Offshore supply income attribution and embedded software royalty tests favoured the assessee; treaty cross-objections became academic.
Offshore supply income of a non-resident is taxable in India only to the extent attributable to operations carried out in India, and no attribution arose where the binding jurisdictional ruling had already found no permanent establishment in India. Receipts from embedded software were treated as part of the hardware supply, not as royalty, because the transaction did not involve transfer of copyright or an independent software right. In light of the offshore income being non-taxable, interest under section 234B was treated as academic, and the Revenue's cross-objections on the limitation of benefits clause under Article 24 of the Indo-US DTAA required no separate adjudication.
Issues: (i) Whether the assessee had a permanent establishment in India and whether the offshore supply receipts were taxable in India under section 9 of the Income-tax Act, 1961; (ii) Whether the receipts from embedded software were taxable as royalty; (iii) Whether interest under section 234B was leviable; (iv) Whether the Revenue's cross objections on the limitation of benefits clause under Article 24 of the Indo-US DTAA survived for adjudication.
Issue (i): Whether the assessee had a permanent establishment in India and whether the offshore supply receipts were taxable in India under section 9 of the Income-tax Act, 1961.
Analysis: The binding jurisdictional High Court decision in the assessee's own case had already held that no permanent establishment existed in India and that no part of the profit from offshore supply was taxable in India. The contract structure, the place of transfer of title, and the performance of installation and commissioning through the Indian entity did not justify attribution of the offshore supply income to India. The principle of apportionment under section 9 required a nexus with operations carried out in India, which was absent for the offshore supply component.
Conclusion: The issue is decided in favour of the assessee.
Issue (ii): Whether the receipts from embedded software were taxable as royalty.
Analysis: The software component supplied with the hardware was inseparable from the equipment and did not involve a transfer of copyright or any independent royalty-generating right. The receipt was treated as part of the supply transaction and not as consideration for use of copyright or software rights in the royalty sense.
Conclusion: The issue is decided in favour of the assessee.
Issue (iii): Whether interest under section 234B was leviable.
Analysis: In view of the finding that no taxable income survived in India on the offshore supply receipts, the levy of interest became academic and no separate tax consequence remained to support the charge.
Conclusion: The issue is decided in favour of the assessee.
Issue (iv): Whether the Revenue's cross objections on the limitation of benefits clause under Article 24 of the Indo-US DTAA survived for adjudication.
Analysis: Since the domestic-law finding of non-taxability itself disposed of the substantive controversy, the question whether treaty benefits were restricted under Article 24 did not require separate adjudication.
Conclusion: The cross objections were dismissed as academic.
Final Conclusion: The assessee succeeded on the core taxability controversy, and the Revenue's cross objections did not alter the result.
Ratio Decidendi: Offshore supply income of a non-resident is taxable in India only to the extent attributable to operations carried out in India, and activities performed by an independent Indian entity on its own behalf do not, without more, create a permanent establishment or justify attribution of that offshore income to the non-resident.
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AI Drafter ✕
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