Permanent establishment attribution limits Indian tax on foreign fabrication profits, while Indian operations may be profit-estimated on a presumptive basis.

Profits from foreign fabrication and delivery work completed in Korea were not taxable in India because they lacked the required economic nexus with the Indian permanent establishment under the treaty and the Income-tax Act; only profits attributable to the Indian permanent establishment could be taxed. By contrast, where the assessee's books were rejected and reliable supporting particulars were absent, the Court accepted a best-judgment estimate of profits from installation, commissioning and related Indian operations at 10% of gross receipts, consistent with the presumptive assessment approach applied to those receipts.

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Issues: (i) Whether profits from the Korean operations of designing and fabrication were taxable in India as attributable to the Indian permanent establishment under the double taxation convention and the Income-tax Act, 1961. (ii) Whether the profits from installation, commissioning and related Indian operations were to be estimated at 10% of gross receipts.

Issue (i): Whether profits from the Korean operations of designing and fabrication were taxable in India as attributable to the Indian permanent establishment under the double taxation convention and the Income-tax Act, 1961.

Analysis: The taxable subject remained the foreign enterprise, and only such profits as accrued or arose in India, or were attributable to the Indian permanent establishment, could be taxed. On the facts, the fabrication and delivery of the platforms in Korea were completed before the installation permanent establishment in India came into existence. The source country could tax only hypothetical profits attributable to the independent permanent establishment, and no material showed that the supply price included any element for services rendered by the Indian permanent establishment or was not at arm's length. The contract proceeds relatable to the Korean operations therefore lacked the required economic nexus with the Indian permanent establishment.

Conclusion: Profits from the Korean operations were not taxable in India and this issue was decided in favour of the assessee.

Issue (ii): Whether the profits from installation, commissioning and related Indian operations were to be estimated at 10% of gross receipts.

Analysis: The accounts produced by the assessee had been rejected and best judgment assessment was justified. The assessee itself had accepted computation on a presumptive basis under Section 44BB of the Income-tax Act, 1961 and the CBDT instruction governing such receipts. In the absence of reliable books and supporting particulars, the Court accepted the Commissioner (Appeals)'s approach of estimating profits from the Indian operations at 10% of the gross receipts for installation, hook-up and commissioning carried out in India.

Conclusion: The Indian-operation profits were correctly estimated at 10% of gross receipts and this issue was decided in favour of Revenue.

Final Conclusion: The appeal succeeded only to the extent that the Indian operations were taxable on the estimated basis accepted by the Court, while the Korean fabrication profits remained outside Indian tax net.

Ratio Decidendi: Under the attribution rule in a treaty case, only profits having an economic nexus with the permanent establishment are taxable in the source State, and where books are rejected in a presumptive assessment context, reasonable estimation of profits from Indian operations is permissible.

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