Dongfang Electric Corporation, Kolkata V. ACIT (International Taxation), Circle - 1(1), Kolkata , Kolkata

ITA 2564/KOL/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4799 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Assessee Lawyers: SHRINAGESHWAR RAO; AMIT SHARMA ACA
• Keywords: Depreciation; Transfer pricing; International transaction; Permanent establishment; Set aside
• Section: 92C; 92B; 92A; 92E; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENC H KOLKATA BEFORE SHRI S. S. GODARA, JM &DR. A.L.SAINI, AM ./ITA NOS.2563 & 2564/KOL/2017 ( / ASSESSMENT YEARS: 2007-08 & 2008-09) DONGFANG ELECTRIC CORPORATION PROJECT OFFICE, CK-189, SECTOR-II, SALT LAKE CITY, KOLKATA 700 091. VS. ACIT(INTERNATIONAL TAXATION), CIRCLE-1(1), KOLKATA ./ ./PAN/GIR NO.: AACCD0559L (APPELLANT) .. (RESPONDENT) APPELLANT BY :SHRINAGESHWAR RAO, A DVOCATE & AMIT SHARMA, ACA RESPONDENT BY : DR. P.K. SRIHARI, CIT(D R) / DATE OF HEARING : 14/03/2019 /DATE OF PRONOUNCEMENT : 17/05/2019 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED TWO APPEALS FILED BY THEASSESSEE, PER TAINING TO ASSESSMENT YEARS 2007-08 AND 2008-09, ARE DIRECTED AGAINST FAI R ASSESSMENT ORDERS PASSED BY THE ASSESSING OFFICER U/S 143(3)/144C(13) OF THE IN COME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), WHICH INCOR PORATE THE FINDINGS OF THE LD. DISPUTE RESOLUTION PANEL UNDER SECTION 144C (5) OF THE ACT. 2.SINCE, THE ISSUES INVOLVED IN THESE TWO APPEALS A RE COMMON AND IDENTICAL; THEREFORE, THESE APPEALS HAVE BEEN HEARD TOGETHER A ND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER. FOR THE SAKE OF CONVENIENCE, TH E GROUNDS AS WELL AS THE FACTS NARRATED IN ASSESSEE`S APPEAL IN ITA NO.2563/KOL/20 17,FOR ASSESSMENT YEAR 2007-08, HAVE BEEN TAKEN INTO CONSIDERATION FOR DEC IDING THE ABOVE APPEALS EN MASSE . ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 2 3. THE SOLITARY GRIEVANCE OF THE ASSESSEE IN THIS A PPEAL IS THAT THE LD. ASSESSING OFFICER/DRP ERRED IN LAW AND ON FACTS AND CIRCUMSTA NCES IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS.90,31,04,234/- BY APPLYING TRANSACTIONAL NET MARGIN METHOD(TNMM), WHEREAS AS PER ASSESSEE ONLY COMPARAB LE UNCONTROLLED PRICE METHOD(INTERNAL-CUP) IS APPLICABLE. NOTE: IN THIS APPEAL, THE ASSESSEE HAS ALSO RAISED A TECHNICAL GROUND STATING THAT IMPUGNED ASSESSMENT ORDER IS TIME BARRED, AS THERE IS NO VALID REFERENCE OF INTERNATIONAL TRANSACTIONS TO LD TPO IN TERMS OF SE CTION 92CA(1) OF THE ACT, CONSEQUENT TO WHICH EXTENDED PERIOD FOR PASSING ASS ESSMENT ORDER IS NOT AVAILABLE. THE LD COUNSEL INFORMS THE BENCH THAT THE ASSESSEE RESERVES HIS RIGHT TO CHALLENGE THE VALIDITY OF REFERENCE MADE BY AO TO LD TPO IN T ERMS OF SECTION 92CA(1 ) OF THE ACT. HOWEVER, THE LD COUNSEL FOR THE ASSESSEE D ID NOT PRESS THIS TECHNICAL GROUND BEFORE THE BENCH THEREFORE, WE DO NOT ADJUDI CATE THE SAME. 4. THE FACTS OF THE CASE WHICH CAN BE STATED QUITE SHORTLY ARE AS FOLLOWS: IN THE ASSESSEE`S CASE, VIDE DECREE OF HON'BLE SUPREME COU RT OF INDIA IN THE CASE OF DIRECTOR OF INCOME TAX (INTL. TAXATION) VERSUS DONG FANG ELECTRIC CORP. IN CIVIL NOS. 11006-1007 OF 2013, DATED 09.12.2013, THE ASSE SSING OFFICE HAS BEEN DIRECTED BY THE HON'BLE SUPREME COURT TO CONSIDER T HE ASSESSMENT AFRESH. ACCORDINGLY, A REFERENCE UNDER SECTION 92CA(1) OF T HE IT ACT, 1961 WAS MADE BY THE ASSESSING OFFICER, TO LD. TRANSFER PRICING OFFI CER (TPO). THE ASSESSEE HAD NOT FILED FORM 3CEB ALONG WITH ITS RETURN OF INCOME FOR AY 2007-08.THE ASSESSEE IS A COMPANY INCORPORATED IN THE PEOPLE'S REPUBLIC OF CH INA. IT IS ENGAGED MAINLY IN TURNKEY CONTRACTING AND SUB-CONTRACTING FOR POWER P ROJECTS, DEVELOPMENT AND CONSULTATION FOR POWER EQUIPMENT TECHNOLOGY ETC. DU RING THE FINANCIAL YEAR 2006- 07, RELEVANT TO A.Y. 2007-08, IT WAS CARRYING OUT W ORK ON TWO CONTRACTS FOR ERECTION AND COMMISSIONING OF TURNKEY PROJECTS FOR THERMAL POWER PLANTS. THESE CONTRACTS HAD BEEN AWARDED BY THE WEST BENGAL POWER DEVELOPMENT CORPORATION LIMITED FOR THE PROJECT AT SAGARDIGHI AND BY DURGAP UR PROJECTS LIMITED AT DURGAPUR, BOTH IN THE STATE OF WEST BENGAL. IT IS C LAIMED THAT THE ASSESSEE IS A ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 3 33 3 PERMANENT ESTABLISHMENT (PE) IN INDIA DURING THE RE LEVANT ASSESSMENT YEAR WITHIN THE MEANING OF ARTICLE 5 OF THE DOUBLE TAXATION AVO IDANCE AGREEMENT (DTAA) BETWEEN INDIA AND THE PEOPLE'S REPUBLIC OF CHINA. L T FILED ITS RETURN OF INCOME FOR AY 2007-08 WITH THE OFFICE OF DDIT(IT)-1(1), KOLKAT A. ON THE BASIS THE PROFIT ANDLOSS ACCOUNT SUBMITTED BY THE ASSESSEE FOR ASSES SMENT YEAR 2007-08, IT WAS OBSERVED THAT THE ASSESSEE HAD DISCLOSED A LOSS TO THE TUNE OF RS.67,11,07,016/- (BEFORE FBT) FOR ITS PE IN INDIA. THIS LOSS HAD BAS ICALLY ARISEN ON ACCOUNT OF EXPENSES INCURRED TO THE TUNE OF RS.332,80,55,124/- (INCLUSIVE OF DEPRECIATION OF RS.4,54,98,363/-). DURING THE RELEVANT ASSESSMENT Y EAR, THE ASSESSEE HAD SHOWN REVENUES TO THE TUNE OF RS.265,69,48,108/- FOR ITS PE IN INDIA FROM WEST BENGAL POWER DEVELOPMENT CORPORATION LIMITED AND DURGAPUR PROJECTS LIMITED. 5. THE CONTRACTS ENTERED INTO BY THE ASSESSEE WITH THE INDIAN PARTIES SUGGEST THE SCOPE OF THE CONTRACT, WHICH IS AS FOLLOWS: (A). OFFSHORE SUPPLY: PROCUREMENT AND SUPPLY (OVERSEAS) OF EQUIPMENT (IN CLUDING SPARE PARTS, TOOLS AND TACKLES) FOR THERMAL POWER P LANT; AND (B). ONSHORE SUPPLIES AND SERVICES: LOCAL SUPPLY, DESIGN AND ENGINEERING, CONSTRUCTION, FABRICATION, ERECTION, INSTALLATION, TESTING AND COMMISSIONING OF THERMAL POWER PLANT IN INDIA, TRANSPORTATION OF THE OVERSEAS SUPPLY OF EQUIPMENTS FROM THE INDIAN PORT OF DESTINATION TO THE SITE OR PLACE OF BUSINESS OF THE BUYER AND INLAND INSURANCE CHARGES. THE ACTIVITIES MENTIONED ABOVE I.E. (A) OFFSHORE SUPPLY AND (B) ONSHORE SUPPLY & SERVICES , WERE BEING RENDERED BY THE ASSESSEE ON THE BASIS OF TWO SEPARATE CONTRACTS ENTERED INTO BETWEEN IT AND THE RESPECTIV E CONTRACTING PARTIES IN INDIA. THUS, EACH ACTIVITY AS MENTIONED ABOVE WAS GUIDED B Y A SEPARATE CONTRACT. SIMPLICITER, THE SUPPLY OF THE PLANT & MACHINERY AN D EQUIPMENTS FOR ERECTION AND COMMISSIONING OF THE POWER PROJECTS WAS UNDERTAKEN THROUGH A SEPARATE CONTRACT BETWEEN THE ASSESSEE AND THE INDIVIDUAL PARTIES CON CERNED. AS THIS SUPPLY OF PLANT & MACHINERY WAS TO TAKE PLACE OUTSIDE THE TERRITORI AL WATERS OF INDIA, IT WAS TERMED ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 4 44 4 AS 'OFFSHORE SUPPLY'. ON THE OTHER HAND, ONCE THE P LANT & MACHINERY WAS BROUGHT TO THE PORT OF UNLOADING IN INDIA, THE REMAINING AC TIVITIES I.E. TRANSPORTATION OF THE PLANT & MACHINERY FROM THE INDIAN PORT TO THE SITE OF INSTALLATION AND ALL ACTIVITIES RELATED TO THE CONSTRUCTION, FABRICATION, ERECTION, INSTALLATION, TESTING AND COMMISSIONING WAS GUIDED BY ANOTHER SEPARATE CONTRA CT. THIS CONTRACT WAS REFERRED TO AS 'ONSHORE SUPPLIES & SERVICES' CONTRACT. LN OT HER WORDS, THE TURN-KEY PROJECTS AWARDED TO THE ASSESSEE ARE BEING EXECUTED BY SPLIT TING UP THE PROJECTS INTO TWO PARTS, NAMELY, A) SUPPLY OF PLANT & MACHINERY, AND B) INSTALLATION OF THE PLANT & MACHINERY AND ITS COMMISSIONING AND ALL OTHER RELAT ED ACTIVITIES. 6. AS THE ASSESSEE ENTERED INTO TWO SEPARATE CONTRA CTS, THE CONSIDERATION TO BE PAID ALONG WITH THE DETAILED DUTIES AND RESPONSIBILITIES WITH REGARD TO EACH SET OF ACTIVITIES WERE DEFINED SEPARATELY ON THE BASIS OF THESE CONTRACTS. FOR EXECUTION OF THE CONTRACT PERTAINING TO ONSHORE SUPPLIES AND SER VICES (I.E. LOCAL SUPPLY, DESIGN AND ENGINEERING, CONSTRUCTION, FABRICATION, ERECTIO N, INSTALLATION, TESTING AND COMMISSIONING OF THE POWER PROJECT), THE ASSESSEE E STABLISHED A PROJECT OFFICE NAMED DONGFANG ELECTRIC CORPORATION, PROJECT OFFICE , KOLKATA ON OCTOBER 1, 2004 IN KOLKATA, INDIA. AS HAS ALREADY BEEN MENTIONED, T HIS PROJECT OFFICE WAS TREATED AND CLAIMED BY ASSESSEE, AS A PERMANENT ESTABLISHME NT (PE) OF THE ASSESSEE IN INDIA FOR TAX PURPOSES. THE ASSESSEE DID NOT DISPUT E THIS FACT. THUS, THE PE OF THE ASSESSEE IS AN 'ENTERPRISE' UNDER THE PROVISIONS OF SECTIONS 92F(III) AND 92F(IIIA) OF THE ACT. AS PER LD TPO, AS THE ASSESSEE MANAGED AND CONTROLLED ITS PE IN INDIA, THE PE CONSTITUTED AN 'ASSOCIATED ENTERPRISE' (AE) OF T HE ASSESSEE UNDER SECTION 92A OF THE ACT. THUS, ANY TRANSACTION BETWEEN THE PE AN D THE ASSESSEE WOULD CONSTITUTE AN 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B OF THE ACT AND COME UNDER THE PURVIEW OF SECTION 92 OF THE ACT. IN OTHER WORDS, T HE 'ARM'S LENGTH PRINCIPLE WOULD HAVE TO BE APPLIED TO THE TRANSACTIONS BETWEEN THE ASSESSEE AND ITS PE IN INDIA. ACCORDINGLY, EVEN THOUGH THE ASSESSEE HAD NOT FILED ANY FORM 3CEB, WITH ITS RETURN OF INCOME FOR A.Y. 2007-08, A REFERENCE WAS MADE BY THE ASSESSING OFFICER U/S 92CA(1) OF THE ACT TO THE TRANSFER PRICING OFFI CER FOR DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTE RED INTO BETWEEN THE ASSESSEE AND ITS PE IN INDIA. ON RECEIVING THE REFERENCE U/S 92C A(1) OF THE ACT, NOTICE U/S ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 5 55 5 92CA(2) WAS ISSUED BY THE TPO ON 16.09.2016 FOR INI TIATING PROCEEDINGS FOR DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF I NTERNATIONAL TRANSACTIONS ENTERED BY THE PE WITH THE ASSESSEE. LN RESPONSE TO THE NOTICE U/S 92CA(2), THE ASSESSEE SUBMITTED REPLY TO THE LD TPO. THE LD TPO, EXAMINED THE SUBMISSIONS OF THE ASSESSEE AND THEN ASKED THE FOLLOWING FURTHER D ETAILS: (I).WHY YOUR PERMANENT ESTABLISHMENT IN INDIA DURIN G F.Y. 2006-07 SHOULD NOT BE CONSIDERED YOUR 'ASSOCIATED ENTERPRISE' WITHIN THE MEANING OF SECTION 92A OF THE IT ACT, 1961; (II). WHY THE TRANSACTIONS BETWEEN YOU AND YOUR PER MANENT ESTABLISHMENT IN INDIA DURING F.Y. 2006-07 SHOULD NOT BE CONSTRUED AS 'INT ERNATIONAL TRANSACTIONS' WITHIN THE MEANING OF SECTION 92B READ WITH SECTION 92F(V) OF THE ACT; (III). AS YOU HAVE NOT FURNISHED ANY FORM 3CEB FOR AY 2007-08, WHY THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS SHOU LD NOT BE COMPUTED BY ADOPTING THE MOST APPROPRIATE METHOD AND BY SELECTING COMPAR ABLES/APPROPRIATE PROFIT LEVEL INDICATOR OF COMPARABLES, WHICH ARE CARRYING OUT SI MILAR ACTIVITIES/FUNCTIONS. 7. IN RESPONSE, THE ASSESSEE SUBMITTED THE FOLLOWIN G WRITTEN SUBMISSIONS BEFORE THE TRANSFER PRICING OFFICER (TPO), WHICH IS REPRODUCED AS UNDER: IN THIS REGARD, WE RESPECTFULLY DRAW YOUR KIND REF ERENCE TO OUR EARLIER LETTER DATED 26 SEPTEMBER 2016 FILED BEFORE YOUR GOODSELF AND WITH UTMOST RESPECT, WE ONCE AGAIN REQUEST YOUR HONOR TO PROVIDE GUIDANCE O N ALL ISSUES RAISED THEREIN ESPECIALLY AS THE SAME ARE PRELIMINARY BEFORE FURTH ER PROCEEDINGS. WITHOUT PREJUDICE TO ABOVE, IN PRESENT CASE IT IS N ECESSARY TO APPRECIATE THAT AS REFERENCE TO YOUR GOODSELF (I.E. TRANSFER PRICING O FFICER) (AS EXPRESSLY DEFINED IN ACT AND NOTIFIED BY CENTRAL BOARD OF DIRECT TAXES) IS NOT MADE, FURTHER PROCEEDINGS, BEYOND NORMAL (NOT EXTENDED) PERIOD PR ESCRIBED IN ACT, BECOME TIME BARRED AND INVALID IN LAW. WE, THEREFORE, IN THE IN TEREST OF JUSTICE RESPECTFULLY PRAY CONSIDERATION OF THIS AND ALLOW US A COPY OF VALID REFERENCE BY LEARNED ASSESSING OFFICER TO DESIGNATED TRANSFER PRICING OFFICER BEFO RE ANY FURTHER PROCEEDINGS. WITHOUT PREJUDICE TO ABOVE, IT IS PERTINENT TO CONS IDER THAT NO INTERNATIONAL TRANSACTIONS THAT CAN FALL WITHIN THE SCOPE OF CHAP TER X OF THE ACT HAVE BEEN UNDERTAKEN DURING ASSESSMENT YEAR UNDER QUESTION. W ITHOUT PREJUDICE TO ISSUES RELATING TO VALIDITY OF REFERENCE BEING MADE TO LEA RNED TPO AS PART OF EXERCISE OF PROFIT ATTRIBUTION TO PERMANENT ESTABLISHMENT, ANY SUCH REFERENCE WOULD NOT BE ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 6 66 6 COVERED AS REFERENCE UNDER SECTION 92CA ENTITLING E XTENSION OF NORMAL PERIOD FOR COMPLETION OF ASSESSMENT. SOME OF THESE VERY ISSUES /CLARIFICATIONS HAVE BEEN SOUGHT BOTH FROM LEARNED ASSESSING OFFICER AND YOUR HONOR (UNDER ABOVE CITED LETTER). PROCEEDING FURTHER BY IGNORING THIS VERY F UNDAMENTAL ASPECTS WOULD CAUSE SERIOUS PREJUDICE, INJUSTICE TO ASSESSEE IN ADDITIO N TO BEING INVALID IN LAW. WITHOUT PREJUDICE TO ABOVE AND WITHOUT APPEARING TO ACQUIESCE/ WAIVE ANY OF LEGITIMATE RIGHTS IN ANY WAY IN PROPOSED PROCEEDING S THE VALIDITY OF SUCH PROCEEDINGS IS CLARIFIED, IT APPEARS THAT SOME OF THE DETAILS REQUISITIONED VIDE NOTICE DATED 05 OCTOBER 2016 IS ALREADY PART OF REC ORDS AS THE SAME WAS PROVIDED DURING INITIAL ASSESSMENT PROCEEDINGS VIDE OUR EARL IER SUBMISSIONS DATED 22 APRIL 2010. 1. WHY YOUR PERMANENT ESTABLISHMENT IN INDIA DURING FY 2006-07 SHOULD NOT BE CONSIDERED YOUR 'ASSOCIATED ENTERPRISES' WITHIN THE MEANING OF SECTION 92A OF THE ACT WITHOUT PREJUDICE TO THE LEGAL POSITION THAT COURTS HAVE INTERPRETED THE PROVISIONS OF ASSESSMENT AND CHAPTER X HARMONIOUSLY AND BROADL Y DETERMINED THE ROLES OF LEARNED ASSESSING OFFICER VIS-A-VIS LEARNED TRANSFE R PRICING OFFICER. VALIDITY OF REFERENCE (WITHOUT PREJUDICE TO CONTENTIONS AS ABOV E RELATING TO NON-EXISTENCE OF ANY SUCH REFERENCE IN THE FIRST PLACE) CAN BE CONSI DERED APPROVAL SOUGHT AND IN PRESENT CASE IT CAN BE SEEN THAT NO PARTICULAR INTE RNATIONAL TRANSACTION HAS BEEN INDICATED IN SUCH NOTE SEEKING APPROVAL. IT IS FOR KIND CONSIDERATION THAT ACT DOES NOT PERMIT FINDING OF INTERNATIONAL TRANSACTION BY TRANSFER PRICING OFFICER IN CIRCUMSTANCES SUCH AS PRESENT CASE. EXERCISE FOR DE TERMINATION OF PROFITS ATTRIBUTABLE TO PERMANENT ESTABLISHMENT CANNOT BE R EFERRED AS INTERNATIONAL TRANSACTION UNDER CHAPTER X OF THE ACT. DONGFANG ELECTRIC CORPORATION CHINA, (DEC' OR THE COMPANY') 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, ELECTR ICAL MACHINERY, ELECTRONIC EQUIPMENT AND RELATED PROJECTS, ETC. DURING FY 2004 -05, THE COMPANY WAS AWARDED TWO POWER PROJECTS IN WEST BENGAL BY FOLLOW ING ENTITIES: (A) THE WEST BENGAL POWER DEVELOPMENT CORPORATION L IMITED (WBPDCL) FOR SAGARDIGHI AND; (B) THE DURGAPUR PROJECTS LIMITED ('DPL') FOR DURGA PUR. UNDER THE TERMS OF THE CONTRACTS, THE SCOPE OF ACTI VITIES TO BE UNDERTAKEN IS AS FOLLOWS: OFFSHORE SUPPLY - PROCUREMENT AND SUPPLY (OVERSEAS) OF EQUIPMENT (INCLUDING SPARE PARTS, TOOLS AND TACKLES) FOR THER MAL POWER PLANT; AND ONSHORE SUPPLIES AND SERVICES - LOCAL SUPPLY, DESIG N AND ENGINEERING, CONSTRUCTION, FABRICATION, ERECTION, INSTALLATION, TESTING AND COMMISSIONING ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 7 77 7 OF THERMAL POWER PLANT IN INDIA, TRANSPORTATION OF THE OVERSEAS SUPPLY OF EQUIPMENT FROM THE INDIAN PORT OF DESTINATION TO TH E SITE OR PLACE OF BUSINESS OF THE BUYER AND INLAND INSURANCE CHARGES. FOR EXECUTION OF THE DEMARCATED ON-SHORE ACTIVITIES , [ON SHORE SUPPLIES AND SERVICES-LOCAL SUPPLY, DESIGN AND ENGINEERING, CONS TRUCTION, FABRICATION, ERECTION, INSTALLATION, TESTING AND COMMISSIONING OF POWER PR OJECT] A PROJECT OFFICE NAMED DONGFANG ELECTRIC CORPORATION, KOLKATA PROJECT OFFI CE WAS ESTABLISHED IN OCTOBER 2004 IN KOLKATA, INDIA. THE PAYMENT FOR ON-SHORE SU PPLIES AND SERVICES WAS RECEIVED FROM WBPDCL AND DPL AND ACCOUNTED FOR IN T HE BOOKS OF DEC-PO IN INDIA. SINCE THESE SERVICES WERE RENDERED BY DEC-PO , REVENUE FROM THE SAME WAS OFFERED TO TAX IN INDIA DURING AY 2007-08 AS PER TH E PROVISIONS OF THE ACT. LN THIS REGARD, YOUR GOODSELF HAS ASKED US TO SHOW CAUSE AS TO WHY DEC-PO SHOULD NOT BE CONSIDERED AS ASSOCIATED ENTERPRISES ('AE') OF DEC, CHINA WITHIN THE DEFINITION OF SECTION 92A OF THE ACT. REFERENCE IS MADE TO SECTION 92A OF THE ACT WHICH P ROVIDES THAT, 'ASSOCIATED ENTERPRISE', IN RELATION TO ANOTHER ENTERPRISE, MEA NS AN ENTERPRISE: (A) WHICH PARTICIPATES, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL OR CAP ITAL OF THE OTHER ENTERPRISE; OR (B) IN RESPECT OF WHICH ONE OR MORE PERSONS WHO PAR TICIPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN ITS MANAG EMENT OR CONTROL OR CAPITAL, ARE THE SAME PERSONS WHO PARTICIPATE, DIRECTLY OR I NDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL O R CAPITAL OF THE OTHER ENTERPRISE. LN THIS CONTEXT, ACCORDING TO SECTION 92F(III) OF T HE ACT, 'ENTERPRISE' MEANS A 'PERSON (INCLUDING A PERMANENT ESTABLISHMENT OF SUC H PERSON) WHO IS, OR HAS BEEN, OR IS PROPOSED TO BE, ENGAGED IN ANY ACTIVITY, RELA TING TO THE PRODUCTION.............. SECTION 92F(IIIA) OF THE ACT CLARIFIES THAT A PERMA NENT ESTABLISHMENT ('PE') IS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. THUS, WE SUBMIT THAT UNDER THE A CT, THE PE IS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF HEAD OFFICE IS BEING CARRIED OUT. THUS, WE SUBMIT THAT DEC-PO AND DEC, CHINA ARE THE SAME ENTE RPRISES AND THE PROJECT OFFICE (I.E. DEC-PO) IN THE INSTANT CASE CANNOT BE REGARDED AS ANOTHER ENTERPRISE. FURTHER, AS PER SECTION 2(31) OF THE ACT PERSON INC LUDES A COMPANY. ON PERUSAL OF THE SAID DEFINITIONS, IT CAN BE SAID THAT THE DEFIN ITION OF ENTERPRISE CONSIDERS A COMPANY AND ITS PE AS THE SAME ENTERPRISE. SINCE AN ENTERPRISE IS SAID TO MEAN A PERSON INCLUDING A PE OF SUCH PERSON, HENCE THE PE OF A COMPANY CANNOT BE CONSIDERED AS DISTINCT FROM THE COMPANY FOR THE PUR POSE OF THE DEFINITION OF ENTERPRISE. HENCE, THE PE OF A COMPANY AND THE COMP ANY ITSELF ARE NOT ASSOCIATED ENTERPRISE. FURTHER, AS YOUR GOODSELF IS AWARE THAT A FOREIGN C OMPANY CAN HAVE ITS EXISTENCE IN INDIA ONLY BY WAY OF ITS BRANCH OFFICE OR PROJECT O FFICE OR LIAISON OFFICE IN INDIA. ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 8 88 8 HENCE, DEC-PO IS TO BE CONSIDERED AS PRESENCE OF DE C, CHINA IN INDIA AND HENCE, DEC, CHINA & DEC-PO CANNOT BE TREATED AS TWO SEPARATE ENTITIES FOR TAX PURPOSES AND SHOULD NOT BE REGARDED AS ASSOCIATED E NTERPRISES. FURTHER, ALL THE REVENUE EARNED BY DEC-PO FROM THE ONSHORE ACTIVITIE S WAS OFFERED TO TAX IN INDIA AS PER THE PROVISIONS OF THE ACT. ALSO, REFERENCE IS MADE TO SECTION 2(7) OF THE ACT WHICH DEFINES ASSESSEE. LN THIS REGARD, IT IS SUBMITTED THAT THE WORD 'ASSESSEE' IN SECTION 2(7) OF THE ACT READ WITH THE DEFINITION OF 'PERSON' IN SECTION 2(31) OF THE ACT WOULD MEAN THAT A PROJECT OFFICE OF A COMPANY NOT BEING AN ARTIFICIAL JURIDIC AL PERSON SHOULD NOT BE TAKEN AS SEPARATE ASSESSEE/ENTITY FOR THE PURPOSE OF TAXATIO N. THEREFORE, IT IS SUBMITTED THAT PE BEING AN EXTENSI ON OF ENTERPRISE, SHOULD ALSO BE TREATED AS THE SAME PERSON I.E. ENTERPRISE WHO IS O R HAS BEEN, OR IS PROPOSED TO BE ENGAGED IN ANY ACTIVITY. LN THIS REGARD, EVEN FOR THE SAKE OF ARGUMENT IF WE ASSUME BUT NOT ACCEPT THAT DEC, CHINA AND ITS PE (I.E. DEC-PO) ARE TWO SEPARATE ENT ERPRISES, THEN BOTH WILL BE CONSIDERED AS ASSOCIATED ENTERPRISE WHEN THEY SATIS FY THE CONDITION PRESCRIBED UNDER SECTION 92A OF THE ACT. SECTION 92A(1) OF THE ACT STATES AS FOLLOWS: 'FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92B, 92C, 92D, 92E AND 92F, ASSOCIATED ENTERPRISE', IN RELATION TO ANOTHER ENT ERPRISE, MEANS AN ENTERPRISE - (A) WHICH PARTICIPATES, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL OR CAP ITAL OF THE OTHER ENTERPRISE; OR (B) IN RESPECT OF WHICH ONE OR MORE PERSONS WHO PAR TICIPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN ITS MANAG EMENT OR CONTROL OR CAPITAL, ARE THE SAME PERSONS WHO PARTICIPATE, DIRECTLY OR I NDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL O R CAPITAL OF THE OTHER ENTERPRISE. FURTHER SUB-SECTION 2 OF SECTION 92A STATES THAT 'F OR THE PURPOSES OF SUB-SECTION (1), TWO ENTERPRISES SHALL BE DEEMED TO BE ASSOCIAT ED ENTERPRISES IF, AT ANY TIME DURING THE PREVIOUS YEAR,- (A)..... (M).................' ON PERUSAL OF THE AFORESAID DEFINITION, IT COULD BE SEEN THAT AS PER SUB-SECTION (1) OF SECTION 92A OF THE ACT, TWO ENTERPRISE ARE SAID TO BE ASSOCIATED ENTERPRISE IN RELATION TO ONE ANOTHER WHEN ONE ENTERPRISE (A) PAR TICIPATES DIRECTLY OR INDIRECTLY OR THROUGH ONE OF MORE INTERMEDIARIES, IN THE MANAG EMENT OR CONTROL OR CAPITAL OF THE OTHER ENTERPRISE; OR (B) IN RESPECT OF WHICH ON E OR MORE PERSONS WHO PARTICIPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN ITS MANAGEMENT OR CONTROL OR CAPITAL, ARE THE SAME PERS ONS WHO PARTICIPATE, DIRECTLY ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 9 99 9 OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIE S, IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER ENTERPRISE. FURTHER, WE SUBMIT THAT WHEN TWO ENTERPRISES FALLS UNDER SUB-SECTION (1) OF SECTION 92A OF THE ACT, THEN SUCH ENTERPRISES HAVE TO FURTH ER FALL UNDER ONE OF THE CLAUSES GIVEN IN SUB-SECTION (2) OF SECTION 92A OF THE ACT TO BE CONSIDERED AS ASSOCIATED ENTERPRISES FOR THE PURPOSE OF TRANSFER PRICING PRO VISIONS OF THE ACT. IN THE INSTANT CASE, ON ASSUMING THAT DEC, CHINA PA RTICIPATES IN THE CONTROL AND MANAGEMENT OF ITS PE (I.E. DEC-PO) AND HENCE FALLS UNDER ONE OF THE CLAUSES OF SUB-SECTION (1) OF SECTION 92A OF THE ACT. HOWEVER, IT IS SUBMITTED THAT ON GOING THROUGH THE CLAUSES AS PROVIDED IN SUB-SECTION (2) OF SECTION 92A OF THE ACT, IT COULD BE SEEN THAT THE DEC, CHINA AND ITS PE/ PROJE CT OFFICE (I.E. DEC-PO) WOULD NOT FALL UNDER ANY OF THE SAID CLAUSES. CONSIDERING THE SAME, IT IS SUBMITTED THAT EVEN IF DEC, CHINA AND DEC-PO ARE CONSIDERED AS SEPARATE ENTERPRISES, THEN ALSO THEY WOULD NOT FALL WITHIN ANY OF THE CLAUSES GIVEN IN SUB-SECTION (2) OF SECTION 92A OF THE ACT FOR CONSIDERING THE SAME AS ASSOCIATED ENTERPRISES. FURTHER, IT IS SUBMITTED THAT THE PE IS NOT A DIFFE RENT PERSON/DIFFERENT ENTERPRISE IS ALSO IN CONSISTENT WITH ARTICLE 5 READ WITH ARTICLE 7 OF DOUBLE TAXATION AVOIDANCE AGREEMENT ('TAX TREATY') ENTERED BETWEEN INDIA WITH CHINA. REFERENCE IS MADE TO ARTICLE 5 OF THE TAX TREATY WH ICH PROVIDES THAT, 'FOR THE PURPOSE OF THIS AGREEMENT, THE TERM 'PERMANENT ESTA BLISHMENT' MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. AS PER ARTICLE 3(G), THE TERM 'ENTERPRISE OF A CONT RACTING STATE' & 'ENTERPRISE OF THE OTHER CONTRACTING STATE 'HAS BEEN DEFINED TO ME AN RESPECTIVELY, AN ENTERPRISE CARRIED ON BY A RESIDENT OF A CONTRACTING STATE AND AN ENTERPRISE CARRIED ON BY A RESIDENT OF THE OTHER CONTRACTING STATE. THE TERM ENTERPRISE HAS NOT BEEN DEFINED IN THE TAX TREATY. HENCE AN ENTERPRISE MEANS CARRYING ON OF BUSINESS AND A FIXED PLACE OF BUSINESS IN ANOTHER CONTRACTING STATE AS A PE OF THE ENTERPRISE AND NOT AN ENTERPRI SE ITSELF. FURTHER, ARTICLE 7(1) OF THE TAX TREATY STATES THAT PROFITS OF AN ENTERPRISE OF CHINA SHALL BE TAXABLE ONLY IN CHINA UNLESS THE ENTERPRIS E CARRIES BUSINESS IN INDIA THROUGH A PE SITUATED THEREIN. LF THE ENTERPRISE CA RRIES ON BUSINESS IN INDIA AS AFORESAID, THE PROFITS OF THE ENTERPRISE MAY BE TAX ED IN INDIA, BUT ONLY SO MUCH OF PROFIT AS IS DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THAT PE. ACCORDINGLY, THE PROFITS ATTRIBUTED TO DEC-PO HAS BEEN ATTRIBUTED AND OFFERE D TO TAX IN RESPECT OF THE ONSHORE SUPPLY AND SERVICES. FURTHER, REFERENCE IS ALSO MADE TO ARTICLE 9 OF THE TAX TREATY WHICH DEFINES ASSOCIATED ENTERPRISES AS UNDER:- 'WHERE, ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 10 00 0 (A) AN ENTERPRISE OF CHINA PARTICIPATES DIRECTLY OR INDIRECTLY IN THE MANAGEMENT, CONTROL OR CAPITAL OF AN ENTERPRISE OF INDIA, OR (B) THE SAME PERSONS PARTICIPATE DIRECTLY OR INDIRE CTLY IN THE MANAGEMENT, CONTROL OR CAPITAL OF AN ENTERPRISE OF CHINA AND AN ENTERPR ISE OF INDIA,AND IN EITHER CASE CONDITIONS ARE MADE OR IMPOSED BETWEEN THE TWO ENTE RPRISES IN THEIR COMMERCIAL OR FINANCIAL RELATIONS WHICH DIFFER FROM THOSE WHIC H WOULD BE MADE BETWEEN INDEPENDENT ENTERPRISES, THEN ANY PROFITS WHICH WOU LD, BUT FOR THOSE CONDITIONS, HAVE ACCRUED TO ONE OF THE ENTERPRISES, BUT, BY REA SON OF THOSE CONDITIONS, HAVE NOT ACCRUED, MAY BE INCLUDED IN THE PROFITS OF THAT ENT ERPRISE AND TAXED ACCORDINGLY.' LN THE INSTANT CASE, WE SUBMIT THAT THERE IS ONLY A CHINESE ENTERPRISE (I.E. DEC, CHINA) AND IT'S PE (I.E. DEC-PO), WHICH IS THE SAME ENTERPRISE AND THEY CANNOT BE TERMED AS ASSOCIATED ENTERPRISES UNDER THE TAX TREA TY. THE ASSESSEE IS A RESIDENT OF CHINA AND IS GOVERNED BY TAX TREATY BETWEEN INDIA A ND CHINA. IN VIEW OF THE AFORESAID, WE SUBMIT THAT CONSIDERING BOTH THE ACT AS WELL AS FAX TREATY BETWEEN INDIA AND CHINA, DEC, CHINA AND DEC-PO CANNOT BE TR EATED AS ASSOCIATED ENTERPRISES. 2. WHY THE TRANSACTIONS BETWEEN YOU AND YOUR PERMANENT ESTABLISHMENT IN INDIA DURING FY 2006-07 SHOULD NOT BE CONSTRUED AS 'INTER NATIONAL TRANSACTIONS' WITHIN THE MEANING OF SECTION 92B READ WITH SECTION 92F(V) OF THE ACT LN THIS REGARD, WE WOULD LIKE TO HAVE YOUR KIND ATT ENTION TO THE TRANSFER PRICING PROVISIONS IN THE ACT PERTAINING TO THE REFERENCE M ADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER. THE PROVISIONS OF SEC TION 92CA(1) OF THE ACT STATES AS UNDER: 'WHERE ANY PERSON, BEING THE ASSESSEE, HAS ENTERED INTO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION IN AN Y PREVIOUS YEAR, AND THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIE NT SO TO DO, HE MAY, WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE CO MPUTATION OF THE ARM'S LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSAC TION OR SPECIFIED DOMESTIC TRANSACTION UNDER SECTION 92C TO THE TRANSFER PRICI NG OFFICER.' THE TERM 'INTERNATIONAL TRANSACTION' HAS BEEN DEFIN ED TO MEAN A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR B ORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME , LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT O R ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR A PPORTIONMENT OF OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PR OVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. DURING FY 2006-07 RELEVANT TO THE SUBJECT AY 2007-0 8, WE WISH TO SUBMIT THAT THERE WAS NO INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. WE ARE ALSO ENCLOSING THE A UDITED FINANCIAL STATEMENT OF ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 11 11 1 DEC-PO FOR THE CAPTIONED FINANCIAL YEAR AS ANNEXURE 4 FROM WHICH IT WILL BE APPARENT THAT THERE HAS NOT BEEN ANY INTERNATIONAL TRANSACTION WITH THE ASSOCIATED ENTERPRISES WHATSOEVER. FURTHER, WE HAVE ALSO ENCLO SED THE CERTIFIED (BY INDIAN EMBASSY OF CHINA) CONSOLIDATED FINANCIAL STATEMENTS IN RESPECT OF THE TWO POWER PROJECTS UNDERTAKEN BY DEC, CHINA IN INDIA (INCORPO RATING BOTH OFFSHORE AND ONSHORE PORTION) FOR FY 2006-07 AS ANNEXURE 5. THE SAID STATEMENT REFLECTS THAT DEC, CHINA HAS INCURRED LOSSES ON THE OVERALL POWER PROJECT (BOTH OFFSHORE AND ONSHORE SUPPLY & SERVICES,) UNDERTAKEN BY IT IN IND IA DURING FY 2006-07. THE ASSESSEE ALSO HUMBLY SUBMITS THAT DURING THE CO URSE OF INITIAL ASSESSMENT PROCEEDINGS VIDE SUBMISSION DATED 22 APRIL 2010, TH E ASSESSEE HAS ALREADY MADE A DETAILED SUBMISSION THAT THE TRANSFER PRICING PROVI SIONS UNDER THE ACT ARE NOT APPLICABLE IN THE CASE OF THE COMPANY FOR THE AY 20 07-08 SINCE NO INTERNATIONAL TRANSACTIONS WERE UNDERTAKEN BY THE COMPANY DURING THE YEAR. WE WISH TO SUBMIT THAT IN THE PRESENT CASE, DEC, CH INA HAS EARNED INCOME FROM TWO UNRELATED ENTITIES IN INDIA I.E. WBPDCL AND DPL AND THE TAX ACCOUNTS OF DEC-PO HAVE BEEN DRAWN TO DETERMINE THE INCOME ATTR IBUTED IN A MANNER WHICH ARE REFLECTIVE OF APPROPRIATE PROFITS FOR THE ACTIV ITIES OF DEC, CHINA IN INDIA. HENCE, IT IS SUBMITTED THAT THERE HAS BEEN NO INTER NATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ANY OF ITS ASSOCIATED ENTERPRISES IN P URSUANCE OF THE CONTRACTS ENTERED INTO WITH WBPDCL AND DPL WHICH COULD BE DEEMED AS A N INTERNATIONAL TRANSACTION WITHIN THE AMBIT OF TRANSFER PRICING PR OVISIONS UNDER THE ACT. THEREFORE, WE SUBMIT THAT THE TRANSFER PRICING PROV ISIONS UNDER THE ACT ARE NOT APPLICABLE IN THE CASE OF THE COMPANY FOR AY 2007-0 8. 3. AS YOU HAVE NOT FURNISHED ANY FORM 3CEB FOR AY 2007 -08, WHY THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS SHOU LD NOT BE COMPUTED BY ADOPTING THE MOST APPROPRIATE METHOD AND BY SELECTI NG COMPARABLES/ APPROPRIATE PROFIT LEVEL INDICATOR OF COMPARABLES, WHICH ARE CA RRYING OUT SIMILAR ACTIVITIES/ FUNCTIONS WE SUBMIT THAT SECTION 92(1) OF THE ACT PROVIDES TH AT THE INCOME FROM INTERNATIONAL TRANSACTIONS SHOULD BE COMPUTED HAVING REGARD TO TH E ARM'S LENGTH PRICE. FURTHER, SECTION 92(2) OF THE ACT STATES THAT, 'WHERE IN AN INTERNATIONAL TRANSACTION, TWO OR MORE ASSOCIATED ENTERPRISES ENTER INTO A MUTUAL AGR EEMENT OR ARRANGEMENT FOR THE ALLOCATION OR APPORTIONMENT OF OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BEN EFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERP RISES, THE COST OR EXPENSE ALLOCATED OR APPORTIONED TO, OR, AS THE CASE MAY BE , CONTRIBUTED BY, ANY SUCH ENTERPRISE SHALL BE DETERMINED HAVING REGARD TO THE ARM'S LENGTH PRICE OF SUCH BENEFIT, SERVICE OR FACILITY, AS THE CASE MAY BE'. LN THIS REGARD, WE WISH TO SUBMIT THAT THE ARM'S LE NGTH PRICE IS TO BE COMPUTED IN CASE OF AN INTERNATIONAL TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES. HOWEVER, AS STATED AFORESAID IN PARA 1 & 2 ABOVE TH AT THE PE OF DEC;, CHINA IN INDIA IS NOT AN ASSOCIATED ENTERPRISE OF DEC AND FURTHER NO INTERNATIONAL TRANSACTION HAS BEEN ENTERED WITH ITS ASSOCIATED EN TERPRISES DURING FY 2006-07 IN PURSUANCE OF THE AFORESAID CONTRACTS WITH WBPDCL AN D DPL WHICH COULD BE ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 12 22 2 DEEMED AS AN INTERNATIONAL TRANSACTION. LN VIEW OF THE SAME, WE SUBMIT THAT THE QUESTION OF DETERMINATION OF ARM'S LENGTH PRICE DOE S NOT ARISE. WITHOUT PREJUDICE TO THE AFORESAID, WE WISH TO SUBM IT THAT THE LOSSES WERE SUFFERED ON THE OVERALL PROJECT (BOTH ONSHORE AND OFFSHORE S UPPLY). THE SAME IS EVIDENCED BY THE CONSOLIDATED FINANCIAL STATEMENTS DULY CERTI FIED BY THE INDIAN EMBASSY OF CHINA IN RESPECT OF THE TWO POWER PROJECTS UNDERTAK EN IN INDIA FOR FY 2006-07 (COPY OF THE SAME IS ALREADY ENCLOSED AS ANNEXURE 5 ) ON PERUSAL OF THE SAID FINANCIAL STATEMENTS, IT WOU LD BE NOTED THAT LOSS WAS INCURRED ON THE OVERALL POWER PROJECT (BOTH OFFSHOR E SUPPLY AND ONSHORE SUPPLY & SERVICES) UNDERTAKEN DURING FY 2006-07. HENCE, IT I S PERTINENT TO NOTE HERE THAT LOSSES WERE SUFFERED NOT ONLY ON ONSHORE SUPPLY AND SERVICES UNDERTAKEN IN INDIA BUT ALSO ON OFFSHORE SUPPLY EXECUTED FROM CHINA IN RESPECT OF THE CONTRACTS ENTERED INTO WITH DPL AND WBPDCL IN INDIA FOR FY 2006-07. A CCORDINGLY, WE SUBMIT THAT THE ISSUE OF APPLICABILITY OF TRANSFER PRICING PROV ISIONS DOES NOT ARISE BETWEEN DEC, CHINA AND DEC-PO. LN THIS REGARD, IT IS RESPECTFULLY SUBMITTED THAT L OSSES WERE SUFFERED ON THE PROJECTS DUE TO THE REASON THAT A FAIR ESTIMATE OF THE VALUE / CONSIDERATION IN RESPECT OF THE PROJECTS COULD NOT BE MADE. FURTHER, DURING THE BID PROCESS DUE CARE AND DILIGENCE WAS EXERCISED ALONG WITH THE EXPERTISE IN QUOTING S UCH PRICE FOR THE PROJECTS. HOWEVER, DUE TO UNAVOIDABLE CIRCUMSTANCES AND DRAST IC INCREASE IN PRICES OF THE RAW MATERIAL & OTHER NECESSARY COST, HUGE LOSSES WE RE SUFFERED FROM THE PROJECTS. IN SPITE OF REASONABLE CARE & DILIGENCE IN QUOTING THE PRICE FOR THE PROJECTS, IT WAS NOT POSSIBLE TO OVERCOME SUCH HUGE LOSSES OR TO RED UCE THE COST. FURTHER, ON PERUSAL OF THE EXPENSES INCURRED BY DEC-PO, IT IS V ERY CLEAR THAT ALL THE EXPENSES ARE NECESSARY AND GENUINE FOR THE PROJECT AND COULD NOT BE ESCAPED BY THE ASSESSEE DURING THE COURSE OF BUSINESS OPERATIONS. ALSO ALL THE MAJOR EXPENSES, SUCH AS EXPENSES ON CIVIL, ERECTION, TRANSPORTATION, INSURA NCE, ETC., ARE IN THE NATURE OF OBLIGATORY AND/ OR CONTRACTUAL PAYMENTS. AS A RESUL T OF THE SAME, LOSSES WERE INCURRED BOTH ON 'OFFSHORE SUPPLY CONTRACT' AND 'ON SHORE SUPPLY & SERVICES CONTRACT'. THE OVERALL PROJECT (BOTH ONSHORE AND OFFSHORE PORT ION) WAS AWARDED TO DEC, CHINA AND FOR EXECUTION OF THE ONSHORE SUPPLY AND S ERVICES THE PROJECT OFFICE WAS OPENED IN INDIA. ACCORDINGLY, THE REVENUE FOR ONSHO RE SUPPLY AND SERVICES HAS BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS OF THE PROJECT OFFICE AND WAS OFFERED TO TAX IN INDIA. LN VIEW OF THE AFORESAID FACTS AND CIRCUMSTANCES OF THE CASE, WE SUBMIT THAT IF AT ALL ANY ATTRIBUTION IS TO BE MADE TO THE PROJECT OFFICE OF DEC, CHINA, THE ATTRIBUTION OF LOSS HAS TO BE MADE SINCE THERE IS AN OVERALL LOSS ON THE PROJECT UNDERTAKEN BY DEC, CHINA. FURTHER, REFERENCE IS MADE TO RULE 10B(1)(D) OF THE RULE WHICH STATES THAT PROFIT SPLIT METHOD ('PSM') MAY BE APPLICABLE IN CASES WHE RE TRANSACTIONS INVOLVED TRANSFER OF UNIQUE, INTANGIBLE OR ANY MULTIPLE INTE RRELATED INTERNATIONAL ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 13 33 3 TRANSACTIONS, WHICH CANNOT BE EVALUATED SEPARATELY FOR DETERMINING THE ARM'S LENGTH PRICE OF ANY ONE TRANSACTION. THIS METHOD INVOLVES DETERMINATION OF OVERALL PROFI T OF THE ASSOCIATED ENTERPRISES ARISING OUT OF THE INTERNATIONAL TRANSACTIONS UNDER TAKEN. LN THIS REGARD, FOR THE APPLICATION OF PSM, THE CONTRIBUTION OF BOTH THE AS SOCIATED ENTERPRISE IS DETERMINED AND THE OVERALL PROFITS OF THE INTERNATI ONAL TRANSACTION ARE ATTRIBUTED TO THE RESPECTIVE ASSOCIATED ENTERPRISE. LN THE INSTANT CASE, IT IS RESPECTFULLY SUBMITTED T HAT LOSS WAS SUFFERED BY DEC, CHINA ON THE OVERALL PROJECTS (INCLUDING BOTH OFFSH ORE SUPPLY AND ONSHORE SUPPLY & SERVICES). HENCE, FOR DETERMINING THE PROFITS OF THE DEC-PO, THE CONTRIBUTION MADE BY DEC-PO IN EXECUTION OF THE ONSHORE SUPPLY A ND SERVICE PORTION OF THE WHOLE CONTRACT HAS TO BE DETERMINED. IRRESPECTIVE O F THE RATIO DETERMINED ON THE BASIS OF CONTRIBUTION MADE BY BOTH DEC, CHINA AND D EC-PO, AS THERE HAS BEEN OVERALL LOSS ON THE PROJECT, HENCE THERE WILL BE AT TRIBUTION OF LOSS TO DEC, KOLKATA AND THE QUESTION OF ATTRIBUTION OF PROFITS DOES NOT APPLY IN ANY CIRCUMSTANCES. WITHOUT PREJUDICE TO THE AFORESAID SUBMISSION, WE F URTHER SUBMIT THAT EVEN IF YOUR GOOD SELF PROCEEDS TO CONSIDER DEC, CHINA AND DEC-P O AS THE ASSOCIATED ENTERPRISES WITHIN THE MEANING OF SECTION 92A OF TH E ACT, THEN FOR COMPUTING THE ARM'S LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TR ANSACTIONS YOUR GOODSELF SHOULD ONLY CONSIDER THE FOREIGN COMPANIES AS COMPARABLES WHO ARE ENGAGED IN ACTIVITIES/ PROJECT IN INDIA SIMILAR TO DEC, CHINA THROUGH THEI R PE'S IN INDIA. WE THEREFORE SUBMIT THAT THE ASSESSEE HAS NOT UNDER TAKEN ANY INTERNATIONAL TRANSACTION DURING THE FY 2006-07 WITH ITS ASSOCIAT ED ENTERPRISES AND HENCE THE ISSUE OF APPLICABILITY OF TRANSFER PRICING PROVISIO NS DOES NOT ARISE UNDER THE PROVISIONS OF THE ACT. ACCORDINGLY, WE SUBMIT THAT SINCE THE TRANSFER PRICING PROVISIONS OF THE ACT ARE NOT APPLICABLE TO THE COM PANY, FORM 3CEB IS NOT REQUIRED TO BE MAINTAINED BY THE COMPANY. WITHOUT PREJUDICE TO ABOVE, FOR THE PURPOSE OF OUR UNDERSTANDING WE AGAIN REQUEST YOUR GOODSELF TO PROVIDE US THE DETAILS OF INTERNAT IONAL TRANSACTION WHICH AS PER YOUR GOODSELF HAS BEEN ENTERED INTO BY THE ASSESSEE COMPANY DURING THE AY 2007- 08 AND WHICH FALLS WITHIN THE AMBIT OF TRANSFER PRI CING PROVISIONS UNDER THE ACT ALONG WITH THE VALUE OF TRANSACTIONS WHICH REQUIRE COMPARISON WITH TESTED PARTIES FOR DETERMINING THE ARM'S LENGTH PRICE. IT WILL KINDLY BE APPRECIATED THAT CLARITY ON VALID ITY OF PROCEEDINGS RELATING TO AY 2007-08 AT THIS POINT OF TIME IS PRELIMINARY AND FO UNDATIONAL TO ANY POSSIBLE PROCEEDINGS. ONCE WE RECEIVE THE CLARIFICATION/ GUI DANCE FROM YOUR HONORS ON UNDER WHICH PROVISION CURRENT PROCEEDINGS ARE BEING UNDERTAKEN, WE MAY KINDLY BE ALLOWED TO MAKE SUCH FURTHER SUBMISSIONS (BOTH O N PRELIMINARY ISSUES AS ALSO MERITS) AS WE ARE ADVISED TO BEFORE CONCLUDING THE PROCEEDINGS. WE WOULD BE MOST OBLIGED FOR THIS ACT OF KINDNESS. ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 14 44 4 8. THEN AFTER THE LD. TPO DISCUSSED IN HIS ORDER AB OUT THE POSITION UNDER INDIA VS. CHINA TREATY, INTERNATIONAL TAX PRACTICE AND DO MESTIC TAX LAW. THE TPO ALSO DISCUSSED IN HIS ORDER VIDE PARA 40 ABOUT THE THEOR Y WHICH IS MENTIONED IN THE BOOK WRITTEN BY JOSEPH A. HUSE, UNDERSTANDING AND NEGOT IATING TURNKEY AND EPC CONTRACTS. THE LD. TPO THEN AGAIN DISCUSSED THE TH EORY OF ANOTHER BOOK WRITTEN BY ANOTHER AUTHOR FIDIC SILVER BOOK WITH RESPECT TO CO NTRACT AND SUFFICIENCY OF THE CONTRACT PRICE. 9. HAVING DISCUSSED THE THEORY ABOUT THE CONTRACT P RICE AND THE NEGOTIATING OF TURNKEY AND EPC CONTRACTS, THE LD. TPO CONCLUDED TH AT IN THE ASSESSEE`S CASE THE TRANSACTIONAL NET MARGIN METHOD(TNMM METHOD) WOUL D BE APPLICABLE TO COMPUTE THE ARM`S LENGTH PRICE ADJUSTMENT (ALP). TH E LD TPO ALSO HELD THAT THE COMPARABLE UNCONTROLLED PRICE METHOD(CUP METHOD) IS NOT APPLICABLE TO THE ASSESSEE. THE LD TPO EVENTUALLY FOLLOWED TNMM METHO D AND TOOK THE COMPARABLES OF M/S. THERMAX INSTRUMENTATION LTD. AN D WORKED OUT THE RATIO OF OPERATING MARGIN (I.E. PBT/TOTAL COST) @6.97%, AND COMPUTED THE TRANSFER PRICING ADJUSTMENT. THE LD TPO OBSERVED THAT IN THE ASSESSEE`S CASE, TH E TNMM IS BEING APPLIED TO ARRIVE AT THE ARMS LENGTH PRICE. SINCE THE TERMS A ND THE CONDITIONS OF THE CONTRACT AND THE RISK ALLOCATED TO THE PE VIS-A-VIS THE OFFS HORE CONTRACT WERE NOT IN THE CONTROL OF THE PE, THE MARK-UP OVER COST IS CONSIDE RED AS THE APPROPRIATE PROFIT- LEVEL INDICATOR, AS AN INDEPENDENT SUB-CONTRACTOR F OR THE ONSHORE CONTRACT WOULD HAVE CONSIDERED THE SAME WHILE NEGOTIATING THE CONT RACT AS AN INDEPENDENT PARTY. THE LD TPO NOTED THAT SO FAR AS BENCHMARKING THE TR ANSACTIONS AND APPLYING THE TRANSFER PRICING METHODS ENUMERATED IN SECTION 92C OF THE ACT ARE CONCERNED, IT CAN BE CONSTRUED THAT AS AN INDEPENDENT ENTITY, THE PE OF THE ASSESSEE IN INDIA WOULD HAVE CHARGED AN APPROPRIATE AMOUNT FOR THE SE RVICES RENDERED. LN LIEU OF THE SERVICES THAT THE PE HAS RENDERED IN IMPLEMENTING T HE 'SERVICES AND SUPPLIES CONTRACT' ON BEHALF OF M/S. DONGFANG ELECTRIC CORPO RATION, CHINA, AND THE RISKS ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 15 55 5 UNDERTAKEN BY IT, IT IS TO BE SEEN WHETHER THE INTE RNATIONAL TRANSACTION IS AT ARMS LENGTH PRICE OR NOT. THE LD TPO NOTICED THAT FROM THE PROFIT & LOSS ACCO UNT SUBMITTED BY THE PE FOR THE ASSESSMENT YEAR 2007-08, THAT IT HAD DISCLOSED A LOSS OF RS.67,11,07,016/-. THIS LOSS HAS ARISEN ON ACCOUNT OF EXPENSES INCURRED AMO UNTING TO RS.332,80,55,124/- (INCLUSIVE OF DEPRECIATION OF RS.4,54,98,363/-) WHI LE THE REVENUES HAVE BEEN REPORTED AT RS.265,69,48,108/- FROM WEST BENGAL POW ER DEVELOPMENT CORPORATION LIMITED AND DURGAPUR PROJECTS LIMITED ON BEHALF OF DEC, CHINA ON ACCOUNT OF THE EXECUTION OF THE ONSHORE SERVICES CONTRACT. THE LD TPO, IN ORDER TO ARRIVE AT AN ARM'S LENGTH P RICE, A BENCHMARK HAS TO BE FOUND OUT. FOR THIS PURPOSE, A SEARCH WAS MADE IN T HE PROWESS DATABASE BASED ON THE FOLLOWING COMMANDS: I. CIVIL WORKS & ERECTION & COMMISSIONING OF CO-GEN ERATION PLANTS II. ERECTION & COMMISSIONING III. ERECTION & COMMISSIONING SERVICE CHARGES IV. ERECTION & COMMISSIONING SERVICES V. ERECTION & INSTALLATION VI. ERECTION & INSTALLATIONS VII. ERECTION & OTHER SERVICES VIII. ERECTION AND COMMISSIONING IX. ERECTION AND COMMISSIONING CHARGES X. ERECTION SERVICE, CIVIL WORKS & OTHER SERVICES XI. ERECTION, INSTALLATION & OTHER SERVICES XII. ERECTION/COMMISSIONING/DRAWING/SUPERVISION XII. ELECTION/SUPERVISION CHARGES THE SEARCH RESULTED IN COMPANIES WHICH HAD SUPPLY O F MACHINERY OR OTHER COMPLEX FUNCTIONS, ONLY M/S THERMAX INSTRUMENTATION LIMITED , QUALIFIED OUT OF THE COMPANIES THROWN UP BY THE DATABASE. IT IS A SUBSID IARY OF M/S THERMAX LTD AND THE ANNUAL REPORT MENTIONS THAT IT FOCUSES ITS OPER ATIONS ON INSTALLATION AND ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 16 66 6 COMMISSIONING OF POWER AND COGENERATION PLANTS INCL UDING CIVIL CONSTRUCTION. IN F.Y. 2006-07, IT HAD OPERATING REVENUE OF RS.42.37 CRORES AND AN OPERATING REVENUE OF RS. 2.76 CRORES. ITS OPERATING MARGIN OV ER TOTAL COSTS OF RS. 39.61 CRORES IS PRESENTED BELOW: COMPANY NAME OPERATING MARGIN (PBT/TOTAL COST) (FY 2006-07) THERMAX INSTRUMENTATION LIMITED 6.97% FROM THE ABOVE CHART IT IS SEEN THAT THE MARGIN ON THE COST INCURRED BY THE COMPARABLE UNDER CONSIDERATION IS 6.97%. THE COST I NCURRED BY THE ASSESSEE COMPANY DURING THE YEAR IS RS.332,80,55,124/-. HENC E, THE ASSESSEE IS ENTITLED TO BE REMUNERATED @6.97% OF RS.332,80,55,124/- WHICH C OMES TO RS.23,19,97,218/-. HENCE, IN VIEW OF THE CONCEPT OF ARMS LENGTH PRICI NG, THE ASSESSEE COMPANY SHOULD HAVE EARNED A PROFIT OF RS.23,19,97,218/- IN STEAD OF THE BOOK LOSS OF RS.67,11,07,016/-. THEREFORE, TPO MADE UPWARD ADJUSTMENT TO THE TOTAL INCOME OF THE ASSESSEE AT RS.90,31,04,234/-( RS. 23,19,97,218 + RS. 67,11,07, 016). 10. AGGRIEVED BY THE ORDER OF THE LD. TPO, THE ASSE SSEE FILED OBJECTIONS BEFORE THE LD DISPUTE RESOLUTION PANEL WHO HAS CONFIRMED T HE TP ADJUSTMENT MADE BY THE LD TPO OBSERVING THE FOLLOWING: DRP'S DIRECTIONS 2.4.1 IN THIS CASE NO FORM-3 CEB HAD BEEN FILED ALO NG WITH ITS RETURN OF INCOME. THE TPO HAD, DURING THE INITIAL/ORIGINAL ASSESSMENT PROCEEDINGS, CARRIED OUT APPROPRIATE ANALYSIS FOR APPLICATION OF MAM IN RESP ECT OF THE ABOVE DISCUSSED INTERNATIONAL TRANSACTIONS AND AFTER DUE FAR ANALYS IS HE SELECTED 08 COMPARABLES FOLLOWING CUP FOR MAKING THE ADJUSTMENT, WHICH HAD BEEN UPHELD BY THE DRP AS WELL AS THE HONBLE ITAT(SUPRA) THOUGH THE HONBLE ITAT HAD SET ASIDE THE ASSESSMENT ORDER FOR CONSIDERATION OF THE ASSESSEE' S CONTENTION REGARDING OVERALL LOSS. DURING THE ORIGINAL TP PROCEEDINGS, THE ASSES SEE HAD CONTENDED BEFORE THE TPO FOR APPLYING PSM INSTEAD OF CUP. LN THE SET ASI DE FRESH ASSESSMENT ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 17 77 7 PROCEEDINGS THE TPO APPLIED TNMM AND SELECTED ONE C OMPARABLE AFTER APPLYING NECESSARY FILTERS, HOWEVER, BEFORE DRP, BY GIVING G ENERAL ARGUMENTS, THE ASSESSEE OBJECTED TO THE APPLICATION OF TNMM AND HAS GIVEN A LTERNATE ARGUMENTS FOR APPLYING CUP AND PSM.LN RESPECT OF THE CUP IT HAS B EEN ARGUED THAT AGREEMENT ENTERED BETWEEN DEC CHINA AND THE THIRD PARTY CONTR ACTEES (DPL AND WBPDCL) CONSTITUTE A PERFECT INTERNAL CUP FOR THE ACTIVITIE S CARRIED OUT BY DEC-PO IN LNDIA AND THE VALUE AGREED BETWEEN DEC CHINA AND DPL AND WBPDCL IN RELATION TO THE ONSHORE CONTRACT CAN BE CONSIDERED TO BE VALUE FOR THE SERVICES RENDERED BY DEC-PO IN INDIA SINCE THE PROJECT OFFICE IS CARRYIN G OUT THE SAME ACTIVITIES AND THE PROJECT OFFICE IS BEING REMUNERATED AT THE AMOU NT AGREED BETWEEN DEC CHINA AND DPL AND WBPDCL. AS REGARDS PSM, IT HAS BEEN ARG UED THAT THE TPO REJECTED THIS METHOD IN ABSENCE OF PROFITABILITY DA TA OF AES BASED IN BAHAMAS AND USA BUT THAT DEC CHINA HAS NO AES BASED OUT OF BAHA MAS AND USA AND THEREFORE THE TPO WAS NOT JUSTIFIED IN REJECTING TH E PSM METHOD ON THE BASIS OF INCORRECT FACT. 2.4.2 THE LD. AR HAS ALSO SUBMITTED THAT THE COMPAR ABLE, THERMAX INSTRUMENTATION LIMITED (THERMAX INSTRUMENTATION LIMITED), SELECTED BY THE TPO APPLYING TNMM IS NOT COMPARABLE ARGUING THAT, THERMAX INSTRUMENTATION LIMITED COULD NOT BE SAID T O BE A PROJECT OFFICE OF A FOREIGN ENTITY, THERMAX INSTRUMENTATION LIMITED IS ANLNDIAN ENTITY INCORPORATED IN LNDIA SINCE 1996 AND ENGAGED IN VARIOUS UTHERMAX INSTRUMENTATION LIMITEDITY PROJECTS SUCH AS WASTE WATER TREATMENT S ERVICES AND UNDERTAKES TURNKEY PROJECTS THERMAX INSTRUMENTATION LIMITED IS ENGAGED IN THE B USINESS FROM A LONG PERIOD OF TIME, HAVING HUGE RESOURCES A ND MANPOWER FOR EXECUTING THE PROJECTS; DURING THE FY 2006-07 THERMAX INSTRUMENTATION LIMIT ED GROUP RESTRUCTURED EXPANDING ACTIVITIES SUCH AS SUPPLY OF ELECTRONIC AND INSTRUMENTATION SYSTEMS, ELECTRICAL INSTALLATIONS, ERECTION AND COMMISSIONING OF POWER PLANTS, CONGENERATION PLANTS INCLUDING CIVIL CONSTRUCTION WORK; FURTHER NO SEGMENTAL INFORMATION OF THE COMPANY IS AVAILABLE RELATING ITS INCOME FROM VARIOUS SOURCES AND ACTIVITIES; AFTER THE COMPLETION OF THE PROJECTS THE ASSESSEE W OULD HAVE TO SHUT ITS PROJECT OFFICE AND HENCE, THE AFORESAID COMPARISON IS UNREALISTIC; THE ASSESSEE HAS SUBMITTED THE ANNUAL ACCOUNTS OF T HERMAX INSTRUMENTATION LIMITED FOR FY 2006-07 IN A CD. ON PERUSAL OF THE ACTIVITIES OF THERMAX INSTRUMENTATION LIMITED IT IS OBSERVED THAT THERMAX INSTRUMENTATION LIMITED IS ENGAGED IN CARRY ING OUT CONTRACTS ITSELF IN THE POWER AND ENGINEERING SECTOR. AS PER NOTE-16 TO THE ACCOUNTS THERE IS ONLY ONE SEGMENT AND THE EXPANDED ACTIVITIES ARE RE LATED TO THE MAIN BUSINESS OF THERMAX INSTRUMENTATION LIMITED AS HAS ALSO BEEN ME NTIONED IN THE ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 18 88 8 DIRECTORS' REPORT WHEREIN IT HAS BEEN MENTIONED THA T 'THE ECONOMY IS BOOMING, ESPECIALLY THE POWER AND ENGINEERING SECTOR. WITH A VIEW TO USE THIS OPPORTUNITY TO GOOD ADVANTAGE THE PARENT COMPANY THERMAX LIMITE D HAD UNDERTAKEN A RESTRUCTURING EXERCISE FOR THE GROUP COMPANIES'. TH E FAR IS BROADLY SIMILAR AS IF REQUIRED UNDER TNMM. HENCE, THERE IS NO INFIRMITY I N THE APPROACH OF THE TPO. 2.4.3 HOWEVER, WE FIND THAT THE TPO HAS NOT GIVEN C OGENT REASONS FOR NOT APPLYING CUP, WHICH WAS APPLIED IN THE ORIGINAL TP/ASSESSMEN T PROCEEDINGS. LN THE CURRENT IMPUGNED PROCEEDINGS ONLY 01 COMPARABLE WAS SELECTE D UNDER TNMM THE FAR OF WHICH, ACCORDING TO THE ASSESSEE, IS NOT COMPARABLE TO THE DEC-PO CONSIDERING THAT DEC-PO WAS ENGAGED IN THE SINGLE PROJECT OF DP L/WBPDCL THE SCOPE AND ACTIVITIES OF WHICH HAVE BEEN DISCUSSED ABOVE. THE TPO HAS REJECTED CUP ON THE GROUND THAT THE AUTHENTIC GROSS LEVEL INFORMATION I S NOT AVAILABLE. SINCE THE ASSESSEE ITSELF HAS ARGUED FOR APPLICATION OF CUP, AND HAS NOT PRESENTED ANY ARGUMENT AGAINST THE 08 COMPARABLES SELECTED BY THE TPO DURING THE ORIGINAL ASSESSMENT/TP PROCEEDINGS, THE PANEL IS OF THE VIEW THAT IF THE AUTHENTIC GROSS LEVEL INFORMATION IS AVAILABLE HE SHOULD APPLY CUP AND CONSIDER THE SAME 08 COMPARABLES SELECTED DURING THE ORIGINAL ASSESSMENT /TP PROCEEDINGS, OTHERWISE, AS HELD IN PARA-2.4.2 ABOVE, TNMM SHOULD BE APPLIED WITH THERMAX INSTRUMENTATION LIMITED AS THE COMPARABLE. 11. AGGRIEVED BY THE ORDER OF THE HONBLE DRP/A.O, THE ASSESSEE IS IN APPEAL BEFORE US. 12. THE LD. COUNSEL FOR THE ASSESSEE, SHRI NAGESHWA R RAO, BEGINS BY POINTING OUT THAT IN ASSESSEE`S CASE UNDER CONSIDERATION ONL Y COMPARABLE UNCONTROL PRICE METHOD, (INTERNAL CUP-METHOD) IS SUITABLE TO COMPUT E THE ARM`S LENGTH PRICE ADJUSTMENT. BY APPLYING CUP-METHOD, NO ANY TRANSFER PRICING ADJUSTMENT IS JUSTIFIED, AS IN ASSESSEE`S CASE THERE IS A PERFECT CUP. LN PRESENT CASE, EVEN IF, IT IS POSSIBLE (FOR ARGUMENT SAKE ONLY)FOR ONE TO REFER P ROFIT ATTRIBUTION EXERCISE TO TPO UNDER SECTION 92CA OF THE ACT, IT DOES NOT ALTER TH E CONCLUSION THAT FOR ONSHORE CONTRACT A CUP IS AVAILABLE IN TERMS OF SECTION 92C READ WITH RULE 10C(2). LN PRESENT CASE, IT CANNOT BE DENIED THAT EVEN IN TERM S OF RULE 10B(2) ALL DETAILS FOR APPLICATION OF CUP ARE AVAILABLE, INCLUDING DETAILS LIKE TERMS OF CONTRACT (WHICH ARE NORMALLY NOT AVAILABLE IN ANY EXTERNAL COMPARIS ON). THERE IS NO JUSTIFICATION FOR REJECTING CUP AND UPHOLDING TNMM AS TPO HAS SOUGHT TO APPLY ON VAGUE AND SPECULATIVE NOTIONS. THE COUNSEL ALSO SUBMITTED BEF ORE THE BENCH THAT IN ASSESSEE`S CASE THERE IS NO INTERNATIONAL TRANSACT ION IT IS JUST REIMBURSEMENT OF ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 1 11 19 99 9 EXPENSES TO THE ASSESSSEE COMPANY DONGFANG ELECTR IC CORPORATION-PROJECT OFFICE KOLKATA BY THE GOVERNMENT OF WEST BENGAL ( WBPDCL) AT THE INSTANCE OF THE DONGFANG ELECTRIC CORPORATION, CHINA THE LD COUNSEL POINTED OUT THAT THERE IS NO FAR ANA LYSIS FOR SELECTION OF MOST APPROPRIATE METHOD (MAM) FOR TNMM AND SELECTION OF COMPARABLE ARE DISCUSSED IN CRYPTIC WAY BY LD TPO. REFERENCE TO LD TPO ORDER IN SECOND ROUND (WHICH ARE IMPUGNED IN PRESENT APPEALS) WOULD SHOW THAT EXCEPT IPSE DIXIT OF TPO NO OTHER REASONS ARE CITED ON HOW TNMM IS MOST APPROPRIATE M ETHOD IN TERMS OF SECTION 92C R.W. RULES 10B AND 10C OF THE RULES. FURTHER NO SEARCH PROCESS IS INDICATED THE BASIS WHICH THERMAX IS SELECTED AS COMPARABLE. IT IS CLEAR, THAT THE WHOLE EXERCISE IS PREDETERMINED AND VITIATED. LDDRP HAS R OUTINELY UPHELD TPO ACTIONS PERPETUATING SUCH INJUSTICE. HAVING FOUND THAT TPO' S ACTION IN REJECTING CUP IS WITHOUT COGENT REASONS, DRP OUGHT TO HAVE CLEARLY D IRECTED APPLICATION OF CUP. FURTHER VAGUE OBSERVATIONS TO APPLY TNMM ETC., BY L OOKING 8 COMPARABLE COMPANIES SELECTED IN ORIGINAL PROCEEDINGS IS IMPER MISSIBLE IN LAW AS EARLIER PROCEEDINGS IN WHICH SUCH 8 COMPANIES WERE CONSIDER ED AS COMPARABLE BY TPO HAVE BEEN QUASHED AND IN FRESH PROCEEDINGS TPO HAS ONLY CRYPTICALLY (WITHOUT CITING ANY REASONS AND UNDERLYING SEARCH PROCESS) C ONCLUDED THAT THERMAX IS THE ONLY COMPARABLE FOR TNMM METHOD. HENCE, LD COUNSEL PRAYED THE BENCH THAT BY APPLYING THE INTERNAL CUP METHOD, NO ANY ARM`S LENG TH PRICE ADJUSTMENT IS REQUIRED, THEREFORE THE UPWARD ADJUSTMENT DONE BY L D TPO AT RS.90,31,04,234/- NEEDS TO BE DELETED. 13. ON THE OTHER HAND, LD DR FOR THE REVENUE SUBMIT TED BEFORE US THAT PROJECT OFFICE DONGFANG ELECTRIC CORPORATION- PROJECT OFF ICE WAS TREATED AS A PERMANENT ESTABLISHMENT (PE) OF THE ASSESSEE IN IND IA FOR TAX PURPOSES. THE ASSESSEE DID NOT DISPUTE THIS FACT. THUS, THE PE OF THE ASSESSEE IS AN 'ENTERPRISE' UNDER THE PROVISIONS OF SECTIONS 92F(III) AND 92F(I IIA) OF THE ACT. AS THE ASSESSEE MANAGED AND CONTROLLED ITS PE IN INDIA, THE PE CONS TITUTED AN 'ASSOCIATED ENTERPRISE' (AE) OF THE ASSESSEE UNDER SECTION 92A OF THE ACT. THUS, ANY TRANSACTION BETWEEN THE PE AND THE ASSESSEE WOULD C ONSTITUTE AN 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B OF THE ACT AND COME UNDER THE PURVIEW OF SECTION ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 20 00 0 92 OF THE ACT. THE 'ARM'S LENGTH PRINCIPLE WOULD HA VE TO BE APPLIED TO THE TRANSACTIONS BETWEEN THE ASSESSEE AND ITS PE IN IND IA. ACCORDINGLY, EVEN THOUGH THE ASSESSEE HAD NOT FILED ANY FORM 3CEB, WITH ITS RETURN OF INCOME FOR A.Y. 2007-08, A REFERENCE WAS MADE BY THE ASSESSING OFFI CER U/S 92CA(1) OF THE ACT TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF A RM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BETWEEN THE ASSESSEE AND ITS PE IN INDIA. IN THE ASSESSEE`S CASE, THE TNMM IS BEING APPLIED TO A RRIVE AT THE ARMS LENGTH PRICE. SINCE THE TERMS AND THE CONDITIONS OF THE CONTRACT AND THE RISK ALLOCATED TO THE PE VIS-A-VIS THE OFFSHORE CONTRACT WERE NOT IN THE CON TROL OF THE PE, THE MARK-UP OVER COST IS CONSIDERED AS THE APPROPRIATE PROFIT-LEVEL INDICATOR, AS AN INDEPENDENT SUB- CONTRACTOR FOR THE ONSHORE CONTRACT WOULD HAVE CONS IDERED THE SAME WHILE NEGOTIATING THE CONTRACT AS AN INDEPENDENT PARTY. T HE LD TPO NOTED THAT SO FAR AS BENCHMARKING THE TRANSACTIONS AND APPLYING THE TRAN SFER PRICING METHODS ENUMERATED IN SECTION 92C OF THE ACT ARE CONCERNED, IT CAN BE CONSTRUED THAT AS AN INDEPENDENT ENTITY, THE PE OF THE ASSESSEE IN INDIA WOULD HAVE CHARGED AN APPROPRIATE AMOUNT FOR THE SERVICES RENDERED. THERE FORE, LD TPO HAS RIGHTLY APPLIED THE TNMM METHOD TO COMPUTE THE ARM`S LENGTH PRICE ADJUSTMENT AT RS.90,31,04,234/- AND HENCE, THE TPO`S ORDER SHOULD BE UPHELD. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE NOTE THAT THE CORE CONTROVERSY IN THIS A PPEAL IS WHETHER TRANSACTIONAL NET MARGIN METHOD (TNMM) OR COMPARABLE UNCONTROL PR ICE METHOD(CUP) IS APPLICABLE TO COMPUTE THE ARM`S LENGTH PRICE (ALP)? THE LD COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT ONLY CUP METHOD I S APPLICABLE WHEREAS LD DR FOR THE REVENUE REITERATED BEFORE US THE STAND TAKE N BY THE LD TPO TO APPLY THE TNMM METHOD. WE NOTE THAT LD. TPO APPLIED TNMM METH OD TO MAKE THE TP ADJUSTMENT TO THE TUNE OF RS.90,31,04,234/-. TO ADJ UDICATE THIS ISSUE, LET US, FIRST OF ALL, WE SHOULD ANALYZE THE CONTRACT BETWEEN THE ASS ESSEE COMPANY AND THE CONTRACTEE. WE NOTE THAT THE ASSESSEE HAS ENTERED I NTO AN AGREEMENT TO EXECUTE THE DURGAPUR PROJECT LIMITED. THE AGREEMENT BETWEEN THE DONGFANG ELECTRIC ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 21 11 1 CORPORATION, CHINA AND THE DURGAPUR PROJECT LIMITED IS GIVEN BELOW FOR READY REFERENCE: ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 22 22 2 WE NOTE THAT IT IS A SINGLE CONTRACT BETWEEN THE AS SESSEES HOLDING COMPANY, DONGFANG ELECTRIC CORPORATION, CHINA ( IN SHORT DEC-CHINA) AND DURGAPUR PROJECTS LTD. FOR THIS SINGLE PROJECT, THE LD. TPO HAS APPLIED TNMM BY TAKING INTO ACCOUNT THE PROFIT LEVEL INDICATORS OF COMPANY M/S THERMAX INSTRUMENTATION LIMITED. LN RESPECT OF THE CUP IT HAS BEEN ARGUED THAT AGREEMENT ENTERED BETWEEN DEC CHINA AND THE THIRD PARTY CONTRACTEES (DPL AND WBPDCL) CONSTITUTE A PERFECT INTERNAL CUP FOR THE ACTIVITIES CARRIED OUT BY DONGFANG ELECTRIC CORPORATION-PROJECT OFFICE KOLKATA ( IN SHORT DEC -PO) IN INDIA AND THE VALUE AGREED BETWEEN DEC CHINA AND DPL AND WBPDCL IN RELA TION TO THE ONSHORE ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 23 33 3 CONTRACT CAN BE CONSIDERED TO BE VALUE FOR THE SERV ICES RENDERED BY DEC-PO IN LNDIA SINCE THE PROJECT OFFICE IS CARRYING OUT THE SAME ACTIVITIES AND THE PROJECT OFFICE IS BEING REMUNERATED AT THE AMOUNT AGREED BE TWEEN DEC CHINA AND DPL AND WBPDCL. THEREFORE, THE DEC-PO IN INDIA IS BEING REMUNERATED BY THIRD PARTY CONTRACTEES (DPL AND WBPDCL) AND AS PER LD CO UNSEL, WHICH MAY CONSTITUTE A PERFECT INTERNAL CUP. THEREFORE, TNMM METHOD FAILS IN THE ASSESSEE`S CASE. WE NOTE THAT THE COMPARABLE, THERMAX INSTRUMENTATI ON LIMITED, SELECTED BY THE TPO APPLYING TNMM IS NOT COMPARABLE BECAUSE OF THE FOLLOWING REASONS: THERMAX INSTRUMENTATION LIMITED COULD NOT BE SAID T O BE A PROJECT OFFICE OF A FOREIGN ENTITY. THERMAX INSTRUMENTATION LIMITED IS AN INDIAN ENTITY INCORPORATED IN INDIA SINCE 1996 AND ENGAGED IN VARIOUS PROJECTS SUCH AS WASTE WATER TREATMENT SERVICES AND UNDERTAKES TURNKEY PROJECTS. ITS ACTIV ITIES ARE DIFFERENT FROM THE ASSESSEE. THERMAX INSTRUMENTATION LIMITED IS ENGAGED IN THE B USINESS FROM A LONG PERIOD OF TIME, HAVING HUGE RESOURCES AND MANPOWER FOR EXECUTING THE PROJECTS; DURING THE FY 2006-07 THERMAX INSTRUMENTATION LIMIT ED GROUP RESTRUCTURED EXPANDING ACTIVITIES SUCH AS SUPPLY OF ELECTRONIC AND INSTRUMENTATION SYSTEMS, ELECTRICAL INSTALLATIONS, ERECTION AND COMMISSIONING OF POWER PLANTS, CONGENERATION PLANTS INCLUDING CIVIL CONSTRUCTION WORK; FURTHER NO SEGMENTAL INFORMATION OF THE COMPANY IS AVAILABLE RELATING ITS INCOME FROM VARIOUS SOURCES AND ACTIVITIES; AFTER THE COMPLETION OF THE PROJECTS THE ASSESSEE W OULD HAVE TO SHUT ITS PROJECT OFFICE AND HENCE, THE AFORESAID COMPARISON IS UNREALISTIC. THEREFORE, WE ARE OF THE VIEW THAT TNMM METHOD APPL IED BY THE LD TPO IS NOT A MOST APPROPRIATE METHOD (MAM) FOR THE ASSESSEE COMP ANY UNDER CONSIDERATION. ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 24 44 4 15. NOW, WE ANALYZE THE SECOND PROJECT WHICH ALSO R ELATES TO GOVT. OF WEST BENGAL IN RESPECT OF SETTING UP OF A PROJECT OF THE RMAL POWER PROJECT AT DURGAPUR, WEST BENGAL. THE CONTRACT BETWEEN THE ASSESSEE AND THE GOVT. OF WEST BENGAL IS GIVEN BELOW FOR READY REFERENCE: ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 25 55 5 ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 26 66 6 ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 27 77 7 AFTER GOING THROUGH THE AGREEMENT BETWEEN THE WEST BENGAL THERMAL POWER PROJECT AND THE ASSESSEE COMPANY, WE NOTE THAT THIS IS A UNIQUE PROJECT WHERE IT IS DIFFICULT TO APPLY TNMMMETHOD. WE HAVE GIVEN DETAIL ED REASONING IN PARA NO.14 OF OUR ORDER, WHICH ARE APPLICABLE TO THIS AGREEMEN T ALSO, THEREFORE, FOR THE SAKE OF BREVITY, WE DO NOT REPEAT THEM. 16.WE NOTE THAT THE CORNERSTONE OF TRANSFER PRICING PRINCIPLE IS THE COMPARABILITY ANALYSIS OF A CONTROLLED TRANSACTION WITH AN UNCONT ROLLED TRANSACTION WHICH IS SUBSTRATUM OF ARRIVING AT ARMS LENGTH PRICE. THE CONTROLLED A ND UNCONTROLLED TRANSACTIONS ARE COMPARABLE IF NONE OF THE DIFFERENCES BETWEEN THE T RANSACTIONS MATERIALLY AFFECT THE FACTOR BEING EXAMINED IN A GIVEN METHODOLOGY, WHETH ER DETERMINATION OF PRICES OR FOR PROFIT MARGIN AND FOR SUCH DETERMINATION A REASONAB LE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF ANY SUCH DIFFE RENCES. RULE 10B(2) OF INCOME TAX RULES, PROVIDES THE COMPARABILITY OF THE TRANSACTIO N WITH UNCONTROLLED TRANSACTION WHICH HAS TO BE JUDGED WITH REFERENCE TO SPECIFIC CHARACT ERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED; FAR ANALYSIS; CONTRACTUAL TERMS; CONDITIONS PREVAILING IN THE MARKETS, ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 28 88 8 THAT IS, ECONOMIC CONDITIONS IN WHICH RESPECTIVE PA RTIES TRANSACT OR OPERATE INCLUDING GEOGRAPHICAL LOCATIONS, SIZE ETC. THUS, COMPARISON OF ATTRIBUTES OF THE TRANSACTION IS CARRIED WHICH WOULD AFFECT CONDITIONS IN ARMS LENG TH DEALING. RULE 10B (3) SPECIFICALLY PROVIDES AS UNDER:- AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION IF- (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSA CTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. THIS, RULE SPECIFICALLY RECOGNIZES THAT REASONABLY ACCURATE ADJUSTMENT SHOULD BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF DIFFERENCES, IF A NY. SUB-RULE (2) LAYS DOWN THE FACTORS FOR DETERMINING COMPARABILITY WHEREAS; SUB-RULE (3) LAY S DOWN THE STANDARD OF COMPARABILITY. THE STANDARD COMPARABILITY NOT NECES SARILY ENTAILS COMPLETE IDENTITY BETWEEN THE TWO TRANSACTIONS BUT SUFFICIENT SIMILAR ITY. IT CAN BE HELD TO BE SUFFICIENT SIMILAR IF THE DIFFERENCES BETWEEN THEM IS NOT MATE RIAL SO AS TO EFFECT PRICE OR PROFIT IN THE OPEN MARKET AND IF THERE IS ONE SUCH THING, THEN SU CH A MATERIAL DIFFERENCE NEEDS TO BE ELIMINATED THROUGH ADJUSTMENTS. THE FACTORS GOVERNI NG THE PRICE OR PROFIT IN A TRANSACTION MAY DEPEND UPON BUSINESS STRATEGIES, MARKET CONDITI ONS, COMPETITIONS, MARKET PENETRATION SCHEMES, GEOGRAPHICAL LOCATIONS, CLIMAT IC CONDITIONS, ETC. GUIDELINES ISSUED BY OECD ALSO RECOGNIZED THE BUSINESS STRATEGIES ADO PTED BY THE COMPANIES WHICH HAVE A BEARING ON PROFITABILITY LEVELS. PARA 1.60 AND 1.62 OF OECD GUIDELINES FOR THE SAKE OF READY REFERENCE ARE REPRODUCED HEREUNDER: PARA 1.60 OF THE GUIDELINES STATES AS UNDER: BUSINESS STRATEGIES ALSO COULD INCLUDE MARKET PENE TRATE SCHEMES. A TAXPAYER SEEKING TO PENETRATE A MARKET OR TO INCREA SE ITS MARKET SHARE MIGHT TEMPORARILY CHARGE A PRICE FOR ITS PRODUCT TH AT IS LOWER THAN THE PRICE CHARGED FOR OTHERWISE COMPARABLE PRODUCTS IN THE SAME MARKET. FURTHERMORE, A TAXPAYER SEEKING TO ENTER A NEW MARK ET OR EXPAND (OR DEFEND) ITS MARKET SHARE MIGHT TEMPORARILY INCUR HI GHER COSTS (E.G. DUE TO START-UP COSTS OR INCREASED MARKETING EFFORTS) AND HENCE ACHIEVE LOWER PROFIT LEVELS THAN OTHER TAXPAYERS OPERATING IN THE SAME MARKET. ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 2 22 29 99 9 FURTHER, PARA 1.62 OF THE OECD GUIDELINES STATES AS UNDER: WHEN EVALUATING A TAXPAYERS CLAIM THAT IT WAS FOL LOWING A BUSINESS STRATEGY THAT TEMPORARILY DECREASED PROFITS IN RETU RN FOR HIGHER LONG-RUN PROFITS, SEVERAL FACTORS SHOULD BE CONSIDERED. TAX ADMINISTRATIONS SHOULD EXAMINE THE CONDUCT OF THE PARTIES TO DETERMINE IF IT IS CONSISTENT WITH THE PROFESSED BUSINESS STRATEGY . ANOTHER FACTOR TO CO NSIDER IS WHETHER THE NATURE OF THE RELATIONSHIP BETWEEN THE PARTIES TO T HE CONTROLLED TRANSACTION WOULD BE CONSISTENT WITH THE TAXPAYER BEARING THE C OSTS OF THE BUSINESS STRATEGY. FOR EXAMPLE, IN ARMS LENGTH DEALINGS A C OMPANY ACTING SOLELY AS A SALES AGENT WITH LITTLE OR NO RESPONSIBILITY FOR LONG-TERM MARKET DEVELOPMENT WOULD GENERALLY NOT BEAR THE COSTS OF A MARKET PENETRATION STRATEGY . THUS, BUSINESS STRATEGIES, MARKET PENETRATION, INCR EASE OR SAVE ITS MARKET SHARE ARE RELEVANT AND MATERIAL FACTORS DETERMINING PRICES AN D PROFIT. ALL THESE FACTORS HAVE TO BE TAKEN INTO CONSIDERATION WHILE ELIMINATING TH E MATERIAL EFFECTS WHICH WARRANTS SOME KIND OF REASONABLE ACCURATE ADJUSTMEN TS. THEREFORE, AFTER GOING THROUGH THE FACTS OF THE ASSESSEE`S CASE UNDER CONS IDERATION, IT SEEMS TO US THAT TNMM METHOD ADOPTED BY THE LD TPO FOR COMPUTATION O F ARM`S LENGTH PRICE IS AD HOC, AND WITHOUT ANY COGENT BASIS, HENCE THE ENTIRE APPROACH FOLLOWED BY THE LD. TPO IS UNJUSTIFIED. WE NOTE THAT THE SEARCH RESULTED IN COMPANIES WHICH HAD SUPPLY OF MACHINERY OR OTHER COMPLEX FUNCTIONS, ONLY M/S THERMAX INSTRUMENTATION LIMITED , QUALIFIED OUT OF THE COMPANIES THROWN UP BY THE DATABASE. IT IS A SUBSIDIARY OF M/S THERMAX LTD AND THE ANNUAL REPORT MENTIONS THAT IT FOCUSES ITS OPERATIONS ON INSTALLATION AND COMMISSIONING OF POWER AND COGENERATION PLANTS INCLUDING CIVIL CONSTRUCTION. WE NOTE THAT COMPARABLE SELECTED BY THE TPO, NAMELY M/S THERMAX INSTRUMENTATION LIMITED IS IN CIVIL CONSTRUCTION ALSO AND FOR THAT LD TPO D ID NOT MAKE ANY REASONABLE ACCURATE ADJUSTMENTS. BESIDES, M/S THERMAX INSTRUMENTATION LIMITED, IS FUNCTIONING IN DIFFERENT ENVIRONMENT, LOCATION, GEOGRAPHY WITH PRODUCT DIFFERENTIATION FOR WHICH LD TPO DID NOT MAKE ANY ADJUSTMENT. THE TURNOVER DIFFERENCE HAS ALSO NOT CO NSIDERED BY THE LD TPO. ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 3 33 30 00 0 IN RESPECT OF THE CUP IT HAS BEEN ARGUED THAT AGREE MENT ENTERED BETWEEN DEC CHINA AND THE THIRD PARTY CONTRACTEES (DPL AND WBPD CL) CONSTITUTE A PERFECT INTERNAL CUP FOR THE ACTIVITIES CARRIED OUT BY DEC- PO IN LNDIA AND THE VALUE AGREED BETWEEN DEC CHINA AND DPL AND WBPDCL IN RELA TION TO THE ONSHORE CONTRACT CAN BE CONSIDERED TO BE VALUE FOR THE SERV ICES RENDERED BY DEC-PO IN LNDIA SINCE THE PROJECT OFFICE IS CARRYING OUT THE SAME ACTIVITIES AND THE PROJECT OFFICE IS BEING REMUNERATED AT THE AMOUNT AGREED BE TWEEN DEC CHINA AND DPL AND WBPDCL. TO CONSTITUTE INTERNAL CUP THERE SHOULD BE THIRD PARTY TO WHOM THE ASSESSEE IS EXECUTING THE SAME WORK, IN THIS CASE, ASSESSEE (DEC-PO) IS EXECUTING THE WORK FOR DURGAPUR PROJECT LIMITED, AND THE SAME WORK IS BEING EXECUTED BY THE ASSESSEE (DEC-PO) FOR WBPDCL WHICH IS A THIRD PARTY TO CONSTITUTE THE INTERNAL CUP. WE NOTE THAT REFERENCE TO LD TPO ORDE R IN SECOND ROUND (WHICH ARE IMPUGNED IN PRESENT APPEALS) WOULD SHOW THAT EXCEPT IPSE DIXIT OF TPO NO OTHER REASONS ARE CITED ON HOW TNMM IS MOST APPROPRIATE M ETHOD IN TERMS OF SECTION 92C R.W. RULES 10B AND 10C OF THE RULES. WE NOTE THAT BUSINESS STRATEGIES, MARKET PENETRATI ON, INCREASE OR SAVE ITS MARKET SHARE ARE RELEVANT AND MATERIAL FACTORS DETERMINING PRICES AND PROFIT, WHICH HAS NOT BEEN CONSIDERED BY THE LD TPO WHILE SELECTING M/S THERMAX INSTRUMENTATION LIMITED, AS A COMPARABLE COMPANY FOR APPLICATION OF TNMM ME THOD. ALL THESE FACTORS HAVE TO BE TAKEN INTO CONSIDERATION WHILE E LIMINATING THE MATERIAL EFFECTS WHICH WARRANTS SOME KIND OF REASONABLE ACCURATE ADJ USTMENTS AND THE LD TPO HAS FAILED TO DO SO, HENCE TNMM METHOD DOES NOT APPLY TO THE ASSESSEE UNDER CONSIDERATION. FOR THE REASONS SET OUT ABOVE, WE FI ND INFIRMITY IN THE ORDER PASSED BY THE LD TPO THEREFORE, THE TP ADJUSTMENT MADE BY THE TPO BY FOLLOWING THE TNMM METHOD, IS NOT JUSTIFIED. HENCE, WE DELETE THE ADDITION OF RS.90,31,04,234/-. 17.SINCE, THE FACTS AND CIRCUMSTANCES IN THE CASE O F ASSESSMENT YEAR 2007-08 ARE IDENTICAL TO THOSE CONSIDERED IN THE ASSESSMENT YEA R 2008-09, THEREFORE OUR DECISION IN THE CASE OF ASSESSEE FOR A.Y.2007-08 SH ALL APPLY MUTATIS MUTANDIS IN ITA NOS.2563 & 2564/KOL/2017 DONGFANG ELECTRIC CORPORATION P PP PA AA AG GG GE EE E | || | 3 33 31 11 1 THE ASSESSMENT YEAR 2008-09 ALSO. ACCORDINGLY, BOT H APPEALS OF THE ASSESSEE ARE ALLOWED. 18. IN THE RESULT, BOTH APPEALS FILED BY THE ASSESS EE ARE ALLOWED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 17.05.2019 . SD/- ( S.S.GODARA ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; / DATE: 17/05/2019 ( RS, SR.PS ) / COPY OF THE ORDER FORWARDED TO : TRUE COPY BY ORDER ASSISTANT REGISTRAR, I.T.A.T, KOLKATA BENCHES, KOLKATA . 1. /THE APPELLANT- DONGFANG ELECTRIC CORPORATION 2. ! / THE RESPONDENT- ACIT(INTERNATIONAL TAXATION), CIR CLE- 1(1), KOLKATA 3. ' ( ) / THE CIT(A), 4. ' / CIT 5. #$% &&'( , '( , / DR, ITAT, KOLKATA 6. %)*+ / GUARD FILE. !# &