Income tax Implication - Composite Contract involving Supply of Equipment & Rendering of Service by Non Resident

1.       In case of composite contract, non-resident person supply equipment from abroad and install in India.

2.       In most of the recent rulings it has been held that composite contracts cannot be dissected and entire income from contract is taxable in India.

3.       Following questions emerge for consideration:-

a)      If Non-resident presence in Indian is treated as Installation PE, can profit be attributable on supply of equipment to Installation PE? Since in case of installation PE, only service income needs to be attributable to such PE

 

b)  If Non-resident presence in India is treated as Fixed based PE, Is the entire income attributable to composite contract is taxable in India or income corresponding to work performed in India is taxable  in India. In such case, principles of Transfer Pricing to be kept in mind in analysing the income attributable to fixed base PE based on functions performed and risk taken. In case of composite contracts, the majority of functions, and consequent risk, relating to supply and transportation of equipment are performed by Non-resident from abroad; income therefrom should be attributable to such Non-resident. PE share in income relating to supply of equipments would be Nil or miniscule. As a result only income attributable to Installation work in composite contract is attributable to PE and hence taxable in India in case of composite Contracts .Thus ratio of judgement by Hon’ble SC in Ishikawajima - Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 still hold value