Chinese entity's offshore goods supply not taxable in India when title transfers outside India

The ITAT Delhi held that offshore supplies of goods and equipment by a Chinese non-resident corporate entity are not taxable in India where title transfer occurs outside India. The court rejected the AO's arbitrary 60-40 allocation between fees for technical services and goods supply, finding no contractual basis for such bifurcation. The alleged PE through ZTT India Private Limited was deemed uninvolved in the offshore supply activities. Since sale incidents and title transfers completed outside India per contract terms, the receipts cannot be taxed in India. The assessee's appeals were allowed and additions deleted.

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Issues Involved:
1. Taxability of amounts received towards offshore supplies of goods and equipment.
2. Existence of Permanent Establishment (PE) in India.
3. Attribution of profits to the PE.

Summary:

1. Taxability of Amounts Received Towards Offshore Supplies of Goods and Equipment:

The core issue in the appeals was the taxability of amounts received by the assessee, a non-resident corporate entity incorporated in China, for offshore supplies of goods and equipment to Power Grid Corporation of India Ltd. (PGCIL) and its subsidiaries. The assessee argued that the title over the goods/equipment was transferred outside India, making the receipts from such sales non-taxable in India. The assessee relied on the decision in DDIT vs. Mitsui & Co. and other judicial precedents to support its claim. The Tribunal held that the terms of the contracts clearly demonstrated that the transfer of title and associated risks occurred outside India, and the payments were also made outside India. Thus, the receipts from such offshore supplies were not taxable in India.

2. Existence of Permanent Establishment (PE) in India:

The Assessing Officer contended that the assessee's Indian subsidiary, ZTT India Private Limited, constituted a PE in India, as it was fully controlled by the assessee and engaged in similar business activities. The Tribunal, however, found that there was no material evidence to suggest that ZTT India Private Limited was involved in the design, manufacture, testing, or supply of goods from China. The mere existence of a subsidiary performing onshore activities under a separate contract did not make the offshore and onshore contracts composite. Thus, ZTT India Private Limited could not be considered a dependent agent PE of the assessee.

3. Attribution of Profits to the PE:

The Assessing Officer attributed 60% of the offshore revenue towards Fees for Technical Services (FTS) and 40% towards the supply of goods, treating the entire 60% as the income of the assessee. The Tribunal found this bifurcation irrational and without any basis, as the price for design, manufacture, testing, and CIF supply was consolidated in the contract. The Tribunal held that the artificial segregation of receipts between supply of goods and FTS was unacceptable. Since the transfer of title over the goods occurred outside India, the receipts from such supplies could not be taxed in India. The Tribunal directed the Assessing Officer to delete the additions.

Conclusion:

The Tribunal allowed the appeals, concluding that the receipts from offshore supplies of goods and equipment were not taxable in India, and there was no basis for attributing profits to a PE in India. The order was pronounced on 29.11.2023.

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