Composite contract and permanent establishment rules: offshore supply completed outside India was not taxable on the facts found.

For tax purposes, connected agreements are to be tested by the parties' contractual intention and actual allocation of obligations, not by the tender alone. Here, the three project agreements were treated as separate contracts rather than one composite arrangement, because each had distinct scope, timing and performance obligations. A permanent establishment in India arose only for the first contract, based on onshore site investigation and approval work, and did not extend to the offshore supply contract. Offshore supply completed entirely outside India was not taxable merely because it formed part of a larger project.

---

---

Issues: (i) Whether the three agreements formed one composite and indivisible contract; (ii) Whether the assessee had a permanent establishment in India before the project office was set up and, if so, since when; (iii) What income, if any, was attributable to activities in India.

Issue (i): Whether the three agreements formed one composite and indivisible contract.

Analysis: The contractual documents, including the tender, bid documents, amendments and executed agreements, showed that the parties deliberately split the project into three separate contracts with distinct scope, timing and obligations. The decisive factor was the intention of the parties as reflected in the executed contracts, and not the original tender alone. The supply contract and the service contract were separately structured and were not inseparable for tax purposes.

Conclusion: The three agreements were not a single composite contract. This issue was decided in favour of the assessee.

Issue (ii): Whether the assessee had a permanent establishment in India before the project office was set up and, if so, since when.

Analysis: The activities under the first contract involved scientific site investigation and DGMS approval work carried on in India over a period exceeding six months, which satisfied the treaty threshold for a permanent establishment in relation to that contract. However, the offshore design, manufacture and delivery of equipment under the supply contract were carried out outside India, and the project office set up later had no role in those offshore activities. The existence of a permanent establishment for one contract did not automatically extend to the offshore supply contract.

Conclusion: A permanent establishment existed only in relation to the first contract, and it arose from the date of the contract until DGMS approval was obtained. This issue was substantially in favour of the assessee, except to the limited extent of the first contract.

Issue (iii): What income, if any, was attributable to activities in India.

Analysis: Since the offshore supply was completed outside India and the assessee's Indian presence did not participate in the design, manufacture or delivery of the equipment, no part of the supply receipts could be attributed to Indian operations on the basis adopted by the assessing authorities. The attribution made by the assessing authorities and the dispute resolution panel was therefore unsustainable.

Conclusion: No part of the offshore supply receipts was taxable in India on the facts found. This issue was decided in favour of the assessee.

Final Conclusion: The additions made on the footing of a composite contract and taxable offshore supply were deleted, and the appeal succeeded.

Ratio Decidendi: For tax purposes, the true character of connected agreements must be determined from the contractual intention of the parties and the actual allocation of obligations; offshore supply completed entirely outside India is not taxable merely because it forms part of a larger project or because a limited permanent establishment exists for a separate onshore component.

---