DCIT, (IT), CIR-1(1), KOLKATA, KOLKATA vs. THE DONGFANG ELECTRIC CORPORATION, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA [Before Sri J. Sudhakar Reddy Accountant Member & Sri Aby T. Varkey, Judicial Member] I.T.A. No. 196/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation.….…….………………………………………………………….……..Appellant Dongfang Electric Corporation Kolkata Project Office CK-189 & CK-141 Sector-II Salt Lake City Kolkata – 700 091. [PAN : AACCD 0559 L] Deputy Commissioner of Income Tax, International Taxation-1(1), Kolkata…..Respondent Aayakar Bhawan Poorva 110 Shanti Pally Kolkata – 700 107 I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Deputy Commissioner of Income Tax, International Taxation-1(1),Kolkata……….Appellant 110 Shanti Pally Kolkata – 700 107 Dongfang Electric Corporation.….…….……………………………………………………………….Respondent Dongfang Electric Corporation Kolkata Project Office CK-189 & CK-141 Sector-II Salt Lake City Kolkata – 700 091. [PAN : AACCD 0559 L] Appearances by: Shri Nageswar Rao, AR, appeared on behalf of the assessee. Shri G. Mallikarjuna, CIT, DR, appearing on behalf of the Revenue. Date of concluding the hearing : December 04th, 2017 Date of pronouncing the order : February 09th, 2017 O R D E R 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 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 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 ready reference:-

The assessee M/s Dongfang Electric Corporation (DEC), China is a foreign company incorporated under the laws of the People's Republic of China, having its registered office at 71-73 First Section, West Yihyuan Avenue, Chengdu 610041, Sichuan Province, P.R. China and 'is an enterprise, engaged mainly in development and consultation for power equipment technology, manufacturing and sale of power equipment, turnkey contracting for power projects, turnkey contracting for machinery, 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 India-China Double Taxation Avoidance Agreement [hereafter referred to as 'DTAA'].

In the year 2004, the assessee entered into two separate contracts; one with the "The West Bengal Power Development Corporation Limited (WBPDCL)' for setting up Units 1 & 2 (2 X 300 M) for the Sagardighi Power Projects at Murshidabad, West Bengal and the other with “The Durgapur Projects Limited (DPL) for setting up units 7(1x300 MW) for the Durgapur Project Power Station at Durgapur, West Bengal, 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 common facilities:

3 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation (c) Contract No. SgTPP/1/(SgMP-I ERECTIONS)/04/2004 dated August 26, 2004 for erection and services of Main Plant Turnkey Package (SgMP-1) Units 1&2 (2X300 MW) alongwith some common facilities and

(d) Letter of Award (LOA) dated July 27, 2004 issued by WBPDCL of Erection and Services of Main Plant Turnkey Package (SgMP-I) Units 1 & 2 (2X300 MW) alongwith some common facilities:

As per the terms of the said contracts, the consideration to be received by the company from DPL 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 alongwith some common facilities and

(f) Contract No. DPL/Unit-7/DMP-1(SERVICES)/2004-05/002 for erection and services of thermal power plant alongwith some common facilities and

(g) LOA dated July 27, 2004 issued by DPL for supply of plant equipments and erection and services of thermal plant alongwith some common facilities

As per the terms of the said contracts, the consideration to be received by the company from WBPDCL in respect of the aforesaid activities will be as under:

 USD 11,40,47,092 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.

4 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 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’ breach clause features very prominently in both cases by virtue of which performance of the entire contract was treated as a single point responsibility of DEC, China and non-performance of any part or portion of the contract was to deemed as a breach of the whole contract.

In February, 2005 the assessee made separate applications u/s 197 of the income tax Act, 1961 (the Act) in respect of the aforesaid two projects in which the following submissions were made.

(i) Supply of equipment from overseas 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 maintenance of regular books of accounts u/s 44AA as well as preparation of accounts and getting the same audited as required u/s 44AB which are subject to scrutiny by the assessing officer u/s 143(3) of the Act.

After considering the assessee’s submissions separate orders u/s 197 were passed on 28.02.2005, WBPDCL & DPL were directed to deduct tax at source u/s 195 the following manner:

 Offshore supply: A sum equivalent to 2.5% of gross receipts under this contract(s) was deemed to be income 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

5 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation tax which was required to be deducted at source. Accordingly, rate of TDS was determined of 41.8% (the rate prescribed in the Finance Act plus surcharge & cess as applicable) of 10% or @ 4.182%.

Having been not satisfied with the above orders u/s 197, the assessee filed revision petition u/s 264 of the Act before the DIT (International Taxation), Kolkata on 25.04.2005. The Ld. DIT (International Taxation), Kolkata after taking into consideration the factual matrix of the case(s) and all applicable legal provisions passed separate orders u/s 264 for WBPDCL and DPL on 17.06.2005. Paragraph 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-

 If the petitioner is able to prove that the offshore supply could not have been undertaken by the permanent establishment or have no relation with permanent establishment, then no income from offshore supply contract is taxable in India.

 Otherwise, only such part of profit as is reasonably attributable to 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

6 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 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 if there is only tax liability, after giving credit for TDS from local supply and services contract, the same shall be paid by the petitioner by way of advance tax.

b) Local supply and Services:-

The order of the Assessing Officer is confirmed. The tax shall continue to be deducted @ 4.182% of the receipts for local suppliers & services till the completion the contract, even if there is actual loss/lesser income, after exercising option u/s 44BBB(2) of the I.T. Act, by the petitioner. It is considered necessary to do so, because there may be some profit attributable to offshore supply which can only be determined after regular assessment.

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 by the AO to Transfer Pricing Officer (TPO') is erroneous, bad in law and grossly violative of principles of natural justice.

7 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 2. On the facts and in the circumstances of the case and in law, determination of existence of specific international transaction being an exercise within exclusive jurisdiction of the AO before making any reference to the TPO, determination of existence of international transaction by TPO and subsequent determination of ALP is beyond specific and distinct jurisdictions conferred in law and consequently the resultant demand is invalid and unenforceable in law.

4a. On the facts and in the circumstances of the case, the DRP completely misinterpreted the directions of courts in earlier year, failed to consider all relevant aspects and routinely upheld draft assessment order and transfer pricing order passed on identical lines as in earlier years. DRP completely failed to appreciate that the whole purpose of de novo assessment as already directed by the higher courts in earlier years, would be lost by merely repeating the earlier orders.

4b. On the facts and in the circumstances of the case, DRP erred in not considering the fact that routine and predetermined repetition 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'.

8 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 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-contractor of the Head Office in China and should be remunerated by the Head Office on an arm's length basis.

(i) By applying Transactional Net Margin Method and rejecting Comparable Uncontrolled Price method or Profit Split Method for determining the amount of profit;

(ii) By taking into consideration the comparable which differ in many aspects in context of business activities of the Project Office of the Appellant in India;

(iii) Without making adjustments necessary to account for differences in the comparables;

(iv) By adopting the cost base without appreciation of the scope of activities undertaken by the Project Office;

(v) Without appreciating that the appellant is making overall loss on the said project;

(vi) By incorrectly computing the operating revenue and operating expense of the Project Office for AY 2011-12;

9 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation (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 Project Office in the FY 2010-11 is explicitly bad in law.

10 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 20. The above grounds are independent and without prejudice to each other. The appellant craves leave to add, amend, withdraw or vary any grounds of appeal in the interest of natural justice either before or at the time of hearing of appeal proceedings.” 3.2. The revenue filed the cross-appeal on the following grounds:- “1) Whether on facts and circumstances of the case, the Hon’ble DRP erred in rejecting the comparable M/s Ceragon Network India Ltd. whence FAR analysis of the said comparable is the same 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 time for completion of assessment as per the Act. He further submitted that the Act mandates the Assessing Officer may refer to the TPO “international transactions” for determination of “Arm’s Length Price”, u/s 92CA of the Act. He submitted that, no international transaction has been referred to the TPO by the Assessing Officer as required u/s 92CA of the Act and what was referred is the entire assessment itself. Thus, he submits that the reference is bad in law and subsequently the assessment is barred 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 hand, strongly supported the order of the DRP and submitted that a valid reference was made by the Assessing Officer to the TPO-1, Kolkata, on 14th March, 2014, a copy of which was placed before the Bench. Hence he

11 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation submits that the argument that there is no valid reference by the Assessing Officer to the TPO, in the eyes of law is factually incorrect. On the arguments that no specific international transactions has been referred by the Assessing Officer to the TPO as mandated by Section 92CA of the 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 located in the Republic of China and consequently all the transactions between them are international transactions which are subject to scrutiny by the TPO. 4.2. On the issue as to which is the Most Appropriate Method, i.e., CUP or TNMM, the ld. D/R, relied on the order of the Assessing Officer as well as the Ld. DRP and supported the same. On the issue of comparables, he relied on the order of the ld. TPO. 5. In reply, the ld. Counsel for the assessee submitted that the language of the Act is clear 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 determination of ALP could be produced by the Assessing Officer or the ld. D/R. Only the approval granted by the DIT(TP)- Kolkata, for reference to the TPO u/s 92CA(1) of the Act, for determination of ALP was communicated. Thus, he submits that there is no valid reference by the Assessing Officer to the TPO and hence the period of limitation for completion of assessment does not get extended. He submitted that the assessment is barred by limitation. 6. After considering rival contentions, perusing the papers on record, orders of the authorities below and case-law cited, we hold as follows:-

12 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation 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 upon by the ld. D/R, is extracted for ready reference:-

” 6.1.1. A perusal of the above letter demonstrates that the approval granted by the DIT(TP), was communicated to the TPO. Section 92CA(1) of the Act, reads as follows:- “92CA. (1) Where any person, being the assessee, has entered into an international transaction [or specified domestic transaction] in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the [Principal Commissioner 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)

13 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation

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 the Commissioner or from the Principal Commissioner. 6.2. Thus, what has to be referred by the Assessing Officer is the computation of ALP in relation to the said international transaction. No letter or correspondence making the reference to the TPO by the Assessing Officer is produced before us. Moreover, the approval was taken from the DIT(IT)-Kolkata, for referring M/s. Dongfang Electric, Kolkata Project Office to the TPO and not any international transactions. The TPO, in this case tried to identify the international transactions that the assessee has entered into and then proceeded to determine the ALP. No international transaction 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 law. 6.2.1. Once the reference in question is bad in law, the Assessing Officer is bound to pass an assessment order before 31st March, 2014 for the Assessment Year 2011-12. The extended time u/s 153(1) of the Act, does not come into play in the facts of this case. Hence in our considered view, the assessment is barred by limitation. Accordingly, the assessment order is quashed on the ground of limitation. 7. In the result, appeal of the assessee is allowed. The cross-appeal of the revenue is dismissed as infructuous.

Kolkata, the 9th day of February, 2017.

Sd/- Sd/- [Aby T. Varkey] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated :09.02.2018 {SC SPS}

14 .T.A. No. 196/Kol/2016 Assessment Year: 2011-12 & I.T.A. No. 295/Kol/2016 Assessment Year: 2011-12 Dongfang Electric Corporation

Copy of the order forwarded to: 1. Dongfang Electric Corporation Dongfang Electric Corporation Kolkata Project Office CK-189 & CK-141 Sector-II Salt Lake City Kolkata – 700 091. 2. Deputy Commissioner of Income Tax, International Taxation-1(1), Kolkata Aayakar Bhawan Poorva 110 Shanti Pally Kolkata – 700 107