Territorial nexus limits taxation of offshore supply and services for non-residents under domestic law and treaty rules.

Offshore supply of equipment and materials was treated as not taxable in India where the contract separately identified offshore and onshore components, title passed outside India, payment was made outside India, and no operations generating that income were carried out in India. Offshore services were taxed only to the extent attributable to operations in India, because fees for technical services required a sufficient territorial nexus and the services were rendered outside India without operative involvement of the permanent establishment. The principle stated is that a non-resident is taxable only on income with a real Indian nexus, and treaty attribution depends on effective connection with the permanent establishment's own involvement.

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Issues: (i) Whether the amounts received or receivable for offshore supply of equipment and materials were taxable in India; (ii) Whether the amounts received or receivable for offshore services were taxable in India.

Issue (i): Whether the amounts received or receivable for offshore supply of equipment and materials were taxable in India.

Analysis: The contract was structured with separately identified offshore and onshore components, separate prices, and separate payment terms. The offshore supply involved transfer of property in goods outside India and payment outside India. In the absence of operations giving rise to the offshore supply income within India, and applying the principle that only the part of income attributable to operations carried out in India can be taxed, the mere execution of the contract in India or the existence of a permanent establishment did not make the offshore sale taxable in India.

Conclusion: The offshore supply receipts were not taxable in India in respect of the completed offshore transaction.

Issue (ii): Whether the amounts received or receivable for offshore services were taxable in India.

Analysis: The services were also separately priced, but the Court held that fees for technical services under the domestic law required a sufficient territorial nexus with India and that services must be rendered in India, not merely used in India. On the treaty side, Article 12 was displaced by Article 7 only if the services were effectively connected with the permanent establishment. As the services were rendered outside India and had no operative involvement of the permanent establishment in the income-generating activity, the income could not be taxed in India on the basis adopted by the Authority.

Conclusion: The offshore services receipts were taxable in India only to the extent attributable to operations in India, and the Authority's view taxing the entire amount was not sustained.

Final Conclusion: The appeal succeeded in part: offshore supply was held not taxable in India, while the treatment of offshore services was confined by the territorial nexus and apportionment principles under the Act and the treaty.

Ratio Decidendi: In taxing a non-resident under section 9, only the portion of income with a real territorial nexus to operations carried out in India is chargeable, and treaty attribution to a permanent establishment extends only to profits effectively connected with the permanent establishment's own involvement in the income-generating activity.

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