Assessee, a company incorporated in China, established a Project Office (PO) in India to execute an onshore services contract with Power Grid Corporation of India Ltd. (PGCIL). The agreement involved offshore and onshore supplies, with the onshore services executed through the PO in India. TPO treated the transactions between the Head Office (HO) and the PO as international transactions, holding that HO had complete control over PO’s funds, as payments were received and expenses were incurred through HO. The onshore service contract resulted in losses to PO, indicating that the arrangement was not at arm’s length. The difference in per-unit civil work rates received from PGCIL and the rate paid to subcontractors showed inadequate compensation to the PO. Since the PO was a separate enterprise under article 7(2) of the India-China DTAA, transactions between HO and PO were subject to transfer pricing adjustments under section 92B. Assessee challenged the adjustment. Held: The PO must be treated as a distinct and separate enterprise from HO, as per article 7(2) of the India-China DTAA. Transactions between a foreign enterprise and its PE in India qualify as international transactions under section 92B, even if both are non-residents. The matter is directed to be placed before the Division  Bench to give effect to the direction. (AY.  2012-13)