Cost-based contract receipts and no permanent establishment prevented taxation of business profits in India under the treaty.

Receipts from an affiliated concern were treated as cost-based payments under the production sharing contract, with no material showing any profit element; the section 44BB addition was therefore unsustainable. On the treaty issue, the record did not establish a permanent establishment in India under Article 5(2) of the India-USA DTAA, so Article 7 confined taxation of business profits to the State of residence. The analysis also noted that, even otherwise, the record did not show taxable profits in India after allowing corresponding expenditure, and the receipts could not be taxed in India as business profits.

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Issues: Whether the receipts from the affiliated concern were taxable under section 44BB of the Income-tax Act, 1961 as income with a profit element, and whether the assessee had a permanent establishment in India so as to permit taxation of business profits in India under the India-USA DTAA.

Analysis: The receipts were found to be governed by the production sharing contract, under which payments to an affiliated concern were to be on a cost basis without profit element. The assessee's relationship with the recipient entity by itself did not justify an inference of profit, and no other material was shown to dislodge the contractual position. On the treaty issue, the conditions for a permanent establishment under Article 5(2) of the DTAA were not established on the record. In the absence of a permanent establishment, Article 7 permitted taxation of business profits only in the State of residence. Even otherwise, the record did not show taxable profits in India after allowing the corresponding expenditure.

Conclusion: The addition under section 44BB was unsustainable, and the receipts could not be brought to tax in India as business profits.

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