Offshore supply and design receipts not taxable in India where composite contracts passed title abroad and services were inseparable.

Offshore supply of plant and equipment was not taxable in India where the contracts were separate, the supply was on FOB terms, title passed outside India, and payment was received outside India; the receipts did not accrue or arise in India and were not attributable to any permanent establishment nexus for that supply. Offshore drawings and designs were also not taxable as fees for technical services where they were executed outside India, were tailor-made for the equipment, and formed part of an integrated composite arrangement inseparable from the supply contract. The dominant character of the arrangement, rather than the separate pricing label, controlled the tax treatment.

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Issues: (i) Whether consideration received for offshore supply of plant and equipment was taxable in India; (ii) Whether consideration received for offshore services comprising drawings and designs was taxable as fees for technical services.

Issue (i): Whether consideration received for offshore supply of plant and equipment was taxable in India.

Analysis: The offshore supply was made on FOB basis, the title in the equipment passed outside India, and the consideration was received outside India. The supply and onshore activities were under separate agreements, and the post-shipment or commissioning-related clauses did not postpone the transfer of property. On these facts, no part of the offshore supply receipts accrued or arose in India, and they could not be brought to tax as business income in the absence of an attributable permanent establishment nexus for that offshore supply.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether consideration received for offshore services comprising drawings and designs was taxable as fees for technical services.

Analysis: The offshore services contract was executed on the same date as the supply contract and the drawings and designs were tailor-made for the supplied equipment and necessary for its manufacture, installation and integration. The work was performed outside India and the drawings and designs could not be used independently on a standalone basis. The character of the receipt was therefore governed by the integrated nature of the offshore supply arrangement and not by a severed technical-services label. Applying the treaty provisions and the principle that the dominant purpose and real character of the contract control taxation, the receipts were not taxable as fees for technical services or as attributable business profits in India.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The additions made on account of offshore supply and offshore services were deleted and the assessee's appeals succeeded.

Ratio Decidendi: Where offshore supply and offshore drawings/design services form an integrated composite arrangement, with title to the supplied goods passing outside India and the designs being inseparable from the supply, the receipts do not constitute taxable fees for technical services or India-attributable business profits merely because separate consideration is stipulated.

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