AAR recently held that the entire contract revenue arising to the Singapore company ("the applicant") towards supply of goods and rendition of services was taxable in India.

The contract under consideration was awarded to L&T, which in turn awarded the applicant a sub-contract for the entire external and internal façade, for the glazing and cladding systems for piers, fixed link bridges and nodes in connection with development of the airport terminal. The applicant was required to design the curtain wall and façade, supply all materials, erect, install, inspect, test and commission the entire subcontract works. The applicant was of the view that scope of work could be broadly divided into

  • Offshore supply of goods, and
  • Installation and other work to be executed in the airport

AAR, held that the consideration received for the entire contract was taxable in India, based on the following observations:

  • The contract was a composite one and there was no evident division in the contract whatsoever for supply and services in terms of scope of work, payment terms, responsibility, risk, etc.
  • The offshore supply of goods by the applicant to the contractor, and then by the contractor to its ultimate customer (the airport company) on high seas was contentious as, even though the applicant was not a party to the goods supplied by the contractor to the airport company, it was responsible for delivery of materials to the project site in India, and acted as an agent of the airport company, like paying customs duty in India
  • The applicant's PE (i.e., the project office in India) had come into existence long before the design of materials and equipment for offshore supply started and was responsible for custom clearance and payment of custom duty, hence PE was actively involved in supply of goods in India
  • Further, insurance in the name of the applicant instead of the contractor until it reached the site in India was clear proof that risk did not pass to the customer until the goods were used for the works as per the contract
  • Payments under the contract were not in relation to sale of goods, and were linked to different stages of work, which further the point that the contract was a composite one

Nangia's take

This ruling shall impact the foreign companies executing EPC contract in India. The observation of AAR shall act as a guiding factor for those planning to enter into an EPC contract in India. Though an AAR is only binding on the applicant and that too for the specific case, but persuasive value shall be drawn by the Revenue Authorities to examine the cases involving offshore supplies, followed by onshore services.

Source: AAR No. 981 of 2010

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