Turnkey contract taxability and profit attribution require contract-wise analysis; ad hoc offshore supply estimates were set aside for reconsideration.

Turnkey contract receipts from offshore supply were examined on the contractual terms, and the analysis indicated that a composite, integrated obligation to design, supply, erect, install, commission and complete the project could bring such receipts within the Indian tax net where the offshore supply was not a standalone transaction. The attribution of 25% of offshore supply receipts to the permanent establishment and the 5% profit estimate were rejected as ad hoc because the role of the permanent establishment, the treaty position and the protocol effect had not been properly analysed. The matter was restored for contract-wise and treaty-based reconsideration.

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Issues: (i) Whether the receipts from offshore supply under the turnkey contracts were taxable in India as income arising from a composite indivisible contract and whether such receipts could be excluded from Indian taxation on the ground that the supplies were made outside India. (ii) Whether the attribution of 25% of offshore supply receipts to the permanent establishment in India and the estimation of profits at 5% could be sustained.

Issue (i): Whether the receipts from offshore supply under the turnkey contracts were taxable in India as income arising from a composite indivisible contract and whether such receipts could be excluded from Indian taxation on the ground that the supplies were made outside India.

Analysis: The agreement examined in detail showed an integrated end-to-end obligation to design, supply, erect, install, commission and complete the paper mill, with payment milestones, performance testing, start-up obligations and acceptance linked to completion of the project. On those terms, the offshore supply could not be treated as a standalone transaction for the Hoshangabad contract. At the same time, the record showed that the departmental authorities had not examined the terms of the other contracts, and the extent of the role of any permanent establishment in the offshore activities had also not been properly analysed.

Conclusion: The contention that the offshore supply receipts were wholly /inexorably the Indian tax net was rejected on the basis of the Hoshangabad contract, but the broader issue was remitted for contract-wise reconsideration.

Issue (ii): Whether the attribution of 25% of offshore supply receipts to the permanent establishment in India and the estimation of profits at 5% could be sustained.

Analysis: The attribution of profit to the permanent establishment was made on an ad hoc basis without a proper examination of the role of the permanent establishment in relation to each contract. The estimate of profits was also unsupported by any rational basis, particularly when the assessee had produced material indicating a much lower global profit margin. The treaty position and the effect of the protocol were also not examined by the lower authorities in the manner required.

Conclusion: The attribution of profits and the estimated profit rate were not sustained and the matter was restored for de novo adjudication.

Final Conclusion: The dispute was sent back for fresh consideration after a contract-wise and treaty-based examination, and the assessee obtained relief only to the extent of remand.

Ratio Decidendi: In turnkey supply cases, taxability and profit attribution must be examined on the exact contractual terms and the demonstrated role of any permanent establishment, and ad hoc estimates cannot be sustained without such analysis.

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