ITAT Upholds Income Tax Addition On Amount Received For Arbitration Settlement

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the income tax addition on the amount received for arbitration settlement from Indian Oil Infrastructure & Energy Services.

The two-member bench of Kul Bharat (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) has observed that the assessee was engaged in the project only through its PE in India. In view of the complete involvement of the PE, the settlement amount arising out of the MOU consequent upon project termination is also effectively connected to the PE. The sum falls within the scope of Article 21(2) of the tax treaty and will be taxable in India under Article 7 of the tax treaty. The AO shall compute the income accordingly, as provided under Article 7 of the tax treaty.

The assessee was incorporated in Germany and is a tax resident in Germany. The assessee had a project office in India. 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. The assessee had received an arbitration settlement payment of Euro 2 million from Indian Oil Tanking Pvt. Ltd. on account of a breach of contract by its client. The assessee has not offered the amount to tax in India.

The assessing officer treated the settlement amount of Rs. 16,13,20,000 as taxable income in India. The AO made a 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 an objection against the addition. The Dispute Resolution Panel held that the settlement amount would be subject to tax in India.

The DRP noted that, under Article 7 of the India-Germany DTAA, expenses incurred for the purposes of the PE's business are allowable as deductions in accordance with the domestic law of the contracting state in which the PE is located. According to Article 24(2) of the DTAA, the project office, which is the PE, shall be allowed the deduction of expenses and carryforward of the same.

The tribunal did not see any infirmity in the order of the DRP as the settlement amount is related to the project office of the assessee company. Therefore, the submission of the assessee that it has no connection with the project office in India is misplaced and contrary to the records.

Case Title: TGE Gas Engineering GmbH Versus DCIT

Citation: ITA No.1958/Del/2022

Date: 09.03.2023

Counsel For Appellant: S.K.Aggarwal

Counsel For Respondent: Gangadhar Panda

Click Here To Read The Order