Recently, in the case of Technip France SA, the Authority for Advance Rulings (the “AAR”) dealt with the issue of taxability in India of an offshore supply of equipment and provision of offshore services. The AAR held that the payment for the offshore supply was not taxable in India, as the delivery and title of the equipment was transferred outside India. However, the consideration for the offshore services, i.e., for engineering design services in relation to the construction, erection, installation, commissioning and testing of the plant in India, and related advisory services, was held to be taxable in India as business income. This decision is important for all foreign companies executing EPC projects in India across various sectors.
Technip France SAS (“Technip France”) is a French company engaged in the business of engineering, procurement and construction (“EPC”) for oil production, refining, petrochemicals, etc. Technip France entered into a contract with ONGC Petro Additions Limited (“ONGC”), an Indian company, to setup a Butene-1 plant in the state of Gujarat on a lump-sum turnkey basis (the “EPC Contract”). Under the EPC Contract, Technip France agreed to the below-listed scope of work and fees.
|1.||Offshore supply of equipment||2,779,595|
|4.||Onshore supply of equipment/inspection||773,854,241|
|5.||Onshore services for EPC commissioning||639,014,017|
|Total EPC Contract Price||8,976,775||1,412,868,258|
Technip France filed an application before the AAR on December 6, 2012, seeking a ruling on whether any part of the offshore supply and services was liable to tax in India under the provisions of the Income-tax Act, 1961 (the “IT Act”) read with the double taxation avoidance agreement between India and France (the “France DTAA”).
Technip France submitted to the AAR that the offshore supply of equipment was made by Technip France to ONGC outside India on a principal-to-principal basis with the sale concluding outside India; and, no operations were carried out by Technip France in India in connection with this supply. Further, Technip France’s project office in India was only set up to execute the onshore scope of work, and it had no role to play in the offshore supply of equipment.
The AAR’s ruling
Based on the facts, examination of documents, and the evidence provided to the Indian tax authorities, the AAR held as under:
1. While acknowledging the fact that the EPC Contract was a composite contract, the AAR followed the Supreme Court’s ruling in the Ishikawajima Harima case and held that, as the sale was completed by Technip France outside India, no income was chargeable to tax in the hands of Technip France in India. The basis was that:
(i) ONGC was the consignee in the bill of lading and in the bill of entry,
(ii) the transfer of title to ONGC took effect while the equipment was outside the Indian territory, and
(iii) the payment was made by ONGC to Technip France outside India in foreign currency as per the terms of the EPC Contract.
2. The consideration received for offshore services was considered as taxable in India (as business profits under Article 7 of the France DTAA) because the actual rendering of the engineering design services was provided by Technip France’s India project office and not directly from France. The AAR was of the view that although some of the design services were rendered in France, the engineering drawings, designs, etc., were used by the project office for setting up the plant at ONGC’s site in India.
3. Technip France’s employees were involved in the purchase of tender documents, the bidding process, pre- and post-bid meetings, techno-commercial meets, bid clarificatory meetings and the price bid opening. Further, the non-resident employees had a secured right to use the office space in the project office premises and were carrying on the business of Technip France in India. As Technip France’s key personnel were managing Technip France’s business affairs in India, Technip France had a fixed place permanent establishment in India.
The issue with respect to taxability of offshore supply and services, through composite or separate contracts, has been a subject matter of debate before various Indian courts and tribunals as briefly clarified below.
- The Delhi High Court, in the LG Cable case, held that income from offshore supply of equipment cannot be taxed in India merely because it is interlinked with the satisfactory performance of the onshore contract. Further, the Delhi High Court held that since the taxpayer’s permanent establishment was not at all involved in the transaction of the offshore supply of equipment, the existence of the permanent establishment would be irrelevant for taxing offshore supplies.
- The Delhi High Court, in the Nokia Networks case, following the decision of the Supreme Court in the Ishikawajma-Harima case, held that in the case of one composite contract, supply has to be segregated from the installation, and only then the question of apportionment can arise under the IT Act.
- The AAR, in the SEPCO III Electric case, held that payments received by a foreign company for offshore supply of equipment were not taxable under the IT Act.
- The AAR in the Alstom case and the Roxar case applied a “look at” approach and held that composite contracts for offshore supply of equipment and for installation and commissioning of a project in India cannot be dissected for the purpose of taxability of the contract, and therefore, an offshore supply of equipment was taxable in India.
- The Delhi Bench of the Indian Income-tax Appellate Tribunal, in the Voith Paper GmbH case, held that two contracts were entered into between an offshore supplier and an Indian customer for the supply of equipment, and the rendition of services to ensure that the equipment is operative, represent a single composite contract. The offshore supplier had both, a business connection and a service PE in India, and since the service PE had undertaken some of the work required under the supply agreement, 35% of the profit from the offshore supplies was attributed to the PE and taxed in India.
Although the current decision of the AAR is legally binding only on the parties involved, the ruling will have a persuasive value in similar matters before the Indian tax authorities and courts.
This ruling has been delivered on the specific facts of the case and cannot be uniformly applied in each case for determining taxability of offshore supplies and services. However, it is imperative to monitor the terms of EPC contracts, the place where the services are performed, and the conduct of the parties, so as to avoid adverse tax consequences in India.
About the Author
Ravi S. Raghavan has more than 25 years of experience in corporate tax advisory work, business re-organizations, international taxation (investment and fund structuring, repatriation strategies, treaty analysis, advance rulings, exchange control regulations, FPI taxation), tax litigation services, and other tax issues (including withholding taxes, capital gains tax, permanent establishment concerns, employee taxation, and tax holiday schemes).
Ravi has spoken at different forums on various tax matters, including at the Annual India Tax Forum in New Delhi, and at the Annual Symposium on India’s Taxation Regime at the National Law School of India University, Bangalore