Composite turnkey contract taxation: offshore supply linked to Indian operations and technical services taxed on gross receipts with treaty cap.

A composite turnkey contract may make offshore supply taxable in India where the supply is not isolated from connected Indian operations and forms part of a business connection; tax is then limited to the profit reasonably attributable to operations carried out in India. Offshore services described as managerial, technical and consultancy services are treated as fees for technical services under the Act and the India-Japan treaty, and are taxable on the gross amount without apportionment on these facts. The treaty rate cap applies, and no deduction of expenses is admissible where the statutory bar for such receipts operates.

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Issues: (i) Whether the amounts received or receivable for offshore supply of equipment and materials were taxable in India under the Income-tax Act and the India-Japan tax treaty; (ii) if taxable, what part of the offshore supply profit was chargeable in India; (iii) whether the amounts received or receivable for offshore services were taxable in India under the Income-tax Act and the India-Japan tax treaty; (iv) whether the entire amount for offshore services was chargeable to tax and, if so, at what rate; and (v) whether any deduction of expenses was admissible in computing income from offshore services.

Issue (i): Whether the amounts received or receivable for offshore supply of equipment and materials were taxable in India under the Income-tax Act and the India-Japan tax treaty.

Analysis: The offshore supply formed part of a composite turnkey arrangement with business connection in India. Although the price was paid abroad and property in the goods passed on high seas, the supply was not an isolated foreign sale. The contract required significant connected operations in India, including receiving, unloading, customs clearance and transport to site, and the contract price covered those operations as well. On that basis, the income from offshore supply was treated as arising through business connection in India under the Act. Under the treaty, the profit was also held attributable to the permanent establishment to the extent contemplated by the treaty provisions and protocol.

Conclusion: The offshore supply receipts were taxable in India.

Issue (ii): If taxable, what part of the offshore supply profit was chargeable in India.

Analysis: Where all operations are not carried out in India, only the part of the income reasonably attributable to operations carried out in India can be brought to tax. The Authority declined to quantify the exact apportionment because no evidence or addressing on that aspect was produced.

Conclusion: Only such profit as is reasonably attributable to operations carried out in India was taxable, and no specific quantification was made.

Issue (iii): Whether the amounts received or receivable for offshore services were taxable in India under the Income-tax Act and the India-Japan tax treaty.

Analysis: The offshore services were in the nature of managerial, technical and consultancy services and did not fall within the exclusion for construction, assembly, mining or like projects. They therefore constituted fees for technical services under the Act. Under the treaty, the services were not excluded from Article 12 merely because the recipient had a permanent establishment, as the receipts were specifically governed by the article dealing with technical fees.

Conclusion: The offshore services receipts were taxable in India under both the Act and the treaty.

Issue (iv): Whether the entire amount for offshore services was chargeable to tax and, if so, at what rate.

Analysis: The Act and the treaty did not provide any apportionment for fees for technical services in the facts of the case. The treaty imposed a ceiling on the rate of tax, and the statutory provision also contemplated taxation on the gross amount.

Conclusion: The entire offshore services receipt was taxable, but the tax rate could not exceed 20% of the gross amount.

Issue (v): Whether any deduction of expenses was admissible in computing income from offshore services.

Analysis: Section 44D barred deductions for expenditure in computing royalty and fees for technical services for the relevant class of foreign company receipts. Since the offshore services fell within fees for technical services, no deduction was allowable under the Act, and the treaty position also supported gross taxation.

Conclusion: No deduction of expenses was admissible.

Final Conclusion: The Authority held that offshore supply and offshore services receipts were chargeable in India, with offshore supply taxable only to the extent attributable to Indian operations, while offshore services were taxable in full as fees for technical services, subject to the treaty rate cap and without deduction of expenses.

Ratio Decidendi: In a composite turnkey contract, income from offshore supply may be taxed in India when it arises through business connection and is linked with operations carried out in India, with taxation limited to the profit reasonably attributable to Indian operations; separately, technical services receipts are taxable as fees for technical services on the gross amount, subject to treaty limitations and without deduction where the statute so provides.

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