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Indian decision that income of South Korean entity from offshore supply of equipment not taxable in India

The Indian Income Tax Appellate Tribunal (ITAT) delivered a ruling dated 8 August 2008 in the case of LG Cable Ltd v. Deputy Director of Income Tax (2008-TIOL-382-ITAT-DEL) on whether income earned by a foreign entity from offshore supply of equipment to an Indian entity was taxable in India.

(a) Facts. The Taxpayer (i.e. LG Cable Ltd.) was a South Korean company which established a project office in India with the approval of the Reserve Bank of India. The Taxpayer entered into two contracts with Power Grid Corporation of India Limited (PGCIL), i.e. for the onshore execution of the Fibre Optic Cabling System Package Project, and for the offshore supply and services. The onshore services contract was executed by the Taxpayer through its project office for which separate books of account were maintained.

The tax authorities accepted the tax return filed by the Taxpayer with respect to the onshore services contract as the project office constituted a permanent establishment (PE) in India and income attributable to the activities carried out by the PE was taxable in India. The tax authorities however held that income arising from the offshore supply contract was also taxable in India. In taking this view, the tax authorities referred to the advance ruling delivered by the Authority for Advance Rulings (AAR) in the case of Ishikawajima Harima Heavy Industries v. Director of Income Tax wherein it was held that offshore supply of material resulting from engineering procurement and construction contract was taxable in India.

The Commissioner of Income Tax (Appeals) rejected the Taxpayer's appeal, and the matter reached the ITAT.

(b) Issue. The issue before the ITAT was whether income arising out of offshore contract entered into between the Taxpayer and PGCIL was taxable in India?

(c) Decision. The ITAT ruled that in the case of a composite contract signed between an Indian and a non-resident company for offshore and onshore supplies and services, income arising out of offshore supplies cannot be held to be taxable in India as such supplies/equipment were developed offshore, the payments for the same were made outside India, and the delivery was also taken outside India.

The ITAT observed that:

-   In the offshore supply, goods were ascertained and delivered to a ship for transportation to India, a bill of lading was also handed over to the bank nominated by the Taxpayer, and payment was also received outside India. The title in the goods was transferred to the buyer and sale was completed. With the completion of the sale outside India, the income accrued to the non-resident supplier (i.e. the Taxpayer) outside India as it was not attributable to any operation carried out in India. Therefore, income from the offshore contract for supply was not taxable in India under Sec. 9 of the Indian Income Tax Act 1961 (Note. Under Sec. 9, income accruing or arising to a non-resident directly or indirectly from any business connection, or any source of income or from any capital asset situated in India, becomes taxable in India).
-   There was no material to show that the Taxpayer's PE in India had any role to play in the supply of offshore equipment. All the services were rendered outside India, and income arising out of it was not attributable to the PE and therefore not taxable in India.
-   The fact that the contract was signed in India was of no material consequence as all activities in connection with the offshore supply were carried out outside India. Hence, income from such contract cannot be held as accruing or arising in India.
-   The decision of the AAR in the case of Ishikawajima Harima Heavy Industries was later modified and reversed by the Supreme Court of India on the point of taxability in India of profits from offshore supply of equipment.

The ITAT observed that since under the domestic tax law of India, income from offshore supply was not taxable in India, it was not examining the provisions of India0South Korea tax treaty.

Accordingly, the Taxpayer's appeal was allowed, and the income arising out of offshore contract was held to be not taxable in India.

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