Offshore supply profits and permanent establishment attribution under the India-Finland treaty: Indian taxation denied

Offshore supply profits under a turnkey contract were examined under the India-Finland DTAA and the Income-tax Act to determine whether they were attributable to an Indian permanent establishment. Article 7(1)(a) was treated as inapplicable because the profits on offshore supply arose before the installation permanent establishment came into existence and there was no evidence of non-arm's-length pricing. Article 7(1)(b) was also held inapplicable because the record did not show sales in the other State of goods of the same or similar kind as those sold through the permanent establishment. Article 7(1)(c) did not apply because the issue concerned equipment sale proceeds, not other business activities in India. The profits were therefore not taxable in India, and section 9(1)(i) was not separately examined.

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Issues: Whether the profits from sale of equipment supplied outside India under the turnkey contract were taxable in India under the Income-tax Act and the India-Finland Double Taxation Avoidance Agreement.

Analysis: The dispute turned on whether the offshore supply formed part of profits attributable to the permanent establishment in India, or whether Article 7 of the treaty extended Indian taxing rights under the restricted force of attraction principle. Article 7(1)(a) was held inapplicable because the profits on offshore supply were earned before the installation permanent establishment came into existence and could not be treated as profits attributable to that permanent establishment without evidence of any non-arm's-length pricing. Article 7(1)(b) was also held inapplicable because the provision extends only to sales in the other State of goods of the same or similar kind as those sold through the permanent establishment, which was not shown on the facts. Article 7(1)(c) was found irrelevant because the issue concerned sale proceeds of equipment and not other business activities carried on in India. In view of the treaty position, there was no necessity to examine domestic law further, and the alternative reliance on section 9(1)(i) was left without adjudication as infructuous.

Conclusion: The profits from sale of equipment were not taxable in India.

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