(2007) 288 ITR 408 (SC)
Income deemed to accrue or arise in India; scope of total income
No. Territorial nexus is essential. Offshore supply where title passes outside India, and services rendered wholly outside India, are not chargeable merely because the project is located in India or the payment is made by an Indian party.
In a turnkey contract split between offshore supply, offshore services and onshore work, is the consideration for the offshore elements taxable in India?
A Japanese company, as part of a consortium, contracted with an Indian company to build a liquefied natural gas facility. The contract was a turnkey arrangement covering offshore supply of equipment, offshore services such as design and engineering performed in Japan, and onshore supply, services, construction and commissioning in India. The price was allocated between these components. Title to the offshore equipment passed outside India and payment for it was received abroad. The Revenue sought to tax the consideration attributable to the offshore supply and offshore services, on the footing that the contract was a composite whole to be performed in India.
The Authority for Advance Rulings decided substantially against the taxpayer, treating the contract as indivisible. The matter came before the Supreme Court, which examined the divisibility of the contract and the nexus required before income may be deemed to arise in India.
For the assessee
The contract itself apportioned the price among distinct components. Property in the offshore equipment passed outside India, and the design and engineering services were performed entirely in Japan. Neither the location of the project nor the residence of the payer supplies a territorial connection sufficient to bring offshore activity within the Indian charge.
For the Revenue
The contract was a single turnkey obligation to deliver a working facility in India, and it cannot be dismembered for tax purposes. The entire consideration relates to a project in India, and the services were utilised in India even if performed abroad.
The Court held that the contract, having itself allocated consideration among identifiable components, was divisible and could be examined component by component. On offshore supply, it held that where property in the goods passes outside India and payment is received abroad, the transaction is completed outside India and the resulting income does not accrue here; the fact that the equipment is destined for an Indian site does not create a taxable nexus. On offshore services, the Court held that for fees for technical services to be taxable there must be sufficient territorial nexus, and that the services must be both rendered in India and utilised in India. Services performed wholly abroad therefore fell outside the charge, notwithstanding that their benefit was enjoyed in India. The Court emphasised that a deeming provision must be construed strictly and cannot be extended to create a charge on income lacking any real connection with India, and that the principle of territorial nexus underlies the scheme. It accordingly held the offshore supply and offshore service consideration not chargeable.
Foundational for cross-border EPC and turnkey contracts under Section 9 of the IT Act 2025. Its holding on the rendered-and-utilised requirement for technical service fees was subsequently displaced by an amendment providing that such income is taxable whether or not the services are rendered in India, so that limb must be checked against the current provision and against any applicable treaty. The reasoning on divisibility and on offshore supply remains good and is applied routinely, and should be read with Samsung Heavy Industries on attribution.