Composite cross-border contract principles shape taxability: offshore supply escaped Indian tax, while installation-linked income remained taxable.

Reassessment under section 147 was upheld because the recorded material provided a prima facie basis to believe income had escaped assessment. Separate supply and service agreements for the same modernization project were treated as one composite contract, since the obligations, milestones and commercial substance were integrated. No fixed place permanent establishment arose merely from review visits; it arose only when goods were cleared in India and handed over for installation. Offshore supply and software receipts were therefore not taxable in India for the relevant year, while installation-linked income for the Mumbai project remained taxable. Consideration could be bifurcated between equipment and software on objective estimation, and later advance rulings were only persuasive.

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Issues: (i) Whether reassessment under section 147 was valid; (ii) whether the supply contract and service contract formed one composite contract; (iii) whether the assessee had a permanent establishment in India and whether profits from offshore supply and software were taxable in India; (iv) whether the consideration could be bifurcated between equipment and software and whether the revenue could rely on the advance ruling material.

Issue (i): Whether reassessment under section 147 was valid.

Analysis: The reassessment was founded on recorded reasons referring to the contract documents and the possibility of income from anomaly resolution and software modification having escaped assessment. At the reopening stage, the Assessing Officer was only required to have a prima facie basis for a belief that income had escaped assessment. The material on record was sufficient to form such a belief, and the absence of a prior return strengthened the revenue's case under the statutory scheme.

Conclusion: The reopening under section 147 was upheld.

Issue (ii): Whether the supply contract and service contract formed one composite contract.

Analysis: The two agreements, though separately drafted, were executed on the same date for the same modernization project and were commercially interlinked. The supply of hardware and software, installation, testing, commissioning and training were all parts of one integrated commercial arrangement, and the payment milestones were also linked to project stages rather than isolated supplies. In substance, the contracts could not be treated as independent for tax purposes.

Conclusion: The two agreements were treated as one composite contract.

Issue (iii): Whether the assessee had a permanent establishment in India and whether profits from offshore supply and software were taxable in India.

Analysis: Mere occasional visits for review meetings, system specification review and design finalisation did not by themselves establish a fixed place permanent establishment from the outset. The permanent establishment came into existence only when the goods were cleared in India and handed over to the assessee for installation and related custodial activities. Since the property in the equipment and software had passed outside India on shipment and the supply and payment milestones were completed outside India, the offshore supply receipts did not accrue in India in the relevant year. The installation and onshore service receipts linked with the Mumbai project, however, were taxable in India for the year to the extent they arose after the permanent establishment came into existence.

Conclusion: No tax was sustained on offshore supply and software receipts for the year, while installation-related income for the Mumbai project remained taxable in India.

Issue (iv): Whether the consideration could be bifurcated between equipment and software and whether the revenue could rely on the advance ruling material.

Analysis: A composite consideration for equipment and software could be segregated where the surrounding facts showed distinct components and no reliable evidence of actual allocation was produced by the assessee. In the absence of objective material, estimation was permissible. The advance rulings obtained in later transactions were not binding on the assessee in this proceeding, but they could be looked at as persuasive material where the facts were similar.

Conclusion: The bifurcation approach was sustained, but the advance rulings were treated only as persuasive and not binding on the assessee.

Final Conclusion: The reassessment was sustained, the contracts were treated as an integrated arrangement, offshore supply income for the relevant year was held not taxable in India, and only the installation-linked income for the Mumbai project survived for fresh computation, resulting in a partial relief to the assessee.

Ratio Decidendi: For reopening, a prima facie nexus between the recorded material and the belief of escapement is sufficient; and in a composite cross-border project, offshore supply receipts do not become taxable in India merely because the contract is turnkey, unless the income accrues in India through the relevant business presence and project-stage facts.

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