GLOBAL SERVICE/ INDUSTRY

EPC Contracts – Evolution of

judicial interpretations
Sudhir Kapadia, Executive Director & Head of Tax
November 19, 2007
TAX
Overview

Features of EPC contracts

Key tax rulings
Way Ahead

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Features of EPC contracts

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EPC – Key Aspects

Activities envisaged under Classification of

a typical EPC contract revenue streams

Offshore supplies Offshore supplies

Offshore design, project Offshore services

management and control

Onshore supply Onshore supplies

Onshore installation Local services

Services - unskilled
Onshore installation Onshore technical
Services - skilled services
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 EPC – Key Parameters Impacting Taxability

Divisibility & allocation

of consideration Tax residential status

Nature & categorization

Duration of services Income Tax of scope of work

Situs of services

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 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.

Optimization of Certainty in
taxes tax impact Ease of Commercial
• minimization • definite taxable implementation imperatives
of taxes base • minimizing not to be
• ensure • responsibility to exposures compromised
availability pay tax • avoiding
of all • factor litigation
concessions/ ‘change in law’
exemptions

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EPC – Contract Structures

Single Contract
Sub-Contracts
- Exposes entire
contract revenues to tax
- All parties are taxable

Contract
structures

Consortium Contracts
- Exposure to AOP if not Multiple Contracts
- Optimizes taxes
structured appropriately
and facilitates
- CBDT instruction 1829 planning avenues
supports non-AOP view

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CBDT I No 1829 - Taxability of non-residents engaged in
the execution of power projects on turnkey basis

Consortium of foreign companies (‘FCos’) - Separate agreements for:

Sale of equipments/materials on FOB outside India – not deemed
to accrue or arise in India
Planning, design, engineering services – taxable as FTS
Civil works contracts executed in India – taxable under Section
44BBB
Status of FCos – Association of persons (‘AOP’) not constituted if:
Overall performance agreement (‘OPA’) for ensuring guaranteed
performance
No payment made under the OPA
All entities of FCos treated as separate entity

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Key Tax Rulings

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 AAR - (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 Activities

Umbrella Services Agreement (USA) -*

License and Basic Engineering Agreement (LBEA) Offshore

Engineering Services Agreement (ESA) Onshore/ Offshore

Equipment Supply Agreement (SA) Offshore

Buying Services Agreement (BSA) Onshore/ offshore

Site Services and Assistance Agreement (SSA) Onshore

Project Management Services Agreement (MSA) Onshore/ Offshore

*No consideration provided

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AAR - (228 ITR 487) Aug 1995 (contd…)

Held - Offshore Services - Not taxable

PE in India has an ‘undoubted voice’ over the offshore activities
and hence effectively connected with the PE - 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
- Even if regarded as a single contract - only profits attributable
to the operations carried out in India would be taxable. 11
DCIT v. Roxon 291 ITR 275 (Mumbai ITAT)
Aug 2006
Facts
FCo supplied equipment under a composite contract for a
turnkey project
Employees sent for erection, commission and training
PE of the FCo procured local equipment and rendered
services in India

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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- Canada treaty
- entire composite contract receipts to tax
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 Ishikawajima Harima Heavy Industries Ltd.
(IHHI) v. DIT 288 ITR 408 (SC) Jan 2007

IHHI
Offshore supply &
offshore services –
not taxable
Japan
India
Onshore supply,
Contract signed in India onshore services
and construction and
Petronet erection -- taxability not
LNG Ltd. in dispute

• Consortium with 5 other enterprises (composite contracts)

• Role, responsibility and consideration of each specified

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IHHI - 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 - 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

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IHHI - 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 - hence not taxable as business
income

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IHHI - Key Issues

Amendment to section 9(1)(v)(vi)(vii) - concept of ‘live

link’ or ‘territorial nexus’ overruled?

Ruling confined to Section 9(1)(vii)(c) of the Act or

applies to payments made by a resident to a non-
resident for services rendered outside India?

Other services – IHHI still good in law?

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 CIT(A) v. Hyundai Heavy Ind Co Ltd
291 ITR 482 (SC) May 2007

Facts in brief
Single contract for lumpsum value - 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

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CIT(A) v. 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

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Ansaldo Energia SPA v. ADIT (ITAT, 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 (‘ICo’)
into –
Contract I & II - Off-shore supply and onshore services (FCo)
Contract III & IV - Onshore supply and services (contracted to ICo of
FCo at its request)
ICo not equipped with requisite experience, manpower, finance
All the liabilities/ responsibilities with FCo
Common managers and premises used by FCo and sub
FCo gave discounts for Contracts III & IV

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Ansaldo Energia SPA v. ADIT (ITAT, 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. Substance
Terms of the contract, Conduct of the parties and
Circumstances of the case are critical for building substance

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Way ahead…

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Way ahead – Structuring contracts

Execute separate contracts

Offshore supply

Performance
Offshore services guarantee
agreement
Onshore supply Project Owner Between
Project Owner
and Contractor
Onshore services
- unskilled

Onshore services
– skilled

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Way ahead (contd...)

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, 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

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Thank you!

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 Presenter’s contact details
Name: Sudhir Kapadia
KPMG India Private Limited
Phone number: +91 (22) 3983 5700
Email: shkapadia@kpmg.com
www.in.kpmg.com

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