M/S. TBEA SHENYANG TRASFORMER GROPUP COMPANY LIMITED,,VADODARA vs. THE DEPUTY COMMISSIONER OF INCOME TAX, INT. TAX.,, VADODARA

For the purpose of executing above agreements, TBEA had set up a project / branch office in India, which constituted Permanent Establishment ( PE )of the non resident TBEA in India.

The case of the assessee (i.e. project office or Permanent Establishment) (PO/PE)was selected for scrutiny. During the course of which, the Assessing Officer ( AO ) noticed that even though no Form 3CEB was filed by the assesse, it had entered into international transaction with the head office (TBEA) in [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 3 – China by way of reimbursement of expenses amounting to Rs.16,34,71,956/-. Accordingly, reference u/s.92CA(1) of the Act was made by the AO to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) of the international transaction executed between the head office and the project office. The assessee objected to the reference made by the AO to the TPO contending that the transaction between the branch office in India and the head office in China did not qualify as an international transaction between two associate enterprises for the purpose of applying the transfer pricing provision to the same. The objections of the assessee were dismissed holding that the branch office of TBEA in India constituted PE of TBEA and all income attributable to PE was taxable in India in accordance with Section 9 of Income Tax Act r.w.s. Article 7 of the India- China DTAA and that such PE was to be treated as a distinct and separate enterprise wholly independent of its head office as per Article 7 of the India-China DTAA while attributing profits to it. Therefore, the transactions between the PE and the head office in China were to be considered at ALP for determining the taxable profits of the PE in India. The PE and head office, the AO held, accordingly qualified as distinct entities and transactions entered into between them were international transactions which the AO was empowered to refer to the TPO for computation of Arm’s Length Price in terms of the provisions of Section 92CA of the Act. The AO further noted that though reference had been made only with respect to the international transaction of reimbursement of expenses incurred by the head office in China and PE in India for benchmarking, it was open for the TPO to benchmark any other transaction which may come to [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 4 – his notice during the course of TP proceedings in accordance with power conferred upon him by Section 92CA of the Act.

After dismissing the assessee’s preliminary objection to the reference made to the TPO, thus, the TPO noted that all agreements (off-shore supply as well as on-shore service) were entered into by the head office with PGCIL. All the receipts pertaining to the contracts (both offshore supply contract as well as onshore service contract) had also been received by the head office in China from PGCIL. The TPO, therefore, noted that the execution of the onshore service contract or offshore contract supply (either in full or in part) by the project office in India constituted an international transaction vis-à-vis head office in China since the responsibility of carrying out the contract was delegated by the head office in China to the project office in India. He, therefore, proceeded to determine the ALP of so identified international transaction between the project office and the head office in China i.e. TBEA.

The TPO noted that TBEA China had entered into ten contracts for eight different sites in India which are tabulated at page 16 of the TPO’s order passed u/s.92CA(3) of the Act. He also noted that while the offshore contract was to be executed / completed in F.Y. 2010-11, the onshore contract was to be executed in F.Y. 2011-12. The TPO noted that in the return of income filed by the assessee it had claimed income from offshore supply of reactors and equipments as not taxable in India since the title was transferred outside India and the consideration was received outside India. With respect to the income from onshore [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 5 – service activity, the project office recognized revenue and expenditure in relation to work completed under five onshore service contracts during the year and claimed a total loss of Rs.5,23,75,844/- from the said onshore activities. The TPO proceeded to peruse both the offshore and onshore service agreements.

He noted from the onshore service contract, in relation to five contracts executed during the year, that the services agreed to be rendered pertained to transportation of equipment as well as activities related to installation and commissioning of shunt reactors supplied by TBEA China. He noted from the onshore services agreement entered into by TBEA China with PGCIL, that the total value of the contract was Rs.58,07,95,518/-. Perusal of the Profit & Loss Statement of the PE i.e. assessee before us, for the impugned F.Y. revealed that it had incurred loss of Rs.6,39,56,699.72 from the onshore activities carried out. The TPO further noted from the financial statement that the assessee PE had incurred expense by way of job work paid and transportation charges paid which were paid to Indian companies M/s. Techno Electric and Engineering Company Limited and M/s. Cosco Logistics Ltd. He noted that the onshore activities of construction and installation activities and transportation activity had been sub-contracted to them respectively. The sub-contract agreements were noted to be entered into between the head office i.e. M/s. TBEA China and the said Indian Company’s. On analyzing the said two sub-contracts, the TPO noted that with respect to the sub-contract agreement for transportation with M/s. Cosco Logistics Ltd. when compared to the onshore agreement [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 6 – terms relating to the same activity entered into by TBEA with PGCIL the project office ought to have earned gross profit of Rs.5,99,76,050/- from such activity. He noted from the agreement that the entire transportation work was to be completed during the F.Y. 2011-12 pertaining to the impugned assessment year before us i.e. A.Y. 2012-13. As per the agreement, the TPO noted the assessee PE to have earned total revenue of Rs.16.24 Crores and incurred expenses of Rs.10.24 Crores. The accounts of the project office however revealed revenue to have been recognized only to the extent of Rs.12.40 Crores against payment made to M/s. Cosco Logistics Ltd. Rs.11.58 Crores. The TPO, therefore, noted that the project office was not compensated completely with respect to the transportation activity.

With respect to the sub contract entered into with M/s. Techno Electric and Engineering Company Limited, on going through the contract agreement, the TPO noted that the entire installation and civil work had been sub-contracted to M/s. Techno Electric and Engineering Company Limited for an amount of Rs.32.50 Crores and though as per the original agreement the project office was to have earned profit from such activity, it had incurred losses at gross level continuously for successive financial years. In this background, the rate chart for various work related to installation and erection activity including civil work sub contracted was compared with the original agreement between PGCIL and TBEA and glaring differences were noted therein, more particularly the sub contract being noted to have been given at higher rates as compared to the original onshore [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 7 – agreement. The TPO, therefore, noted that the project office was not compensated adequately by TBEA with respect to the transportation activity and the activity of installation and erection including civil work carried out by it.

In this background, the assessee was asked to furnish the detailed project report containing the details of projected revenue and expense from the offshore supply and onshore service agreement, however, no such details were submitted. In view of the same, the AO held that the international transaction of the execution of onshore service contract by the assessee (PE of TBEA) was not at ALP and proceeded to determine the same by applying TNMM as (Most Appropriate Method) MAM adopting average margin OP to OC of comparables identified from database. 13 companies were identified as comparables and their average Profit Level Indicator (PLI) was found to be 7%. Applying the said PLI of 7%, the ALP of the international transaction of sub-contract of onshore service activities by head office in China to the project office in India was computed at Rs.37,05,03,015/-. The revenue as per the books of accounts of the assessee was noted to be Rs.28,23,57,916/- and accordingly an upward adjustment of Rs.8,81,45,099/- was proposed by the TPO to the international transaction of execution of onshore service activities by the project office in India on behalf of the head office in China.

With regard to the offshore supply contract, the TPO disagreed with the assessee that the entire transaction took place outside the country noting that the act of carrying out the [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 8 – execution of the offshore supply contract included presales activity, design and engineering of plant & equipment, manufacturing of plant and equipment, testing of the same and defect liability and functional and equipment performance guarantees. He noted that the presales activity in terms of bidding for the project and initiating the terms of contract and final conclusion of the agreement and also post-sales activities of guarantees and warrantees had happened in India through a fixed place of business of the head office; in the case of pre-sale activities it was identified as the office of one Mr. Jagdish Lal who was noted to have been appointed by TBEA China as its country representative and who had participated in all pre and post bid discussions pertaining to all aspects of both offshore and onshore agreements. The post-sale activities of functional guarantees equipment performance guarantees and defect liabilities were noted to be carried out by the project office of the assessee. The TPO accordingly, finding the pre-sale and post- sale activities of the offshore contract carried out through the PE of TBEA in India, therefore held that profits attributable to the said activities were to be taxed in India. For this purpose, Comparable Uncontrolled Price (CUP) was chosen as the MAM for determining the ALP to be received by the project office in India. Search of comparable was done and one comparable agreement was identified, wherein, it was found that the ALP of the compensation for the work or activities carried out through the project office was 5% of the net sales. The ALP of the international transaction in relation to the offshore activity was accordingly computed by applying the said [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 9 – percentage to the total offshore supply contract value and ALP accordingly determined at Rs.20,69,41,033/-.

Accordingly, total upward adjustment of Rs.29,50,86,132/- was proposed by the TPO to be made to the total income of the assessee, on account of determination of the ALP of international transactions undertaken by the assessee PE with its Head Office, i.e TBEA, China.

The AO passed a draft order in accordance with the adjustment proposed by the TPO as above, against which the assessee raised objections to the DRP (Dispute Resolution Panel) in terms of provision of Section 144 C of the Act and the DRP, after considering the objections of the assessee to the said draft order, dismissed all the objections, confirming the draft order passed by the AO. Accordingly, in the assessment order passed u/s.143(3) r.w.s. 144C of the Act an addition, amounting to Rs.29,50,86,132/-, was made to the income of the assessee on account of upward adjustment made to the international transaction of execution of onshore contract and offshore contract of TBEA by the assessee project office in India.

Aggrieved by the same, the assessee has come up in appeal before us raising the following effective grounds:

During the course of hearing, an argument raised by the assessee, challenging the orders of the authorities below holding that there was an international transaction between the Foreign head office and assessee project office in India, which was amenable for determination of ALP thereof in terms of the [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 11 – provision of Section 92B of the Act, was referred to the Special Bench , constituted for the said purpose, for adjudication. The matter was considered by the Special Bench who vide their order passed in dated 11.11.2024 identified the question referred for their consideration as “whether or not the transactions between an foreign enterprise outside India and its Indian PE can be considered as international transactions for the purpose of Section 92B of the Act, and accordingly can be subjected to the ‘arm’s length price’ adjustment?” and answered the same in the affirmative holding that the transaction between a foreign enterprise and its PE in India can be considered as international transaction and be subjected to ALP adjustment. The relevant para 21 of the order reads as under:

The matter was directed to be placed before the Division Bench to give effect to the direction of this order and accordingly thereafter the appeal was heard.

Taking into consideration the decision of the Special Bench on the question framed before it, and after considering the arguments raised by both the parties before us we shall proceed to adjudicate the grounds raised by the assessee before us.

Having said so, the argument now raised before us by the Ld. Counsel for the assessee was that the Special Bench had not definitely answered the question posed to it in the affirmative and had left the final determination of the question to the Division [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 13 – bench to identify the specific case as per which the assessee could be said to be associated enterprise of its HO, as per section 92A(2) of the Act, to qualify for applicability of TP provisions. The case of the Ld.Counsel for the assessee was that the assessee did not qualify under any of the cases listed in section 92A(2) of the Act.

As is evident from the above, the question before the Special bench was vis-à-vis the applicability of the provisions of transfer pricing to transactions between the foreign head office and its Indian PE. The Special Bench considered the provisions of law in this regard and identifying the parameters which needed to be fulfilled for the applicability of transfer pricing provisions as, the existence of two enterprises which are associated enterprise, the Special Bench rejected the assessee’s contention that the Indian PE did not qualify as a separate enterprise and [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 14 – categorically held the PE to qualify as an enterprise as defined under law. Thereafter, after identifying the head office and the PE as two separate enterprises the Special Bench went on to deal with the aspect of whether they can be said to be associated enterprise as defined u/s.92A of the Act. The bench noted that while Section 92A(1) of the Act provided the basic rule for treating one enterprise as associated enterprise of another, that there has to be participation in any of the three aspects of the other enterprise i.e. management, capital or control, it was however, noted that Section 92A(1) of the Act did not define the expression participation in management, capital or control and noted that the same was illustrated in Section 92A(2) of the Act with several cases of participation in management, capital and control listed therein. The Special bench held that the provisions of Section 92A(1) & (2) of the Act are to be read together to establish the existence of association between the two enterprises. Thereafter, the Special Bench went on to identify the cases listed in Section 92A(2) of the Act applicable to the facts of the issue before it i.e. between head office and its PE and it ruled out the applicability of certain cases while it held other cases to be applicable ,leaving the determination of the exact case applicable in the present case before the Division Bench. Having done so, the Special Bench concluded by holding that the transactions between the foreign enterprise and its PE can be considered as an international transaction and be subject to ALP adjustment.

It is clear from the order of the Special Bench that the question posed to it regarding applicability of transfer pricing [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 15 – provision to transaction between the head office and its PE was answered in the affirmative subject to the identification of the exact case as per which the head office and its PE can be said to be associate enterprise, in terms of the illustrations or cases listed in Section 92A(2) of the Act.

Having said so, we shall now proceed to identify the exact case as illustrated in Section 92A(2) as per which the two enterprises in the present case would qualify associate enterprises. For the said purposes, the conditions specified in Section 92A(2) of the Act are listed herein.

The facts of the present case are that the head office i.e. M/s. TBEA Shenyang Transformer Group Company Ltd., China had bid for certain projects floated by M/s. Power Grid Corporation of India Ltd. which had called for bids for the design, engineering, supply, erection, testing and commissioning of shunt reactors at different sites. TBEA had successfully bid for these projects and had entered into separate agreement for each site; one for offshore of equipments and the other for onshore service including transportation type testing, installation, erection and commissioning in India. For the execution of the above agreement a project office was set up in India which constituted the PE of TBEA in India. The onshore project entirely was executed by the project office while a part of the execution of the offshore project was also attributed to the project office by the TPO.

Coupled with the above is the fact that the assessee undisputedly being the “Permanent Establishment”( PE) of TBEA, which term has been defined by section 92F(iiia) to include a fixed place of business through which the business of the enterprise (TBEA in the case before us) is carried out, undoubtedly there is no separation as such of capital, management or control between TBEA and the assessee its PE, though for purposes of Transfer Pricing it is treated as a separate enterprise. The assessee PE is only a place of business through which the business of TBEA is carried on, leaving no question of entire capital, control and management of the PE resting with its HO, TBEA. There is no doubt at all of the HO, TBEA, being associated enterprise of the assessee.

Ground No.1, 2 & 3 raised by the assessee are accordingly dismissed.

Ground No.4 raised by the assessee relates to the adjustment made to the income earned by the assessee project office from the execution of onshore contract by determining the ALP in terms of provision of Section 92CA of the Act amounting to Rs.8,81,45,009 /-. The ground raised by the assessee reads as under:

It be so held now.”

Briefly stated, the assessee project office was noted to have been delegated execution of the work of the onshore contract entered into by the head office i.e. TBEA China with PGCIL India with all the terms and conditions and consideration for the contract being agreed to between the said two parties. The only role of the project office was pertaining to the execution of the contract. The said transaction was, therefore, treated as international transaction and exercise of determining its ALP was undertaken by the TPO. The TPO noted that there were two major activities to be carried out in lieu of onshore activities i.e. transportation and installation and commissioning of the shunt reactors. He noted the assessee to have completed onshore activity in relation to five sites during the impugned year and he found the assessee to have returned losses from onshore activities. He further noted that both the onshore activities had been further sub-contracted by the head office i.e. TBEA China to Indian entities and the assessee project office had no role to play in the same. He noted that the assessee had incurred losses from the carrying out of the onshore activities. Further on inquiring into the cause of losses, he found that with respect to onshore activity of transportation, the assessee project office had not been completely compensated by the head office. With respect to the civil construction activities of installation and commissioning of shunt reactors, he found that the work had been sub-contracted to Indian sub-contractors at a much higher rate than of originally agreed between head office TBEA China and [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 20 – PGCIL. He also found that there was no one to one correspondence between the Revenue recognized for particular work and expenses incurred for executing such work. Based on the above, he held that the assessee project office had not been adequately and fairly compensated for the onshore activities delegated to it for execution and he went on to determine the ALP of the said activity by applying TNMM. A selection for comparables were done. 13 comparables were selected and using PLI OP/OC 7% was found to be the average mean of the PLI comparables which was applied in the case of the assessee to the total operating cost incurred by it and the ALP of operating income of the assessee was determined at Rs.37,05,03,015/-. Noting the assessee to have recognized revenue in its books of Rs.28,23,57,916/-, on upward adjustment of Rs.8,81,45,099/- was made to the international transaction of execution of onshore services activities by the assessee project office in India on behalf of the head office in China. The same was confirmed by the DRP.

The solitary argument of the Ld. Counsel for the assessee before us was that the CUP method was the most appropriate method to be applied in the present case with the contract entered into for the onshore activities by the head office with PGCIL as the correct external comparables, since, the entire contract was required to be executed by the assessee project office on the same terms and conditions as agreed into between the head office and PGCIL. In this regard, he heavily relied on the decision of the ITAT, Ahmedabad Bench in the case of Assistant Director of Income-tax (International Taxation)-II, Ahmedabad vs. [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 21 – Shandong Tijun Electronic Power Engg. Company Lt., reported in [2018] 93 taxmann.com 273 (Ahmedabad-Trib.). Our attention was invited to para 16 to 19 of the order as under:

Learned CIT(A) further observed that the transfer pricing addition was incorrectly made by selecting functionally incomparable transactions by observing as follows:- “10. I have perused the above submission of the appellant company. The appellant has pointed out various shortcomings in -application of filter while selecting comparable companies and also emphasized that the comparable transactions selected by the AO for benchmarking the deemed international transactions for determining ALP are not comparable uncontrolled transactions in terms of Rule 10B & Rule 10C of the IT Rules r.w Section 92C of the IT Act. Also I have perused the submission filed vide page no 60 to 80 of the Paper Book more particularly detailed information of the said comparables provided vide page nos 81 to 146 of the Paper Book. Further, I have perused the information about 10 comparable companies provided vide above referred submission dated 1st August, 2014. I have found that the comparables selected by the AO are not comparable in view of functional compatibility of the said transactions, absence of segment information for individual line of [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 22 – business in case of those comparables which are engaged in various line of business and generalized filter applied for selection of comparables. Accordingly, I hold that the transfer pricing addition is incorrectly made by selecting functionally incomparable transactions and is therefore deleted.”

In view of the above provisions and examining the facts of the instant appeal, we find that there is no difference in the terms of functions performed, assets employed and risk undertaken, the price charged, incomparable uncontrolled transactions entered in the contracts between the parties APL & JPL to Shandong HO vis-a-vis the contract awarded to Shandong PO by the Shandong HO. Further, it is also not disputed at the end of the Revenue that the price at which the contracts were awarded by APL and JPL- Indian parties – to Shandong HO – Chinese entity – is a same price at which transactions price between Shandong PO, i.e. appellant in India and Shandong HO, a Chinese entity, as agreed upon. When the total value of the contract awarded to the Chinese HO has been offered as gross revenue by the Shandong PO, i.e. foreign entity incorporated in India, [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 23 – then how can there be any shifting of profits. This view further gets fortified in view of the fact that the action of the Assessing Officer in rejecting the books of accounts has already held to be invalid, which therefore, shows that the profits have been rightly shown by the assessee. For the purpose of computing Arm’s Length Price, the basic thing which is to be examined that whether the assessee has shifted the profits to its Associate Enterprises either directly charging less revenue or showing excess cost to reduce the profits, but in the instant case where the total contract terms are similar between the Shandong HO and PO as well as between the Shandong HO and two Indian parties which is the fit comparable uncontrollable transactions and there being no variation in the rates charged as well as the other terms of the agreement, then there remains no room for the Revenue Authorities to make any upward adjustment to make addition in the hands of the assessee. We, therefore, in the given facts and circumstances of the case are of the considered opinion that for the purpose of calculating Arm’s Length Price, Comparable Uncontrollable Price (CUP) method should have been followed by the Assessing Officer to determine the ALP and we further hold that if the CUP method is applied, then no transfer pricing adjustment needs to be made in the given facts and circumstances of the case. We, therefore, find no infirmity in the findings of the learned CIT(a) and we uphold the same. In the result, this issue is also decided against the revenue and in favour of the assessee.”

Ld. DR, on the other hand, vehemently opposed the contention of the Ld. Counsel for the assessee. At the outset, he stated that no ground was raised by the assessee challenging applicability of TNMM method by the AO for determining the ALP for the onshore international transaction. He further contended that the decision of the ITAT, Ahmedabad Bench in the case of Shandong Tijun Electronic Power Engg. Company Ltd. (supra) was distinguishable on facts.

We have heard the rival contentions. The solitary argument of the Ld. Counsel for the assessee before us against the ALP adjustment made to the international transaction of onshore activity carried out by the assessee PE, amounting to Rs.8,81,45,099/-, is only with regard to applicability of the most appropriate method applied for determining the ALP for the transaction. While the AO/TPO had determined the ALP using [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 24 – TNMM method, the contention of the Ld. Counsel for the assessee is that the CUP method was the most appropriate method and the agreement entered into between the head office/ TBEA and PGCIL was to be treated as comparable since the entire onshore agreement between the two non associated entities, i.e TBEA and PGCIL, had been offloaded to the assessee project office for execution purposes on the same terms and conditions as agreed between the head office & PGCIL.

We have considered the facts of the case, the arguments of both the sides, the findings of the authorities below and we do not find any merit in the contention of the Ld.Counsel for the assessee that the CUP was the most appropriate method for determining the ALP of the international Transaction of onshore activity carried out by the assessee PE, and that the onshore contract between HO/ TBEA & PGCIL ought to have been treated as a comparable for the said purpose.

The reason being that the said comparable, we find, fails the strict test of comparability for CUP to be applied as the Most Appropriate Method, on account of the fact noted by the TPO that the terms and conditions of the contract between TBEA and PGCIL were found to be not at Arms Length vis a vis the assessee, was found to be detrimental to the assessee, and the assessee found not to have been compensated as per the agreed terms also.

The orders of the authorities below record the fact that the onshore contract of transportation and installation & [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 25 – commissioning, which the assessee PE/PO was required to execute, was in turn sub contracted to two Indian sub-contractors, one for transportation, i.e M/s. Cosco Logistics Ltd., and the other for installation & commissioning, M/s. Techno Electric and Engineering Company Limited. Both these sub contracts were also entered into by the HO/TBEA, and the terms of the sub- contract were noted to be detrimental to the assessee PO/PE and /or the assessee was found to be not compensated completely .

With respect to the onshore activity of installation and commissioning of shunt reactor, the TPO noted that the rates agreed upon for the different work involved, by the head office with PGCIL was far less as compared to the rates agreed upon by the head office with the sub-contractor. Clearly the rates agreed in the onshore contract was not even sufficient to cover the cost of the activity.

Both the contracts entered into with PGCIL for the onshore activity and its further sub-contract to the Indian entities, was entered into by the head office. The price of the contract was, therefore, determined by the head office and was imposed on the project office. The TPO has pointed out rightly that in an independent third party scenario, no third party would agree to undertake any assignment, wherein the consideration to be received and expenses to be incurred in relation to such assignment is already decided by some other party, that too at rates which guarantee losses to it. There is no question, in such scenario of treating the onshore agreement as a comparable, when [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 26 – the facts demonstrate that the rates agreed therein were not even sufficient to cover expenses.

With respect to the onshore activity of transport, the TPO has recorded as a matter of fact that the assessee was not completely compensated. He has noted that while the entire work of transportation was executed during the impugned year the corresponding revenue was not recognized completely in the books of project office. He noted that the agreed compensation, as per the onshore contract of TBEA with PGCIL, for the five sites executed by the assessee was at Rs.16.24 Crores, and the same was sub contracted to Cosco Logistics Ltd. for 10.24 crs, however as per the accounts of the assessee, revenue recognized in relation to the said activity was only 12.40 Crs against payment of 11.58 Crs to the sub-contractor. The TPO also noted lack of one to one correspondence between Revenue and Expenses incurred as recorded in the Books of the assessee.

The assessee, we have noted, was asked to furnish detailed project report prepared by the head office estimating the profit margin for the onshore activity separately for each year. However, no such details were furnished by the assessee.

The TPO has recorded the above discrepancies/ inconsistencies at para 9.15 of his order, while rejecting assesses contention of treating CUP as the MAM at para 9.17 of his order as under:

All the above facts are not disputed by the Ld. Counsel for the assessee before us.

In the light of the same, when considering the original onshore agreement entered into by the head office with PGCIL, it was found that the assessee was not adequately compensated for the activities carried out, there is no question at all for treating that agreement as a comparable for applying CUP method for determining ALP for the transaction. The onshore agreement surely was not at arms length since no independent entity would agree to carry out work at losses/ without being adequately compensated for it. The argument of the Ld.Counsel for the assessee in this regard is, therefore, rejected.

The decision of the coordinate Bench in the case of Shandong (supra) is of no assistance to the assessee since in the facts of the said case there was no finding of the assessee not being adequately compensated in terms of the original sub contract. Therefore, as rightly pointed out by the Ld.DR the said decision is rendered in different facts and circumstances and has no applicability to the facts of the present case before us.

Ground of appeal no.4 is accordingly dismissed.

The facts relating to the issue are that the TPO noted that TBEA China has business connection within the meaning of Section 9 of the Act and PE within the meaning of Article 5(2) of India China DTAA during various F.Ys. In addition to the existence of business connection and PE, he also noted certain components of income from offshore supply contract attributable to such business connection and PE. He noted that a single price had been agreed upon between the head office in China and PGCIL for equipments sold under offshore supply agreement which price included compensation for the following activity:

With respect to the post sales activities forming part of the offshore contract, comprising of testing to be conducted outside India, defect liability, functional guarantees and equipment performance guarantee, the TPO noted that the responsibility was cast upon the project office for the same. The TPO also noted that TBEA China had also been asked to establish a repair & maintenance facility in India, in lieu of which an MOU was signed by TBEA China with Vijay Electricals Ltd. (VEL), Hyderabad for setting up repair and maintenance facilities. The minutes of post bid discussion dated 03.02.2010 provided for manufacturing of all major components like winding etc. at TBEA China with minor jobs to be attended at VEL under TBEA supervision to take care of damages that may occur during transportation. The release of payment towards offshore supply contract was also made contingent upon the satisfactory performance of the equipment supplied and establishment of repair and maintenance facility. The TPO accordingly noted that after sales activity so carried out by the PE/Project office in India, income related to the same needed to be accrue or arose in India within the meaning of Section 9 of the Act and Article 7 of the Indian China DTAA.

The act of carrying out execution of the portion of offshore supply contract (i.e. presales, after sales support and provision [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 36 – of warranty services) by the PE/Project Office in India on behalf of the head office in China was, therefore, held to be an international transaction, for which, the project office was to be remunerated as ALP. CUP was identified as the most appropriate method and for determining such ALP to be received by the Project Office in India and after conducting search for the most appropriate comparable, one comparable agreement was identified wherein it was noted that the consideration for rendering identical services was 5% of the net sale price treating the same as basis for determining the ALP of the international transaction of offshore activities carried out by the Project Office in India. The compensation for the same was determined to be Rs.20,69,41,033/- adjustment accordingly was made to the total income of the project office.

The argument of the Ld. Counsel for the assessee against the same before us was that: i. the TPO had no power to attribute profit, the exercise of attribution of profits being different from the determination of ALP of international transaction in terms of TP provisions. Reference was made to para 20 of the decision of the order of Special Bench in this regard:

Article 7(2) of the India China DTAA leads to the conclusion that determination of profits under the hypothesis of the PE being a distinct and separate enterprise, dealing wholly independently with the enterprise of which it is a PE, is nothing but adherence with the arm's length principles. The underlying philosophy of TP provisions and Article 7(2) is same wherein both try to analyse as to how third parties would have dealt with each other under uncontrolled conditions. Thus, contention of the learned AR that there is conflict between Article 9 of the DTAA and domestic TP provisions is rejected.” On going through the contents of the order of the Special Bench, we do not find any such finding therein to the effect that attribution of profits as per Article 7(2) of DTAA is a separate and distinct exercise from the determination of ALP of transaction vide application of the transfer pricing provisions. On the contrary, in para 20 of the order, the Special bench notes that the underlining philosophy of transfer pricing provisions and Article 7(2) is same wherein both try to analyse as to how third parties would have dealt with each other under controlled conditions.

With regard to VEL, the contention was that the same did not constitute PE of TBEA China in India since MOU entered into with VEL for providing repair facilities to the transformers supplied to the PGCIL and there was no presence of TBEA China in India in any way through VEL. That in any case no activities, as such, had been carried out by VEL regarding repair and maintenance, the carrying out of such activity being only contingent to the occurring of any event requiring service of repair and maintenance to the shunt reactors supplied by the TBEA China to PGCIL.

With regards to TBEA Energy India Ltd. constituting PE of TBEA China, the contention of the Ld. Counsel for the assessee [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 39 – was that TBEA had been incorporated on 07.07.2010, by the said date contracts already stood awarded to TBEA China, therefore, there was no question of any pre-sales activity to have been carried out by TBEA Energy India Ltd. TBEA Energy India Ltd. had nothing to do with offshore activities. The post-sale activity, it was contended only related to onshore activity.

The contention of the Ld. DR to the contrary was that the TPO had dealt with all the contentions raised by the Ld. Counsel for the assessee before us. Having noted so, we shall deal with all the arguments of the Ld. Counsel for the assessee taking note of the finding of the TPO with regard to the same.

With regard to the contention of the Ld. Counsel for the assessee that Shri Jagdish Lal did not constitute PE of TBEA China in India, he was not authorized by the TBEA China in any way, the findings of the TPO in this regard are contained at page 89 and 90 of the order as under:

On going through the order of the TPO, we find that for arriving at his finding of Shri Jagdish Lal representing the PE of TBEA, China, in India for pre-sales onshore activities, he noted the fact that Shri Jagdish Lal was the country representative of TBEA China in India at the time of negotiation of the bids, which, activity took place in India and finally contract signed between TBEA China and PGCIL in India. He has noted from the minutes of the post-bid discussion mentioning Shri Jagdish Lal to be the country representative of TBEA China. The TPO has noted that his name appeared in all post-bid discussions. The TPO has accordingly noted that Shri Jagdish Lal was involved in the day- to-day bid relating activities of TBEA China and was privy to sensitive technical and financial detail of the project. Noting that Shri Jagdish Lal participated in post-bid discussions pertaining to all sites awarded to TBEA China, the TPO has noted that even if Jagdish Lal is not termed as the Agent of TBEA his office constituted fixed place of business or PE through which the pre- [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 42 – sales activity of TBEA China in India was carried out. The TPO has also noted that alternatively if agreed with the Ld. Counsel for the assessee that the authority to sign the final contract was with Mr. Chen Zhijin, then, it was necessary to ascertain his duration of stay in India during the impugned year and if his stay in India exceeded 180 days, such stay constituted service PE of TBEA in India. The TPO has noted that the assessee did not furnish any details of the number of days of stay of Mr. Chen Zhijin in India, and therefore, in the absence of any such detail, he held Mr. Chen Zhijin to constitute service PE of TBEA in India.

It is clear from the above that the TPO has not identified Mr. Jagdish Lal alone as constituting PE of TBEA China. He had noted that even office of Shri Jagdish Lal constituted fixed place of business of TBEA, China in India since Shri Jagdish Lal was undisputedly involved in day-to-day bid relating activity of TBEA. He has also noted that even Mr. Chen Zhijin constituted service PE of TBEA in India since the assessee had not proved that his stay in India did not exceeded 183 days.

In the light of the above, the argument of the Ld.Counsel for the assessee that Shri Jagdish Lal did not constitute PE in India, we find, has no merits because besides being found to be involved as country representative of TBEA , China, in the day to day activities of prebid discussion and being privy to all information relating to the same, even his office was also identified as PE of TBEA China and Mr. Chen Zhijin was also identified to have constituted service PE of TBEA, China in [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 43 – India. We have noted the assessee had not countered the same before us. In the light of the above therefore, the contention of the Ld. Counsel for the assessee in this regard is found to be without any merit and dismissed.

With regard to the contention of the Ld. Counsel for the assessee that TBEA Energy India Ltd. identified as constituting PE of TBEA China for offshore activity was incorrect, the findings of the TPO in this regard are contained at para 10.12 of his order as under:

The TPO has noted TBEA Energy India Ltd. to constitute the PE of the TBEA China noting the fact that all project related activities were carried out by employees of TBEA Energy India Ltd. using its infrastructure and expenses so incurred were charged in the books of accounts of project office of TBEA China. Further, in para 10.2 of the order, the TPO has noted that TBEA Energy India Ltd. was incorporated by the TBEA China and agreement entered into with it to execute its EPC contract with PGCIL. The relevant finding of the TPO in this regard are as under:

What is evident from the finding of the TPO, therefore, is that TBEA Energy India Ltd. had entered into an agreement with TBEA China to execute its contract with PGCIL and agreed to act as an agent of the foreign company in this regard. The TBEA Energy India Ltd. was also noted as a matter of fact to have incurred expenses for the project executed by TBEA China with PGCIL and had charged those expenses to the head office of TBEA China. Thus, the fact remains that TBEA Energy India Ltd. constituted business connection/PE of TBEA China in India. The contention of the Ld. Counsel for the assessee is accordingly rejected.

With respect to VEL not constituting PE of PBEA China, the findings of the TPO in this regard are contained at para 10.4 of his order as under:

What is evident from the above is that the TPO has noted VEL to have entered into an agreement with TBEA China to carry out its repairs and maintenance activity agreed as part of offshore contract entered into with PGCIL. He has also noted that the staff of VEL was required to be trained by TBEA China, for the said purpose and all major components for the said, were to be provided by TBEA China and only small jobs to be done by VEL under TBEA supervision.

The above facts have remained uncontroverted before us and we, therefore, see no reason to disagree with the TPO that VEL constituted PE of the TBEA China in India. In any case, we have noted that the TPO has only identified VEL as constituting PE of TBEA China in India for the offshore activity of defect liability and functional and equipment performance guarantees for which it has also identified the project office of TBEA China (the assessee before us) as the PE of TBEA China. For the said reason therefore, even if VEL did not constitute PE of TBEA [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 47 – China in India, the fact remains that project office constituted PE of the head office in India for the offshore activity and, therefore, there is no infirmity in the order of the authorities below treating the identified offshore activities as international transaction for the purpose of transfer pricing adjustment, determining the ALP of the same at Rs.22 Crores.

Ground No.5 raised by the assessee is dismissed.

In the result, the appeal filed by the assessee is dismissed.