2025 (11) TMI 915 - AT - Income Tax

Turnkey offshore supply and managerial fees not FTS under Income-tax Act/India-UK DTAA; no PE found

ITAT held for the assessee that fees received for turnkey offshore supply and managerial services do not constitute FTS under the Act or India-UK DTAA ... Offshore supply receipts - Fees from Technical Services (“FTS”) under the provisions of the Act and the India-UK DTAA - Income deemed to accrue or arise in India - scope of contract includes complete project management, design, engineering, manufacturing, testing, supply, port handling and custom clearance for plant and equipments including spare parts, inland transportation, staff training, testing, erection/installation related civil work, and commissioning including performance testing of plant and equipment - A single composite contract was awarded to the assessee on turnkey basis HELD THAT:- As in assessee’s appeal for AY 2018-19 [2023 (4) TMI 532 - ITAT DELHI] held essence of ‘make available’ clause is that the technical knowledge or skills of the provider should be imparted to be absorbed by the receiver so that the receiver can deploy similar technology or technique in the future without dependent upon the provider. However, in the case in hand for the services rendered, there is renewal of contract on annual basis and the nature of services are all prima facie managerial in nature. They have also passed the arm’s length tests. Thus Ld. Tax authority below have fallen in error in taxing global operation fee received as Fees from Technical Services (“FTS”) under the provisions of the Act and the India-UK DTAA, without appreciating that provision of said services by the Appellant did not satisfy the ‘make available’ clause contained in Article 13(4)(c) of the India-UK DTAA. Ground is adjudicated in favor of assessee. Holding GE T&D IL as assessee’s PE in India - Though, it is a well-established legal principle that PE has to be determined in each year separately, as pointed earlier, the Dispute Resolution Panel has admitted that the legal and the factual matrix in the impugned assessment year is similar to that of AY 2020-21. Thus, in light of findings of the Co-ordinate Bench in assessee’s own case in preceding assessment year, we have no hesitation in holding that the assessee does not have any PE/DAPE in India. ISSUES PRESENTED AND CONSIDERED 1. Whether offshore supplies under the First Contract are taxable in India. 2. Whether the single turnkey bid/contract was artificially split into three contracts such that offshore supplies and on-shore activities form an indivisible composite contract giving rise to taxable nexus. 3. Whether the assessee had a business connection in India or any form of Permanent Establishment (PE) - fixed place PE, dependent-agent PE (DAPE) or construction PE - attracting taxation/attribution under the DTAA/Act. 4. Whether the onus of proving existence of a PE rested on the revenue and, if so, whether that onus was discharged. 5. Whether 100% of profits from offshore supplies could be attributed to an alleged PE in India. 6. Applicability of section 44BBB to the assessee's offshore supply receipts. 7. Taxability of offshore supply receipts from two Indian entities (GETDIL and SFO Technologies) not related to the PGCIL contract, and compliance with DRP directions. 8. Whether Global Operation Fees received from an associated Indian company constituted Fees for Technical Services (FTS) under the DTAA/Act by virtue of the 'make available' clause. 9. Validity of levy of interest under section 234B and computational discrepancies in the assessment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of offshore supplies under the First Contract Legal framework: Taxation follows territorial principles - only income attributable to operations carried out in India is taxable. Under Section 9 and relevant DTAA provisions, transfers where property and payment occur outside India are generally not taxable in India. Precedent treatment: The Tribunal relied on earlier decisions in the assessee's own matters where offshore supplies were held not taxable; authority invoked that apportionment and territorial jurisdiction govern taxability. Interpretation and reasoning: The First Contract's scope was limited to CIF Indian port supply, with title transfer and payments occurring outside India; separate second and third contracts covered on-shore activities. The contractual documents, bidding requirements and notifications of award - read holistically - delineated independent scopes. The Tribunal found the revenue authorities were selective and failed to consider the entire contract matrix; offshore supply receipts flowed from operations outside India and were not rendered taxable by the separately awarded on-shore contracts. Ratio vs. Obiter: Ratio - offshore supply receipts under the First Contract are not taxable in India where transfer of property and payment occur outside India and no PE/attributable operations in India are proven. Obiter - observations on business prudence behind split contracts. Conclusion: Offshore supplies under the First Contract are not taxable in India; related assessment additions are unsustainable. Issue 2 - Whether the single turnkey bid was artificially split into three contracts Legal framework: Determination of whether multiple documents/awards reflect one composite contract requires construction of contract terms as a whole, with attention to parties' intentions and bid requirements; tax consequences cannot be inferred by isolating clauses to serve taxing provisions. Precedent treatment: The Tribunal followed prior decisions in the assessee's cases and persuasive authority recognizing that contractual allocation among independent contractors may be business prudence rather than tax avoidance. Interpretation and reasoning: The bid required an Indian associate at the bid stage; separate notifications of award and executed contracts (with distinct scopes and independent consideration) established independent contractual obligations. Clauses making a party overall responsible for successful completion were contextual safeguards and did not merge discrete contracts into an indivisible composite. Revenue's selective reading and reliance on 'single source responsibility' and liability clauses were held incorrect; such clauses were confined in context (e.g., to the offshore contract price components) and did not prove an artificial split. Ratio vs. Obiter: Ratio - a contractual split mandated by the bidding process and reflected in distinct executed contracts with distinct scopes is not, per se, an artificial split attracting tax consequences. Obiter - commentary on normal commercial safeguards in large infrastructure procurement. Conclusion: There was no artificial splitting of the composite bid by the assessee; the separate contracts stood on their own. Issue 3 - Existence of PE (fixed place, dependent agent, construction) and business connection Legal framework: PE and business connection under the DTAA/Act require specific factual and evidentiary foundation (authority to conclude contracts, representation, place of business, construction activities within territory etc.). Precedent treatment: The Tribunal applied earlier coordinate bench findings in the assessee's own appeals and referred to case law distinguishing joint contractual liability from association/PE; authority cited supports that contractual joint and several liability does not alone create PE/DAPE. Interpretation and reasoning: The Indian associate was contractually designated an 'independent contractor' by the employer; it had independent receipts, workforce and tax liability in India, and lacked authority to conclude contracts for the foreign principal. The bid structure required the associate's involvement from the outset; any coordination did not amount to dependent agency or fixed place PE. Revenue failed to produce specific evidence showing the associate acted as agent empowered to bind the assessee or that the assessee conducted construction/installation activities in India constituting a construction PE. The Tribunal emphasized the revenue's onus to prove PE by evidence, which was not discharged. Ratio vs. Obiter: Ratio - absent concrete evidence that an Indian entity acted as the assessee's dependent agent with authority to conclude contracts or that the foreign party carried out construction activities in India, no PE/business connection is constituted. Obiter - discussion on coordination among independent contractors not amounting to common enterprise. Conclusion: No fixed place PE, DAPE or construction PE existed; no business connection established; attribution of profits to an alleged PE is unsustainable. Issue 4 - Onus of proof regarding existence of PE Legal framework: Tax/DTAA jurisprudence requires the revenue to establish factual basis for PE; legal standards require specific evidence of acts creating PE. Precedent treatment: The Tribunal relied on prior holdings placing onus on revenue to prove PE. Interpretation and reasoning: The revenue did not marshal specific acts, agreements or evidence demonstrating that the Indian associate represented the assessee or had contracting authority; mere coordination and presence of associate in a bid do not discharge the onus. Ratio vs. Obiter: Ratio - onus to prove PE lies on revenue and must be discharged by specific evidence. Obiter - none. Conclusion: Onus not discharged; finding of PE is unwarranted. Issue 5 - Attribution of 100% profits from offshore supplies to alleged PE Legal framework: Profit attribution to PE under DTAA requires existence of PE and proper apportionment principles; attribution cannot be presumed absent PE. Precedent treatment: Tribunal followed its prior findings vacating attribution where PE not established. Interpretation and reasoning: Because no PE was established, attributing offshore profits to an alleged PE is legally unsound. Revenue's reliance on force of attraction and blanket attribution was unsupported by evidence or correct application of apportionment principles. Ratio vs. Obiter: Ratio - absent a PE, attribution of offshore profits to India is impermissible. Obiter - none. Conclusion: Attribution of 100% profits to an alleged PE is unsustainable. Issue 6 - Applicability of section 44BBB Legal framework: Section 44BBB applies in contexts involving engagement of foreign company in connection with turnkey power projects and presupposes PE and attributable activities in India. Precedent treatment: Tribunal treated section 44BBB as inapplicable where revenue streams arose from offshore supplies and no PE existed. Interpretation and reasoning: The assessee's revenue derived from offshore supplies where property and payment took place outside India; section 44BBB presumes engagement for Indian construction/turnkey activities and thus does not apply to pure offshore supply receipts. Revenue failed to establish the factual predicate (PE/Indian construction activities) required for section 44BBB to operate. Ratio vs. Obiter: Ratio - section 44BBB is inapplicable to offshore supply receipts absent PE/turnkey execution within India. Obiter - none. Conclusion: Section 44BBB not applicable; application by revenue is erroneous. Issue 7 - Offshore supplies to GETDIL and SFO Technologies and DRP directions Legal framework: DRP directions are binding on AO and require compliance; taxability of supplies to third parties hinges on connection with taxed contract and requisite PE findings. Precedent treatment: Tribunal enforced DRP directions and prior bench findings favouring assessee where supplies were not shown to relate to the PGCIL contract or to be attributable to PE. Interpretation and reasoning: DRP had directed deletion of receipts from GE T&D and SFO if not related to the PGCIL contract. AO failed to apply DRP directions properly, relying instead on his PE finding (now discredited). No written agreements linking those supplies to the PGCIL contract were produced; invoices and purchase orders demonstrated standalone offshore supplies. Because the PE foundation collapsed, the AO's rationale for taxing these receipts fell away; AO's failure to follow DRP directions substantively was contrary to mandate. Ratio vs. Obiter: Ratio - receipts from such third-party offshore supplies not linked to taxed contract/PE are not taxable; AO must comply substantively with DRP directions. Obiter - none. Conclusion: Offshore supply receipts from GETDIL and SFO Technologies not taxable; DRP directions require deletion and AO's additions are reversed. Issue 8 - Global Operation Fees and 'make available' test for FTS Legal framework: Under the DTAA/Article 13, fees are taxable as FTS only if the provider 'makes available' technical knowledge, experience or skill enabling the recipient to exploit it independently; managerial services not amounting to 'make available' are not FTS. Precedent treatment: Tribunal applied established authorities holding 'make available' to be a high threshold and distinguishing managerial/ongoing support from making technical knowledge available. Interpretation and reasoning: The Global Operation Fees agreements described predominantly managerial, coordinating and recurring support services renewed annually; a portion (global industrialization function) had been offered to tax. The remainder did not satisfy the 'make available' threshold because the recipient was not enabled to deploy technical knowledge independently; services were ongoing/managerial and also passed arm's length testing. Revenue's general assertions without factual evidence that technical know-how was made available were inadequate. Ratio vs. Obiter: Ratio - Global Operation Fees that merely provide managerial/ongoing support and do not transfer the ability to exploit technical knowledge independently do not constitute FTS under the 'make available' clause. Obiter - none. Conclusion: Global Operation Fees challenged as FTS (except amounts already offered) are not taxable as FTS; additions reversed. Issue 9 - Interest under section 234B and computational error Legal framework: Interest under section 234B is mandatory when prerequisites are satisfied; computational corrections lie within AO's jurisdiction on remand. Precedent treatment: The Tribunal treated the charging of interest as consequential to the assessment and mandatory. Interpretation and reasoning: The levy of interest under section 234B was held to be mandatory and therefore the ground challenging it was dismissed. A separate ground alleging computational error was remitted to the AO for verification and correction. Ratio vs. Obiter: Ratio - interest under section 234B, if applicable, must be charged; computational discrepancies may be corrected by the AO. Obiter - none. Conclusion: Ground challenging section 234B dismissed; computation error restored to AO for verification. Overall Conclusion The Tribunal accepted prior coordinate bench findings and the contractual/ factual analysis: offshore supply receipts under the First Contract are not taxable in India; there was no artificial split of contract; no PE (fixed place, dependent agent or construction) existed; section 44BBB inapplicable; offshore supplies to third parties not linked to the PGCIL contract are not taxable and DRP directions require deletion; Global Operation Fees (except amounts already offered) do not satisfy the 'make available' test for FTS; interest under section 234B stands but computational issues remitted to AO. Consequently the assessment additions challenged on these grounds were set aside with consequential effects.