Offshore supply and permanent establishment rules: seconded employees and subsidiary premises did not create taxable Indian presence.

Offshore supply of KD parts was treated as completed outside India because invoices, bills of lading, insurance material and affidavit evidence showed principal-to-principal transfer of title and risk abroad; the inspection clause did not alter that result. A supervisory permanent establishment was not established because the seconded employees were found to be working for the Indian company, and reporting, information sharing or cost-to-cost salary reimbursement did not prove operational control by the foreign enterprise. A fixed place permanent establishment was also rejected because the subsidiary's premises were not shown to be at the foreign enterprise's disposal for its own business. With no PE and no taxable offshore supply connection, the attributed income addition could not stand.

---

---

Issues: (i) Whether the assessee's supply of KD parts constituted offshore sales with title, risk and rewards passing outside India; (ii) Whether the assessee had a supervisory permanent establishment in India through seconded employees; (iii) Whether the assessee had a fixed place permanent establishment in India through the Indian subsidiary's premises; (iv) Whether the addition made in the final assessment order survived.

Issue (i): Whether the assessee's supply of KD parts constituted offshore sales with title, risk and rewards passing outside India.

Analysis: The relevant invoices, bills of lading, insurance material and affidavit evidence showed that the goods were supplied on a principal-to-principal basis and that the transfer of title and risk occurred outside India. The inspection clause in the supply arrangement did not, by itself, establish that the sale was completed in India. The documentary material supported the assessee's claim that the transaction was an offshore supply.

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

Issue (ii): Whether the assessee had a supervisory permanent establishment in India through seconded employees.

Analysis: The decisive inquiry was whether the seconded employees were carrying on the business of the foreign enterprise or were working for the Indian entity. The material on record, including the secondment terms, job profiles and surrounding facts, indicated that the employees were working for the Indian company and that the Revenue had not established operational control by the assessee over the Indian company's business. Mere reporting, information sharing or reimbursement of salary on cost-to-cost basis was held insufficient to establish supervisory PE.

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

Issue (iii): Whether the assessee had a fixed place permanent establishment in India through the Indian subsidiary's premises.

Analysis: A fixed place PE requires a place of business at the disposal of the foreign enterprise through which its business is carried on. The Revenue failed to show that the Indian subsidiary's premises were to the assessee for carrying on its own core business or that the assessee exercised such control over the premises as to satisfy the disposal test. The assembly/manufacturing operations of the Indian subsidiary, without more, did not convert that unit into the assessee's fixed place PE.

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

Issue (iv): Whether the addition made in the final assessment order survived.

Analysis: Once offshore supply was accepted and both supervisory PE and fixed place PE were negated, there was no basis to attribute the disputed income to a PE in India. The consequential addition could not stand.

Conclusion: The addition was deleted.

Final Conclusion: The assessee succeeded on the substantive PE and offshore supply disputes, and the impugned addition was set aside, leaving only the minor procedural grounds to be dealt with separately.

Ratio Decidendi: A foreign enterprise is taxable on business profits in India only if the Revenue establishes, on cogent material, that it has a place at its disposal through which its own business is carried on or that seconded personnel are in fact performing the enterprise's business in India; mere subsidiary operations, salary reimbursement or internal communications are insufficient.

---