Divisible contract taxation and PE-linked interest: offshore receipts escaped Indian tax, while onshore profits used a 10% computation method.

Divisible contracts for offshore and onshore work may confine Indian taxation to income attributable to activities performed in India; the offshore designing, fabrication and supply receipts under the ONGC and GMR contracts were treated as outside Indian tax net, while the HMI project required fresh examination. For inside-India operations, profit was directed to be computed at 10% of gross revenue after allowing subcontract cost, following the assessee's earlier year method. Interest from Citi Bank, Chennai was upheld as taxable at the applicable normal rate because it was effectively connected with the permanent establishment. Interest under sections 234B and 234D was sent back for reconsideration, and challenge to initiation of penalty under section 271(1)(c) was rejected as premature.

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Issues: (i) Whether the receipts from offshore activities under the ONGC and GMR contracts were taxable in India and whether the contracts were divisible so that only the income attributable to activities carried out in India could be taxed; (ii) Whether the income from inside India operations was required to be computed by estimating profit at 10% of gross revenue after allowing subcontract cost; (iii) Whether interest earned from Citi Bank, Chennai was taxable at the maximum marginal rate under the DTAA; (iv) Whether interest under sections 234B and 234D and the initiation of penalty proceedings under section 271(1)(c) called for interference.

Issue (i): Whether the receipts from offshore activities under the ONGC and GMR contracts were taxable in India and whether the contracts were divisible so that only the income attributable to activities carried out in India could be taxed.

Analysis: The dispute turned on the earlier Tribunal view in the assessee's own case on identical contracts and facts. The Tribunal accepted that the contracts were divisible and that the offshore components relating to designing, fabrication and supply were performed outside India. Those receipts were not attributable to the Indian operations or to the permanent establishment in India. The Tribunal also noted that the findings concerning the offshore portions applied to the ONGC and GMR projects, while the HMI project required fresh examination by the Assessing Officer in the light of the same principles.

Conclusion: The issue was decided in favour of the assessee for the ONGC and GMR offshore receipts, and the HMI matter was remanded for fresh decision.

Issue (ii): Whether the income from inside India operations was required to be computed by estimating profit at 10% of gross revenue after allowing subcontract cost.

Analysis: The Tribunal followed its earlier decision for the immediately preceding assessment year and held that the consistent method adopted in the assessee's case had to be applied. It directed that 10% of the gross revenue from inside India operations be taken after allowing subcontract cost, and that the earlier assessment-year procedure be followed. The Tribunal also observed that the alternative challenge based on section 44BB did not survive once this computation method was accepted.

Conclusion: The issue was decided in favour of the assessee, with the assessment to be recomputed on the directed basis.

Issue (iii): Whether interest earned from Citi Bank, Chennai was taxable at the maximum marginal rate under the DTAA.

Analysis: The assessee fairly conceded that the issue was against it. The Tribunal accepted the revenue's position that the interest was effectively connected with the permanent establishment and upheld taxation at the applicable normal rate.

Conclusion: The issue was decided against the assessee.

Issue (iv): Whether interest under sections 234B and 234D and the initiation of penalty proceedings under section 271(1)(c) called for interference.

Analysis: On interest under sections 234B and 234D, the Tribunal directed fresh consideration by the Assessing Officer in the light of the outcome of the remanded issues and the applicable High Court decision. On penalty initiation, the Tribunal held that the issue was premature because penalty proceedings are independent and could be challenged only if and when adverse action is taken.

Conclusion: The interest issue was remanded for fresh decision, and the penalty initiation challenge was rejected.

Final Conclusion: The appeal succeeded only in part: offshore receipts from the covered contracts were held not taxable in India, the inside-India profit computation was directed on a limited estimated basis, the Citi Bank interest addition was sustained, and the interest and penalty-related matters were either remanded or rejected.

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