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AAR Reiterates ‘look at’ Approach for Turnkey Contracts
The Authority for Advance Rulings 'AAR' in its ruling pronounced on 7 June 2012 has held that a contract for design, manufacture, supply, installation, testing and commissioning of signaling/ train control and communication systems is a composite contract, and income from offshore supply was taxable in India, even though property in such goods was transferred outside India. The decision largely reiterated the recent ruling of the AAR in the case of Roxar. Taxand India provides a summary of facts of the case and the ruling given by the AAR and tries to analyse how multinationals are likely to be impacted but the result.
Facts of the case
Bangalore Metro Rail Corporation Limited 'BMRC' floated a tender for design, manufacture, supply, installation, testing & commissioning of certain equipment.
Alstom Transport SA, a French resident entered into a consortium agreement with Alstom Projects India Limited, Thales Security Solutions & Services, SA, Portugal and Sumitomo Corporation, Japan, to cooperate on an exclusive basis in the submission of a joint tender to BMRC for the project and, in the negotiation and performance of the contract, if awarded.
Parties to the contract with BMRC were to be jointly and severally bound by terms of the tender and, jointly and severally liable for performance of all obligations under the contract. The bid submitted by the consortium was accepted by BMRC and the contract between consortium and BMRC was executed.
Taxand India provides a more detailed analysis of the ruling on Turnkey Contracts
This ruling, like the earlier ruling in Roxar, is likely to affect similar cases of EPC contracting, with the Revenue taking an aggressive approach in tax audits going forward.
The AAR, while admitting that the decision in IHI does not stand overruled, observed that the dissecting approach followed in IHI stands expressly or impliedly disapproved and the Authority was bound to follow the subsequent "look at" approach postulated by the Apex Court in Vodafone. It is also important to note that the AAR has observed that even if dissecting approach would be followed in the facts before it, it was not possible to split the composite contract. Thus, while the conclusion reached by the AAR on the express or implied disapproval by Apex Court of the IHI approach remains questionable, the ruling even otherwise suggests that, scope within composite contracts cannot be segregated for taxation purposes. It is highly debatable whether the decision in Vodafone disapproves the ratio laid down in IHI for taxing offshore supplies.
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