Permanent establishment attribution under tax treaty prevails over section 44BB for offshore supply receipts where method remains unchanged.

Offshore supply receipts from a Singapore resident's equipment contracts were analysed under Article 7 of the India-Singapore DTAA against section 44BB of the Income-tax Act. The text states that only profits directly or indirectly attributable to the permanent establishment in India may be taxed, and that the same attribution method should ordinarily be followed year after year unless there is good and sufficient reason to depart from it. On that basis, a change in method without any material change in facts was treated as inconsistent with the treaty framework, and the settled 1% attribution approach was applied to the offshore supply receipts instead of section 44BB.

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Issues: Whether the receipts from offshore supply of equipment were taxable under section 44BB of the Income-tax Act, 1961, or whether only 1% of such receipts could be attributed as profits of the permanent establishment in India in terms of Article 7 of the India-Singapore DTAA.

Analysis: The assessee was a tax resident of Singapore and had carried on similar contractual activities in earlier years. In past assessment years, the Revenue had followed a consistent approach of attributing 1% of the offshore supply receipts as profits attributable to the permanent establishment in India. Article 7(1) of the treaty permits taxation in India only to the extent profits are directly or indirectly attributable to the permanent establishment, and Article 7(6) requires the same method to be followed year after year unless there is good and sufficient reason to depart from it. The departmental authorities changed the method without showing any material change in facts or any sufficient reason for departing from the settled approach. The application of section 44BB to the offshore supply receipts was therefore held to be inconsistent with the treaty framework and the earlier consistent method of attribution.

Conclusion: The receipts from offshore supply of equipment were not taxable under section 44BB in the manner adopted by the Assessing Officer. The income had to be computed by attributing 1% of the offshore supply receipts as profits of the permanent establishment, which was in favour of the assessee.

Ratio Decidendi: Where the treaty requires profits attributable to a permanent establishment to be determined by the same method year by year, a departure from the settled attribution method cannot be made without good and sufficient reason, and only the profits properly attributable to the permanent establishment can be taxed in India.

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