<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>With globalization, we have been witnessing the execution of mega engineering, procurement and construction (EPC) projects in India. Typically EPC contracts involve multiple activities within and outside India relating to offshore services (basic design and engineering, provision of technology, training, etc.), offshore supply of equipment and onshore supply and services that would include equipment installation, testing and commissioning. <br><br>A recurrent tax issue in such projects relates to the taxability of offshore supplies. Large EPC contracts typically involve complex structures, multiple sub-contracts, linkage between the offshore supply and onshore service components and single point performance guarantees, raising questions as to the place where the offshore sale could be said to have been completed and the situs of taxation. Indian tax authorities are constantly seeking to tax some portion of the offshore supply profits, under composite and split contracts, on various grounds. Even a minor profit attribution on the offshore supply component could translate into a huge tax liability in India. <br><br>Various commercial aspects viz. form of the contract (composite or split), obligations and responsibilities of the parties, performance guarantees, signing of the contract, role of the Indian project office, insurance beneficiaries, terms of payment, etc. have been considered by Courts while laying down principles for determining taxability.<br><br>In the case of a supply of equipment simpliciter, Courts have held that if the entire operations (design, engineering, manufacture etc.) relating to offshore supply of equipment take place outside India, the transfer of title in goods takes place outside India, the payments are received outside India and if the transaction is on a principal-to-principal basis then the income from offshore supply cannot be said to arise in India. The place where the transfer of title in goods would take place depends upon the intention of the parties as mutually agreed. <br><br>In the case of a composite or turnkey contract that involves both offshore supply and onshore services, Courts have held that the offshore supply will not be taxable in India if the obligations under the contract and the consideration for offshore supply, offshore services, onshore supply and services are distinct and separate and if the title in the equipment is transferred outside India and payments are also received outside India. Thus, if the contract provides that the property in goods shall pass at the time of loading of goods at the port of shipment, the sale would be completed outside India, even if the contractor was to additionally perform onshore services like customs clearance, port handling, or retain care, custody and control of the equipment and have overall responsibility, till final acceptance and equipment testing in India. <br><br>A single point performance guarantee, or a covenant to the effect that a default under the offshore supply component would automatically be deemed as a default or breach of the onshore component, would also not affect the passing of the property outside India. A right to examine and repudiate equipment does not, by itself, indicate that property has not passed, if separate remedies by way of repairs, replacement or payment of damages are available for such breach.<br> <br>However the position could be different if the buyer reserves the right to reject the equipment on acceptance test failure in India. <br><br>Provisions relating to part payment of the offshore supply price, after receipt at the Indian site, do not affect the passing of the property in goods. Likewise, signing of the contract in India is of no consequence where the offshore supply activities are carried out outside India and the Indian project office for onshore activities is not involved, or, has no role to play, in the offshore supply. <br><br>In some recent cases, profit from offshore supply was held to be taxable in India. In these cases, there was a finding that the onshore entity was a façade created for taxation purposes and was not actually engaged in executing onshore contracts; that it was formed prior to the award of the contract and had a vital role to play in the execution of the entire project; that even after the goods were supplied from outside India, certain parts which were to be fused with the machinery supplied were manufactured in India and it was the responsibility of the contractor to supply the total equipment; that a single contract initially awarded had been subsequently split into separate contracts and there was an allegation that the price under the onshore contract was ‘loaded on' to the contract price for the offshore contract. <br><br>Thus, certain ‘Do's' and ‘Don'ts' need to be kept in mind while structuring EPC contracts. Additionally, one may consider approaching the AAR since this issue has been the subject matter of several advance rulings. <br> <br>(<em>The author is Director with Deloitte Haskins & Sells. The views expressed herein are his own)</em><br><br></p>