Offshore supply, supervisory services, and design drawings: attribution and royalty treatment turned on contract performance and copyright rights.

Profits from offshore supply of equipment were held not taxable in India because the contracts were performed outside India, title passed outside India, payment was received outside India, and a supervisory permanent establishment did not justify attribution of those profits. Income from supervisory services was attributed at 27.5% of gross revenue, as no reliable basis was shown to displace the earlier settlement-based method and the absence of books supported estimation. Receipts for designs and drawings were treated as business income, not royalty, because the materials were supplied as copyrighted articles for internal plant set-up without transfer of copyright or know-how rights.

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Issues: (i) whether profits from offshore supply of equipment were taxable in India and attributable to a permanent establishment; (ii) whether income from supervisory services was to be computed at 27.5% of gross revenue; and (iii) whether receipts from supply of designs and drawings were taxable as royalty or as business income.

Issue (i): whether profits from offshore supply of equipment were taxable in India and attributable to a permanent establishment.

Analysis: The contracts showed that designing, procurement, fabrication and manufacture of equipment were undertaken outside India, title passed outside India, consideration was received outside India, and the buyers were independent customers dealing on a principal-to-principal basis. The acceptance and performance tests were held to be warranty-type conditions and not determinative of the place of sale. The existence of a supervisory permanent establishment did not justify attribution of profits from offshore supply, and the cited treaty provisions did not support taxation of such offshore supplies in India.

Conclusion: The profits from offshore supply of equipment were not taxable in India and no attribution to the permanent establishment was warranted.

Issue (ii): whether income from supervisory services was to be computed at 27.5% of gross revenue.

Analysis: The supervisory services were rendered in connection with technically specialised project supervision, and no reliable basis was shown to depart from the earlier settlement-based attribution accepted in the assessee's own case. The comparable-company margin relied upon by the assessee was found not sufficiently comparable, and the absence of books justified estimation of profits on the basis adopted by the Assessing Officer and affirmed by the Dispute Resolution Panel.

Conclusion: The attribution of supervisory-service income at 27.5% was upheld.

Issue (iii): whether receipts from supply of designs and drawings were taxable as royalty or as business income.

Analysis: The designs and drawings were prepared and supplied from outside India as part of basic engineering packages, and the recipients used them internally for setting up plants rather than for commercial exploitation. The restrictions on intellectual property were held not to change the character of the transaction into a licence of copyright, and the materials were treated as a copyrighted article rather than a transfer of copyright or know-how rights. On the facts, the earlier settlement view was not followed.

Conclusion: The receipts from supply of designs and drawings were not taxable as royalty and were held to be business income.

Final Conclusion: The appeals succeeded on the offshore-supply and design-drawing issues, but failed on supervisory-services attribution, resulting in a partial allowance of the assessee's appeals.

Ratio Decidendi: Offshore supply completed outside India on a principal-to-principal basis is not taxable in India merely because acceptance or warranty tests occur in India, and use of designs or drawings for internal plant set-up without transfer of copyright does not constitute royalty.

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