Facts of the Case

The respondent-assessee, a Korean company, entered into contracts relating to supply of equipment and materials for an infrastructure project in India. The issue before the AAR concerned taxability of receipts arising from offshore supply of such equipment.

The AAR held that income arising from overseas/offshore supplies under the contract was not taxable in India. This ruling was based on earlier AAR decisions which had already been affirmed by the Delhi High Court.

The Revenue challenged the AAR’s ruling by filing writ petitions before the Delhi High Court, arguing that unlike earlier cases involving separate contracts for offshore and onshore components, the present transaction involved a composite contract covering both offshore and onshore obligations.

Issues Involved

  1. Whether income received by the assessee from offshore supply of equipment and materials for an Indian project is taxable in India?
  2. Whether the composite nature of the contract changes the taxability position of offshore supplies?
  3. Whether the AAR correctly relied upon its earlier rulings affirmed by the High Court?

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the present contract was distinguishable from earlier precedents.
  • Earlier decisions involved three separate contracts—offshore supply, onshore supply, and onshore services.
  • In the present case, the contract was composite and integrated, covering both offshore and onshore components.
  • Therefore, the Revenue contended that the offshore supply income had sufficient nexus with India and should be taxed in India.

Respondent’s Arguments (Assessee)

  • The assessee maintained that the issue referred to the AAR was specifically confined to offshore supply income.
  • The offshore supply transaction was completed outside India.
  • Title to goods passed outside India.
  • Payments were received outside India.
  • Therefore, no income accrued or arose in India under the Income-tax Act or DTAA.
  • The assessee relied upon settled precedents and earlier AAR rulings.

Court Findings / Court Order

The Delhi High Court dismissed the Revenue’s writ petitions and upheld the AAR ruling.

The Court held:

  • The question before the AAR was restricted only to offshore supplies.
  • Merely because the larger contract was composite would not alter the tax treatment of offshore supply receipts.
  • The issue had already been settled in earlier judicial precedents.
  • The AAR correctly followed its earlier rulings.
  • No legal error was found in the impugned order.

Accordingly, the writ petitions were dismissed without costs.

Sections Involved

  • Section 9, Income-tax Act, 1961 – Income deemed to accrue or arise in India
  • Section 245R, Income-tax Act, 1961 – Advance Ruling provisions
  • India-Korea Double Taxation Avoidance Agreement (DTAA)
  • Principles relating to Offshore Supply Taxation
  • International Taxation Jurisprudence

Important Clarification

This judgment reinforces that:

  • Taxability of offshore supply depends on the nature of the specific transaction, not merely on the composite structure of the contract.
  • If offshore supply is completed outside India and title passes outside India, such income may remain outside Indian tax net.
  • Composite contracts do not automatically result in taxation of offshore supply components.
  • The principle of transaction segregation remains relevant in international taxation.

Link to download the order -

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

Top of Form

 Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of ai tool