2023 (4) TMI 1040 - AT - Income Tax

Tribunal overturns assessment order, directs reassessment on various issues

The Tribunal set aside the assessment order that assessed total income at Rs. 27,89,21,250 against nil income declared by the assessee. The Tribunal found ... Taxability of receipts from offshore supplies and onshore services - Apportionment of 60% receipt from offshore supply contract towards supply of equipments and balance amount towards FTS - attribution of profit as global accounts - DRP has directed the Assessing Officer to apportion 50% of the said amount to the assessee and which shall be attributed to the PE of the assessee - HELD THAT:- DRP has completely misconceived the facts, accordingly, decided the objections of the assessee with improper application of mind to the facts and materials on record. One more factor which needs deliberation is, while disposing of the objections of the assessee, learned DRP had specifically directed the AO to consider the global gross profit figure and attribute 25% of such profit to the PE in India. Though, the global accounts of the assessee are very much available with the Assessing Officer, however, while finalizing the assessment in pursuance to the directions of learned DRP, the Assessing Officer has not consider the global profit and straightway attributed 25% of Rs.54.22 crores to the PE. Thus due to factual inconsistencies and non-consideration of facts on record by learned DRP, the impugned assessment order deserves to be set aside. Restore the matter back to the Assessing Officer for deciding the issues relating to taxability of receipts from offshore supplies and onshore services afresh by properly considering the facts brought on record. We further direct the Assessing Officer to decide the issue of attribution of profit to PE by taking note of the profit rate as per the global accounts, keeping in view the ratio laid down in the decisions referred to earlier in the order - Appeal is allowed for statistical purposes. Issues Involved:1. Justification of assessing the total income at Rs. 27,89,21,250 against nil income shown in the return.2. Entitlement to benefit of CBDT circular no. 07/2016.3. Classification of three contracts as a single composite contract.4. Responsibility for offshore supplies and onshore services.5. Existence of a permanent establishment (PE) in India under Article 5 of the DTAA between India and China.6. Existence of a PE in India under Article 5(1) and 5(2) of the DTAA.7. Existence of a PE in India under Article 5(5) of the DTAA.8. DRP's direction to find out global revenue and gross profit from offshore supplies.9. Attribution of 25% of the profit from offshore supplies to the PE in India.10. Attribution of 50% of onshore services receipts to the PE in India.11. Justification of the entire offshore receipts being considered as profit from offshore supplies.12. Justification of the profit from onshore services receipts held attributable to the PE.13. Initiation of penalty proceedings under Section 274 read with Section 270A.14. Additional grounds related to cash system of accounting, receipt of income, and remand for proper computation.Detailed Analysis:1. Justification of Assessing Total Income:The assessee contested the assessment order which assessed the total income at Rs. 27,89,21,250 against the nil income declared. The Tribunal considered the assessee's arguments and found that the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) had not properly appreciated the facts, leading to an erroneous assessment.2. Entitlement to Benefit of CBDT Circular No. 07/2016:The assessee argued that it met all conditions of the CBDT circular and was entitled to its benefits. However, the AO/DRP denied this benefit. The Tribunal noted that the factual matrix was not properly considered and directed a fresh examination.3. Classification of Three Contracts:The AO/DRP treated the three contracts (offshore supply, onshore services, and maintenance) as a single composite contract. The assessee argued that these were independent contracts executed by different parties. The Tribunal found merit in the assessee's submission and directed a reassessment considering the separate nature of the contracts.4. Responsibility for Offshore Supplies and Onshore Services:The AO/DRP held the assessee responsible for both offshore supplies and onshore services. The assessee contended that it was only responsible for offshore supplies, while the Indian partner, SPL, handled onshore services. The Tribunal directed the AO to re-examine this division of responsibilities.5. Existence of Permanent Establishment (PE) under Article 5:The AO/DRP concluded that the assessee had a PE in India under Article 5 of the DTAA between India and China. The Tribunal found that this conclusion was based on a misapprehension of facts and directed a fresh examination.6. Existence of PE under Article 5(1) and 5(2):The AO/DRP held that the assessee had a fixed place PE or installation PE under Article 5(1) and 5(2) of the DTAA. The Tribunal noted that the facts were not properly considered and directed a reassessment.7. Existence of PE under Article 5(5):The AO/DRP held that the assessee had an agency PE under Article 5(5) of the DTAA. The Tribunal directed a fresh examination of this issue, considering the factual inconsistencies.8. DRP's Direction on Global Revenue and Gross Profit:The DRP directed the AO to determine the global revenue and gross profit from offshore supplies and apply the gross profit rate to the supplies to India. The Tribunal found that the AO did not properly follow this direction and ordered a reassessment.9. Attribution of 25% Profit from Offshore Supplies:The AO/DRP attributed 25% of the profit from offshore supplies to the PE in India. The Tribunal found that this attribution was not based on proper factual consideration and directed a fresh examination.10. Attribution of 50% Onshore Services Receipts:The AO/DRP attributed 50% of the onshore services receipts to the PE in India. The Tribunal noted that the Indian partner, SPL, had already paid taxes on these receipts and directed a reassessment.11. Entire Offshore Receipts as Profit:The AO/DRP held that the entire offshore receipts were profit from offshore supplies without considering any expenses. The Tribunal directed a fresh examination of this issue.12. Profit from Onshore Services Receipts:The AO/DRP held that the profit from onshore services receipts was attributable to the PE without considering any expenses. The Tribunal directed a reassessment.13. Penalty Proceedings:The AO initiated penalty proceedings under Section 274 read with Section 270A. The Tribunal's decision on the reassessment would impact the penalty proceedings.14. Additional Grounds:The Tribunal considered additional grounds related to the cash system of accounting, the receipt of income, and the need for a remand to determine proper computation. The Tribunal directed the AO to reassess these issues.Conclusion:The Tribunal set aside the impugned assessment order and restored the matter to the AO for a fresh adjudication, considering the facts and legal principles properly. The AO was directed to provide a reasonable opportunity of being heard to the assessee before deciding the appeal. The appeal was allowed for statistical purposes.