Turnkey contract taxation: inseparable supply and supervision clauses made offshore supply income taxable in India, with profit attribution upheld.

In a customised turnkey arrangement, supply and supervision clauses were treated as inseparable because the plant was intended for installation, commissioning, testing and acceptance in India, so the offshore supply was not an independent sale concluded outside India and the related income was held to accrue or arise in India under section 9(1)(i). The Tribunal further held that the Indian supervisory presence and connected activities warranted attribution of profits to the Indian establishment, and sustained the Assessing Officer's attribution of 35% of offshore supply profit on the facts. It also upheld levy of interest under section 234B, holding that advance-tax consequences could not be avoided merely because taxability had been disputed earlier.

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Issues: (i) whether the equipment supply and supervision arrangements constituted a single composite turnkey works contract and whether the offshore supply income was taxable in India under section 9(1)(i) of the Income-tax Act, 1961; (ii) whether profit from the offshore supply was attributable to a permanent establishment in India and, if so, to what extent; (iii) whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The contractual documents, when read as a whole, showed that the purchaser's dominant intention was installation and commissioning of a customised plant in India and that the supply and service obligations were interlinked through performance warranty clauses, completion-linked acceptance, delivery of the last consignment, and cross-default termination provisions. The machinery supplied was not standard off-the-shelf goods but parts and sections of a plant which acquired a deliverable state only upon assembly, installation, commissioning, testing and acceptance in India. On that basis, the offshore supply could not be treated as an independent sale concluded outside India; the business operations connected with the supply were held to have been carried on in India and the income was held to accrue or arise in India under section 9(1)(i). The Tribunal also held that the Indian supervisory presence and connected activities contributed to the earning of profits and that the attribution adopted by the Assessing Officer, namely 35% of the profit from offshore supplies, was justified on the facts. On interest, the Tribunal held that the assessee could not avoid advance-tax consequences merely by disputing taxability earlier, and upheld levy of interest under section 234B.

Conclusion: The offshore supply income was held taxable in India, the profit attribution to the Indian establishment was sustained, and the levy of interest under section 234B was upheld.

Final Conclusion: The appeal failed in full and the additions and interest consequential to the assessment were sustained.

Ratio Decidendi: In a customised turnkey arrangement, where supply and supervision clauses are inseparably linked and the goods are put into a deliverable state only through installation, commissioning and acceptance in India, the supply transaction is not an independent offshore sale and the resulting profits can be taxed in India to the extent attributable to the business operations carried on there.

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