Permanent establishment attribution limits treaty taxation; offshore fabrication profits stayed outside India, while Indian installation income was estimated at 10%.

Under the India-Korea tax treaty, only business profits economically attributable to a permanent establishment in India are taxable in India, so profits from Korean designing and fabrication completed before the Indian permanent establishment existed were not taxable there. For the Indian installation, commissioning and hook-up operations, the rejected accounts justified best-judgment estimation, and the attributable profits were reasonably fixed at 10% of gross receipts. The treaty therefore protected the offshore profits, while the India-source operational income remained taxable on an estimated basis.

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Issues: (i) Whether profits from the Korean operations comprising designing and fabrication were taxable in India as attributable to the Indian permanent establishment under the India-Korea Double Taxation Avoidance Convention. (ii) Whether the profits attributable to the Indian operations of installation, commissioning and hook-up were to be estimated at 10% of the gross receipts.

Issue (i): Whether profits from the Korean operations comprising designing and fabrication were taxable in India as attributable to the Indian permanent establishment under the India-Korea Double Taxation Avoidance Convention.

Analysis: Under the treaty, business profits of a foreign enterprise are taxable in the source State only to the extent attributable to a permanent establishment there. The permanent establishment is treated as a distinct and separate enterprise only for attribution purposes, and profits earned outside India cannot be taxed merely because they are connected with a later installation activity in India. On the facts, the fabrication and supply of the platforms in Korea were completed before the Indian permanent establishment came into existence, and no material showed that the billing price included any element for services rendered by the Indian permanent establishment.

Conclusion: The profits from the Korean operations were not taxable in India and the finding was in favour of the assessee on this issue.

Issue (ii): Whether the profits attributable to the Indian operations of installation, commissioning and hook-up were to be estimated at 10% of the gross receipts.

Analysis: The accounts produced by the assessee were rejected and the assessment proceeded on best judgment. In these circumstances, and having regard to the assessee's own reliance on presumptive taxation and the departmental instruction governing installation and commissioning receipts, the profits attributable to the Indian permanent establishment had to be estimated on a reasonable basis. The Commissioner of Income-tax (Appeals) adopted 10% of gross receipts for the Indian operations, and no sufficient basis was shown for reducing that estimate.

Conclusion: The profits attributable to the Indian operations were rightly estimated at 10% of the gross receipts and this issue was decided in favour of Revenue.

Final Conclusion: The treaty protected the profits from the Korean operations from Indian tax, but the income from installation and commissioning in India was taxable on an estimated basis at 10% of the relevant gross receipts, so the Department succeeded only in part.

Ratio Decidendi: Under a tax treaty based on the OECD model, only those business profits of a foreign enterprise that are economically attributable to the permanent establishment in the source State are taxable there, and profits from offshore operations completed before the permanent establishment comes into existence are not so attributable.

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