Composite turnkey contracts: offshore supply title passage and no India-attributable income defeat tax withholding on supply receipts.

A composite turnkey arrangement with identifiable supply and erection segments did not make the supply consideration chargeable in India where title in the equipment passed outside India, no part of the goods was manufactured in India, and no income was attributable to activities in India. On that basis, the supply portion was not subject to deduction of tax at source under section 195. The alleged business connection or permanent establishment of the non-resident supplier also did not render the supply receipts taxable in India, because the facts did not satisfy the attribution requirement for business profits. The supply segment was therefore treated separately from the taxable erection and commissioning element.

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Issues: (i) whether the supply portion of the turnkey contract, though part of a composite arrangement, gave rise to income chargeable in India so as to require deduction of tax at source under section 195; (ii) whether the non-resident supplier's alleged business connection or permanent establishment in India made the supply consideration taxable in India.

Issue (i): whether the supply portion of the turnkey contract, though part of a composite arrangement, gave rise to income chargeable in India so as to require deduction of tax at source under section 195.

Analysis: The contract was treated as composite, but the supply and erection components were identifiable and capable of separate treatment. Applying the principles governing passing of property in goods, the intention of the parties and the FOB nature of the supply arrangement showed that title in the equipment passed outside India. No part of the equipment was manufactured in India, and the supply segment did not generate income attributable to activities in India. The existence of a composite overall arrangement did not authorise clubbing the supply segment for tax deduction when the taxable element, if any, arose only from the erection and commissioning segment.

Conclusion: The supply segment did not attract deduction of tax at source, and the assessee was not liable to deduct tax on that portion.

Issue (ii): whether the non-resident supplier's alleged business connection or permanent establishment in India made the supply consideration taxable in India.

Analysis: The revenue's case on business connection and permanent establishment was rejected because no manufacturing activity for the supplied generators took place in India and no income from the supply segment was attributable to activities carried on in India. The treaty provision concerning business profits required activities in India for attribution of profits, and that condition was not satisfied for the supply consideration. The facts, therefore, did not justify taxation of the supply receipts in India on the basis of business connection or permanent establishment.

Conclusion: The alleged business connection or permanent establishment did not render the supply consideration taxable in India.

Final Conclusion: The order of the first appellate authority was upheld, and the department failed to establish liability to deduct tax at source on the supply portion of the contract.

Ratio Decidendi: Where a turnkey arrangement contains identifiable supply and erection segments, and the supply contract shows that title passes outside India with no income attributable to activities in India, the supply consideration is not chargeable in India merely because the overall project is composite or because the foreign supplier is alleged to have a business connection or permanent establishment in India.

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