TMI Blog2012 (6) TMI 687X X X X Extracts X X X X X X X X Extracts X X X X ..... of an adjustment to the value assigned to the contract for ‘onshore supplies and services’, which is alleged to have been kept for a lower amount with a view to avoid taxes in the India. Real issue is as to at what value the revenues for onshore supplies and services should be adopted so as to bring out the correct onshore profits. This in turn, proceeds on the assumption that there were profits on offshore supplies which have been outside the ambit of taxation in India. However, in view of the assessee’s claim that there are losses on overall project and that there cannot thus be any advantage by assigning lower value to onshore activities, what really needs to be examined in the first place is the working of overall losses given by the assessee. In case the Assessing Officer has no issues with this computation of overall losses, the very foundation of his action ceases to hold good in law. Hence, the matter is being remitted back to the file of the Assessing Officer for fresh adjudication. - I.T.A. No. 833/Kol/2011 - - - Dated:- 22-6-2012 - Pramod Kumar and Mahavir Singh, JJ. G C Srivastava, alongwith Ashish Agarwal, Arijit Chakraborty and Rohit Bothra for the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to ₹ 88,56,193 as appearing in the profit and loss account of the appellant, although the same had already been considered in applying cost plus method to data of comparable companies. 4. On the facts and circumstances of the case and in law, the AO, based on directions of the DRP, erred in making additions under section 40 A (3) of the Act and section 40(a)(ia) of the Act, while computing the total income for the assessment year under consideration. 5. On the facts and circumstances of the case and in law, the AO, based on directions of the DRP, erred in levying interest under section 234 B and 234 D of the Act. 3. The core issue in this appeal is against Assessing Officer s proceeding on the basis that the revenues of assessee s permanent establishment in India are understated by ₹ 91,23,91,013 which, according to the Assessing Officer, should be treated as part of the onshore services rather than for offshore supplies as claimed by the assessee. Grounds of appeal numbers 1 to 3 deal with the same. We will take up these three grounds together. 4. The relevant material facts are like this. The assessee before us, Dongfang Electric Corporation (DEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon facilities; and (ii) Contract No. DPL/Unit 7/(DMP-1 Services)/2004-05/02 for erection and services of thermal power plant, alongwith some common facilities; and (i) LOA dated July 27,2004 issued by the DPL for supply of plant and equipment and erection and services of thermal power plant, alongwith some common facilities; As per the terms of the said contracts, the consideration is to be received by the company from DPL in respect of aforesaid activities as under: (i) USD 11,40,47,092 on account of offshore supply of equipment (including spare parts, tools and tackles) outside India; and (ii) ₹ 240,91,28,459 and USD 1,06,82,305 for local supplies, design, engineering and construction, fabrication, erection, installation, testing and commissioning of thermal power unit in India. 5. The Assessing Officer further noticed that in both the above cases the original tenders were for setting up of turnkey thermal power projects but entire scope of work was split up in two contracts each as per mutual agreement, even though there was cross-fall breach clause which ensured that performance of entire contract was treated as single point responsibility of DEC, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r erection of power plants and those were divided into separate parts solely to suit the assessee s purpose . He noted that the scope of contract was to design, manufacture, fabricate, conduct shop testing, supply, transport, storage, erection, testing and commissioning of steam generator and auxiliaries, turbine generator and auxiliaries, CW and ACW system, fuel oil pressuring system, compressed air system, transformers, control and instrumentation of the total plant and auxiliary packages, including all civil, structural and architectural work on turnkey basis and the tender was open to any single bidder . He was thus of the view that entire bidding could have been done only by one person but 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 . The Assessing Officer further observed that normally attribution of profits of a permanent establishment, following the force of attraction rule spelt out in Article 7- by the virtue of which profit which may arise directly or indirectly through the activities of the PE are taxable in the source state, and the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not mere sale of equipment. The Assessing Officer was thus of the view that revenue in offshore supply was not only for price of equipment, but also for each and every function performed on the goods sold. The Assessing Officer then proceeded to give his categorical findings in this regard as follows: ..In the course of hearing, invoice for offshore supplies have been obtained from the assessee. It is seen that materials are brought into India in large number of packages. Separate invoices are raised for main plant components and spare parts . From the description of the items mentioned in the invoices, it appeared that several components of the power plant, together with the spares, are brought into India, which are to be inspected, fabricated and tested within the scope of supply contract before their utilization, particularly when items are sent by ship from a distant place. The PE is definitely having a role to play in such activities and should be adequately remunerated for the same. Considering the huge risk involved, prominent presence of the cross-fall breach clause in the contract and with a battery of trained persons at their disposal, it is impossible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE in coordinating the supply and also providing information on actual site based requirements cannot be denied . As PE was not compensated for its services, and in the absence of difficulties in quantifying the reward attributable to PE for such services, the TPO estimated ₹ 30,00,000 as arm s length remuneration for services rendered by the PE in connection with offshore supplies. We need not deal with this adjustment of ₹ 30,00,000 in greater detail, as the Dispute Resolution Panel (DRP) has deleted the same on the ground that this adjustment is not based on any recognized method of determining the arm s length price, and thus not in accordance with the provisions of the transfer pricing legislation. As regards the main adjustment of ₹ 91,23,91,013, assessee s grievance before the DRP was rejected and the action of the Assessing Officer was confirmed in entirety. The Assessing Officer thus proceeded to make the impugned adjustment of ₹ 91,23,91,013 towards arm s length price of onshore services, aggrieved by which the assessee is in appeal before us. 9. We have heard the rival contentions, perused the material on record and duly considered factual mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. .. The object of the contract and the purpose of the contract were the installation and commissioning of a signaling and communication system. The contract provided for the payment for the work in lump and it cast a joint and several liability on the consortium for carrying out the work. A contract has to be read as a whole in the context of the purpose for which it is entered into. A contract for the installation and commissioning of a project like the present one, cannot be split up into separate parts as consisting of independent supply or sale of goods and for installation at the work site, leading to the commissioning and so on. In the case on hand, on a true construction of the contract between the parties, I am clearly of the view that this is a contract, the main purpose, if not the sole purpose of which is installation and commissioning of a signaling and communication system and its delivery to BMRC. In recent rulings in AAR/962/2010 and in AAR/979/2010, this Authority has discussed this aspect and has taken the view that such contracts should be read as a whole in the context of the object sought to be achieved and they cannot be split up into different parts for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent installation and commissioning, divorced from the design and supply of the equipments necessary. Such a contract has necessarily to be read as a whole and is not capable of being split up. On reading the contract in the context of the tender floated and the purpose sought to be achieved, in the light of the arguments raised by learned Senior counsel for the applicant, I am satisfied that the contract involved herein is a composite contract and it cannot be dissected into parts even if a dissecting approach is permissible after the Vodefone decision. Thus, looking at and reading the contract as a whole, I overrule the claim of the applicant that a part of the transaction sould be treated as a contract for offshore supply not liable to be taxed in India. I find that for the purpose of taxation, the contract must be taken as one, for installation and commissioning of a project in India. 11. While one may have legitimate issues as to whether these observations regarding looking at the transactions as a whole and not adopting dissecting approach can indeed be applied in all cases in which separate contracts are entered into for offshore supplies and onshore services, in our con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountry. That would be the situation in which while offshore supplies show unreasonable profits while onshore supplies and services result in unreasonable losses. 12. We have noted that in the present case, however, the assessee has stated that all the activities of the assessee company, i.e. onshore as also offshore, resulted in huge losses due to inordinate delays in the project. The assessee has also filed audited accounts of its Indian projects, including in respect of offshore supplies, which show losses in both segments onshore as also offshore. The Dispute Resolution Panel has taken note of this submission, by observing, at page 8 of the order, that it has been further contended that consolidated financial statements duly certified by the auditors in respect of two power projects undertaken by DEC, China in India for financial year 2006-07 were submitted and it was stated that losses were incurred not only on onshore supplies undertaken in India but also on offshore supplies executed from China , but has not dealt with the same at all. In our considered view, this is a very important aspect of the matter inasmuch as if the assessee has incurred a loss on its entire proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hore profits. As we have noted earlier in our order, this action, in turn, proceeds on the assumption that there were profits on offshore supplies which have been outside the ambit of taxation in India. However, in view of the assessee s claim that there are losses on overall project and that there cannot thus be any advantage by assigning lower value to onshore activities, what really needs to be examined in the first place is the working of overall losses given by the assessee. In case the Assessing Officer has no issues with this computation of overall losses, the very foundation of his action ceases to hold good in law. It is, therefore, necessary that the Assessing Officer deals with this aspect of the matter before proceeding further. 15. The issues regarding applicability and working of transfer pricing mechanism in reallocating the values to onshore and offshore activities are, therefore, academic at this stage. These things will call for adjudication only if the assessee s basic plea regarding overall losses fails the Assessing Officer s examination. 16. In view of the above discussions, and bearing in mind entirety of the case, we remit the issue, regarding adjustme ..... 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