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The case involves M/s. TBEA Shenyang Transformer Group Company Limited, a Chinese company, which had set up a project office in India and was involved in international transactions with its head office in China. The Deputy Commissioner of Income Tax, International Taxation, Vadodara, made adjustments to the income of the assessee for the Assessment Year 2012-13 based on the TPO's findings that the transactions were not at Arm's Length. The Tribunal examined whether the transactions between the head office and the project office constituted international transactions and whether the TPO was correct in applying the TNMM and CUP methods for determining the ALP. The Tribunal found that the project office in India constituted a Permanent Establishment (PE) of the head office in China and that the transactions were international in nature, thus subject to transfer pricing provisions under the Income Tax Act.
Appeal Details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 712133 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
22-07-2025
Appeal Filed By
Assessee
Order Result
Dismissed
Assessment Year
2012-2013
Judgement Text
" IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER & Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER आयकर अपील सं./I.T.A. No. 581/Ahd/2017 (िनधा[रण वष[ / Assessment Year : 2012-13) M/s. TBEA Shenyang Transformer Group Company Limited National Highway No.-8, Villae : Miyagam, Karja, Vadodara, Gujarat - 390007 बनाम/ Vs. Deputy Commissioner of Income Tax International Taxation, Vadodara èथायी लेखा सं./जीआइआर सं./PAN/GIR No. : AADCT4557F (Appellant) .. (Respondent) अपीलाथȸ ओर से /Appellant by : Shri Arpit Jain, AR Ĥ×यथȸ कȧ ओर से/Respondent by : Shri Mahesh Shah, CIT. DR Date of Hearing 24/04/2025 Date of Pronouncement 22/07/2025 O R D E R PER SMT. ANNAPURNA GUPTA, AM: The present appeal has been filed by the assessee against the order passed by the Assessing Officer (in short ‘the AO’) in accordance with the directions of the Dispute Resolution Panel- 2, Mumbai (in short ‘DRP’) in terms of the directions of Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2012-13. 2. The brief background of the case which has led to present appeal before us is that the assessee is a permanent establishment (PE) i.e. project office for the enterprise – M/s. Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 2 – TBEA Shenyang Transformer Group Company Ltd. (hereinafter referred to as ‘TBEA’), a company incorporated in China and a tax resident of China. TBEA had bid for certain projects floated by M/s. Power Grid Corporation of India Ltd. (‘PGCIL’) during F.Y. 2009-10. M/s. PGCIL had called for the bids for the design, engineering, manufacturing, supply, erection, testing and commissioning of shunt reactors at its different sites in Bilaspur, Bhiwani, Fatehpur, Agra, Lucknow, Meerut, Moga and Jatikalam. The bids were called for on Global Competitive Bidding basis. TBEA had successfully bid for these projects and entered into separate agreement for the various sites. Against the single bid, two separate agreements were executed by TBEA for each of the sites. a) Agreement for Offshore supply of equipments including type testing abroad. b) Agreement for Onshore Service including inland transportation, type testing, installation, erection and commissioning in India. 3. 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. 4. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 5. 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. 6. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 7. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 8. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 9. 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. 10. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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/-. 11. 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. 12. 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. 13. Aggrieved by the same, the assessee has come up in appeal before us raising the following effective grounds: “1. The order passed by the learned Deputy Commissioner of Income Tat International Taxation), Vadodara (\"the AO\"] u's 143(3) 1440(13) invalid and void-ab-initio. In the facts and circumstances, the AO has erred in invoked provisions of section 92CA(1) without satisfying the conditions prescribed therein including applicability of Chapter X of the Income Tax Act It is submitted that it be so held now and such order may please he quashed or suitably modified. Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 10 – 2. The learned Deputy Commissioner of Income Tax (Transfer Pricing Officer)-2. Ahmedabad (the TPO) has erred in determining attributable profits to Permanent Establishment (\"PE\") of the assessee while TPO's authorization us. 92CA is restricted to determination of arm's length price of the international transactions referred to him by the AO. The sole authority to determine profits attributable to PE, if any, rests with the AO and the TPO exceeded his jurisdiction in carrying out exercise of attribution of profit to Indian PE. Transfer Pricing adjustment of Rs. 29,50,86, 132 made by the TPO essentially represents additional profit attributable to Indian PE and therefore the TPO and consequently AO has clearly erred in making such adjustment. It be so held now. 3. The learned Dispute Resolution Panel (\"DRP\"), TPO and consequently the AO has erred in facts as well as in law by confirming and making addition of Rs. 29,50,86,132 in contravention of the provisions of Section 92CA in respect of the onshore contracts as well as the offshore contracts. 4. Without prejudice to the applicability of provisions of Chapter X of the Income Tax Act, the learned DRP, learned TPO and consequently the learned AO erred in Duct and in law in holding that the Project Office of assessee in India has not been adequately remunerated for the work performed by it in respect of on-shore service provided to M/s PGCIL and thereby making an adjustment of Rs 8,81,45,099 u/s. 92. It is submitted that in the facts and circumstances of the case, no adjustment in respect of value of offshore services can be made us. 92. It be so held now. 5. Without prejudice to the applicability of provisions of Chapter X of the Income Tax Act, the learned DRP, the learned TPO and consequently the learned AO erred in fact and in law in holding that a portion of the activities in relation to off-shore supply made from China were carried out in India and therefore a portion of off-shore supply contract value is taxable in India. In the facts and circumstances, no income in respect of offshore contract is taxable in India as it has not accrued or arisen in India or is not deemed to accrue or arise in India and it is also not attributable to Permanent Establishment of assessee company in India and accordingly adjustment of Rs. 20,69,41,033 deserves to be deleted. It be so held now.” 9. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal.” 14. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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 ITA No.581/Ahd/2017 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: “21. In light of aforesaid reasoning, we are of the view that the transaction between foreign enterprise and its PE in India can be considered as an international transaction and be subject to ALP adjustment. The matter may be placed before the Division Bench to give effect to the direction of this Order. Hence, we answer the reframed question at para 4 of this Order in affirmative and in favour of the Revenue.” 15. 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. 16. 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. Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 12 – 17. Ground Nos. 1, 2 & 3, it was common ground pertained to the challenge raised by the assessee to the invocation of transfer pricing provision in the present case as provided in chapter X of the Income Tax Act. The said grounds read as under: “1. The order passed by the learned Deputy Commissioner of Income Tat International Taxation), Vadodara (\"the AO\"] u's 143(3) 1440(13) invalid and void-ab-initio. In the facts and circumstances, the AO has erred in invoked provisions of section 92CA(1) without satisfying the conditions prescribed therein including applicability of Chapter X of the Income Tax Act It is submitted that it be so held now and such order may please he quashed or suitably modified. 2. The learned Deputy Commissioner of Income Tax (Transfer Pricing Officer)-2. Ahmedabad (the TPO) has erred in determining attributable profits to Permanent Establishment (\"PE\") of the assessee while TPO's authorization us. 92CA is restricted to determination of arm's length price of the international transactions referred to him by the AO. The sole authority to determine profits attributable to PE, if any, rests with the AO and the TPO exceeded his jurisdiction in carrying out exercise of attribution of profit to Indian PE. Transfer Pricing adjustment of Rs. 29,50,86, 132 made by the TPO essentially represents additional profit attributable to Indian PE and therefore the TPO and consequently AO has clearly erred in making such adjustment. It be so held now. 3. The learned Dispute Resolution Panel (\"DRP\"), TPO and consequently the AO has erred in facts as well as in law by confirming and making addition of Rs. 29,50,86,132 in contravention of the provisions of Section 92CA in respect of the onshore contracts as well as the offshore contracts.” As stated above, on the aspect of the applicability of transfer pricing provision to transaction between a Foreign Enterprise and its Indian PE, the issue was referred to the Special Bench which has answered the question posed to it vide order dated 11.11.2024. 18. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 19. The DR, on the other hand, vehemently stated that the Special Bench had definitely addressed the question posed before it leaving no scope for any interference in the answer to the question posed before it. 20. To address the above arguments, we have gone through the order passed by the Special Bench. The question referred for consideration was as under: “whether or not the transactions between a 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 ALP adjustment?” 21. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 22. It is clear from the order of the Special Bench that the question posed to it regarding applicability of transfer pricing Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 23. 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. “92A. (1) …………………….. …………………….. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,— (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 16 – the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.” 24. 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. Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 17 – 25. From the above facts, it is amply clear that the project office was only required to execute what was determined by the head office in the agreement entered with the PGCIL. The entire onus and responsibility of the project lay with the head office, which was required to design, engineer and manufacture shunt reactors and supply it to PGCIL and, in turn, install it and commission it for the use by PGCIL. The entire activity of the project office/PE clearly was wholly dependent on know-how/drawing documentation of the head office. In our view, therefore, in the fact of the present case, Clause (g)of section 92A(2) is clearly attracted which states that where the business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; there exist an association between the two enterprises. Clause (g) of 92A(2) of the Act is reproduced hereunder again for clarity: “92A. Meaning of associated enterprise. …………………………….. …………………………….. the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or” Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 18 – In view of the above, we hold that the head office and its Indian PE are associated in terms of a clause (g) of Section 92A(2) of the Act. 26. 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. 27. Ground No.1, 2 & 3 raised by the assessee are accordingly dismissed. 28. 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: “4. Without prejudice to the applicability of provisions of Chapter X of the Income Tax Act, the learned DRP, learned TPO and consequently the learned AO erred in Duct and in law in holding that the Project Office of Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 19 – assessee in India has not been adequately remunerated for the work performed by it in respect of on-shore service provided to M/s PGCIL and thereby making an adjustment of Rs 8,81,45,099 u/s. 92. It is submitted that in the facts and circumstances of the case, no adjustment in respect of value of offshore services can be made us. 92. It be so held now.” 29. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 30. 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. Printed from counselvise.com ITA No. 581/Ahd/2017 [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: “16. Further coming to the issue of application of method for calculating the Arm’s Length Price, we find that the Assessing Officer applied the TNMM method; whereas, the learned CIT(A) has held that the CUP method is most appropriate method. Learned CIT(A), while deciding that the CUP method is the most appropriate method, as pleaded by the assessee, observed following findings:- “8. As mentioned above, the appellant company has alternatively submitted that the AO ought to have selected CUP as Most Appropriate Method over TNMM in view of availability of CUP of APL & 3PL transaction with HO of the appellant company more so when the transactions are functionally comparable. I have also perused judicial pronouncements cited by the appellant company to contend that where CUP is available, CUP method should be followed in preference to other methods for determination of the ALP. I find force in the contention of the appellant company that CUP is the most appropriate method for determining ALP in the given set of facts in view of availability of CUP of APL & JPL with HO. Further, I hold that transaction of APL & JPL with HO of the appellant can be treated as CUP being functionally comparable uncontrolled transactions in terms of Rule 10B(2) & (3) of the IT Rules and more particularly in view of the fact that entire income from the transaction is offered for tax in India. Accordingly, I hold that on this count also the transfer pricing addition is unsustainable and is hereby deleted.” 17. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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.” 18. We further find that the transactions of awarding contract by APL and JPL- Indian parties to Shandong HO- a Chinese entity, ought to have been taken as comparable uncontrolled transactions to benchmark the transactions of Shandong PO. For the sake of clarity, we reproduce Rule 10C of the Income-tax Rules, wherein with respect to section 92C of the Act relating to the most appropriate method of calculating the Arm’s Length Price, which reads as under:- “10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction, as the case may be. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely;— (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method.” 19. 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, Printed from counselvise.com ITA No. 581/Ahd/2017 [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.” 31. 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. 32. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 33. 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. 34. 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. 35. The orders of the authorities below record the fact that the onshore contract of transportation and installation & Printed from counselvise.com ITA No. 581/Ahd/2017 [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 . 36. 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. 37. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 38. 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. 39. 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. 40. 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: Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 27 – “9.15 In view of the discrepancies as discussed above, the revenue recognized in the books of account of the Project Office is not at Arm's Length for the reasons as summarized below: a) Even though the transportation activity for Bhiwani R1/R2 site would have been completed in FY:11-12, the corresponding revenue and expenses have not been recognized in the books of account for FY:11-12 b) The fall in gross profit from the transportation activity has been attributed to depreciation in value of Rupee. However, the transportation activity was to finish by the end of Aug'11 during which the Rupee was standing at Rs 44-45 per USD. In terms of accounting principles, all the invoices should have been raised by the end of Aug'11. Accordingly, the reduction of gross profit from transportation activity cannot be attributed to depreciation in value of rupee. c) It was claimed by the assessee that Inland transportation and insurance charges were recognized as revenue on pro-rate basis, as per the unit rates for different item indicated in the Contract agreement between TBEA CHINA and PGCIL after receipt of materials/items at site and on issue of invoices. However, it is not clear how the corresponding expenses are recognized as the item-wise rates are not available in the sub-contract agreement between TBEA China and M/s Cosco Logistics Lid. Under such circumstances, the one-to-one correspondence between Revenue and Expenses incurred for inland transportation activity cannot be established. d) The contract agreement with PGCIL as well as the sub- contract agreement with Mis Cosco Logistics Ltd was executed by the Head Office and forced upon the Project Office. Thus, both the revenue stream as well as expenses to be incurred in relation to transportation activity was pre-decided by the Head Office with Project Office having no say in such decision. e) Even though the Contract WIP of Rs 14365992 was shown in the books of account for FY:10-11, no corresponding expense was found to be booked in Profit & Loss Account implying that books of account are un- reliable. f) There were glaring differences for the rate of work related to installation, erection and civil work in the contract agreement between PGCIL and TBEA CHINA vis-à-vis sub-contract agreement between TBEA CHINA Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 28 – and M/s Techno Electric and Engineering Co. Thus, there was no one to one correspondence between the revenue earned and expenses incurred. The per unit rate for various items of work is found to be greater in the sub-contract agreement with M/s Techno Electric and Engineering Co as compared to such rates agreed upon with PGCIL. In the Arm's length scenario, any entity will seek commensurate compensation for a piece of work executed by it. However, in the present case, all the contract agreements including sub-contract agreement were executed by the Head Office and were forced upon the Project Office. In view of this, the terms at which the work was executed by the Project Office were not at Arm's Length. 8) Even though the entire civil works was sub-contracted to M/s Techno Electric and Engineering Co, the total scope of work as per the agreement with M/s Techno Electric and Engineering Co was all together different from the scope of work originally agreed upon in the contract executed with PGCIL. No explanation whatsoever has been offered by the assessee in this regard. The scope of work originally agreed in contract with PGCIL was much wider than the scope of work specified in the sub-contract with M/s Techno Electric and Engineering Co. When and how the remaining work not covered in the agreement with M/s Techno Electric and Engineering Co was executed is not known. h) Though the Project Office was supposed to have profit at Gross level, it incurred huge losses at Gross level from installation, erection and civil work, the reason for which remain unexplained. No explanation has been offered by the assessee for such losses. i) In the Arm's Length Scenario, any entity actually executing the project would not settle for the consideration decided by any other entity on its behalf and that too when such consideration does not even recover the cost of the project. Since both offshore supply and onshore service agreements were executed by the lead-Office in China against the single bid from POCIL, the Head Office had the discretion to overload one contract at the expense of other in terms of pricing. It is imperative that while bidding against the tenders Boated by De PGCIL, the THEA CHINA would have prepared a detailed project report taking into consideration the revenue stream and expenses to be incurred in relation to each of the project activity before quoting a final fixed price. The assessee was then requested to fumish such project report prepared Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 29 – by it at the time of bidding for the project. But the assessee failed to furnish such report In view of the above reasons, the international transaction of execution of the onshore service contract by the branch office in India on behalf of the Head Office in China is proposed to be benchmarked by applying transfer pricing provisions contained in Chapter-X of the IT Act 61. 9.16 The Indian TP regulations call for selecting a suitable method as Most Appropriate Method (MAM) for benchmarking any international transaction. In relation to such benchmarking, the assessee submitted as under vide its submission dated 11 Jan 2016: \"Without prejudice to above, the assessee submits that even if the onshore activities are to be benchmarked based on the benchmarking carried out by your office, the assessee submits as under: (a) Comparable Uncontrolled Transaction (CUP) should be considered as the Most Appropriate Method considering the value agreed upon between TBEA China and PGCIL as it represents the value agreed upon between two uncontrolled parties for the same transaction. Further, since the assessee has recorded revenue on the same basis, the same should be treated as arm's length price. (b) The companies selected by your office are functionally not comparable with the functions performed by the Project Office. The Project Office undertakes very limited function in respect of transportation, civil construction, erection and installation as significant portion of the said activities are sub-contracted and the role of Project Office is more in form of supervision and co-ordinating various activities. Whereas the comparable companies selected by your office performs full fledge infrastructure set-up activities including designing, engineering, manufacturing, procurement, construction, assembly, erection, installation, etc. Thus, the role of Project Office is much smaller as compared to the activities performed by the companies considered as comparable by your office. (c) We would further like to submit that the Operating Margin over Cost computed by your office is erroneous. The correct Operating Margin over Cost works out to 6.5% (instead of 7.6% as computed by your office). The computation of margin as per the data available in Prowess database is enclosed herewith as Annexure-31. Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 30 – (d) In case your office still considers to benchmark the transaction based on above said comparable companies, we submit that since the activities performed and risks assumed by Project Office is very limited as compared to the companies considered as comparable by your office, mark-up to be applied in such case should be much lower as compared to 6.5% computed as above to account for reduced functions and risks.\" “9.17 The assessee submitted that CUP should be considered as the Most Appropriate Method considering the value agreed upon between TBEA CHINA and PGCIL as it represents the value agreed upon between two uncontrolled parties for the same transaction. In this respect it is important to note that for the application of comparable uncontrolled price CUP method, the standards of comparability are very strict since, a small difference in the factor of comparability may have large difference in the price. The same can also be seen from the observations made in OECD guidelines reproduced below: 2.15 It may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin.........” Consequently, for the application of CUP as the most appropriate method, the factors of comparability are required to be strictly met. On the facts of the case, the assessee seeks to submit that the price agreed between HO and PGCIL should be compared with the price that should have been agreed between the assessee and HO for the execution of same project. However, in view of various pertinent defects/ discrepancies as summarized in paragraph 9.15 above, it is not possible to compare the conditions in which these two transactions have been undertaken. The Head Office has signed two separate fixed price contract with PGCIL ie. offshore supply contract and onshore service contract. From the perspective of PGCIL, the entire projects is a single project involving offshore supply and onshore service activity for which a single bid was placed Thus, POCIL awarded contract on the basis of total price quoted for off-shore supply and onshore service activity. Thus, from the perspective of PGCIL, the bifurcation of such total consideration into various activities is not important. However, from the perspective of Revenue, it is important to ascertain whether such bifurcation of consideration has been fairly valued as such bifurcation affects the Indian tax base. For this purpose, it was very important to examine the detailed project report which must have Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 31 – been prepared by the THEA China at the time of bidding the project at a fixed price. However, no such details have been furnished by the assessee. In the absence of such critical information, the use of comparable uncontrolled price CUP method becomes unreliable. Even though the two transactions may pass the test of \"uncontrolled\" nature, they do not pass the test of \"comparability\" and consequently CUP method cannot be applied on the facts of the case. In this regard it is appropriate to mention very relevant discussion made in the judgement delivered by the Special bench in case of Aztec Software reproduced below: \"134 There would be cases, where taxpayer does not cooperate and fails to furnish ALP or disclose full information, relevant for determination of ALP when called upon to do so by taz authorities. The taxpayer fails to discharge burden placed on the taxpayer. In similar enactments of other countries, it is provided that burden on the revenue authorities in such a case would be reduced. We have not come across similar provision in Chapter X of the Act. The tax authorities therefore, have to resort to provision of section 144 of the Income-tax Act and determine the ALP on the basis of the material collected or available on record. In such circumstances, the ALP determined would be on the parity with a best judgment assessment Such assessment (determination of ALP) would have some approximations and estimations. But even such approximations and estimations mat satisfy dictates of justice and fair play and look reasonable. It cannot be arbitrary and capricious. The order of TPO is appealable and therefore, u must be objective, contain detailed reasons, conform to regulations and should be seen as just and fair.\" Accordingly, the CUP method cannot be applied in the present case and the TNMM is applied as a method of last resort with OP/OC as PLI as the sale of service is a controlled transaction. Since it is not possible to separately benchmark the transportation, erection, installation and civil works activity, all such activities are bundled together for the purpose of benchmarking. Such approach of bundling of similar activities has been approved by the Hon'ble High Court of Delhi in the care of M/s Sony Ericsson Mobile Communications India Pvt Ltd vs CTT The relevant portion of the said judgment is reproduced as under: \"In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLL. In fact, when transactions are inter-connected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 32 – aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters.\" 41. All the above facts are not disputed by the Ld. Counsel for the assessee before us. 42. 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. 43. 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. 44. Ground of appeal no.4 is accordingly dismissed. 45. Ground No.5 raised by the assessee relates to the transfer pricing adjustment made in the international transaction of offshore contracts alleged to be executed by the PE/project office Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 33 – TBEA China in India resulting in an adjustment of Rs.20,69,41,033/- to the same. 46. The said ground reads as under: “5. Without prejudice to the applicability of provisions of Chapter X of the Income Tax Act, the learned DRP, the learned TPO and consequently the learned AO erred in fact and in law in holding that a portion of the activities in relation to off-shore supply made from China were carried out in India and therefore a portion of off-shore supply contract value is taxable in India. In the facts and circumstances, no income in respect of offshore contract is taxable in India as it has not accrued or arisen in India or is not deemed to accrue or arise in India and it is also not attributable to Permanent Establishment of assessee company in India and accordingly adjustment of Rs. 20,69,41,033 deserves to be deleted. It be so held now.” 47. 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: “a) Pre Sales activity in terms of bidding for the project, negotiating the terms of contract and final conclusion of the agreement b) Design and Engineering of plant and various equipments c) Manufacturing of plant and equipment d) Testing to be conducted outside India e) Defect Liability f) Functional Guarantees g) Equipment performance guarantee” Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 34 – 48. The TPO held that while design, engineering and manufacturing of the plant and equipment had been carried out by the head office in China, the presales activities (involving filing bid documents, negotiating the contract, signing the agreement etc.) and the post sales activities involving warranty functions had happened in India. He noted that for presales activity one Mr. Jagdish Lal and M/s. TBEA Energy India Ltd. had acted as PE of TBEA China in India. The TPO noted that Shri Jagdish Lal had been appointed by TBEA China as the country representative who represented TBEA China in bid related discussion held with PGCIL for all its project at various sites during F.Y. 2009-10 and 2010-11. All such discussions with respect to all the projects floated by PGCIL at its various sites were noted by the TPO to have been attended by Mr. Jagdish Lal. He further noted that subsequently TBEA China had registered its subsidiary M/s. TBEA Energy India Ltd. on 07.07.2010 with Mr. Jagdish Lal and Chen Zhijin as its director, for executing its contract with PGCIL. The TPO noted that though the project office of TBEA China, the assessee before us, was registered in India w.e.f. 1/12/2010, it neither had any infrastructure nor any employee and the project related activities were noted to be carried out by the employees of M/s. TBEA Energy India Ltd. using infrastructure of TBEA Energy India Ltd. and all expenses so incurred on behalf of the TBEA China were simply charged in the books of accounts of project office of TBEA China. Noting the above facts, the TPO held that Shri Jagdish Lal initially and M/s. TBEA Energy India Ltd. subsequently had acted as PE of TBEA in India whose activities fell in the domain of pre sale and marketing support activities and the portion of income Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 35 – attributable to presales and marketing support activities carried out by the PE was accordingly held to accrue or arise in India and hence, taxable in India due meaning of Section 9 of the Act and Article 7 of India China DTAA. 49. 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. 50. The act of carrying out execution of the portion of offshore supply contract (i.e. presales, after sales support and provision Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 51. 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: “20. 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.” Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 37 – We have gone through the decision of Special Bench more particularly para 19 & 20 of the order, which was referred by the Ld. Counsel for the assessee before us in support of his contention that for the offshore activities the TPO could have carried out exercise only of attribution of profits and not the determination of ALP of the transaction by invoking the transfer pricing. The contents of para 19 & 20 of the order read as under: “19. In the context of a PE of a foreign enterprise in India, the Article 7(2) provides that profits that will be attributed to PE shall be profits which the PE might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. 20. 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. In view of the above, we do not find any merit in the contention of the Ld. Counsel for the assessee that for the offshore activities Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 38 – the TPO could have carried out exercise only of attribution of profits and not the determination of ALP of the transaction by invoking the transfer pricing. ii. The other contention raised by the Ld. Counsel for the assessee before us was that the entities or persons identified by the TPO as constituting PE or TBEA China for both the pre-sales and post-sales activities did not constitute PE of TBEA China. His arguments were with reference to Shri Jagdish Lal, TBEA Energy India Ltd. and VEL. With respect to Shri Jagdish Lal not constituting PE, his contention was that he had no authorization on behalf of the TBEA China. That it was not the case of the Revenue that Shri Jagdish Lal had the authority to conclude contracts on behalf of the TBEA China. That in terms of Section Explanation 2 to section 9 (1) of the Act, Shri Jagdish Lal should not be treated as PE of TBEA. 52. 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. 53. With regards to TBEA Energy India Ltd. constituting PE of TBEA China, the contention of the Ld. Counsel for the assessee Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 54. 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. 55. 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: “10.10 It is undisputed that the pre-sales activity had happened in India as the tenders were floated by PGCIL in India, the TBEA made the hid against such tenders in India, all contract related negotiation took place in India and the final contracts between the TBEA and the PGCIL were signed in India. To the extent such activities were being carried out by a Permanent Establishment of TBEA in India with the meaning of Section 9 of the IT Act row. Article 9 of the India-China DTAA, the PE should have been adequately compensated for such activities in accordance with the transfer pricing provisions contained in the Chapter-X of the IT Act. In this context, various bid related documents submitted by the assessee were perused. From the perusal of such documents, it was observed that Shri Jagdish Lal was the Country Representative of the TBEA CHINA in India at the time of negotiation. The relevant snapshot from one such document recording post bid discussion is reproduced as under: Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 40 – From the above document, it is clear that TBEA China had appointed Jagdish Lal to be the country representative of the company in India. The assessee vide its submission dated 11/01/16 has rightly pointed out that bids for such a large projects involve large team from the side of bidders and such team put up days/month together to determine the whole bid together. The assessee was again right in pointing out that multiple post discussions relating to technical, financial, performance etc takes place in relation to such large contract. In this context, it is important to examine the role of Mr Jagdish Lal who was designated as Country representative of TBEA in India. The fact that his name was appearing on all post bid related discussions shows that he was actively involved in entire bid process in view of being the Country Head of TBEA in India at that point of time. The assessee submitted vide its submission dated 11/01/16 that Mr Chen Zhijin was having the authority to sign various agreements and no such authority was granted to Mr Jagdish Lal. The assessee further submitted that Mr Jagdish Lal had no contractual relationship with the TBEA CHINA and it had not appointed him for any matter. If this was indeed the case, then under what capacity Mr Jagdish Lal participated in all post bid discussions pertaining to all sites for both off-shore supply and on-shore service agreements. If Mr Jagdish Lal would not have been actually the Country Representative of TBEA in India, then under no circumstances M/s PGCIL would have allowed him to become privy to sensitive technical and financial details of the project. Thus, even if the authority to sign agreement was given by TBEA to Mr Chen Zhijin, it clear that various day-to-day bid relating activities were performed by Mr Jagdish Lal. To that extent even if Mr Jagdish Lal cannot be termed as agent of TBEA, his office constituted fixed place of business or permanent establishment through which the pre-sales activity of TBEA CHINA in INDIA was carried out. Subsequently, M/s TBEA Energy India Pvt Ltd was incorporated on 07/07/10 as agreed upon between TBEA and PGCIL Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 41 – as under and Mr Jagdish Lal became the First Director of the company: 9. TBEA-S informed that it is under the process of registering their company in India located in NCR. Further, before the dispatch of the first Reactor from China necessary manpower shall be in place. In view of the discussion made above, it is clear that M/s TBEA had fixed place of business or PE in India in office of Mr Jagdish Lal from where all pre-sales activity in India was carried out. It is also important to point here that even though the assessee was asked to furnish the passport details of Mr Chen Zhijin so as to ascertain his duration of stay in India during FY:09-10, the same was not submitted by the assessee. Without prejudice to above, if his stay in India during FY 09-10 exceeded 183 days, such stay would constitute service PE of TBEA in India. Accordingly, such component of the sale price of 'offshore supply' which relates to pre-sales activity carried out by such permanent establishment of TBEA is taxable in India.” 56. 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- Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 57. 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. 58. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 59. 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: “10.12 As already discussed in detail in paragraph 10.2 above, subsequent to its incorporation on 07/07/10, M/s TBEA Energy India Ltd acted as the Permanent Establishment of M/s TBEA China. Though, a separate Project Office of M/s TBEA China was registered in India w.e.f 01/12/10, it neither had any infrastructure nor any employee. All project related activities were carried out by the employees of TBEA Energy India Ltd using infrastructure of TBEA Energy India Ltd. The related expenses were simply charged in the books of account of Project Office of TBEA Shenyang, China. The price at which the plant and equipment was sold to the PGCIL by TBEA also contained component pertaining to defect liability, functional guarantees and equipment performance guarantee. Such components are discussed in the subsequent paragraphs.” 60. 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: Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 44 – “10.2 In the present case, it was observed that M/s TBEA CHINA had appointed Mr Jagdish Lal as the Country Representative who represented M/s TBEA CHINA in Bid related discussion held with PGCIL for all its projects at various sites during FY:09-10 and FY:10-11. All such discussions with respect to all the projects floated by PGCIL at its various sites were attended by Mr Jagdish Lal. The minutes of post bid discussion dated 04th Feb 2010 (which was represented by Mr Jagdish Lal, Country Representative of M/s TBEA China) specified that TBEA China was under the process of registering their company in India located in India and before the dispatch of the first reactor from China necessary manpower shall be at place. In pursuance of such discussion, M/s TBEA ENERGY INDIA LTD was incorporated on 07/07/10 with Mr Jagdish Lal and Chen Zhijin as its Director. Mr Jagdish Lal held 5000 shares (i.e. 0.01%) in M/s TBEA Energy India Ltd. Thus subsequent to its incorporation, M/s TBEA Energy India Ltd thus acted as the Permanent Establishment of M/s TBEA China. Though, a separate Project Office of M/s TBEA China was registered in India w.e.f 01/12/10, it neither had any infrastructure nor any employee. All project related activities were carried out by the employees of TBEA Energy India Ltd using infrastructure of TBEA Energy India Ltd. The related expenses were simply charged in the books of account of Project Office of THEA Shamyang, China Juring FY 11-12. A separate agency agreement was also excited between M'S THEA Shenyang and the THEA Energy India Ltd on 20/01/11 as per which Mis THEA Energy India Pvt Lid was engaged by the TBEA Shenyang for executing the PGCIL project and to market, sale and supply the products of TDEA Shenyang in India. The relevant portion of the contract is reproduced as under: Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 45 – The above agreement clearly states that M/s TBEA Energy India Pvt Ltd was engaged by THEA China in order to execute its EPC contract with PGCIL. Accordingly, M/s TBEA Shenyang, China had the business connection and permanent establishment in M/s TBEA Energy India Ltd in India from the date of incorporation of M/s TBEA Energy India Ltd i.e. 07/07/10 which also acted as Project Office of M/s TBEA China. 61. 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. 62. 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: “10.4 The Offshore supply contract agreement between TBEA China and PGCIL categorically specified that the equipments/materials supplied under the said contract should give satisfactory performance in accordance with the provisions of offshore supply contract when installed and commissioned under the onshore service agreement. Thus, the responsibility was cast upon the Project Office in India for ensuring satisfactory performance of such equipments when installed. In addition, various guarantees in the form of defect liability, functional guarantee and equipment performance guarantee were also required to be extended by the TBEA to PGCIL as per the original bid document. Such guarantee related functions were to be performed by the Project Office in India. The TBEA China was also asked to establish a repair and maintenance facility in India, against which an MoU was signed by Printed from counselvise.com ITA No. 581/Ahd/2017 [M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT] A.Y. 2012-13 - 46 – M/s TBEA with M/s Vijay Electricals Ltd (VEL), Hyderabad for setting up repair and maintenance facilities. The minutes of post bid discussion dated 03.02.10 provided for training of staff from VEL in China as well as in India. The minutes also provided for manufacturing of all major components like winding etc at THEA 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. To that extent, the activities of the PE/Project Office fell in the domain of After Sales support and Provision of Warranty Services for the Goods sold under 'Off-shore supply' agreement. Such portion of income from Offshore supply contract which is attributable to 'After Sales support and Provision of Warranty Services' carried out by PE in India thus accrues or arise in India and hence is taxable in India within the meaning of Section 9 of IT Act and Article 7 of the India-China DTAA.” 63. 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. 64. 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 Printed from counselvise.com ITA No. 581/Ahd/2017 [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. 65. Ground No.5 raised by the assessee is dismissed. 66. In the result, the appeal filed by the assessee is dismissed. This Order pronounced on 22/07/2025 Sd/- Sd/- (SUCHITRA KAMBLE) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 22/07/2025 S. K. SINHA True Copy आदेश कȧ Ĥितिलǒप अĒेǒषत/Copy of the Order forwarded to : 1. अपीलाथȸ / The Appellant 2. Ĥ×यथȸ / The Respondent. 3. संबंिधत आयकर आयुƠ / Concerned CIT 4. आयकर आयुƠ(अपील) / The CIT(A)- 5. ǒवभागीय Ĥितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड[ फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad Printed from counselvise.com "
Other Referred Cases
Assistant Director of Income-tax (International Taxation)-II, Ahmedabad vs. Shandong Tijun Electronic Power Engg. Company Ltd.
Laws Referred To
Income Tax Act, 1961
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