It is quite common now a days that a foreign company undertakes turnkey projects along with an Indian company. Such projects include activities which are carried out in India as well as outside India. The activities to be carried out outside India generally include offshore supply of goods, equipment and services. The Income-tax law as interpreted by various courts is that the offshore supply or services may or may not be taxable in India depending upon the existence of foreign company's Permanent Establishment (PE) in India.
In case of a turnkey project which normally includes supply of equipment, fabrication, installation and commissioning etc. certain activities will be done entirely outside India. But certain activities, e.g. installation and commissioning etc. will be done within India for which purpose the foreign company will be required to have a necessary set-up (e.g. a project office) in India.
Such Indian set-up may either be for the entire project or only for installation and commissioning to be done in India. In case the Indian office is for the entire project, then the offshore supplies and services pertaining to the project carried out by the foreign enterprise outside India may also be taxable in India. However, in case the activity of the Indian office is restricted to operations to be done only in India, e.g. installation and commissioning, then there is a possibility that the offshore supplies and services may not be liable to tax in India.
Reference in this regard may be made to a recent decision of the Hon'ble Delhi Tribunal in the case of Samsung Heavy Electrical Co Ltd. V ADIT, [133 ITD 413]. In this case, the assessee, Samsung Heavy Electrical Co Ltd (SHI), along with L&T entered into an agreement with ONGC to carry out the work of surveys (pre-engineering, pre-construction/pre installation etc), design, engineering, procurement, fabrication, transportation, installation and commissioning of entire facilities covered under Vasai East Development Project.
For the aforesaid project, SHI opened an office in Mumbai, India for "Co-ordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation Limited (ONGC), India." In other words, the project office was opened for the entire project. SHI were to receive certain amounts from ONGC in respect of activities carried out by it outside India. SHI did not however offer the said income for tax in India on the ground that no core business activity had been carried out through the Mumbai office.
The Hon'ble Tribunal observed that no restriction has been put either by the assessee company in the application moved to RBI or by the RBI while granting the approval with regard to the activity of the Mumbai project office. In all the activities relating to project, the Mumbai Office has a vital role to play.
Therefore, the Mumbai Office was not restricted to installation and commissioning. The activity of the Mumbai office was related to the entire project. Therefore, the income earned outside India is also liable to tax in India.
The Hon'ble Tribunal distinguished the instant case from the case of CIT v Hyundai [291 ITR 482] (SC) on the ground that in that case the foreign company had only an installation PE in India. It had no office in India until the completion of fabrication outside India. But in the instant case, the Mumbai office could not be said to be only installation PE as its activity was not restricted to installation only.
Therefore, it is advisable that whenever a foreign company enters into any such turnkey project wherein part of the activities are to be carried out in India and part outside India, then the nature of the Indian office, which may be required to be opened in India, should be clearly defined in such a way that its scope remains restricted to the activities to be undertaken only in India. Then only off-shore supply may remain outside tax net in India.
The author is a Sr. Partner in S.S. Kothari Mehta & Co.