Permanent establishment attribution under DTAA denied where offshore supplies had no taxable profit and Indian office had only customs compliance role.

Under Article 7 of the applicable DTAA, profit from offshore supplies can be taxed in India only to the extent it is attributable to an Indian permanent establishment. Where the equipment was manufactured and supplied from Japan, the Indian project office's role was limited to customs-related compliance, and no substantive involvement in the offshore transaction was identified, attribution to the PE was not justified. The Tribunal also noted that the offshore segment resulted in loss, so no attributable income could be brought to tax in India. The addition was therefore deleted.

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Issues: Whether profit from offshore supplies made from Japan could be attributed to the assessee's permanent establishment in India and taxed in India when the offshore segment resulted in loss and the Indian project office's role was confined to customs-related compliance.

Analysis: The appeals concerned addition made by attributing 35% of the profit from offshore supplies to the assessee's Indian permanent establishment. The Tribunal noted that the equipment was manufactured and supplied from Japan, the transporter handled delivery to India, and the lower authorities had not identified any substantive role of the Indian project office in the offshore transaction beyond customs clearance. The Tribunal further relied on the jurisdictional High Court decision holding that, under Article 7 of the applicable DTAA, attribution arises only to the extent profits are attributable to the permanent establishment, and where the foreign enterprise has a global net loss, no profit can be attributed to the PE.

Conclusion: The addition on account of attribution of profit from offshore supplies was not sustainable and was directed to be deleted. The issue was decided in favour of the assessee.

Ratio Decidendi: Under Article 7 of the DTAA, profits can be attributed to an Indian permanent establishment only to the extent the foreign enterprise earns taxable profits and the PE has a real role in the relevant transaction; where the offshore segment yields no profit or loss is shown, no attributable income can be brought to tax in India.

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