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

Features of EPC contracts

EPC Key Aspects

Activities envisaged under
a typical EPC contract

Classification of
revenue streams

Offshore supplies

Offshore supplies

Offshore design, project

management and control

Offshore services

Onshore supply

Onshore supplies

Onshore installation
Services - unskilled

Local services

Onshore installation
Services - skilled

Onshore technical
services
4

EPC Key Parameters Impacting Taxability

Divisibility & allocation

of consideration

Duration of services

Tax residential status

Income Tax

Nature & categorization

of scope of work

Situs of services
5

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
taxes
minimization
of taxes
ensure
availability
of all
concessions/
exemptions

Certainty in
tax impact
definite taxable
base
responsibility to
pay tax
factor
change in law

Ease of
implementation
minimizing
exposures
avoiding
litigation

Commercial
imperatives
not to be
compromised

EPC Contract Structures

Single Contract
- Exposes entire

Sub-Contracts
- All parties are taxable

contract revenues to tax

Contract
structures
Consortium Contracts

- Exposure to AOP if not

structured appropriately
- CBDT instruction 1829
supports non-AOP view

Multiple Contracts
- Optimizes taxes
and facilitates
planning avenues

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

Key Tax Rulings

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
Umbrella Services Agreement (USA)
License and Basic Engineering Agreement (LBEA)
Engineering Services Agreement (ESA)

Activities
-*
Offshore
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

10

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

12

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 arms 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
13

Ishikawajima Harima Heavy Industries Ltd.

(IHHI) v. 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,
onshore services
and construction and
erection -- taxability not
in dispute

Consortium with 5 other enterprises (composite contracts)

Role, responsibility and consideration of each specified

14

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

15

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

16

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 nonresident for services rendered outside India?
Other services IHHI still good in law?

17

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

18

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 arms length
price

19

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

20

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

21

Way ahead

22

Way ahead Structuring contracts

Execute separate contracts
Offshore supply

Offshore services
Onshore supply
Onshore services
- unskilled

Project Owner

Performance
guarantee
agreement
Between
Project Owner
and Contractor

Onshore services
skilled
23

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
24

Thank you!

25

Presenters contact details

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

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we
endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular
situation.

2007 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

26