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Dongfang Electric Corporation Versus Deputy Commissioner of Income Tax, International Taxation-1 (1) , Kolkata

2017 (2) TMI 1318 - ITAT KOLKATA

TPA - computation of ALP - proof of reference to the TPO u/s 92CA - approval from competent authority - assessment barred by limitation - Held that:- If the Assessing Officer considers it necessary to do so, he may refer the computation of the ALP, in relation to the said international transaction, u/s 92CA of the Act, to the TPO, after obtaining approval from the Commissioner or from the Principal Commissioner. - What has to be referred by the Assessing Officer is the computation of ALP in .....

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on was identified by the Assessing Officer and referred to the TPO after taking approval of the DIT (International Taxation). The assessee’s case is that there is no international transaction on the facts of his case. This aspect should have been adjudicated and approval taken from the appropriate authority. Thus, the mandate of the Section has not been followed by the Assessing Officer. Hence we have no other alternative but to hold that the reference to the TPO, u/s 92CA of the Act is bad in l .....

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war Rao, AR For The Revenue : Shri G. Mallikarjuna, CIT, DR ORDER Per J. Sudhakar Reddy :- The assessee has filed this appeal directed against the order of the Assessing Officer, passed u/S 143(3) r.w.s. 153(1) & 144C(13) of the Income Tax Act, 1961 (the Act ). The revenue has filed a cross-appeal, challenging the directions of the Dispute Resolution Panel ( DRP ). 2. The facts of the case are brought out by the Assessing Officer from para 1 to para 6 of his order, which is extracted for rea .....

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nery, electrical machinery, electronic equipment and related projects etc.' The assessee has its sufficient presence in India, in order to carry on its business in India, through the project office referred to as "Dongfang Electric Corporation Kolkata Project Office". Admittedly, since the year 2004 i.e. on October 1, 2004, this Kolkata Project Office has served as the Permanent Establishment (PE) in India in the context of taxation under the Indian Income-tax Act, l96l and the Ind .....

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Each contract was divided into two distinctly separate parts, the details of which are as under: DPL : (a) Contract No. Sg TPP/1/SgMP-I Supply)/03/2004 dated August 26, 2004 for supply of equipment and materials of Main Plant Turnkey Package (sgMP-I) Units 1 & 2 (2X300 MW) alongwith some common facilities and (b) Letter of Award (LOA) dated July 27, 2004 issued by WBPDCL for supply of equipment and materials of Main Plant Turnkey Package (SgMP-I) Units 1 & 2 (2X300 MW) alongwith some co .....

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PL in respect of the aforesaid activities will be as under: * USD 22,20,56,503 on account of offshore supply of equipment (including spare parts, tools and tackles) outside India and * IMR 4,59,33,77,323 and USD 1,62,75,326 for local suppliers, design, engineering and construction fabrication, erection, installation, testing and commissioning of thermal power unit in India. WBPDCL : (e) Contract No. DPL/Unit-7/DMP-1(supply)/2004-05/001 for supply of plant and equipment of thermal power plant alo .....

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on account of offshore supply of equipment (including spare parts, tools and tackles) outside India and * INR 2,40,91,28,459 and USD 1,06,82,305 for local suppliers, design, engineering and construction fabrication, erection, installation, testing and commissioning of thermal power plant in India. In both the cases, the original tender was for setting up of turnkey thermal power projects. The entire scope of work was split up in to two contracts on mutual arrangement. However, a cross-fall brea .....

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is not taxable in India both under the Domestic Law as well under the Indo-China DTAA and hence should not be subjected to tax deduction at source and (ii) Local supply and services portion should be subjected to tax deduction of source at Nil rate since the company expected to incur substantial loss on such services. Section 44BBB of the Act will be applicable to the company s case and company will opt for taxation on net income basis under sub-section (2) of the said section which requires mai .....

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for the purpose of determination of rate at which tax was required to be deducted at source. Accordingly, rate of TDS was determined at 41.8% (the rate prescribed in the Finance Act plus surcharge & cess as applicable) of 2.5% or @ 1.045%. * Local supply and services: A sum equivalent to 10% of gross receipts under this contract(s) was deemed to be income for the purpose of determination of rate of tax which was required to be deducted at source. Accordingly, rate of TDS was determined of 41 .....

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raph No. 8, which is the last paragraph of the order u/s 264 contains the summary which is identical in both the order. The summary is reproduced below for ready reference: To sum up a) Offshore Supply- 1. Profit from offshore supply of equipment/machinery is deemed to accrue or arise to the petitioner under Indian income tax Act, as it has arisen to the petitioner through or from business connection in India. 2. Only such part of profit as is reasonably attributable to the operation, relating o .....

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o the operation relating offshore supply is carried out by the PE in India is taxable in India. There would be no deduction of tax in respect of receipts from offshore supply, but the petitioner shall maintain a separate account of receipt and expenditure in respect of operation relating to offshore supply contract carried out by the PE in India (with proper documentation and supporting evidence), the profit, from which shall be clubbed with the profits from local supply and services portion and .....

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considered necessary to do so, because there may be some profit attributable to offshore supply which can only be determined after regular assessment. 3. The assessee has filed his return of income electronically on 30/09/2011, declaring -Nil- income. The assessee has not offered to tax any income on off-shore supplies on the ground that no income accrues or arises in India. It offered to tax revenue from on-shore supply of services on percentage completion method as laid down in AS-7 of The In .....

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this final assessment order, in accordance with the directions of the DRP determining the total income of the assessee at ₹ 5,51,46,673/-, interalia considering the amount as the profit of the assessee from the project operations, on 30/12/2015. 3.1. Aggrieved the assessee is in appeal before us on the following grounds:- 1. On the facts and in the circumstances of the case, the DRP and consequentially the impugned order erred in rejecting the Appellant's claim that the reference made .....

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ns conferred in law and consequently the resultant demand is invalid and unenforceable in law. 3. On the facts and in the circumstances of the case, the DRP grossly erred in mechanically relying on the TPO order for AY 2011-12 without any independent application of mind and erred in upholding draft assessment order and transfer pricing order for AY2011-12 leading to the impugned order. 4a. On the facts and in the circumstances of the case, the DRP completely misinterpreted the directions of cour .....

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tition of the very same grounds for reaching same conclusions as in earlier years has led to serious miscarriage of justice and in a way made mockery of directions from Higher Courts in earlier years to carry out 'de novo assessment considering all aspects'. 5. On the facts and in the circumstances of the case, DRP erred in not considering the fact that the TPO has chosen to selectively ignore critical facts or consciously chosen to apply irrelevant provisions to reach predetermined conc .....

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y presumptions on facts and law. 8. On the facts and in the circumstances of the case and in law, the AO has erred in law and on the facts of the case in making reference under section 92CA of the Act to the TPO on erroneous assumption that: (i) the Project office and the Head Office in China are Associated Enterprise; (ii) domestic activities carried out by the Project Office are international transactions within the meaning of section 928 of the Act; and (iii)the project office is a sub-contra .....

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ent between India and China read with Article 5 thereof. 10. Without prejudice to the above grounds, DRP erred in routinely upholding the FAR analysis and transfer pricing adjustment made by the TPO. 11. Without prejudice to the above grounds, the adjustment of ₹ 55,146,673 made by the AO/TPO/ DRP vide impugned order is bad in law and on the facts and circumstances of the case as the same has been made: (i) By applying Transactional Net Margin Method and rejecting Comparable Uncontrolled P .....

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oss on the said project; (vi) By incorrectly computing the operating revenue and operating expense of the Project Office for AY 2011-12; (vii) By not taking into consideration the fact that while computing operating expense of the Project Office, the sub-contractor and supply expenses has already been considered by the TPO while computing the operating margin of the Project Office in Financial Year ('FY') 2009-10 and considering the same again while computing the operating margin of the .....

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t provided the company with the copies of bid documents of BHEL obtained from DPL and WBPDCL and other details obtained from BHEL and other parties. 13. Without prejudice to the above grounds, TPO's order giving effect to DRP directions is in explicit contradiction to said directions of DRP. 14. On the facts and in the circumstances of the case, the DRP/ AO did not consider the fact that interest under section 2348 is not applicable in the case of DEC basis various judicial pronouncements. 1 .....

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ances of the case, the AO in the impugned order has erred in levying interest under section 2348 and 234D of the Act of ₹ 9,521,808 and ₹ 720,121 respectively. 18. On the facts and in the circumstances of the case, the AO in the impugned order has erred in adding back the TDS credit of ₹ 3,451,340 claimed by the appellant. 19. On the facts and circumstances of the case and in law, the AO has erred in initiating penalty proceedings under sections 271 (1 )(c) of the Act. 20. The .....

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as that of the taxpayer. 2) The Department craves leave to add or alter, amend and modify, substantiate, delete and/or revise the Ground of Appeal on or before the final hearing. 4. The ld. Counsel for the assessee Shri Nageswar Rao, submitted that there is no valid reference by the Assessing Officer to the TPO as required by law and hence, the order of the TPO is of no consequence and consequently the assessment is barred by limitation as the Assessing Officer is not entitled to an extended tim .....

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red by limitation. On merits, the contentions of the assessee is that CUP method is the Most Appropriate Method (MAM), and that the Assessing Officer has erred in adopting TNMM method. Detailed arguments were made in support of the contentions. Alternatively, he made arguments on the exclusions/inclusions of certain such comparables. We do not repeat all these submissions in details as we would first take up the preliminary issue of limitation for consideration. 4.1. The ld. D/R, on the other ha .....

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e Act, it was submitted that only M/s Dongfang Electric, Kolkata, Project office was referred as all the transactions done by it are international transactions. He vehemently contended that, there is no requirement in law that international transactions have to be mentioned by the Assessing Officer. He filed written submissions in support of the contention that, M/s. Dongfang Electric, Kolkata, project office in this case has to be considered as an Associate Enterprise of the parent company loca .....

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and what has to be referred to by the Assessing Officer to the TPO is only an international transaction, for determination of ALP. Referring to the letter dt. 14/03/2014, he submitted that this is not a valid reference by the Assessing Officer to the TPO and it is a communication by an officer in the office of the DDIT(IT)-11, Kolkata, to the TPO-1, Kolkata. He submitted that no letter, whatsoever, written by the Assessing Officer to the TPO, referring the international transactions for determi .....

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papers on record, orders of the authorities below and case-law cited, we hold as follows:- 6.1. Though the TPO stated that a reference u/s 92CA(1) of the Act, was received in the case of the assessee, for Assessment Year 2011-12, from the Assessing Officer for the determination of ALP for its international transaction. No specific letter/ communications referring the international transaction, by the Assessing Officer to the TPO, could be produced before us. The letter dt. 14/03/2014, relied upo .....

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mmissioner or] Commissioner, refer the computation of the arm's length price in relation to the said international transaction [or specified domestic transaction] under section 92C to the Transfer Pricing Officer. (Emphasis ours) 6.1.2. A plain reading of the same demonstrates that, if the Assessing Officer considers it necessary to do so, he may refer the computation of the ALP, in relation to the said international transaction, u/s 92CA of the Act, to the TPO, after obtaining approval from .....

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