FOB sale attribution and source-wise set-off principles allowed full deductions and loss adjustment under the tax framework.

FOB sales completed in France were treated as outside Indian tax attribution because title and risk passed abroad, freight and insurance were borne by the Indian buyer, and the Indian role was limited to installation supervision, so no permanent establishment or business connection was found for those supplies. The note also states that expenses incurred in India for engineers and related support services were fully deductible against technical service fees under the treaty, rather than being restricted to 50 per cent. It further explains that section 44D does not prevent set-off under section 70(1), so a loss from technical service fees may be adjusted against royalty income from another source under the same head.

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Issues: (i) Whether profits from FOB sales of equipment completed in France were taxable in India on the footing that the assessee had a permanent establishment or business connection in India; (ii) Whether the full expenses incurred in India for support services and supervision of technical services were deductible against technical service fees; (iii) Whether the loss computed under technical service fees could be set off against royalty income despite section 44D of the Income-tax Act.

Issue (i): Whether profits from FOB sales of equipment completed in France were taxable in India on the footing that the assessee had a permanent establishment or business connection in India.

Analysis: The agreements showed that the goods were manufactured and delivered FOB in France, title and risk passed in France, insurance and freight were borne by the Indian buyer, and the Indian activity was confined to supervision of installation by Indian personnel. The support arrangement with Mekaster was on a principal-to-principal basis and did not amount to an office or permanent establishment. On these facts, no operations relating to the FOB supplies were carried out in India so as to attract section 9(1)(i) or justify attribution of profits to India.

Conclusion: The addition made as estimated profit on FOB supplies was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether the full expenses incurred in India for support services and supervision of technical services were deductible against technical service fees.

Analysis: The support-services agreement was independent of the technical-services agreement and had no nexus with FOB supplies. Article 16 of the relevant double taxation arrangement allowed deduction of expenses incurred in India in connection with activities actually performed in India. Since the expenses claimed were actually incurred in India for the engineers and related services, restricting them to 50 per cent had no basis in the treaty framework.

Conclusion: The assessee was entitled to the full deduction of the expenses incurred in India against technical service fees.

Issue (iii): Whether the loss computed under technical service fees could be set off against royalty income despite section 44D of the Income-tax Act.

Analysis: Section 44D barred deductions in computing royalty or fees for technical services, but it did not override the separate rule of set-off under section 70(1). Royalty and technical service fees were distinct sources under the same head, and a loss from one source could therefore be adjusted against income from the other. Such set-off was not the same as allowing a deduction from royalty income.

Conclusion: The set-off of the technical-services loss against royalty income was permissible and the assessee succeeded on this issue as well.

Final Conclusion: The appellate order of the Commissioner (Appeals) was upheld, the additions made by the Assessing Officer were deleted, and the revenue's appeals failed in full.

Ratio Decidendi: Where a sale is completed FOB outside India and no operations relating to that sale are carried out in India, no profits from that transaction can be attributed to India; separately, a loss from one source under the same head may be set off against another source notwithstanding a bar on deductions in computing royalty or technical-fee income.

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