Permanent establishment and offshore supply taxation: no Indian PE, no tax on completed foreign sale, and no withholding duty on payments.

A foreign enterprise does not create a permanent establishment in India merely because its subsidiary receives shareholder oversight, periodic reporting, or expatriate support; the subsidiary's separate identity must be disregarded only if its premises or personnel are shown to carry on the parent's business in India. The AAR found no such nexus and held there was no PE. Consideration for offshore supply completed outside India, where title and risk passed abroad, was not taxable in India on the facts stated, subject to verification of the contractual and shipping documents. Since section 195 applies only to sums chargeable under the Act, no tax was deductible on those offshore supply payments.

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Issues: (i) Whether the applicant had a permanent establishment in India under Article 5 of the India-Japan DTAA by reason of its transactions and expatriate personnel at the Indian subsidiary. (ii) Whether the consideration for offshore supply of raw material, components, capital goods and CR-V cars was taxable in India. (iii) Whether tax was deductible under section 195 on payments for such offshore supplies.

Issue (i): Whether the applicant had a permanent establishment in India under Article 5 of the India-Japan DTAA by reason of its transactions and expatriate personnel at the Indian subsidiary.

Analysis: The relevant treaty provision required a fixed place of business through which the enterprise's business is wholly or partly carried on. The subsidiary's separate corporate personality could not be ignored merely because the parent exercised shareholder oversight or received periodic reports. The record did not establish that the subsidiary was carrying on the business of the Japanese company, or that its employees were acting on behalf of the parent in a manner that created agency or fixed place nexus. The expatriate personnel's activities were found to relate to the subsidiary's own business, including product planning, market surveys, brand promotion and operational reporting.

Conclusion: The applicant did not have a permanent establishment in India.

Issue (ii): Whether the consideration for offshore supply of raw material, components, capital goods and CR-V cars was taxable in India.

Analysis: The supply contract provided for transfer of title and risk outside India at the port of shipment or delivery, with payment in foreign currency. Applying the principle of apportionment and territorial nexus, income from a completed offshore sale outside India was not chargeable in India where no relevant part of the sale transaction accrued or arose in India. The ruling was, however, subject to verification of the contractual and shipping documents for each consignment.

Conclusion: The consideration for offshore supply was not taxable in India, subject to verification as directed.

Issue (iii): Whether tax was deductible under section 195 on payments for such offshore supplies.

Analysis: Section 195 applies only to sums chargeable under the Act. Since the offshore supply consideration was held not taxable in India, the payer had no withholding obligation on those payments.

Conclusion: No tax was deductible under section 195 on the offshore supply payments.

Final Conclusion: The ruling rejected the Revenue's PE theory, held the offshore supplies to be outside Indian tax charge on the facts stated, and consequently negatived withholding liability on those payments.

Ratio Decidendi: A foreign enterprise is not chargeable to Indian tax merely because its subsidiary receives periodic oversight or expatriate support unless the subsidiary's premises or personnel are shown to be used for carrying on the parent's business in India, and an offshore sale completed outside India with transfer of title and risk abroad does not give rise to income taxable in India.

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