Offshore supply and liaison office principles: no PE, no royalty tax, no section 234B interest, but attribution was remitted.

A liaison office carrying on only preparatory and auxiliary activities was not treated as a business connection or permanent establishment in India. Offshore supply of hardware and embedded software was held to be a completed sale outside India, with title and risk passing abroad; the software was a copyrighted article rather than a transfer of copyright rights, so the receipts were not taxable as royalty and interest under section 234B was not leviable on the non-resident. Attribution of profits to the alleged permanent establishment and any notional interest on delayed consideration or vendor financing required fresh factual reconsideration and was remitted.

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Issues: (i) Whether the liaison office constituted a business connection or permanent establishment in India. (ii) Whether consideration for offshore supply of hardware and software was taxable as royalty and whether interest under section 234B could be levied. (iii) Whether the attribution of profits to the alleged permanent establishment and the vendor-financing interest required fresh consideration.

Issue (i): Whether the liaison office constituted a business connection or permanent establishment in India.

Analysis: The liaison office was found to have carried on only preparatory and auxiliary activities and was not shown to have undertaken business operations on behalf of the foreign enterprise. The record did not support the Revenue's case that the office furnished a business connection, and the same factual material could not sustain the existence of a permanent establishment merely on conjecture or perception.

Conclusion: The liaison office did not constitute either a business connection or a permanent establishment in India.

Issue (ii): Whether consideration for offshore supply of hardware and software was taxable as royalty and whether interest under section 234B could be levied.

Analysis: The supply contract was treated as a contract for sale of goods completed outside India, with title and risk passing outside India. Software supplied as an inseparable part of the equipment was held to be a copyrighted article and not a transfer of copyright rights. The treaty definition of royalty was narrower than the domestic provision, and the retrospective amendment to section 9(1)(vi) did not alter the treaty position. On the same footing, a non-resident against whom tax was deductible at source could not be fastened with interest under section 234B.

Conclusion: The offshore supply receipts were not taxable as royalty, and interest under section 234B was not leviable.

Issue (iii): Whether the attribution of profits to the alleged permanent establishment and the vendor-financing interest required fresh consideration.

Analysis: The attribution exercise rested on factual assumptions that were not adequately tested and, in part, proceeded on errors accepted by the Revenue. In view of those infirmities, the question whether any profits were attributable to the subsidiary and whether notional interest on delayed consideration or vendor financing was taxable required reconsideration by the fact-finding authority.

Conclusion: This issue was remitted for fresh consideration.

Final Conclusion: The foreign enterprise succeeded on the core jurisdictional and royalty questions, while the attribution and vendor-financing matters were sent back for reconsideration.

Ratio Decidendi: Offshore supply completed abroad is not taxable in India as royalty or business income unless the non-resident has a real Indian nexus giving rise to taxable income, and a copyrighted article does not amount to a transfer of copyright rights.

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