Permanent establishment and offshore supply profits require real Indian nexus; notional interest cannot be taxed without accrual.

The majority held that a foreign enterprise's Indian subsidiary did not, on these facts, create a fixed place or dependent agent permanent establishment, and mere shareholding, control, shared offices, administrative support or expatriate presence was insufficient. For the offshore supply segment, no business connection was found and no further profit attribution was sustained for signing, network planning or negotiation activities in India, which were treated as preparatory or auxiliary. The majority also rejected tax on notional interest for delayed consideration, since no interest was charged, invoiced, accrued or received and no enforceable debt was shown. The dissent took a contrary view on PE, attribution and vendor financing interest.

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Issues: (i) Whether the Indian subsidiary constituted a business connection or permanent establishment of the foreign assessee in India; (ii) whether any profit was attributable to signing, network planning and negotiation of offshore supply contracts in India; (iii) whether notional interest on delayed consideration for supply of equipment and licensing of software was taxable.

Issue (i): Whether the Indian subsidiary constituted a business connection or permanent establishment of the foreign assessee in India

Analysis: The dispute was confined to offshore supply of equipment, the related installation and support activities already being separately assessed in India. The majority held that the subsidiary did not satisfy the treaty conditions for a fixed place permanent establishment or a dependent agent permanent establishment. Mere shareholding, control, co-location of offices, provision of administrative support, or the presence of expatriate employees did not establish that any fixed place was at the disposal of the foreign enterprise for its own supply business. The subsidiary's independent installation, marketing and technical support activities were separately remunerated and could not be treated as the assessee's business presence in India. The majority also held that the facts did not establish a business connection for the offshore supply segment.

Conclusion: The answer is in the negative. The subsidiary was not a business connection or permanent establishment of the assessee in India.

Issue (ii): Whether any profit was attributable to signing, network planning and negotiation of offshore supply contracts in India

Analysis: Once the offshore supply was held to take place outside India and no permanent establishment or taxable business connection was found for that segment, no income could be attributed to signing, network planning or negotiation activities in India. Those activities were treated as preparatory or auxiliary in relation to the supply contracts, and the revenue from the independent Indian contracts already stood assessed in the subsidiary's hands. The majority therefore declined to sustain any further attribution on the remanded issue.

Conclusion: No profit was attributable to those activities in India.

Issue (iii): Whether notional interest on delayed consideration for supply of equipment and licensing of software was taxable

Analysis: The majority found that no interest had been charged, invoiced, acknowledged as due, or actually received from the customers, and no corresponding debt or enforceable claim was shown to have accrued. In these circumstances, the amount could not be taxed on a hypothetical basis as real income had not arisen. The contractual clause alone did not justify addition in the absence of accrual or receipt.

Conclusion: The notional interest was not taxable.

Final Conclusion: All issues remitted by the High Court were answered in favour of the assessee, and no addition survived on account of business connection, permanent establishment, attribution of profits, or notional interest.

Ratio Decidendi: A foreign enterprise is taxable in respect of offshore supply profits only if the relevant income accrues in India through a real business connection or through a permanent establishment satisfying the treaty tests; mere subsidiary control, administrative assistance, or preparatory activities do not, by themselves, create such taxability, and hypothetical interest cannot be assessed absent real accrual.

Dissenting Opinion: The dissenting member held that the Indian subsidiary constituted both a business connection and a permanent establishment, and that a part of the global profits from the specified Indian activities was attributable to the permanent establishment. The dissent also accepted taxability of interest from vendor financing, but it did not alter the final majority outcome.

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