TaxTMI 
TaxTMI 
2023 (3) TMI 557
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....ructure & Energy Services Ltd ('IOT') for AY 2018-19 as income from other sources under Article 21(2) of the India-Germany DTAA. 1.2. On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the Ld. AO have erred in alleging that the settlement amount received by the appellant as income effectively connected with its fixed base in India. They have failed to appreciate that the said income is not effectively connected with its fixed base or fixed place PE (in form of its Project Office in India) because the arbitration! settlement discussion was carried out directly by TGE with no involvement of PO. Ground No.2: Disallowance of claim of brought forward business loss of Rs. 9,80,71,711 2.1. Without prejudice, On the facts and in the circumstances of the case and in law, the Ld. AO has erred in making a disallowance of brought forward business losses of Rs. 9,80,71,711 from earlier assessment years, stating that appellant has failed to mention the same in its income tax return form, despite satisfactorily substantiating the losses with documentary evidence by the applicant. 2.2. On the facts and in the circumstan....
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....t was found that the assessee had not claimed the brought forward losses in the Income tax return for the year under consideration. As the assessee did not claim the same in its return of income, the same was not being given set off from the assessed income in the year under consideration. Thus, the AO assessed the income at Rs.16,09,42,890/-. 3. Aggrieved against the order of Ld.CIT(A), the assessee is in appeal before this Tribunal. 4. Apropos to grounds of appeal raised by the assessee, Ld. Counsel for the assessee vehemently argued that the authorities below were not justified in disallowing the claim of carry forward vis-à-vis taxing the amount related to arbitration settlement. He further reiterated the submissions as made in the synopsis. For the sake of clarity, the relevant contents of the synopsis are reproduced as under:- "May it please Your Honours: 1. Background of the appellant: It is a company incorporated in Germany and is a tax resident therein. It is engaged in the business of cryogenic Liquid Gas Storages & Terminals for LNG& Petrochemicals. It secures projects from various clients, provides Engineering- procurement-construction ('E....
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.... 24(2) of the OTAA, the project office being the PE shall be allowed deduction of expenses and carry forward of the same. The AO shall verify the expenses claimed from the said additional evidence in terms of Section 144C(13) of the Act and allow accordingly as per DTAA and IT Act. Ground 2 is disposed of as above. " 5. Final Assessment order u/s 143(3) r.w.s 144C of the Act: Pursuant to directions of the Hon'ble DRP, the Ld. AO passed the final assessment order dated July 28,2022 u/s 143(3) r.w.s. 144C of the Act. The Ld. AO has retained he disallowances and additions made in the draft assessment order and determined taxable income of the applicant for AY 2018-19 as follows (refer page no. 88 - 97 of Paper Book for copy of final assessment order): Particulars Amount in Rs. Total income as per return of income (3,77,110) Addition: Arbitration receipt 16,13,20,000 Total assessed income 16,09,42,890 6. Appeal before Hon'ble ITAT: Against the above order, the appellant has filed an appeal before your honors. Synopsis of arguments 7. Ground No.1: Addition in respect of amount received for Arbitration settlement amounti....
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....ft assessment order proposed to make addition to the total income of the Appellant in respect of the arbitration settlement receipt Refer pages 69- 75 of Paper Book. 7.1.2. Facts in appellant's case * The Appellant incorporated the PO for execution of original EPCC contract which was later terminated by PLL by issuing a contract termination letter dated 9th July 2012 (refer pages 292- 302 of the Paper Book). * The separate tripartite Settlement agreement entered between PLL, the Appellant and IOT on July 13, 2017 explicitly states that arbitration settlement is independent of the EPCC contract entered into by Appellant with PLL. Clause H of recitals under settlement agreement specifically mentions independence of the settlement payment. Therefore, it states that PLL has no role in the payment made by IOT and is not on behalf of PLL. Therefore, it demonstrates that PO (set-up for contract with PLL) has no role in arbitral payment made by IOT. Relevant extract is reproduced as under (refer pages 306 - 314 of the Paper Book): "TGE-IOT hereby represent that they have entered into a separate agreement amongst themselves for a payment to be made....
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.... right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. At the outset, the appellant submits that the addition proposed by the Ld. AO is on the ground that the receipt for arbitration settlement is effectively connected with Appellant's fixed base and thus chargeable to tax in India. However, the appellant would like to humbly submit that the fixed base (in form of PO) of the appellant has no role to play in the receipt of arbitration settlement amount and thus the argument of Ld AO that the receipt is effectively connected with the PE is not tenable in law. Reliance placed on the following judicial precedents for the same: Case Law citation Held Reference M/s JC Bamford Excavators Limited [ITA No. 540/Del/2011] "The phrase' effectively connected with' has neither been defined under the Act nor the DT AA. In such a situation, it becomes crucial to understand the import of such an expression. In our considered opinion, the words effectively connected' are akin to 'real....
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....of PO. 8. Ground No.2: Disallowance of claim of brought forward loss of Rs. 9,80,71,711 8.1. Background The appellant has claimed total carry forward loss of Rs. 9,80,71,711 in income tax return for AY 2018-19 on account of following: AY Amount of Loss (in Rs.) 2012-l3 2,15,58,022 2013-14 86,53,400 2014-15 1,39,53,999 2015-16 2,35,36,520 2016-17 1,59,00,335 2017-18 1,40,92,324 2018-19 3,77,111 Total 9,80,71,711 The appellant had been asked by Ld AO office to explain the nature of losses carried forward along with the break-up thereof vide notice u/s 142(1) of the Act dated 26 February 2021. The appellant has duly furnished details thereof vide response filed for hearing dated 04 March 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: ....
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....of the assessment order of Ld. AO are reproduced as under: "As per Hon'ble DRP directions, the expenses claimed by the assessee in each of the financial years i.e. FY 2011-12 to FY 2012-13 were verified from the additional evidence as submitted by the assessee during Hon'ble DRP proceedings and found to be satisfactory as per provisions of the Act. Further, from the information available on ITD database, it is noticed that the assessee has filed its return of income for the abovementioned years within stipulated time as prescribed u/s 139(1) of the Act. But upon verification, it is found that assessee has not claimed the brought forward losses in the income tax return for the year under consideration. As the assessee has not itself claimed the same in its return of income, the same is not 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 ....
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....o submitted the details and evidences of the loss during assessment proceedings. ITAT observed that if any loss was actually suffered by assessee or any deduction was legally allowable for which all details were available before AO at the time of the assessment, then such loss or deduction had to be allowed by AO. ITAT held, "the Assessing Officer is duty bound to compute the total income of the assessee as per provisions of law and it cannot be appreciated that the Assessing Officer will not allow the benefit of loss or deduction to the assessee merely on the ground that the assessee has not claimed the same 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 appr....
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....e independent of PE. 2.10 The assessee's reliance on the Hon'ble, Supreme Court's ruling in Ishikawajima Harima case is misplaced since the issue under consideration in that case was in relation to the rendering of offshore services rendered outside India due to which it was held that the PE did not have any role to play in the earning of the said income. In the present case, it is not in dispute that the assessee had a PE in India during the period. As discussed above, 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 co....
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....rbitration tribunal accepted the settlement reached between the parties and issued order terminating the arbitration proceedings. Thereafter the assessee raised an independent invoice dated 17.07.2017 on IOT for settlement of arbitration for an amount of Euro 2 million under the settlement agreement in view of liability clause (Article 12) under Consortium Agreement dated 22.12.2010 entered between the assessee and IOT. The said arbitration settlement payment of Euro 2 million was received by the assessee from IOT in January 2018. 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 assess....