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EPC Contracts ± Evolution of judicial interpretations
Sudhir Kapadia, Executive Director & Head of Tax November 19, 2007
Features of EPC contracts Key tax rulings Way Ahead
Features of EPC contracts 3 .
skilled Classification of revenue streams Offshore supplies Offshore services Onshore supplies Local services Onshore technical services 4 . project management and control Onshore supply Onshore installation Services .unskilled Onshore installation Services .EPC ± Key Aspects Activities envisaged under a typical EPC contract Offshore supplies Offshore design.
EPC ± Key Parameters Impacting Taxability Divisibility & allocation of consideration Tax residential status Duration of services Income Tax Nature & categorization of scope of work Situs of services 5 .
Optimization of taxes minimization of taxes ensure availability of all concessions/ exemptions Certainty in tax impact definite taxable base responsibility to pay tax factor µchange in law¶ Ease of implementation minimizing exposures avoiding litigation Commercial imperatives not to be compromised 6 .Objectives of Contract Structuring Efficient contract structuring options need to be analysed to optimize taxes in light of the significant tax inefficiencies arising from a single consolidated contract for the entire work and lump sum price.
EPC ± Contract Structures Single Contract .All parties are taxable Contract structures Consortium Contracts .Exposes entire contract revenues to tax Sub-Contracts .Exposure to AOP if not structured appropriately .CBDT instruction 1829 supports non-AOP view Multiple Contracts .Optimizes taxes and facilitates planning avenues 7 .
engineering services ± taxable as FTS Civil works contracts executed in India ± taxable under Section 44BBB Status of FCos ± Association of persons (µAOP¶) not constituted if: Overall performance agreement (µOPA¶) for ensuring guaranteed performance No payment made under the OPA All entities of FCos treated as separate entity 8 .Taxability of non-residents engaged in nonthe execution of power projects on turnkey basis Consortium of foreign companies (µFCos¶) .Separate agreements for: Sale of equipments/materials on FOB outside India ± not deemed to accrue or arise in India Planning.CBDT I No 1829 . design.
Key Tax Rulings 9 .
(228 ITR 487) Aug 1995 Facts French Co to provide complete project services on a single point under an Umbrella Agreement (ie separate onshore and offshore agreement for each scope of work) Agreement Umbrella Services Agreement (USA) icense an asic ngineering Agreement ( A) ns Activities -* ffs re/ ffs ns re ffs re re re ngineering Services Agreement ( SA) quipment Supply Agreement (SA) uying Services Agreement ( SA) Site Services an Assistance Agreement (SSA) Pr ject Management Services Agreement (MSA) re/ ffs ns re ffs ns re/ re *No consideration provided 10 .AAR .
Not taxable (contd«) PE in India has an µundoubted voice¶ over the offshore activities and hence effectively connected with the PE .Even if regarded as a single contract .AAR .Offshore Services .Not taxable as Royalty/FTS Not taxable as business profits as per Para 3 of the Protocol activities effectively connected with the business of the PE in India carried outside India are not liable to tax in India Taxability of Onshore Services Effectively connected to the PE in India ± taxable as business income Key Observation -Multiple contract not artificial .required due to complexity of large infrastructure projects .only profits attributable to the operations carried out in India would be taxable. 11 .(228 ITR 487) Aug 1995 Held .
Roxon 291 ITR 275 (Mumbai ITAT) Aug 2006 Facts FCo supplied equipment under a composite contract for a turnkey project Employees sent for erection.DCIT v. commission and training PE of the FCo procured local equipment and rendered services in India 12 .
entire composite contract receipts to tax 13 .Canada treaty .DCIT v. Roxon 291 ITR 275 (Mumbai ITAT) Aug 2006 (contd«) Held Payment for supply of equipment not taxable in India Installation PE comes into existence after the equipment was supplied Even if found supplies integral to activities of the PE no attribution to PE unless supplies are not at arm¶s length price Force of attraction rule not applicable since same or similar activities not carried out through the PE SNC Lavalin/Acres Inc. (Delhi ITAT) ± On differing facts Force of Attraction applied based on provisions of the India.
taxability not in dispute Consortium with 5 other enterprises (composite contracts) Role. responsibility and consideration of each specified 14 . DIT 288 ITR 408 (SC) Jan 2007 IHHI Offshore supply & offshore services ± not taxable Japan India Contract signed in India Petronet LNG Ltd. Onshore supply.Ishikawajima Harima Heavy Industries Ltd. (IHHI) v. onshore services and construction and erection -.
IHHI .entire contract not taxable in India Sutron (AAR) ± signing of contract in India triggered taxability Offshore supplies not taxable ± not attributable to Indian operations Services inextricably linked to offshore supplies ± part of supply and not taxable in India Rotem (AAR) and Sundwiger (AP HC) ± similar principle applied 15 .Key Observations Turnkey Project need not mean entire contract is integrated and taxable in India Rotem (AAR) ± Composite contracts can be segregated Merely signing of contract in India .
Key Observations Offshore services not taxable under the Act and Treaty Not FTS under 9(1)(vii) as services rendered outside India Doctrine of territorial nexus applied ± services to be rendered and utilised in India under the Act Not taxable as Royalty / FTS since a PE was constituted Not attributable to the PE under the treaty ± activities performed outside India .IHHI .hence not taxable as business income 16 .
Key Issues Amendment to section 9(1)(v)(vi)(vii) .IHHI .concept of µlive link¶ or µterritorial nexus¶ overruled? Ruling confined to Section 9(1)(vii)(c) of the Act or applies to payments made by a resident to a nonresident for services rendered outside India? Other services ± IHHI still good in law? 17 .
divisible into two parts designing and fabrication of platform installation and commissioning of platform Installation and commissioning lasted for less than nine months Fabricated platform handed over outside India prior to emergence of installation PE 18 .CIT(A) v. Hyundai Heavy Ind Co Ltd 291 ITR 482 (SC) May 2007 Facts in brief Single contract for lumpsum value .
Hyundai Heavy Ind Co Ltd 291 ITR 482 (SC) May 2007 (contd«) Held Profits to be ascertained by making an artificial division between profits earned in India and profits earned outside India Payment for fabrication of equipments not taxable in India Installation PE comes into existence only on installation of fabricated platforms Even if found supplies integral to activities of the PE no attribution to PE unless supplies are not at arm¶s length price 19 .CIT(A) v.
Off-shore supply and onshore services (FCo) Contract III & IV . ADIT (ITAT. manpower. finance All the liabilities/ responsibilities with FCo Common managers and premises used by FCo and sub FCo gave discounts for Contracts III & IV 20 . Chennai) July 2007 Facts Single bid offered by FCo in response to request for a single bid for setting up two thermal plants Subsequently contract split between FCo and Indian subsidiary (µICo¶) into ± Contract I & II .Ansaldo Energia SPA v.Onshore supply and services (contracted to ICo of FCo at its request) ICo not equipped with requisite experience.
Ansaldo Energia SPA v. Substance Terms of the contract. Chennai) July 2007 (contd«) Held Corporate veil lifted in absence of substance Reliance placed by FCo on Circular 1829 and Ishikawajima SC disregarded Contracts I & IV treated as a composite contract and fully taxable Offshore supply of equipment to the extent carried out in India (fabrication) connected to the PE in India and taxable in India Form v. Conduct of the parties and Circumstances of the case are critical for building substance 21 . ADIT (ITAT.
Way ahead« 22 .
Way ahead ± Structuring contracts Execute separate contracts Offshore supply Offshore services Onshore supply Onshore services .unskilled Onshore services ± skilled 23 Project Owner Performance guarantee agreement Between Project Owner and Contractor .
) Scope of work to be clearly identified under each contract Obligation for executing the contract specific to the scope of work under each contract Supply of equipment from outside of India.Way ahead (contd... no activities to be performed in India Entities executing independent contracts to substantiate substance Overall performance guarantee agreement be entered into with the Project Owner Consortium agreements to regulate rights and obligations of each member 24 .
Thank you! 25 .
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