Taxation of Offshore Supplies – Is Composite/Turnkey nomenclature fatal?
AAR 1218 of 2011
Taxability of EPC contracts continues to engage the tax payer and the department despite the Supreme Court laying down the principles in Ishikawajima Harima Heavy Industries judgement in (2007) 288 ITR 408 (SC).
In the instant case, the Applicant was a tyre-manufacturing company and engaged its overseas associated enterprise to supply equipment and supervise the installation of the equipment. Accordingly, an Umbrella Agreement was entered into for offshore supply of equipment, followed much later by a Services agreement for supervision of installation. Contending that the two were part of a composite contract, Revenue sought to tax the offshore supply portion in addition to the services portion on the basis that the contracts have to be ‘looked at’ as composite and turnkey and that the supplier was defacto responsible for installation too.
Dismissing the ‘look at’ theory expounded in Vodafone as irrelevant to the case in hand, the Authority found that prices were separately determined for each of the contracts, the transfer of title to supplies took place outside India, the payment was also made outside India and there was no cogent evidence to show that the installation work was carried out by the Supplier (who admittedly did the supervision of Installation). That the contracts of supply and service were entered into at different points of time and that the supplier was not responsible for installation was relied upon to show that the contracts were neither composite nor turnkey and cannot be said to be indivisible giving rise to taxability in India. The Authority further supported its ruling by observing that the situs of income was clearly determinable, as there was no overlapping arrangements, clear terms and conditions, separate pricing and also no continuity in the work done.
Comments and Analysis:
While the Ruling of the Authority is unassailable, the Ruling may give a reader an impression that a composite/turnkey contract may lead to different results. The decision of the Supreme Court in Ishikawajima (which is also extracted in this Ruling) is clear and unambiguous – “The contract may be also a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one............ The taxable events in execution of a contract may at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of this contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. The very fact that in the contract, the supply segment and the service segment have been specified in different parts of the contract is a pointer to show that the liability of the applicant thereunder would also be different.” Hence there should be no adverse inference due to nomenclatures.
The Authority did well to distinguish the factual matrix of the instant case from MAPL ( AAR 981 of 2010), Ansaldo ( 310 ITR 237) and Alstom ( AAR 958 of 2010). However, with respect, the Authority should have decided this matter de hors the composite/turnkey nomenclature so as to send a clear message that ipso facto a composite or turnkey contract would not lead to taxability of offshore supplies in India.