presentation - mr. sanjay sanghvi - taxation of epc contracts -21 dec 2013

Engineering, Procurement & Construction

Contracts

Sanjay Sanghvi | 21 December 2013

Key Tax Considerations : Case Studies

Copyright © Khaitan & Co 2013 | 2

Contents

• An Introduction to EPC contracts

• Glimpse of relevant provisions of tax laws in the context of EPC contracts

• Case studies

• Some practical challenges


Introduction

Typical elements of EPC contract

Complexities arise in relation to taxation of EPC contracts due to various skill sets

required and the different types of services rendered in such contracts.


Glimpse of relevant provisions of tax laws in the

EPC context

Indian Income-tax Act

Section 2(31): Definition of ‘person’ including ‘association of persons’

Section 9: Income deemed to accrue/ arise in India

Transfer Pricing Regulations

General Anti Avoidance Rules (GAAR)

Section 195: Withholding tax obligations at the time of payment to Foreign EPC

Contractors

Double Taxation Avoidance Agreements/ Tax Treaties

Article 5: Permanent Establishment

Article 12: Royalties and Fees for Technical Services


Case Study 1…

Facts

XYZ, a Japanese company, along with its Indian affiliate ABC, bids for and is awarded

an EPC contract in India for setting up a power plant for an Indian company

The contract consists of the following four elements:

Onshore services & supply agreement

Offshore services & supply agreement

The onshore elements of the contract would be executed by ABC, a Indian affiliate of

XYZ.

Certain employees of XYZ would come to India for the purpose of providing supervisory

services in relation to setting up of the plant. Their presence in India would be for 4

months spread across two financial years.

Onshore services & supply

Offshore services & supply

EPC Contract


…Case Study 1 | Issues?

Taxability of XYZ’s income arising from offshore supply? Supply based on CIF / FOB?

Existence of ‘Permanent Establishment’ (“PE”) in India due to presence of employees -

How to compute PE threshold – Multiple counting of days can be considered?

Taxability of offshore services element – whether embedded in the supply of equipment

or to be separately taxed?

Can the values assigned to the onshore elements vis-à-vis the offshore elements be

questioned?

In case any portion of offshore service element is sub-contracted to third party in India,

is the presence of sub-contractor to be included for determining threshold of installation

PE?


Case Study 2…

Facts

XYZ, a Japanese company, bids for and awarded an EPC contract in India.

Contract consists of the following elements:



Onshore elements of the contract assigned to ABC, a new company set up in India as a

subsidiary of XYZ.

Certain employees of XYZ are seconded to ABC to carry out the onshore services

elements.



Can questions be raised regarding divisibility of contract awarded to XYZ thereby

having an impact on the taxability of amounts received by it (aggregation of income

from ‘onshore’ and ‘offshore’ elements in the hands of XYZ) ?

Whether assignment of contract from XYZ to ABC attracts Transfer Pricing Regulations

under Income-tax Act?

Whether secondment of employees could give rise to a PE of XYZ in India?


Case Study 3…

Facts

A consortium of foreign companies bids for and awarded an EPC contract in India.

Contract consists of the following elements:



Lead partner of the consortium (i.e. XYZ) enters into an ‘Umbrella Agreement’ for the

performance of contract with the Indian Project owner.

Each consortium member has a defined role and would incur expenses for his part of

the contract.



Can questions be raised regarding divisibility of contract awarded to the consortium?

In view of the recent advance rulings – Roxar Maximum Reservoir, Alstom

Transport

Exposure relating to taxability of consortium as an ‘Association of Persons’ (AOP) and

related risks?

What impact does joint and several liability of consortium members have in terms of

AOP exposure ?

What will be the tax impact if a consolidated invoice is given to client by the consortium

as opposed to each consortium member separately invoicing the client ?

What impact does a managing/coordination committee for the consortium made up of

representatives of the consortium members have in terms of AOP exposure?


Some Practical Challenges

Tax cost passed on to the Indian Project owner thereby increasing project costs and

therefore need to achieve tax efficiency in structuring EPC contracts

Ascertaining Withholding Tax (TDS) obligation of the Indian Project Owner where the

foreign EPC contractor creates a PE in India

Obtaining withholding tax certificate from Tax Authorities

Alternatives: Obtain Chartered Accountants certificate or consider obtaining an

advance ruling (if time permits)


Copyright & Disclaimer

• The contents of this Presentation are for informational purposes only and

are based on the laws as on date.

• It is neither intended to be nor is legal advice whether of a general or

specific nature. We encourage you to seek legal advice suited to your

specific requirements.

www.khaitanco.com

presentation - mr. sanjay sanghvi - taxation of epc contracts -21 dec 2013

Documents

onshore services elements

offshore supply

offshore elements

onshore elements vis

supervisory services

case studies copyright

following elements

case study