Ishikawajma-Harima Heavy Industries Ltd. v. Assistant Director Income Tax

Quick Summary

This case asks: Are payments for offshore supply of equipment taxable in India? The Supreme Court said No, because the sale happened outside India and had no strong territorial link with India.

The judgment draws a clear line: for tax to apply, the income must have a real territorial nexus with India. Using services or signing papers in India is not enough by itself.

Issues

• Whether sums received/receivable from Petronet LNG for offshore supply were taxable in India under the Income Tax Act, 1961.

Rules

• Section 9(1)(vii) — FTS: Fees for technical services payable by a resident to a non-resident are not always taxable in India.
• Utilization in India: Mere use of services in India is not conclusive for accrual or arising of income in India.
• Territorial Nexus: There must be a sufficient territorial link with India to justify Indian taxation.
• PE Attribution: Profits are attributable to a PE only if the PE is involved in the activity giving rise to those profits.

Facts — Timeline

Japanese Company

Assessee: a Japan-based engineering company known for large storage tank projects.

2001 — Consortium & Contract

Formed a consortium; entered into contract with Petronet LNG Ltd. to build an LNG terminal at Dahej, Gujarat.

Contract Scope

(i) Offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services, (v) construction & erection.

AAR Application

Taxpayer asked on taxability of offshore supply & services. AAR viewed offshore supply profits as attributable to PE.

Supreme Court Appeals

Assessee appealed to the Supreme Court against AAR’s conclusions on offshore items.

Arguments

Judgment (Held)

• Offshore supplies not taxable in India. Entire sale took place outside India; profits did not arise in India.
• Place of signing is immaterial. Contract signed in India did not create tax liability when performance and sale were offshore.
• PE attribution needs activity link. A PE must be involved in the profit-generating activity; otherwise, no attribution.
• FTS not automatic. Services used in India alone do not trigger Section 9(1)(vii) without territorial nexus.

Result: Offshore supply profits remained outside Indian tax.

Ratio Decidendi

Tax under the Act requires a sufficient territorial nexus. For PE attribution, the PE must participate in the activity that earns the profit. Offshore sales completed abroad, without such nexus, are not taxable in India.

Why It Matters

• Guides cross-border project structuring for EPC and LNG terminals.
• Clarifies limits of FTS taxation and the need for territorial nexus.
• Helps separate offshore vs onshore streams for clean tax positions.

Key Takeaways

Mnemonic + 3-Step Hook

Mnemonic: “H-T-P”

• High seas sale — outside India
• Territorial nexus — must be real
• PE participation — profit link needed

3-Step Hook (Exam Writing):

1. State Section 9(1)(vii) & nexus rule.
2. Show offshore sale facts (high seas, title abroad).
3. Seal conclusion: no Indian tax on offshore supply.

IRAC Outline

Glossary

Offshore Supply

Sale and transfer of goods completed outside India.

FTS

Fees for Technical Services under Section 9(1)(vii) of the Act.

Territorial Nexus

Real connection between income and Indian territory for tax.

PE Attribution

Assigning profits to a PE only if it took part in earning them.

FAQs

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