Renewable Energy Sector - wirc-icai.org EPC contract structuring and implications 5 Judicial precedents ... • Recently, the Delhi High Court in case of Ericsson A.B., Ericsson Radio

Renewable EnergySector

- Updates and Direct tax issues

4 February 2012

© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1

Contents

2 Proposed Direct Taxes Code - Impact

3 Accelerated depreciation and GBI

1 Tax incentive for energy

4 EPC contract structuring and implications

5 Judicial precedents


Tax Incentive for Energy

• 10 consecutive years out of 15 years

• However, applicable Minimum Alternate Tax payable on Book Profits during incentive period

Tax Incentives

• ‘Undertaking’ which generates power

• ‘Undertaking’ which transmits or distributes power• ‘Undertaking’ which carries out substantial renovation and

modernization*

Applicability

• All the above should commence (*complete) before 31 March, 2012Eligibility


Contents

2 Direct Taxes Code - Impact



4


EPC contract structuring and implications

Draft for Discussion

© (2012) KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4

Profit Linked IncentiveUpto 31 March 2012

Expenditure based incentiveFrom 1 April 2012*

Particulars

Gross Income

Less:

Revenue Expenses

Depreciation

Net Income

Less: Deduction u/s 80-IA

(10 out of 15 years)

Minimum Alternate Tax

Amount

XXX

(XXX)

(XXX)---------

XXX

(XXX)

XXX

Particulars

Gross Income

Less:

Revenue Expenses

Capital Expenses*

Net Income / (Loss)

Minimum Alternate Tax

Amount

XXX

(XXX)

(XXX)

---------

XXX

XXX

Incentive under Direct Taxes Code - merely a timing difference

*Capital Expenditure does not include acquisition of Land

(including long term lease), Goodwill and Financial Instrument

Tax Incentive for Energy– Paradigm Shift

* If DTC comes into effect from 1 April 2012



Specified profit linked tax holiday under the Act - to be continued for unexpired period

Profits to be computed as per the Code

• No deduction to be allowed for capital expenditure and expenditure incurred before commencement of business

Conditions specified under Section 80-IA of the Act to be complied with

Undertaking as are eligible for deduction under Section 80-IA as on 31 March 2012 shall be eligible for Grandfathering

Tax Incentive – Grandfathering

Deduction for tax depreciation on capital assets acquired prior to 31 March 2012 – not clear



Contents




4





Accelerated Depreciation and GBI

Generation Based Incentive

For renewable power projects certified by concerned utility announced by Ministry of New and

Renewable Energy

Projects to have minimum installed capacity of 5 MW

Accelerated Depreciation

Accelerated depreciation (80 to 100 percent) on Written Down Value (WDV) basis for energy saving

and renewable energy devices

Benefit of accelerated depreciation gradually losing importance

GBI or accelerated depreciation, both cannot be claimed






4 EPC contract structuring and implications


Contents



Supplie

s

Serv

ices

Offshore

Onshore

Generally Not

Taxable

Generally taxable

@ 42.02%

Offshore

Onshore

Taxable ‘Net

basis’Effectively connected with PE

Generally Taxable

‘Gross basis’

Not connected with PE

Rendered through PE

Taxable

‘Net’ basis’

Taxable @ 42.02%

Taxable @ 33.22%

FTS @ 10%

Taxable

‘Net’ basis’

Rendered by Indian Entity

Taxable @ 42.02*

*10% on gross basis if not effectively connected to PE

Whether EPC contracts adversely affected by introduction of GAAR?

Whether recent withdrawal of beneficial circulars affect EPC contracts adversely?

EPC Contract Structuring



Direct Tax Issues

Direct Tax Issues

Designs and Drawings / Software

Designs and Drawings / Software

Consortium –Association of Persons

Consortium –Association of Persons

Split Contracts

Split Contracts

Offshore Supply

Equipments

Offshore Supply

Equipments

EPC Contract Implications

Leasing of equipmentLeasing of equipment

Deputation of employees in

India

Deputation of employees in

India

Offshore ServicesOffshore Services

Onshore ServicesOnshore Services






4

5

Contents

Judicial precedents




Taxability of Offshore Supply(1/2)…

Ericsson A.B. (December 2011)

• Recently, the Delhi High Court in case of Ericsson A.B., Ericsson Radio Systems A.B. and M/s Metapath Software International Ltd[1] has released a landmark order on taxability of equipment comprising hardware and software. The High Court has held the following:

� Profits from offshore supply of equipment comprising hardware and software, are not taxable in India;

� Revenues from software license are not taxable as royalty income as there is no transfer of all or any rights in respect of the copyright of the software;

� Software supply is an integral part of the equipment. Accordingly, it is not permissible for the Revenue to assess sale of hardware and sale of software under two different articles and the payments made by the Indian customers for acquiring such equipment cannot be taxed as royalty.

[1] ( ITA 504,507, 508, 511 & 397 of 2007)



…Taxability of Offshore Supply(2/2)

LS Cable Ltd (July 2011)

• Recently, the AAR in the case of LS Cable Ltd[2] (the applicant) held that amount received by the applicant

from offshore supply of equipments and materials is not taxable in India under the Act as well as under the

India-Korea tax treaty.

• Further, the AAR held that the existence of PE is relevant for the purpose of carrying out the contract for

onshore supplies and services but such a PE would have no role to play in offshore supplies.

• Also, as the consideration for the sale portion is separately specified, it can well be separated from the whole

as it was held in the case of Ishikwajima Harima Heavy Industries.

• Recently, the Bombay High Court in the case of Xelo Pty Ltd[3] upheld the decision of the Mumbai Tribunal

which held that offshore supply is not taxable in India.

Xelo Pty Ltd (November 2011)

[2] 2011-TII-20-ARA-INTL[3] Income Tax Appeal No.825 OF 2010



Fees for Technical Services(1/2)…

Verizon Data Services Private Ltd (May 2011)

• Recently, the AAR in case of Verizon Data Services India Private Limited[4] (the applicant) held that fees which are

managerial in nature need not be ‘made available’ to get covered under the definition of FIS

• It was held that since the services provided are managerial in nature, the ‘make-available ‘clause is not required

to be satisfied and hence payment would fall under the definition of FIS.

• The salary reimbursement of seconded employees is taxable as FIS under Article 12 of India - USA tax treaty and

also as fees for technical services under Section 9(1)(vii) of the Act. Accordingly, tax is required to be deducted

under Section 195 of the Act on such reimbursements

• Further, the AAR held that while the seconded employees are providing services to the applicant, they will remain

the employees of the foreign company. Accordingly, the services performed by the seconded employees are

performed on behalf of such foreign company and not as employees of applicant

[4]11 taxmann.com 177



...Fees for Technical Services(2/2)

• On the same day on which the above referred Verizon’s ruling was pronounced, the Hyderabad Tribunal in

the case of Viceroy Hotels Ltd[5] (the taxpayer) held that advisory and opinion related services provided to a

non-resident company could not be treated as Fees for Included Services under India-USA tax treaty

• Further, the Tribunal held that since the services provided did not make available technical knowledge, know-

how, skills, etc. to the taxpayer it could not be treated as Fees for Technical Services either under the tax

treaty.

• SNC Lavalin[6], entered into contract with NHAI for providing technical drawings and reports. Appellant had

withheld taxes @15% under Article 12(4) of the India-Canada tax treaty

• Tax department contended that unless the development or technical design is made available, article 12(4)

would not apply.

• The Delhi High Court held that Article 12(4)(b) does not contemplate transfer of all rights or interest in such

technical design or plan. Fees received from transfer of technical design or plan for the purpose of mere use

would be covered under Article 12(4)(b)

(5]11 taxmann.com 216[6]11 taxmann.com 23

Viceroy Hotels (May 2011)

SNC Lavalin International Inc (April 2011)



Permanent Establishment(1/2)…

• In the case of Samsung Heavy Industries[7], the Delhi Tribunal held that where a PO which was opened by a

Korean company in India for the coordination and execution of a project in India / abroad and no restriction was

imposed by Reserve Bank of India on the working of the said PO, such a PO was PE within the meaning of Article

5(1) of DTAA between India and Korea.

• It was held that under the India – Korea DTAA, that the PE was established under Article 5(1), therefore, there is no

need to look into the provisions of Article 5(3) as the case of the Korean company falls under Article 5(1) which

has equal force.

• Article 5(3) of the tax treaty which deals with the installation PE was not an exclusionary clause to be read in

isolation, it rather extends the scope of Article 5(1) and Article 5(2) of the tax treaty.

• In the case of BKI / HAM[8], the Uttarakhand High Court held that as the Netherlands company’s contract was

completed in two months [Article 5(3) of the India – Netherland DTAA provided that a “building site” or “construction

project” would be a PE only if continued for more than 6 months], there was no PE under Article 5(3).

• The argument that the Mumbai office was a PE under Article 5(2) of the DTAA is not acceptable because while

Article 5(2) is a general provision, Article 5 (3) is a specific provision which prevails over Article 5(2).

BKI / HAM (October 2011)

Samsung Heavy Industries (August 2011)

[7]13 taxmann.com 14[8]15 taxmann.com 102



…Permanent Establishment (2/2)

• Recently, the Delhi Tribunal in the case of GIL Mauritius Holdings Ltd[9] held that construction or assembly project

constitutes a Permanent Establishment only if the assembly project would have lasted for more than nine months

as specified in Article 5(2)(i) of India-Mauritius tax treaty.

• The Tribunal observed that Article 5(2)(i) of the tax treaty specifically deals with construction or assembly project or

supervisory activities in connection therewith. If the matter was concluded under Article 5(1) of the tax treaty, Article

5(2)(i) becomes redundant. Therefore, Article 5(1) and 5(2)(i) have to be read together harmoniously.

GIL Mauritius Holdings Ltd (September 2011)

[9] [ ITA No. 5686(Del)/2010, dated 16 September, 2011 (AY 2007-08)]

18© (2012) KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Abbreviations Full Forms

AAR Authority for Advance Rulings

AO Assessing Officer

AOP Association Of Persons

DTAA Double Tax Avoidance Agreement

EPC Engineering Procurement Construction

FIS Fees for Included Services

FTS Fees for Technical Services

GAAR General Anti Avoidance Rules

GBI Generation Based Incentive

PE Permanent Establishment

PO Project Office

The Act Income Tax Act, 1961

The Tribunal Income Tax Appellate Tribunal

Glossary

© (year) KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 19

19

Thank You

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual

or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is

accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.

Hemal ZobaliaPartner

Documents

Renewable Energy Sector - wirc-icai.org EPC contract structuring and implications 5 Judicial precedents ... • Recently, the Delhi High Court in case of Ericsson A.B., Ericsson Radio