Composite contract taxability turns on separate streams of income; offshore supply, overseas repairs, and equipment rentals were differently treated.

A composite contract with severable, independently identifiable activities must be analysed stream by stream for taxability, with separate treatment for offshore supply, overseas repairs and rentals. Offshore supply completed outside India, with title passing abroad and no Indian operations, was not taxable in India as royalty or fees for technical services. Repair and related services performed entirely at overseas workstations were also not royalty or fees for technical services, and no attribution to the Indian PE arose because technical knowledge was not made available. Equipment rental for mineral oil operations fell under the presumptive regime of section 44BB, not section 44DA.

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Issues: (i) Whether the taxability of receipts under a composite contract had to be determined independently for separate, divisible and independent activities; (ii) Whether income from offshore supply of products/equipment outside India was taxable in India as royalty or fees for technical services; (iii) Whether receipts from repair and related activities carried out at overseas workstations were taxable in India as fees for technical services, royalty, or as attributable to the permanent establishment in India; (iv) Whether rental income from equipment supplied on hire for use in mineral oil operations was taxable under section 44DA or under the presumptive regime of section 44BB.

Issue (i): Whether the taxability of receipts under a composite contract had to be determined independently for separate, divisible and independent activities.

Analysis: The activities under the contract were found to be separate in nature, with distinct streams such as offshore supply, repairs, rentals, and project management. Separate invoices were raised for the different activities, and the work performed in India and outside India was not shown to be inextricably interlinked. The principle of apportionment applied to severable parts of a composite contract when different operations were performed in different places.

Conclusion: The taxability of the receipts had to be determined independently for each separate, divisible and independent activity.

Issue (ii): Whether income from offshore supply of products/equipment outside India was taxable in India as royalty or fees for technical services.

Analysis: The offshore supply was completed outside India, title in the goods passed outside India, the sale was on FOB basis, and no part of the supply activity was carried out in India. The Indian permanent establishment had no role in effecting the transfer. On these facts, the receipts could not be characterised as royalty or fees for technical services, and no territorial nexus for taxation in India was shown.

Conclusion: The income from offshore supply of products/equipment was not taxable in India.

Issue (iii): Whether receipts from repair and related activities carried out at overseas workstations were taxable in India as fees for technical services, royalty, or as attributable to the permanent establishment in India.

Analysis: The repair work was performed entirely outside India at overseas workstations, and the equipment was sent abroad for overhaul and maintenance. Although the work involved technical expertise, it did not make available technical knowledge, experience, skill, know-how, or processes to the recipient. No right to use the equipment was granted, as the equipment belonged to the Indian customer itself. Since the services were rendered outside India, attribution to the permanent establishment in India did not arise.

Conclusion: The receipts from repair and related activities were neither fees for technical services nor royalty and were not attributable to the permanent establishment in India.

Issue (iv): Whether rental income from equipment supplied on hire for use in mineral oil operations was taxable under section 44DA or under the presumptive regime of section 44BB.

Analysis: The equipment was supplied on hire for use in prospecting for or extraction or production of mineral oil. The royalty definition under the Act excludes amounts falling within section 44BB, and the special presumptive provision for mineral oil-related services covered the rental receipts. Consequently, section 44DA did not apply to the rental income.

Conclusion: The equipment rental income was to be assessed under section 44BB and not under section 44DA.

Final Conclusion: The revenue appeal failed in full, and the assessee's cross objection did not survive after dismissal of the appeal.

Ratio Decidendi: Where a composite contract contains severable and independently identifiable activities performed partly inside and partly outside India, each stream of income must be examined separately for taxability; offshore supply completed outside India is not taxable absent Indian source operations, and services rendered entirely outside India do not become royalty or fees for technical services unless technical knowledge is made available.

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