Offshore supply and profit attribution: receipts outside India were not taxable, and no further Indian profit attribution was allowed.

Offshore supply receipts in the Teesta and Purulia projects were held not taxable in India under section 44BBB or Article 7 of the India-Japan DTAA because the supply contracts were separate, title passed outside India, and the permanent establishment had no role in the offshore segment. The Liaison Office was not treated as a permanent establishment, and Mitsui India Private Limited was not found to be a dependent agent permanent establishment because the treaty conditions for habitual authority, stock maintenance, or order procurement were not established. Where the Indian entity had already been remunerated at arm's length for its functions, no further profit attribution to India was permissible.

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Issues: (i) Whether the receipts from offshore supplies in the Teesta and Purulia projects were taxable under section 44BBB and under Article 7 of the DTAA between India and Japan. (ii) Whether the Liaison Office constituted a permanent establishment, whether Mitsui India Private Limited constituted a dependent agent permanent establishment, and whether any further profit was attributable to India.

Issue (i): Whether the receipts from offshore supplies in the Teesta and Purulia projects were taxable under section 44BBB and under Article 7 of the DTAA between India and Japan.

Analysis: The offshore supply contracts were found to be separate from the onshore supply and service contracts, and the transfer of title in the goods took place outside India on shipment in the country of origin. The payments for offshore supplies were linked to foreign-currency receipts and the permanent establishment had no role in the offshore supply segment. It was held that section 44BBB, which applies to receipts for civil construction, erection, testing or commissioning, did not authorise taxation of offshore supply receipts merely because the project was otherwise assessed on a presumptive basis. The force of attraction principle under the treaty was also held inapplicable because the permanent establishment was not involved in the offshore supply transaction.

Conclusion: The offshore supply receipts were not taxable in India under section 44BBB or Article 7 of the DTAA, and the deletion of the related addition was upheld in favour of the assessee.

Issue (ii): Whether the Liaison Office constituted a permanent establishment, whether Mitsui India Private Limited constituted a dependent agent permanent establishment, and whether any further profit was attributable to India.

Analysis: The Liaison Office issue was treated as covered by earlier decisions in the assessee's own case, and the same position was followed for the year under appeal. As regards the alleged dependent agent permanent establishment, the record did not establish habitual authority to conclude contracts, maintenance of stock, or habitual securing of orders as required by the treaty. The transfer pricing analysis had already examined the Indian entity's functions and remuneration at arm's length, and nothing further was shown to justify extra attribution of profits. The authorities therefore applied the settled principle that where the Indian entity has been remunerated at arm's length for the functions performed, no additional profits are to be attributed to the foreign enterprise on the same facts.

Conclusion: The Liaison Office was not a permanent establishment, Mitsui India Private Limited was not a dependent agent permanent establishment, and no further profit was attributable in India, all in favour of the assessee.

Final Conclusion: The additions made on account of offshore supplies and alleged Indian attribution were deleted, and the connected appeals were resolved consistently with the assessee's stand.

Ratio Decidendi: Offshore supply receipts are taxable in India only to the extent the income is attributable to operations carried out in India, and where the Indian entity's functions are already remunerated at arm's length and the permanent establishment is not involved in the offshore transaction, no further attribution of profit is permissible.

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