Deemed accrual and permanent establishment principles apply to composite non-resident contracts with Indian operations.

Income from a composite supply and services contract may be deemed to accrue or arise in India where a non-resident carries on substantial contractual operations through a business connection in India. The analysis applied section 9(1)(i) to attribute profits only to operations performed in India, while treaty relief was examined to limit chargeability accordingly. A permanent establishment was also found under Article 5 because the country manager acted as a dependent agent and the business was partly conducted from a fixed place in India. The treaty consequently permitted taxation only of profits attributable to the Indian operations and the permanent establishment.

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Issues: (i) Whether income from the contracts with the Government of Andhra Pradesh could be deemed to accrue or arise in India to the non-resident applicant under the Income-tax Act. (ii) Whether the applicant had a permanent establishment in India under the India-USA Double Taxation Avoidance Agreement.

Issue (i): Whether income from the contracts with the Government of Andhra Pradesh could be deemed to accrue or arise in India to the non-resident applicant under the Income-tax Act.

Analysis: The contracts were a composite arrangement for supply of equipment, installation, commissioning, warranty and maintenance. Although proposal preparation and shipment of goods were linked to activities outside India, the applicant carried on substantial contractual activity in India through its country manager, who submitted bids and signed contracts on its behalf. The statutory concept of deemed accrual under section 9(1)(i) was applied on the footing that the applicant had a business connection in India and that profits attributable to operations carried out in India were taxable to that extent. The treaty provisions were then considered to determine the extent of chargeability.

Conclusion: Income could be deemed to accrue or arise in India to the applicant.

Issue (ii): Whether the applicant had a permanent establishment in India under the India-USA Double Taxation Avoidance Agreement.

Analysis: Under Article 5, a permanent establishment includes a fixed place of business and also a dependent agent who habitually exercises authority to conclude contracts or otherwise secures orders on behalf of the enterprise. On the facts, the country manager was not an independent consultant in substance, but a paid agent who collected business information, submitted bids and executed contracts for the applicant. The residential address from which the applicant's business was partly carried on was treated as a fixed place of business, and the exclusion for an independent agent did not apply. The applicant was therefore held to have a permanent establishment in India, making Article 7 applicable to profits attributable to that establishment.

Conclusion: The applicant had a permanent establishment in India.

Final Conclusion: The non-resident applicant's profits from the composite supply and services contracts were held taxable in India to the extent attributable to the Indian operations and the permanent establishment.

Ratio Decidendi: Where a non-resident carries on a composite contract through a dependent agent in India, profits attributable to operations in India are deemed to accrue or arise in India, and the treaty permits taxation of only the profits attributable to the permanent establishment.

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