Jiangdong Fittings Equipments Co. Ltd. v. ACIT (2024)

⚙️ Jiangdong Fittings Equipments Co. Ltd. vs. ACIT – ITAT Delhi on Offshore Supplies and Non-Taxability of Business Profits under India–China DTAA (2024)

📌 Background

Taxation of offshore supply contracts has been a recurring issue in international taxation, particularly in cases where non-resident suppliers enter into composite contracts with Indian entities involving both supply of goods and technical services.

In Jiangdong Fittings Equipments Co. Ltd. v. ACIT [(2024) 206 ITD 344 (Delhi)(Trib.)], the Delhi Bench of the ITAT dealt with the taxability of income arising from the offshore supply of goods and equipment to Indian public sector undertakings (PSUs) by a Chinese company.

The Tribunal reiterated that where the transfer of title and risk in goods occurs outside India, income from such supply cannot be deemed to accrue or arise in India under Section 9(1)(i), nor can it be treated as fees for technical services (FTS) under Section 9(1)(vii) or Article 7 of the India–China DTAA.

📂 Facts of the Case

• Assessee: Jiangdong Fittings Equipments Co. Ltd., a tax resident of China.
• Assessment Year: 2020–21.
• Transaction:
  The assessee entered into contracts with Indian Public Sector Undertakings (PSUs) for supply of goods and related technical services for setting up industrial infrastructure.
• Nature of Receipts:
  The Assessing Officer (AO) bifurcated the total receipts as follows:
  • 60% towards supply of equipment;
  • 40% towards fees for technical services (FTS).
• Revenue’s Stand:
  • The AO and the Dispute Resolution Panel (DRP) held that the assessee’s operations were partly carried out in India.
  • They concluded that 40% of the income constituted FTS, taxable under Section 9(1)(vii).
• Assessee’s Contention:
  • The supply of goods and equipment was completed entirely outside India.
  • The title and risk in goods passed to Indian PSUs at the port of shipment outside India.
  • The consideration for such supply was received outside India.
  • The assessee did not have a Permanent Establishment (PE) in India.
  • Therefore, no portion of the receipts could be taxed in India either as business income or FTS under the India–China DTAA.

❓ Point of Dispute

Whether income arising from offshore supply of goods and equipment by a Chinese company to Indian PSUs, where title and risk transfer outside India, can be deemed to accrue in India under Section 9(1)(i) or taxed as fees for technical services under Section 9(1)(vii) and Article 7 of the India–China DTAA.

📑 Submissions by the Assessee

• Offshore Transfer of Property:
  The contractual terms clearly indicated that the title and risk in goods passed outside India (at the port of shipment).
• No PE in India:
  The assessee had no office, branch, or other fixed place of business in India.
• Independent Technical Support:
  Any technical services, if rendered, were ancillary to the supply contract and performed outside India.
• DTAA Protection:
  Under Article 7 of the India–China DTAA, business profits of a foreign enterprise are taxable in India only if the enterprise carries on business through a PE in India.
  Since there was no PE, such income was not taxable.
• Precedent Reliance:
  Relied on its own case decided earlier — Jiangdong Fittings Equipments Co. v. ACIT (2023) 157 taxmann.com 109 (Delhi Trib.), where the Tribunal held that offshore supplies made under identical contracts were not taxable in India.

📑 Submissions by the Revenue

• The Revenue contended that part of the activities were carried out in India, including installation and technical services, thereby justifying the 40% allocation as FTS.
• It argued that such services were “ancillary and subsidiary” to the supply contract and therefore taxable under Section 9(1)(vii).

⚖️ Legal Principles & Tribunal’s Findings

1. Offshore Supply – Situs of Sale

The Tribunal reaffirmed that where the sale of goods is completed outside India, and both property and risk pass to the buyer at that point, no income accrues or arises in India.
Thus, Section 9(1)(i) was not attracted.

2. Article 7 – Business Profits

Under Article 7 of the India–China DTAA, business profits of an enterprise of one contracting state can be taxed in the other only if it carries on business through a Permanent Establishment (PE).
The Revenue failed to establish the existence of a PE of the assessee in India.

3. Fees for Technical Services (FTS)

The AO’s allocation of 40% as FTS was arbitrary. The Tribunal observed:

• The technical assistance provided was merely incidental to the offshore supply.
• Since the services were performed and utilized outside India, they were not taxable under Section 9(1)(vii) or the DTAA.

4. Precedent Consistency

The Tribunal relied on its earlier order in the assessee’s own case for earlier assessment years, holding that the supply and transfer of goods occurred entirely outside India, thereby making the income non-taxable in India.

🏁 Held

✅ Supply of goods and equipment was completed outside India.
✅ Transfer of title and risk occurred at the port of shipment outside India.
✅ No PE of the assessee existed in India under Article 7.
✅ Receipts from offshore supplies could not be taxed in India either as business profits or FTS.
✅ The Assessing Officer was directed to delete the addition in full.

✅ Practical Impact for Taxpayers

• Relief for EPC and Offshore Suppliers: Reinforces that offshore supply contracts, where title passes abroad, remain outside the Indian tax net.
• Importance of Contract Structuring: Highlights the significance of clearly demarcating supply and service components in international contracts.
• Consistency with DTAA: Confirms that under India–China DTAA, only income effectively connected with a PE in India can be taxed.
• Precedent-based Protection: Strengthens judicial consistency for non-residents involved in turnkey or supply-based projects.

🔑 Key Takeaways

1. No Tax Without PE: Business profits of non-residents are taxable in India only if linked to a Permanent Establishment.
2. Situs of Sale is Critical: Transfer of title and risk outside India precludes taxation under Section 9(1)(i).
3. FTS Must Involve Rendering in India: Merely incidental technical assistance does not qualify as taxable FTS.
4. Contract Terms Decide Taxability: Courts rely heavily on contractual delivery terms (e.g., FOB, CIF) and documentary evidence.

📢 Why This Case Matters

The Jiangdong Fittings Equipments Co. Ltd. (2024) ruling reinforces a fundamental principle of source-based taxation — that India can only tax income accruing within its jurisdiction.

By reaffirming that offshore supplies completed outside India are not taxable, the Tribunal provides much-needed certainty to foreign suppliers involved in infrastructure and industrial projects with Indian PSUs.

This decision aligns with established jurisprudence from the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. (2007) and subsequent ITAT rulings, ensuring consistency and fairness in international tax enforcement.

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