Taxation of non-resident income turns on Indian nexus; offshore supply receipts were excluded, while onshore profits were estimated.

For a non-resident, only income reasonably attributable to operations carried out in India and having a real nexus with the Indian permanent establishment can be taxed; offshore supply receipts do not become taxable merely because they relate to an Indian project. The tribunal deleted taxation of the offshore supply income, but upheld rejection of books for the onshore contracts and sustained estimation of profit at 10% under the best-judgment approach. It also upheld reassessment where the original return had been processed under section 143(1), while the levy of interest under sections 234B and 234D was remitted for verification of tax deduction and year-specific applicability.

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Issues: (i) Whether the income from the offshore supply contract was taxable in India and, if so, to what extent; (ii) Whether the books of account relating to the onshore contracts could be rejected and income estimated at 10%; (iii) Whether the reassessment under section 147 and the levy of interest under sections 234B and 234D were sustainable.

Issue (i): Whether the income from the offshore supply contract was taxable in India and, if so, to what extent.

Analysis: The offshore contract was entered into before the India Project Office came into existence, and the mere existence of the project office did not establish a sufficient territorial nexus for taxing the offshore supply receipts in India. The contract language relied upon by the lower authorities regarding installation was read as referring to cable quantities and related supply requirements, not as showing taxable installation income in India. The training component was incidental and no profit from that activity was shown to accrue in India. On the principles governing attribution of profits to operations carried out in India, only income reasonably attributable to Indian operations can be taxed.

Conclusion: No part of the offshore supply income was taxable in India and the addition sustained by the first appellate authority was deleted in favour of the assessee.

Issue (ii): Whether the books of account relating to the onshore contracts could be rejected and income estimated at 10%.

Analysis: The onshore supply and onshore services contracts were distinct from the offshore supply arrangement, and the project office accounts were found to have accounting deficiencies justifying invocation of the best-judgment approach. The assessee's contention that section 44BBB did not apply was accepted, but that did not foreclose rejection of the books under section 145(3). Given the nature of the contracts and the evidentiary difficulties, estimation at 10% was considered reasonable.

Conclusion: The rejection of books and estimation of income at 10% on the onshore contracts were upheld, against the assessee.

Issue (iii): Whether the reassessment under section 147 and the levy of interest under sections 234B and 234D were sustainable.

Analysis: The reassessment was held valid because the original return had been processed under section 143(1), there had been no earlier scrutiny assessment, and the reopening was within the permissible period on recorded reasons to believe. As regards interest, the matter required verification of the extent to which the taxed income was subject to tax deduction at source and whether section 234D applied to the assessment year in question.

Conclusion: The reassessment was upheld, while the interest issue was remitted for verification and decision by the Assessing Officer.

Final Conclusion: The assessee succeeded on the offshore income issue, failed on the onshore profit estimation issue, and obtained limited relief on interest, resulting in a partial allowance of the appeal and dismissal of the Revenue's appeal.

Ratio Decidendi: In taxing a non-resident, only the portion of income reasonably attributable to operations carried out in India and having a real nexus with the Indian permanent establishment can be brought to tax; receipts arising wholly offshore do not become taxable merely because the contract is connected with an Indian project.

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