Supervisory PE requirements limit Indian taxation of offshore supplies and cost-only seconded employee salary reimbursements.
Supervisory permanent establishment under Article 5(4) of the India-Japan DTAA requires supervisory activities to exceed six months on a project-wise basis and to relate to a qualifying building-site, construction, installation, or assembly project; employee presence across projects cannot be aggregated. Offshore-supply profits lack the territorial nexus for Indian taxation where contracts, transfer of title, payment, and relevant operations occur outside India and buyers import independently, absent a composite arrangement with supervisory services. Cost-to-cost reimbursement of seconded expatriates' salary, without markup, is employee cost rather than fees for technical services and is not taxable merely because it was mistakenly offered in a return, since there is no estoppel against statute.
Issues: (i) Whether the assessee had a Supervisory PE in India under Article 5(4) of the India-Japan DTAA; (ii) Whether profits from offshore supplies were taxable in India; and (iii) Whether cost-to-cost reimbursement of salary of seconded expatriates was taxable as income.
Issue (i): Whether the assessee had a Supervisory PE in India under Article 5(4) of the India-Japan DTAA.
Analysis: Article 5(4) imposes cumulative requirements that supervisory activities must exceed six months and must be connected with a building site, construction, installation or assembly project. The duration test applies project-wise and cannot be determined by aggregating the presence of multiple employees. The projects other than the dealership arrangement did not cross the prescribed duration threshold. Although employees served the dealership entity for more than six months, no qualifying construction, installation, assembly or building-site project was established; the entity was engaged in automobile dealership activities.
Conclusion: No Supervisory PE existed in India under Article 5(4) of the India-Japan DTAA; the issue is decided in favour of the assessee.
Issue (ii): Whether profits from offshore supplies were taxable in India.
Analysis: The supply contracts were concluded outside India, title and property in the goods passed outside India, consideration was received outside India, and Indian buyers imported the goods in their own capacity under principal-to-principal transactions. No operations relating to the offshore supplies were carried out in India, and the supplies were not shown to form a composite arrangement with supervisory services. Accordingly, the receipts lacked the territorial nexus required for taxation under sections 5(2) and 9(1)(i).
Conclusion: Profits from the offshore supplies were not taxable in India; the issue is decided in favour of the assessee.
Issue (iii): Whether cost-to-cost reimbursement of salary of seconded expatriates was taxable as income.
Analysis: The expatriates were seconded to the Indian entity, their salary costs were reimbursed at cost without markup, and the cost-to-cost character of the reimbursement was undisputed. Such reimbursement represented salary costs of employees working for the Indian entity and not fees for technical services. An amount not taxable in law does not become taxable merely because it was erroneously offered in the return, as there is no estoppel against statute.
Conclusion: The expatriate salary reimbursement was not taxable income and must be excluded from taxable income; the issue is decided in favour of the assessee.
Final Conclusion: The tax consequences founded on the alleged Supervisory PE were unsustainable, and the offshore-supply receipts and genuine salary reimbursements remained outside the assessee's taxable income for the relevant assessment years.
Ratio Decidendi: A Supervisory PE arises only when supervisory activities, assessed project-wise, both exceed the treaty duration threshold and are connected with a qualifying building, construction, installation or assembly project.