2019 (5) TMI 2018 - AT - Income Tax

Computation of income attributable to the activities of the LO in India - determination of gross profit rate of 2.75% - HELD THAT - Undisputedly initially assessee has sought relief from CIT (A) by applying the agreed formula for AYs 1998-99 to 2004-05 by following the rule of consistency. It is also not in dispute that during the appellate proceedings assessee raised additional grounds which were admitted. Once the Gross profit rate declared by the assessee has been allowed and accepted by the Department in the proceeding and succeeding year(s) then there is no jurisdiction either to increase or decrease the Gross profit rate declared by the assessee in the year under consideration that such Gross profit rate was not justified.Assessing Office is directed to apply profit rate of 10% on the total sales made to DMRC and attribute 50% of such profit to the appellant. CIT (A) has merely decided the issue pertaining to applicability of correct gross profit rate by applying the rule of consistency. CIT (A) has also decided the applicability of gross profit rate of 10% pertaining to DMRC project but has not decided the issue of exclusion from turnover. CIT (A) in order to test the applicability of gross profit rate of 10% has merely relied upon the order of AY 2006-07. We are of the considered view that since the assessee has set up a new case by raising additional grounds by departing from the rule of consistency all the grounds were required to be decided by the CIT (A) on merits. However at the same time we are of the considered view that since the assessee has raised many of the new grounds first time before the CIT (A) qua which no material was there before the AO at the time of framing assessment it would be in the interest of justice to remand the case back to AO to decide afresh after giving an opportunity of being heard to the assessee.

Summary

Issues Involved:

1. Principle of Consistency
2. Inclusion of Purchases in Turnover
3. Permanent Establishment (PE) and Attribution of Income
4. Gross Profit Rate and Attribution Rate
5. Deduction of Expenses
6. Indian Subsidiary as PE
7. Double Taxation of Income
8. Classification of Contract as 'Works' or 'Sales'

Detailed Analysis:

1. Principle of Consistency:

The appellant argued that the Commissioner of Income-tax (Appeals) [CIT(A)] erred by dismissing additional grounds of appeal on the basis of the principle of consistency. The appellant contended that the principle of consistency should not be applied selectively to certain streams of income while ignoring others. The Tribunal noted that the CIT(A) had summarily rejected the claims without examining the merits, relying solely on past settlements between the appellant and the Revenue for assessment years (AYs) 1998-99 to 2004-05. The Tribunal emphasized that when new grounds are admitted, they should be decided on their merits rather than solely on the principle of consistency.

2. Inclusion of Purchases in Turnover:

The appellant challenged the inclusion of purchases from India in the turnover for computing income attributable to the Liaison Office (LO) activities, arguing that the Income Tax Act, 1961, and the tax treaty between India and Japan exempt such purchases from being deemed to accrue in India. The Tribunal noted that the CIT(A) did not address this issue on its merits and remanded it back to the Assessing Officer (AO) for reconsideration.

3. Permanent Establishment (PE) and Attribution of Income:

The appellant contended that the LO, which handled only specific divisions, should not have its income attributed to sales made by other divisions of the parent company. Additionally, the appellant argued that the Indian subsidiary should not be considered a PE. The Tribunal highlighted that the CIT(A) failed to address these issues comprehensively and remanded them for fresh consideration by the AO.

4. Gross Profit Rate and Attribution Rate:

The appellant disputed the application of a 5% gross profit rate and a 100% attribution rate for the Project Office (PO) activities, as opposed to the previously agreed 2.75% and 50%, respectively. The CIT(A) had applied a 10% gross profit rate for DMRC sales without addressing the exclusion from turnover. The Tribunal found that the CIT(A) had not adequately addressed these issues and remanded them for further examination.

5. Deduction of Expenses:

The appellant argued that expenses related to the LO operations should be fully deductible, rather than limited to 50%. The Tribunal noted that this issue was not adequately addressed by the CIT(A) and required reconsideration by the AO.

6. Indian Subsidiary as PE:

The appellant contended that the Indian subsidiary did not constitute a PE and that sales made on a principal-to-principal basis should be excluded from turnover. The Tribunal observed that the CIT(A) did not fully consider these arguments and remanded the issue for further analysis.

7. Double Taxation of Income:

The appellant raised concerns about double taxation, particularly regarding DMRC sales and the inclusion of certain receipts already taxed as fees for technical services. The Tribunal acknowledged that the CIT(A) did not address these concerns adequately and remanded the issue for reconsideration by the AO.

8. Classification of Contract as 'Works' or 'Sales':

The appellant challenged the classification of the RS1 contract as a 'Works' contract rather than a 'Sales' contract. The Tribunal noted that this issue was not adequately addressed by the CIT(A) and required further examination.

Conclusion:

The Tribunal concluded that the CIT(A) failed to address several issues on their merits, relying instead on the principle of consistency without considering the appellant's new grounds. Consequently, the Tribunal remanded the case back to the AO for a fresh decision on all issues, ensuring that the appellant is given an opportunity to be heard. The appeals for AYs 2005-06, 2006-07, 2007-08, and 2008-09 were allowed for statistical purposes, with instructions for the AO to reconsider the issues comprehensively.