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Issues involved: Determination of liability to deduct tax at source (TDS) on a composite contract involving supply of equipment and erection/commissioning works, consideration of permanent establishment (PE) and business connection in India.
Summary: 1. The department appealed against the CIT (A) order for assessment year 2006-07, contesting the decision that the assessee is not liable to deduct TDS on a composite contract with a non-resident company having PE in India and business connection. The Assessing Officer treated the contract as composite, attributing income to India under sec. 44BBB. CIT (A) found two identifiable segments in the contract and held that only income from erection and commissioning is taxable in India. 2. The CIT (A) considered the two separate letters by the assessee, one for equipment supply and the other for erection/commissioning, and concluded that income from the supply segment, taking place outside India, is not taxable in India. The departmental representative argued for TDS on the entire contract, citing the composite nature of the agreement. 3. The main contention was that it was an FOB contract with title passing outside India, supported by the absence of manufacturing activity in India. The Tribunal analyzed the composite agreement, referring to the Board's instruction and Sale of Goods Act provisions to ascertain the intention of the parties. It upheld CIT (A)'s decision that no TDS is required on the supply agreement and the 10% income tax on the erection agreement is reasonable. 4. The Tribunal dismissed the department's appeal, emphasizing that no income arises to the supplier from the supply segment of the composite contract. It upheld CIT (A)'s order based on lack of business profit due to no activities in India as per the DTAA between India and China. 5. The judgment was pronounced on 19-12-2008.
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