Offshore supply taxation and AOP principles: separate contracts, foreign transfer of title, and no PE shown on current facts

Separately awarded contracts, independent performance and separate consideration do not by themselves establish an Association of Persons; a common design, unity of action and shared profit-making purpose are required, so the parties were not assessable as an AOP. Offshore supply receipts were not taxable in India where title passed outside India on shipment, payment was made outside India and the sale was completed on the high seas, since protective clauses on custody, risk, insurance and testing did not create Indian-source accrual. On the available facts, supervisory activities did not clearly cross the DTAA time threshold and a Permanent Establishment in India was not shown, though any proven PE would support taxation only of profits attributable to Indian operations.

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Issues: (i) Whether the applicant and L&T constituted an Association of Persons for assessment under the Income-tax Act, 1961; (ii) Whether receipts from offshore supply of equipment and materials were taxable in India; (iii) Whether the applicant had a Permanent Establishment in India under the India-Korea DTAA and, if so, whether profits attributable to Indian operations could be taxed in India.

Issue (i): Whether the applicant and L&T constituted an Association of Persons for assessment under the Income-tax Act, 1961.

Analysis: The contracts were separately awarded, each party performed its own obligations under separate contractual arrangements, and each received consideration independently. The coordination between the parties and the applicant's overall responsibility for project completion did not by itself show a joint enterprise formed to earn income. The safeguards, guarantees, and indemnities were contractual protections imposed in the overall interest of the project and did not establish the common design, unity of action, or shared profit-making purpose required for an Association of Persons.

Conclusion: The applicant and L&T did not constitute an Association of Persons and could not be assessed as such.

Issue (ii): Whether receipts from offshore supply of equipment and materials were taxable in India.

Analysis: The contractual terms showed that title to the goods passed outside India on shipment and negotiation of shipping documents. The supply was on CIF basis, payment was made outside India, and the sale was completed on the high seas. The contractual stipulations relating to custody, risk, insurance, testing, and final acceptance were protective and did not defer transfer of property or create Indian-source accrual. The income from offshore supply was therefore not attributable to operations carried out in India and lacked the territorial nexus required for taxation in India.

Conclusion: The offshore supply receipts were not taxable in India.

Issue (iii): Whether the applicant had a Permanent Establishment in India under the India-Korea DTAA and, if so, whether profits attributable to Indian operations could be taxed in India.

Analysis: The supervisory role connected with erection, testing, and commissioning was the relevant activity for Article 5(3). On the facts placed, the duration of such supervisory activities did not clearly cross the nine-month threshold. The applicant's activities incidental to transport and storage of imported goods were part of offshore supply obligations and could not be treated as supervisory activity. The possibility of a Permanent Establishment was not ruled out entirely, but on the material available the applicant was not shown to have one. If a Permanent Establishment were later established on further inquiry, only profits reasonably attributable to its Indian operations could be taxed under Article 7(1).

Conclusion: The applicant was not shown to have a Permanent Establishment in India on the present facts, though any profits attributable to a proven Permanent Establishment would be taxable in India.

Final Conclusion: The ruling substantially favoured the applicant by rejecting the Association of Persons contention and holding offshore supply receipts outside Indian taxability, while leaving only a limited contingent possibility of attribution if a Permanent Establishment were later established on further inquiry.

Ratio Decidendi: Where title to goods passes outside India under a separable offshore supply contract and the associated contractual safeguards do not alter the transfer of property or create territorial nexus, the sale proceeds are not taxable in India; coordination and protective obligations between contracting parties do not by themselves constitute an Association of Persons or automatically create a Permanent Establishment.

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