Permanent establishment attribution limits Indian taxation of offshore supplies, while connected supervisory income is taxed as net business profits.
Offshore supply profits from equipment, integrated designs and spares were not taxable in India where manufacture and supply operations occurred abroad, title passed on FOB shipment, consideration was received abroad, and no Indian fixed place or supervisory permanent establishment carried on those supplies. The force of attraction rule did not apply without a relevant permanent establishment. Supervisory activities exceeding the treaty threshold created a supervisory permanent establishment; receipts effectively connected with it were taxable as net business profits rather than fees for technical services, avoiding gross taxation and double taxation. Project-specific designs and drawings supplied without any right to commercially exploit intellectual property constituted sale of copyrighted products, not royalty or technical services.
Issues: (i) Whether profits from offshore supply of equipment, integrated designs and spares were taxable in India through a fixed place or supervisory permanent establishment, including under the force of attraction rule; (ii) Whether receipts for onshore supervisory activities were taxable as business profits or fees for technical services; (iii) Whether consideration for designs and drawings for indigenous equipment and civil works constituted royalty or fees for technical services.
Issue (i): Whether profits from offshore supply of equipment, integrated designs and spares were taxable in India through a fixed place or supervisory permanent establishment, including under the force of attraction rule.
Analysis: The offshore contracts had distinct scopes and consideration, with manufacture, fabrication and design undertaken outside India. The supplies were made on FOB terms; title passed upon shipment outside India, consideration was received abroad, and the Indian customers bore customs clearance and insurance. Retention of part of the price, performance warranties, acceptance tests and a right to reject defective goods did not displace the offshore transfer of title.
Analysis: The Indian associated entity was not shown to have secured or concluded contracts, or to have performed functions establishing that its premises were at the assessee's disposal. Nor was the customer site shown to be under the assessee's dominant control. The supervisory permanent establishment had no role in offshore supplies and arose for onshore supervisory activities after the offshore supply operations. Article 7(1) could not attract offshore business profits in the absence of a relevant permanent establishment through which those supplies were carried on.
Conclusion: In favour of the assessee. Offshore supply profits, including integrated drawings and designs, were not taxable in India and could not be attributed to a fixed place or supervisory permanent establishment.
Issue (ii): Whether receipts for onshore supervisory activities were taxable as business profits or fees for technical services.
Analysis: Supervisory activities at the Indian project sites exceeded the six-month threshold under Article 5(2)(j). The supervisory receipts were directly connected with the supervisory permanent establishment. The treaty treatment applicable to fees for technical services did not apply where the receipts were effectively connected with that permanent establishment; such receipts were assessable as business profits under Article 7 on a net basis. The completed-contract method adopted for recognition of the supervisory profit had been accepted in assessment, and gross taxation in the years of receipt would result in double taxation.
Conclusion: In favour of the assessee. Supervisory receipts were taxable as business profits under Article 7 on a net basis and not as fees for technical services under Article 13.
Issue (iii): Whether consideration for designs and drawings for indigenous equipment and civil works constituted royalty or fees for technical services.
Analysis: The designs were customised for integration of indigenous equipment and civil works with the imported plant, and were supplied for completing, operating and maintaining the plant. The customers obtained no right to commercially exploit the intellectual property embedded in the designs; their use was confined to their own projects. The transaction was therefore a sale of a copyrighted article/product, not a grant of a right to use a design or intellectual property and not a service.
Conclusion: In favour of the assessee. Receipts from designs and drawings for indigenous equipment and civil works were neither royalty nor fees for technical services; they constituted business income not taxable in India in the absence of attribution to a permanent establishment.
Final Conclusion: Offshore supplies and project-specific designs remained outside Indian tax jurisdiction, while onshore supervisory income was assessable only under the business-profits provisions applicable to the supervisory permanent establishment.
Ratio Decidendi: Offshore supply income cannot be taxed or attributed to an Indian permanent establishment where title and supply operations are completed abroad and the alleged permanent establishment has no real role in those supplies; supervisory receipts effectively connected with a qualifying supervisory permanent establishment are taxable as business profits, not as fees for technical services.