Composite turnkey contract and permanent establishment principles control Indian taxation, with income taxed only on attributable operations.

In a turnkey project with single-bidder responsibility, the first appellate authority's enhancement power under section 251 was treated as co-terminous with the Assessing Officer's and was not confined to items expressly added in assessment. The record was also held to show adequate disclosure and opportunity, so no breach of natural justice arose. The contracts were treated as one composite arrangement, the subsidiary as a tax device, and the corporate veil was lifted. On that basis, the enterprise was found to have a permanent establishment and business connection in India, with tax restricted to profits attributable to Indian operations. Interest under section 234B remained chargeable, but had to be recomputed after reducing tax deductible at source under section 209.

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Issues: (i) Whether the first appellate authority could exercise enhancement powers under section 251 of the Income-tax Act, 1961 in respect of items not expressly considered in the assessment order. (ii) Whether the proceedings suffered from breach of natural justice. (iii) Whether the four contracts formed one composite contract and whether the subsidiary was a facade warranting lifting of the corporate veil. (iv) Whether the assessee had a permanent establishment and business connection in India and how the income was to be attributed. (v) Whether interest under section 234B was chargeable in the manner adopted by the revenue.

Issue (i): Whether the first appellate authority could exercise enhancement powers under section 251 of the Income-tax Act, 1961 in respect of items not expressly considered in the assessment order.

Analysis: The appellate power was held to be co-terminous with that of the Assessing Officer. The jurisdiction of the first appellate authority was not confined to the exact matters considered in the assessment order, and the statutory framework permitted examination of matters arising from the assessment proceedings. The Court treated the contract receipts as part of the same subject matter and held that enhancement was not barred merely because the Assessing Officer had not made separate additions on every component.

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

Issue (ii): Whether the proceedings suffered from breach of natural justice.

Analysis: The material relied upon by the Department was disclosed to the assessee, the replies of the assessee were considered, and no material witness giving directly incriminating testimony was examined so as to require formal cross-examination as a matter of natural justice. The Court found that the assessee was given adequate opportunity and that the complaint of denial of hearing was not borne out on the record.

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

Issue (iii): Whether the four contracts formed one composite contract and whether the subsidiary was a facade warranting lifting of the corporate veil.

Analysis: The tender documents, award terms, performance obligations, liquidated damages clause, managerial control, financial backing, and the conduct of the parties showed that the project was conceived and executed as a single turnkey arrangement with single-bidder responsibility. The split into four contracts was found to be only a contractual device, while the assessee retained overall responsibility for execution and performance. On that basis, the subsidiary was treated as a facade for tax purposes and the corporate veil was lifted.

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

Issue (iv): Whether the assessee had a permanent establishment and business connection in India and how the income was to be attributed.

Analysis: Since the contract was held to be composite, the assessee was found to have carried on substantial and continuous operations in India through project offices, site personnel, supervisory activity, and coordinated execution. The presence in India was held to satisfy the test of permanent establishment, and the assessee was also held to have a business connection in India. At the same time, only income attributable to operations actually carried out in India could be taxed in India. The Court therefore affirmed taxation of profits attributable to Indian activities and directed estimation of profit on the relevant receipts in the manner indicated in the order.

Conclusion: The issue was decided against the assessee and in favour of the Revenue, subject to attribution only of income connected with Indian operations.

Issue (v): Whether interest under section 234B was chargeable in the manner adopted by the revenue.

Analysis: Interest under section 234B was held to be mandatory, but the computation had to be made after reducing the amount of tax deductible at source in accordance with section 209. The existing levy was therefore not sustained in the form adopted by the lower authority, and the matter required reworking on the correct basis.

Conclusion: The issue was decided partly in favour of the assessee and the matter was remitted for recomputation.

Final Conclusion: The assessee succeeded only on the limited question of recomputation of interest under section 234B, while the principal additions and the finding of composite execution with Indian taxability were upheld.

Ratio Decidendi: In a turnkey project with single-bidder responsibility, the appellate authority may examine the entire composite arrangement, lift the corporate veil where the subsidiary is only a tax device, and tax only the profits attributable to operations actually carried out in India.

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