Controversy on taxability of Engineering Procurement & Construction (‘EPC’) company
EPC companies are those which design the installation, procure the necessary materials and build the project, either directly or by subcontracting part of the work. In India, typically foreign companies take up EPC contracts. Under which, they are involved in procuring material from India known as onshore supply and from outside India known as offshore supply. Similarly, the services rendered under the EPC agreement from India are known as onshore services, whereas services rendered from outside India are called offshore services. In order to fulfil the conditions of the contract as well as to render services under the contract and successful execution of the same, foreign companies set up a project office in India, which based on the nature of services undertaken, may constitute a permanent establishment in India, based on the provisions of the tax treaty as applicable to the foreign company.
The Indian revenue authorities for quite a sometime have been consistently taking a stand that offshore supplies and offshore services are chargeable to tax. They state these contracts as turnkey contracts and thus, whole contract is taxable as a composite contract, irrespective of the fact that supply or services, whether offshore or onshore are liable to be taxed under the Indian law. The project office set up by the foreign company under the contract is constituted as permanent establishment by the revenue authorities and hence, the profits of the contract, if not taxable under the regime of turnkey contract, are taxed as profits of permanent establishment in India. Broadly permanent establishment can be classified into fixed place, agency or construction. In the tax treaties entered by India with various other countries, there are threshold limit of months or days for various types of permanent establishments to trigger in India. For example, in India – US tax treaty, construction or installation permanent establishment triggers when construction on a single site continues for a period of more than 120 days in any twelve-month period.
However, the Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. DIT (288 ITR 408), wherein assessee formed a consortium along with other foreign companies to enter into an agreement with an Indian company for setting up of a gas facility in India. The contract envisaged a turnkey contract and every member of the consortium had separate responsibility. Hon’ble Supreme Court in this case held that income earned from offshore supplies and services is not taxable in India, irrespective of the fact contract is a turnkey contract and foreign company may constitute a permanent establishment in India.
In another judgement of the Hon’ble Apex Court in the case of CIT vs. Hyundai Heavy Industries Co. Ltd. (291 ITR 482) on similar circumstances as assessee being a foreign company had entered into a contract with Indian company for designing, fabricating, hook-up and commissioning of facilities at Bombay High. Contract was in two parts – one was for fabrication of platform and the other was for installation and commissioning of the said platform. Hon’ble Supreme Court held that only that portion of the income that is attributable to operations carried out in India can be taxed in India. Income from offshore supplies and offshore services is not taxable in India even though the foreign company had a permanent establishment in India and was carrying out activities under the turnkey contract in India.
In the case of Hyosung Corporation [AAR No 773 of 2008], the Authority for Advance Ruling also held that consideration received for offshore supply is not taxable in India. On similar grounds of appeal, Authority in the cases of SEPCO III Electric Power Construction Corporation [AAR No 1008 of 2010] and CTCI Overseas Corporation Ltd. [AAR No 854 of 2009], held that payments received by a foreign company for offshore supply of equipment is not taxable under the Indian tax law.
Given the above pronouncements of the Hon’ble Apex Court, there is not much change in the practice of revenue authorities as they have been still constantly saying that receipts of such foreign companies are taxable wholly in India irrespective of the fact whether they have earned the same for supply and services rendered outside India or inside India.
Recent Developments
The Authority for Advance Ruling in the case of Roxar Maximum Reservoir Performance WLL [AAR No 977 of 2010] held that where assessee is awarded a single contract for supply, installation and commissioning of equipment was a composite contract, and hence, income from whole of the same is taxable in India. Authority applied the ‘look at’ approach and held that income from offshore supply of equipment accrued in India and the same was taxable in India. Authority did not follow the Hon’ble Supreme Court judgment in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra).
Authority in the case of Alstom Transport SA [AAR No 958 of 2010] held that the contract entered into by the consortium of which assessee was a member for design, manufacture, supply, installation, testing and commissioning of equipment cannot be split up to treat a part of it as confined to offshore supply of equipment not capable of being taxed in India, and that the income from such a contract should be taxed as a whole.
Moreover, in the case of Linde AG, Linde Engineering Division [AAR No. 962 of 2010], Authority laid down that contract of designing, fabrication and installation of equipment should be taxed as a whole contract and there cannot be split of activities for the sake of avoidance of tax on assessee’s part.
Income Tax Appellate Tribunal in the case of National Petroleum Construction Company [ITA No5168/Del/2010] held that a foreign company entering into a contract for providing services in regard fabrication and installation of equipment and having a project office for the same in India, the said project office shall be construed as a permanent establishment. The profits attributing to such a permanent establishment shall be taxed in India, although offshore services shall not be taxed in India.
Further, in the case of Samsung Heavy Industries Co. Ltd. [ITA No 5237/Del/2010], Income Tax Appellate Tribunal held that where a foreign company has a project office in India, which is not specifically restricted by Reserve Bank of India from carrying on any business activities in its approval letter, then the said project office shall be construed as fixed place permanent establishment under the provisions of Articles 5(1) and 5(2) of the OECD commentary.
However, subsequent Hon’ble High Court ruling in the case of same company has reiterated the principles laid down by Hon’ble Supreme Court in the cases of Ishikawajma (supra) and Hyundai Heavy (supra), wherein it was held that even in the case of composite contracts, offshore supply profits are not taxable in India. Thus, it is a welcome decision rightly in line with the age old principle of territorial taxation laid down by the Hon’ble Supreme Court in the case of Anglo-French Textile Co. Ltd.[1] and Ahmedbhai Umarbhai[2]. Further, the conclusion of the High Court also suggests that unless the PE played active role in offshore supply/ outside India activities, no taxability can be imposed on non residents with respect to revenue from outside India activities and has put all allegations under this issue at rest.
[1] Anglo-French Textile Co. Ltd vs. CIT (1953 AIR 105) (SC)
[2] CIT vs. Ahmedbhai Umarbhai & Co (18 ITR 472) (SC)
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