Offshore supply and software receipts were not taxable in India absent PE, and section 234B interest was deleted.

Offshore supply receipts of a non-resident were held not taxable in India because title and risk passed outside India, consideration was received offshore, and the Revenue failed to establish any business connection or taxable PE, including a fixed place, installation, liaison office or dependent agent PE. Interest under section 234B was not leviable because the tax deduction obligation lay on the payer, not the non-resident assessee. Consideration for supplied software was also held not taxable as royalty, as the transaction was treated as sale of a copyrighted article and not a transfer of copyright rights or a licence to exploit copyright.

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Issues: (i) Whether offshore supply receipts were taxable in India in the absence of a business connection or permanent establishment in India, including fixed place PE, installation PE, liaison office nexus and dependent agent PE; (ii) whether interest under section 234B of the Income-tax Act, 1961 was leviable; (iii) whether consideration for supply of software was taxable as royalty.

Issue (i): Whether offshore supply receipts were taxable in India in the absence of a business connection or permanent establishment in India, including fixed place PE, installation PE, liaison office nexus and dependent agent PE.

Analysis: The supply contracts showed that title and risk in the hardware passed outside India and consideration was received offshore. Installation, testing and commissioning were undertaken by the Indian telecom operators themselves or by SPCNL under separate contracts for separate consideration. The liaison office was not shown to be a place from which the appellant's business was carried on, and the factual material did not establish that SPCNL was at the appellant's disposal, habitually concluded contracts on its behalf, or otherwise satisfied the conditions of a dependent agent PE. On the facts, the offshore supply was on a principal-to-principal basis and the onshore service activities were separately taxed.

Conclusion: The offshore supply income was not taxable in India and no business connection or PE was established against the assessee.

Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The liability to deduct tax at source lay on the payer, and the non-resident assessee could not be fastened with advance tax interest on the amounts remitted in the absence of such obligation on its part.

Conclusion: Interest under section 234B was not leviable against the assessee.

Issue (iii): Whether consideration for supply of software was taxable as royalty.

Analysis: The software supply was treated as part of the sale of articles and not as a transfer of copyright or a licence to use copyright. The payment was linked to supply of software enabling use of the hardware, and the transaction did not amount to royalty.

Conclusion: The software consideration was not taxable as royalty.

Final Conclusion: The assessee succeeded on all substantial issues, the offshore supplies were held not taxable in India, the interest demand under section 234B was deleted, and the software receipts were held not to constitute royalty.

Ratio Decidendi: Offshore supply income of a non-resident is not taxable in India unless the Revenue establishes a business connection and a taxable nexus through a permanent establishment in India, and software supplied as a copyrighted article is not royalty in the absence of a transfer of copyright rights.

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