Offshore Supply Non-Taxable as No PE Was Proven in India: ITAT Delhi

Alstom Transport SA Vs DCIT (ITAT Delhi)

ITAT held that no profit could be attributed to offshore supply receipts as the Revenue failed to establish the existence of a Permanent Establishment (PE) in India, noting that design fees were non-taxable since they were inextricably linked to offshore supply, while the assessment was quashed because the AO ignored Tribunal directions and merely copied earlier orders. The Tribunal further observed that the consortium structure showed no fixed-place or installation PE, and that all on-site work—installation, testing and commissioning—was executed solely by Indian partners, leaving no basis to tax the foreign supplier in India.

Facts:

• The assessee, Alstom Transport SA, is a company incorporated in France and a tax resident of France. It is engaged in supplying railway signalling systems and related components to metro rail corporations in India. For Assessment Years 2011-12, 2013-14, 2014-15, 2015-16 and 2022-23, the assessee filed appeals before the Income Tax Appellate Tribunal, Delhi Bench “D”, challenging the assessments made by the Deputy Commissioner of Income Tax, International Taxation. These appeals arose from common facts and issues, principally concerning the taxability of receipts from offshore supply of equipment and offshore design services and the alleged existence of a Permanent Establishment (PE) of the assessee in India.
• During the relevant previous years, the assessee entered into several metro-related contracts as part of different consortia. Its activities comprised two principal categories of international transactions: (i) offshore supply of equipment and spare parts amounting to ₹68,00,79,873, and (ii) offshore design and other services amounting to ₹22,80,39,490. The assessee did not offer the offshore supply receipts to tax in India and initially offered the design receipts to tax, but later, by additional grounds of appeal, contended that these design receipts were also not taxable in India since the entire design activity was executed outside India and was integrally linked to the offshore supply.
• The assessee, together with various international and Indian consortium members, entered into three key contracts with Delhi Metro Rail Corporation (DMRC) and Bangalore Metro Rail Corporation Ltd. (BMRCL). These were: (i) Contract SYS-1 dated 09.03.2001 with DMRC, covering design, manufacture, supply, installation and commissioning of train control, signalling and telecommunication systems; (ii) Contract BS-01 dated 14.03.2007 with DMRC, for supply and commissioning of signalling systems for extension lines under Phase-II; and (iii) Contract “2 S & T” dated 16.09.2009 with BMRCL for similar systems. Under these contracts, the consortium leader was not the assessee. For SYS-1, the consortium leader was Alstom Transport Ltd.; for BS-01, the leader was Alstom Projects India Ltd.; and for BMRCL’s 2 S&T, the leader was again Alstom Projects India Ltd.. The consortium agreements and MoUs placed on record showed that each consortium member had independent, non-agency responsibilities and was directly responsible to the client for its allocated scope of work. The contracts also provided that each member would raise separate invoices for its scope and be directly paid by the employer.
• The assessee’s contractual obligations were limited to offshore supply of equipment and designs. Supplies executed by the assessee were delivered on FOB (Free on Board) terms, meaning that title and risk in the goods passed to DMRC/BMRCL at the port of shipment, outside India. Payments for offshore supplies, as contractually mandated, were made in foreign currency. Following importation, all on-shore activities—such as transportation to site, installation, testing, commissioning, integration and site-based works—were to be performed exclusively by the Indian consortium partners, who were paid in Indian currency for those activities. The assessee had no role, contractual obligation or physical presence in relation to any on-shore activity in India.
• In earlier rounds of litigation involving some of the same years, the Tribunal, by order dated 11.11.2022, had specifically directed the Assessing Officer (AO) to re-examine the issue of existence of PE afresh based on the actual contracts and documents for each assessment year. The Tribunal categorically held that merely relying upon findings from earlier years was impermissible and that the existence of PE had to be determined distinctly for each year based on the factual matrix of that year. The AO was required to analyse contract terms, allocation of responsibilities among consortium members, and the geographical situs of the assessee’s activities.
• In the remand proceedings, although the AO issued notices under section 142(1) and the assessee furnished complete contract documents, consortium agreements, MoUs, and a chart of critical contractual covenants, the AO did not undertake any independent analysis. Instead, the AO reproduced and relied on assessments and Dispute Resolution Panel directions from earlier and subsequent assessment years (AYs 2010-11 and AYs 2018-19 to 2021-22). The AO also relied heavily on a DMRC reply dated 23.12.2022, which pertained to AY 2021-22 and not the years under consideration. Based on those earlier findings, the AO again concluded that the assessee had a fixed-place PE/installation PE in India, despite the absence of any year-specific verification of contract terms, activities performed, or assets/employees in India for the impugned years.
• The assessee disputed these conclusions, arguing that it neither maintained any office, workshop, project site or fixed place at its disposal in India, nor engaged any dependent agent with authority to conclude contracts or habitually secure orders. It further argued that physical installation and on-site engineering were entirely performed by Indian consortium companies. The assessee pointed out that Revenue had produced no evidence that the assessee had any employees stationed in India, or that it exercised control or supervision over on-shore works. It highlighted that the AO erroneously assumed it to be the consortium leader, whereas documents clearly established otherwise.
• The assessee also submitted that the offshore design services were inextricably linked to the offshore supply of equipment. It relied on binding Tribunal precedents, such as SMS Concast AG, Andritz AG, DSD Noell GmbH, and SMS Siemag, for the proposition that where design/drawing fees form an integral part of offshore supply, both components must be treated consistently, and if offshore supply is not taxable due to absence of PE and offshore transfer of title, then design receipts are also not taxable.
• For AY 2022-23, which was in the first round of litigation, the assessee pointed out that the AO again reproduced verbatim the assessment order for AY 2021-22 without undertaking any independent factual examination. The Tribunal, in earlier appeals concerning AY 2021-22, had already directed the AO to conduct a fresh assessment in line with the Tribunal’s 11.11.2022 directions. The assessee argued that the same error had been repeated.
• In addition to the PE and taxability issues, the assessee had raised certain ancillary grounds relating to validity of assessment orders issued without DIN, levy of interest under sections 234B, 234C and 234D, and premature initiation of penalty proceedings under section 271(1)(c). However, the main factual controversy before the Tribunal concerned the manner in which the AO assessed PE and the taxability of offshore supply and design receipts.

Issues:

• Whether the assessee had a Permanent Establishment (PE) in India under Article 5 of the India–France DTAA for the relevant assessment years.
• Whether the receipts from offshore supply of equipment and spare parts are taxable in India, considering the FOB terms and offshore transfer of title.
• Whether the receipts from offshore design and engineering services are taxable, or whether they are inextricably linked with offshore supply and therefore non-taxable.
• Whether the Assessing Officer failed to follow the Tribunal’s earlier directions requiring a fresh, year-specific examination of contracts rather than relying on past assessments.
• Whether the assessment orders are valid when they merely reproduce findings of earlier years without independent analysis for the impugned years.
• Whether interest under sections 234B, 234C and 234D is leviable, particularly in the case of a non-resident.
• Whether initiation of penalty proceedings under section 271(1)(c) is sustainable at this stage.

Observations:

• The Tribunal observed that the Revenue was unable to demonstrate that the assessee had any form of PE in India under Article 5 of the India–France DTAA. The contractual documents showed no office, workshop, project site, or other fixed place in India at the disposal of the assessee. All on-site activities, including installation, testing, commissioning, and integration, were performed by Indian consortium partners in their own capacity. No material was brought on record to show that any employees of the assessee worked in India, or that any Indian entity acted as a dependent agent authorised to conclude contracts or habitually secure orders for the assessee. In the absence of these essential elements, neither a fixed-place PE nor an installation PE nor a dependent-agent PE could be established.
• The Tribunal noted that the assessee’s supplies were executed strictly on FOB basis, resulting in the transfer of title, possession, and risk to the buyer at the foreign port of shipment. Thus, the offshore supply contract was fully performed outside India. The scope of work assigned to the assessee did not extend to any onshore or installation activities. As the assessee had no PE in India to which any part of the offshore supply could be attributed, the Tribunal held that the receipts from offshore supply were not taxable in India.
• The Tribunal observed that the design and engineering services were part of a composite and integrated offshore contract, and were essential for the functioning of the supplied equipment. The design work was carried out entirely outside India. Judicial precedents relied upon by the assessee supported the view that where design services are inseparable from offshore supply, they share the same tax treatment. Consequently, once the offshore supply was held as non-taxable due to the absence of a PE, the design and engineering receipts also could not be taxed independently.
• The Tribunal found that the AO did not undertake the mandated fresh examination of the contracts and factual material for each of the impugned assessment years. Instead, the AO reproduced findings from other assessment years and relied on a DMRC reply relating to AY 2021-22, which had no bearing on earlier years. The AO ignored the Tribunal’s explicit instructions that PE must be established year-wise based on actual contractual responsibilities and factual conduct in each year. This amounted to clear non-compliance with judicial directions.
• The Tribunal observed that the assessment orders lacked independent reasoning for the years under appeal. The AO simply replicated conclusions drawn in previous and subsequent years without evaluating the contracts, invoices, scope of work, or role of the assessee for the specific years in question. Since PE determinations are inherently factual and must be made annually, the assessments could not be sustained when based on borrowed conclusions rather than fresh analysis. The absence of material examination vitiated the validity of the orders.
• The Tribunal held that the levy of interest is merely consequential. It further acknowledged the assessee’s reliance on the Supreme Court’s ruling in DIT v. Mitsubishi Corporation, which holds that section 234B interest generally does not apply to non-residents where taxes are deductible at source. As the substantive additions were deleted, the recomputation of interest would follow accordingly.
• The Tribunal observed that the penalty proceedings were only at the initiation stage and no penalty had been levied. Given that the quantum additions themselves did not survive, the Tribunal held that the issue of penalty was premature and required no adjudication at this stage.

FULL TEXT OF THE ORDER OF ITAT DELHI