TaxTMI 
TaxTMI 
2023 (3) TMI 557
X X X X Extracts X X X X
X X X X Extracts X X X X
....-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 circumstances of the case and in law, the Hon'ble DRP principally allowed the claim and dir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar 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 ('EPC') assistance, or executes the same on turnkey basis as an EPC contractor. It also provides commissioning assistance and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 amounting to Rs.16,13,20,000 from Indian Oil Infrastructure & Energy Services Ltd ('IOT') 7.1.1. Background The Appellant submits the chain of events that took place in the below table for your Honour's read....
X X X X Extracts X X X X
X X X X Extracts X X X X
....L 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 by IOT to TGE which is independent from this Agreement and does not have any connection to the settlement 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). * Pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ixed 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 'really connected'. In the context of royalties, it 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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: "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 forw....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(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 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 accordingly. Prayed accordingly." 5. Ld. CIT DR opposed these submissions and supported the orders of the authorities below. He contended that there is no ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 amounting to Rs.9,80,71,711/- on the basis that assessee has not claimed brought forward loss in the Income tax return for the year under consideration. However, before Ld.DRP,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 between the assessee and IOT to make with all the losses incurred due to irregularities by IOT to fulfill contract with Petro net LNG and not towards provision of any work/service by the assessee. xii. ....