OFFSHORE SUPPLY STAYS OFFSHORE: A SUPERVISORY PRESENCE DOES NOT PULL IN PROFITS IT HAD NO HAND IN

Paul Wurth Italia S.p.A. (PWIT), an Italian tax resident, supplied plant and equipment, integrated designs and drawings and spares, and provided supervision services, for blast furnace projects of various Indian clients under separate agreements. Manufacture, design and fabrication took place in Italy and supplies were on a free on board basis, with risk and title passing outside India. PWIT accepted that its supervision activity created a supervisory Permanent Establishment (PE) under Article 5(2)(j) of the India-Italy Double Taxation Avoidance Agreement (DTAA), because supervision exceeded six months, and offered the income attributable to supervision PE to tax in India. However, PWIT claimed that consideration for offshore supply of equipment, integrated designs and spares was not taxable in India as title and risk passed outside India.

The tax authorities held that Paul Wurth India Private Limited (PWIPL) and the customer sites together formed a fixed place PE, treated the separate agreements as one composite contract, invoked the force of attraction rule in Article 7(1) and attributed 50 percent of profits to the PE. The relied on various judgements to argue that PWIT kept risk until commissioning and was paid against milestones.

The Hon’ble Delhi ITAT, while adjudicating the appeal addressed the twin issues of whether the assessee had a Fixed Place PE in India under Article 5 of the India-Italy DTAA and also dwelled into the aspect of taxation with respect to off-shore sales:

1. No fixed place PE existed since PWIPL was only an associate of PWIT, both being owned by Paul Wurth SA, Luxembourg, and the assessing officer identified no role for PWIPL in the offshore supply.

2. A subsidiary or related entity is not by itself a PE, following the Delhi High Court in E-Funds. A customer site becomes a fixed place PE only where the foreign enterprise has dominant control over it, following the Supreme Court in Formula One, and no such control was shown.

3. In the instant case, the goods were delivered by the ssessee to the carrier (shipping company) on FOB basis and, the payment was made outside India in foreign currency through telegraphic transfer/ Irrevocable Letter of Credit. Reliance was placed on judgment into the case of Linde AG for observations that the term “Free on Board” (FOB) clearly indicates that the ownership of the material supplied would be transferred to the purchaser the moment the material were placed for shipment and the payment was received by the contractor through a letter of credit and the buyer was named as the consignee.

4. The force of attraction rule could not be applied since Article 7(1) of the India-Italy DTAA contains a limited force of attraction clause, which operates only where business is carried on through a PE. The admitted supervisory PE had no role in the offshore supplies and in fact came into existence only after those supplies. Following the Supreme Court in Ishikawajima-Harima, the offshore supply profits were not taxable in India.

5. Supervision receipts are business profits under Article 7, attributable to the supervisory PE and taxable on a net basis and the same are not fees for technical services under Article 13 which are taxable on a gross basis.

6. Designs supplied from outside India for indigenous equipment and civil works, under separate contracts with title and risk passing offshore and consideration in foreign currency, are akin to the sale of a product. They are business profits under Article 7, not royalty or fees for technical services under Article 13.

Conclusion:

The ruling is a significant as the same highlights that constitution of a PE under Tax treaties requires satisfaction of well-established criterions and the mere presence of one PE cannot be extrapolated to bring even offshore incomes into the Indian tax net without sufficient Indian nexus. Further, the judgment underscores the importance of well-drafted and segregated robust contractual documents since the contract structure is critical.