2023 (12) TMI 540 - AT - Income Tax

Income taxable in India - taxability of certain amounts received by the assessee towards offshore supplies of goods and equipment - existence or otherwise of permanent establishment (PE) and attribution of profits to the PE - assessee is a non-resident corporate entity incorporated in China involved in offshore supply of goods/equipments to the Indian contractees - HELD THAT - Merely because there is crossfall breach clause in some of the contracts, it will not tantamount to making distinct and separate contracts composite contract and to tax the income accruing outside India taxable in India. When, there is no dispute over the fact that transfer of title over the goods have passed outside India, which in fact has passed, the receipts certainly cannot be taxed in India. Mode and manner in which the receipts from offshore supplies are brought to tax - AO has attributed 60% of the receipts towards FTS and 40% towards price of goods/materials. This, in our view, is totally irrational and perfunctory. On what basis, AO has bifurcated the receipts between FTS and business income is unknown. When the price payable by the contractee is for design, manufacture, testing and CIF supply and is a consolidated price, the basis for allocation of 60% towards FTS is not understood. In fact, AO has not given any reason for quantifying 60% of the receipts towards FTS, as no such bifurcation has been provided in the contract documents. In any case of the matter, the price paid by the contractee for supply of goods and equipments, design and testing etc. is certainly part of the manufacturing activities and cannot be considered de hors such activity. Thus, in our view, the artificial segregation of receipts between supply of goods and FTS is without any basis, hence, unacceptable. Though, AO has made an attempt to link the supply of goods to the alleged PE in the form of ZTT India Private Limited, however, such inference drawn by the AO is not based on any evidence at all. There is nothing on record to suggest that ZTT India Private Limited has undertaken or was in any way involved with the design, manufacturing and testing of supplied goods. Thus, even assuming that ZTT India Private Limited constitutes a PE, however, in our view, it is in no way involved with the supply of goods and equipments from China. Receipts from onshore contracts - There is no dispute that they have been taxed in India at the hands of ZTT India Private Limited. Thus, in our considered opinion, the sale incident in respect of supply of goods having completed outside India and the transfer of title over the goods, having passed from the assessee to the contractees outside India in terms with the contract, the receipts from such supply of goods and equipments cannot be made taxable in India. Accordingly, we direct the Assessing Officer to delete the additions. Assessee appeals are allowed.

Summary

Issues Involved:
1. Taxability of amounts received towards offshore supplies of goods and equipment.
2. Existence of Permanent Establishment (PE) in India.
3. Attribution of profits to the PE.

Summary:

1. Taxability of Amounts Received Towards Offshore Supplies of Goods and Equipment:

The core issue in the appeals was the taxability of amounts received by the assessee, a non-resident corporate entity incorporated in China, for offshore supplies of goods and equipment to Power Grid Corporation of India Ltd. (PGCIL) and its subsidiaries. The assessee argued that the title over the goods/equipment was transferred outside India, making the receipts from such sales non-taxable in India. The assessee relied on the decision in DDIT vs. Mitsui & Co. and other judicial precedents to support its claim. The Tribunal held that the terms of the contracts clearly demonstrated that the transfer of title and associated risks occurred outside India, and the payments were also made outside India. Thus, the receipts from such offshore supplies were not taxable in India.

2. Existence of Permanent Establishment (PE) in India:

The Assessing Officer contended that the assessee's Indian subsidiary, ZTT India Private Limited, constituted a PE in India, as it was fully controlled by the assessee and engaged in similar business activities. The Tribunal, however, found that there was no material evidence to suggest that ZTT India Private Limited was involved in the design, manufacture, testing, or supply of goods from China. The mere existence of a subsidiary performing onshore activities under a separate contract did not make the offshore and onshore contracts composite. Thus, ZTT India Private Limited could not be considered a dependent agent PE of the assessee.

3. Attribution of Profits to the PE:

The Assessing Officer attributed 60% of the offshore revenue towards Fees for Technical Services (FTS) and 40% towards the supply of goods, treating the entire 60% as the income of the assessee. The Tribunal found this bifurcation irrational and without any basis, as the price for design, manufacture, testing, and CIF supply was consolidated in the contract. The Tribunal held that the artificial segregation of receipts between supply of goods and FTS was unacceptable. Since the transfer of title over the goods occurred outside India, the receipts from such supplies could not be taxed in India. The Tribunal directed the Assessing Officer to delete the additions.

Conclusion:

The Tribunal allowed the appeals, concluding that the receipts from offshore supplies of goods and equipment were not taxable in India, and there was no basis for attributing profits to a PE in India. The order was pronounced on 29.11.2023.