13971 sudipta bhattacharjee managing associate bmr advisors
TRANSCRIPT
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4thMaster Class Training Program on
EPC ContractingLegal, Taxation, Commercials and Risks
22nd23rdApril 2013Crowne Plaza Today, Okhla, New Delhi
Supported By
OrganizedBy
www.solarquarter.com www.constructionsphere.com www.windinsider.com www.powermarketsindia.com
www.infrastructure-markets.com
http://www.in.solarquarter.com/http://www.constructionsphere.com/http://www.windinsider.com/http://www.powermarketsindia.com/http://www.infrastructure-markets.com/http://www.infrastructure-markets.com/http://www.infrastructure-markets.com/http://www.infrastructure-markets.com/http://www.powermarketsindia.com/http://www.windinsider.com/http://www.constructionsphere.com/http://www.in.solarquarter.com/ -
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CONFERENCE ON EPC Contrac
t ing:
Legal, Taxation , Commercials and Risk s
KEY INDIRECT TAX ASPECTS
April 22, 2013 | Crowne Plaza Today | New Delhi
Sudipta Bhattacharjee | Managing Associate, BMR Legal
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EPC CONTRACTSSENSITIVITY TO TAX COSTS
Very low margin of error in project cost calculation
Consequently, estimation of tax cost involved in setting up,operation and maintenance of the project becomes vital
A detai led analys is of tax cos ts associatedw ith sett ing up, operat ions and maintenanceof pro ject ought to be undertaken in order toensure:
Maximum accu racy; and
No surpr ises at a later date
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HOW INDIRECT TAXAPPLIES ON EPC
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SERVICE TAX
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Comp rehensive levy on al l act iv i t ies except tho se excluded from the
definition of service and thos e speci f ied in negat ive l ist and exempt ion l is t
SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME FROM JULY 1
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OVERVIEW OF KEY POINTS
Chargingsection
Section 66Bprescribing 12%
ServiceDefined under
section 65B(44)
Negative list17 specified
services providedunder section 66D
Exemption list
Declared servicesProvided under
section 66E
34 specified services
provided under
exemption notification
Place ofprovision ofservicesRule making
power under
section 66C
Complete overhaul of taxation of services
Interpretation
Principles
provided
under
section 66F
ReverseCharge
ValuationRules
CenvatCredit Rules
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME FROM JULY 1
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Definition ofservice
Definition of service
Any activity
For consideration
Carried out by a person for another*, and
Includes declared services
Exclusions Transfer of title in goods or immovable property in
any manner
Deemed sales like leases, works contracts (exceptfor the service portions in these transactions)
Transaction only in money or actionable claim Service provided by an employee to an employer
in the course of the employment
Fees payable to court or tribunal
* Foreign br anch and
AOP clarif ied to bedifferent from head
off ice/ mem ber of AOP
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME
KEY ASPECTS FOR FURTHER CONSIDERATION 1
Given the wide definition of service, any set of legally enforceablereciprocal promises may fall under the service tax net nowwhether
or not intended as a service/economic transaction.
Intra-group company transactions/NDAs/non-compete agreements/anti-poaching agreements etc - under the service tax net now?
Liquidated damages = a service of tolerance of delay/non-performance by the owner?
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Argument in favor Argument against
Agreeing to the obligation to
refrain from an act, or to tolerate anact or a situat ion, or to do an actA Declared Service under law
LD is nothing but a penalty for delay/
shortfall in performance and cannot bedivorced from the underlying transactionof supply of goods/provision of services
Important to factor this exposure during contract negotiation
and agree on risk sharing in this regard upfront
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME
KEY ASPECTS FOR FURTHER CONSIDERATION 2
Explanation to definition of service - an unincorp orated
association or a body o f persons, as the case may be, and amember thereof shal l be treated as dist in ct person s
An unincorporated consortium of persons and a member thereof mayhave to be treated as distinct taxable entities by everyone above and
below them in the supply chain. This may lead to unintended tax as wellas compliance outcomes for unincorporated consortiums and itsmembersrelevant for consortiums acting as EPC contractor
Applicability of service tax at 50% reverse charge on unincorporated
consortiums undertaking EPC contracts qualifying as association of
persons
Whether the meaning of association of persons has to be taken from
Income Tax Act, 1956 or it has to be interpreted on first principles?
Adoption of wrong value by the AOP contractormay pose issues forthe project owner
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME
KEY ASPECTS FOR FURTHER CONSIDERATION 3
Definition of works contract expanded - Section 65B(54) :
"works contract" means a contract wherein transfer of proper ty ingoods involved in the execution of such contract is leviable to tax assale of goods and suc h contract is for the purpos e of carry ing outconstruction, erection, commissioning, installation, completion, fitting out,
repair , maintenance, renovation, alteration of any movable orimm ovable proper tyor for carrying out any other similar activity or apart thereof in relation to such property - are O&M con tracts c overed?
Status of O & M contractsIs it a bundled service?
Naturally bundled then taxability as per essential character
Artificially bundled then highest rate of tax to apply on the entireservice
Is the main objective of an O&M contract repair and maintenance or is
it unhindered operationa critical consideration from a tax point now
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIMEKEY ASPECTS FOR FURTHER CONSIDERATION 3 (Cont)
Definitionof input and input service provide for exclusions forgoods/services used for
Construction or execution of works contract of a building or a civilstructure or a part thereof.
Earlierconstruction of a building or a civil structure or a part thereof.
Addition of the underlined portioncredit restriction expanded toO&M transactions too?
Possible planning option for O&M contracts for power projects
Any process which amounts to manufacture or production of goods is
listed in the Negative list.
Thus, if the dominant activity/objective in O&M contract is themanufacture or production of goods (ie., electricity), then the entirevalue of O&M should not liable to service tax??
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME
KEY ASPECTS 4 : WORKS CONTRACT VALUATION
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Old Scheme New Scheme
Composition scheme -Option to pay tax at4.94% on contract value
No composition scheme wef July 1, 2012
Value of service is deemed to be: 40% of gross amount in case of original works
70% of gross amount in case of works contract formaintenance, repair or servicing of goods
60% of gross amount in all other cases
Abatements under the new schemeconcept of Total Value confusingdefinition
Does expansion of an existing project under a new tender qualify as OriginalWorks? Exemption available for expansion ofan existing power project?
Definition of original works include all new constructions; all types of additions
and alterations to abandoned or damaged structures on land that are required to
make them workable; and erection, commissioning or installation of plant,
machinery or equipment or structures, whether pre-fabricated or otherwise
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SERVICE TAXCOMPREHENSIVE SERVICE TAXREGIME
KEY ASPECTS (miscellaneous)
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Entry 14(a) of the exempt services list provides exemption forservices of construction, E&C etc of original works pertainingto an airport, port or railways including monorail or metro:
Does that mean services for setting up etc of captive power plants forairports, ports etc can now be claimed exempt from service tax?
Pertaining to = a term of broad amplitude, like in relation to
Earlier, unfettered service tax exemption available to dams
now, exemption available only for Services provided to the
Government , a local autho r i ty or a go vernmental autho r i ty by
way of construction, erection, commissioning, installation, completion,fitting out, repair, maintenance, renovation, or alteration of canal, dam
or other irrigation works
Private hydro power projects tax cost to go up significantly
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OTHER TAXES
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INTERSTATEWORKSCONTRACT
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CAN WORKS CONTRACT BE AN INTER-STATESALE?
Revenues viewNo, a works contract can only be a local sale within the
state where the project is situated & material incorporated
Ownership with the Contractor until goods are incorporated since transfer ofproperty (ToP) in works contract occurs via accretion:
H&K rolling Mill 120 STC 179 (West Bengal Tribunal)- notwithstanding that theContractor purchased goods from out of State vendors, the fact that the transfer of
property in these goods to the Owner took place when the works contract was executed
by the applicant under the contract and not earlier than that, the deemed sale was a localsale and not a CST sale
Perspective of the assesseesYes, States cannot impose tax on sale orpurchase which takes place outside the State or in the course of import or export
M/s Gannon Dunkerley v. State of Rajasthan (1993) 1 SCC 364- the state
legislature is not competent to levy a tax on such deemed sales which are in thecourse of interstate trade or commerce
Balabhagas Hulaschand 37 STC 207 (SC) -passing of property in one or theother state was of no consequence for deciding the nature of the transaction asbeing interstate or local
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KEY POINTS TO NOTE
To reduce the likelihood of dispute the following may be considered
Contract should clearly envisage the specific goods that are proposed to bepurchased by the Contractor from out of State Vendors
In case the contract is silent, specific approval from the Owner may be takenbefore placing the purchase orders on such out of State vendors
While issuing the purchase order (PO) on out of State vendor, name and
reference of the Owner and the contract should be indicated The PO should direct that the goods be dispatched to the Owners site
The invoice raised by the vendor should also provide corresponding crossreference to the Contract between the Purchaser and the Owner
Goods in question shouldnt be received and stored separately by the Contractor
in the destination State for gradual supply to the project as and when required
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PROBLEMS IN CONSORTIUM BASED EXECUTION-CUSTOMS
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Supreme Court in Gammon India case
JV between Gammon and Atlanta Infrastructure Limited Customs exemption notification - condition that the importer was a
person who has been awarded a contract for the construction of roadsand the appropriate certification was produced that the goods would beused exclusively for road construction
Gammon obtained certificate from NHAI and tried to import concretebatching plant on customs duty exemptionRevenue rejected sinceGammon was not the person who was awarded the contract, it
was the JV
Gammon contended that the JV is like a partnership and hence Gammonwould be eligible for import benefit. Also, that Gammon was acting on
behalf of the JV and hence eligible
Supreme Court ruled against importerHeld that even if JV is held tobe like a partnership, given that Gammon was dealing with the foreign
seller in its own name and not on behalf of the JV
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PROBLEMS IN CONSORTIUM BASED EXECUTION(CONT)
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Key take-aways from the Gammon decision
This decision is fact specific and relies on the basis that nodeclaration was made by the importer that it was acting on behalf of a
JV (as its partner);
Given this, it may still be possible to take a position that an end-usebased exemption can be availed when imports are effected by one ofthe members of a consortium (in the form of an unincorporated joint
venture executing a project), if it can be proved that the importswere on behalf of the said consortium
This decision may necessitate a review of import processes by
various consortia (in the form of unincorporated joint ventures)Import/ customs clearance related provisions in the underlyingcontract documentsmay also merit a re-look
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PROJECT IMPORT BENEFIT FOR CONTRACTORS
CONSTRUCTION EQUIPMENT (CONT)
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Circular 49/2011-Cusdated November 4, 2011Important
- construction equipments would qualify as auxiliary equipment, ifessentially required for initial setting up or substantial expansion ofregistered projects
- construction equipments may be permitted to be transferred to otherregistered project under CTH 9801, after completion of its intended use,
on recommendations of sponsoring authority- Plant Site Verification Certificate (PSVC) required to be submitted for
finalization of project as per Circular No. 14/2006-Cus F.No. 528/9/2006-Cus (TU) shall also incorporate the details of construction equipmentsimported and used for the project, to ensure proper utilization of goodsimported
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BUILDING CESSA KEY NEGOTIATION POINT
Who will bear building cess? This question becomes pertinent when in a taxinclusive contract, the tax clause is worded to include all applicable taxes
The debate gets escalated because the Building and Other ConstructionWorkers Welfare Cess Act (under which building cess is levied), specificallyincludes both project owner as well as the contractor as the person liableto pay the cess. Relevant provision excerpted below:
2(i) "employer", in relation to an establishment, means the owner thereof,and includes(iii) in relation to a bui ld ing o r other con struc t ion work
carr ied on by or through a cont ractor, or by the employment of buildingworkers supplied by a contractor, the contractor
Contractors perspective: Building cess is the primary statutory liability of the
owner (given the definition) and thus not a tax applicable on the contractor; Owners perspective: Given that all taxes are clearly specified to be included
in the contract price , and that the statute specifically includes the contractoras a person liable to pay, there is no scope for ambiguity as to who shouldbear building cess.
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DRAFTING EPC
CONTRACTSKEYCAUTION POINTS FROMA TAX PERSPECTIVE
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DRAFTING EPC CONTRACTSKEY CAUTION POINTS(SPECIFIC TO NEW SERVICE TAX REGIME)
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Reverse charge obligations of Project Owner
Re-stating bid evaluation criterion / Re-drafting of existing tax clauseso Contractor can only charge and recover 50% of applicable service tax (if AoP)
o Specify that where the owner is liable to pay on reverse charge basis, the reversecharge tax amount cannot be recovered from the contractor by way of withholding
Important: recent Supreme Court decision of Rashtriya Ispat Nigam Ltd . vs M/SDewan Chand, the arbitrators interpretation that the customer may withhold the
reverse charge service tax amount from service providers paymentupheld!
Impact of change in abatement/composition scheme etc to existing contracts
Change in law clause of the contract need examination - Does it cover sub-contractor level change in taxes like new exemptions/ withdrawals
Section 64A of the Sale of Goods Act, 1930 provides for indemnification of affectedparty on imposition/ remission or increase/ decrease of customs/excise duty andtax on sale/purchase of goods
Delhi HC in Pearey Lal Bhawan Association case: used Section 64A to decide aclaim of service tax not originally envisaged under the contract - overruled aspecific contractual clause mandating the lessor (ie the service provider) tobear all the municipal, local and other taxesappealed against and stayedrecently. Also distinguished: Raghubir Saran v Puma [2012(193) ECR30 (Del)]
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DRAFTING EPC CONTRACTSKEY CAUTIONPOINTS (GENERAL)
Absolute clarity on the following required:
What are the taxes to be borne by each party? If the contract price is supposed to include all taxes, does it also include
taxes which are statutorily payable by the customer (like service tax onreverse charge basis, customs duty etc)?
For taxes/cesses like entry tax and building cess which can be the
statutory liability of either the customer or the contractor depending onvarious factors, who bears the responsibility?
For taxes that would be reimbursed by the customer, what would be thebasis for such reimbursement? What sort of documentary proof would berequired?
If certain tax benefits have been factored which are contingent uponspecific certification/documentation requirements, who bears the risk ofnon-availability of such certification/ documentation? In general, who bearsthe risk of the tax positions?
If In-Transit sales and/or High Sea Sales have been envisaged, is thetransfer of ownership clause consistent with such planning options?
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C h a l l e n g e U s
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Sudipta Bhattacharjee(Email: [email protected],Phone (D) - 0124 3395085)
Competencies
Sudipta is Managing Associate at BMR Legal and is an important part of the Power & Utilities
Practice of the firm. He has been involved in advising various industry majors in significantareas of indirect taxes to large infrastructure projects including power projects
Sudipta has a rich, practical & varied experience in advising various Project Developers andContractors in the realm of taxes during the bidding stage, bid evaluation stage, contractnegotiations, contract formulation & drafting and the implementation stage
Key recent experiences vis a vis infrastructure sector
Sudipta has advised power sector players like Tata Power, Moserbaer, GMR, India Bulls;construction players like Shapoorji Pallonji, Simplex, EIL; and oil and gas players like GSPL,GSPC and Petronet
Sudipta has played a key role in conceptualizing the overall transaction structures, finalizing therelevant contractual documents and tax impact analysis for several power projects (boththermal and renewable)as well as oil & gas projects and road projects
He has spoken on various occasions at the well-known EPC Conference (organized byInfraline every year), at the World Petro-Coal Congress, 2012 , at the 4thAnnual India CoalConference, 2012, at the Thermal Power EPC Conference, 2012 and at the conference onbidding analysis of highway and toll road projects
Professional Qualifications
Sudipta holds a B.A.LL.B (Hons.) degree from the prestigious National University of JuridicalSciences (NUJS), Kolkata
mailto:[email protected]:[email protected]