Offshore arm's-length sales by a non-resident did not create Indian taxability absent proven business connection or permanent establishment.

Offshore supplies by a non-resident under contracts concluded in Italy on a principal-to-principal, arm's length basis were treated as not giving rise to income accruing or arising in India under section 9(1)(i), because there was no proof of over-invoicing, business operations in India, or profits earned there. Mere valuation acceptance by customs and a presumptive profit estimate were rejected as conjectural. Majority shareholding, common directors, and control of a subsidiary were also held insufficient to establish a business connection or permanent establishment under the Indo-Italian DTAA, since the subsidiary remained an independent entity and no agency, fixed place, or qualifying supervisory presence was proved.

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Issues: (i) whether any part of the profits from supply of machinery and raw material by the non-resident assessee was taxable in India under section 9(1)(i) of the Income-tax Act, 1961; and (ii) whether the assessee had a business connection or permanent establishment in India under the Indo-Italian DTAA.

Issue (i): whether any part of the profits from supply of machinery and raw material by the non-resident assessee was taxable in India under section 9(1)(i) of the Income-tax Act, 1961.

Analysis: The supplies were found to have been made pursuant to contracts concluded in Italy, on a principal-to-principal basis and at arm's length. The valuation accepted by the customs authorities, the absence of evidence of over-invoicing, and the lack of material showing that the assessee carried on business operations in India or earned profits there were treated as decisive. The addition based on a presumptive profit rate was held to rest on conjecture rather than proof of income accruing or arising in India.

Conclusion: No part of the assessee's profit from the supplies was taxable in India under section 9(1)(i); the finding was in favour of the assessee.

Issue (ii): whether the assessee had a business connection or permanent establishment in India under the Indo-Italian DTAA.

Analysis: Mere majority shareholding, common directors, and control over the subsidiary's affairs were held insufficient by themselves to establish business connection or a permanent establishment. The subsidiary was treated as an independent legal entity, and there was no reliable evidence that the subsidiary acted as agent of the assessee, that the assessee maintained a fixed place of business in India, or that any supervisory activity meeting the treaty threshold was proved. Article 5(6) was applied to reject the contention that control of a resident company by a non-resident automatically creates a permanent establishment.

Conclusion: The assessee did not have a business connection or permanent establishment in India; the finding was in favour of the assessee.

Final Conclusion: The taxability of the disputed supplies in India was negatived, and the Revenue's challenge to the deletion of the addition failed.

Ratio Decidendi: A non-resident is not taxable in India merely because it sells goods to an Indian subsidiary or exercises shareholder-level control; in the absence of proved business operations in India, agency, or a treaty permanent establishment, profits from such offshore, arm's-length sales do not accrue or arise in India.

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