invoices raised by it under all the heads vis- -vis payments received by it and the quantum of income offered by it over various years has neither been tabulated nor been quantified at any stage of proceedings. Instead, the assessee has, merely raked up the issue on merits, which already stood adjudicated by the Tribunal. Double taxation of income - No separate books are being maintained for Indian operations and therefore, the method of accounting would lose relevance in such a case. Per query from the bench, Ld. AR has failed to provide any such information or computations before us. In such an eventuality, lower authorities would be left with no option but to determine the profits as per material available on record, which they have correctly done. AR has pleaded for another opportunity to provide the complete details as well as computations to the lower authorities - Accepting the same, we direct Ld. AO / TPO to provide another opportunity of hearing to the assessee to place before it the complete details of invoices raised by it, in all the heads, under the contract and income offered by it over various years. The computation of income which arose to the assessee under the contract shall also be quantified. The complete onus, in this regard, would be on assessee. We order so. For the said limited purpose only, the issue of computation of income stand restored back to the file of Ld. AO / TPO. The appeal stands partly allowed for statistical purposes.

Summary

Issues Involved:
1. Whether the income from the composite contract is taxable in India.
2. Whether the contract was a single composite contract or separate contracts.
3. Correct computation of income and allegations of double taxation.
4. Adherence to the Tribunal's directions in set-aside proceedings.

Detailed Analysis:

1. Taxability of Income from Composite Contract:
The main issue was whether the income from the composite contract was taxable in India. The assessee, a wholly-owned subsidiary of a German company, operated in two divisions and executed turnkey projects for automobile manufacturers, including Ford India. The contract was split into three parts: offshore supply, supervision charges, and installation and commissioning. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that all activities were inextricably linked, forming a single composite contract. The Tribunal upheld this view, stating that the contract was a single composite turnkey contract, and the income accrued in India, making it taxable in India.

2. Single Composite Contract:
The Tribunal examined various documents, including the Request for Quotation (RFQ), proposals, purchase orders, and project reports, concluding that the contract was a single composite contract. The split was at the instance of Durr Germany, and the risks and responsibilities vested with Durr Germany until the successful execution of the project. The Tribunal referenced a similar case (Ansaldo Energia SPA v ITAT, Chennai) to support its findings, emphasizing that all activities from engineering to commissioning were organically linked. Thus, the income from the contract was to be assessed as a single composite contract.

3. Correct Computation of Income and Double Taxation Allegations:
The Tribunal addressed the assessee's plea regarding errors in income computation, including double taxation and the method of accounting. The AO had applied an ad-hoc markup rate, leading to alleged double taxation. The Tribunal remitted the issue back to the AO/TPO for re-examination, directing the assessee to provide detailed information to support its claims. However, during set-aside proceedings, the assessee failed to furnish necessary details, leading the AO to retain the original computations. The Tribunal reiterated the need for the assessee to provide complete details of invoices and income computations, restoring the issue back to the AO/TPO for limited re-computation purposes.

4. Adherence to Tribunal's Directions in Set-Aside Proceedings:
In the set-aside proceedings, the AO noted the assessee's failure to maintain separate books for the Indian permanent establishment (PE) and its inability to reconcile income details. Despite multiple opportunities, the assessee did not provide convincing evidence of double taxation or accurate income computations. The Tribunal found that the assessee did not comply with its earlier directions and failed to demonstrate the alleged errors. Consequently, the Tribunal directed the AO/TPO to provide another opportunity for the assessee to submit detailed information and reconcile income computations, emphasizing that the onus was on the assessee.

Assessment Year 2013-14:
The Tribunal's findings for AY 2014-15 were applied mutatis mutandis to AY 2013-14, as the nature of contracts and business operations remained the same. The AO treated the contracts as a single composite contract, and the DRP endorsed this view. The Tribunal restored the issue of income computation back to the AO/TPO, directing the assessee to provide requisite details.

Conclusion:
Both appeals were partly allowed for statistical purposes, with the Tribunal directing the AO/TPO to re-compute the income based on detailed information to be provided by the assessee. The Tribunal emphasized the need for the assessee to comply with its directions and provide comprehensive details for accurate income computation.