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Taxability of income arising to non-residents. - Income Tax - 1829/1989Extract INSTRUCTION NO. 1829/1989 Dated: September 21, 1989 The taxability of income arising to non-residents who will be entering into agreements with resident organisations/public sector companies for the execution of power projects on turnkey basis involving activities to be carried out in India as well as outside India has been examined by the C.B.D.T. 2. Turnkey execution of hydroelectric power projects mainly involve the following work packages: i. Planning, design and engineering services ii. Supply of permanent equipment, iii.Civil works and iv. Erection testing and commissioning of electrical and mechanical equipment. 3. The concept of the turnkey execution of the project involves total and complete responsibilities of the persons undertaking the contracts for commissioning the project and they are accordingly required to furnish performance guarantees for timely completion. 4. Some of these hydroelectric power projects are likely to be undertaken by a consortium of foreign companies. The public sector companies in India will be entering into separate agreements with one or more of these foreign companies for the following purposes:- a. for supply of equipment and materials FOB at ports outside India: b. for planning, design and engineering services. These services would include preparation of designs, technical specification and drawings for the project as well as for the equipment model studies and rendering of advice on various technical aspects during construction as well as planning of the entire work schedule etc. c. for execution of civil works at the project site like construction of dams, tunnels, power houses etc. and for transportation of equipment and materials to India by air/sea. d. for erection testing and commissioning of the machinery and equipment purchased outside India on FOB basis as well as equipment purchased in India, and for transportation of equipment and materials to India, by air/sea. The items of work mention at a,b,c,d above may be entrusted to one or more foreign companies. But the suppliers referred to at (a) above need not be the contractor(s) for civil works mentioned at (c) above. 5. Apart from the separate contracts for the jobs mentioned in para 4 above, there would be an overall co-ordination agreement between the public sector company on the one hand and the foreign contracting parties referred to in para 4 on the other hand to ensure guaranteed performance of all the contracts in a coordinated manner and within an agreed time frame and for undertaking to meet necessary liabilities and responsibilities including payments of liquidated damages for delays etc. One of the companies would for this purpose act as leader to ensure supervision and coordination of inter-related tasks. 6. With facts and circumstances stated above, nothing contained in the overall agreement will be intended to create a joint venture or partnership or association of persons between the contracting parties. The Indian concern will not be making any payments whatsoever to any foreign under this overall agreement. 7. On the basis of these broad facts the issues which arise for consideration and the taxability of the various items of income have been discussed below; a) THE STATUS OF THE CONSORTIUM FOR TAX PURPOSES: As mentioned above there will be an overall agreement between the public sector company on the one hand and the various foreign companies referred to in para 4 on the other. This will be only for ensuring the guaranteed performance of all the contracts in a co-ordinated manner within the agreed time and for ensuring acceptance of liabilities and responsibilities thereof including payment of liquidated damages for delays in execution etc. Further no payment is to be made under the overall agreement to any of the contracting parties. In view of these facts the foreign companies forming the consortium will not constitute an association of persons under the I.T.Act. Each foreign company will be individually liable for taxation as a separate entity. b) PROFITS FROM SALE OF EQUIPMENTS AND MATERIALS ON FOB BASIS WHERE THE PAYMENTS ARE ALSO MADE OUTSIDE INDIA: Profits from such sale of equipments would not be deemed to accrue or arise in India u/s.9(1)(i) of the I.T.Act as the title of the goods will pass outside India will be so even if there is an overall agreement as mentioned above. As already indicated no payments will be made under the overall agreement nor technical services abroad for doing the civil works at the site or for installation, errection, testing etc. Therefore, in respect of these sales no part of the income will be deemed to accrue or arise in India. c. PAYMENTS FOR PLANNING, DESIGN AND ENGINEERING SERVICES: These services rendered in India or abroad are of the nature of technical services and the fees payable in respect of such services will not partake the character of royalty. In the absence of a double taxation avoidance agreement with the country concerned the gross fees paid to the foreign company will be subjected to tax at the rate of 30 per cent, u/s.115 A of the I.T.Act, 1961. If the foreign company is a resident of a country with which india has a double taxation avoidance agreement then such Agreement will govern the taxation of the fees for technical services. D) PROFITS IN RESPECT OF CIVIL WORK CONTRACTS EXECUTED IN INDIA AND CONTRACTS FOR ERECTION TESTING OR COMMISSIONING OF PLANT OR MACHINERY. In this connection, attention is invited to the provisions of sec.44BB inserted by the Finance Act with effect from 1-4-90. Under the provisions of this section, a sum equal to 10% of the gross amounts paid or payable to the foreign company on account of such civil construction, erection, testing or commissioning will be treated as the profits and gains of such business chargeable to tax in India provided other conditions mentioned in the section are satisfied. It may be added that the errection of plant or machinery or testing or commissioning thereof will also include laying of transmission lines. e)CHARGEABILITY OF RECEIPTS ON ACCOUNT OF TRANSPORTATION OF EQUIPMENT AND MATERIAL TO INDIA BY AIR/SEA. In respect of these payments the provisions of sec.44B and sec.44BBA of the I.T.Act relating to the computation of profits and gains of business of operation of ships or aircraft, as the case may be will be applicable. These provisions may be applied only if the charges payable for such transportation are clearly distinguishable in the agreements. 8. For the removal of doubts, it is clarified that inspite of the existence of the overall agreement between the public sector company and the foreign companies covering the completing scope of work etc. as mentioned in para 5 above each contracting foreign company should be treated as a separate entity. Further various contracts should not be clubbed together unless they are undertaken by the same foreign company. 9. These guidelines will be applicable in the cases of the contracts entered into after 1-4-89. 10. The above instructions may please be brought to the notice of the officers working in your charge particularly the A.O.'s dealing with the cases of non-residents for strict compliance.
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