Offshore supply taxability under a turnkey contract turns on territorial nexus and separate apportionment of income.

Offshore supply under a composite turnkey contract was treated as a separate segment for tax purposes, and the mere fact that the overall arrangement was turnkey did not make that income taxable in India. Taxability depended on whether the income accrued or arose in India or was attributable to operations in India; on the facts, the offshore supply was completed outside India, its consideration was separately determined, and the project office had no role in that segment. The territorial nexus and apportionment principles in Ishikawajima-Harima were applied, while Ansaldo Energia was found inapplicable on its facts, so the offshore supply revenue was not taxable in India.

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Issues: Whether the revenue from offshore supply of equipment under the composite turnkey contract was taxable in India.

Analysis: The transaction involved separate consideration for offshore supply, and the fact that the overall arrangement was a turnkey contract did not by itself make the entire income taxable in India. The applicable test was whether the income accrued or arose in India or was attributable to operations in India. On the facts, the offshore supply was completed outside India, the consideration for that segment was separately determined, and the project office had no role in that supply segment. The reasoning in Ishikawajima-Harima, which applies the territorial nexus and apportionment principles to composite transactions, was held to govern the matter, while the contrary approach in Ansaldo Energia was found inapplicable on its facts.

Conclusion: The offshore supply revenue was not taxable in India and the assessee succeeded on this issue.

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