Offshore supply taxation in composite contracts limited to India-linked operations; fixed deposit interest addition sustained on bank records.
In a composite contract, only income attributable to operations carried out in India is taxable in India, and offshore supply completed outside India cannot be taxed merely because the supplier has a permanent establishment in India. Applying that principle, the tribunal treated the supply and installation-related obligations as divisible and noted separate consideration for each component, so the profit attribution to offshore supply was deleted. On the fixed deposit issue, interest shown in Form 26AS and credited by the bank after tax deduction was treated as accrued income; the explanation that the deposits were misplaced was rejected, and the addition was sustained.
Issues: (i) Whether profits attributable to offshore supply of equipment under the composite contracts were taxable in India and whether the attributed addition could be sustained; (ii) Whether the addition made on account of interest on fixed deposits was sustainable.
Issue (i): Whether profits attributable to offshore supply of equipment under the composite contracts were taxable in India and whether the attributed addition could be sustained.
Analysis: The dispute turned on the extent to which the force of attraction rule could be applied to offshore supply/sale of goods under a composite contract. The governing principle applied was that only that part of income which is attributable to operations carried out in India can be taxed in India, and where the supply part is severable and completed outside India, the existence of a permanent establishment does not, by itself, render the entire offshore supply taxable. The contracts were treated as divisible, with separate components for supply and for installation, testing, commissioning and maintenance, and the evidence showed separate payments for those components. On those facts, the attribution of profit to offshore supply was not justified.
Conclusion: The addition relating to offshore supply of equipment was deleted and this issue was decided in favour of the assessee.
Issue (ii): Whether the addition made on account of interest on fixed deposits was sustainable.
Analysis: The fixed deposits were reflected in Form 26AS and interest had been credited by the bank after deduction of tax at source. The explanation that no interest accrued because the fixed deposits were misplaced was rejected as untenable on the facts. The bank records were treated as reliable evidence of accrual of interest income.
Conclusion: The addition on account of interest on fixed deposits was upheld and this issue was decided against the assessee.
Final Conclusion: The appeal succeeded only in relation to the offshore supply addition, while the interest addition was sustained, resulting in partial relief to the assessee.
Ratio Decidendi: In a composite contract, only the income attributable to operations carried out in India is taxable in India, and offshore supply completed outside India cannot be taxed merely because the supplier has a permanent establishment in India.
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AI Drafter ✕
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