2023 (7) TMI 982 - AT - Income Tax

Income deemed to accrue or arise in India - profit attributable to the India PE - As argued transaction was effected offshore and the Project Office merely acted for custom clearance - HELD THAT - Though custom clearance of offshore equipment supply was the responsibility of Hitachi Ltd. Indian Project Office, however, all activities in relation to the same are carried out by M/s Mitsui Co. Ltd. and goods are only passed through the Project Offices for the purpose of customs duty compliance in India including payment of customs duty and IGST, which in turn was charged back to Hitachi Ltd. Japan by the Project Office. The activities relating to customs clearance are covered under the scope of work for Onshore portion of the contract. Hence, as per the terms of contract with DFCCIL, the offshore goods supplied from Japan were handed over to M/s Mitsui Co. Ltd. in Japan for transportation and delivery at site. Thus, no activity in respect of offshore portion of the contract is attributable to the PEs of assessee in India. Role of the Project Officer - What was the role of the Project Office for the transaction in question and what is the basis for attributing the profit at 35% to the PE. Moreover, before AO it was stated by the assessee company that the goods were passed through the Project Offices purely for the purpose of customs duty compliances. The lower authorities have not adverted anything on this aspect. As on account of loss no profit could be attributed - As following the binding judgment of CIT (International Taxation) Vs. Nokia Solutions and Net Works OY 2022 (12) TMI 700 - DELHI HIGH COURT we are of the considered view that the authorities below were not justified in attributing the profit to the assessee when there was loss. We, therefore, direct the Assessing Officer to delete the impugned addition - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the assessment order.
2. Computation of business loss.
3. Attribution of income from offshore supply of equipment to the Permanent Establishment (PE) in India.
4. Initiation of penalty proceedings under section 270A of the Income Tax Act, 1961.

Summary:

1. Validity of the Assessment Order:

The assessee contended that the assessment orders dated 20.07.2022 for the assessment years 2018-19 and 2019-20 were "bad in law and void, being contrary to law and principles of natural justice." The Tribunal did not specifically address this issue in isolation, focusing instead on the substantive grounds of appeal.

2. Computation of Business Loss:

The assessee argued that the Assessing Officer (AO) erred in computing the business loss for the years at Rs. 25,68,94,846 and Rs. 90,55,226, respectively, against the returned business loss of Rs. 26,19,37,833 and Rs. 90,55,226. The Tribunal did not delve into the specifics of the business loss computation, as the primary focus was on the attribution of income from offshore supplies.

3. Attribution of Income from Offshore Supply of Equipment to the PE in India:

The core issue was whether the income from offshore supply of equipment was attributable to the assessee's PE in India and thus taxable. The AO and the Dispute Resolution Panel (DRP) attributed 35% of the profit from offshore supplies to the PE in India, citing the global profitability rate of 6.87%. The assessee argued that the offshore supplies were made from Japan, and no part of these activities was carried out in India. The Tribunal noted that the lower authorities did not specify the role of the Project Office in these transactions and failed to provide a basis for the 35% attribution. The Tribunal referenced the Delhi High Court's decision in CIT (International Taxation) Vs. Nokia Solutions and Net Works OY, which held that no profit could be attributed to the PE if the offshore portion of the contract resulted in a loss. Consequently, the Tribunal directed the AO to delete the impugned addition, allowing the assessee's appeals for both years.

4. Initiation of Penalty Proceedings under Section 270A:

The assessee contended that the initiation of penalty proceedings under section 270A was erroneous. The Tribunal did not specifically address this issue, as the primary focus was on the attribution of income from offshore supplies.

Conclusion:

The Tribunal allowed the appeals for both assessment years, directing the AO to delete the additions related to the attribution of income from offshore supplies to the PE in India, following the precedent set by the Delhi High Court in the Nokia Solutions case.