Offshore supply and supervisory receipts: composite drawings-linked supply not taxable in India, while PE income is taxed on net basis.

Where drawings and designs are contractually and commercially inseparable from offshore supply of plant and equipment, the composite receipt is treated as offshore supply completed outside India and not taxed as fees for technical services or business income in India. Supervisory receipts for erection and commissioning are taxable according to their treaty character; short-duration supervision fell within fees for technical services, while longer-duration supervision through a permanent establishment had to be assessed on a net basis under Article 7. If audited books were not validly rejected and showed a loss from that activity, no taxable income could be brought to tax on that head.

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Issues: (i) Whether consideration for offshore supply of drawings, designs, plant and equipment was taxable in India as business income or fees for technical services. (ii) Whether receipts from supervisory services for erection and commissioning were taxable in India and, in the case of longer-duration supervision, how the profit of the permanent establishment was to be computed.

Issue (i): Whether consideration for offshore supply of drawings, designs, plant and equipment was taxable in India as business income or fees for technical services.

Analysis: The agreements and surrounding facts showed that the drawings and designs were tied to the supply of equipment and were not a standalone consultancy or technical service arrangement. The earlier coordinate bench decisions in the assessee's own case were followed, and the same composite factual pattern was treated as offshore supply completed outside India. On that basis, the receipts from the supply of drawings, designs and equipment could not be brought to tax in India as fees for technical services or as taxable business receipts merely because the contracts were separately drafted.

Conclusion: The issue was decided in favour of the assessee. The receipts from offshore supply of drawings, designs and equipment were held to be not taxable in India on the basis applied by the Tribunal.

Issue (ii): Whether receipts from supervisory services for erection and commissioning were taxable in India and, in the case of longer-duration supervision, how the profit of the permanent establishment was to be computed.

Analysis: For the short-duration supervisory receipts, the Tribunal followed the earlier coordinate bench view that such services fell within the treaty definition of fees for technical services, and the existence of a permanent establishment did not alter that character. For the longer-duration supervisory activity in the later year, the Tribunal held that a permanent establishment existed and that the income had to be computed on a net basis under Article 7 of the treaty. It further held that the Assessing Officer had given no reasons for rejecting the audited book results, and where the books showed a loss from that activity, no income could be brought to tax on that head. Interest under sections 234B and 234C was treated as consequential, and the penalty ground was premature or not pressed, and therefore did not alter the substantive outcome.

Conclusion: The short-duration supervisory receipts were held taxable, while the longer-duration supervisory income had to be computed on the basis of audited results and no income was assessable where the activity showed a loss. The assessee succeeded only partly on this issue.

Final Conclusion: The Tribunal sustained taxability of the short supervisory receipts, but granted relief on the offshore supply of drawings, designs and equipment and on the longer-duration supervisory segment where the audited results showed no taxable income, resulting in partial relief overall.

Ratio Decidendi: Where drawings and designs are contractually and commercially inextricable from offshore supply of plant and equipment, the composite receipt is not taxable in India as fees for technical services; supervisory receipts are taxable according to their treaty character, and income of a permanent establishment must be computed on a net basis on the basis of accepted books unless validly rejected.

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