TGE Gas Engineering GmbH Vs DCIT (ITAT Delhi)
ITAT Delhi held that the amount of received in the arbitration settlement is related to project office of the assessee company in India. Accordingly, the same is taxable in India.
Facts- 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/-. 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 regarding carry forward all the losses, the AO was directed to verify the claim of the additional evidence in terms of section 144C (13) of the Act and accordingly, as per DTAA and Income Tax Act. However, the AO in respect of this, recorded that upon verification, it 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/-.
Aggrieved against the order of Ld.CIT(A), the assessee is in appeal before this Tribunal.
Conclusion- The amount received in the arbitration settlement from Indian Oil Infrastructure & Energy Services Ltd. falls within the scope of Article 21(2) of India-Germany DTAA and will be taxable in India under Article 7 of the DTAA.
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.
FULL TEXT OF THE ORDER OF ITAT DELHI
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 Oil Infrastructure & Energy Services Ltd (‘IOT’).
1.1. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in making an addition in respect of amount received for Arbitration settlement amounting to Rs.16,13,20,000 from Indian Oil Infrastructure & 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 circumstances of the case and in law, the Hon’ble DRP principally allowed the claim and directed the Ld. AO to verify the details of expenses claimed as brought forward losses. Ld. AO in spite of being satisfied on verification, failed to allow the set off on the ground that the Appellant has not mentioned the amount in the income tax return form. The Ld. AO grossly erred in not following the above directions in spirit and rather disallowing the brought forward loss only on technical grounds, disregarding the legal substance.
General
3. On facts and in law, the Ld. AO erred in initiating penalty proceedings u/s 270A of the Act for under-reported income due to misreporting thereof.”
The appellant prays for leave to add, alter, rescind from or withdraw any of the above grounds of appeal at or before the time of hearing of the appeal.”
2. Facts giving rise to the present appeal are that the assessee company 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 regarding carry forward all the losses, the AO was directed to verify the claim of the additional evidence in terms of section 144C (13) of the Act and accordingly, as per DTAA and Income Tax Act. However, the AO in respect of this, recorded that upon verification, it 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 (‘EPC’) assistance, or executes the same on turnkey basis as an EPC contractor. It also provides commissioning assistance and hands over the same to client for further operation. TGE has a wholly owned subsidiary in India named TGE Gas Engineering Private Limited.
2. Return of income: The appellant electronically filed its return of income u/s 139(1) of the Income Tax Act (‘the Act’) for AY 2018-19 on September 07, 2018 vide e-filing acknowledgement number 286346921070918, declaring loss of Rs. 3,77,110. Refer page no 168 of Paper Book.
3. Draft assessment order u/s 143(3) r.w.s 144C of the Act: The Deputy Commissioner of Income Tax, Circle International Tax 3(1)(1), Delhi (‘Ld. AO’) issued draft assessment order u/s 143(3) r.w.s 144C of the Act vide dated September 28, 2021 (refer page no. 69- 75 of Paper Book for copy of draft assessment order), wherein the following additions/disallowances have been made:
