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TMI Blog2023 (3) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuance of the direction of Ld.DRP. The AO failed to take note of the fact that the assessee had raised its claim before the Ld.DRP. Therefore, the AO was under legal obligation to comply with the direction of higher authority. We therefore, considering the totality of the facts, direct the Assessing Authority to allow set off of the losses as claimed by the assessee before the Ld.DRP. Thus, Ground No.2 raised by the assessee is allowed in terms indicated herein above. - ITA No.1958/Del/2022 - - - Dated:- 9-3-2023 - Shri Narendra Kumar Billaiya, Accountant Member And Shri Kul Bharat, Judicial Member For the Appellant : Shri S.K.Aggarwal, CA For the Respondent : Shri Gangadhar Panda, CIT DR ORDER PER KUL BHARAT, JM : The present appeal filed by the assessee for the assessment year 2018- 19 is directed against the order of Ld. CIT(A), International taxation 3(1)(1), Delhi passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( the Act ) dated 28.07.2022. The assessee has raised following grounds of appeal:- Ground No.1: Addition to the total income of Rs. 16,13,20,000 in respect of amount received for Arbitration settlement from Indian Oi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed its return of income, declaring NIL income for AY 2018-19. The case was taken up for scrutiny assessment. The assessee was incorporated in Germany and is a tax resident therein. The assessee had a Project office in India during the year under consideration. The office was set up in 2012 when the assessee had entered into an EPC contract with Petronet LNG. The losses have been carried forward year after year. During the year under consideration, the assessee had received an arbitration settlement payment of Euro 2.0 Million from Indian Oil Tanking Pvt.Ltd. on account of breach of contract by its client. The assessee has not offered such amount to tax in India. Further, the assessee has claimed carry forward of losses amounting to Rs.9,80,71,711/-. The Assessing Officer ( AO ) therefore, treating the settlement amount of Rs.16,13,20,000/- as taxable income in India. Further, the AO made disallowance of Rs.9,80,71,711/- and proposed to assess total income at Rs.16,13,20,000/- after disallowing the expenses. The assessee filed objection against such addition. Ld. Dispute Resolution Panel ( DRP ) however, held that settlement amount would be subjected to tax in India and regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr. No. Particulars Amount 1 Addition of settlement amount received from Indian Oil Infrastructure Energy Services Ltd ('IOT') under the head 'Income from Other Sources' under Article 21 of the India-Germany tax treaty treating It as effectively connected to the PE. Rs. 16,13,20,000 2 Disallowance of claim of brought forward loss and current year expenses Rs. 9,80,71,711 4. Proceedings before Hon'ble Dispute Resolution Panel - 1, Delhi ( DRP ): The appellant filed application before the Hon'ble DRP against the abovementioned draft assessment order and the Hon'ble DRP issued directions vide order dated June 23, 2022 (refer page no 76 - 87 of Paper Book for Copy of directions). Further, regarding the objection of the appellant on the issue pertaining to 'disallowance of brought forward loss and current year expenses', the Hon'ble DRP allowed the ground as under: The AO has held the Project Office as constituting a PE in India in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper 11 th January 2011 Consortium awarded a contract by PLL for Engineering, Procurement, Construction and commissioning ( EPCC Contract') of Top Side facilities for stand by Jetty at Dahe LNG Termina Refer pages 118 - 291 of Paper 2012 Appellant established a Project Office ('PO') in India in for execution of said Contract. 9 th July2012 EPCC Contract terminated by PLL without making any payment to the consortium. Refer pages 292- 302 of Paper 14 th January 2013 Consortium invoked arbitration mechanism with PLL. 2 nd Feb 2016 During the pendency of arbitration proceedings, IOT approached TGE to settle the dispute with PLL. Accordingly, a Memorandum of Understanding ('MOU') was signed between TGE and IOT to jointly approach PLL for settlement Refer pages 303 - 305 of Paper 30 th April 2016 Arbitration hearings concluded. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tlement reached between TGE-IOT and PLL. In light of above, a separate MOU has been entered between TGE and IOT under which the said arbitral payment has been made, to which PLL is not a party (refer pages 303 - 305 of the Paper Book). Pursuant to the above MOU, an independent invoice has been raised by the appellant on IOT having no connection with the EPCC contract (refer page 315 of the Paper Book). Thus, the arbitration settlement receipt is not connected with the PO of the Appellant, and the arbitration/ settlement discussion was carried out directly by TGE with no involvement of PO (which was responsible for only executing the EPCC contract with PLL). The payment is towards the settlement of dispute (in lieu of consortium agreement entered between the Appellant and IOT to make good all the losses incurred due to irregularities by IOT to fulfill the contract with PLL) and not towards provision of any work service by the Appellant. It has been specifically submitted before the Ld AO that no work has been undertaken/executed in the relevant year by the Appellant vide its submission for hearing dated 11th Feb 2021 in response to query no 5 of notice d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is in the nature of something more than the mere possession by the PE of property or right but equal to or a little less than the legal ownership of such property or right. But in no case the remote connection between the PE and property or right can be categorized as effectively connected . Refer pages 500- 557 of the Paper / Book for a copy of judgement EPCOS AG (2014) 43 taxman.com 65 (Pune Trib.) an Assessee having no PE at all, or having PE but no income attributable to PE will not be liable to tax in India Refer pages 558 564 of the Paper Book for a copy of judgement Ishikawajma-Harima Heavy Industries Ltd. (2007) 158 Taxman 259 (SC) The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the instant case, the permanent establishment's non-involvement in transaction in question excludes it from being a part of the cause of the income itself, and thus there is no business connection. Refer pages 565- 594 of the Paper Book for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 2021. Further, as called upon, income tax return and audited balance sheet of the PO was also duly filed before the Ld AO during the course of assessment proceedings. The Hon'ble DRP remanded the matter back to the Ld AO with respect to verification of the expenses claimed from the additional evidences filed by the appellant. Relevant extract of DRP directions are reproduced as under: 3.2 The submissions have been explained. There is no dispute that expenses have been claimed by the project office in the returns filed for preceding assessment years based on audited financial statements and allowed as such under section 143(1) of the Act for those years. As stated earlier, the additional evidence containing details of expenses claimed in each of the financial years from 2011-12 to 2017- 18 in the form of ledgers and sample supporting vouchers for disallowed claim of loss of INR 9,80,71,711 was forwarded to the AO for examination vide ORP letter dated 08.02.20 22. However, no report was received from the AD. Under paragraph 2 of Article 24 (Non-discrimination) of the India- Germany DTAA. 2. The taxation of a permanent establishment which an enterprise of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being set off from the assessed income in the year under consideration . 8.2 Key contentions of the appellant The appellant had submitted that the claim of expenses during each of the financial year concerned i.e. FY 2011-12 to FY 2017-18 has been made basis the financial statements of the PO of Appellant which have been duly audited. This itself establishes the authenticity of the claim of Appellant. Further, the Appellant has also submitted the detail of expenses claimed in each of the prior financial years i.e. FY 2011-12 to FY 2017-18 alongwith their ledgers and sample supporting vouchers. Thus, it is only on administrative grounds that the claim has been disallowance which is against the legal substance. Reliance is placed on the following case laws: Case Law citation Held Reference M/s Mistral Solutions (p.) Ltd. v. DCIT [(2021) 123 taxmann.com 125 (Bangalore - Trib.)] Facts: Assessee company filed its return and declared ' ii' business Income Subsequently, assessee filed rectification application before Assessing Officer seekin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame in the return of income. Refer pages 619-628 of the Paper Book for a copy of judgement TRC Engineering India Pvt. Ltd v. ITO [TS-596- ITAT- 2020(Bang) ] ITAT holds when certain exemptions or deductions are not claimed in return of income, the assessee may make a claim through a letter before the authorities as ruled out by SC in NTPC Ltd.: ITAT Bang Refer pages 629 -637 of the Paper Book for a copy of judgement. ACIT v. Mangaiam Timber Products Ltd [2017] 82 taxmann.com 62 (Cuttack - Trib.) ITAT has held that where assessee in return of income mentioned appropriate amount of carry forward of losses, but amount of brought forward losses could not be mentioned in appropriate column due to technical error, application for rectification to allow such loss should be entertained. Refer pages 638 - 643 of the Paper Book for a copy of judgement. In view of the detailed factual and legal submissions, it is most respectfully prayed before your Honors that the objection of the appellant be allowed, and relief granted accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, the assessee was engaged in the project only through its PE in India. In view of the complete involvement of the PE as above, the settlement amount, arising out of the MOU consequent upon project termination is also effectively connected to the PE. The said sum falls within the Scope of Article 21 (2) of the DTAA and will be taxable in India under Article 7 of the DTAA. The AO shall compute the income accordingly as provided under Article 7 of the DTAA. Ground 1 is disposed of as above. 8. We do not see any infirmity into the order of Ld.DRP as admittedly the settlement amount is related to project office of the assessee company. Therefore, the submission of the assessee is that it has no connection with the project office in India is misplaced and contrary to the records. We therefore, do not find any merit in the Ground No.1 raised by the assessee, the same is hereby dismissed. 9. Now, coming to Ground No.2 raised by the assessee in respect of disallowance of claim of brought forward business loss of Rs.9,80,71,711/-. 10. Ld. Counsel for the assessee submitted that in pursuance to the direction of Ld.DRP, the AO did not allow set off of loss of earlier years amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018. x. As per Article 21 of India-Germany DTAA, the income of a non-resident under the head Other Sources is taxable in India only if the said income is effectively connected with PE of the non-resident, otherwise income would only be taxable in Germany. The fixed base in the form of Project Office of the assessee had no role to play in the receipt of arbitration settlement amount. The Project Office was incorporated by assessee for execution of original EPCC contract which was later terminated by Petronet LNG by issuing a contract termination letter dated 09.07.2012. A separate settlement agreement was entered into between Petronet LNG, the assessee and IOT which states that arbitration settlement is independent of the EPC contract entered into by assessee with Petro net LNG. Clause 'H' of recitals under settlement agreement specifically mentions independence of the settlement payment. Petronet LNG has no role in the payment made by IOT and it is not in behalf of Petronet LNG. xi. The project office set up for contract with Petro net LNG has no role in the payment made by IOT. The payment is toward settlement of disputes in lieu of Consortium Agreement entered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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