Territorial nexus and apportionment determine whether offshore supply or services are taxable; purely offshore activities not attributable to local operations are excluded.

The note addresses taxation of amounts for offshore supply and offshore services under domestic tax law and the India-Japan treaty, applying territorial nexus and apportionment principles. It explains that where transfer of property, payment and operations occur outside India, profits from offshore supply are not attributable to Indian operations and fall outside Indian taxing jurisdiction. For services, taxation requires services to be rendered in and utilised in India or to have a direct live link to India; services performed entirely offshore and not effectively connected to an Indian permanent establishment are not attributable to that PE. Onshore supplies/services and attributable construction elements remain taxable.

---

---

Issues: (i) Whether amounts received/receivable by the non-resident appellant for offshore supply of equipment and materials are taxable in India under the Income-tax Act, 1961 and the India-Japan DTAA; (ii) Whether amounts received/receivable by the appellant for offshore services are taxable in India under the Income-tax Act, 1961 and the India-Japan DTAA.

Issue (i): Whether income from offshore supply is taxable in India.

Analysis: The Court examined Section 5(2) and Section 9(1)(i) of the Income-tax Act, 1961, the contractual terms (including transfer of title on high seas and separate price components for offshore supply), and Article 7 and Article 5 of the India-Japan DTAA with its Protocol. Applying the territorial nexus and apportionment principles, the Court treated the legal fiction in Section 9 in light of the object of the statute and international covenants. It found that where transfer of property and payment occur outside India and offshore operations are performed outside India, the profits from such offshore supply are not attributable to operations in India and thus fall outside Indian taxing jurisdiction; apportionment applies where operations are separable.

Conclusion: The amounts attributable to offshore supply are not taxable in India. Conclusion in favour of the assessee.

Issue (ii): Whether income from offshore services is taxable in India.

Analysis: The Court construed Section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 and Article 7 of the DTAA. It held that Section 9(1)(vii) requires services to be both rendered in India and utilized in India (or have a direct 'live link' with India) to be taxable; services rendered entirely outside India and not effectively connected with the Indian permanent establishment are not attributable to that permanent establishment under Article 7. The Court emphasised territorial nexus and apportionment for composite contracts and rejected treating head-office offshore services as automatically attributable to the Indian PE.

Conclusion: The amounts for offshore services rendered outside India and not attributable to the Indian permanent establishment are not taxable in India. Conclusion in favour of the assessee.

Final Conclusion: The appeal is allowed in part: offshore supply and offshore services, as characterized and factually established in this case, are not taxable in India; taxation remains open for onshore supplies, onshore services and construction/erection elements that are attributable to operations in India.

---