Composite turnkey contracts and offshore supply were held taxable in India where Indian operations and nexus were materially involved.

In a composite turnkey arrangement, offshore supply was held taxable in India where the contracts, correspondence, site control and operational conduct showed an integrated project with a real nexus to Indian operations and material involvement of the permanent establishment and business connection. The mere passing of title outside India was not decisive. However, the fixation of 75% of Contract I receipts as taxable lacked adequate reasoning, so the quantification of the attributable profit was set aside and remitted to the Tribunal for fresh determination on the existing material after hearing the parties.

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Issues: (i) Whether the offshore supply under Contract I was outside Indian taxability or formed part of a composite arrangement giving rise to taxable income in India by reason of business connection and permanent establishment. (ii) Whether the percentage of profits attributed to operations in India and the fixation of 75% of Contract I receipts as taxable were properly determined.

Issue (i): Whether the offshore supply under Contract I was outside Indian taxability or formed part of a composite arrangement giving rise to taxable income in India by reason of business connection and permanent establishment.

Analysis: The contractual structure, surrounding correspondence, site control, and operational conduct showed that the four contracts were interlaced and formed one composite turnkey arrangement. The Indian subsidiary was found to be under the effective control of the foreign assessee for the project, and the project activities exhibited a real, intimate and continuous nexus with the Indian operations. The Court distinguished the earlier offshore-supply rulings on facts and held that the mere passing of title outside India did not, by itself, exclude taxability where the supply segment was integrated with Indian operations and the permanent establishment and business connection were materially involved.

Conclusion: The offshore supply under Contract I was not immune from Indian taxation on the facts found, and the issue was decided against the assessee.

Issue (ii): Whether the percentage of profits attributed to operations in India and the fixation of 75% of Contract I receipts as taxable were properly determined.

Analysis: While the Court accepted the finding that only a portion of the income could be attributed to activities outside India, it found that the fixation of the taxable percentage lacked a proper reasoning basis. The matter therefore required a fresh determination by the Tribunal confined to working out the correct taxable proportion on the material already accepted, with the parties given an opportunity to be heard.

Conclusion: The percentage attribution was set aside for fresh determination, and this issue was decided partly in favour of the assessee.

Final Conclusion: The judgment upheld the taxability principle on a composite-contract and nexus basis, but sent back the quantification of the taxable profit percentage for reconsideration by the Tribunal.

Ratio Decidendi: In a composite turnkey arrangement, offshore supply is taxable in India to the extent attributable to operations carried out in India where the supply segment is inseparable from Indian operations and the permanent establishment or business connection is materially involved; passing of title abroad is not decisive by itself.

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