According to the Press Trust of India, the Indian Supreme Court in a significant judgement has held that only the Indian income of foreign firms is taxable and that no tax can be levied on work done outside the country.
“Only such part of the income, as is attributable to the operations carried out in India, can be taxed in India”, a Division Bench of Justice SB Sinha and Justice Dalveer Bhandari said.
The judgment came on an appeal filed by Japanese engineering firm Ishikawajma-Harima Heavy Industries Ltd. (IHHIL), challenging the Authority for Advance Rulings (Income Tax) decision that asked it to pay taxes.
IHHIL had formed a consortium with Ballast Nedam International BV, Itochu Corporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toya Engineering (India) Ltd. for setting up an LNG plant at Dahej in Gujarat on turnkey basis in 2001. The contract involved offshore and onshore supply and services, construction and erection of storage tanks.
The apex court ruled that since all parts of the transaction were carried out outside India, it could not have been taxed in the country.
The fact that the contract was signed in India was of no consequence as all activities of offshore supply were outside India, it said, and added that the income tax authority made a mistake.
The company had argued that it was not liable to pay tax as India had a Double Taxation Avoidance Agreement with Japan and it did not receive any income for offshore supply and services in India.
“If the test applied by the Authority for Advanced Rulings is to be adopted here too, then it would eliminate the difference between Indian and foreign operations, and the apportionment of income accordingly,'’ the bench said.
The turnkey project would not mean the entire contract must be considered to be an integrated one so as to make the Japanese company pay tax in India, the judges said.
As per the contract, while prices for offshore and onshore supply and services were paid in dollars, the construction and erection was partly to be paid in dollars and partly in Indian rupees. — PTI
