“taxability of prison guard contracts”
List of abbreviations
Income Tax Act
In this paper an effort is made to analyse the jurisprudence on taxability of prison guard contracts. An effort has been made to analyse to what extent income is nonexempt in prison guard contract. An attack has been taken in this paper to analyze the statutory proviso and different instance Torahs sing the taxability of prison guard contract and what is the current state of affairs of jurisprudence on enforcing the revenue enhancement liability.
The nature of the undertaking is strictly doctrinal/ non-empirical. It is strictly based on the informations collected from books, legislative acts, diaries, instance Torahs and web resources. It is a literature reappraisal. The research worker has relied upon the primary every bit good on secondary beginnings.
In the paper research worker has followed the unvarying manner of commendation.
Scope of the Paper
The range of the research paper is limited to analyse the jurisprudence and statute law on the taxability of prison guard contracts and what is the function played by the judicial dictum in make up one’s minding the instances on taxability of prison guard contracts. In this research an effort has been made to analyse the statutory proviso every bit good as judicial dictums delivered sing the taxability of prison guard contract. The analysis can foster aid in turn uping the blank in the present jurisprudence and how it can get the better of by beef uping and modulating the prospective Torahs. The range of paper is limited to Torahs releted to taxability of prison guard contracts.
In today’s universe substructure is considered as one of the prima factors for development. The Indian authorities has desire to do India as an approaching world power state for which they have been intensifying their investing on heightening the substructure of the state as it will assist in its advancement and development. [ 1 ] Because of the graduated table of the substructure undertakings and the complexnesss included, on a regular basis these undertakings welcome stamp from the whole manner across the Earth, the understanding signed with these companies are known as EPC contracts moreover referred to as prison guard contracts. [ 2 ] A prison guard contract is a concern program in which a undertaking is conveyed in a finished province. Rather than undertaking with an proprietor to make a undertaking in phases, the developer is enlisted to finish the whole undertaking without proprietor information. The builder or developer is independent from the concluding proprietor or operator, and the undertaking is turned over merely once it is wholly operational. Basically, the developer is finishing the undertaking and “ turning the key ” over to the new proprietor. This kind of agreement is usually utilised for building undertakings widening from individual constructions to expansive scale developments. Because of the many-sided nature of these undertakings it is surely unrealistic for any one individual commercial component to try the full undertaking, later these undertakings are taken up by a pool of different companies who handle diverse parts of the undertaking as per their several expertness. [ 3 ] Initially, these turnkey undertakings did non keep the revenue enhancement liability but with the alteration in fortunes the finance ministry in its finance bill’06 has made these turnkey contracts revenue enhancement liable.
Prior the rendition of offshore services for an prison guard undertaking and offshore supply of equipments and stuff for the undertaking are considered to be the chief bone of contention sing the taxability of these undertakings [ 4 ] , but after the amendment to subdivision 9 of the Income Tax Act, offshore services have been made nonexempt and the jurisprudence has been reasonably much settled on this issue, [ 5 ] nevertheless the taxability of seaward supply of equipment and stuff under the turnkey undertakings is still an argumentative issue.
Turnkey contract would convey about a few peculiarly identifiable watercourses of income to the contractor which include the followers:
- Offshore supplies of equipment and stuff
- Offshore services
- Onshore supplies of equipment and stuffs
- Onshore supplies of servives
- What is the extent of taxability of seaward supplies of equipment and stuffs and seaward sevives under prison guard contracts and the function of by judicial dictums in set uping jurisprudence related to such prison guard contracts?
Taxability of seaward supplies of equipment and stuffs
To enforce taxability on seaward supplies of equipment and stuffs, it has to be shown that the non- occupant has lasting constitution and concern connexion. If there is no concern connexion or lasting constitution so there would be no revenue enhancement liability. But, if there is concern connexion or lasting constitution so the revenue enhancement can be imposed on the net income that is attributed to such concern connexion and lasting constitution.
For non-residents, subdivision 5 of the Income Tax Act is the bear downing subdivision for their income. [ 6 ] Section 5 ( 2 ) of Income Tax Act enforce revenue enhancement on the income of non-residents which is received or deemed to be received in India by or on behalf of such individual [ 7 ] or accrues or arise or is deemed to be arise. [ 8 ] Section 9 of Income Tax Act trades with income deemed to accrue or originate in India. Section 9 provinces that all income accruing or originating through or from any concern connectionin should be considered as nonexempt in India. [ 9 ] The account clause attached to it points out the extent of income to be taxed by saying that merely such portion of income that is attributable to the concern carried out in India woul be nonexempt. [ 10 ] Therefore, it is clearly mentioned in the statutory proviso that in instance of offshore supplies, income which is non attributable to the operations carried out in India would non be taxed.
Taxability of offshore services
The taxability of offshore services is no more a bone of contention as after the amendment to subdivision 9 of IT Act [ 11 ] these services have been made nonexempt.
Ishikawajna-Harima Heavy Industries Ltd. V. Direct of Income Tax
In Ishikawajna- Harima Heavy Industies Ltd. v. Direct of Income Tax [ 12 ] , it is Japan based company engaged in the concern ofengineering and building of storage armored combat vehicles. The company formed a pool with other companies and entered into an understanding with Petro LNG Ltd.situated in the province of Gujrat to put up liquified Natural Gas storage armored combat vehicle and for degasification installation. It is a turnkey contract. Each member of pool was specified about their separate function and duty and hence, they receive separate payment. The clip period for the undertaking was 41 months. The inquiry that arised in this instance whether the company is apt to pay revenue enhancement in India under Income Tax Act and India- Japan Tax Treaty. Therefore, the company filed an application before Authority for Advance Appellant. The determination of Supreme Court is given in two parts one for the offshore supplies and other for the offshore services. The Apex Court held the undermentioned determination ;
“ merely such portion of the income which is attributed to the operations carried out in India can be taxed. Under the prison guard contracts, if all the dealing were operated outside India so these minutess can non be taxed in India.
It made the differentiation between the lasting constitution and concern connexion. Being of lasting constitution is a nonexempt entity but its presence does non make sufficient concern connexion. Therefore the net income attributable to the lasting constitution in India would be made nonexempt and the mere presence of lasting constitution in India does non made the income of assessee generated under turnkey contract does non do it nonexempt.
Mere being of of concern connexion is non sufficient, to do the income nonexempt the income should be originating or accruing out of such concern connexion.
The prison guard contract need non to be be considered as an integrated contract merely to do the contractor to pay revenue enhancement in India. To do an income nonexempt under Income Tax Act, it should be shown that the services are non merely utilised but rendered in India.
To do the income nonexempt it is necessary to hold adequate territorial link between the rendering of services and territorial bounds in India.” [ 13 ]
Hyundai Heavy Industries Co Ltd v. Director of Income Tax
This is the another landmark instance on the taxability of prison guard contract decided by the supreme tribunal. In Hyundai Heavy Industries Co. Ltd. v. manager of Income Tax [ 14 ] , the Hyundai Heavy Indutries is a Korean based company which eneterd into a prison guard contract with an Indian based company ONGC for manufacturing, planing, installing and commissioning of platforms in Bombay High. Designing and fabricating of platform was performed outside India and remainder of the activities like installationand commissioning of platform was performed in Bombay High.
The Revenue officer issue a notive to the company, to which a company filed a return of income as ‘nil’ income. And responded to the gross governments, as they did non hold lasting constitution in India and the activities like planing and fiction were done outside India doing them non apt to pay revenue enhancement. They are merely apt to pay revenue enhancement for the net net income arising from the activities that are performed in India i.e. installing and commissioning of platforms.
The gross authorization appealed to the Supreme sing the contention that to what extent the net income attribuatable to company’s lasting constitution in India.
The tribunal held that “the constitution PE of HHI came into presence merely on completion of fiction exercisings and supply of the fancied platforms to ONGC outside India, no portion of net incomes emerging from operation conveyed outside India could be said to hold been earned through the Permanent Estabishment. Likewise, no portion of net incomes from operation conveyed outside India could be credited to the PE and accordingly accumulated to revenue enhancement in India. In a prison guard contract consisting designing, fiction, installing and commissioning work, benefits originating from the operation performed outside India can non be ascribed to the Permanent Establishment. In this manner, such benefits can non be apt to revenue enhancement in India, if the cost paid for work performed outside India is at a careful distance. [ 15 ]
The Supreme Court ‘s determination in HHI instance settles the treatment embracing the taxability of oil field disposal providers in esteem of fiction and designing exercisings performed outside India under a prison guard contract. The opinion accept increased noteworthiness since it maintains the rule that supply outside India wo n’t be nonexempt in India so where such supply is made as per a individual prison guard contract which includes onshore and seaward extent of work and accommodates a bulge entireness idea. [ 16 ]
The Apex Court follows its pick in the case of Ishikawajma Harima Heavy Industries Ltd, affirmed prior, on taxability of offshore supplies. The Court had decided that a non-resident would non be obligated to revenue enhancement in India in grasp of exercisings performed outside India if such exercisings are non viably joined with a concern association in India. [ 17 ]
- Income Tax Act, 1961
- Finance Act
The Assessing Officer ( “AO” ) held that the contract between HHI and ONGC was a prison guard contract for a lumpsum monetary value and is an indivisible contract. The designing and fiction of platform under the contract is per se linked to installing and commissioning activities performed in India. As respects the taxability of Indian operations, the AO held that the activities of HHI constituted a PE in India under Article 5 ( 3 ) of the DTAA, and hence, net incomes attributable to Indian operations were apt to revenue enhancement in India.
In add-on, planing and fiction activities, though performed outside India, are interlinked to the ultimate activity of installing and commissioning ; and hence, a part of the net incomes from such operations would besides be apt to revenue enhancement in India.
The Supreme Court’s opinion in HHI instance settles the contention environing the taxability of oil field service suppliers in regard of fiction and designing activities performed outside India under a prison guard undertaking. The governing assumes increased significance since it upholds the rule that supply outside India will non be nonexempt in India even where such supply is made pursuant to a individual prison guard contract which includes onshore and offshore range of work and provides for a ball amount consideration.