Offshore supply of equipment not taxable in India where no related operations were carried out in India

Receipts from offshore supply of equipment under project contracts were treated as not taxable in India because the supply was completed outside India and no operations relating to that supply were carried out in India. The Tribunal applied Explanation 1(a) to Section 9(1) of the Income-tax Act, 1961, and held that where a business is not wholly carried on in India, only income reasonably attributable to operations in India can be deemed to accrue or arise in India. As no part of the offshore supply segment was connected to Indian operations, no attribution of income to India was warranted.

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Issues: Whether receipts from offshore supply of equipment under the project contracts were taxable in India and whether any part of such income could be attributed to operations carried out in India.

Analysis: The question turned on whether the offshore supply formed a distinct transaction completed outside India or whether it was part of a composite arrangement giving rise to taxable income in India. The Tribunal noted that the issue had already been decided in the assessee's favour by the jurisdictional High Court for an earlier assessment year, where it was held that the offshore supply contract was successfully performed only after commissioning and erection, but that no operations qua the agreement for supply of equipment were carried out in India. On that basis, Explanation 1(a) to Section 9(1) was held inapplicable because, for a business where all operations are not carried out in India, only the income reasonably attributable to operations carried out in India can be deemed to accrue or arise in India. Since there were no operations in India relating to the offshore supply itself, no income from that segment could be taxed in India.

Conclusion: The receipts from offshore supply of equipment were not taxable in India and no attribution of income in respect of that supply was warranted; the issue was decided in favour of the assessee.

Ratio Decidendi: Where offshore supply of equipment is completed outside India and no operations relating to that supply are carried out in India, no income from such supply is deemed to accrue or arise in India under Section 9(1) of the Income-tax Act, 1961.

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