Composite cross-border supply contracts may trigger Indian tax on attributable profits where supervision and permanent establishment exist.

A composite cross-border contract for offshore supply of BTG equipment was treated as taxable in India to the extent the profits were attributable to Indian operations. The contracts were read as a single arrangement linking supply with supervision, testing, commissioning and takeover, so title passing outside India did not by itself exclude Indian taxability. The non-resident was found to have a business connection and a supervisory permanent establishment in India, bringing attributable profits within section 9 and Article 7 of the India-China DTAA. Interest under section 234B was not leviable on the non-resident where tax was deductible at source by the payer under section 195.

---

---

Issues: (i) whether the income from offshore supply of BTG equipment was taxable in India, including the questions of composite contract, transfer of title outside India, business connection, permanent establishment, and attribution under the India-China DTAA; (ii) whether interest under section 234B was leviable on the assessee.

Issue (i): whether the income from offshore supply of BTG equipment was taxable in India, including the questions of composite contract, transfer of title outside India, business connection, permanent establishment, and attribution under the India-China DTAA.

Analysis: The contracts were examined as a whole and were found to be composite in nature, with supply and supervision obligations interlinked and the supplier continuing to bear responsibility up to successful testing, commissioning, and takeover. On the facts of the contracts, the transfer of title was not treated as conclusively taking place outside India in a manner that excluded Indian taxability. The Court further held that the assessee had a business connection in India and a supervisory permanent establishment, and that profits from offshore supply were attributable to operations carried out in India and therefore taxable to the extent so attributable under section 9 and Article 7 of the DTAA.

Conclusion: The offshore-supply income was held taxable in India to the extent attributable to Indian operations and the supervisory permanent establishment, against the assessee.

Issue (ii): whether interest under section 234B was leviable on the assessee.

Analysis: Following the jurisdictional law on non-residents, the obligation to deduct tax at source lay on the payer under section 195, and where tax was deductible at source, the assessee could not be fastened with advance-tax liability for the same income. The earlier view governing non-resident assessees was applied to delete the levy of interest.

Conclusion: Interest under section 234B was not leviable and the addition was deleted, in favour of the assessee.

Final Conclusion: The appeals succeeded only in part: the offshore-supply additions were sustained, while the levy of interest under section 234B was set aside.

Ratio Decidendi: In a composite cross-border contract, where supply obligations are inextricably linked with Indian operations and the non-resident has a business connection and supervisory permanent establishment in India, only the income reasonably attributable to operations carried out in India is taxable under section 9(1)(i) and Article 7; however, interest under section 234B cannot be levied on a non-resident where tax was deductible at source by the payer under section 195.

---