2016 (11) TMI 1496 - HC - Income Tax

High Court: Section 44BB not applicable to offshore equipment supply. Only India commissioning profits taxable.

The High Court ruled in favor of the assessee in an appeal under Section 260A of the Income Tax Act regarding the applicability of Section 44BB to ... Taxability under divisible contracts - distinction between manufacture/sale and installation/commissioning - Non-application of offshore profit attribution where situs of sale is outside India - Attribution of income to India only for commissioning services - Determination of India accruing profit by reference to global profit ratio in absence of specific statutory provision - Application of Ishikawajma Harima precedent Taxability under divisible contracts - distinction between manufacture/sale and installation/commissioning - Non-application of offshore profit attribution where situs of sale is outside India - Application of Ishikawajma Harima precedent - Whether the provisions of Section 44BB (as contended) apply to the sale of offshore supply of equipment manufactured outside India, or whether only the commissioning performed in India is taxable - HELD THAT: - The Tribunal found, and the High Court accepted, that the contract was divisible into a manufacture/supply component and an installation/commissioning component. The manufactured equipment was entirely produced outside India and there is no finding that the situs of sale of those manufactured items was in India. Relying on the reasoning affirmed by the Supreme Court in Ishikawajma Harima , the Court held that the manufacturing and sale component, effected outside India, did not give rise to taxable income in India. Only the activities of installation and commissioning carried out in India could be taxed here. Consequently, the claimed applicability of the provision relied upon by the department to treat the offshore sale as taxable in India was rejected.The appeal is allowed on this ground; the sale/manufacture outside India is not taxable in India, and only the commissioning performed in India is taxable.Determination of India accruing profit by reference to global profit ratio in absence of specific statutory provision - Whether, in the absence of a specific statutory provision, 20% of profits on the offshore sale should be treated to have accrued in India and whether profit should be determined by applying a global profit ratio - HELD THAT: - The Tribunal had proceeded on the basis that where a divisible contract exists and the manufacturing element is outside India, a proportionate part of global profit representing the commissioning activity may be attributed to India and determined by applying the global profit ratio. The High Court, having accepted the Tribunal's factual conclusion that the sale occurred outside India and that only commissioning took place in India, affirmed the approach that profit attributable to the India based commissioning activity should be determined on the basis of global profit ratio in the absence of any specific provision to the contrary. That approach was applied without imposing tax on the offshore sale portion.The Tribunal's approach to treat and determine the profit attributable to the commissioning activity by reference to global profit ratio is accepted.Final Conclusion: The appeal is disposed of in favour of the assessee and against the department: the offshore manufacture and sale of equipment, the situs of which is outside India, is not taxable in India; only the installation/commissioning carried out in India is taxable, and the profit attributable to that activity may be determined by reference to the global profit ratio in the absence of specific statutory provision. Issues: Interpretation of Section 44BB of the Income Tax Act for offshore supply of equipmentAnalysis:The High Court addressed the appeal filed by the department under Section 260A of the Income Tax Act, 1961 against the Tribunal's order for the assessment year 2002-03. The primary question of law revolved around whether the provisions of Section 44BB of the Income Tax Act applied to the sale of offshore supply of equipment. The Tribunal had ruled that Section 44BB did not apply to offshore supply of equipment and that 20% of profits should be treated as accrued in India based on the Global Profit Ratio. This decision was supported by the Hon'ble Apex Court in a similar case, emphasizing the concept of divisible contracts and the absence of a sale element in India for the manufacturing part of the equipment. The Court noted that the equipment was entirely manufactured outside India, with only the installation and commissioning taking place in India. Consequently, the assessee was held liable for taxation only on the commissioning aspect, not on the purchase of equipment done outside India. The Court, therefore, ruled in favor of the assessee and against the department, disposing of the appeal with no costs incurred.