MISSING THE WOODS FOR THE TREES:

ISHIKAWAJIMA v. VODAFONE CRISIS IN

TURNKEY CONTRACTS

Neha Pathakji

Abstract

Recently when Delhi High Court in Linde AG reaffirmed application of

Ishikawajima‘s dissected approach to turnkey contracts and rapped the knuckles

of AAR for having read principles of Vodafone without context; it provided some

settled shores to foreign companies engaged in turnkey contracts and their

liability to tax in India. Post Vodafone several rulings of AAR and Tribunal had

applied ‗look at‘ approach to turnkey contracts to hold that ‗dissected‘ approach

of Ishikawajima stood impliedly overruled by Vodafone. This newfound

controversy on Ishikawajima v. Vodafone added further complications in an

already muddled issue on taxation of turnkey contracts. However, to merely view

issue of turnkey contracts as a tussle between dissected approach of Ishikawajima

versus ‗look at it as a whole‘ approach propounded by Vodafone would be an

over simplification of the problem. I argue that the problem has much deeper

roots. Whilst Ishikawajima decision required determination of taxability of

turnkey contracts to necessitate combined application of ‗purpose and object of

contract‘ test and ‗source of receipt‘ test; judicial authorities have applied tests in

mutual exclusion to one another. Evidently, when one set out to inquire only one

of the tests, different answers are derived depending upon the test applicable. It is

during the application of ‗purpose of contract test‘ and manner of reading

contract that courts entangled with Vodafone decision. It is therefore suggested

that both tests need to be applied in conjunction with each other so as to attain

some consistency in decisions. Further it is suggested that Vodafone ratio ought

be applied to those matters where question have been reserved for consideration

whether parties had resorted to sham transaction or tax avoidance mechanism

through contractual arrangement.

Assistant Professor of Law, NALSAR University of Law, Hyderabad; E-mail: nehapathakji@gmail.com

2014 Missing the Woods for the Trees: Ishikawajima v. Vodafone Crisis in

Turnkey Contracts

3

PART I INTRODUCING THE CONTROVERSY

Contemporary times have witnessed proliferation of turnkey contracts and consortium

form of executing work. Turnkey contracts entails coming together of several companies in

accordance to their expertise and to that extent member companies form a consortium to bid

for contract. On successful bidding members perform activities according to their expertise.

Taxation of turnkey contracts has remained problematic on more than one count. First,

taxation of such consortium model as ‗Association of Person‘ u/s 2(31) of Income Tax Act as

separate legal entity other than companies forming such consortium has been subject matter

of constant litigation. At the heart of the controversy however lies the issue regarding tax

liability of non-resident consortium members on offshore supply and services in Indian

projects under domestic tax statute and DTAA. An extension of this is also comprised in

determining a consequential query on apportionment of income to Indian jurisdiction and

establishment of PE.

In 2007 when two Judge Bench of the Supreme Court in Ishikawajima – Harima

Heavy Industries Limited vs. DIT1 (hereinafter ‗Ishikawajima‘) held that a turnkey contract

was capable of being dissected and it was open to the assessee to raise the contention that

parts of offshore contract should be treated separately for the purpose of taxation in India; it

was expected that legal position has been settled. However, the issue gained a fresh lease of

life after Supreme Court‘s three judge bench in Vodafone International Holdings BV v. UOI

and another2 (hereinafter ‗Vodafone‘) held that it is the ‗task of the Revenue/Court to

ascertain the legal nature of the transaction and while doing so it has to look at the

transaction as a whole and not to adopt a dissecting approach (emphasis are mine)‘.

Consequent to Vodafone judgement it was opined by several rulings of Authority for

Advance Ruling (hereinafter ‗AAR‘), Income Tax Appellate Tribunal (hereinafter ‗ITAT‘)

that the dissected approach adopted in Ishikawajima stands disapproved or overruled on

account of Vodafone decision, if not expressly, definitely by clear implication. A natural

corollary of such understanding was diametrically opposite views taken by different judicial

authorities at different levels on seemingly similar fact scenario. While decisions in Roxar

Maximum Reservoir Performance WLL,3 Alstom Transport SA,

4 and Linde AG

5 relied on

1 Ishikawajima – Harima Heavy Industries Limited v. DIT, (2007) 288 ITR 408.

2 Vodafone International Holdings BV v. UOI and Another, (2012) 341 ITR 1.

3 Re: Roxar Maximum Reservoir Performance WLL, (2012) 349 ITR 189 (AAR).

VOL. 1] INDIAN JOURNAL OF TAX LAW 4

Vodafone to apply ‗look at‘ test to hold that composite contracts of commissioning and

installation cannot be dissected for tax purposes and hence entire contract is liable to tax in

India; Nokia Networks OY6

and National Petroleum Construction Company7

followed

Ishikawajima to apply a ‗dissected approach‘ and held that only that part of income that has

territorial nexus with India should be liable to tax in India.

Recently Delhi High Court decision in Linde AG, Linde Engineering Division v.

DCIT8 (hereinafter ‗Linde AG (HC)‘) overturned decision of AAR to hold that Ishikawajima

was clearly applicable to the facts and dissected approach of turnkey contract is applicable.

High Court categorically held that AAR‘s reading of Vodafone was out of context. Whilst

Delhi High Court judgment is hailed as a provider of relief to foreign companies and bringing

in much required clarity on Ishikawajima v. Vodafone conundrum, I argue that the dissected

approach v. look at approach of understanding the issue may be an over simplification of a

much deeper problem. The main issue comprise in the different object of inquiry pursued by

different judicial authorities. Whereas for certain courts object of inquiry in taxation of

turnkey contract is determination whether ‗purpose and object of contract‘ is to avail piece

meal supply and service onshore and offshore; for others it is determination whether ‗source

of income‘ being under question was in India.

The paper proceeds in V parts. Part I introduces the controversy, outlines the argument

and provides scheme of paper. Part II briefly narrates foundational pillar of dissecting

approach Ishikawajima and introduces context Vodafone ratio. Part III analyse rulings post-

Vodafone to demonstrate how several judicial authorities have been taking diametrically

opposing views on seemingly similar fact situation and discusses recent Delhi High court

judgement in Linde AG (HC). Part IV examine set of inquires made by different judicial

authorities. It argues that it is this difference of inquiries that has led to reading of Vodafone

and consequent divergent conclusion regarding turnkey contracts. Part V sums up the

discussion and concludes.

4 Alstom Transport v. DIT, (2012) 349 ITR 292 (AAR).

5 Linde AG v. DIT, (2012) 349 ITR 172 (AAR).

6 DIT v. Nokia Networks OY, (2012) 253 CTR 417 (Delhi).

7 National Petroleum Construction Company v. ADIT, (2013) 151 TTJ 47 (ITAT Delhi).

8 Linde AG, Linde Engineering Division v. DCIT, W.P.(C) No. 3914/2012 & CM No. 8187/2012.

2014 Missing the Woods for the Trees: Ishikawajima v. Vodafone Crisis in

Turnkey Contracts

5

PART II FOUNDATION PILLARS OF DISSECTED APPROACH AND LOOK

AT APPROACH

Ishikawajima is considered to be foundation pillar of dissecting approach to turnkey

contracts. In this matter Petronet LNG Limited had entered into an agreement with a five

member consortium for setting up its plant in India on turnkey basis. The contract involved

onshore supply and service as well as offshore supply and service and construction and

erection. The scope of work, the role and responsibility of each member of consortium was

specified separately. Dispute arose regarding taxability of offshore supply and service in

India. Whilst Ishikawajima, Japanese member of consortium contended that the contract is a

divisible one and it did not have any liability to pay any tax with regard to offshore services

and offshore supplies; Revenue contended that the contract was a composite and integrated

one, and thus could not be split for the purposes of tax. Two judge bench of Supreme Court

held that merely because it is a turnkey contract would not mean that even for the purpose of

taxability the entire contract must be considered to be an integrated one. The taxable events in

execution of a contract may arise at several stages in several years. The contract was a

divisible one as offshore and onshore supply and service and offshore supply and service not

taxable in India.

The Supreme Court held that offshore supplies were not amenable to tax in India since

these were procured outside India and payment received outside India. Offshore services

though utilised in India were rendered outside India hence not taxable in India.9 In addition to

this, Supreme Court also held that the said offshore services were inextricably linked to

offshore supply and it must be considered in same manner.10

Consequently, turnkey contract

could not be taxed in its entirety and only onshore activities were liable to tax in India. The

decision also applied principle of apportionment envisaged under Clause (a) of Explanation 1

to Section 9(1)(i) of Income Tax Act. Accordingly that only such part of the income as is

attributable to the operations carried out in India, are taxable in India.11

9 Ishikawajima – Harima Heavy Industries Limited v. DIT, supra note 1, at ¶ 51.

10 This implies where offshore services are subservient to main element which is offshore supply an

inextricably linked to same, such supply being outside purview of domestic taxation laws renders

services also beyond purview of tax liability.

11 [Explanation 1].—For the purposes of this clause—(a) in the case of a business of which all the

operations are not carried out in India, the income of the business deemed under this clause to accrue or

arise in India shall be only such part of the income as is reasonably attributable to the operations carried

out in India.

VOL. 1] INDIAN JOURNAL OF TAX LAW 6

While efforts were being made to bring turnkey contracts under tax ambit through

several amendments in the statute and insertion of explanations;12

Vodafone judgment and its

‗look at‘ approach was sought to provide renewed support to these efforts. The Supreme

Court was considering a matter which, inter alia, involved a transfer of sale and purchase of

shares of an overseas company by one non-resident company to another non-resident

company. Revenue sought to tax this as transfer of capital asset situation in India under

section 9(1)(i) of Income Tax Act. Additionally it was contended on behalf of the Revenue

that the said transaction was arranged under a scheme to avoid payment of tax in India and

hence required to be ‗looked through‘. Rejecting this argument, Supreme Court applied the

‗look at‘ approach. It clearly held that while ascertaining genuineness of transaction it is the

task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it

has to look at the transaction as a whole and not to adopt a dissecting approach.

Thus Vodafone decision when contextualised in turnkey contracts once again set the

hare running not knowing which direction it would take. Juxtaposing Vodafone and

Ishikwajima the two were soon found to be at loggerheads with each other in court rooms.

Since Ishikawajima was a two-judge bench decision while Vodafone was three judge bench

decision, the later was readily received with much funfair.

PART III OSCILLATING DECISIONS POST VODAFONE

A quick survey of rulings delivered post-Vodafone, provides fair amount of

understanding about divided opinions amongst several judicial authorities. Thus AAR ruling

in Linde AG v. DIT13

was amongst early followers of Vodafone. AAR held that the contract

entered into by the consortium with resident company in India is a composite contract and

‗dissecting approach‘ is not permissible. Considering that consortium members had furnished

joint and several liability for performance of contract; the contract must be read as indivisible

one in the light of Vodafone judgment. Perhaps AAR was so enthusiastic about Vodafone

12 An Explanation to Sec. 9 as inserted by the Finance Act, 2007.—For the removal of doubts, it is hereby

declared that for the purposes of this section, where income is deemed to accrue or arise in India under

clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in

India." This explanation has been largely criticised as a hasty move on the part of legislature to supersede

Supreme Court‘s decision in Ishikawajima.

13 Alstom Transport v. DIT, supra note 4.

2014 Missing the Woods for the Trees: Ishikawajima v. Vodafone Crisis in

Turnkey Contracts

7

judgment that it did not follow its decision in Hyosung Corporation v. DIT14

which had quite

similar facts to the facts of this matter.

In Re: Roxar Maximum Reservoir Performance WLL15

where ONGC floated a tender

calling for ―services for supply, installation and commissioning of 36 manometer gauges‖ for

carrying out its operations; the assessee company sought ruling whether supply, title to which

passed outside India, was taxable in India. Referring to Vodafone judgement AAR held that

the Supreme Court in that matter had advocated ‗look at approach‘ to the transaction. In the

light of three judge bench decision of Vodafone, two judge bench decision of Ishikawajima

and its dissected approach cannot be applied.AAR held that the contract in question has to be

read as a whole. The purpose for which the contract is entered into by the parties is to be

ascertained from the terms of the contract. Since it is a contract for supply and erection at

sites within Indian territory, it is a composite contract.

Alstom Transport v. DIT16

went on to hold that the approach adopted in Ishikawajima

now stands disapproved or overruled, if not expressly, definitely by clear implication by

Vodafone. In this matter Bangalore Metro Rail Corporation Limited floated a tender for

design, manufacture, supply, installation and commissioning of train control and

communication systems; and consortium was jointly and severally responsible for the work

tendered. Emphasising that the basic principle in interpretation of a contract is to read it as a

whole and to construe all its terms in the context of the object and purpose sought to be

achieved; AAR arrived at conclusion that contract cannot be split up into different parts for

the purpose of taxation.

There however have been judgements that followed the dictum of Ishikwajima to hold

that nomenclature of turnkey contract itself is not determinative and regard being had to

contract dissection is permissible. Thus, in National Petroleum Construction Company v.

ADIT,17

a UAE based assessee had entered into contracts with ONGC for the ―fabrication

and installation of onshore and off-shore oil facilities and submarine pipelines and

pipelines‖. The assessee contended that their contracts with ONGC itself had bifurcated two

different and distinct components—one for designing, procurement, fabrication and supply of

14 Hyosung Corporation v. DIT,(2009) 314 ITR 343 (AAR)

15 Vodafone International Holdings BV v. UOI and Another, supra note 2.

16 Re: Roxar Maximum Reservoir Performance WLL, supra note 3.

17 DIT v. Nokia Networks OY, (2012) 253 CTR 417 (Delhi).

VOL. 1] INDIAN JOURNAL OF TAX LAW 8

material and the other, for installation and commissioning of the project. The Tribunal held

that even where the contract is a turnkey contract, the fact that contract itself provided for

such segregation and it was open for ONGC to accept the supply and not proceed with

installation was conclusive that contract was divisible one. Reliance placed on CIT v.

Hyundai Heavy Industries Co. Ltd.18

case which echoes the Ishikawajima ratio.

In DIT v. Nokia Networks OY19

, the assessee (Nokia Networks) was a Finnish

company having operations in India. Its activities involved supply of hardware and software

as well as installation and commissioning and also after sale services. It entered into

agreements with various Cellular Operators and entered into three contracts with them

namely (1) Overall Agreement, (2) the Supply Agreement and (3) the Installation Agreement.

The question came up before Delhi High Court whether Supply Agreement is a standalone

Agreement. Revenue‘s argument proceeded on the basis that the three agreements are to be

taken to form an integrated business arrangement between the parties which was governed by

the Overall Agreement. The assessee relied on the judgment of Ishikwajima and contended

that such supplies being made overseas and property in goods passed outside India, the same

would not be liable to tax in India. The Court did not find it as being one composite contract

and held that supply has to be segregated from installation and only then apportionment of

income can be made.

The aforementioned discussion demonstrates how turnkey contracts were subject to

constant litigation and attempts on part of foreign companies to rely on Ishikwajima while the

Revenue placed relevance on Vodafone. Recent decision of Delhi High in Linde AG (HC)20

has delivered a landmark judgment which seeks to provide some relief in this constant battle.

Overturning AAR ruling, Delhi High Court held that Ishikawajima is applicable to the fact of

present case and that the turnkey contract under issue was divisible in nature. It also

categorically observed that in absence of any controversy involving lifting of corporate veil

or ‗looking at‘ any scheme of sham transaction, reading principles of Vodafone was out of

context. While decision of Delhi High Court has put judicial authorities on alert and carries a

visible ratio to keep in check tendencies to blankly follow Vodafone decision, it is crucial for

judiciary to provide clear guidance as to composite nature of contract and how it can be

safely discerned.

18 CIT v. Hyundai Heavy Industries Co. Ltd., (2007) 291 ITR 482 (SC).

19 DIT v. Nokia Networks OY, supra note 17.

20 National Petroleum Construction Company v. ADIT, supra note 7.

2014 Missing the Woods for the Trees: Ishikawajima v. Vodafone Crisis in

Turnkey Contracts

9

PART IV TWO DETERMINANT TESTS

It emerges from the discussion so far that turnkey contracts involve contract for

manufacture, installation wherein sale or supply of goods and/or elements of services will be

invariably present. Depending upon nature of work to be executed, such supply of goods and

provisioning of services take place offshore and onshore. The core of the issue has been

regarding tax liability of such turnkey contract under Income Tax Act and DTAA. Reading

Sec.5 with Sec.9 of the Income Tax Act, where sec. 5 defines scope of total income in India

and sec.9 provides source based taxation of income accruing or arising or deemed to have

accrued or arisen in India. Thus when contextualised in terms of turnkey contracts following

propositions emerge:

1) Where equipments and materials are manufactured by a non-resident outside

India, consideration for sale is received abroad and property in goods passes to resident

purchaser outside India- Such supply of material and equipments under the contract is

nothing but a sale of goods simpliciter outside India and would not be amenable to tax

in India even though said goods are to be utilised within India.

2) Where equipments and materials are manufactured by a non-resident, procured

outside India by a resident in India and such sale is a part of a composite contract

involving onshore and offshore operations- Such supply would be taxable in India if the

said income arises through or from a business connection in India and such non-

resident has Permanent Establishment under DTAA.

3) Where offshore services are provided as a part of a composite contract

involving various onshore and offshore operations and such offshore services are

inextricably linked with the offshore supply of equipments and materials- such offshore

services cannot be taxed as FTS in India.

4) Where it cannot be sufficiently provide that the offshore services formed an

integral part of offshore supply- such offshore services are fees for technical services

taxable in India provided they are utilized in India.

Thus what is enumerated above is possible tax implication of a transaction. Situation

(1) and (4) are instances of either independent transactions or a standalone element of a

divisible contract; situation (2) and (3) emanate from a composite contract. What lies behind

each of this proposition is a common thread of inquiry whether the source of income had any

linkage with India. Thus in situation (1) and (3) there is no linkage found and hence it is not

VOL. 1] INDIAN JOURNAL OF TAX LAW 10

amenable to tax whereas situation (2) and (4) results into liability to tax in India provided

there is a live linkage.

The answers derived here, call for a combination of two key objects of inquiries: one, to

determine whether turnkey contract under question is divisible into onshore-offshore

components. Since this is fact based query and requires further inquiring nature of contract, I

call this ‘purpose and object of contract test’. Two, to determine whether such offshore

supply/service was on account of any business connection, permanent establishment or

utilisation of service in India. This tends to establish territorial nexus of income to India. I

call this ‘source of receipt test’.

While we have probable answer before us, the difficulty is we do not have a dedicated

set of questions to be asked in order to arrive at these answers. And this is where the main

problem lies. An analysis of judicial rulings already discussed above follows that the tests,

instead of being applied in combination to each other, have been applied in a mutually

exclusive manner.

PURPOSE AND OBJECT OF CONTRACT TEST

Thus in Alstom, AAR whilst discerning whether contract under consideration was

composite took on board purpose of tender invited. It thereby concluded that contract was not

for supply of offshore equipments independently of the installation and commissioning, nor

was it for independent installation and commissioning, divorced form design and supply of

necessary equipments. Such contract has to necessarily be read as a whole and is not capable

of being split up. Similarly in Roxar Maximum it was viewed that the purpose for which the

contract is entered into by the parties is to be ascertained from the terms of the contract. On

reading of the contract, AAR arrived at conclusion that the contract is clearly not one for sale

of equipment. Nor is it one for mere erection of the equipment. It is a composite contract for

supply and erection at sites within the territory of India.

Another close cousin of this test is found in performance test or cross fall breach clause.

This also helps in determining composite nature of contract. This clause is said to be helpful

in determining whether there is an intricate link between the offshore activities and onshore

activities so that breach of offshore element would result in breach of the whole contract. If

the answer is in affirmation the contract is a composite contract.

2014 Missing the Woods for the Trees: Ishikawajima v. Vodafone Crisis in

Turnkey Contracts

11

Interestingly AAR ruling in Ishikawajima21

had referred to the breach clause in order to

discern if the offshore-onshore elements of contract are so inextricably linked that the breach

of the 'offshore' element would result in the breach of the whole contract. Based on this set of

query, AAR ruling concluded that each component of the contract was directly relatable to the

performance of the integrated contract since any breach of any terms would result in breach of

entire contract and not just particular obligation. Hence, contract was indivisible and taxable

in its entirety.

SOURCE OF RECEIPT TEST

The Supreme Court in Ishikawajima, however accorded prominence to source of

receipt test that entails territorial nexus. It took a pragmatic line of decision that where

income arises from operations carried out in more than one jurisdiction, it would have such

territorial nexus with each of these jurisdictions. If that be so, it may not be correct to contend

that the ‗entire income‘ accrues or arises in each of the jurisdiction. Supreme Court thus went

on to hold that the fact that contract was fashioned on turnkey basis by itself would not mean

that even for the purpose of taxability the entire contract must be considered to be an

integrated one so as to make the assessee to pay tax in India.

Delhi High court ruling in Linde AG (HC) once again echoed the ratio of Supreme

Court in Ishikwajima and steered the object of inquiry altogether from purpose of contract

test to source of receipt test. While overturning AAR decision Delhi High Court held that the

Authority erred in proceeding on the basis that the contract as a whole was the subject of

taxation. The subject matter of taxation was not the Contract between the parties but the

income that the petitioner derived from the Contract. Delhi High Court sidesteps inquiry into

divisible or composite nature of contract and accords prominence to determination of situs of

income. It was thereby held that the object of inquiry would have to be determination to situs

where the income had accrued or arisen. According to Delhi High Court the assertion that

contractual obligations mandated due performance of entire contract was not necessary since

the same would not necessarily imply that entire income had its source in India.22

21 A.A.R. No. 618 of 2003.

22 The fact that the contractual obligations of Linde were not limited to merely supplying equipment, but

were for due performance of the entire Contract, would not necessarily imply that the entire income

which was relatable to the Contract could be deemed to accrue or arise in India.

VOL. 1] INDIAN JOURNAL OF TAX LAW 12

Such mutually exclusive application of tests resulted into divergent tax implication.

While under the ‗purpose and object of contract’ test prominence was accorded to contract

entered into between the parties to determine if the contract was composite in nature or

divisible; the ‗source of receipt’ test directly launch an inquiry into situs of income

rendering the ‗purpose and object of contract‘ test totally irrelevant in the process. Delhi

High Court goes on to assert that even where such composite nature of contractual

obligations are established the same would not necessarily imply that entire income had its

source in India. In other words ‗source of receipt‘ test supersedes ‗purpose of contract‘ test.

Whilst one concedes that source based taxation is the overarching principle of taxation

in sec.9; the difficulty I have with such proposition is that source of receipt test cannot be

answered in absence of purpose and object of contract test. Thus even where source of receipt

test helps in fixating ultimate tax liability and provides sound theoretical grounding; purpose

of contract test provides factual assertions on the issue.

It is important to note that Supreme Court in Ishikawajima had not denounced the

‘purpose and object of contract’ test. In fact the Court had taken terms of contract into

account while arriving at its decision. Whilst deciding the question of division of taxable

income of offshore services Supreme Court held that ‗parties were ad idem that there existed

a distinction between onshore supply and offshore supply. The intention of the parties, thus,

must be judged from different types of services, different types of prices, as also different

currencies in which the prices are to be paid.... But it is trite that the terms of a contract are

required to be construed having regard to the international covenants and conventions. In a

case of this nature, interpretation with reference to the nexus to tax territories will also

assume significance (emphasis are mine).‘23

PART V CONCLUSION

Thus Ishikawajima had applied both tests in order to arrive at its conclusion.

Subsequent cases however resorted to one such test and hence the confusion. While one may

concede that nomenclature of a turnkey project or works contract is not relevant in

determining whether any profit arising pursuant to such contract was entirely chargeable to

tax in India; it is imperative to carefully proceed with the inquiry. Even where source of

receipt test is an overarching principle to impose source based taxation on non-resident

23 Ishikawajima – Harima Heavy Industries Limited v. DIT, supra note 1, at ¶¶ 48-49.

2014 Missing the Woods for the Trees: Ishikawajima v. Vodafone Crisis in

Turnkey Contracts

13

entities; it needs to be appreciated that factual inquiry into nature of contract cannot be

dismissed altogether. Thus in order to ensure consistency and clarity it is important that both-

purpose and object of contract test as well as source of receipt test are applied in conjunction

with each other.

Insofar as application of Vodafone is concerned it needs to be carefully examined that

Vodafone ratio and its look at approach has been referred whilst applying the purpose and

object of contract test. Since this test accords prominence to contract and the basic tenet of

interpretation of contract entails it to be read as a whole, Vodafone ratio was found applicable

and thus it ended up adding to the existing confusion. It is humbly suggested that Vodafone

ratio will be helpful in instances where question have been reserved for consideration

whether parties had resorted to sham transaction or tax avoidance mechanism through

contractual arrangement.

A classic instance of matters where Vodafone decision has application is found in

Dongfang Electric Corporation v. DIT.24

The core dispute before Calcutta Tribunal was

adjustment to value assigned to the onshore supplies and services which was alleged to have

been kept for a lower amount with a view to avoid tax in India. Whilst deciding the matter

made a profound observation regarding applicability of Vodafone and its ‗look at‘ approach.

Tribunal conceded to the fact that there may be doubts expressed regarding application of

‗looking at the transaction as a whole and not adopting dissecting approach‘ to all matters

pertaining to offshore-onshore supply and service; nevertheless this is certainly applicable in

cases where values assigned to onshore services are prima facie unreasonable vis-à-vis values

assigned offshore supply contract. Tribunal held ‗to that limited extent......, the transactions

are to be essentially looked at as a whole, and not on standalone basis, when the overall

transaction is split in an unfair and unreasonable manner with a view to evade taxes.‘

24 Dongfang Electric Corporation v. DIT, (2012) 147 TTJ 579 (ITAT Calcutta).