Facts of the Case

LS Cable & Systems Ltd., Korea entered into contracts involving offshore supply of equipment and materials for Indian infrastructure projects. The supplies were manufactured, sold, and delivered outside India.

The assessee approached the Authority for Advance Rulings seeking clarification on taxability of receipts from such offshore supplies. The AAR ruled in favor of the assessee, holding that such income was not taxable in India.

The Revenue challenged the AAR ruling before the Delhi High Court by filing writ petitions, contending that the composite nature of the contract attracted Indian tax jurisdiction.

Issues Involved

  1. Whether receipts arising from offshore supply contracts executed outside India are taxable under Section 9(1)(i) of the Income Tax Act, 1961?
  2. Whether the composite nature of the contract involving offshore and onshore elements changes the taxability of offshore supplies?
  3. Whether the AAR was justified in following its earlier rulings on similar facts?

Petitioner’s Arguments (Revenue Department)

  • The Revenue argued that the contracts were composite in nature and could not be artificially bifurcated into offshore and onshore components.
  • It was contended that since the ultimate project execution was in India, the offshore supply component had sufficient territorial nexus with India.
  • The Revenue attempted to distinguish earlier judgments by arguing that prior cases involved separate contracts, whereas the present matter involved a consolidated contractual structure.

Respondent’s Arguments (Assessee Company)

  • The assessee maintained that offshore supplies were completed outside India, with transfer of title and risk occurring outside Indian territory.
  • It was argued that no income accrued or arose in India from offshore supplies.
  • Reliance was placed on earlier AAR rulings and Delhi High Court precedents affirming that offshore supplies are not taxable merely because the ultimate project is in India.

Court Findings / Judicial Analysis

The Delhi High Court observed that the issue was no longer res integra, having already been settled in earlier rulings involving the same assessee.

The Court noted that the AAR had consistently followed earlier decisions which had been judicially affirmed by the High Court.

It rejected the Revenue’s attempt to distinguish the present case merely on the basis of composite contract structure, holding that the decisive factor remained the situs of supply, transfer of title, and accrual of income.

The Court reaffirmed that offshore supply receipts, where the sale is completed outside India, do not become taxable merely because the project is connected to India.

Court Order / Final Decision

The Delhi High Court dismissed all writ petitions filed by the Revenue and upheld the AAR ruling in favor of LS Cable & Systems Ltd., Korea.

It held that receipts from offshore supplies executed outside India were not taxable in India under the Income Tax Act or the India-Korea DTAA.

Important Clarification

This judgment reinforces the settled principle that offshore supply transactions cannot be taxed in India merely because they form part of a larger composite project executed in India, provided the transfer of property and accrual of income occur outside India.

The judgment strengthens jurisprudence on territorial nexus and source-based taxation under Indian tax law.

 Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8840-DB/SMD04092017CW78002017_152218.pdf

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