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Consideration received by holding and subsidiary companies for independent contracts in respect of power projects, respectively, for offshore supply of equipments and for erection of equipments, cannot be clubbed for the purpose of section 44BBB of the Act.
Consideration received for offshore supply of machinery is not taxable in India.
Facts:
The applicant was a Japanese company. It was a subsidiary of TC, another Japanese company. An Indian company setting up a power project, which was approved by the Government, had invited bids in respect of two projects in connection with the power project. Pursuant to the bid contract, the applicant and its holding company were awarded two different projects. The parent company was to undertake offshore supply of plant and machineries and the applicant (subsidiary company) was to undertake installation and erection of the plant, depute personnel for execution of project and for turnkey completion and commencement of the power project. The respective roles and responsibilities were as per the following diagram:
The applicant raised the following issues before AAR:
Whether consideration received by the applicant is eligible for presumptive rate of taxation in terms of section 44BBB, and accordingly whether 10% of the contract amount would be deemed to be profits chargeable under the head Profits and Gains from Business or Profession.
If the applicant engages services of a related party or third party for supply of labour for executing the work under the contract with the condition that overall responsibility would remain with the applicant, would the applicant be eligible for presumptive taxation u/s.44BBB of the Act.
The Tax Authority contended that though the two contracts were separately awarded to the holding company and the applicant, they represented a composite contract and hence its taxability should be determined by clubbing transactions of supply and erection of machines.
As regards the second question, the applicant contended that, in essence, the applicability of section 44BBB would be conditional upon verification of master documents along with the facts as to whose employees would render services to the applicant. The applicability of section 44BBB would also depend on whether skilled labour or employees would work under the control and supervision of the applicant.
The applicant contended that:
(a) Both contracts represented two distinct and independent contracts for which separate considerations were fixed.
(b) Applicant was engaged in the business of erection of plant in connection with turnkey power projects. Income of the applicant was taxable u/s.44BBB of the Act.
(c) Parent company merely supplied the equipments which were installed as per required specifications. Consideration for offshore supply was not taxable in view of the Supreme Court’s decision in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT3.
Held:
The AAR held as follows:
The Indian company had executed two contracts, one with the parent company (for supply of plant) and the other with the applicant (for erection of plant and machinery) for the turnkey power project in India.
Consideration received by parent company is not taxable in India as it pertains to offshore supply and reliance on the Supreme Court’s decision by the applicant to that extent is valid.
Section 44BBB was applicable as the applicant was in the business of erection of plant and machinery in approved turnkey power project.
