Facts of the Case

LS Cable & Systems Ltd Korea entered into a contract relating to the Hyderabad project involving supply of equipment and materials. The contract had offshore supply and onshore elements.

The assessee approached the Authority for Advance Rulings (AAR) seeking clarification on whether income arising from offshore supply under the contract was taxable in India.

The AAR relied upon its earlier rulings and held that income from overseas supplies under the contract was not taxable in India.

The Revenue filed writ petitions before the Delhi High Court challenging the AAR’s common order dated 9 May 2016.

The Revenue argued that unlike earlier cases involving separate contracts for offshore and onshore supplies, the present contract was composite in nature.

 Issues Involved

  1. Whether income arising from offshore supply of equipment and materials under a composite contract is taxable in India under Section 9 of the Income-tax Act, 1961?
  2. Whether the existence of a composite contract changes the tax treatment of offshore supply income?
  3. Whether the AAR correctly followed earlier judicial precedents on offshore supply taxation?

 Petitioner’s Arguments (Revenue Department)

  • The Revenue contended that earlier judgments dealt with three separate contracts (offshore supply, onshore supply, and onshore services).
  • In the present matter, there was a composite contract incorporating both offshore and onshore supply obligations.
  • Therefore, earlier precedents could not automatically apply.
  • Revenue argued that the composite structure of the contract created sufficient nexus with India to attract taxation.

 Respondent’s Arguments (Assessee)

  • The assessee maintained that the issue referred before the AAR was restricted only to offshore supply.
  • The offshore supply was executed outside India.
  • Title in goods passed outside India.
  • Consideration for offshore supply was received outside India.
  • Therefore, no income accrued or arose in India under Section 9.
  • Earlier AAR rulings and High Court judgments directly covered the issue.

 Court Findings / Observations

The Delhi High Court observed that:

  • The question before the AAR was specifically confined to offshore supply.
  • The taxability issue had already been examined in earlier AAR rulings.
  • Those earlier rulings had been affirmed by the Delhi High Court.
  • The mere fact that the larger contract was composite would not alter the tax treatment of the offshore supply component.
  • The offshore supply issue remained legally identical to earlier decided cases.

The Court found no legal error in the AAR’s decision.

 Court Order / Final Decision

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

The Court held that income arising from offshore supply under the contract was not taxable in India.

No order as to costs was passed.

Sections Involved

  • Section 9, Income-tax Act, 1961 – Income deemed to accrue or arise in India
  • Authority for Advance Rulings (AAR) Provisions
  • India-Korea Double Taxation Avoidance Agreement (DTAA)
  • Taxability of offshore supply contracts
  • Permanent Establishment (PE) principles (indirect relevance)

 Important Clarification

This judgment clarifies that:

  • Even if a contract is composite in structure, the offshore supply portion can be independently examined for taxability.
  • If offshore supply is completed outside India and consideration is received outside India, it may remain outside Indian tax jurisdiction.
  • Contract structure alone does not determine taxability; the nature of transaction does.

 Link to download the order -

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

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