Delhi ITAT Quashes Revision Order Taxing Offshore Supplies Under Section 44BBB

Under Section 263 of the Income Tax Act, 1961, Shenzhen SDG Information Co. Ltd., a Chinese company that supplies fiber optic communication equipment, appealed the revision order issued by the Commissioner of Income Tax (International Taxation-3), New Delhi, dated March 24, 2022. The disagreement started with an assessment for the Assessment Year (AY) 2017–18, in which the Commissioner determined that offshore profits from a turnkey power project totalling Rs. 64,37,76,118 were subject to Indian taxation under Section 44BBB of the Act.

Invoking Section 263, the Commissioner claimed that the Assessing Officer (AO) had improperly excluded offshore revenues from tax and failed to carry out adequate investigations into their taxability, which was considered detrimental to the Revenue’s interests. According to the revision, the Assessee’s contract with Power Grid Corporation of India Ltd. was a composite turnkey agreement that was purposefully divided into onshore and offshore sections in order to evade Indian taxes.

Issue Raised: Whether the offshore supply component of a contract executed outside India by a non-resident foreign company, in a split contract structure for a turnkey project, can be taxed in India under Section 44BBB?

ITAT’s Decision: The appeal was granted by the Honourable Delhi ITAT, after concluding that the Section 263 revision order was unsustainable. The Honourable Tribunal noted that the Assessee had duly designated Incap Ltd., an Indian business, to manage the project’s onshore responsibilities. Instead of an artificial split intended to evade taxes, it pointed out that the facts and documentation showed a true bifurcation of the contract into offshore and onshore components. In order to show that the arrangement was both legally and commercially sound, the offshore contract was executed separately for goods that were supplied exclusively from outside India, while a separate agreement covered the limited onshore services.

ITAT highlighted that similar offshore supply contracts were ruled non-taxable in India in the Supreme Court’s rulings in Ishikawajima Harima Heavy Industries (288 ITR 408) and Hyundai Heavy Industries (291 ITR 482).

The Hon’ble Tribunal emphasised that the applicability of Section 44BBB requires the income to arise from activities undertaken in India or a Permanent Establishment (PE) in India, which was not the case in the present matter. The offshore supply contract being executed outside India could not be subjected to tax merely by recharacterizing it. Based on the above, the Tribunal set aside the Commissioner’s order and held that Section 44BBB did not apply to the Assessee’s offshore revenues. Thus, the appeal was allowed.

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