ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD. versus DIRECTOR OF INCOME TAX, MUMBAI

Citation: [2007] 1 S.C.R. 112 · Decided: 04-01-2007 · Supreme Court of India · Bench: S.B. SINHA · Disposal: Case Partly allowed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

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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 liability-
A foreign company entering into a contract with an Indian company for 
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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 
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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 
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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 
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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. 
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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 
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assessment of tax liability. 
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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 
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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 
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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 
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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 
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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 
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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 
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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 Ac

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