Facts of the Case

The Revenue filed writ petitions challenging the common order dated 9 May 2016 passed by the Authority for Advance Ruling (Income Tax), whereby the applications filed by LS Cable & Systems Ltd Korea were decided in its favour.

The AAR held that income arising from overseas/offshore supply under the contract in question would not be taxable in India. The AAR relied upon its earlier ruling dated 26 July 2011, which had already been affirmed by the Delhi High Court.

The respondent-company, a Korean tax resident, was engaged in offshore supply of equipment and materials for the Hyderabad Project under a contractual arrangement involving supply of 220, 132 kV XLPE insulated UG cable and accessories. The primary issue concerned whether consideration received for offshore supply could be brought to tax in India.

 Issues Involved

  1. Whether the consideration received by a non-resident from offshore supply of equipment and materials is taxable in India?
  2. Whether income from offshore supplies accrues or arises in India under Section 9(1)(i) of the Income-tax Act, 1961?
  3. Whether such income is taxable under the India-Korea DTAA?
  4. Whether the composite nature of the contract changes the taxability position of offshore supplies?

 Petitioner’s Arguments (Revenue)

The Revenue argued that the present case was distinguishable from earlier judgments because those cases involved three separate contracts, namely:

  • Offshore supply contract
  • Onshore supply contract
  • Onshore service contract

Whereas in the present matter, the contract was composite in nature and contemplated both offshore and onshore supply, thereby creating a sufficient territorial nexus with India for taxation purposes.

 Respondent’s Arguments (Assessee)

The respondent contended that the issue placed before the AAR was restricted exclusively to offshore supplies and not the composite contract as a whole.

It was submitted that title to goods passed outside India, payments were received outside India, and the offshore supply segment was independent for tax purposes. Therefore, no income accrued or arose in India in respect of offshore supplies.

 Court Findings / Court Order

The Delhi High Court upheld the AAR ruling and dismissed the writ petitions filed by the Revenue.

The Court observed:

  • The issue before the AAR was specifically confined to offshore supplies.
  • The taxability question in the present case was substantially identical to earlier cases already decided.
  • The mere fact that the overall contract was composite would not alter the legal position insofar as offshore supply was concerned.
  • Earlier AAR decisions had already been affirmed by the High Court.

The Court found no legal infirmity in the AAR’s reasoning and upheld the non-taxability of offshore supply receipts in India.

 Important Clarification

The Court clarified that even in a composite contract involving offshore and onshore obligations, the offshore supply component can still retain independent tax treatment if the issue before the adjudicating authority is specifically confined to offshore supplies.

This decision reinforces the settled principle that offshore supply income of a non-resident is not taxable in India where property in goods passes outside India and the transaction is completed outside Indian territory.

 Sections Involved

  • Section 9(1)(i), Income-tax Act, 1961 – Income deemed to accrue or arise in India
  • Section 245R, Income-tax Act, 1961 – Advance Ruling mechanism
  • India-Korea Double Taxation Avoidance Agreement (DTAA)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8243-DB/SMD26072017CW62962017_130215.pdf

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