The case is: Donglang Electric Corp. v. DDIT (ITA No. 833/Kol/2011)
The taxpayer, a Chinese company, filed an income tax return in India, declaring a loss of INR 671 million.
The Assessing Officer noted that the taxpayer had entered into two contracts with Indian entities—one for setting up an electric unit in West Bengal and the other for setting up a unit in Durgapore. Each contract was divided into two parts—for example, one for the supply of equipment and materials, and the other for the construction and services of a plant.
The taxpayer filed an application for a declaration from the Assessing Office that it was entitled to zero withholding with respect to the offshore supplies of equipment (under provisions of the India-China income tax treaty) and with respect to domestic supplies and services because of the taxpayer’s substantial loss.
The Assessing Officer rejected this request, and held that taxes were to be withheld at source.
On referral to the Transfer Pricing Officer, it was determined that using an arm’s length price (under the Cost Plus Method (CUP)), the taxpayer realized a profit of INR 241 and not the loss claimed by the taxpayer. Concerning the offshore supply of equipment, it was determined that this was an ongoing process and therefore the involvement of a permanent establishment (PE) in coordinating the supply and onsite information.
The question presented to the tribunal was whether the taxpayer had split the contract into offshore supplies and domestic / onshore services to evade taxes in India.
The tribunal held that the Assessing Officer had erred in concluding that one integrated contract for offshore supplies and onshore activities and supplies was artificially arranged / split to avoid taxes.
Read a July 2012 report [PDF 175 KB] on the case, prepared by the KPMG member firm in India: Mere incurring of loss in case of onshore activity does not indicate that one integrated contract for offshore and onshore activities was artificially split to avoid tax