Composite turnkey contract taxability: offshore supply escaped Indian tax, while engineering and advisory receipts were taxable as business profits.

In a composite turnkey contract, offshore supply receipts were not chargeable to tax in India because the equipment supply was completed outside India, ownership passed on FOB shipment, payment was made outside India, and no material linked that segment to Indian operations of the permanent establishment. By contrast, basic engineering design services and offshore advisory services were taxable in India as business profits attributable to the permanent establishment, since they formed part of the plant-setting project, involved design review and approval for the Indian project, and were rendered through the Indian project set-up. The ruling thus granted partial relief by excluding offshore supply income while sustaining taxability of the service receipts.

---

---

Issues: (i) whether consideration for offshore supply of equipments under the composite turnkey contract was chargeable to tax in India; and (ii) whether consideration for basic engineering design services and offshore advisory services was chargeable to tax in India as business income of the permanent establishment.

Issue (i): whether consideration for offshore supply of equipments under the composite turnkey contract was chargeable to tax in India.

Analysis: The contract provided a separate break-up for imported supplies and stipulated transfer of ownership upon FOB shipment. The invoice and bill of lading stood in the name of the buyer, payment for the offshore supply was remitted outside India, and no material was shown to connect the offshore supply segment with operations carried out in India by the permanent establishment. In a composite contract, only the income attributable to operations in India can be taxed, and the offshore supply was completed outside India.

Conclusion: The offshore supply receipts were not chargeable to tax in India and were in favour of the assessee.

Issue (ii): whether consideration for basic engineering design services and offshore advisory services was chargeable to tax in India as business income of the permanent establishment.

Analysis: The design and engineering services formed part of the composite contract for setting up the plant in India and were intrinsically connected with the project execution. The contract required design review, engineering review, verification, submission of drawings and calculations, and approval by the Indian project team, showing that the services were rendered through the permanent establishment in India and were made available in the course of the project. The services were not stand-alone foreign services divorced from the Indian project, and the profits attributable to the permanent establishment were taxable in India under the business profits article.

Conclusion: The receipts for basic engineering design services and offshore advisory services were taxable in India as business income attributable to the permanent establishment and were against the assessee.

Final Conclusion: The ruling granted partial relief by excluding offshore supply receipts from Indian tax while upholding taxability in India of the engineering and advisory service receipts attributable to the permanent establishment.

Ratio Decidendi: In a composite turnkey contract, offshore supply completed outside India is not taxable in India, but design and advisory receipts attributable to a permanent establishment in India and rendered through the Indian project set-up are taxable as business profits.

---