Composite contract treatment upheld while Indian permanent establishment attribution was remanded for fresh functional analysis.

A foreign contractor's single project for automated system implementation was treated as a composite contract because responsibility for performance, taxes, indemnity and completion remained with the contractor; separate invoicing and subcontracted installation did not split the receipts for tax purposes. The project office in India was treated as a permanent establishment because it oversaw execution under the contractor's overall control. Income attribution to Indian operations, however, was remanded for fresh determination with a proper FAR analysis and verification of supporting expense evidence.

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Issues: (i) Whether the contract executed by the assessee was a composite contract, so that the receipts from supply and installation could not be split for tax purposes; (ii) whether the assessee had a permanent establishment in India and, if so, how the income attributable to Indian operations was to be determined.

Issue (i): Whether the contract executed by the assessee was a composite contract, so that the receipts from supply and installation could not be split for tax purposes.

Analysis: The contract was awarded to the assessee as a single project for implementation of automated systems, with the assessee retaining full responsibility towards the customer. The tender terms placed responsibility for performance, taxes, indemnity, and completion squarely on the assessee. The billing pattern adopted by the assessee, including separate invoicing for equipment and installation, did not alter the contractual substance, since the customer had only intended procurement of a completed automation solution. The sub-contract with the installation vendor was only a mode of execution and did not create a separable offshore supply arrangement.

Conclusion: The contract was rightly treated as a composite contract, and the assessee's claim to split the receipts was rejected.

Issue (ii): Whether the assessee had a permanent establishment in India and, if so, how the income attributable to Indian operations was to be determined.

Analysis: The assessee had opened a project office in India to oversee execution of the project, and the contract obligations were performed under its overall control. On that basis, the project office was treated as a permanent establishment. However, the method adopted for attribution of profits required fresh examination. The Tribunal held that the assessee should be given an opportunity to place material and that the profit attributable to Indian operations should be determined afresh by applying a proper FAR analysis, along with examination of the supporting expense evidence.

Conclusion: The existence of a permanent establishment was upheld, but the determination of attributable income was set aside for fresh adjudication.

Final Conclusion: The appeal succeeded only to the limited extent of remand on profit attribution and expense verification, while the core findings on composite contract and permanent establishment were upheld.

Ratio Decidendi: Where a foreign contractor undertakes a project as a single, fully responsible contractual obligation, subcontracting or separate invoicing does not by itself split the contract for tax purposes, and profits attributable to the Indian operations must be determined on a proper functional analysis where a permanent establishment exists.

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