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TMI Blog2012 (6) TMI 687X X X X Extracts X X X X X X X X Extracts X X X X ..... in 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 the data on an average for three years which was necessary looking to the nature of the functions of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils 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 of offshore supply of equipment (including spare parts, tools and tackles) outside India; and (ii) Rs. 459,33,77,323 and USD 1,62, 75,326 for local supplies, design, enginee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.8% 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 outside India; * * Invoices were also raised directly from China to the Indian buyer; and * * The consideration for such offshore supply was also received outside India. 6. The assessee also contended that in view of Hon'ble Supreme Court's judgment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar 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 inland transportation and insurance, his corresponding revenue receivable on this account is only Rs. 23.93 crores. The Assessing Officer, therefore, was of the view that "the amount included in the on shore supply and services component for rendering services in the nature of trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer on the ground that whereas sale of equipment was finalized before the stage at which PE came into existence, the offshore supplies are a continuous process in the present case and the PE is fully involved in this process. but then there is a school of thought that the said d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the implementation of the contract. Reading parts of the contract as imposing distinct obligations may not be the proper way to understand a composite contract especially for installation and commissioning and delivery of a project or a system. 8. What was the purpose for which the tender was invited by B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 Contract)" A materially identical clause also appears in letter dated 27th July 2004 issued by the West Bengal Power Corporation Limited, a copy of which is placed at pages 99 to 110 of the paper book (relevant portion at page 102). While these clauses undoubtedly give an indication that 'the offshore supplies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 view that the core dispute before us is not of the arm's length price adjustment but 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. No doubt, this adjustment in the value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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