Income Tax - execution of power projects on turnkey basis – CBDT withdraws a 1989 Instruction
CBDT has withdrawn Instruction No.1829 dated 21/9/1989 as the Board feels that the Instruction had been misused and misrepresented.
According to the Board, the Instruction No. 1829/1989
1. Deals with the taxability of income arising to non-residents from the execution of power projects on turnkey basis involving activities to be carried out in India as well as outside India.
2. analyses a hypothetical situation and taxability thereof.
3. lays down the basis of taxation with regard to the four activities listed therein. With regard to the activity relating to profits from sale of equipments and materials on FOB basis, delivered at port outside India, where the payments are also made outside India, it instructs that on the given facts no part of the income will be deemed to accrue or arise in India.
But the Board found that in practice:
1. the assessees rely on the instruction for not only the power projects but other projects as well.
2. Further, a single project is split into various components like offshore supply of equipments/services, onshore supply equipments and onshore services.
3. Sometimes, the contract is split even when only one contractor/supplier bid for the project. In such cases the contract is split into various components to be executed by the bidder and its associate concerns. Thus consortium of foreign companies is not in existence but is created to take advantage of the instruction.
4. This is not the same case as “consortium of foreign companies” envisaged in the instruction.
5. most of the profit is loaded in the offshore supply and the payments for the Indian portion of the contracts barely meets the expenses resulting into either losses in India or very low profit.
6. The assessing officer's attempt to apportion profit correctly into various components of the overall project on the basis of functions, risks and assets is often resisted by the assessee taking recourse to the instruction.
7. even if it is proved that a part of the operations relating to supplies have taken place in India or the permanent establishment of the assessee had a role in offshore supply, the profit from offshore supply is claimed to be exempt under the instruction.
Thus, the Board found that, the instruction which was originally intended for only a particular type of turnkey power project, for a given situation, is being relied upon by assessees in all cases, in all situations, to align their business operation in a manner to avoid payment of taxes in India. This was never the purpose of issuance of this instruction.
So the instruction no.1829 dated 21.09.1989, is WITHDRAWN. And it took the Board twenty years to realise this!
CBDT Instruction No. 5/2009, Dated: July 20, 2009