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AAR Changes Approach to Taxing Offshore Supplies

15 May 2012

The Authority for Advance Ruling in a recent ruling has held that a single contract for supply, installation and commissioning of equipment was a composite contract and hence could not be 'dissected' for determining taxability of income from offshore supply of equipment and erection and commissioning activities in India. Applying the 'look at' approach enunciated by the Apex Court in Vodafone's case, the AAR held that consideration for offshore supply of equipment accrued in India and was taxable, along with consideration for onshore erection and commissioning activities. Taxand India considers the facts of the case in the ruling announced by the AAR and how this will affect multinationals based in India.

Facts of the case

  1. Roxar Maximum Reservoir Performance WLL, a company registered in Kingdom of Bahrain, entered into a contract with ONGC for supply, installation and commissioning of 36 manometer gauges. Under the contract, the Applicant was responsible for supply of the manometer gauges and their installation and commissioning in India. The consideration for the supply and the services were identified separately in the contract.
  2. The Applicant approached the AAR for a ruling on whether the consideration receivable for the offshore supply is taxable in India.

Taxand India discusses the case including the applicant's and revenue's contentions in more detail

Taxand's Take

While a ruling from the AAR is not a binding precedent and has only a persuasive value, this ruling could be significant as it may prompt the Revenue to apply its rationale to other similar cases, ignoring an almost settled position regarding taxation of off shore supplies in a composite contract containing clearly identifiable and distinct parts for the scope of work involved. The ruling is likely to have ramifications for several turnkey EPC contract structures, which had taken tax positions based on principles emanating from landmark decisions of the Apex Court in IHI and Hyundai Heavy Industries Company Ltd.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

Taxand's Take Author