Entire law on formation of AOP & taxability of off-shore supply & services explained
(d) As regards taxability, the principle of apportionment of income
on the basis of territorial nexus is now well accepted. Explanation 1(a)
to section 9(1)(i) of the Act also specifies that only that part of
income which is attributable to operations in India would be deemed to
accrue or arise in India. It
necessarily follows that in cases where a
contract entails only a part of the operations to be carried on in
India, the assessee would not be liable for the part of income that
arises from operations conducted outside India. In such a case, the
income from the venture would have to be appropriately apportioned.
Merely because a project is a turnkey project would not necessarily
imply that for the purposes of taxability, the entire contract be
considered as an integrated one. Where the equipment and material is
manufactured and procured outside India, the income attributable to the
supply thereof could only be brought to tax if it is found that the said
income therefrom arises through or from a business connection in India.
It cannot be concluded that the Contract provides a “business
connection” in India and accordingly, the Offshore Supplies cannot be
brought to tax under the Act (
Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC) and
Hyundai Heavy Industries 291 ITR 482 (SC) followed)