Offshore sales and dependent agent PE principles: principal-to-principal CKD and CBU sales were held not taxable in India.

Offshore sales of CKD units on a principal-to-principal basis, with delivery and payment completed outside India and no operations carried out in India for those transactions, did not create a business connection or fixed place/management PE; the related income was not taxable in India. Direct CBU sales through the Indian distributor also did not create a dependent agent PE because the distributor only acted as a communication channel, had no authority to conclude contracts, did not habitually secure orders, and performed only preparatory or auxiliary functions. In the absence of a PE and attributable profit-generating activity in India, no profits from the CBU sales were taxable in India.

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Issues: (i) Whether sales of completely knocked down units to the Indian distributor gave rise to business connection or permanent establishment in India so as to attract tax under section 9(1)(i) of the Income-tax Act, 1961 and the treaty; (ii) Whether direct sales of completely built-up cars to Indian customers through the distributor created a dependent agent permanent establishment and whether any profits from such sales were attributable to activities in India.

Issue (i): Whether sales of completely knocked down units to the Indian distributor gave rise to business connection or permanent establishment in India so as to attract tax under section 9(1)(i) of the Income-tax Act, 1961 and the treaty.

Analysis: The sales of CKD parts were concluded outside India on a principal-to-principal basis, delivery and payment took place outside India, and the Indian distributor used the goods in its own manufacturing and sale business. The non-resident carried out no operations in India in relation to those sales. On these facts, no part of the income from such offshore supply accrued or arose in India, and the distributor could not be treated as a business connection or as a fixed place or place of management PE for those transactions.

Conclusion: The issue was decided in favour of the assessee. Income from CKD sales to the Indian distributor was held not taxable in India.

Issue (ii): Whether direct sales of completely built-up cars to Indian customers through the distributor created a dependent agent permanent establishment and whether any profits from such sales were attributable to activities in India.

Analysis: The distributor functioned only as a communication channel and did not habitually conclude contracts, maintain stock for the foreign enterprise, or habitually secure orders in a manner that satisfied the agency PE clause. The real commercial decisions, price and terms were controlled by the foreign enterprise, and the distributor's activities were found to be preparatory or auxiliary. In the absence of a PE, and with no proved profit-generating activity in India attributable to the distributor, no portion of the profits from direct CBU sales could be taxed in India under the treaty attribution rule.

Conclusion: The issue was decided in favour of the assessee. No dependent agent PE was established and no profits from direct CBU sales were attributable to India.

Final Conclusion: The revenue's appeals failed and the assessee's appeals succeeded, resulting in a complete deletion of Indian taxability on the impugned offshore CKD sales and the direct CBU sales profits.

Ratio Decidendi: Where a non-resident's sales are concluded offshore on a principal-to-principal basis and the Indian entity performs only auxiliary communication functions without authority to conclude contracts or generate attributable profits, neither business connection nor agency permanent establishment is established and the related income is not taxable in India.

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