1. Case Introduction

Company A is a British construction contractor, and Company B is its subsidiary registered in India. Local Indian company C wants to build a 3,000-megawatt power terminal. Through the EPC (E refers to engineering design, P refers to project-related procurement, and C refers to construction) project bidding, it signed a “first contract” with Company A, also known as an “offshore contract”, which provides equipment and spare parts supply, testing and training outside India. The “second contract” and “third contract” were signed with Company B, namely the “onshore supply contract” and “onshore service contract”, which provide equipment type tests and related services such as inland transportation, insurance, on-site delivery, handling, storage, installation, etc. for the project owner in India.

2. Focus of the Dispute

The Indian tax authorities believe that: According to Section 2 of the Indian Income Tax Act, all legal entities established or actually managed in India are required to pay corporate income tax. Permanent establishments established by foreign companies in India are also taxpayers of Indian income tax. In this case, the taxpayer deliberately split an overall EPC contract into three separate contracts to evade tax. Company B constitutes a permanent establishment of Company A in India, and all responsibilities and obligations of the three contracts belong to Company A, and all income generated should be taxed in India.

The taxpayer argued that different tax obligations should be considered separately according to the provisions of the UK-India tax treaty, rather than treating the EPC project as a whole contract for taxation. Company A does not constitute a permanent establishment in India, and income generated outside India should not be taxed in India. First, the property rights and sales of the products in the offshore contract are all realized outside India, and there are no related payments in India. The contract income has nothing to do with India. Secondly, Company B is a subsidiary of Company A in India. There is no legal and financial dependence between the two, and it does not constitute a permanent establishment of Company A in India. Furthermore, Company A has not sent any employees to carry out project-related business activities in India, and does not constitute a permanent establishment in India.

The taxpayer sought help from the Indian Appeals Committee, which supported the conclusion of the tax bureau after evaluation. The differences between the tax bureau and the company could not be reconciled, so the taxpayer filed an appeal.

3. Final Decision

The court ruled in favour of the taxpayer, holding that only profits derived from business activities carried on in India are taxable in India and income derived outside India is not taxable in India, mainly on the following grounds:

First, Company A and Company B only perform their respective duties to achieve common project goals, but the fulfillment of contractual obligations and the acquisition of remuneration are independent, and there is no confusion between roles and identities.

Second, the EPC project was tendered globally through regular procedures and both domestic and foreign companies in India were eligible to bid. There was no case where the taxpayer maliciously split the overall contract into three separate contracts.

Third, the sale and provision of project equipment was entirely completed by Company A outside India and had no direct connection with its Indian subsidiary B. Company A did not participate in the construction of the project in India, and Company B did not constitute a permanent establishment of Company A in India.

4. Implications for “Going Global” Enterprises

This case is a typical example of the determination of a permanent establishment for an EPC project, and has certain reference and guiding significance for enterprises to effectively identify and control overseas tax risks in the process of “going global”.

First, be familiar with the host country’s tax laws and regulations and improve risk prevention awareness. In the early stage of project preparation, enterprises should fully understand and study the host country’s tax regulations and relevant judicial precedents on EPC projects, evaluate the EPC contract signing form and the tax risks that offshore supply may face, and make corresponding plans.

Second, conduct cross-border business activities in compliance with regulations to avoid the risk of double taxation. When undertaking EPC projects, “going out” enterprises should consider the factors for the identification of permanent establishments, standardize their legal, financial, personnel and other aspects with overseas project subsidiaries, perform their functions independently, avoid confusing the nature of the institutions, and reduce the risk of double taxation.

Third, make good use of legal channels for dispute resolution to safeguard their own legitimate rights and interests. Enterprises need to understand the host country’s tax dispute resolution mechanism and make good use of the host country’s legal relief channels. If necessary, they can use the bilateral consultation mechanism in the tax treaty to resolve cross-border tax disputes and safeguard their own legitimate interests.