Offshore supply may escape Indian tax, but embedded technical services and any proved PE remain taxable by apportionment.
Offshore supply receipts under separate contract segments were prima facie not taxable in India because title passed outside India, payment was received abroad, and the supply was completed outside India without artificial contract splitting. No conclusive permanent establishment was established on the material before the AAR, though income attributable to any proved PE would be taxable only to that extent. The contract consideration also contained an embedded technical services component arising from design, drawing and engineering work, which was taxable in India under the domestic deeming rule and treaty definition, with apportionment to be made on a reasonable basis.
Issues: (i) whether the amounts received or receivable for offshore supply of equipment and materials under the offshore contract were chargeable to tax in India; (ii) whether the applicant had a permanent establishment in India so that income attributable to the Indian operations could be taxed; (iii) whether an element of fees for technical services was embedded in the contract and taxable in India.
Issue (i): whether the amounts received or receivable for offshore supply of equipment and materials under the offshore contract were chargeable to tax in India.
Analysis: The bid documents themselves contemplated separate contracts for offshore supply, onshore supply and onshore services. The transfer of title in the imported goods occurred outside India on loading and endorsement of the shipping documents, and the payment for the offshore supply was to be received in foreign currency outside India. The arrangement was not shown to be an artificial splitting of a single composite contract. Applying the principle of territorial nexus and the rule of apportionment, income from operations wholly completed outside India could not be taxed in India.
Conclusion: The offshore supply receipts were, prima facie, not taxable in India.
Issue (ii): whether the applicant had a permanent establishment in India so that income attributable to the Indian operations could be taxed.
Analysis: Under the treaty, a permanent establishment requires a fixed place through which business is carried on, and a construction or supervisory project must last beyond the prescribed period. The material placed did not establish a concluded fixed place or construction PE on the record as presented. However, the possibility of a PE was not ruled out if the Department were to establish prolonged stay of employees after the letter of intent, and any income attributable to such PE would be taxable only to that extent.
Conclusion: No conclusive PE was established on the existing material, but any income attributable to a proved PE would be taxable in India.
Issue (iii): whether an element of fees for technical services was embedded in the contract and taxable in India.
Analysis: The contract materials and minutes of meeting showed that design, drawing and engineering work was undertaken for the project in India and was not confined to the mere offshore sale of goods. Such services were independent of the onshore services contract and were not separately charged, so part of the offshore price represented consideration for technical services. Under the domestic law deeming rule and the treaty definition, such embedded technical service component was taxable in India, with apportionment to be determined on a reasonable basis.
Conclusion: A technical services component was embedded in the consideration and was taxable in India.
Final Conclusion: The offshore supply component escaped Indian tax on a prima facie basis, but the ruling recognised possible PE-based attribution if established and held that the consideration also contained a taxable technical services element requiring reasonable apportionment.
Ratio Decidendi: Where offshore supply is completed outside India with title and payment passing abroad, only income attributable to operations in India can be taxed; however, where the contract consideration includes separately identifiable technical services, that component may be taxed even if the services are rendered from outside India and must be reasonably apportioned.