9. Now let us examine the facts of the instant case to determine if the income from sale of offshore equipment is taxable in India as per the provisions of the IT Act. The offshore supply of equipment from abroad, in common parlance, means that the supply of goods is made outside India. Ordinarily in such a case, the Indian party opens a letter of credit and nominates a bank to issue irrevocable LOC favoring the foreign party. Equipment is handed over to ship and Bill of Lading etc. are delivered to the nominated bank. With such delivery of bill of lading and other relevant documents, the property in goods passes to the Indian party and thus the sale of equipment is complete outside India. The Assessing Officer has admitted that the disputed consideration is towards the supply of offshore equipment. He has calculated the income of the assesses by holding such amount as receipt towards “Offshore supplies’. Further there is no quarrel that the said payment was received by the assessee outside India.
10. Section 4, which is a charging section provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every person. Section 5(2) deals with the scope of total income of non-residents and provides that subject to the provisions of the Act the total income of non-resident includes income from whatever sources which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise in India during such year. Clause (a) of this sub-section encompasses the income which ‘is received or is deemed to be received in India’ in the relevant year. Obviously the above referred consideration was not received in India. The expression “Income deemed to be received’ in India has been defined in section 7 of the Act, which refers to the annual accretion in the previous year to the balance at the credit of an employee participating in a recognized provident fund etc. It is apparent that the nature of amount under consideration is quite distinct from the items specified in this section. Then clause (b) of sub-section (2) talks of income which accrues or arises or is deemed to accrue or arise in India. It is trite law that income accrues at the place where the title to goods passes to the buyers on the payment of price. Our view is fortified by the judgment of the Hon’ble Summit Court in Seth Pushalal Mansighka (?) Ltd, VS. CIT (1967) 66ITR 159 (SC). As it is the case of offshore supply of equipment, it is axiomatic that this transaction got completed outside India. Further since; the payment was also received by the assessee in foreign –country, we are unable to find any income accruing or arising in India on this count.
11. Then the last component of section 5(2)(b) is the income which is deemed to accrue or arise to the non-resident in India. Section 9 enlists certain incomes which are deemed to accrue or arise in India. The amount for the supply of offshore equipments cannot be in the nature of “salaries’, dividend, interest, royalty or fees for technical services, which items of income have been specifically dealt with in clauses (ii) to (vii) of section 9(1). Hence we are left with examining the applicability or otherwise of clause (i). This provision states that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. As it is the case of sale of equipment to the Indian party, possibly only the “business connection’ needs to be probed in as the applicability of the other components of clause (i) is ruled out Now we will concentrate on examining if the assessee, as a result of this transaction, can be said to have any business connection in India so as to attract section 9(1). At this stage it will be pertinent to mention, even at the cost of repetition, that the assessee received four types of payments in the previous year relevant to the assessment year under consideration. Income from KBPL project and IPCL project has been admitted by the assessee to be taxable in India. As regards Metro Rail project, again there are two receipts viz, one is towards onshore supplies, income from which again the assessee is admitting to be chargeable in India. It is only the last item, being the offshore supplies, income from which the assessee is contesting as not taxable. It is seen that this receipt is only towards supply of equipment and no part of it relates to indigenous or offshore services, for which there is a mention of separate consideration in the contract with Metro Railways. We have to decide whether such offshore sale of equipment by non-resident magnetizes any tax ability on that count. It is true that the assessee sold the assessee sold the equipment to an Indian party. But this in itself is not sufficient to prove that the assessee had a “Business connection’ in India and thus the profit from the sale should be brought to tax. Here is a case in which the contract for the supply of equipment, was accepted by the assessee in foreign country; offshore supply of the equipment was made and thus the property in goods passed to the buyer in the foreign country; payment was received by the assessee in foreign country. It is true that the business connection is a commercial connection, but all the commercial connections are not necessarily business connections unless the commercial connection is really and intimately connected with the business activity of the non resident in the taxable territories. In our considered opinion the mere fact that the assessee effected sale of equipment to an Indian party, that in itself, cannot be construed as resulting into any business connection in India. The Hon’ble Supreme Court considered almost similar circumstances in CIT VS. R.D. Aggarwal & Co. & Anr (1965) 56ITR 20 (SC). It was held by their Lordships that there was no business connection. It has been explained that “business connection” predicates an element of continuity between the business of the non-resident and the activity in the taxable territories. A stray or isolated transaction has been held to be not normally regarded as business connection. Where contract for sale of goods took place outside the taxable territories, the price received by the non-resident Indian outside that taxable territories and the delivery was given also at the outside taxable territories, the Hon’ble Supreme Court held that there results no business connection. Where there is a transaction of sale between two parties on principal to principal basis, it cannot be held that there is any business connection which would attract the deeming provisions of section 9(l)(i).
12. Further Explanation la) to section 9(1) provides that for the purposes of this clause, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India-shall- be only such part of the income as is reasonably attributable to the operations carried out in India. From this Explanation, it is further manifested that even if there is a business connection of the non-resident in India, then also only that part of the income shall be deemed to accrue or arise in India which is relatable to the operations carried out in India. So going by the argument of the Id. DR, even if we presume for a moment, with which we do not agree, that there was any business connection of the assessee in India-, still in the absence of any operations carried on by the assessee in India, there cannot be any question of brining the case within the ambit of section 9(1). We, therefore, hold that no part of the income, to that extent, can be said to have deemed to accrue or arise to the assessee in India within the meaning of section 9.
14. Circular No. 786 dated 7.2.2000 further clarifies the position qua commission and charges payable for services rendered outside India. It has been explained that no tax is deductible u/s.195 on the export commission and other related charges payable to non-resident for services rendered outside India. In this Circular the afore-noted Circular no. 23 dated 23.7.1969 has also been duly considered.
16. On going through the CBDT’s view in the above Instruction, it is abundantly clear that no part of income can be deemed to accrue or arise in India due to sale of equipment on FOB basis. The contract of the assessee with Metro Railway clearly stipulates in clause 1.1 that the total value of the contract will be on FOB basis for supply and services. There is no reason why the mandate of this Instruction rendered in the context of “power projects” should not be applied to other similar projects.
17. On going through the above circulars and the legal position it is clearly borne out tint a sum of Rs. 3.17 crores represents the consideration for the exclusive supply of offshore equipments. The provisions of section 9(l)(i) do not apply to the instant case. Since no income on this score is received or is deemed to be received or accrues or arises or is deemed to accrue or arise in India, there cannot be fastened any tax liability on the assessee as it is outside the scope of total income as per-section 5(2). We, therefore, hold that the Id. CIT(A) was correct in holding that no addition was sustainable on account of offshore supply to Metro Railways.