Instruction No. 1829, dated 21st September 1989 laying down guidelines for determining taxability of non-residents from execution of power projects on a turnkey basis stand withdrawn — Instruction No. 5, dated 20-7-2009 (reproduced).

Instruction No 1829, dated 21-9-1989 (hereinafter called ‘the instruction’)
issued by the Central Board of Direct Taxes 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. The
Instruction analyses a hypothetical situation and taxability thereof. The
Instruction 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.

2. This Instruction was issued in 1989 with regard to execution of power
projects on turnkey basis with certain specified features. Further, the
Instruction quite clearly covers a specific situation in which there is actually
a consortium of foreign companies.

3. In practice, however, the assessees rely on the Instruction for not only the
power projects but other projects as well. Further, a single project is split
into various components like offshore supply of equipments/services, onshore
supply equipments and onshore services. 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. This is not the same case
as ‘consortium of foreign companies’ envisaged in the Instruction.

4. It is also noticed that most of the profit is loaded in the offshore supply
and the payments for the Indian portion of the contracts barely meet the
expenses resulting into either losses in India or very low profit. 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. Further, 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.

5. Thus 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. Accordingly, the Central Board of Direct Taxes
hereby withdraws the Instruction No. 1829, dated 21-9-1989 with immediate
effect.

6. It is clarified that the withdrawal of Instruction will not in any way
prejudice the plea of the Income-tax Department, in any appeal, reference or
petition, that the Instruction No. 1829 does not apply to a particular case on
the given facts even though it was in force at the time of making the
assessment.

7. This may be brought to the knowledge of all officers within your region.