2016 (2) TMI 229 - AT - Income Tax

Taxability of contract receipt in India - Held that - There is merit in the submissions of the Ld A.R that the profit attributable to Indian operations should be determined by undertaking FAR analysis. Since the assessee had taken the view that the profit arising from supply of equipments was not taxable in India, it appears that the assessee did not consider it necessary to put up its arguments on the profitability issue. Further, it is stated that the assessee is possessing evidences in support of the expenses claimed by it. Hence, we are of the view that the assessee should be provided with one more opportunity, in the interest of natural justice, to make its submissions before the AO and also to produce evidences. Hence, we are of the view that the issue relating to the attribution and determination of income should be examined afresh at the end of the assessing officer. Accordingly, we set aside the issue relating to determination of income to the file of the AO with the direction to examine the same afresh by duly considering the information and explanations that may be furnished by the assessee. The assessee is also directed to furnish evidences supporting various expenses claimed by it and also make its submissions with regard to the income attributable to the Indian operations.- Decided partly in favour of assessee for statistical purposes.

Issues Involved:

1. Taxability of composite contract receipts in India.
2. Determination of Permanent Establishment (PE) in India.
3. Attribution of profit to Indian operations.
4. Disallowance of expenses due to lack of evidence.

Issue-wise Detailed Analysis:

1. Taxability of Composite Contract Receipts in India:

The primary issue revolves around whether the contract executed by the assessee, an Israel-based company, with Hindustan Petroleum Corporation Limited (HPCL) is a composite contract, thereby making the entire contract receipts taxable in India. The assessee argued that the project consisted of two parts: supply of equipment from Israel and installation of systems in India, claiming that income from the supply of equipment was not taxable in India as both the supply and payment were handled outside India. However, the Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that the contract was a composite contract and could not be split into offshore supply and installation services. The AO/DRP emphasized that the project office in India constituted a Permanent Establishment (PE) and the entire contract receipts were liable for taxation in India.

2. Determination of Permanent Establishment (PE) in India:

The AO/DRP determined that the project office opened by the assessee in India constituted a PE, thus making the profits attributable to Indian operations taxable in India. The assessee contended that the project office was only for coordinating activities carried out by the subcontractor, Honeywell Automation India Ltd (HAIL), and should not be considered a PE. However, the AO/DRP rejected this argument, emphasizing that the entire responsibility for executing the contract was on the assessee, and the subcontracting to HAIL was merely a method of executing the contract.

3. Attribution of Profit to Indian Operations:

The AO applied a profit margin of 17.77% to the contract amount and attributed 75% of this profit to Indian operations, resulting in an addition of Rs. 2,46,68,265/-. The assessee argued that the profit attributable to Indian operations should be computed based on a Functional, Asset, and Risk (FAR) analysis, which indicated a gross profit of 3.90%. The Tribunal agreed with the assessee that the profit attributable to Indian operations should be determined through a FAR analysis and directed the AO to re-examine this issue, allowing the assessee to present its evidence and arguments.

4. Disallowance of Expenses Due to Lack of Evidence:

The AO disallowed several expenses claimed by the assessee, including interest on delayed payment of service tax, professional tax, rates and taxes, and sundry expenses, due to lack of evidence. The assessee contended that it had all the necessary evidence to support these expenses. The Tribunal directed the AO to re-examine the disallowed expenses, providing the assessee an opportunity to furnish the required evidence.

Conclusion:

The Tribunal upheld the AO's decision that the contract was a composite contract and taxable in India. However, it directed the AO to re-examine the issues of profit attribution and expense disallowance, allowing the assessee to present evidence and arguments. The appeal was partly allowed for statistical purposes, and the case was remanded to the AO for fresh examination.

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