# ISHIKA WAJMA-HARIMA HEAVY INDUSTRIES LTD v. DIRECTOR OF INCOME TAX, MUMBAI

- **Citation:** [2007] 1 S.C.R. 112
- **Court:** Supreme Court of India
- **Decided:** 2007-01-04
- **Case number:** Civil Appeal No. 9 of2007
- **Bench:** S.B. Sinha, Dal Veer Bhandari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ishika-wajma-harima-heavy-industries-ltd-v-director-of-income-tax-mumbai-22466
- **Pages:** 52

## Headnote

income TaxAct, 1961; ss. 5, 9, 42 and 24I(q)(J) of Double Taxation
Avoidance Agreement, Clauses 5 and 7, Article I 2: income tax liabilityA foreign company entering into a contract with an Indian company for
C
offshore supply of equipments and providing services-Tax liability--
Extent of-Held: Contract executed in India-Since part thereof has to be
carried out outside India, entire income derived by Contractor would not
be taxable in India-Income arising from a business connection could be
assessed keeping into consideration terms of the agreement and s.9 of the
D
Act-Income arising out of operation in more than one jurisdiction would
have territorial nexus with eachjurisdiction on actual basis-Tax liability
on income of asses see would depend upon the facts of each case-income
earned by assessee from offshore and onshore supply of goods and services
clearly demarcated-Therefore, principle of apportionment could be applied
to determine fiscal jurisdiction to assess tax liability-Merely because
E
assessee is a non resident having business connection in India, his income
may not be treated as accruing in India-In terms of provisions in DTAA,
income arising out of turnkey project as in the instant case would not be
assessable in India only because the assessee had a permanent establishment
in India-In terms of s.9(J)(vii)(c) of the Act, a non-resident could be taxed
F
on income for services rendered in India-In the facts and circumstances
of the case, in te1ws of Double Taxation Avoidance Agreement and
provision of the Act, only such part of income as attributable to the
operation carried out in India could be taxed in India.
G
Existence of business connection and income accruing or arising out
of such business-Distinction between-Discussed.
Doctrines:
Doctrine of territorial nexus-Applicability of in the context of
H
assessment of tax liability.
112
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)
ISHIKAWAJMA-HARlMAHEA VY INDUSTRIES LTD. 1·. DIRECTOR OF INC<:JME TAX, MUMBAI
113
Appellant, a company incorporated in Japan, is engaged in the business
A
of construction of storage tanks as also engineering equipments etc. It
formed a consortium along with other companies and entered into an
agreement with an Indian company for setting up a Liquefied Natural Gas
(LNG), a project, receiving storage and degasification facility in the State
of Gujarat. The contract envisaged a turnkey project. Role and responsibility
B
of each member of the consortium was specified separately. Each of the
member of the consortium was to receive separate payments. The project
was to be completed in 41 months. The contract mainly involved: (i) offshore
supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and
(v) construction and erection. The price payable for offshore supply and
offshore services was in US dollars, whereas that of onshore supply as also c
onshore services and construction and erection partly in US dollars and
partly in lndian rupees.
Liability to pay income tax in India by the appellant being doubtful, an
application was filed by the appellant before the Authority for Advance
D
Rulings (Income Tax) in terms of Section 241 (Q)(l) of the Income Tax Act,
1961. The following questions were proposed by the appellant for
determination by the Authority:
"l. On the facts and circumstances of the case, whether the amounts,
received/receivable by the applicant from the Indian company for offshore
E
supply of equipments, materials, etc. are liable to tax in India under the
provisions of the Act and India-Japan tax treaty;
2. lfthe answer to (1) is in the affirmative in view of Explanation (a)
to section (l)(i) of the Act and/or Article (1) read together with the protocol
of the India-Japan tax treaty, to what extent are the amounts reasonably
F
attributable to the operations carried out in India and accordingly taxable
in India;
3. On the facts and circumstances of the case, as to whether the
amounts received/receivable by the applicant from the Indian

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B
ISHIKA WAJMA-HARIMA HEAVY INDUSTRIES LTD.
V.
DIRECTOR OF INCOME TAX, MUMBAI
JANUARY 4, 2007
[S.B. SINHA AND DAL VEER BHANDARI, JJ.]
income TaxAct, 1961; ss. 5, 9, 42 and 24I(q)(J) of Double Taxation
Avoidance Agreement, Clauses 5 and 7, Article I 2: income tax liabilityA foreign company entering into a contract with an Indian company for
C
offshore supply of equipments and providing services-Tax liability--
Extent of-Held: Contract executed in India-Since part thereof has to be
carried out outside India, entire income derived by Contractor would not
be taxable in India-Income arising from a business connection could be
assessed keeping into consideration terms of the agreement and s.9 of the
D
Act-Income arising out of operation in more than one jurisdiction would
have territorial nexus with eachjurisdiction on actual basis-Tax liability
on income of asses see would depend upon the facts of each case-income
earned by assessee from offshore and onshore supply of goods and services
clearly demarcated-Therefore, principle of apportionment could be applied
to determine fiscal jurisdiction to assess tax liability-Merely because
E
assessee is a non resident having business connection in India, his income
may not be treated as accruing in India-In terms of provisions in DTAA,
income arising out of turnkey project as in the instant case would not be
assessable in India only because the assessee had a permanent establishment
in India-In terms of s.9(J)(vii)(c) of the Act, a non-resident could be taxed
F
on income for services rendered in India-In the facts and circumstances
of the case, in te1ws of Double Taxation Avoidance Agreement and
provision of the Act, only such part of income as attributable to the
operation carried out in India could be taxed in India.
G
Existence of business connection and income accruing or arising out
of such business-Distinction between-Discussed.
Doctrines:
Doctrine of territorial nexus-Applicability of in the context of
H
assessment of tax liability.
112
)--
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·- ,,, ?'
)
)
ISHIKAWAJMA-HARlMAHEA VY INDUSTRIES LTD. 1·. DIRECTOR OF INC<:JME TAX, MUMBAI
113
Appellant, a company incorporated in Japan, is engaged in the business
A
of construction of storage tanks as also engineering equipments etc. It
formed a consortium along with other companies and entered into an
agreement with an Indian company for setting up a Liquefied Natural Gas
(LNG), a project, receiving storage and degasification facility in the State
of Gujarat. The contract envisaged a turnkey project. Role and responsibility
B
of each member of the consortium was specified separately. Each of the
member of the consortium was to receive separate payments. The project
was to be completed in 41 months. The contract mainly involved: (i) offshore
supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and
(v) construction and erection. The price payable for offshore supply and
offshore services was in US dollars, whereas that of onshore supply as also c
onshore services and construction and erection partly in US dollars and
partly in lndian rupees.
Liability to pay income tax in India by the appellant being doubtful, an
application was filed by the appellant before the Authority for Advance
D
Rulings (Income Tax) in terms of Section 241 (Q)(l) of the Income Tax Act,
1961. The following questions were proposed by the appellant for
determination by the Authority:
"l. On the facts and circumstances of the case, whether the amounts,
received/receivable by the applicant from the Indian company for offshore
E
supply of equipments, materials, etc. are liable to tax in India under the
provisions of the Act and India-Japan tax treaty;
2. lfthe answer to (1) is in the affirmative in view of Explanation (a)
to section (l)(i) of the Act and/or Article (1) read together with the protocol
of the India-Japan tax treaty, to what extent are the amounts reasonably
F
attributable to the operations carried out in India and accordingly taxable
in India;
3. On the facts and circumstances of the case, as to whether the
amounts received/receivable by the applicant from the Indian company for
G
offshore services are chargeable to tax in India under the Act and/or the
India-Japan tax treaty;
4. lfthe answer to (3) above is in the affirmative, to what extent would
be amounts received/receivable for such services be chargeable to tax in
India under the Act and/or the India-Japan tax treaty;
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114
SUPREME COURT REPORTS
[2007] 1 S.C.R.
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S. If the answer to (3) above in the affirmative, would be applicant be
B
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entitled to claim deduction for expenses incurred in computing the income
from offshore services under the Act and/or the India-Japan treaty."
\
The dispute centered round its exigibility to pay tax in respect of
'offshore supply' and 'offshore services'. The Government oflndia and the
Government of Japan entered into a by-lateral treaty on "Double Taxation
Avoidance Agreement" (DT AA) in regard to the tax liabilities. The Authority
opined that having regard to the provisions contained in Section S read with
Section 9 of the Income Tax Act, following propositions of law would
,
emerge:
"(1) In a case of sale of goods simpliciter by a non-resident to a
resident in India, if the consideration for sale is received abroad and the
property in the goods a1lso passes to the purchaser outside India, no income
accrues or arises or deemed to accrue or arise to the seller in India.
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(2) In a case of transaction of sale of goods by the non-resident to an
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Indian resident which is a part of a composite contract involving various
operations within and outside India, income from such sale shall be deemed
to accrue or arise in India if it accrues or arises through or from any
business connection in India.
(3) In the case of a business of which all operations are not carried
out in India, the deemed accrual or arising of income shall be only such
part of the income as is reasonably attributable to the operations carried
out in India.
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(4) As to whether there is business connection in India or/and as to
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whether all operations of the business are not carried out in India are
questions of fact which have to be determined on the facts of each case."
Applying these principles to the facts of the present case, the Authority
opined that the appellant-assessee was liable to pay direct tax even under
the Treaty having regard to Articles S and 7 thereof as also Clause 6 of
the Protocol. As regards taxability of the amounts 'received' and 'receivable'
by the assessee from other company for offshore services, it was held that
the whole technical fee without any deduction is chargeable to tax, however,
the tax so charged shall not exceed 20% of the gross amount of the royalty
H
or fee for technical services.
ISHIKAWAJMA-HARIMAl-IEA \'Y INDUSTRIES LTD 1: DIRECTOR OF INCO~IETAX. MUMBAI
115
Question Nos. 4 and 5 were held to be the consequential ones.
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~ • _...
Assessee challenged the findings of the authority by filing the appeal
before this Court.
)
Appellant-assessee contended that the Authority misconstrued and
misinterpreted the contract in arriving at its findings, as from a bare
perusal thereof, it would appear that the payments were made in US dollars
in respect of 'offshore supply' and 'offshore services' and furthermore title
to the goods passed on to the Indian company outside the territories of India
and services had also been rendered outside India; that the fact that the
contract signed in India was of consequences as converse could not have
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made the assessee not liable to pay the tax; that the Authority committed
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a manifest errur in arriving at its findings insofar as it failed to properly
construe Explanation-2 appended to Section 9(l)(vii) of the Act related to
a construction, assembly, mining or like project so as to fall outside the
scope thereof; that although fee received by the assessee is effectively
connected to the contract but it is not attributable to the permanent
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establishment and, therefore, Article 12(5) of the Double Taxation Avoidance
Agreement (DT AA) is not attracted; that assessee being a non-resident in
terms of Section 5(2) of the Act, it would be chargeable to tax in India only
in the event income accrues or arises in India or is deemed to accrue or
arise in India or income is received or is deemed to be received in India
and not otherwise; that as no part of the income for the 'offshore supply'
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or 'offshore services' is received in India, the Authority misdirected itself
in passing the impugned judgment; that a legal fiction raised under the Act
cannot be pushed too far. Also, as all operations in connection with the
offshore supply are carried out outside India, the question of any portion
of the consideration to be regarded as deemed to accrue or arise in India
F
would not arise; that the requirement of the assessee to perform certain
services in India, such as unloading, port clearance, transportation of the
equipments supplied would not render him eligible to tax as the consideration
thereof is embedded in the consideration for the offshore supply; that
although he was required to carry out certain activities in India, the
consideration for offshore services had separately been provided for; and
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that assuming that the income from the offshore supply is chargeable to
tax in India on the premise that Section 9(1)(i) applies, it was required to
be examined by the Authority as to whether it would also be chargeable in
accordance with the provisions of the Double Taxation Avoidance Agreement
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SUPREME COURT REPORTS
[2007) I S.C.R.
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(DTAA) in terms whereof no charge to tax in India was leviable in·respect
of the consideration·for offshore supply.
B
c
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Respondent submitted that the question as to whether terms of the
contract constitute a composite contract or not is essentially a question of
fact and the findings of the Authority being final, therefore, should not
ordinarily be interfered with; that each component of the contract·was
directly relatable to the performance of the integrated contract as violation
and/or breach on the part of the parties thereto would affect the entire
contract; that the contract itself providing for milestone dates, the breach
of any of the terms thereof would result in the breach ofthe·entire contract
and not just the particular obligation; that the turnkey project contemplated
a permanent establishment and in that view of the matter Explanation
appended to Section 9(1)(i) of the· Act is directly applicable; that the
appellant has business connection in India and in that view of the matter
the causal connection between ·the·offshore supply and offshore services
being interlinked with the entire project, the opinion of the Authority
cannot be faulted; that by reason ofDTAA, the parties thereto can always
allocate the jurisdiction to tax the entire income attributable to such
permanent establishment to the country in which it is established; and that
-'.
supply of goods whether offshore or onshore as well as rendition of service
whether offshore or onshore are attributable to the turnkey project and,
thus, it would be wrong to contend that in terms of Article 7 of DT AA, no
tax could be levied upon the assessee.
Partly allowing the appeal, the Court
p
HELD:• 1.1. The very fact that in the contract; the supply segment
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and service segment have been specified in different parts of the contract
is a pointer to show that the liability of the assessee thereunder would also
be different. The contract was executed in India. By entering into a contact
in India, although parts thereof will have to be carried out outside India
would not make the entire income derived by the contractor to be taxable
in India. [Paras 22 and 231 [140-H, 141-A)
1.2. The provisions with regard to offshore supplies and offshore
services wereto be read with the provisions contained in the agreement'Ex.
D which formed the basis of customs,duty; Clause 13.4 of the agreement
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refers to Ex.Das the basis for price escalation. The question of imposition
" . -
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):
)
ISHIKAWAJMA-HARJMAHEAVY INDUSTRIES LTD. v. DIRECTOR OF INCOME TAX, MUMBAI
117
of tax on income arising from a business connection may, thus, have to be
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considered keeping in view the terms of the agreement.
[Paras 25 and 26] [141-E-FJ
1.3. Section 9 of the Income Tax Act raises a legal fiction; but having
regard to the contextual interpretation and furthermore in view of the fact
that in dealing with a taxation statute the legal fiction must be construed
B
having regard to the object it seeks to achieve. The legal fiction created
under Section 9 of the Act must also be read having regard to the other
provisions thereof. [Para 28) (141-H, 142-A)
Maruti U.iyog Ltd. v. Ram Lal and Others, (2005) 2 SCC 638, relied
on.
1.4. Section 42 of the Income Tax Act, 1922 provided that only such
part of income as was attributable to the operations carried out in India
would be taxable in India. Territorial nexus doctrine, thus, plays an
important part in assessment of tax. Tax is levied on one transaction where
the operations which may give rise to income may take place partly in one
territory and partly in another.
(Paras 29 and 30] (142-B, CJ
1.5. Income arising out of operation in more than one jurisdiction
would have territorial nexus with each of the jurisdiction on actual basis.
If that be so, it may not be correct to contend that the entire income
'accrues or arises' in each of the jurisdiction. The Authority has proceeded
on the basis that supplies in question had taken place offshore. It, however,
has rendered, its opinion on the premise that offshore supplies or offshore
services were intimately connected with the turnkey project.
[Para 31) [142-D)
N. Khadervali Sahib (Dead) by L.Rs. and Another v. N. Gudu Sahib
(Dead) and Others, [2003} 3 SCC 229 and Hindustan Shipyard Ltd. v. State
of A.P., [2000} 6 SCC 579, referred to.
1.6. It is only for the purpose of taxability that the terms of the
contract are required to be construed. A turnkey contract may involve
supply of materials used in the execution of the contract for price as also
for use of the materials by works and labour; but the same may not have
any relation with the taxability part of it. [Para 38] [143-H, 144-A]
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State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., (1959]
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118
SUPREME COURT REPORTS
[2007] 1 S.C.R.
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SCR 379; State of Rajasthan v. Mis Man Industrial Corporation Ltd.,
[1969) 1 SCC 567; Mis Patnaik and Co. Ltd v. Commissioner of Income
Tax, Orissa, [1986] 4 SCC 16 and BSES Ltd. (Now Reliance Energy Ltd.)
v. Fenner India Ltd. and Another, [2006) 2 SCC 728, held not applicable.
1.7. Tax under the Act has to be assessed under different heads.
B
Income under one head may be subject to exemption; under same head,
ded~ctions may be claimed; yet under another, no tax may be payable at all.
Whether a part of the income of the assessee would be taxable or not
depends upon the fact of each case. [Para 42] [145-H, 146-A)
c
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Union of India and Another v. Azadi Bachao Ando/an and Another,
(2004) 10 SCC 1; Commissioner of Income Tax, Bombay v. Ahmedbhai
Umarbhai & Co., Bombay, [1950] SCR 335; Commissioner of Taxation v.
Kirk, (1900] AC 588; Carborandum Co. v. Commissioner of Income-Tax,
Madras, [1977] 108 ITR 335: [19771 2 SCC 862 and Commissioner of
Income Tax, Punjab v. R.D. Aggarwal and Co.& Another, [1965) 56 ITR
20, relied on.
Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, Madras,
[1954] SCR 523, referred to.
1.8. In the instant case, since the payment for the offshore and
onshore supply of goods and services was in itself clearly demarcated and
therefore it cannot be held to be a complete contract that has to be read as
a whole and not in parts. [Para 52] [150-B]
CIT v. Mitsui Engineering and Ship Building Co. Ltd., 259 ITR 248,
distinguished.
1.9. Principle of apportionment is recognized by Clause (a)
·of Explanation I. Thus, if submission of the Additional Solicitor General
is accepted that the contract is a composite ooe, th-en offshore supply
would be of equipment ·designed and manufactured in one territory
(Japan), and then sold in another tax territory, leading to division of profits
arising in two tax territories, which is not envisaged under taxation law in
India. [Para 53] [150-D]
-
1.10. Mere existence of business connection may not result in income
of the non-resident assessee from transaction with such a business
connection accruing or arising in India. [Para 54] [150-E]
ISHIKA W AJMA-HARIMA HEAVY INDUSTRIES LTD. v. DIRECTOR OF INCOME TAX. MUMBAI
119
Mazagaon Dock Ltd. v. CIT and Excess Profits Tax, 34 ITR 368;
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Anglo French Textile Co. Ltd. v. CIT Madras, 23 ITR 101 and Barendra
Prasad Ray v. ITO 129 ITR 295, held in applicable.
Commissioner of Income-Tax v. Atlas Steel Co. Ltd., [1987J 164 ITR
401; Income-Tax Officer and Others v. Shriram Bearings Ltd., [1987) 164
B
ITR 419 and Income-Tax Officer and Others v. Shriram Bearings Ltd.,
' ;
[1997) 224 ITR 724 : [1997) 10 SCC 332, referred to.
. 2.1. In construing a contract, the terms and conditions thereof are to
·'
be read as a whole. A contract must be construed keeping in view the
intention of the parties. No doubt, the applicability of the tax laws would c
\.
depend upon the nature of the contract, but the same should not be
construed keeping in view the ta:i::ing provisions. (Para 65) (153-G)
Commissioner of Income-Tax, Tamil Nadu-Vv. Fried Krupp Industries,
(1981) 128 ITR 27
D
2.2. Since the appellant carries on business in India through a
Permanent Establishment, they clearly fall out of the applicability of Article
12(5) of the Double Taxation Avoidance Agreement (DTAA) and into the
ambit of Article 7. The permanent establishment here h_itsJiad no role to
play in the transaction.that is sought to be taxed, since the transaction took
E
place abroad. [P~ra 68f (154-G, H, 155-A)
""'!!"""
2.3. Clause 1 of Article 7 of DT AA provides that if an income ar!ses
in Japan (Contracting State), it shall be taxable in that country unless the
enterprise carries on business in the other Contracting State (India)
F
through a permanent establishment situated therein. What is to be
taxed is profit of the enterprise in India, but only so much of them as is
directly or indirectly attributable to that permanent establishment.
All income arising out of the turnkey project would not, therefore,
be assessable in India, only because the assessee has a permanent
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establishment. (Para 69) (155-B]
2.4. The distinction between the existence of a business connection
and the income accruing or arising out of such business connection is
)
clear and explicit. In the present case, the permanent estabJishment'g noninvolvement in the business transaction excludes it from being a part of the
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SUPREME COURT REPORTS
[2007] I S.C.R.
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cause of the income itself, and thus there is no business connection.
[Para 72] [156-G, Hl
B
2.5. For attracting the taxing statute there has to be some activities
through permanent establishment. If incorrie arises without any activity of
the permanent establishment, even under the DT AA the taxation liability
in respect of oversea services would not arise in India. Section 9 spells out
the extent to which the income of non-resident would be liable to tax in
India. Section 9 has a direct territorial nexus. Relief under a Double
Taxation Treaty having regard to the provisions contained in Section 90(2)
of the Income Tax Act would arise only in the event a taxable income of the
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assessee arises in one Contracting State on the basis of accrual of income
in another Contracting State on the basis of residence. Thus, if assessee
had income that accrued in India and is liable to tax because in its
State all residents it was entitled to relief from such double taxation
D
E
payable in terms of Double Taxation Treaty. However, so far as accrual of
income in India is concerned, taxability must be read in terms of Section
4(2) read with Section 9 of the Act, whereupon the question of seeking
assessment of such income in India on the basis of Double Taxation Treaty
would arise. (Para 74) [157-D, E, F)
2.6. In cases such as this, where differe!lt severable parts of the
composite contract is performed in different places, the principle of
apportionment can be applied, to determine which fiscal jurisdiction can tax
that particular part of the transaction. (Para 75) (157-F)
2.7: The concepts 'profits of business connection' and 'permanent
F
establishment' should not be mixed up~ Whereas business connection is
relevant for the purpose of application of Section 9; the concept of permanent
establishment is relevant for assessing the· income of a non-resident under
the DT AA.
[Para 76) (158-A]
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2.8. The entire transaction having been completed on the high seas,
the profits on sale did not arise in India, as has been contended by the
assessee. Thus, having been excluded from the scope of taxation under the
Act, the application of the double taxation treaty would not arise. Double Tax
Treaty, however, was taken recourse to by assessee only by way of an
alternate submission on income from services and not in relation to the tax
of offshore supply of goods. [Para 76) [158-B, CJ
\...
.....
/
....
)
ISHIKA W AJMA-HARIMA HEAVY INDUSTRIES LTD. v. DIRECTOR OF INCOME TAX, MUMBAI
121
3.1. Parties were ad idem that there existed a distinction between
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onshore supply and offshore supply. The intention of the parties, thus, must
be judged from different types of services, different types of prices, as also
different currencies in which the prices are to be paid. (Para 77) [158-B)
3.2. Reading the provision of Section 9(1)(vii)(c) of the Act in its
plain sense, it can be seen that it requires two conditions to be met - the
services which are the source of the income that is sought to be taxed, has
to be rendered in India, as well as utilized in India, to be taxable in India.
In the present case, both tl}ese conditions have not been satisfied
simultaneously, therefore. excluding this income from the ambit of
taxation in India. Thus, for a non-resident to be taxed on income for
services, such a service needs to be rendered within India, and has to be
a part of a business or profession carried on by such person in India. The
Petitioners in the present case have provided services to persons resident
in India, and though the same have been used here, it has not been rendered
in India. [Para 78] [158-G]
3.3. Global income of a resident although is subjected to tax,
global income of a non-resident may not be. The answer to the question
would depend upon the nature of the contract and the provisions ofDTAA.
[Para 80] [159-BJ
3.4. Territorial nexus for the purpose of determining the tax liability
is an internationally accepted principle. An endeavour should, thus, be
made to construe the taxability of a non-resident in respect of income
derived by it. Having regard to the internationally accepted principle and
DT AA, it may not be possible to give an extended meaning to the words
'income deemed to accrue or arise in India' as expressed in Section 9 of
the Act. Section 9 incorporated various heads of income on which tax is
sought to be levied by the Republic of India. Whatever is payable by a
resident to a non-resident by way of fees for technical services, thus, would
not always come within the purview of Section 9(l)(vii) of the Act. It must
have sufficient territorial nexus with India so as to furnish a basis for
imposition of tax. Whereas a resident would come within the purview of
Section 9(l)(vii) of the Act, a non-resident would not, as services of a nonresident to a resident utilize in India may not have much relevance in
determining whether the income of the non-resident accrues or arises in
India. It must have a direct live link between the services rendered in India,
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SUPREME COURT REPORTS
[2007] 1 S.C.R
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when such a link is established, the same may again be subjected to any
relief under DTAA. [Para 81) [159-C, D, E, F)
B
3.5. The provisions of Section 9(1)(vii) of the Act are plain and capable
of being given a meaning. There, therefore, may not be any reason not to
give full effect thereto. However, even in relation to such income, the
provisions of Article 7 of the DT AA would be applicable, as services
rendered outside India would have nothing to do with permanent
establishment in India. Thus, if any services have been rendered by the head
office of assessee outside India, only because they were connected with
permanent establishment Even in relation thereto, principle of apportionment
C
shall apply. [Para 83) [160-B, CJ
D
4. The Authority has committed an error as if services rendered by
the head office are considered tO be the services rendered by the permanent
establishment, the distinction between Indian and foreign operations and
the apportionment of the income of the operations shall stand obliterated.
It would be contrary to the intent and purport of the Double Taxation
Convention which is a part of the scheme under the Income Tax Act. Hence
with regard to offshore supply only such part of the income, as is attributable
to the operations carried out in India can be taxed in India in terms of
detailed directions in the Judgment and with regard to Offshore Services
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sufficient territorial nexus between the rendition of services and territorial
limits of India is necessary to make the income taxable.
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[Paras 84, 85, 86 and 87) [160-D, F, 161-G]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9 of2007.
From the final Ruling dated 1i.I0.2004 of the Authority for Advance
Rulings (Income Tax), New Delhi in A.A.R. No. 618/2003.
Harish N. Salve, Sr. Adv. Percy Pardiwalla, Kamaldeep Dayal,
Ms. Ruby Singh Ahuja, Debmalya Banerjee, Mrs. Manik Karanjawala Advs.
for the Appellant.
Mohan Parasaran, A.S.G., Shilpa Singh, Pritish Kapur,
O.P. Srivastava, Gaurav Dhingra and B.V. Balaram Das Advs. for the
Respondent.
ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES Lill. v. DIRECTOR OF INCOME TAX, MUMBAI [SINHA, J.] 123
The Judgment of the Court delivered by
S.B. SINHA, J. : Leave granted.
I. Appellant herein is a company incorporated in Japan. It is a resident
of the said country. It pays its taxes in Japan. It is engaged, inter alia,
in the business of construction of storage tanks as also engineering etc.
It formed a consortium along with Ballast Nedam International BV, Itochu
Corporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toyo
Engineering (India) Ltd. With the said consortium members, it entered into
an agreement with Petronet LNG Limited (hereinafter referred to as "the,
Petronet") on 19.01.2001 for setting up a Liquefied Natural Gas (LNG)
receiving storage and degasification facility at Dahej in the State of Gujarat.
A supplementary agreement was entered into by the parties on 19.03.2001.
The contract envisaged a turnkey project. Role and responsibility of each
member of the consortium was specified separately. Each of the member of
the consortium was also to receive separate payments. Appellant was to
develop, design, engineer and procure equipment, materials and supplies, to
erect and construct storage tanks of 5 MMTPA capacity, with potential
expansion to IO MMTPA capacity at the specified temperatures i.e. -200
degree Celsius. The arrangement also was to include marine facilities Getty
and island break water) for transmission and supply of the LNG to purchasers;
A
B
c
D
to test and commission the facilities relating to receipt and unloading,
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storage and re-gasification of LNG and to send out of re-gasified LNG by
means of a turnkey fixed lump-sum price time certain engineering procurement,
construction and commission contract. The project was to be completed in
41 months. The contract indisputably involved : (i) offshore supply, (ii)
offshore services, (iii) onshore supply, (iv) onshore services
and (v)
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construction and erection. The price was payable for offshore supply and
offshore services in US dollars, whereas that of onshore supply as also
onshore services and construction and erection partly in US dollars and
partly in Indian rupees.
2. Liability to pay income tax in India by the appellant herein being
doubtful, an application was filed by the same before the Authority for
Advance Rulings (Income Tax) (hereinafter referred to as 'the Authority') in
terms of Section 24l(Q)(l) of the Income Tax Act, 1961 (hereinafter referred
to as 'the Act'). The following questions were proposed by the appellant
for determination:
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124
A
B
c
D
E
"l.
2.
,,
.).
4.
SUPREME COURT REPORTS
(2007] 1 S.C.R.
On the facts and circumstances of the case, whether the
amounts, received/receivable by the applicant from Petronet
LNG for offshore supply of equipments, materials, etc. are
liable to tax in India under the provisions of the Act and IndiaJapan tax treaty?
If the answer to (1) is in the affirmative in view of Explanation
(a) to section (l)(i) of the Act and/or Article (1) read together
with the protocol of the India-Japan tax treaty, to what extent
are the amounts reasonably attributable to the operations
carried out in India and accordingly taxable in India?
On the facts and circumstances of the case, whether the
amounts received/receivable by the applicant from Petronet
LNG for offshore services are chargeable to tax in India under
the Act and/or the India-Japan tax treaty?
If the answer to (3) above is in the affirmative, to what extent
would be amounts received/receivable for such services be
ch_argeable to tax in India under the Act and/or the IndiaJapan tax treaty?
5.
If the answer to (3) above in the affirmative, would be
applicant be entitled to claim deduction for expenses incurred
in computing the income from offshore services under the Act
and/or the India-Japan treaty?"
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3. Before the Authority no issue was raised as regards the liability of
the appellant to pay income tax on onshore supply and onshore services
and on its activities relating to construction and erection.
The dispute
centered round its exigibility to pay tax in respect of 'offshore supply' and
'offshore services'.
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4. it is also not in dispute that the Government of India and the
Governme11t of Japan entered into a by-lateral treaty in regard to the tax
liabilities.
5. Contention of the appellant before the Authority was that the
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contract being a divisible one, it did not have any liability to pay any tax
•--k
..........
'
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,..
ISHIKAWAJMA-HARIMAHEAVY INDUSTRIES LTD. v. DIRECTOR OF INCOME TAX, MUMBAI [SINHA, J J 125
in regard to offshore services and offshore supply. Revenue, on the other
hand, contended that the contract being a composite and integrated one,
they were so liable.
6. The Authority referred to a large number of decisions governing
the field and opined that having regard to the provisions contained in
Section 5 read with Section 9 of the Act, following propositions oflaw would
emerge:
"(I) In a case of sale of goods simpliciter by a non-resident to
A
B
a resident in India, if the consideration for sale is received
abroad and the property in the goods also passes to the
C
purchaser outside India, no income accrues or arises or
deemed to accrue or arise to the seller in India.
(2)
In a case of transaction of sale of goods by the non-resident
to an Indian resident which is a part of a composite contract
involving various operations within and outside India, income
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from such sale shall be deemed to accrue or arise in India if
it accrues or arises through or from any business connection
in India.
(3)
In the case of a business of which all operations are not
carried out in India, the deemed accrual or arising of income
shall be only such part of the income as is reasonably
attributable to the operations carriP-d out in India.
(4)
Whether there is business connection in India or/and whether
all operations of the business are not carried out in India are
questions of fact which have to be determined on the facts
of each case."
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F .
7. Applying the said principles to the facts of the present case, the
Authority opined that the appellant was liable to pay direct tax even under
the Treaty having regard to Articles 5 and 7 thereof as also Clause 6 of the
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Protocol. It was held :
"The substance of the protocol quoted above, represents the
consensus reached between the parties to the treaty in regard to
the meaning of the phrase "directly or indirectly attributable to that
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A
B
c
D
E
126
SUPREME COURT REPORTS
[2007] I S.C.R.
pennanent establishment" employed in paragraph I of article 7.
Further, profits shall also be regarded as attributable to the pennanent
establishment to the extent indicated in the said protocol even
when the contract or order relating to the sale or provision of
goods or services in question is made or placed directly with the
overseas head office of the enterprise rather than with the pennanent
establishment.
It would be clear. t}_lat having regard to provisions of article
7(1) of the Treaty read with para 6 of the protocol supply of
equipment of machinery (sale of which was completed abroad,
having placed the order directly overseas office of the enterprise)
the same should be within the meaning of the phrase directly or
indirectly attributable to that pennanent establishment."
8. As regards taxability of the amounts 'received' and 'receivable' by
the appellant from Petronet for offshore services, it was held :
"In so far as the Treaty is concerned, both section l 15A(l)(b)(B)
and para 2 of Article 12 of the Treaty clearly indicates that the
whole technical fee without any deduction is chargeable to tax,
however, the tax so charged shall not exceed 20% of the gross
amount of the royalty or fee for technical services."
9. Question Nos. 4 and 5 were held to be the consequential ones. It
was opined:
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"In the light of the above discussions we rule on :
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(i)
Question No. I that on the facts and in the circumstances of
the case, the amounts received/receivable by the applicant
from Petronet LNG in respect of offshore supply of equipment
and materials is liable to be taxed in India under the provisions
of the Act and the India-Japan Treaty.
(ii)
Question No.2 that in view of the Explanation (a) to section
9(1 )(i) of the Act and/or Article 7(1) read with the Protocol of
the India-Japan Treaty the amounts that would be taxable in
India is so much of the profit as is reasonably attributable to
,.
~.
ISHIKAWAJMA-HARJMAHEAVY INDUSTRIES LID. v. DIRECTOR OF INCOME TAX, MUMBAI [SINHA, J.J 127
,,.
the operations carried out in India, we decline to answer the
A
other part· of the question in regard to quantification of the
amount taxable in India as the parties produced no evidence
and did not address in this regard.
(iii)
Question No. 3 that the amom1t received/receivable by the
applicant from Petronet LNG for offshore services is liable to
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be taxed in India both under the provisions of the Act as well
as under Indo-Japan Treaty.
(iv) Question No.4 that the entire amount received for offshore
. services is chargeable to tax under the Act and under the c
T~eaty but at the rate not more than 20% of the gross amount.
(v)
Question No. 5 that the applicant would not be able to claim
·any deduction in computing the income from offshore service
under the Act, and/or under the Indo-Japan Treaty."
D
Before us, the following findings of the Authority are not disputed :
~
"(i) the Petitioner has a business connection in India;
(ii)
if consideration accrues only for supply of goods and the sale
is completed outside India no profits can accrue in India;
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(iii) howeyer, if a contract envisages a composite consideration
for the various obligations to be perfonned and if certain
operations are to be performed by or through the business
connection, then, profits would be deemed to accrue in India;
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(iv) property in the goods, which were the subject matter of the
offshore supply, passed outside India; and
1:
(v)
the petitioner has a permanent establishment in India within
the meaning of the said term in paragraph 3 of Article 5 of the
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Double Taxation Avoidance Agreement entered into between
the Governments of India and Japan (hereinafter referred to as
"the DT AA")."
)
10. Mr. Harish N. Salve, the learned Senior Counsel appearing on
behalf of Appellant, urged :
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128
SUPREME COURT REPORTS
[2007] 1 S.C.R.
A
(i) The Authority misconstrued and misinterpreted the contract in
-..
B
c
D
arriving at its aforementioned findings, as from a bare perusal thereof, it
would appear that the payments were made in US dollars in respect of
'offshore supply' and 'offshore services' and furthermore title to the goods
passed on to Petronate outside the territories of India and services had also
been rendered outside India;
(ii) The fact that the contract signed in India was of consequences as
converse could not have made the appellant not liable to pay the tax;
(iii) The Authority committed a manifest error in arriving at its findings
insofar as it failed to properly construe Explanation-2 appended to Section
9(l)(vii) of the Act as it was nobody's case that the consideration related
to a construction, assembly, mining or like project so as to fall outside the
scope thereof;
(iv) Although fee received by Appellant is effectively connected to
the contract but it is not attributable to the permanent establishment and,
therefore, Article 12(5) of the Double Taxation Avoidance Agreement (DT AA)
is not attracted;
(v) Appellant being a non-resident in terms of Section 5(2) of the Act,
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it would be chargeable to tax in India only in 'the event income accrues or
arises in India or is deemed to accrue or arise in India or income is received
or is deemed to be received in India and not otherwise;
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(vi) As no part of the income for the 'offshore supply' or 'offshore
services' is received in India, the Authority misdirected itself in passing the
impugned judgment;
(vii) A legal fiction raised under the Act cannot be pushed too far.
Also, as all operations in connection with the offshore supply are carried
out outside India, the question of any portion of the consideration to be
regarded as deemed to accrue or arise in India would not arise;
(viii) The requirement of the appellant to perform certain services in
India, such as unloading, port clearance, transportation of the equipments
(
supplied would not render the appellant eligible to tax as the consideration
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thereof is embedded in the consideration for the offshore supply;
ISHIKAWAJMA·HARIMA HEAVY INDUSTRIES LTD. v. DIRECTOR OF INCOME TAX, MUMBAI [SINHA, J] 129
(ix) Although the appellant was required to carry out certain activities
A
,;
in India, the consideration for offshore services had separately been provided
for.
(x) Assuming that the income from the offshore supply is chargeable
to tax in India on the premise that Section 9(1 )(i) applies, it was required to
be examined by the Authority as to whether it would also be chargeable in
accordance with the provisions of the Double Taxation Avoidance Agreement
(DTAA) in terms whereof no charge to tax in India was leviable in respect
of the consideration for offshore supply.
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11. Mr.