An engineering, procurement and construction contract in India is taxed on the strength of decisions taken before the award: how the scope is divided, which entity signs, where title to equipment passes, and what the employer is told to withhold. This note takes the questions that arise on both sides of that contract, for the foreign contractor and for the Indian employer. From 1 April 2026 the Income-tax Act, 2025 applies, and the section numbers in this note are its numbers. Indirect tax on EPC contracts is a separate exercise and is not covered here. The firm’s work on these projects is described on its page on international EPC advisory.
When does an EPC contract give the foreign contractor a permanent establishment in India?
The treaty decides, and the thresholds differ from treaty to treaty, so the applicable one has to be read. Under Article 5(2)(j) of the India-UK convention, a permanent establishment includes a building site or construction, installation or assembly project, or supervisory activities in connection with it, where the site, project or activity continues for more than six months. Article 5(2)(k) adds the furnishing of services through employees where activities of that nature continue for more than 90 days in any twelve-month period, or more than 30 days where the services are performed for an associated enterprise.
Presence is not the same as a permanent establishment. In Director of Income Tax v Samsung Heavy Industries Co Ltd, decided on 22 July 2020, the Supreme Court held that the contractor’s Mumbai project office was not a fixed place of business through which the core business of the enterprise was carried on, and so was not a permanent establishment under Article 5(1). The Court also held that the burden of proving that a foreign assessee has a permanent establishment lies initially on the Revenue.
Domestic law runs alongside the treaty. Under Section 9(9) of the Income-tax Act, 2025, a business connection includes a business carried out in India of which all or part of the operations are carried out in India, and also a significant economic presence in India. In the author’s view, the analysis has to be run at the tender stage and not at the first assessment, because the facts that decide it, such as who supervises, where the engineers sit and for how long, are created by the mobilisation plan rather than by the contract’s label.
Does splitting the contract into offshore supply and onshore work still protect the offshore part?
It can, and the principle is settled. In Ishikawajma-Harima Heavy Industries Ltd v Director of Income Tax, decided on 4 January 2007, the Supreme Court held that only such part of the income as is attributable to operations carried out in India can be taxed in India, that apportionment is essential where a composite transaction has operations in more than one territory, and that offshore supply, where title and payment pass outside India, is not taxable here.
What has moved is the services side. Ishikawajma’s reasoning on offshore services rested on the requirement, in the law as it then stood, that the services be both rendered in India and utilised in India. Under Section 9(6) and Section 9(7) of the 2025 Act, royalty and fees for technical services payable by a resident are deemed to accrue or arise in India, subject to the exceptions stated there, of which the principal one is use for a business or profession carried on by the resident outside India. In the author’s view, the split must now be built on the documents and on the treaty, that is, on where title and risk pass, what each scope actually covers, how each part is priced and invoiced, and whether a permanent establishment existed when the income accrued. An argument that rests only on the place where the work was performed is weaker than it was in 2007.
Is presumptive taxation available, and is it better than a normal computation?
For one class of project, yes. Under Section 61(2) of the Income-tax Act, 2025, table serial number 4, a foreign company engaged in civil construction or the erection, testing or commissioning of plant or machinery in connection with a turnkey power project approved by the Central Government is taxed on 10% of the amount paid or payable for that work. Section 61(3) allows the assessee to claim that the profits actually earned are lower, for serial numbers 4 and 5, if it keeps books of account as required by Section 62 and has them audited and reported under Section 63. Section 61(4) is the price of the scheme: no loss, allowance or deduction otherwise available is set against income computed on that basis.
| Question | Presumptive basis, Section 61(2) Sl. No. 4 | Normal computation |
|---|---|---|
| Availability | Only a foreign company, and only for a turnkey power project approved by the Central Government | Any contractor |
| Tax base | 10% of the amounts paid or payable for the civil construction, erection, testing or commissioning | Actual profits attributable to the Indian operations |
| Deductions and losses | Not set off against that income, under Section 61(4) | Available on ordinary principles |
| Books and audit | Needed only to claim lower actual profits, under Section 61(3) with Sections 62 and 63 | Needed in any event |
| Suits | A profitable contract with few Indian costs | A thin-margin or loss-making contract, and contracts outside the approved class |
Does a consortium or joint venture become an association of persons?
Not automatically. In Linde AG the Delhi High Court held that joint and several liability, and presenting a single face to the employer, are not enough. What is required is that two or more persons join together for a common purpose or common action with joint management or joint action, and the Court found that the cooperation between the two members there was no more than what independent agencies executing a project would be expected to show.
In the author’s view, this is a drafting question before it is a tax question. Separate and identifiable scopes, separate pricing, separate invoicing, separate performance security and decision-making that stays with each member are what keep a consortium outside the association of persons analysis. A single lump sum, pooled profits and a joint project management committee push it the other way. The consequence of getting it wrong is an assessment on the consortium as a single taxable person, with the offshore elements drawn in.
Project office, branch or subsidiary: which vehicle?
A project office is the usual answer for a single contract. Under the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any other place of business) Regulations, 2016, notified as FEMA 22(R)/2016-RB, a project office is a place of business in India to represent the interests of a foreign company executing a project in India, excluding a liaison office. The general permission requires a contract secured from an Indian company, together with one of four funding conditions: inward remittance from abroad, funding by a bilateral or multilateral international financing agency, clearance by an appropriate authority, or a term loan to the Indian employer from a public financial institution or a bank.
A branch office is the wider licence and suits a contractor expecting a series of Indian contracts. An Indian subsidiary is a resident taxpayer, which removes the permanent establishment argument altogether and replaces it with transfer pricing on everything the parent supplies. In the author’s view, the vehicle should be chosen after the permanent establishment and withholding analysis, not before it, because the vehicle changes who files, who is assessed and what the employer deducts, but it does not by itself decide whether India can tax the offshore scope.
What must the Indian employer withhold, and what happens if it does not?
Under Section 393(2) of the Income-tax Act, 2025, table serial number 17, tax is deducted on any sum chargeable under the Act that is credited or paid to a non-resident. Where only part of a payment is chargeable, which is the position on most EPC contracts, Section 395(2) allows the payer to apply to the Assessing Officer to determine the appropriate proportion of the sum chargeable, so that tax is deducted only on that proportion. The recipient may separately apply under Section 395(1) for a lower or nil deduction certificate.
The cost of getting this wrong falls on the employer first. Section 35 disallows interest, royalty, fees for technical services or any other sum chargeable that is payable outside India, or in India to a non-resident or foreign company, where the tax was not deducted or was deducted and not paid by the due date, and allows the deduction only in the year the tax is eventually paid. The remittance filings are Forms No. 145 and No. 146, prescribed under the Income-tax Rules, 2026. The firm sets out the framework on its page on withholding tax on payments to non-residents.
Can the attribution be fixed in advance?
It can. Under Section 168 of the Income-tax Act, 2025, the Board may enter into an advance pricing agreement determining the arm’s length price of an international transaction or the income attributable to a non-resident’s operations in India under Section 9(2). The agreement is valid for up to five consecutive tax years and may be rolled back to up to four preceding tax years, and it binds both the taxpayer and the income-tax authorities for the transaction it covers. On a long project with a permanent establishment that nobody disputes, the argument is about how much profit belongs to India, and that is the argument an agreement can close. The firm’s work on these agreements is described on its page on advance pricing agreements.
Old and new references at a glance
| Subject | Before 1 April 2026 | From 1 April 2026 |
|---|---|---|
| Income deemed to accrue in India | Section 9, Income-tax Act, 1961 | Section 9, Income-tax Act, 2025 |
| Business connection and significant economic presence | Section 9(1)(i) and its Explanations | Section 9(9) |
| Presumptive tax, turnkey power projects | Section 44BBB | Section 61(2), Table Sl. No. 4 |
| Withholding on payments to non-residents | Section 195 | Section 393(2), Table Sl. No. 17 |
| Determination of the taxable proportion | Section 195(2) | Section 395(2) |
| Lower or nil deduction certificate | Section 197 | Section 395(1) |
| Disallowance for non-deduction | Section 40(a)(i) | Section 35 |
| Advance pricing agreement | Section 92CC | Section 168 |
What should be settled before the contract is signed?
Five things. Read the permanent establishment article of the applicable treaty and count the days the mobilisation plan will actually take. Divide the scope so that the offshore and onshore parts are separately described, priced and invoiced, and so that title and risk pass where the contract says they pass. Decide the vehicle after that analysis, not before. Agree what the employer will deduct, and whether an application under Section 395(2) will be made, with a timetable that allows for it. Write the tax clause so that the answer to who bears Indian tax, and who supplies which document, is on paper. In the author’s view, the contracts that produce Indian tax disputes are almost always the ones where these five were left to the finance teams after signature.
Related Services
International EPC Advisory: structuring, negotiation and execution support on cross-border engineering, procurement and construction contracts.
International Taxation and Cross-Border Tax Planning: permanent establishment analysis, treaty positions, profit attribution and international tax disputes.
Withholding Tax on Payments to Non-Residents: rate determination, applications under Section 395, remittance compliance and default proceedings.
Advance Pricing Agreements: forward certainty on transfer pricing and on income attributable to Indian operations.
Key Sources
Income-tax Act, 2025, Section 61 (presumptive taxation of specified non-resident businesses)
Income-tax Act, 2025, Section 393 (deduction of tax at source on payments to non-residents)
Income-tax Act, 2025, Section 395 (certificates and determination of the taxable proportion)
Income-tax Act, 2025, Section 35 (amounts not deductible in certain circumstances)
Income-tax Act, 2025, Section 168 (advance pricing agreements)
India-United Kingdom convention, Article 5 (permanent establishment), Income Tax Department
Director of Income Tax v Samsung Heavy Industries Co Ltd, Supreme Court of India, 22 July 2020
Income Tax Department, forms under the Income-tax Rules, 2026 (Forms No. 128, 145 and 146)
This article is for informational purposes only and does not constitute legal or tax advice. The views expressed are those of the author. Specific legal or tax matters should be referred to qualified advisers. Ravish Bhatt is an Advocate (Bar Council of Gujarat) and a non-practising Solicitor of England and Wales.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
