In a significant judgement, the Supreme Court has ruled that only the income earned by foreign firms from their operations in India was taxable and 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 S B Sinha and Justice Dalveer Bhandari said.

The judgement 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 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 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.