Offshore supply profit taxable only when attributable to Indian operations; separate foreign sale and TDS-backed non-resident receipts defeat advance tax interest.

Offshore supply of equipment completed outside India, with title passing on shipment and payment received abroad, was held not taxable in India because the offshore sale was a separate commercial transaction and no part of that profit was attributable to Indian operations. The related onshore erection, testing and commissioning obligations were treated as separate consideration and trade warranties, not as conditions delaying transfer of title. For a non-resident whose receipts were subject to tax deduction at source, no advance tax liability arose and interest for default in advance tax was not leviable. The offshore supply addition and consequential interest levy were deleted.

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Issues: (i) Whether the profit on offshore supply of equipment under the contract was taxable in India under section 9(1)(i) of the Income-tax Act, 1961, and the India-Korea DTAA; (ii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the assessee.

Issue (i): Whether the profit on offshore supply of equipment under the contract was taxable in India under section 9(1)(i) of the Income-tax Act, 1961, and the India-Korea DTAA.

Analysis: The offshore supply was treated as a separate commercial operation from the onshore erection and commissioning work. The sale terms showed that property in the equipment passed outside India on shipment and delivery of documents under the irrevocable letter of credit, while payment for the offshore supply was also received outside India to a substantial extent. The subsequent obligations relating to transport, erection, testing, commissioning and performance were treated as separate obligations for separate consideration and as trade warranties, not as conditions postponing the passing of title. Applying the Supreme Court ruling on offshore supply, only income attributable to operations carried out in India can be taxed in India. As the offshore sale was completed outside India and no part of that profit was attributable to Indian operations, section 9(1)(i) did not bring that income to tax.

Conclusion: The profit from offshore supply was not taxable in India and the addition was liable to be deleted, in favour of the assessee.

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

Analysis: The assessee was a non-resident whose receipts were subjected to tax deduction at source. In such a situation, there was no liability to pay advance tax, and interest for default in advance tax could not be charged. The finding on the substantive tax issue also supported deletion of the interest levy.

Conclusion: Interest under section 234B was not leviable, in favour of the assessee.

Final Conclusion: The offshore supply addition was deleted and the consequential interest levy was set aside, with the appeal allowed.

Ratio Decidendi: For taxing offshore supply of goods, the decisive test is whether the income is attributable to operations carried out in India; where title, payment, and sale are completed outside India and the Indian obligations are separately compensated, the offshore profit is not taxable in India. A non-resident whose income is fully subject to tax deduction at source is not liable to interest under section 234B for failure to pay advance tax.

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