Offshore supply in a turnkey contract may fall outside Indian tax net where title, payment and performance occur outside India.

A turnkey contract that separately identifies offshore supply, onshore supply, transportation and installation, with distinct pricing and currency terms, treats offshore supplies completed outside India as lacking territorial nexus with India. On those facts, the offshore supply income is not attributable to operations in India under section 9(1)(i) and is not taxable through the permanent establishment under the treaty. The note also states that presumptive estimation under sections 44BB and 44BBB cannot be applied to the full contract value once excluded offshore receipts are removed, and that interest under section 234B is not leviable on a non-resident where tax deduction at source is the payer's obligation.

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Issues: (i) Whether receipts from offshore supply under the turnkey contracts were taxable in India in the hands of the non-resident assessee. (ii) Whether profit could be estimated at 10% on the entire contract receipt by applying sections 44BB and 44BBB of the Income-tax Act, 1961. (iii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Issue (i): Whether receipts from offshore supply under the turnkey contracts were taxable in India in the hands of the non-resident assessee.

Analysis: The contracts and bidding documents separately identified offshore supply, onshore supply, transportation, and installation services, and also prescribed separate pricing and currency terms for each component. The offshore supplies were effected outside India, title passed outside India, payment was received outside India, and the project office in India had no role in the offshore supply transactions. On these facts, the income from offshore supply had no territorial nexus with India and was not attributable to operations carried out in India within the meaning of section 9(1)(i). The profits from offshore supply also were not attributable to the permanent establishment under the treaty.

Conclusion: The offshore supply receipts were not taxable in India and the issue was decided in favour of the assessee.

Issue (ii): Whether profit could be estimated at 10% on the entire contract receipt by applying sections 44BB and 44BBB of the Income-tax Act, 1961.

Analysis: Once offshore supply receipts were held to be outside the tax net, they had to be excluded from the contract receipts for any computation of income. The provisions of sections 44BB and 44BBB were held to be inapplicable to the assessee's contracts, as those provisions are confined to specific businesses and could not justify a presumptive estimate on the full receipts from these contracts. In the absence of identified defects in the accounts, the estimation adopted by the Assessing Officer was not sustained.

Conclusion: The estimate of income at 10% on the entire contract receipt was not upheld and the issue was decided in favour of the assessee, with the matter for onshore receipts restored for verification.

Issue (iii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Analysis: For a non-resident whose income is subject to tax deduction at source, the primary obligation to deduct tax rests on the payer. Following the jurisdictional and co-ordinate bench authorities relied upon, interest for failure to pay advance tax was not sustainable against the assessee in these facts.

Conclusion: Interest under section 234B was not leviable and the issue was decided in favour of the assessee.

Final Conclusion: The appeals succeeded to the extent that offshore supply receipts were excluded from tax, presumptive estimation on the full contract value was rejected, and the levy of interest under section 234B was set aside.

Ratio Decidendi: Where a turnkey contract distinctly segregates offshore supply from onshore obligations, and the offshore sale is completed outside India without any operational role of the Indian permanent establishment, the offshore supply income is not taxable in India; corresponding presumptive estimation on such excluded receipts cannot be sustained, and advance-tax interest is not leviable on the non-resident where tax deduction at source is the payer's obligation.

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