Law on taxability of “turnkey contracts” for offshore & onshore supply explained

Dongfang Electric Corporation vs. DDIT (ITAT Kolkota)

The assessee, a Chinese company, entered into two contracts with WBPDCL, one for the offshore supply of equipment and the other for onshore supplies, design, engineering and construction etc. Separate consideration was specified for each activity. The assessee claimed, relying on Ishikawjima-Harima 288 ITR 408 (SC), that the profits from offshore supply was not taxable in India. The AO rejected the claim on the ground that the project was a “turnkey” one with “cross-fall breach clause” and “single point responsibility” and that the split contracts were entered into only for convenience. It was held that the project office PE played a role in the offshore supplies. He referred the matter of determination of ALP of the onshore supplies to the TPO who determined a profit of Rs. 24 crores as against the loss of Rs. 67 crores offered by the assessee. This was upheld by the DRP. On appeal by the assessee to the Tribunal, HELD: