Composite subcontract and offshore supply principles prevent separate tax treatment where supply, services and project-office functions are integrated.

A subcontract for facade work was treated as a composite arrangement because design, engineering, supply, fabrication, erection, installation, testing and commissioning were interlinked and did not create a real bifurcation between offshore supply and onshore services. Applying Section 19 of the Sale of Goods Act, the sale was not regarded as completed outside India since intention, conduct, insurance, customs clearance, delivery obligations and continuing risk indicated that property and risk did not pass on shipment. The contract also lacked a separate offshore supply price, and the project office performed procurement and supply-related functions. Earlier offshore supply rulings were distinguished on these facts, and the entire subcontract consideration was brought to tax in India.

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Issues: (i) Whether the contract was divisible into offshore supply of goods and materials and onshore services, so as to treat offshore supply as an independent scope of work; (ii) whether the sale of goods to the Indian contractor was completed outside India; (iii) whether the contract specified a separate price for offshore supply; (iv) whether the project office as permanent establishment had a role in the procurement and supply of goods and materials; and (v) whether the facts were comparable to the earlier offshore supply decisions relied upon.

Issue (i): Whether the contract was divisible into offshore supply of goods and materials and onshore services, so as to treat offshore supply as an independent scope of work?

Analysis: The contract documents and appendices were read as a whole. The work description, design, engineering, supply, fabrication, erection, installation, testing and commissioning were found to be interlinked and directed to one integrated facade system. No real contractual bifurcation between supply and services was found; the attempted division based on selected words of one clause was held to be artificial.

Conclusion: The contract was held to be composite and offshore supply was not an independent scope of work.

Issue (ii): Whether the sale of goods to the Indian contractor was completed outside India?

Analysis: Applying the principle under Section 19 of the Sale of Goods Act, the intention of the parties, the conduct of the parties, the insurance arrangement, the customs clearance in India, the delivery obligations, and the continuing risk with the applicant showed that property and risk did not pass merely on shipment from abroad. The sale was not treated as complete outside India.

Conclusion: The sale of goods was held not to have been completed outside India.

Issue (iii): Whether the contract specified a separate price for offshore supply?

Analysis: The payment structure was linked to overall stages of completion and cost-centre values for the whole subcontract work. The contract did not provide a distinct price for offshore supply as a separate contractual component.

Conclusion: No separate price for offshore supply was held to be specified.

Issue (iv): Whether the project office as permanent establishment had a role in the procurement and supply of goods and materials?

Analysis: The project office existed before the supply operations commenced, had design personnel deployed for the project, and was involved in design selection, procurement support, customs clearance, and payment of customs duty in India. The permanent establishment was therefore found to have played a real role in the supply chain.

Conclusion: The permanent establishment was held to have played a role in the procurement and supply of goods and materials.

Issue (v): Whether the facts were comparable to the earlier offshore supply decisions relied upon?

Analysis: The earlier cases involved separate or clearly demarcated supply and service obligations, separate pricing, completion of the relevant transaction outside India, and no meaningful role of the permanent establishment in offshore supply. Those features were absent here, and the earlier authorities were therefore distinguished.

Conclusion: The earlier offshore supply decisions were held not to apply to the present facts.

Final Conclusion: The contract was treated as a single composite arrangement, the offshore supply claim was not accepted as a separate taxable segment, and the entire amount received under the subcontract was brought to tax in India.

Ratio Decidendi: Where a subcontract is, in substance, a composite arrangement with integrated supply and execution obligations, no separate offshore supply exemption arises unless the contract clearly and distinctly bifurcates the supply component, completes the sale abroad, and keeps the permanent establishment out of the supply chain.

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