I.C. SUDHIR, JUDICIAL MEMBER 
AND B.C. MEENA, ACCOUNTANT MEMBER

G.C. Srivastava, Manoneet Dalal, Adv. and Saurav Srivastava, CA for the Appellant. 
Sanjeev Sharma, CIT (DR) for the Respondent.

ORDER

I.C. Sudhir, Judicial Member - The assessee has questioned orders of the authorities below on the following grounds:

"Based on the facts and in the circumstances of the case and in law, the Appellant respectfully submits that the Dispute resolution panel (DRP) has erred in upholding the findings of the Deputy Director of Income Tax (International Taxation), Dehradun ('AO') as per the draft Assessment Order, and issued directions to the AO for passing the order under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ('Act') ('Assessment order') on the following grounds :-

Ground 1
The DRP / AO erred in passing the impugned order in gross violation of the statutory provision as well as the principle of natural justice and fair hearing without appreciating that such gross violation rendered the impugned order null and void.
Ground 2
The DRP / AO have erred in observing that the Appellant has misrepresented the facts and mislead the Income-tax authorities by ignoring documents and facts available on record and not providing any facts and evidences to make the remarks.
Ground 3
The DRP /AO erred in taking the view that consideration of Rs. 2,245,597,453/- received by the Appellant for carrying out its obligations outside India was assessable to tax in India. It was not appreciated that as the entire operations were carried out Outside India, no part of the said consideration was assessable to tax in India.
Ground 4
The AO has erred in making an additional depreciation hoc disallowance of 25% of the overall expenses incurred by the Appellant and the DRP has erred in not issuing any directions in respect thereof.
Ground No. 5
The DRP/AO erred in making ad-hoc disallowance of 50% of material cost, 40% of Plant Cost, 50% of Office cost, 100% of legal cost and thus arriving at a total profit @ 25%.
Ground 6
The DRP/AO has erred in making adjustment in the international transactions undertaken by the Appellant, by holding that its not at arm's length and have therefore erroneously made an adjustment to the total income of the appellant.
Ground 7
Without prejudice to the above, the DRP/AO has erred in not giving correct effect to the proviso to section 92C(2) of the IT Act.
Ground 8
The DRP/AO have erred in law in not considering the offshore revenues considered taxable at a deemed profitability rate of 25% as a part of operating income, while making the transfer pricing adjustment considering 7.8% as the arm's length operating margin, essentially leading to additions based on arm's length rate of 7.89% as well as deemed profitability of 25% of operating revenues as taxable profits;
ii. making an adjustment which is more than the value of the international transactions undertaken by the Appellant which should have been restricted to the proportionate value of the international transaction of the Appellant.
Ground 9
The DRP has erred in not providing any directions to the AO to delete the interest levied by the AO under section 234B and 234C of the Act.
Ground 10
The DRP / AO have erred in initiating / confirming initiation of penalty proceedings under section 271(1)(c) of the Act."

2. We have heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
3. The facts in brief are that assessee company is a non-resident company incorporated in and a tax-resident of Australia. It is eligible to claim benefit under India Australia Tax-Treaty (in short Tax Treaty) as per section 90(2) of the Income-tax Act, 1961. The assessee (CEL) entered into a contract with ONGC on 06.01.2005 for installation of infra-structure in the form of platform and pipelines for ONGC. For the purpose of execution of the Indian operations of the aforesaid contract, a project office was set up by the assessee in India. For the assessment year 2006-07, the assessee had filed its return of income-tax on 29.11.2006 declaring total income of Rs.35,70,010 in respect of permanent establishment (PE) in India. Along with its return of income, the assessee had also filed an accountant's report in Form No. 3CEB and a tax audit report in Form No. 3CD (in accordance with section 92E and section 94AB of the Act respectively). The Assessing Officer, however, proposed that the revenue of Rs.2,24,55,97,443 earned by the assessee in respect of operations undertaken outside India are attributable to the assessee's as taxable in India. Further to determine the portion of the taxable income, the Assessing Officer adopted a deemed profitability rate of 25% on an ad hoc basis. The assessee objected the above action of the Assessing Officer before the DRP on the following basis:

"Denial of opportunity of being heard and violation of principle of natural justice (Objection I);
Proposing to tax revenues earned from outside India operations and thereby attributing the same to the PE as taxable income of the assessee Objection II);
Proposing to disallow 25% of overall expenses on ad ad hoc basis (Objection III);
Proposing to disallow 100% of head office expenses (Objection IV);
Proposing to adopt deemed profitability rate of 25% on an inappropriate basis (Objection V);
Proposing disallowance recommended by TPO and accepted by the ld A.O. (Objection VI);
Proposing to charge interest u/s. 234B and 234C (Objection VII); and
Proposing to initiate penalty proceedings under sec. 271(1)(c) of the Act (Objection VII)"
4. The assessee also placed reliance on several decisions in support but could not succeed, hence, the present appeal before the ITAT.
5. The ground No. 1 is general in nature whereas ground Nos. 2 to 8 are connected. In ground No.9, interest levied under sec. 234B and 234C of the Income-tax Act, 1961 has been questioned and in ground No. 10, initiation of penalty proceedings under sec. 271(1)(c) of the Income-tax Act, 1961.

6. In support of ground Nos. 2 to 8, Learned AR referred the submission made before the DRP and the decisions relied upon. Before the ITAT, written submissions have also been filed on behalf of the assessee along with the copies of documents in the shape of PAPER BOOK No. I and P.B. No.II. The submission of the assessee with regard to addition on account of TP adjustment remained that during the course of assessment proceedings, the learned A.O/TPO made an addition of Rs.36.02 crores on account of TP adjustment applying a net profit of 7.89% which was found to be entity level profits of the comparables selected by him. While making this addition, the learned A.O/TPO applied a margin of 7.89% on the entire transaction i.e. A.E. transaction as well as non A.E. transaction. In this regard, learned AR submitted that even if the method of comparables selected by the TPO and the profit margin arrived at by him is taken to be correct, the facts remained that the TPO was not entitled to apply such margin to non-A.E. transaction or make any addition in relation thereto. In assessee's own case, the Learned CIT(Appeals) restricted the addition proportionately to the value of transaction with A.Es for assessment years 2004-05 and 2005-06 and the revenue has not filed any appeal against these orders, a copy of the said order for the assessment year 2004-05 has been made available on the record. Learned AR submitted that the TP adjustment, if any, under TNMM can be made only to the extent of the value of international transaction which would be restricted to transactions with AEs and not the entire turn over. In this regard, he placed reliance on the following decisions:

7. With the assistance of following chart, learned AR also drawn our attention to the computation of the revised adjustment as per the TPO's own findings:

8. Regarding the addition on account of receipts from outside Indian operation, learned AR submitted that the assessee a foreign company had entered into a contract with ONGC on 06.01.2005 (page 52 of P.B.I). As per the Preamble of the Contract, ONGC was desirous of carrying out works of survey, design engineering, procurement, fabrication, transportation installation, life of some marine pipeline, platform installation and modification of existing platform etc. The preamble itself stipulated that the project was on a turn key basis. The assessee company undertakes the work of engineering, designing, procurement and fabrication of pipeline and platform at different locations outside India but the activity of installation, commissioning, inspection etc. worked carried out through a PE in India. The existence of the PE in India during this year is not in dispute. The assessee filed its return of income-tax for the year showing its income/loss for operation carried out in India through PE in India. He referred page No. 1 of P.B. I and page 3 to 12 of P.B. I wherein computation of income for the operation carried out in India and financial statement for its Indian operations have been made available respectively. He submitted that the said profit from Indian operations have been accepted by the A.O. and the same is not in dispute. Learned AR pointed out that the only dispute is with regard to the taxability of receipts attributable to the activities carried out outside India. In this regard, he submitted that the amount of receipt from operations carried out outside India is also not in dispute. During the year, the assessee company had received Rs.224.55 crores in relation to activities performed outside India. In para 8 of the assessment order (page 523 of P.B.I ), the Assessing Officer has recorded his findings that during the year under consideration, the assessee company had received the payment to the extent of Rs.2,24,55,97,453 that were attributed to the project activities carried out in India. Therefore, there is no dispute with regard to the fact that the amount of Rs.223.55 crores relates to the activities carried out outside India. As per learned AR, the only question that remains for consideration are (a) whether any income arising to the foreign company from the operations carried out outside India can be charged to tax in India under the provisions of the Act and the applicable DTAA; (b) if yes, what would be the chargeable income arising from such operation carried out outside India.

9. Learned AR submitted that it is not in dispute that the work of engineering, designing, procurement, fabrication and a host of other activities in relation to the contract worked out outside India. The sample copies invoices received from third party (page 420 to 452, P.B. I), clearly indicate that the aforesaid activities were done outside India. The schedule of prices appearing on pages 56 to 91 which form part of the contract clearly indicates the nature of items which were fabricated or procured outside India and the price payable by ONGC to the assessee company in relation thereto. It is not an ad hoc or afterthought bifurcation of prices but schedule form part of the contract and it is an agreed understanding between the parties that the part listed as "imported components" are to be fabricated/procured outside India. The project office in India had no role to play except to get these platforms installed and decided before the same is handed over to the contractee.

10. Learned AR submitted further that the work contract could not be completed due to some dispute that the ONGC had got terminated in 2007. Thereupon CEL and ONGC entered into a "settlement and mutual relations agreement" on 08.12.2009. By virtue of this settlement, ONGC took the delivery of work done up to the date of dispute from location outside India. This fact was brought to the notice of the Assessing Officer which has been reproduced by the Assessing Officer in the assessment order (page No. 533, third part of P.B.I ). In this case, ONGC took possession of the goods fabricated/procured on "as is where is "basis".

11. Regarding the attribution of income, the learned AR submitted that in a business where some part of the operations are carried out in India while some operations are carried out outside India, there would be a business connection and the income shall be deemed to accrue or arise in India. In support, he referred Explanation I to Section 9(1)(i) of the Act. Therefore, income from operations carried out outside India will not be taxable in India. Learned AR submitted that as per Article VII(i) of the DTAA with Australia (page 550, P.B.I), the profits of a non-resident company can be taxed in India only if it carries on a business in India through a PE but only so much of profit can be brought to tax in India as are attributable to that PE. Therefore, Article VII restricts the taxing rights of a contracting State to the profits desired from the activity performed through PE situated in the source country. In the case of assessee, existence of PE is not in dispute to but PE had not performed any activity in relation to offshore supply, therefore, no part of the income received by CEL with respect to offshore supply would be taxable in India. The CEL is a tax-resident of Australia and, therefore, is entitled to the benefit of DTAA over the provisions of the Income-tax Act, 1961. It is also a settled provisions that the domestic law can apply only if it is more beneficial to the assessee than the provisions of the DTAA (Section 90)(2) of the Act. But in the present case, profit from offshore supply are neither taxable under the domestic law nor under the treaty, submitted by the learned AR. He accordingly submitted that the issue involved in this case is squarely covered by the following decisions:

12. Without prejudice to the above submissions, learned AR made an alternative submission that since the assessee had incurred overall loss on the entire project, what can be attributed to Indian PE, can only be a loss. The loss on offshore supply cannot be converted into a profit when determining a taxable income of PE in India. The assessee had placed before the A.O/DRP, copy of profit and loss account of the company showing losses. It was also backed by certificate from the auditors. He submitted that the history of the case shows that the assessee company was assessed to tax for assessment years 2004-05 and 2005-06 where the Assessing Officer took the profit from outside India activities at 1%/2% of the receipts. The same has been confirmed by the Learned CIT(Appeals). Neither the revenue nor the assessee is in appeal. There is no justifiable reason for assessing the income at 25% of receipt from outside India activities without having any material to justify the same. He submitted that the TP audit conducted by the TPO had decided the income arising from international transactions by applying comparables in treaty level profit earned by other companies. The arm's length profit margin determined by the Assessing Officer comes to 7.89%. Without going into the merits of these profit margins, it is submitted that an independent entity would earn a profit of not more than 7.89% of the total receipts. The A.O. has taken totally a unreasonable stand, inasmuch as, that while he holds 7.89% profit margin in an open market scenario as reasonable, he goes wild in assessing the profit at 25% of the turnover without any basis. The profits from offshore activities under the circumstances, would in no case be estimated at more than 7.89% of the turnover. Learned AR submitted that the determination of income from outside India operations at 25% of receipts is highly arbitrary, unreasonable and without any tangible basis.

13. Learned DR on the other hand, tried to justify the orders of the authorities below and he placed a written reply to the above submissions of the assessee. He submitted that page Nos. 56 to 91 of the P.B. I, filed by the assessee, is Annexure-C of the Contract and deals with schedule of prices. It refers to "imported components" and "Indian components". In both the cases, the prices are quoted in foreign currencies though prices are bifurcated in two parts ("imported components" and "Indian components") but no where any mention of "for offshore activities" and again "shore activities" as claimed by the assessee appearing in contract. There is no basis for a claim of "offshore" or "outside India" activities.

14. On the issue of transfer pricing adjustment, Ld. CIT(DR) submitted that Paras 5 to 7 of the assessment order and objection VI of the DRP's order deal with this issue. Before the ITAT, the assessee has not objected to the method (TNMM), the comparables and profit margin used by the TPO/A.O. Its only objection is that the adjustment cannot be made to A.E. transaction. In this regard, Learned CIT(DR) placed reliance on the orders of the authorities below. He submitted that one insisting aspect is leveled by Para No. 5 of the assessment order. The assessee had international transaction of INR 29,20,3-6,530 with its various associated enterprises. No doubt, these AEs are located outside India and as per assessee's own assertion, these transactions must fall under the "imported components" for which it has not offered any income to tax then how could the assessee claimed these payments to AEs as expenses against "Indian Components". This fact also clearly shows that the bifurcation of prices in the Indian or imported components does not necessarily bound to location of activity. Further, the payments made to associated enterprises by the PE for services provided by them in regard to import of equipment and materials indicate that such purchases claimed outside India are attributable to PE.

15. Learned CIT(DR) submitted that the Assessing Officer at page Nos. 3 to 34 of the assessment order and DRP in objections 2 to 5 have dealt with the issue of taxation (so called) receipts from outside India operations. He pointed out that during the course of assessment proceedings, the Assessing Officer had asked the assessee to furnish the copy of account in respect of outside India activities along with the copies of accounts of the same, supporting vouchers, books of accounts etc. (page 531 of the P.B). In response to query that the payment consideration has no relevance with regard to location of activities performed, the assessee submitted that, even though payment consideration has no relevance with regard to location of activity that does not mean that all the activities are carried out in India (page 532, P.B.I). Therefore, the assessee had admitted that payment consideration has no relevance to location of activities performed. Accordingly, whether the price is shown as "imported components" or "Indian components" has no relevance to location of operation. All operations carried out are in regard to project in India. It is important to highlight the facts which without doubt demonstrates that the claim of the assessee regarding outside India activity has no factual basis. Learned CIT(DR) submitted that there are no separate, distinct and visible "out of India activities" in the present case and in support he narrated following aspects:

'6. During the course of assessment proceedings, the assessing officer had asked the assessee to furnish the copy of account in respect of outside India activity along with the copies of accounts of the same, supporting vouchers, books of accounts etc. (page 531 of the P. B.) In response to query that the payment consideration has no relevance with regards to location of activity performed, the assessee submitted that, even though payment consideration has no relevance with regard to location of activity; that does not imply that all the activities are carried out in India (Page 532, PB-1l. Therefore the assessee had admitted that payment consideration has no relevance to location of activity performed. Accordingly, whether the price is shown as "imported component" or "Indian component" has no relevance to location of operations. All operations carried out are in regard to projection India. It is important to highlight facts that without doubt demonstrate that the claim of the assessee regarding outside Indio activity has no factual basis. This is demonstrated below.

Whether there are separate distinct and divisible "out of India" activities in the present case

7. The point (ii) of part A (Facts of the Case) and clause (v) of Part G of the assessee's written submission states that, "The scope of work and its pricing are clearly bifurcated into two parts i.e. for offshore activities termed as "Imported Components" and onshore activities termed as "Indian Components" and" the contact price is clearly bifurcated into Imported component and Indian component which demonstrate that although the contract is a turnkey contract but it is divisible in two parts i.e. Inside India activities and outside India activities" . This assertion is not supported by the provisions of Contract for integrated development of G-1 and G-15 Fields (G 1 DP) Project as available on pages 36 to 345 of the PB-1. Scope of Works is stated in Article 2.1 (page 93,PB-1) and "means all things or tasks which the Contractor is, or may be, required to do to comply with its Contract obligations as described in Clause 1.1.37" (page 46,PB-1). Clause 1.1.37 reads as: "Works means all things or tasks, which the Contractor is, or may be, required to do to comply with its Contract obligations. It includes everything required to provide and complete a full functioning GS-15-1 Well platform, Pipelines (both rigid and flexible), Sub Sea control system and Control Umbilical (Offshore and Onshore), Sub Sea manifold, Sub Sea Christmas Trees, Modification of existing platform GS-15-4, Onshore Oil and Gas processing Facilities, Gas Compression facilities and Oil Pumping Facilities etc. at offshore fields G-1 and G-15 in Krishna Godavari Basin located off the East Coast of India and Onshore facilities at Odalarevu, Near Amlapuram, Andhra Pradesh. The works are more fully described in the Bidding Documents."

Annexure-B are the Bidding Documents (pages 205 to 269, PB-1). Page 209 states that all materials required for the completion of the complete scope of work shall be the responsibility of the bidder. Prices were negotiated in India (Pages 236 and 237, PB-1). Page 265 of the PB-1 is letter dated 30.11.2004 issued by the ONGC Notifying the Award of Contract. It states that ONGC places its notification of award of Contract for execution of entire scope of works …. at a negotiated lump sum equivalent price of USD 215,351,156.33. The lump sum contract price shall be inclusive of cost of materials, services, insurance, all taxes and duties and other costs as detailed in the bidding documents.

8. During the hearing of the ease, the Revenue had also referred to preamble of the contract agreement on pages 52 and 53 of the PB-l which reads as: "Where as the Company (ONGC) is desirous of carrying out the work of Surveys (pre-engineering, pre- consultancy/pre-installation and post installation), Design, Engineering, procurement, Fabrication, Anti Corrosion and Weight Coating, Load Out…….Pre Commissioning, Stat up and Commissioning of entire facilities including terminal facilities at onshore as described in the Bidding Documents on turnkey basis at its G-1 and G-15 fields offshore sites the work covered under the Contract to include but not limited to Surveys (pre-engineering, pre-construction/pre-installation and post installation), Design, Engineering, procurement, Fabrication ,Ant Corrosion and Weight Coating .... Pre-Commissioning, Start-up and Commissioning of all facilities including terminal facilities at Onshore as described in the Bidding Documents". Therefore, the Contract document or the correspondence between ONGC and the assessee nowhere states/indicate that scope of work is divided in two parts (offshore activities and onshore activities).

9. Page 53 of the Paper Book states that the negotiated lump sum contract price is USD 215, 351, 156.33. It also does not show that the prices are for offshore activities and onshore activities. Further, Article 3.0 of the Agreement (page 101, PB-1) deals with payment. Article 3.1 concerns Contract Price and reads as: 1/ The Company shall pay to the Contractor in consideration of satisfactory completion of all the works covered by the Scope of Work under the Contract at the negotiated lump sum equivalent Contract price of ... as per the details and break-up of prices given in Schedule of prices. The Contract price is a firm price and the Contractor shall be bound to keep the same firm and without escalation on any ground whatsoever until completion of entire works under the contract. Unless otherwise specified ill the Contract, cost of execution of works on turnkey basis and taste etc. as specified in the Contract and all expenses, duties, taxes, fees changes in relation to or in connection therewith including insurance risk of weather, Construction Plant and Equipment breakdown and Site Conditions etc. per provisions of the contract, shall be deemed to be included in the Contract price. Payment shall be made in the currency or currencies given in the Schedule of Prices for the work executed as per the procedure set forth in clause 3.2".

10. Clause 3.2.2 of the Contract (page 101, PB-1) concerns payment procedure and reads as: "The contractor shall submit its invoices once in each month along with four copies for the work completed and certified by Company's representative as per the agreed milestone formula provided in the Contract at Annexure-F, with all required supporting documents and details of the said work to the Company's representative for certification of the said invoice, at Company's Rajahmundry office for approval of the amount payable and any payment thereafter".

11. Clause 5.2.3 of the Contract Agreement (pages 115 and 116, PB-1) concerns Conditions for Procurement/Selection of Makers and Vendors. This indicates that whatever plants/equipments/materials are procured for the works covered under the contract are to be procured from the makes/vendors agreed and approved by the ONGC. Therefore, all material suppliers whether domestic as well as imported are approved by the ONGC.

12. Pages 57 to 91 of the PB-1 give Schedule of Prices. It indicates description of material, lump sum prices, imported component and Indian component. The prices are in foreign currencies (USD, AUD, DKK etc.) but not Indian rupees. The prices for Indian component are in foreign currencies only. The currencies were the choice of the assessee. Page 60 shows that the assessee has quoted price for:

Onshore pipeline, Rigid pipeline; onshore pipeline including bends, catholic protection, anti corrosion coating, crossing, monolithic insulating joints, valves, pigs etc under the heading imported components only. Similarly, on page 61 {PB-1} with regard to modifications; Topside modifications works and its hooks up with existing facilities, deck extension and Strengthening" is quoted only under imported components. There are many such examples wherein undoubtedly the activities are in India but have been quoted under imported component. There is no justification for the claim that imported components means activities outside India. How can the assessee justify these onshore activities as activities outside India?

13. Page 64 shows the bidders to ascertain customs and excise duty and include these in the offer. The assessee in its letter dated 31.08.2004 indicated that Appendix A3 Price Schedule indicates Nil Customs Duty and this is correct. A3 indicates nil customs duty for construction plant and equipment and this is correct. Therefore, as far as the ONGC was concerned it was to pay the lump sum price. The bifurcation of price into "Imported component" and "Indian component" does not at all indicate that the corresponding activities were carried out outside India and within India. The bifurcation of price is by the assessee and has nothing to do with the place of activities. For executing the contract in India, the assessee may the take payment either under the imported component or Indian component and these do not point to place of carrying on activities. This has been demonstrated above. Place of activities has nothing to do with the imported component or Indian component.

14. In clause (iv) of Part-G, the assessee has placed reliance on the decision of the Hon'ble ITAT in the case of Hyundai Heavy Industries Co. ltd to argue that the letter obtained by the assessing officer from the ONGC has no relevance. That decision is distinguishable on facts and does not in any way support the claim of the assessee for the following reasons:

* In the case of ONGC, fabrication of platform was a segment which got completed in Korea and upon its certification and acceptance by ONGC it was transported to offshore site in India. There are no similar facts or such a claim is not made in the present case.

15. Therefore, the AO has rightly relied on the letter of the ONGC and no parallels can be drawn to the case of Hyundai Heavy Industries limited as no provisions in the agreement or factual information has been filed to justify that its case is similar to that of Hyundai.

16. In clause (vi) of Part G, the assessee has submitted that during the year under consideration, the assessee company had received Rs 224.5 crore in relation to activities performed outside India. The assessee has referred to the assessment order to claim that there is no dispute with regard to the fact that the amount of Rs 223.55 crores relates to activities carried outside India. The Revenue submits that the figure was submitted by the assessee and it had made claims as mentioned by it. Paragraph 8 of the assessment order (page 523, PB-l) shows that the amounts were attributed by the assessee and mentioning of the same does not justify the contention of the assessee that there is no dispute on facts. It is a fact that this amount was not offered to taxation by the assessee and the claims made by the assessee were rejected by the AO and amount has been taxed in the assessment order. There is no documentary evidence to prove that any operations were carried outside India that were distinct and divorced from the contract executed in India.

17. In clause (viii) of Part G of the submission, the assessee has relied on the sample copies of the invoices (pages 420 to 452 of PB-1) received from third parties to indicate that the activities were done outside India. The revenue had offered detailed comments on these invoices during the hearing before Hon'ble tribunal and some of these are:

18. All the above invoices indicate that the assessee has made purchases from third parties in Singapore and UK and payments have been made. These might be made to order purchases. The payments are for purchases of materials for the project. These expenses at the best are deductible from the receipts of the assessee. If some third party has supplied some materials to the assessee that does not mean that it has carried out operations outside India. These are just purchases by the assessee for carrying out its contract with ONGC in India.

19. It is not the case of the assessee that it had a fabricating yard outside India and it was a separate cost and profit centre. Its claim is not that it had its receipts and carried out manufacturing and incurred expenses as a separate permanent establishment outside India or by the company itself in Australia and that profit is not taxable in India.

20. The assessee has presumed that purchases from outside India amounts to operations carried outside India which is a misunderstanding against the facts and law.

21. In clause (viii) of Part-G. it is claimed that "bifurcation of prices is not an ad-hoc and after thought but the Schedule of prices forms part of the contract and it is agreed understanding between the parties that the part listed as "imported component" are to be fabricated/procured outside India". On this claim the comments of the Revenue are as below:

* Assessee has not manufactured any platforms (as was in case of Hyundai) outside India. It has only incurred expenses to import the materials.

* In fact, whole of the receipts on account of "imported components" have gone unaccounted" far as project in India is concerned.

22. The assessee in clause (ix) of Part G has submitted that, after Settlement and Mutual Agreement" on 8 December 2009, the ONGC took possession of goods fabricated/procured on "as is where is" basis and title in goods, as a matter of fact, did not pass in India as alleged by AO. In this regard, the Revenue's submits that, as the ONGC took possession of goods after agreement dated 8. I 2009, therefore, not relevant for AY 2006-07 before the Hon'ble Tribunal. During the relevant year the assessee brought materials in India and was used in execution of project."

16. On the issue of what are the operations carried outside India whether compensated appropriately, the Ld. CIT(DR) made following submissions:
"What are operations carried outside India and whether compensated appropriately

23. The assessee has claimed that prices shown as for "imported components" are towards outside India activities. The assessee has not submitted any account of receipt towards imported component, and expenses against the same. It has also not submitted information on the establishment/offices/entities/location that was used for making purchases and engineering and designing activities.

24. Paper Book-2 filed by the assessee concerns documentation regarding transfer pricing issue. Copy of Transfer Pricing Study for AY 2006-07 in respect of India PE is available on pages 10 to 88 of the PB.

24.1 Paragraph 1.5 on page 14 refers to receipt of logistic services from Asia Offshore Services Pte ltd, Singapore (AOS). The services provided by AOS included supply of project consumables, loading and unloading of containers, labour support, supply of tugs and barges etc. in Singapore to support the mobilization activities occurring in Singapore for G-l- Field Development Project.

24.2 Permanent establishment of CE also received support services from Clough Engineering and Integrated Solutions Pty ltd, Singapore (CEIS). CEIS provided manpower services to CEL PE. In rendering such support, CEIS incurred certain administrative expenses for which it charged administrative fee (paragraph 1.7 on page 15, PB-2).
24.3 Clough Engineering and Integrated Service Pte Ltd, Singapore (CEIS) also provided CEl PE with skilled manpower to perform detailed design engineering work for Gl project (paragraph 1.9 on page 16, PB-2).

24.4 CEL had incurred certain corporate and divisional overheads costs for provision of services such as administrative support, business development and others (paragraph 1.11 on page 17, PB-2)

25. The head office or the group entities have been suitably compensated for the purpose of providing services to the permanent establishment. These are logistics services (Asia Offshore Services Pte Ltd. Singapore-Rs 29,51,017); support services (C Engineering and Integrated Solutions Pte Ltd- Rs 1,66,825); Project support works and installation services (Clough Java Offshore Pte Ltd- Rs10,94,20,149); allocation of overhead costs (Clough Engineering H,O- RslO, 74, 91, 417) and allocation charges on administration support services (C Engineering and Integrated Solutions Pte Ltd- Rs22,63,416) (kindly refer to page 1 of PB-2 filed by the assessee).

26. The assessee has also claimed that the work of engineering, design and fabrication was also carried outside India. However, neither the agreement provides for carrying on of these activities outside India nor the assessee has demonstrated by submission of any documentary evidence in this regard. On the other hand, page 9 of the PB-1 (Accounts of Indian operations) shows that the assessee has claimed sub contractor charges of Rs 1,088,139,947; consultancy charges of 15,590,911; and divisional Corp overhead of Rs 107, 491,471 out of receipts of Indian component. Further, it availed various logistics services and services of personnel in regard to detailed design and payments have been made by Indian PE. If the price of imported component was taken out and out and has not been disclosed in the accounts then there is no justification to claim these payments as deduction from Indian PE accounts.

27. Without prejudice to the above, If the work of engineering and design is carried outside India then the corresponding consideration is taxable as fee for technical services/royalty in India both as per the provisions of the Act and tax treaty (Article XII) and this should have been offered to tax in the return of income filed.

28. Therefore, all the receipts whether shown as imported component price or Indian component price are attributable to the permanent establishment in India and taxable in India and rightly held so in the assessment order and confirmed by the DRP.

29. It has been claimed that the PE had not performed any activity in relation to offshore supplies and therefore no part of income received by the assessee with respect to offshore supplies would be taxable in India. In regard to this claim the Revenue submits that the assessee has not made any offshore supplies to ONGC. It has procured the materials from outside India for executing its project in India. Title in any material or designs, if any has not been transferred to ONGC outside India.

30. The revenue reiterates its position that in absence of any identified and divisible outside India activities, the assessee should have drawn a composite Profit and Loss account for the entire project and then claim expenditure incurred in India or for import of materials or services/designs to arrive at the true chargeable profits. There was no justification to keep the price for imported components out of Indian PE accounts. One more thing, how could a contractor can create artificial division of receipts from the same contract? There is no justification for non-reconciliation of artificial segregation of prices after the completion of contract. The assessee has not submitted any cash flow from HO to Indian PE or vice versa to justify that artificial allocation in the beginning of the contract was based on any sound and scientific criteria.'

17. Regarding attribution of income, Learned CIT(DR) submitted that in case of non-resident, the provisions of Explanation I to section 9(1)(i) will apply, only where operations of a business are carried out in India as well as outside India. In the present case, the assessee executed the ONGC project in India. It has procured some material from outside India to execute the project. The total contract price was lump sum equivalent to USD 215351, 156.33. All operations of a project were carried out in India. Logistic Services and other services in regard to procurement of imported material have been separately compensated by Indian PE.

18. Learned CIT(DR) submitted further that the decisions relied upon by the learned AR are having distinguishable facts and ratios, hence these are not applicable to the facts of the present case. He submitted that in the case of Ishikawajma-Harima Heavy Industries Co. Ltd. (supra), the contract was divisible in four parts (offshore supply, offshore services, on-shore supply and onshore services). In that case, the offshore supply was made from outside India on CFR basis and property was to be passed to the owner on high seas whereas in the case of assessee, the contract is one and not divisible. In the case of LG Cable Ltd. (supra), the assessee was awarded two contracts, first for offshore services and the second for offshore supply of equipment and offshore services. In the case of National Petroleum Construction Co. (supra), the ITAT found that the contract was divisible and it was the discretion of the ONGC to take only the platform erected by the assessee in Abu Dhabi, as it has the right to terminate the contract but its own collusion, without having installation thereof. In the case of Hyundai Heavy Industries Co. Ltd. (supra), the scope of work has been defined in clause 2.1.1 of the contract. ONGC has accepted the work on designing, engineering, procurement, fabrication, loading and transportation at the site abroad through its representative CEIL who has issued the certificate to this aspect. Learned CIT(DR) on the other hand placed reliance on the following decision:

Samsung Heavy Industries Co. Ltd. v. ADIT (International Taxation) [2011] 133 ITD 413/13 taxmann.com 14 (Delhi).

19. He submitted that in that case like present assessee, the contract obtained by the assessee from ONGC is a composite contract, Learned CIT(DR) concluded his arguments with the submissions that the assessee has PE in India. Profits attributable to such a PE are taxable in India as per provisions of Article 7 of the Tax-Treaty between India and Australia.

20. On the alternative submissions of the assessee, Learned CIT(DR) submitted that the loss figures claimed by the assessee on the entire project cannot be accepted because various expenses like material, plant and sub-contractors, costs claimed cannot be verified. The assessee including subsidiaries have shown to have incurred huge losses, therefore, it cannot be said that Indian project has incurred losses. Even the certificate by the auditor cannot be relied because full accounts of Indian projects duly audited as per Indian law were not filed with the Assessing Officer.

21. Learned CIT(DR) submitted further that no support from the earlier assessment orders for the assessment years 2004-05 and 2005-06 can be taken. Each assessment year is a separate assessment year. Further, during current year detailed inquiries have been made by the Assessing Officer and it has been found that the claim of the assessee that offshore supplies have been made is factually incorrect. Further, for assessment year 2005-06, the profits in respect of HHI Project (Harzire) were estimated at 10% and that profit rate was also accepted by the assessee. He reiterated that there are no offshore supplies in the case and, therefore, the profits needs to be attributed not arbitrarily but on the method based on sound logic considering the facts and circumstances of the case. He submitted that from the copy of TPO's order, it is seen that the assessee had shown a operating loss/operating revenue of (minus) 6.93%, whereas the operating profit/operating revenue of comparables was 7.89%. This resulted into an adjustment of Rs.36,02,69,989. Learned CIT(DR) submitted that the assessee had international transaction of Rs.29.20,36,530 in respect of accounts that were prepared by the assessee considering only revenue from Indian components. In respect of imported components, the assessee has not accounted the same in Indian accounts. During the year, operating revenue of Rs.2,47,11,60,712 has been shown that is including receipt of Rs.1,24,68,82,868 on account of Indian components. However, the so called outside Indian revenue (imported components) revenue was Rs.2,24,55,97,453. This is about Rs. 100 crores more than the "Indian components" revenue. One more aspect needs to be considered that whether the assessee had maintained any account in regard to revenue , it received on account of supply of so called imported components and further whether supplies had on any account formed part of accounts maintained for Indian components. This is not explained by the assessee. He submitted that the non-submission of the accounts as was requested by the Assessing Officer, may kindly be considered while attributing profits on account of imported components of the price.

22. Considering above submissions, we found that there are so many disputed facts which need further verification by the Assessing Officer to arrive at the just and proper conclusion to make a just assessment. The claim of the assessee is that contract is in two parts which has been disputed by the Learned CIT(DR). As per him, there is only one contract in case of the assessee and there is no such division "inside India" and outside India" activities as was in the cited cases by the learned AR. Learned CIT(DR) has also disputed the contentions of the assessee that there are activities outside of India that can be considered as separate, identifiable and distinct activity. As per the Learned CIT(DR), the activities of procurement of material from third party are for executing the contract in India. He contended that no separate project have been developed out of India. The contentions of the Learned CIT(DR) also remain that in the present case, the issue is not that how the outside India activities and it revenue was attributable to the PE of the assessee in the form of offices and construction of PE but the issue is that there are no separate out of India activity. Against the claim of the assessee that there is absolutely no material to even remotely suggest that Indian offices had any role to play in the offshore activities of designing, fabricating, procurement of equipment and supply, the contentions of the Learned CIT(DR) remain that the project has been undertaken in India. The project has been managed and executed from Indian offices of the assessee. The procurement, fabrication, designing, services, if any, rendered from outside India have been compensated by Indian PEs. The body and sale of the ONGC project lies in India and it had role in all the activities, if any, carried outside India.

23. We agree with the Learned CIT(DR) that the primary burden of proof is on the assessee to justify that fabrication and designing services were rendered from outside India. It should have submitted the details of all the expenses and location and incurring the expenses against the so called receipts on account of "imported components". This receipt has gone in the hands of the assessee without justifying the expenses against the same and profits earned. We fully agree with the contentions of the Learned CIT(DR) that in absence of providing the basic information of activities, how could the assessee claimed that revenue should prove what role the Indian offices had in regard to those unproved activities outside India.

24. Regarding the settlement agreement with the ONGC, the submissions of the Learned CIT(DR) remained that the passing of title after the settlement agreement does not affect the taxability of the revenue for importing components because firstly new classes on title and assignment came into operation after agreement of 8.12.2009 and does not affect the taxation of payment received for the period ending 31.3.2006 for which materials were already used in the project. He submitted further that the settlement agreement and lifting of material by ONGC was in terms of settlement agreement and does not in any way can be called as sale outside India, because there was no agreement to sell the material as such without a settlement and mutual release agreement settles all matters between parties. The settlement agreement was arrived in India. ONGC took over the material as per settlement agreement and was not a purchase outside India. The settlement agreement provides information on projects supplies (who were third parties) who provided project material equipment and services. These were ordered by the assessee as per the requirements stated in the contract with ONGC and Logestic services were provided by the group companies that were as per the Learned CIT(DR) separately compensated not by the assessee outside India out of the price "imported components" but by the Indian PE outside of price "Indian components". Learned CIT(DR) submitted that as per the details in the settlement agreement, these supplies were of Singapore, Scotland, USA, France, Indonesia and Abu Dhabi. The fabrication and supplies are made by the third parties outside India to the assessee and the revenue is not taxing the profits of these third parties. Profits out of price "imported components" is receipts minus expenses on purchases for which information is not filed to the authorities in India and Assessing Officer has made a reasonable estimation on income chargeable to tax in India, submitted the Learned DR. In view of the above disputes on facts, we set aside the matter to the file of the Assessing Officer/TPO to examine the related facts based on the material made available on record to arrive at a definite conclusion as to whether the assessee has carried out any distinct and identifiable business operation in respect of the project outside India, after affording adequate opportunity of being heard to the assessee and make the afresh assessment accordingly. The ground Nos.2 to 8 are thus set aside for fresh consideration to the Assessing Officer/TPO as directed above.
25. So far as ground No.9 relating to the levy of interest under sec. 234B and 234C of the Income-tax Act, 1961 is concerned, it is consequential in nature and does not need separate adjudication.

26. Ground No.10 is regarding initiation of penalty proceedings under sec. 271(1)(c) of the Income-tax Act, 1961 which is premature, hence, does not need any adjudication.
27. In the result, the appeal is allowed for statistical purposes.