bmr case study

All

rig

hts

reserv

ed

Case Study | 1C h a l l e n g e U s

All

rig

hts

reserv

ed

Case Study | 2

8th Interactive workshop on

SUCCESSFUL EPC CONTRACTING IN INDIA

SIMULATED CASE STUDY

December 2, 2010 | Hotel ITC Grand | Mumbai

All

rig

hts

reserv

ed

Case Study | 3

DISCLAIMER

This presentation provides general information existing as at the

time of preparation. The presentation is meant for general

guidance and no responsibility for loss arising to any person acting

or refraining from acting as a result of any material contained in this

publication will be accepted by BMR Advisors. It is recommended

that professional advice be taken based on the specific facts and

circumstances. This presentation does not substitute the need to

refer to the original pronouncements

All

rig

hts

reserv

ed

Case Study | 4Case Study | 4

DIAGRAMMATIC REPRESENTATION

Mumbai cityNavi Mumbai

Airport

1km

Metro & Road Lines

Road entry

Metro station

Port

SEZ

Landmass

Over Sea

2km22km

2km

2km

2km19km

Power plant

All

rig

hts

reserv

ed

Case Study | 5

TENDER DETAILS/ RELEVANT FACTS

Design, engineering, procurement of equipment and

materials, construction, erection, installation and

commissioning of road and metro via sea link from Sewri

(Mumbai) to Navi Mumbai (Panvel) with triple exits at Navi

Mumbai to the Airport, Navi Mumbai SEZ and Nhava Sheva

port

Bids inviting to executing above on a cash contract (CC)

basis

The Bidder shall quote a lump-sum, fixed, turnkey price for

the EPC Contract, individually a member of the consortium

The sum quoted by the Bidder shall be inclusive of all duties,

taxes, fees, octroi and other levies, materials, labour etc

All

rig

hts

reserv

ed

Case Study | 6

TENDER DETAILS/ RELEVANT FACTS

The Bidder shall take into account all tax, fiscal benefits and

other concessions that may be available to it and indicate

material assumptions in this regard

Stock yard in Mumbai-Sewri and Navi Mumbai- Panvel shall

be made available free of cost to the Contractor for stocking

and related processing purposes

The ownership of the plant and equipment (including spare

parts and tools & tackles) procured shall be transferred to the

Authority on delivery or post commissioning of the Project for

bids, as may be agreed mutually

Change in law/ taxes to exclude any change in rate of taxes

per se

All

rig

hts

reserv

ed

Case Study | 7

GROUP I

‘OF CO’

FOREIGN BIDDER

All

rig

hts

reserv

ed

Case Study | 8

GROUP I – FACTUAL BACKGROUND

OF Co is a foreign contractor and tax resident of Germany

OF Co responsible for supply of signaling and ticketing

equipment for the metro project

Importation of goods likely to be from group entities in

Germany

Scope of work inter-alia involves installation and

commissioning of such equipment

As part of the consortium OF Co propose to bid for the

project but concerned about PE constitution

OF Co is considering setting up a subsidiary in India („OF

Co India‟) for the purpose of executing the onshore work for

the Project, thus under consideration

All

rig

hts

reserv

ed

Case Study | 9

The equipment required to execute this Project has to be imported from OF Co or its group companies around the world; you have the option to route such supply of equipment for the Project through OF Co India as well

Software is a crucial component of the installation and commissioning process for the equipment; the customized software is developed by OF Co and can be supplied through variable means (including a direct download). Ownership of the software would vest in MMRDA at inception

The testing, installation and commissioning of the signaling and ticketing equipment would be done by OF Co India; OF Co India could work in the role of the sub-contractor or the main contractor/ consortium partner

Payments will be separately made by MMRDA to OF Co/ OF Co India for completion of work as per the specified schedule

GROUP I – FACTUAL BACKGROUND

All

rig

hts

reserv

ed

Case Study| 10

GROUP I - DELIVERABLES

Part 1

What are your income tax implications from a PE perspective,

depending on whether the OF Co or OF Co India is the

consortium partner

How can you minimize the PE exposure, if any

What are the indirect tax implications between OF Co/ OF Co

India and MMRDA on the above transaction

Would OF Co be liable to pay service tax?

All

rig

hts

reserv

ed

Case Study | 11

Part 2

Analyze and identify risk factors and suggest amendments on

the following aspects of the tender :

Liquidated Damages

Transfer of property,

Arbitration,

Assignment,

Joint and several liability,

Change in law, including introduction of GST during the project

execution

GROUP I - DELIVERABLES

All

rig

hts

reserv

ed

Case Study| 12

RESPONSES – Part 1

What are your income tax implications from a PE

perspective, depending on whether the OF Co or OF Co

India is the consortium partner

The income on offshore supply shall not be liable to tax in

India, subject to the satisfaction of the following two conditions:

If the ownership of the equipments is transferred outside India/

high seas; and

The payment is made to OF Co outside India in foreign currency

This view has been supported by various judicial precedents

(IHI ltd‟s case, Hyundai Heavy Industry‟s case and Roxon‟s

case)………..

All

rig

hts

reserv

ed

Case Study| 13





Supply of software

The issue relating to characterisation of software income is far from

settled.

There are various judgements at ITAT level which support the view that

the transfer of software is like a transfer of goods, however, in a recent

ruling of Delhi tribunal in case of Microsoft Corporation it was held that

the use of software shall be classified as „royalty‟

Two recent Mumbai Bench of ITAT have rendered favourable rulings on

taxability of supply of off-the-shelf software – Reliance Comm case; and

Tata Communication Ltd

All

rig

hts

reserv

ed

Case Study| 14



perspective, depending on whether the OF Co or OF

Co India is the consortium partner

Supply of software (contd) In the present case, the software is a highly customised software; also,

the copyright in the software shall be owned by Project Owner and not

the supplier

Given the fact pattern, consideration for customised software is likely to

be characterised as „fee for technical service‟ or „royalty‟

All

rig

hts

reserv

ed

Case Study| 15





Installation and commissioning services

If carried out by the Indian subsidiary as:

the principle contractor for this scope – no income tax implication for

German contractor – this would require an assignment of the

onshore installation part

the sub-contractor of principle contractor for this scope – need to

examine whether time spent by Indian Sub can ne attributed to the

German company and hence constitute a PE

All

rig

hts

reserv

ed

Case Study| 16



In order to minimise any risk of income attribution, separate

contracts should be entered for offshore supply of equipments

(ie the work to be performed by OF Co) and the onshore

installation and commissioning (ie the work to be performed by

OF Co India).

All

rig

hts

reserv

ed

Case Study| 17


What are the indirect tax implications between OF Co/ OF

Co India and MMRDA on the above transaction ?

Import and sale of equipment

Importation of equipment liable to customs duty; concessional duty under

the Project Import Scheme could be available (ie BCD @ 5%)

Valuation from a customs perspective could be a larger concern if OF Co/

OF Co India imports equipment into India; given this, a direct supply of

equipment to MMRDA can be considered (which would limit VAT outgo as

well), preferably on a DDU (INCOTERMS) basis

Sale of equipment by OF Co India liable to applicable VAT/CST unless

SICOI benefits are structured

Key ingredients of SICOI

Contract with the Authority should recognize that the equipment shall be

imported

If possible, the details of offshore vendor should also be be mentioned in the

contract, etc

All

rig

hts

reserv

ed

Case Study| 18




Import and supply of software

Electronic import of (operational) software shall not trigger customs duty

implications; however, service tax would be payable on development and

implementation of the (operational) software; while VAT should not apply

as a „work for hire‟

Physical import of (operational) software may trigger customs duty

implications as it is not a shrink-wrap software meant for re-sale; service

tax and VAT implications would be same as above

All

rig

hts

reserv

ed

Case Study| 19



Co India and MMRDA on the above transaction? Comment

on OF Co’s liability to pay service tax


Activity is liable to service tax

If OF Co contractually renders these services, its operations should

constitute a business establishment from which services are rendered. In

such case, OF Co will be liable to pay tax

In case OF Co India acts as a sub-contractor to OF Co (non-resident

entity), service tax would be payable as OF Co India‟s service will not

qualify as an export. However, since OF Co will operate in India, credit

should be available based on judicial rulings

All

rig

hts

reserv

ed

Case Study| 20


Suggestions for tax efficiencies

Supply of equipment directly from OF Co in Germany

Installation and commissioning services should be undertaken

by OF Co India; OF Co should (if required) provide support to

OF Co India

Segregation of scope of work between OF Co and OF Co

India should be reviewed

All

rig

hts

reserv

ed

Case Study| 21

GROUP II

‘PP CO’

INDIAN BIDDER

All

rig

hts

reserv

ed

Case Study| 22

GROUP II - FACTUAL BACKGROUND

PP Co is a domestic contractor to sets up coal based power

plants, proposes to bid for setting up a power plant in the

designated area in the Nhava Sheva port

It would procure all the equipment from third parties and

undertake the civil construction and installation and

commissioning of the power project on it own

The minimum capacity of power plant would be 850 MW (with

reasonably committed off-take(s) of 150 MW for the Project,

150 MW by the proposed Navi Mumbai international airport

and 550 MW by the Navi Mumbai SEZ)

Coal supply up to 1200 MW is being committed by the State

agencies

All

rig

hts

reserv

ed

Case Study| 23

Part 1

Based on the committed offtake for the bids and the Project

bidding process, do you think it you would be more efficient to

set up a Mega Power Project (MPP) ie over 1000 MW and

what would be the decision making parameters for the same

Would this power plant qualify for an MPP status

Assuming that the power plant qualifies for an MPP status,

what tax benefits would be available

Assuming that the power plant does not qualify for an MPP

status, what tax benefits would be available

Does supply of power to the Navi Mumbai SEZ provide any

additional benefits

GROUP II – DELIVERABLES

All

rig

hts

reserv

ed

Case Study| 24

Part 2



Liquidated Damages,


Arbitration,

Assignment,



execution


All

rig

hts

reserv

ed

Case Study| 25

Part 2 (Cont)

Do you forsee any risk of the consortium being taxed as an

Association of Persons


All

rig

hts

reserv

ed

Case Study| 26


Do you think it would be more efficient to set up a MPP ie over 1000 MW and what would be the decision making parameters for the same

Setting up of an MPP as compared to setting up on a non-MPP is beneficial as larger tax benefits available in the former case

Decision to be impacted by the following considerations

Constraints in obtaining the MPP status per se

Availability of fuel

Ability to sell surplus power

Would this power plant qualify for an MPP status

MPP status may not be a possibile of the capacity of proposed power project is 1000 MW or more

All

rig

hts

reserv

ed

Case Study| 27


Assuming that the power plant qualifies for an MPP

status, what tax benefits would be available

Benefit Availability

Project Import linked customs duty

exemption*

Excise Duty Exemption

Advance Authorization*

Deemed Export Drawback

Terminal Excise Duty Refund

* In-principle availability indicated, may not be available for certain supplies

All

rig

hts

reserv

ed

Case Study| 28


Assuming that the power plant does not qualify for an

MPP status, what tax benefits would be available

Benefit Availability

Project Import linked customs duty

exemption*

Excise Duty Exemption

Advance Authorization* #

Deemed Export Drawback #

Terminal Excise Duty Refund #

?* In-principle availability indicated, may not be available for certain supplies

# ICB pre-condition for advancement of benefit

All

rig

hts

reserv

ed

Case Study| 29


Income Tax benefits to power producers

Under the provisions of the Income tax Act, 1961, an

undertaking engaged in the generation of power is eligible for

a tax holiday for 10 consecutive years in a block of 15 years

beginning from the year in which the business commences

operations; however there are certain issues with respect to

tax holidays like difficulty to determine the revenue from

generation of electricity used for captive consumption.

All

rig

hts

reserv

ed

Case Study| 30


Does supply of power to the Navi Mumbai SEZ provide

any additional benefits

Export benefits against supply of power to SEZs (here approx

65% of the committed off-take) could be examined – This

issue is debatable

Likley duty benefits could be

For capex phase – under the EPCG scheme

For opex phase – for procument of fuel, etc

All

rig

hts

reserv

ed

Case Study| 31



Substantial benefits (for non-MPP project) should be

examined for supply to SEZ; though in the opex phase

All

rig

hts

reserv

ed

Case Study| 32

GROUP III

‘ML CO’

INDIAN BIDDER

All

rig

hts

reserv

ed

Case Study| 33

GROUP III – FACTUAL BACKGROUND

ML Co is an Indian contractor, which will undertake

The supply and laying of the tracks for the metro

The supply of the coaches

Procurement/ Sourcing

The metro coaches would be imported

The metro tracks would be locally procured from own unit in India;

other material would also be locally procured from third parties in

India

All

rig

hts

reserv

ed

Case Study| 34

Part 1

Would ML Co be eligible for any deemed export benefits on

manufacture and supply of metro tracks. If so, what are the

benefits and how would they be achieved? Would this change

if the project was funded by specified multilateral agencies?

Would ML Co‟s domestic supplier be eligible for any deemed

export benefits on manufacture and supply of other equipment

for laying tracks. If so, what are the benefits and how would

they be achieved? Would this change if the project was funded

by specified multilateral agencies?

Can any tax efficiencies be achieved on the import of the metro

coaches

GROUP III – DELIVERABLES

All

rig

hts

reserv

ed

Case Study| 35

Part 1 (Cont)

Can metro rails be treated as „railways‟ for claiming an

exemption from service tax as a works contract

Can metro rails be treated as „railways‟ for claiming an

exemption from octroi under the Railways Act, 1989

Can any benefits be claimed for an intra-SEZ component of

the metro. If so, how such benefits can be claimed


All

rig

hts

reserv

ed

Case Study| 36

Part 2



Liquidated Damages,


Arbitration,

Assignment,



execution

Do you foresee any risk of the consortium being taxed as an

Association of Persons


All

rig

hts

reserv

ed

Case Study| 37


Would you be eligible for any deemed export benefits on

manufacture and supply of metro tracks. If so, what are

the benefits and how would they be achieved

Deemed export benefits under the Foreign Trade Policy would

not automatically be available to a metro project; however, if

the project was being funded by specified multilateral

agencies, deemed export benefits would flow

Would your domestic supplier be eligible for any deemed

export benefits on manufacture and supply of other

equipment for laying tracks. If so, what are the benefits

and how would they be achieved

Same as above; further, if the project is eligible, then ML Co‟s

supplier would also be eligible for deemed export benefits

provided due certification is issued in their favour

All

rig

hts

reserv

ed

Case Study| 38


Can any tax efficiencies be achieved on the import of the

metro coaches

No automatic customs duty exemption could be available

(Delhi metro corridor being the only eligible metro project in

this regard)

Though decisions are available that wagons used for

transporting fuel for power plant would not qualify for project

import status as well, a distinction between power plant and

metro systems could be argued to obtain a project import

status

All

rig

hts

reserv

ed

Case Study| 39


Can metro rails be treated as ‘railways’ for claiming

an exemption from service tax as a works contract

Meaning of „Railway‟

Railway is not defined under service tax

Railway has been defined under the Railways Act, 1989 in an inclusive

manner to mean a railway, or any portion of a railway, for the public

carriage of passengers or goods

As per Oxford English Dictionary, it means “a track or set of tracks made

of steel rails along which trains run”; “such a system worked by a single

company”

Thus Metro corridor may qualify as „Railways‟ – exclusion

from levy of service tax under „Works Contract Tax‟

category may be available

All

rig

hts

reserv

ed

Case Study| 40


Can metro rails be treated as ‘railways’ for claiming an

exemption from octroi/ cess under the Railways Act, 1989

As seen previously, metro rails could qualify as „railways‟

under the Railways Act, 1989 and inter-alia be eligible for

exemption from octroi to the extent of project in Mumbai and

cess in Navi Mumbai region – this issue could however be

contested

All

rig

hts

reserv

ed

Case Study| 41


Can any benefits be claimed for an intra-SEZ component

of the metro? If so, how such benefits can be claimed

SEZ specific benefits may be denied for the intra-SEZ section

of the metro corridor if the same constitutes a public

thoroughfare and is not in connection with the „authorized

operations‟

Creation of a metro entry/ exit points could be covered under

the authorized operations of the SEZ developer; though

substantial documentation challenges are likely to be faced to

get exemption on the SEZ based component of the metro

The above response would change in case the metro corridor

does not form a part of authorized operations of the SEZ

developer

All

rig

hts

reserv

ed

Case Study| 42



Project import based status should be considered

Deemed export benefits could be claimed if the bid is funded

by multilateral agencies

Treatment as railways would save octroi in Mumbai and cess

in Navi Mumbai region

All

rig

hts

reserv

ed

Case Study| 43

GROUP IV

‘AA CO’

FOREIGN BIDDER

All

rig

hts

reserv

ed

Case Study| 44

GROUP IV – FACTUAL BACKGROUND

AA Co is tax resident in the UK and would supply imported

traffic control and tolling equipment for the road component of

the project that would be imported from the UK

AA Co would also install and commission such equipment.

AA Co has an existing subsidiary in India („AA Co India‟), which

was set up for the purpose of executing onshore work for other

past projects and on account of perceived fiscal efficiencies

Constitution of PE in India is primary concern of AA Co

The equipment required to execute this Project has to be

imported from AA Co or its group companies around the world;

you have the option to route such supply of equipment for the

Project through AA Co India as well

All

rig

hts

reserv

ed

Case Study| 45

Software is a crucial component of the installation and

commissioning process for the equipment; the customized

software is developed by AA Co and can be supplied through

variable means (including a direct download). Ownership of the

software would vest in MMRDA

The testing, installation and commissioning of the traffic control

and management, and tolling equipment would be done by AA

Co India; AA Co India could work in the role of the sub-

contractor or the main contractor/ consortium partner

AA Co/ AA Co India would not be responsible for setting up the

civil works for the toll plazas

Payments will be separately made by MMRDA to AA Co/ AA

Co India for completion of work as per the specified schedule

GROUP IV – FACTUAL BACKGROUND

All

rig

hts

reserv

ed

Case Study| 46

Part 1

What are your income tax implications from a PE perspective,

depending on whether the AA Co or AA Co India is the

consortium partner


What are the indirect tax implications between AA Co/ AA Co

India and MMRDA on the above transaction

GROUP IV - DELIVERABLES

All

rig

hts

reserv

ed

Case Study| 47

Part 2

Analyze and suggest appropriate deviations in the following

clauses:

Liquidated Damages,


Arbitration,

Assignment,


Governing law and choice of forum


execution

GROUP IV - DELIVERABLES

All

rig

hts

reserv

ed

Case Study| 48



perspective, depending on whether the AA Co or AA Co


The income on offshore supply shall not be liable to tax in

India, subject to the satisfaction of the following two conditions:

If the ownership of the equipments is transferred outside India/

high seas; and

The payment is made to AA Co outside India in foreign currency

This view has been supported by various judicial precedents

(IHI ltd‟s case, Hyundai Heavy Industry‟s case and Roxon‟s

case)………..

All

rig

hts

reserv

ed

Case Study| 49



perspective, depending on whether the AA Co or AA


Supply of software The issue relating to characterisation of software income is far from

settled.

There are various judgements at ITAT level which support the view that

the transfer of software is like a transfer of goods, however, in a recent

ruling of Delhi tribunal in case of Microsoft Corporation it was held that

the use of software shall be classified as „royalty‟

Two recent Mumbai Bench of ITAT have rendered favourable rulings on

taxability of supply of off-the-shelf software – Reliance Comm case; and

Tata Communication Ltd

All

rig

hts

reserv

ed

Case Study| 50



perspective, depending on whether the AA Co or AA


Supply of software (contd) In the present case, the software is a highly customised software; also,

the copyright in the software shall be owned by Project Owner and not

the supplier

Given the fact pattern, consideration for customised software is likely to

be characterised as „fee for included service‟ or „royalty‟

All

rig

hts

reserv

ed

Case Study| 51



In order to minimise any risk of income attribution, separate

contracts should be entered for offshore supply of equipments

(ie the work to be performed by AA Co) and the onshore

installation and commissioning (ie the work to be performed by

AA Co India).

All

rig

hts

reserv

ed

Case Study| 52


What are the indirect tax implications between AA Co/

AA Co India and MMRDA on the above transaction ?

Import and sale of equipment

Importation of equipment liable to customs duty; concessional duty under

the Project Import Scheme could be available

Valuation from a customs perspective could be a larger concern if AA Co/

AA Co India imports equipment into India; given this, a direct supply of

equipment to MMRDA can be considered (which would limit VAT outgo as

well), preferably on a DDU (INCOTERMS) basis

Sale liable to applicable VAT/CST unless SICOI benefits are structured

Key ingredients of SICOI seen earlier

All

rig

hts

reserv

ed

Case Study| 53


What are the indirect tax implications between AA Co/ AA


Import and supply of software

Electronic import of (operational) software shall not trigger customs duty

implications; however, service tax would be payable on development and

implementation of (operational) software; though VAT should not apply

since a „work for hire‟

Physical import of (operational) software may trigger customs duty

implications as it is not a shrink-wrap software meant for re-sale; service

tax and VAT implications would also be same as above

All

rig

hts

reserv

ed

Case Study| 54


What are the indirect tax implications between AA Co/

AA Co India and MMRDA on the above transaction ?


Activity is liable to service tax

If AA Co contractually renders these services, its operations should

constitute a business establishment from which services are rendered . In

such case, AA Co will be liable to pay tax

In case AA Co India acts as a sub-contractor to AA Co (non-resident

entity), service tax would be payable as AA Co India‟s service will not

qualify as an export. However, since AA Co will operate in India, credit

should be available based on judicial rulings

All

rig

hts

reserv

ed

Case Study| 55



Supply of equipment directly from AA Co in UK

Installation and commissioning services should be undertaken

by AA Co India; AA Co should (if required) provide support to

AA Co India

Segregation of scope of work between AA Co and AA Co

India should be reviewed

All

rig

hts

reserv

ed

Case Study| 56

GROUP V

‘TT CO’

INDIAN BIDDER

All

rig

hts

reserv

ed

Case Study| 57

TT Co is the domestic contractor engaged in construction

activities

TT Co is interested in constructing the main bridge and road,

metro station and malls thereupon (but excluding laying of the

metro lines) with technical support, prior experience and

expertise on sea bed constructions from CC Co

Steel and cement for the construction of the Project would be

sourced from TT Co‟s own manufacturing units within and

outside Maharashtra.

In case of shortages, it would procure steel and cement from

third parties within and outside Maharashtra,

All other materials would be procured from third parties

GROUP V – FACTUAL BACKGROUND

All

rig

hts

reserv

ed

Case Study| 58

TT Co would also undertake the civil works for the metro

stations and commercially exploitable areas of such shopping

centers as a part of its obligations

GROUP V – FACTUAL BACKGROUND

All

rig

hts

reserv

ed

Case Study| 59

Part 1

What would be the applicability of VAT on the construction

project. Which scheme for paying works contracts would be

most streamlined, depending on the assumptions that materials

(cement & steel & other materials) would be 60% of the TT

Co‟s project costs

Based on the above assumption, is it optimal to procure the

steel and cement from within or outside Maharashtra (whether

manufactured by TT Co or third party)

What other indirect tax related benefits can be claimed on the

supply of steel and cement

GROUP V - DELIVERABLES

All

rig

hts

reserv

ed

Case Study| 60

Part 1 (Contd)

Would your conclusion change (on the assumption that you

can obtain a pre-fabrication technology and the steel and

cement are being imported?

Would the component of metro station exploited commercially

(shopping centre etc) be entitled for service tax exemption?


All

rig

hts

reserv

ed

Case Study| 61

Part 2



Liquidated Damages,


Arbitration,

Assignment,


Governing law and choice of forum


execution


All

rig

hts

reserv

ed

Case Study| 62


What would the applicability of VAT on the construction

project?

The construction project would be liable to VAT as a works

contract

Following option of discharging VAT liability may be available

to TT Co

Payment of tax at merits rates on value of supplies

Composition of taxes at 5% of the contract value

Payment of tax at merit rates on supplies portion arrived at by

applying an ad-hoc deduction of 30 percent

All

rig

hts

reserv

ed

Case Study| 63


Alternative schemes for VAT payment – streamlined option?

Financial assumptions

Total contract price – INR 100 mn (with 10% on revenue as profit margin)

Cost of purchase of cement (taxable @ 5%) – INR 18 mn

Cost of purchase of steel (taxable @ 4%) – INR 18 mn

Cost of other purchases (taxable @ 12.5%) – INR 18 mn

VAT @ merits rates will be

INR 4.3 mn (20 X 5% +

20 X 4% + 20 X 12.5%)

All VAT purchases

shall be Creditable

All (2%) CST purchases

shall be non creditable

VAT under composition scheme

will be INR 5 mn (100 X 5%)

All VAT purchases shall be creditable

for tax paid in excess of 4%



VAT under ad-hoc deduction

scheme will be INR 4.73 mn

(20 X 5% + 20 X 4% + 20 X 12.5%)

All VAT purchases shall be

creditable



All

rig

hts

reserv

ed

Case Study| 64


Based on the above assumption, is it optimal to procure

the steel and cement from within or outside Maharashtra

(whether manufactured by TT Co or third party)

Ideal sourcing pattern has been indicated below

Scheme for payment of

output VAT

Preferable sourcing

pattern for materials

Merit Rates Intra-state

Composition Inter-state

Ad-hoc deduction Intra-state

All

rig

hts

reserv

ed

Case Study| 65


What indirect tax related benefits can be claimed on the supply of steel and cement (manufactured by TT Co or sourced from third parties)

Our analysis indicated that steel and cement for infrastructure project (such as bridges, railways, etc) should not be entitled to any additional benefit such as deemed export as the supplies would not constitute use in manufacture

The above should not alter irrespective whether the materials are supplied by TT Co upon manufacture or sourced from third parties

However, for pre-fabricated project structures (for bridges, etc) there is a possibility the eligibility for deemed export benefits could be examined if substantial part of steel and cement is being imported to create pre-fabricated structures to economize on customs duties

All

rig

hts

reserv

ed

Case Study| 66


Would the component of metro station exploited

commercially (shopping centre etc) be entitled for service

tax exemption?

Qualification of such scope of work for exclusion from

applicability of service tax could be argued dependent upon

project specification and underlying documentation

All

rig

hts

reserv

ed

Case Study| 67



Sourcing pattern to be reviewed to determine the most

efficient option of paying VAT on works contract

If imported materials are being used for creating pre-

fabricated structures, obtaining deemed export benefits to limit

basic customs duty costs is a possibility

All

rig

hts

reserv

ed

Case Study| 68

GROUP VI

‘CC CO’

FOREIGN BIDDER

All

rig

hts

reserv

ed

Case Study| 69

GROUP VI – FACTUAL BACKGROUND

CC Co is a foreign contractor and Korean tax resident

CC Co will be responsible for undertaking the pre-construction

studies

CC Co is also responsible for providing the technical support to

TT Co for construction of the main bridge and the road thereon

For this purpose CC Co shall leverage upon its expertise and prior

experience in similar projects

It will also import and operate the required specialist equipment

for the project (for use in construction process)

CC Co would not undertake to supply any materials to project

All

rig

hts

reserv

ed

Case Study| 70

GROUP VI – FACTUAL BACKGROUND

CC Co would be supervising the initial location analysis for the

Project as well as supervise, monitor and support the

construction process throughout the execution of the Project

through its own employees

CC Co would operate its office premises in India made

available by MMRDA to manage all services being rendered

All

rig

hts

reserv

ed

Case Study| 71

GROUP VI - DELIVERABLES

Part 1

What are the Permanent Establishment related risks arising from CC Co‟s operations? Can such risks be mitigated?

If the Permanent Establishment risk is imminent, what planning, implementation and compliance shall be required to optimise tax outcomes for the PE? What indirect taxes would apply to fees earned by CC Co

What indirect taxes would apply to fees earned by CC Co?

Will CC Co be liable to pay service tax for its activities in India, or would the reverse charge mechanism apply?

Would specific payments made by MMRDA (as per agreed

schedule) on specialist equipment hired by CC Co result in any

VAT exposures as a lease (when CC Co is the lessor)? If so,

how can such exposures be limited?

All

rig

hts

reserv

ed

Case Study| 72

Part 1 (Contd)

Would customs duty apply to specialist equipment hired by CC

Co. Are there any options to limit the customs duty impact

Part 2



Liquidated Damages,


Arbitration,

Assignment,



execution


All

rig

hts

reserv

ed

Case Study| 73

Part 2 (Cont)

Does there exist any risk/ exposure of the consortium being

taxed as an Association of Persons


All

rig

hts

reserv

ed

Case Study| 74


What are the Permanent Establishment related risks that you foresee from your operations. Can such risks be mitigated

CC Co would be supervising, monitoring and supporting the construction process throughout the execution of the Project (ie through entire period of 48 months)

The presence of CC Co employees in India to undertake the aforestated scope of work is likely to create a Supervisory PE for CC Co in India.

According to Article 5 of the India-Korea Double taxation Avoidance Agreement, the term PE encompasses within its ambit a building site, a construction, assembly or installation project or supervisory activitieswhere such site, project or activities continue for a period of more than

nine months.

Therefore, in the instant case the income of CC Co shall be taxable in India on a net basis at 42.23 percent.

All

rig

hts

reserv

ed

Case Study| 75


If the Permanent Establishment risk is imminent, how can

such risks be ring fenced

CC Co should set up a local presence in India to optimise the

PE tax implications.

CC Co shall have the following macro-level options

Setting up a project office

Floating a wholly owned subsidiary for executing the local scope

All

rig

hts

reserv

ed

Case Study| 76


What indirect taxes would apply to fees earned by CC Co

The fee earned by CC Co for pre-construction studies as well

as supervision service component shall be liable to service

tax; however, for aiding the construction process through

operation of specialized equipment, there is an argument that

the same could qualify as „commercial construction service‟ (ie

as a pure service) and therefore, eligible for exclusion from

the service tax purview

Import of specialist equipment would be exempt from customs

duty (for equipment covered by serial # 230 read with list 18 of

the Notification 21/2002); other equipment would attract duties

All

rig

hts

reserv

ed

Case Study| 77


Will CC Co be liable to pay service tax for its activities in

India, or would the reverse charge mechanism apply

As indicated, MMRDA would provide CC Co office space at

the project site from where CC Co would undertake its

activities in India/ execute the scope of work in relation to the

project

In attendant facts, CC Co shall establish its business in India and

will also have a place of business (though not permanent);

therefore, such arrangement should not fall within the scope of

provisions contained at Section 66A of the Finance Act, 1994

read with relevant rules in this regard

Applicable service tax on fee earned by CC Co shall therefore

be payable by CC Co and the reverse charge mechanism

would not apply

All

rig

hts

reserv

ed

Case Study| 78


Would specific payments made by MMRDA (as per

schedule) on specialist equipment hired result in any VAT

exposures as a lease. If so, how can such exposures be

limited

VAT implications should not be triggered on hire charges

collected by CC Co since in attendant facts of the case CC Co

retains the control and possession over the specialist

equipment in favour of any other person/ party

However, relevant contractual terms in this regard should be

phrased carefully to clearly reflect that the intention of parties

is not to „transfer the right to use goods‟ as has been

interpreted by courts on several occassions

All

rig

hts

reserv

ed

Case Study| 79


Would customs duty apply to specialist equipment hired

by CC Co? Are there any options to limit the customs duty

impact

As discussed earlier, the specialist equipment would be

subjected to customs duty upon importation in India unless

covered by the exemption notification

Following schemes could also be explored to limit the duty

impact

Project Import scheme

Duty Drawback scheme (assuming the specialist equipment

would be re-exported, after use in India, within 18 months of

importation thereof)

All

rig

hts

reserv

ed

Case Study| 80



Contractual structuring to treat activity as construction

services can be considered for service tax exemption

Delivery schedules of equipment should be monitored to

appropriately avail drawback

All

rig

hts

reserv

ed

Case Study| 81

ANNEXURE –

RESPONSES TO

PART 2

All

rig

hts

reserv

ed

Case Study| 82


Contractual deviations

Liquidated damages (Indian Member/Foreign Member)

Rs. 10,000,000,000 per day of delay – unreasonable and not genuine pre-

estimate of loss. Suggest reducing to 0.5% or 1.0% of Contract Price

Performance liquidated damages not clear and unambiguous. Suggest

that specific rates for performance liquidated damages should be

included.

No cap on liquidated damages and this would amount to a penalty.

Suggest cap on delay liquidated damages, cap on performance liquidated

damages and overall cap on liquidated damages. Only when these caps

are exhausted and not before, Owner may have a right to terminate

Contract.

-

-

All

rig

hts

reserv

ed

Case Study| 83


Contractual deviations

Transfer of Property: Indian Member

Suggest transfer of title and ownership to plant and equipment on later of:

(i) delivery; and (ii) receipt of relevant milestone payment.

Tender terms silent on relationship between: substantial completion;

taking over; defects liability period and issuance of final completion

certificate. Suggest transfer of risk of loss to Authority on earlier of: (i)

actual taking over of plant and equipment; and (ii) issuance of taking over

certificate.

Transfer of Property: Foreign Member

Subject to tax considerations, suggest transfer of title and ownership to

plant and equipment on later of: (i) delivery; and (ii) receipt of relevant

milestone payment.

Re risk transfer: same suggestion as above.

-

All

rig

hts

reserv

ed

Case Study| 84


Contractual deviations (Cont)

Arbitration: Indian Member

Suggest institutional arbitration (LCIA/ICDR Rules)

Arbitration: Foreign Member

Suggest institutional arbitration (SIAC/HIAC Rules)

Suggest seat of arbitration: Singapore/Hong Kong

Suggest law governing arbitration agreement: Singapore/Hong Kong law

Suggest exclusion of applicability of Part I of the Indian Arbitration &

Conciliation Act, 1996. Only Section 9 (interim relief by Indian courts)

should continue to apply

All

rig

hts

reserv

ed

Case Study| 85



Assignment (Indian Member/Foreign Member)

Suggest that assignment by Authority should be subject to prior written

consent of Contractor. Contractor should be satisfied that Assignee has

ability to meet payment obligations and meet Authority‟s obligations under

Contract, before grant of consent. Sole exception: assignment of Contract

in favour of Authority‟s lenders.

Suggest that Contractor should be entitled to assign benefits of Contract

to any third party, including its lenders.

Suggest that Contractor should have the freedom to sub-contract its

obligations under Contract to third parties, without consent of Authority.

Exception may be made in relation to material sub-contracts having a

value above a specified threshold, in relation to which Authority approval

may be required.

All

rig

hts

reserv

ed

Case Study| 86



Joint and Several Liability (Indian Member/Foreign Member)

Joint and several liability could result in each Member‟s liability under the

Contract exceeding it‟s portion of the Contract Price. Further, joint and

several liability could contribute to the constitution of an AOP.

The first strategy could be to negotiate with the Authority to: (i) clearly

define each Member‟s scope of work; (ii) appoint Lead Member as project

manager; (iii) undertake to cooperate and coordinate execution of works,

without taking liability for any other Member‟s scope of work; and (iv) limit

each Member‟s liability to it‟s portion of Contract price.

If Authority does not agree to suggestions above, all Members should

enter into an inter se consortium agreement: (i) allocating responsibilities

and liabilities incurred pursuant to the Contract; (ii) agreeing to a payment

mechanism to ensure timely payments; and (iii) stipulating inter-se

indemnities to cover risk of “joint and several liability”.

All

rig

hts

reserv

ed

Case Study| 87



Governing Law and Choice of Forum: Indian Member

Indian law should be acceptable.

Suggest that courts of Mumbai will have exclusive jurisdiction, as assets

of Authority are in Bombay.

Governing Law and Choice of Forum: Foreign Member

Suggest changing governing law to law of neutral jurisdiction that provides

certainty to interpretation of contracts, e.g., English law.

Suggest excluding the conflict of law rules, if English law is chosen.

Suggest that courts of Mumbai will have exclusive jurisdiction, as assets

of Authority are in Bombay.

Suggest including clause to effect that principle of “forum non conveniens”

will have no application to disputes arising under Contract.

All

rig

hts

reserv

ed

Case Study| 88


Change in Law

Risk factors/ Inherent complications

Change in taxes limited to introduction of new or deletion of existing taxes;

impact of change in rates has been specifically excluded

No obligation has been cast on the contractor to opt for tax saving or

economizing opportunity resulting due to change in taxes (though relevant

from MMRDA’s perspective)

Focus on output taxes rather than the net transaction cost; re-

imbursement of outgo towards incremental taxes could be lowered due to

input tax credits, which has not considered

No threshold prescribed

No prescription on alternate dispute resolution mechanism

No discussion on manner of settlement of impact of change in taxes,

whether lump sum or otherwise

All

rig

hts

reserv

ed

Case Study| 89


Change in Law

Suggested changes

Extending the scope of the clause on „change in law‟ to change in tax

rates also

No obligation has been cast on the contractor to opt for tax saving or

economizing opportunity resulting due to change in taxes

Prescribing methodology to compute financial impact of change in taxes

and duties such that effective change in tax cost to be borne by the

contractor could be arrived at

Setting a mutually agreed threshold can offer a savings of time and effort

by imputing the need to undertake financial analysis in case of minor

changes in law

A dispute resolution mechanism should be prescribed (through a forum of

subject matter experts)

All

rig

hts

reserv

ed

Case Study| 90


Change in Law

Suggested changes

The methodology for adjustment of financial impact should be prescribed;

preferred manner could be

One time lump sum adjustment linked with the stage of project completion

Adjustment to contract price for balance period as per project completion/

payment schedule

All

rig

hts

reserv

ed

Case Study| 91


Risk of consortium being taxed as an ‘AOP’

Yes, there is an exposure of the consortium being classified

as AOP. There are certain clauses in the bid document which

give rise to this risk:

Like joint and several responsibility for completion of the project;

Common flow of revenue;

Bidder shall indemnify the project owner for any losses, ie the bidder

would have to indemnify the project owner even in case of any default

from any of the consortium members

In case, the consortium is taxed like an AOP; then the same

shall be taxed like a separate legal entity. The AOP would be

taxed at the maximum marginal rate (42.23 percent) on a net

basis, due to presence of a foreign service provider. Further,

it shall lead to the taxation of offshore supplies as well

All

rig

hts

reserv

ed

Case Study| 92C h a l l e n g e U s

bmr case study

Documents