epc contracts
TRANSCRIPT
GLOBAL SERVICE/ INDUSTRY
TAX
EPC Contracts – Evolution of judicial interpretations
Sudhir Kapadia, Executive Director & Head of TaxNovember 19, 2007
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OverviewOverview
Features of EPC contracts
Key tax rulings
Way Ahead
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Features of EPC contracts
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EPC – Key AspectsEPC – Key Aspects
Activities envisaged under Activities envisaged under a typical EPC contracta typical EPC contract
Classification of Classification of revenue streamsrevenue streams
Onshore installation Onshore installation Services - skilledServices - skilled
Onshore installation Onshore installation Services - unskilledServices - unskilled
Onshore supplyOnshore supply
Offshore design, project Offshore design, project management and controlmanagement and control
Offshore suppliesOffshore supplies Offshore suppliesOffshore supplies
Offshore servicesOffshore services
Onshore suppliesOnshore supplies
Local servicesLocal services
Onshore technicalOnshore technical servicesservices
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EPC – Key Parameters Impacting TaxabilityEPC – Key Parameters Impacting Taxability
Income Tax
Divisibility & allocation of consideration Tax residential status
Nature & categorization of scope of workDuration of services
Situs of services
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CommercialCommercial imperatives imperatives
not to be not to be compromisedcompromised
Objectives of Contract StructuringObjectives 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.
Ease of Ease of implementationimplementation• minimizing minimizing exposuresexposures• avoiding avoiding litigationlitigation
Certainty in Certainty in tax impacttax impact• definite taxabledefinite taxable basebase• responsibility to responsibility to pay tax pay tax • factor factor ‘ ‘change in law’change in law’
Optimization of Optimization of taxestaxes• minimization minimization of taxesof taxes• ensure ensure availability availability of all of all concessions/ concessions/ exemptionsexemptions
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EPC – Contract StructuresEPC – Contract Structures
Contract structures
Single Contract- Exposes entire
contract revenues to tax
Sub-Contracts- All parties are taxable
Multiple Contracts- Optimizes taxes
and facilitates planning avenues
Consortium Contracts
- Exposure to AOP if not
structured appropriately
- CBDT instruction 1829
supports non-AOP view
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CBDT I No 1829 - Taxability of non-residents engaged in CBDT I No 1829 - Taxability of non-residents engaged in the execution of power projects on turnkey basisthe 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 1995AAR - (228 ITR 487) Aug 1995
Agreement Activities
Umbrella Services Agreement (USA)Umbrella Services Agreement (USA) -*-*
License and Basic Engineering Agreement (LBEA)License and Basic Engineering Agreement (LBEA) OffshoreOffshore
Engineering Services Agreement (ESA)Engineering Services Agreement (ESA) Onshore/ OffshoreOnshore/ Offshore
Equipment Supply Agreement (SA)Equipment Supply Agreement (SA) OffshoreOffshore
Buying Services Agreement (BSA)Buying Services Agreement (BSA) Onshore/ offshoreOnshore/ offshore
Site Services and Assistance Agreement (SSA)Site Services and Assistance Agreement (SSA) OnshoreOnshore
Project Management Services Agreement (MSA)Project Management Services Agreement (MSA) Onshore/ OffshoreOnshore/ Offshore
*No consideration provided
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)
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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
AAR - (228 ITR 487) Aug 1995 (contd…)AAR - (228 ITR 487) Aug 1995 (contd…)
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.
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DCIT v. Roxon 291 ITR 275 (Mumbai ITAT) DCIT v. Roxon 291 ITR 275 (Mumbai ITAT) Aug 2006Aug 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) DCIT v. Roxon 291 ITR 275 (Mumbai ITAT) Aug 2006 Aug 2006 (contd…) (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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• Consortium with 5 other enterprises (composite contracts)• Role, responsibility and consideration of each specified
Japan
India
IHHI
Petronet LNG Ltd.
Ishikawajima Harima Heavy Industries Ltd. (IHHI) v. DIT 288 ITR 408 (SC) Jan 2007Ishikawajima Harima Heavy Industries Ltd. (IHHI) v. DIT 288 ITR 408 (SC) Jan 2007
Offshore supply & offshore services – not taxable
Contract signed in IndiaOnshore supply, onshore services
and construction and erection -- taxability not
in dispute
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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
IHHI - Key ObservationsIHHI - Key Observations
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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
IHHI - Key ObservationsIHHI - Key Observations
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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?
IHHI - Key Issues IHHI - Key Issues
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CIT(A) v. Hyundai Heavy Ind Co Ltd CIT(A) v. Hyundai Heavy Ind Co Ltd 291 ITR 482291 ITR 482 (SC) May 2007(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 CIT(A) v. Hyundai Heavy Ind Co Ltd 291 ITR 482291 ITR 482 (SC) May 2007 (SC) May 2007 (contd…)(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) Ansaldo Energia SPA v. ADIT (ITAT, Chennai) July 2007July 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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HeldCorporate veil lifted in absence of substanceReliance placed by FCo on Circular 1829 and Ishikawajima SC disregarded Contracts I & IV treated as a composite contract and fully taxableOffshore supply of equipment to the extent carried out in India (fabrication) connected to the PE in India and taxable in India
Ansaldo Energia SPA v. ADIT (ITAT, Chennai) Ansaldo Energia SPA v. ADIT (ITAT, Chennai) July 2007 July 2007 (contd…) (contd…)
Form v. SubstanceTerms 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 Way ahead – Structuring contracts
Execute separate contracts
Project OwnerProject Owner
PerformancePerformance guarantee guarantee agreement agreement
BetweenBetween Project Owner Project Owner and Contractorand Contractor
Offshore supply Offshore supply
Offshore servicesOffshore services
Onshore supply Onshore supply
Onshore servicesOnshore services- unskilled - unskilled
Onshore services Onshore services – – skilledskilled
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Way ahead Way ahead (contd...) (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: [email protected]
www.in.kpmg.com
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