Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
No — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side.
Decided by the Supreme Court (Supreme Court of India — S.B. Sinha and Dalveer Bhandari, JJ; the judgment was delivered by Sinha J. Case Appeal No. (Civil) 9 of 2007, leave having been granted, on appeal from the Authority for Advance Rulings) on 2007-01-04, reported as [2007] 288 ITR 408 (SC); [2007] 158 Taxman 259 (SC); [2007] 207 CTR 361 (SC). It bears on section 5, section 5(2), section 9, section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(c), section 90, section 90(2), section DTAA art 7, section DTAA art 12 of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Residence & Treaty Benefit matters.
Every EPC, turnkey and composite equipment contract with a foreign vendor is argued on this case, and it is the source of the segregation approach that later High Court decisions apply to offshore supply. It also matters for what it no longer decides: a practitioner who cites the offshore-services half without dealing with the Explanation to s.9(2) will be corrected by the Assessing Officer, and has to fall back on the treaty.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The appellant, a company incorporated and resident in Japan, formed a consortium with Ballast Nedam International BV, Itochu Corporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toyo Engineering (India) Ltd. On 19 January 2001, supplemented on 19 March 2001, the consortium contracted with Petronet LNG Ltd for a turnkey liquefied natural gas receiving, storage and degasification facility at Dahej in Gujarat, to be completed in 41 months. Each member's role and payment were specified separately. The appellant's scope was to develop, design, engineer and procure equipment and materials, to erect and construct storage tanks with marine facilities, and to test and commission. Its price was broken into offshore supply and offshore services, payable in US dollars in Tokyo; onshore supply, payable in rupees; and onshore services and construction and erection, payable partly in each. The property in the offshore-supplied goods passed to Petronet on the high seas, the documents of title having been sent two weeks before shipment, and the appellant's unloading, customs clearance and transport were carried out for Petronet and reimbursed. The contract was signed in India. The appellant sought an advance ruling; the Authority for Advance Rulings held on 11 October 2004 that profit on offshore supply was deemed to accrue in India to the extent reasonably attributable to operations in India, and that the whole of the offshore services fee was taxable at not more than 20 per cent of the gross amount with no deduction. The appellant appealed to the Supreme Court.
The appeal was allowed in part (para 80) and the Authority's ruling was partly reversed. On offshore supply, only so much of the income as is attributable to operations carried out in India can be taxed here; since the transfer of property in the goods and the payment both took place outside India, the transaction could not be taxed in India, and the fact that the contract was signed in India was of no material consequence because all activities connected with the offshore supply were outside India (para 79, Re: Offshore Supply, points 1 to 4). A permanent establishment is not the same thing as a business connection — the first is for assessing a non-resident's income under a treaty, the second for applying s.9 — and the existence of a permanent establishment does not by itself constitute sufficient business connection or let India tax the whole income attributable to it (points 5, 7, 8). On offshore services, sufficient territorial nexus between the rendition of the services and India is necessary; for s.9(1)(vii) to apply the services must not only be utilised in India but also be rendered in India or have such a live link with India that the fee becomes taxable, and the location of the source of income in India does not by itself supply that nexus (para 79, Re: Offshore Services, points 1, 5, 10). Since the services were rendered outside India and had nothing to do with the permanent establishment, Article 7 kept them out of Indian tax (point 8). The principle of apportionment applies to composite transactions performed partly in one territory and partly in another (para 68).
The Court proceeded from territorial nexus: taxability of a non-resident must be read through s.4(2) and s.5(2), and the legal fiction in s.9, however wide, cannot be given an extended meaning that dispenses with a sufficient territorial connection (paras 67, 74). Where severable parts of a composite contract are performed in different places, the principle of apportionment decides which fiscal jurisdiction may tax which part (para 68). It insisted that business connection and permanent establishment not be conflated: business connection is the concept s.9 works with, permanent establishment the concept the treaty works with, and while incomes may overlap, the existence of a permanent establishment does not by itself bring in income with no nexus to Indian operations (para 69). Because the whole of the offshore supply transaction was completed on the high seas, no profit on that sale arose in India, and the treaty did not need to be reached at all on that limb (para 69). On offshore services it set out s.9(1)(vii)(c) and read it in its plain sense as requiring two conditions to be met — the services must be rendered in India as well as utilised in India — and found that both were not satisfied simultaneously, the services having been used here but not rendered here (para 71, repeated at para 75). It added that even if s.9(1)(vii) applied, Article 7 would still exclude the income, because services rendered outside India have nothing to do with a permanent establishment in India, and that the Authority had erred in treating services rendered by the head office as services of the permanent establishment, which would obliterate the distinction between Indian and foreign operations and the apportionment that follows from it (paras 76-78).
Reading the provision in its plain sense, it can be seen that it requires two conditions have 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 these conditions have not been satisfied simultaneously, therefore excluding this income from the ambit of taxation in India.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side. This was decided by the Supreme Court (Supreme Court of India — S.B. Sinha and Dalveer Bhandari, JJ; the judgment was delivered by Sinha J. Case Appeal No. (Civil) 9 of 2007, leave having been granted, on appeal from the Authority for Advance Rulings) and bears on section 5, section 5(2), section 9, section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(c), section 90, section 90(2), section DTAA art 7, section DTAA art 12 of the Income Tax Act 1961. It is reported as [2007] 288 ITR 408 (SC); [2007] 158 Taxman 259 (SC); [2007] 207 CTR 361 (SC). Every EPC, turnkey and composite equipment contract with a foreign vendor is argued on this case, and it is the source of the segregation approach that later High Court decisions apply to offshore supply. It also matters for what it no longer decides: a practitioner who cites the offshore-services half without dealing with the Explanation to s.9(2) will be corrected by the Assessing Officer, and has to fall back on the treaty. If it applies to you, the first step is this: Identify where title in the equipment passed and where payment was made, because that is the determinative fact for the offshore supply limb.
The appellant, a company incorporated and resident in Japan, formed a consortium with Ballast Nedam International BV, Itochu Corporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toyo Engineering (India) Ltd. On 19 January 2001, supplemented on 19 March 2001, the consortium contracted with Petronet LNG Ltd for a turnkey liquefied natural gas receiving, storage and degasification facility at Dahej in Gujarat, to be completed in 41 months. Each member's role and payment were specified separately. The appellant's scope was to develop, design, engineer and procure equipment and materials, to erect and construct storage tanks with marine facilities, and to test and commission. Its price was broken into offshore supply and offshore services, payable in US dollars in Tokyo; onshore supply, payable in rupees; and onshore services and construction and erection, payable partly in each. The property in the offshore-supplied goods passed to Petronet on the high seas, the documents of title having been sent two weeks before shipment, and the appellant's unloading, customs clearance and transport were carried out for Petronet and reimbursed. The contract was signed in India. The appellant sought an advance ruling; the Authority for Advance Rulings held on 11 October 2004 that profit on offshore supply was deemed to accrue in India to the extent reasonably attributable to operations in India, and that the whole of the offshore services fee was taxable at not more than 20 per cent of the gross amount with no deduction. The appellant appealed to the Supreme Court. The matter was decided on 2007-01-04 by the Supreme Court (Supreme Court of India — S.B. Sinha and Dalveer Bhandari, JJ; the judgment was delivered by Sinha J. Case Appeal No. (Civil) 9 of 2007, leave having been granted, on appeal from the Authority for Advance Rulings). On those facts the Supreme Court held as follows. The appeal was allowed in part (para 80) and the Authority's ruling was partly reversed. On offshore supply, only so much of the income as is attributable to operations carried out in India can be taxed here; since the transfer of property in the goods and the payment both took place outside India, the transaction could not be taxed in India, and the fact that the contract was signed in India was of no material consequence because all activities connected with the offshore supply were outside India (para 79, Re: Offshore Supply, points 1 to 4). A permanent establishment is not the same thing as a business connection — the first is for assessing a non-resident's income under a treaty, the second for applying s.9 — and the existence of a permanent establishment does not by itself constitute sufficient business connection or let India tax the whole income attributable to it (points 5, 7, 8). On offshore services, sufficient territorial nexus between the rendition of the services and India is necessary; for s.9(1)(vii) to apply the services must not only be utilised in India but also be rendered in India or have such a live link with India that the fee becomes taxable, and the location of the source of income in India does not by itself supply that nexus (para 79, Re: Offshore Services, points 1, 5, 10). Since the services were rendered outside India and had nothing to do with the permanent establishment, Article 7 kept them out of Indian tax (point 8). The principle of apportionment applies to composite transactions performed partly in one territory and partly in another (para 68).
The Court proceeded from territorial nexus: taxability of a non-resident must be read through s.4(2) and s.5(2), and the legal fiction in s.9, however wide, cannot be given an extended meaning that dispenses with a sufficient territorial connection (paras 67, 74). Where severable parts of a composite contract are performed in different places, the principle of apportionment decides which fiscal jurisdiction may tax which part (para 68). It insisted that business connection and permanent establishment not be conflated: business connection is the concept s.9 works with, permanent establishment the concept the treaty works with, and while incomes may overlap, the existence of a permanent establishment does not by itself bring in income with no nexus to Indian operations (para 69). Because the whole of the offshore supply transaction was completed on the high seas, no profit on that sale arose in India, and the treaty did not need to be reached at all on that limb (para 69). On offshore services it set out s.9(1)(vii)(c) and read it in its plain sense as requiring two conditions to be met — the services must be rendered in India as well as utilised in India — and found that both were not satisfied simultaneously, the services having been used here but not rendered here (para 71, repeated at para 75). It added that even if s.9(1)(vii) applied, Article 7 would still exclude the income, because services rendered outside India have nothing to do with a permanent establishment in India, and that the Authority had erred in treating services rendered by the head office as services of the permanent establishment, which would obliterate the distinction between Indian and foreign operations and the apportionment that follows from it (paras 76-78). In the words reproduced by the source cited on this page: "Reading the provision in its plain sense, it can be seen that it requires two conditions have 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 these conditions have not been satisfied simultaneously, therefore excluding this income from the ambit of taxation in India." The decision followed or applied Maruti Udyog Ltd. v. Ram Lal [2005] 2 SCC 638.
It was decided by the Supreme Court on 2007-01-04 and is reported as [2007] 288 ITR 408 (SC); [2007] 158 Taxman 259 (SC); [2007] 207 CTR 361 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 5, section 5(2), section 9, section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(c), section 90, section 90(2), section DTAA art 7, section DTAA art 12, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed in part (para 80) and the Authority's ruling was partly reversed. On offshore supply, only so much of the income as is attributable to operations carried out in India can be taxed here; since the transfer of property in the goods and the payment both took place outside India, the transaction could not be taxed in India, and the fact that the contract was signed in India was of no material consequence because all activities connected with the offshore supply were outside India (para 79, Re: Offshore Supply, points 1 to 4). A permanent establishment is not the same thing as a business connection — the first is for assessing a non-resident's income under a treaty, the second for applying s.9 — and the existence of a permanent establishment does not by itself constitute sufficient business connection or let India tax the whole income attributable to it (points 5, 7, 8). On offshore services, sufficient territorial nexus between the rendition of the services and India is necessary; for s.9(1)(vii) to apply the services must not only be utilised in India but also be rendered in India or have such a live link with India that the fee becomes taxable, and the location of the source of income in India does not by itself supply that nexus (para 79, Re: Offshore Services, points 1, 5, 10). Since the services were rendered outside India and had nothing to do with the permanent establishment, Article 7 kept them out of Indian tax (point 8). The principle of apportionment applies to composite transactions performed partly in one territory and partly in another (para 68). It arises in Assessment & Scrutiny, How Tax Law Is Read and Residence & Treaty Benefit matters, on section 5, section 5(2), section 9, section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(c), section 90, section 90(2), section DTAA art 7, section DTAA art 12 of the Income Tax Act 1961, and was decided by Supreme Court of India — S.B. Sinha and Dalveer Bhandari, JJ; the judgment was delivered by Sinha J. Case Appeal No. (Civil) 9 of 2007, leave having been granted, on appeal from the Authority for Advance Rulings. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Segregate the contract into offshore supply, offshore services, onshore supply and onshore services in the contract itself and in the invoicing, not after the notice arrives. Do not run the 'rendered in India' argument under s.9(1)(vii) on its own — the Explanation to s.9(2) as substituted by the Finance Act 2010 applies retrospectively from 1 June 1976 and answers it. Take the fees for technical services point under the treaty instead, including any make-available condition, and read this entry with the corpus entry on De Beers. Keep the permanent establishment question separate from the business connection question; the Court held the two are not the same.
Superseded by amendment. The two halves have to be separated. The offshore supply holding is untouched by the amendments, which operate on clauses (v), (vi) and (vii) of s.9(1) and not on the taxability of a sale completed outside India; the Court's conclusions on that limb are at para 79 under 'Re: Offshore Supply'. The offshore services holding does not survive. The Finance Act 2007 inserted an Explanation after s.9(2) with retrospective effect from 1 June 1976 providing that income under clauses (v), (vi) and (vii) of s.9(1) is included in a non-resident's total income whether or not the non-resident has a residence or place of business or business connection in India; the Finance Act 2010 substituted that Explanation, again with effect from 1 June 1976, to add that it applies whether or not the non-resident has rendered services in India. That substitution removes the second of the two conditions the Court read into s.9(1)(vii) at paras 71 and 75. What survives untouched is the territorial nexus reasoning, the separation of business connection from permanent establishment, the principle of apportionment, and the Court's alternative holding at paras 76 to 78 that Article 7 excludes income from services rendered wholly outside India because they have nothing to do with the permanent establishment — a treaty position that no amendment to the Act can displace, given s.90(2). The account of the two Explanations is taken from the commentary cited below and not from a primary text read for this entry. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full. The Bench is S.B. Sinha and Dalveer Bhandari, JJ, where the entry previously said the judges were not named. Two textual points. The report spells the appellant 'Ishikawajma-Harima Heavy Industries Ltd.' while the report of the Authority's ruling it reverses spells it 'Ishikawajima-Harima Heavy Industries Co. Ltd.'; the entry retains the fuller spelling. And para 75 of the report reads 'It is evident that section 9(1)(vii), read in its plain, same envisages the fulfilment of two conditions', which is an evident misprint for 'plain sense'; the sentence previously quoted in this entry was that paragraph with the misprint corrected and the section abbreviated, so it was not the report's own text. On the result: the appeal was allowed in part, and the Authority's ruling of 11 October 2004, [2004] 141 Taxman 669 / [2004] 271 ITR 193 (AAR), is recorded as partly reversed — though the citator note on that ruling describes it as overruled. The Court's conclusions are set out as two numbered lists at para 79, one for offshore supply and one for offshore services. The judgment does not decide the fate of the onshore components; the appellant had offered and was paying tax on onshore supply, onshore services and construction and erection, and those were not in issue. It gives no apportionment figure for the offshore supply — it holds the transaction untaxable here rather than apportioning it — and the Authority's own working, which the Revenue had put at roughly 80 per cent attributable to the permanent establishment, is displaced rather than replaced. The assessment years are not stated in the report. And the entry does not say how the Explanation to s.9(2) has been applied by courts to periods before 2010, beyond noting that it is expressed to operate from 1 June 1976, nor does it reproduce that Explanation from a primary source. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed in part (para 80) and the Authority's ruling was partly reversed. On offshore supply, only so much of the income as is attributable to operations carried out in India can be taxed here; since the transfer of property in the goods and the payment both took place outside India, the transaction could not be taxed in India, and the fact that the contract was signed in India was of no material consequence because all activities connected with the offshore supply were outside India (para 79, Re: Offshore Supply, points 1 to 4). A permanent establishment is not the same thing as a business connection — the first is for assessing a non-resident's income under a treaty, the second for applying s.9 — and the existence of a permanent establishment does not by itself constitute sufficient business connection or let India tax the whole income attributable to it (points 5, 7, 8). On offshore services, sufficient territorial nexus between the rendition of the services and India is necessary; for s.9(1)(vii) to apply the services must not only be utilised in India but also be rendered in India or have such a live link with India that the fee becomes taxable, and the location of the source of income in India does not by itself supply that nexus (para 79, Re: Offshore Services, points 1, 5, 10). Since the services were rendered outside India and had nothing to do with the permanent establishment, Article 7 kept them out of Indian tax (point 8). The principle of apportionment applies to composite transactions performed partly in one territory and partly in another (para 68).
TaxSphere, “Ishikawajima-Harima Heavy Industries Ltd v DIT”, https://taxnotice.vittsphere.com/caselaw/case/ishikawajima-harima-v-dit-offshore-supply-and-services/ (validity last checked 2026-08-25)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We charge Indian sellers a fee for listing on our overseas marketplace. Is that fees for technical services, and do our Indian support companies make us taxable here?
The Assessing Officer has taxed my client, a UK limited liability partnership, under the Independent Personal Services Article of the treaty because its partners are professionals. Can that Article apply to a firm at all?
Our Australian firm monitors a pipeline project in India for the owner - schedules, reporting, coordinating contractors. Is our fee a royalty, or business profits we are taxed on only if we have a permanent establishment?
The Assessing Officer has found a permanent establishment and wants to tax my client's entire Indian booking revenue. My client already pays its Indian distributor a commission larger than anything that could be attributed to India. Is there anything left to tax?
