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The Tax Publishers Arbitral award consequent to termination of an EPC contract - Taxability claim of carry forward and set off of losses not claimed on return *Facts:* Assessee a German Company way back in 2012; as part of a consortium partner of Petronet LNG project awarded by Indian Oil Corporation (IOC) had set up a project PE office in India. Subsequently IOC terminated the contract due to which assessee invoked arbitration proceedings and an award of EUR 2 mio. was awarded to the assessee in AY 2018-19. This was held as taxable as per Indo-German DTAA - Article 21 - (Other incomes). The stand of the assessee were, the arbitral proceedings were carried entirely from offshore from Germany with no project PE or any other PE involvement and since income could not be even remotely related to a PE it cannot be taxed in India. The stand of the Revenue was the income arose from the Project its PE then and since the loss of income stood compensated it was taxable. DRP upheld the taxability as other income under the DTAA. The Assessee had claimed its Project PE expenses in earlier years which resulted in accumulated losses. During the asst. year the assessee did not claim the carry forward and set off of these losses and subsequently at assessment stage claimed the carry forward of losses (probably seeing the possibility of set off of the arbitral award). DRP upheld that the AO should verify and grant the carry forward facility, AO nonetheless went against this DRP instruction. On appeal by the assessee to ITAT: *Held:* Against the assessee that the arbitral award was part of the PE/income source from India and the presence of PE in that relevant year is not a sine qua non to claim non-taxability. The carrying of arbitral proceedings from Germany would not take away taxability in India. The income since it arose from the erstwhile PE in lieu of its income is taxable. In favour of the assessee the claim of set off of losses needs to be allowed by the AO no matter if not claimed in the return of income by the assessee. *Ed. Note:* Arbitral award or taxability of any compensation is a vexed issue under Income tax. Reference be made to following decisions. Kettlewell Bullen & Co. Ltd. v. CIT, Calcutta (1964) 53 ITR 261 (SC) : 1964 TaxPub(DT) 0345 (SC) CIT v. Rai Bahadur Jairam Valji (1959) 35 ITR 148 (SC) : 1959 TaxPub(DT) 0085 (SC) CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC) : 2010 TaxPub(DT) 2095 (SC) Avantor Performance Materials India Ltd. v. CIT & Anr. (2016) 383 ITR 685 (HP-HC) : 2016 TaxPub(DT) 0818 (HP-HC) In re Lead Counsel of Qualified Settlement Fund [A.A.R. No. 1060 & 1078 of 2010/AAR dated 12th January 2016] : 2016 TaxPub(DT) 0571 (AAR) In re Aberdeen Claims administration Inc., USA & Aberdeen Asset Management Plc, [UKAAR No. 1364, 1370 & 1433 of 2012 dated 19th January 2016] : 2016 TaxPub(DT) 0569 (AAR) Application No. 1066 of 2011 : 2015 TaxPub(DT) 5260 (AAR) in the case of Satyam Computer Services Ltd., In re rendered on 1st December 2015. Assessee's dichotomous/dual stand - one for non-taxability of arbitral award citing no PE and second one on carry forward of losses arising out of PE also needs to be noted. *Case:*TGE Gas Engineering GMBH v. DCIT 2023 TaxPub(DT) 1690 (Del-Trib)

The Tax Publishers

Arbitral award consequent to termination of an EPC contract - Taxability claim of carry forward and set off of losses not claimed on return

Facts:

Assessee a German Company way back in 2012; as part of a consortium partner of Petronet LNG project awarded by Indian Oil Corporation (IOC) had set up a project PE office in India. Subsequently IOC terminated the contract due to which assessee invoked arbitration proceedings and an award of EUR 2 mio. was awarded to the assessee in AY 2018-19. This was held as taxable as per Indo-German DTAA - Article 21 - (Other incomes). The stand of the assessee were, the arbitral proceedings were carried entirely from offshore from Germany with no project PE or any other PE involvement and since income could not be even remotely related to a PE it cannot be taxed in India. The stand of the Revenue was the income arose from the Project its PE then and since the loss of income stood compensated it was taxable. DRP upheld the taxability as other income under the DTAA.

The Assessee had claimed its Project PE expenses in earlier years which resulted in accumulated losses. During the asst. year the assessee did not claim the carry forward and set off of these losses and subsequently at assessment stage claimed the carry forward of losses (probably seeing the possibility of set off of the arbitral award). DRP upheld that the AO should verify and grant the carry forward facility, AO nonetheless went against this DRP instruction.

On appeal by the assessee to ITAT:

Held:

Against the assessee that the arbitral award was part of the PE/income source from India and the presence of PE in that relevant year is not a sine qua non to claim non-taxability. The carrying of arbitral proceedings from Germany would not take away taxability in India. The income since it arose from the erstwhile PE in lieu of its income is taxable.

In favour of the assessee the claim of set off of losses needs to be allowed by the AO no matter if not claimed in the return of income by the assessee.

Ed. Note: Arbitral award or taxability of any compensation is a vexed issue under Income tax. Reference be made to following decisions.

Kettlewell Bullen & Co. Ltd. v. CIT, Calcutta (1964) 53 ITR 261 (SC) : 1964 TaxPub(DT) 0345 (SC)

CIT v. Rai Bahadur Jairam Valji (1959) 35 ITR 148 (SC) : 1959 TaxPub(DT) 0085 (SC)

CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC) : 2010 TaxPub(DT) 2095 (SC)

Avantor Performance Materials India Ltd. v. CIT & Anr. (2016) 383 ITR 685 (HP-HC) : 2016 TaxPub(DT) 0818 (HP-HC)

In re Lead Counsel of Qualified Settlement Fund [A.A.R. No. 1060 & 1078 of 2010/AAR dated 12th January 2016] : 2016 TaxPub(DT) 0571 (AAR)

In re Aberdeen Claims administration Inc., USA & Aberdeen Asset Management Plc, [UKAAR No. 1364, 1370 & 1433 of 2012 dated 19th January 2016] : 2016 TaxPub(DT) 0569 (AAR)

Application No. 1066 of 2011 : 2015 TaxPub(DT) 5260 (AAR) in the case of Satyam Computer Services Ltd., In re rendered on 1st December 2015.

Assessee's dichotomous/dual stand - one for non-taxability of arbitral award citing no PE and second one on carry forward of losses arising out of PE also needs to be noted.

Case:TGE Gas Engineering GMBH v. DCIT 2023 TaxPub(DT) 1690 (Del-Trib)