INCOME TAX ACT, 1961

--Income deemed to accrue or arise in India --Under section 9(1)(i)Income from offshore supply of goods--The assessee, was a wholly owned subsidiary of the L.M. Group of Companies with whom the cellular operators had entered into supply agreements. The EFC was also a foreign company with a branch in India and was a subsidiary of the parent company of the assessee, viz., CME . There was one more entity, namely, ECL which was an Indian company and was a wholly owned subsidiary of the parent company. The assessee was a company incorporated in Sweden and was a tax resident of Sweden. The company was a 100% subsidiary of LME. The main business of the assessee company was the supply of hardware and software which is used in the business of rendering telecommunication services and for this purpose, it under takes projects on turnkey basis. In telecommunication projects, the activities involved are supply of hardware and software, installation and commissioning of the two and after sales service. In the relevant assessment year, the assessee company entered into agreements with ten cellular operators collectively called 'operators'. Assessee entered into agreements with various Cellular Operators and entered into three contracts with them, namely (1) Overall Agreement, (2) the Supply of Agreement and (3) the Installation Agreement. Pursuant to the aforesaid contracts, the assessee had supplied various hardware and software to the cellular operators during the relevant assessment year. In regard to tax liability in India, the assessee claimed that it was not liable to tax under the provisions of the IT Act, 1961 and the Double Taxation Avoidance Agreement between Sweden and India (the 'DTAA'). The assessee, a non-resident company, was engaged in supplying equipment to the operators, while the other two companies (EFC and ECL) were in the business of installation of the equipment and granting marketing support to the assessee. Thus, for the first three months, the work of installation and marketing support was done by the EFC, and for the remaining nine months, the same work was done by ECL. The supply of the equipment significantly was a continuous process. In accordance with the contract, the equipment was not to be accepted till it was finally tested through a test known as Acceptance Test (A.T.). Such Acceptance Test was to be carried out by EFC in the first three months and by the ECL in the last nine months of the relevant year. The contracts were signed in India and till delivery to the port in India was the responsibility of the supplier. The supply was on CIP basis and after supply, the defective parts were to be replaced by the assessee. AO after considering the provisions of the IT Act, 1961, and in particular section 9 thereof, held that the assessee had a business connection in India and income of the assessee must be deemed to accrue or arise in India and as such was taxable in India. Two separate independent contracts were entered into: one between the assessee and the cellular operator for the supply of the goods and the other between the installation contractor and the cellular operator and the Tribunal found, on a construction of the relevant provisions of the two agreements, that the contracts could not be treated as turnkey or a works contract. The Tribunal also did not accept the argument that by virtue of the overall agreement the income that arose to the assessee was chargeable to tax in India. As regards the overall agreement, the Tribunal held that the overall agreement was executed as a matter of commercial prudence as the cellular operator needs to be instilled with confidence that the project would ultimately take off and, therefore, he would insist on a single point responsibility. The Tribunal also noted that this was a common practice and Instruction No. 1829 issued by the Central Board of Direct Taxes which was in force on the first day of the assessment year also takes cognizance of the commercial necessity for having such overall responsibility. The Tribunal further found that no payment accrued either to the assessee or the installation contractor under the overall agreement, but the overall agreement merely ensured supervision and guaranteed the performance of all the contracts in a coordinated manner. The Tribunal further noted that the installation contractors and the assessee were separate independent entities and there was no evidence brought on record to disclose that any one is dependent on the other, either financially or in any other manner. The Tribunal found that both EFC as well as ECI were separately assessed to tax in India. The Tribunal thus came to the conclusion that there was no business connection with the assessee in India having regard to the nature of the arrangement that the assessee had with either EFC or ECI. Further, as no operations were formed by the assessee in India no income could be charged to tax in India. The Tribunal, therefore, ultimately concluded that no part of the income accrued to the assessee in India and that as the assessee did not have a business connection in India no part of the income could be regarded as deemed to accrue in India also; and that income from the supply of equipment accrues outside India, where the equipment is manufactured outside India and the property therein passes outside India and the place of execution of the contract is not relevant. The issue before High Court was whether the income earned by the assessee as a result of supply of hardware and software licence under the Supply Agreement accrued or arise in India. Held: Income from offshore supply of equipments did not result in any income being accrued or arise in India.