TaxTMI 
TaxTMI 
2012 (6) TMI 687
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....e and Head Office in China are associated enterprises within the meanings of Section 92A of the Act read with Section 92 F(iii) and 92 F (iiia) of the Act. (ii) domestic activities carried out by the Project Office are international transactions within the meaning of Section 92 B of the Act. 2. The learned AO/TPO/DRP have erred in law and on facts and circumstances of the case in making an adjustment of Rs. 91,23,91,093 by applying the Transfer Pricing provisions and thereby rejecting the book results of the project office which are arrived at in consonance with Article 7(1) of the Double Taxation Avoidance Agreement between India and China, read with Article 5 thereof. 3. Without prejudice to the above grounds, the adjustment of Rs. 92,23,91,013 made by the AO/TPO/DRP is bad in law on the facts of the case as the same has been made: (i) by taking into consideration comparables having percentage of related party transactions; (ii) without granting benefit of deduction under proviso to Section 92 C of the Act; (iii) without making adjustments necessary to account for differences in comparables; (iv) by failing to take th....
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....etting up Unit 7 (of 300 MW) for Durgapur Project Power Station at Durgapur, West Bengal. Each of these contracts was divided into two parts, details of which are as follows: WBPDCL (i) Contract No. SgTPP/1/(SgMP-1 Supply)/03/2004 dated 26th August 2004 for supply of equipment and materials of main plant turnkey package (SgMP-1) Units 1 and 2 ( 2 X 300 MW) alongwith some common facilities, read with letter of award dated 27th July 2004 issue dby WBPDCL for supply of materials of main plant turnkey package (SgMP-1) Units 1 and 2 ( 2 X 300 MW) alongwith some common facilities; and (ii) Contract No. SgTPP/1/(SgMP-1 Erection)/04/2004 dated 26th August 2004 for erection and services of main plant turnkey package (SgMP-1) Units 1 and 2 ( 2 X 300 MW) alongwith some common facilities, read with letter of award dated 27th July 2004 issue dby WBPDCL for erection and services of main plant turnkey package (SgMP-1) Units 1 and 2 ( 2 X 300 MW) alongwith some common facilities; and As per the terms of the said contracts, the consideration is to be received by the company from WBPDCL in respect of aforesaid activities as under: (i) USD 22,20,56,503 on account o....
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....e deducted @ 1.045% from payments for offshore supplies (income tax plus surcharge @ 41.8% on estimated profits of 2.5% from offshore supplies) and @4.182% from payments for services and local supplies (income tax plus surcharge @ 41.8% on estimated profits of 10% from local supplies and services). However, when assessee carried its grievance against the aforesaid stand of the Assessing Officer, in a revision petition under section 264 of the Act, before the learned Director of Income Tax (International Taxation), his plea was upheld to the extent that offshore supplies were held to be non taxable in India as long as the offshore supplies are found to be unrelated to assessee's PE in India. Accordingly, no taxes were deducted from payments made to the assessee in respect of offshore supplies. The income from offshore supply of equipment by the assessee was also not taken into account, while computing taxable income of the assessee in India, and the reasons in support of this stand were stated to be as follows: • * All operations in connection with the said supply were carried out outside India; • * The property in such goods also passed on to the buyer out....
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....from the beginning and the books of accounts have been prepared on the basis of distorted figures and are, therefore, "totally unreliable". He thus rejected the books of accounts of the assessee and held that it could not be accepted that "any independent enterprise performing similar functions under uncontrolled circumstances would have incurred such huge losses as reflected by the assessee in its return of income". The Assessing Officer took note of assessee's submission that the revenues receivable by the PE in respect of 'onshore supply and services' component of the contract with WBPDCL and DPL consist, inter alia, of the charges for transportation of overseas supply of equipment from Indian port of destination to the project site and inland insurance charges. In effect thus, according to the assessee, the end customers are being separately billed for inland transportation and insurance, which is shown as revenue generated by the PE, and the expenses incurred on the same are being claimed as deduction from income of the PE. However, when Assessing Officer probed the matter, he found that as against the expenses of Rs. 54.56 crores incurred by the assessee upto 31.8.2008 on inl....
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....he Transfer Pricing Officer. The Transfer Pricing Officer determined the arm's length price, on the basis of Cost Plus Method (CPM) of onshore services at Rs. 91,23,91,013, and computed the profit at Rs. 24,12,83,996 as against loss declared by the assessee to the tune of Rs. 67,11,07,016. As regards offshore supplies, the Transfer Pricing Officer distinguished assessee's reliance on Hon'ble Supreme Court's judgment in the case of Ishikawajima Harima Heavy Industries Co Ltd (supra), by referring to Hon'ble Madras High Court's observations in Ansaldo Energia SPA Vs ITAT (310 ITR 237) to the effect that, "in Ishikawajima-Harima Heavy Industries Ltd.'s case (supra), "the permanent establishment's non-involvement in this transaction excludes it from being a part of the cause of the income itself, and thus there is no business connection." This is the reason why the profits of offshore supply was not taxed. This is also clear from what the Supreme Court held in Hyundai Heavy Industries Co. Ltd.'s case (supra) that, "therefore, unless the PE is set up, the question of taxability does not arise - whether the transactions are direct or they are through the PE. In the case of a Turnkey Proj....
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....cts with the WBPDCL and DPL , i.e. 'contract for offshore supplies' as also 'contract for onshore supplies and services', constitute one integrated contract and this splitting of contract is done, as per convenience of the assessee, so as to avoid taxability of assessee's income in India. The Assessing Officer has discussed at length as to how "the contract was..... split into two parts, at the convenience of the foreign contractor and manipulated in such a way that its activities in India will always result in losses". As regards assessee's reliance on Commissioner's revision order holding that no taxes are required to be deducted with respect to the payments for offshore supplies, it is only elementary that the directions issued regarding non deduction of tax at source donot bind the Assessing Officer while completing the assessment of the recipient. Whatever the Commissioner has held applies only with respect to the tax deduction at source requirements and it does not extend to the assessment proceedings. The assessee's basic defence of the assessee then consists of its reliance on Ishikawajima-Harima Heavy Industries Ltd.'s case (supra) decision, which has been rejected on the ....
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....II-01-SC-INTL). In Ishikawajima - Harima Heavy Industries Limited vs. DIT, a two Judge Bench of the Supreme Court held that a contract of this nature was capable of being dissected and it was open to the assessee to raise the contention that parts of the contract should be treated separately for the purpose of deciding whether income from the performance of that part of the contract arose onshore or offshore and that part of the income attributable to offshore transaction cannot be taxed in India. In the Vodefone judgement rendered by three-Judge bench of the Supreme Court it is clearly laid down that "it is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the transaction as a whole and not to adopt a dissecting approach." Thus, the approach adopted in Ishikawajima - Harima Heavy Industries Limited vs. DIT now stands disapproved or overruled, if not expressly, definitely by clear implication. In fact, with great respect, the basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the context of the object sought to be achieved and the purpose sought to be attained by....
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....e qua non that while the assessee submits the bids for different segments (e.g. offshore and onshore in the present case) separately, these bids are considered together, as a single cohesive unit, by the other party, and this fact must be apparent from material on record. On the facts of this particular case, we have also noted that each set of contracts, i.e. offshore supply contract and onshore services and supply contract, has a cross fall breach clause which provides that a breach in one contract will automatically be classified as breach of the other contract. We may, in this regard, refer to the following extracts from letter dated 27th July 2004 written by Durgapore Projects Limited to the assessee company ( copy placed at pages 66 to 90 of the compilation of papers filed by the assessee; @ page 73, "The contract for supply of plant equipment and materials and the contract for erection and services have a cross fall breach clause and breach in one contract will automatically be classified as breach of other contract. Any breach or occurrence shall give DPL a right to terminate any or both of the contracts in the manner of relevant clause of GCC (i.e. General Conditions of Co....
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....priate conclusions, but then this exercise has not been carried out at all by the Assessing Officer or the Dispute Resolution Panel. The Assessing Officer was thus clearly in error in coming to the conclusion that one integrated contract for offshore supplies and onshore activities and supplies was artificially split to avoid taxability of income in India. Even if we take both these contracts together, as the Assessing Officer has canvassed, and if there is no profits earned by the assessee from both the contracts taken together, there cannot be an occasion to tax income from these contracts in India. 13. During the course of hearing before us, extensive arguments were advanced for and against the applicability of transfer pricing provisions on GE- PE transactions and the methodology employed in determination of arm's length provisions in respect of GE- PE transactions. These arguments, however, proceeded on the assumption that we have to adjudicate on the correctness of the arm's length price adjustment made to the value of GE-PE transaction, i.e. onshore activities carried out by the PE on behalf of the GE, on the facts of this case. 14. We are, however, of the considered v....