Permanent Establishment under India France DTAA not found; offshore supply receipts non taxable and Section 44BB inapplicable.

Existence of a permanent establishment under Article 5 of the India France DTAA and taxable nexus under Section 9(1)(i) turns on the substantive nature of activities performed in India; where core contractual obligations are offshore supply and installation/commissioning in India is ancillary and time limited, those activities do not constitute a dependent or fixed place of business and the supply receipts are not taxable in India on account of a PE. Consequently, the presumption of taxable income by applying the deemed extraction profit mechanism is inapplicable where no PE exists, so attributing a notional 10% of gross receipts is unjustified.

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Issues: (i) Whether receipts from offshore supply and limited installation/commissioning by a French supplier to ONGC are taxable in India by reason of existence of a permanent establishment under Article 5 of the India-France DTAA and Section 9(1)(i) of the Income-tax Act, 1961; (ii) Whether Section 44BB of the Income-tax Act, 1961 can be invoked to attribute 10% of gross receipts to a deemed business connected with extraction activities.

Issue (i): Whether the assessee had a permanent establishment in India such that offshore supply receipts are taxable in India.

Analysis: The contract under consideration was for supply of machinery manufactured outside India on CFR/ex-works terms with separate, limited installation and commissioning obligations in India; ownership and risks passed outside India and payments were structured with a portion retained until completion of installation. The duration of the overall contract alone was examined by the revenue, but the decisive enquiry under Article 5 of the India-France DTAA and Section 9(1)(i) of the Income-tax Act, 1961 is the substantive nature of the activities performed in India and whether those activities give rise to a dependent or fixed place of business amounting to a permanent establishment. Where the core obligation is supply of goods from abroad and on the facts installation is ancillary and time-limited, the substantive character remains supply, not a business carried on through a PE in India.

Conclusion: The finding of a permanent establishment in India is not sustained; the receipts from offshore supply are not taxable in India on account of a PE. This conclusion is in favour of the assessee.

Issue (ii): Whether Section 44BB of the Income-tax Act, 1961 applies to attribute 10% of gross receipts to taxable income in India.

Analysis: Section 44BB operates only where business activities fall within its scope (exploration or extraction related business carried out through a PE or as specified). Given the conclusion that no PE exists and that the transactions are predominantly offshore supplies with ancillary installation, invocation of Section 44BB to attribute a notional 10% of gross receipts to taxable income in India is not justified on the facts.

Conclusion: Section 44BB was wrongly invoked to determine taxable income at 10% of gross receipts; this conclusion is in favour of the assessee.

Final Conclusion: On the facts and applying the Treaty and relevant provisions of the Income-tax Act, 1961, the impugned additions based on existence of a PE and application of Section 44BB are set aside and the appeal is allowed.

Ratio Decidendi: Existence of a permanent establishment under Article 5 of the India-France DTAA and Section 9(1)(i) depends on the substantive nature of activities performed in India; mere contract duration or ancillary installation obligations do not convert offshore supply contracts into business carried on through a PE, and where no PE is established Section 44BB cannot be invoked to attribute a notional percentage of gross receipts to taxable income in India.

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