R. Kumar, B.Com. MBA (Finance)


EPC Contracts refers to an Engineering, Procurement and Construction contract. In an EPC Contract, the EPC contractor undertakes total responsibilities for the project upto the commissioning stage for a pre-agreed consideration. While conceptually, EPC contract may look similar to turnkey contract, it goes a little further than a turnkey contract as in an EPC contract the EPC contractor undertakes total responsibility as well as liability for the commissioning of the project whereas in a turnkey contract, the contractor is generally responsible for selling up of the plant.        

A turnkey contract, historically, pertained mainly to engineering services, supply of plant and erection of plant. Other aspects pertaining to the project, such as, civil construction, were being taken care of by separate contractors. However, with the highly sophisticated, complex and gigantic projects of significant value being increasingly undertaken, it was necessary to have a more integrated and cohesive approach. Thus, a format going beyond turnkey contract evolved by way of EPC contract. The key drivers towards this format were the need to control commissioning time, control total project costs and requirement of project management and monitoring skills and expertise of a very high order.

An EPC contractor hands over a ready, completed and tested project to the project owner who is required to only manage the actual operation of the plant. This can be compared with a builder who also undertakes interior designing and furnishing and hands over a completed fully furnished house to an owner who simply moves into it.

Meaning of Engineering, Procurement & Construction:-


Engineering involves design and engineering for the project. The engineering would include basic engineering, project engineering and detailed engineering for the project as well as the plant, equipment and components thereof.

Procurement :-

Procurement involves identifying, negotiating and arranging supplies of equipment duly ensuring the compatibility of different pieces of equipment with each other. In case of non-standard equipment, this could also involve design, fabrication and supply of equipment. The EPC contractor is also required to ensure that the different pieces of the equipment are delivered within the agreed time frame.


Construction involves civil works, receiving and handling equipments on-site, on-site erection, project management, project monitoring, supervision, commissioning and testing of the project.

Forms of EPC Contract:-

An EPC contract may be in one of the following forms.

1. Single EPC Contract:

The project owner executes single contract with one contractor. The entire liability and responsibility for execution of the contract is that of the contractor.

Single contract may be split between the offshore components and onshore components. Some times EPC contractor would prefer to have split contracts, mainly to limit its liabilities as also its tax exposure. This split may be either vertical or horizontal. In case of vertical split, the contract is split into civil works, supply and services. In case of horizontal split, the contract is split between onshore supply and services and offshore supply and services.

2. Umbrella Contract:-  

The Umbrella contract covers the overall scope of the project. The Umbrella contract is executed between the project owner and the EPC contractor. Pursuant to the Umbrella contract, specific contracts in respect of different substantive work components such as civil works, supply of equipment, engineering services, erection of equipment etc. are separately executed between the project owner and the EPC contractor. Under Umbrella contract consideration in respect of each component is separately identifiable and the tax authorities do not attribute such consideration on ad-hoc basis.

3. Composite Contract:-

The composite contract is executed between the project owner and the EPC contractor comprising all the aspects of the project. Based on the Composite contract, the EPC contractor may execute sub-contracts with sub-contractors for specific portions of the work. The sub-contractor may be group of the EPC contractor or they may be independent contractors.

Income Streams & Tax Implications:-

An EPC contract would result in several distinctly identifiable streams of income to the contractor. This involves the following four components:

  • Offshore supplies of plant and equipment
  • Offshore services
  • Onshore supplies of plant and equipment
  • Onshore services

1. Taxability of Offshore Supplies of Plant and Equipment:-

In case of supplies of plant and equipment, the issue may be limited to whether the  non-resident supplier has a business connection or permanent establishment. If, on examination, it is found that such business connection or permanent establishment did not exist, no tax incidence could arise.

 However, if such business connection or permanent establishment did exist, the issue would arise as to the profit that should be attributable to such business connection or permanent establishment.

Ishikawajima- Harima Heavy Industries Ltd. Vs. DIT [(2007) 288-ITR-408 (SC)] 

a) Only such part of the income, as is attributable to the operations carried out in India can be taxed in India.

b) If in respect of one of the transactions under the turnkey contract, if all the parts of the transaction, i.e., the transfer of property in goods as well as the payment were carried out outside India, the transactions cannot be taxed in India.

c) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed. This principle is also recognised by clause (a) of Explanation 1 to section 9(1)(i) of Income tax Act.

d) The situs of signing of contract is of no material consequence if all activities connected with offshore supplies were outside India. In such case, income cannot be deemed to accrue or arise in India.

e) There is a difference between the existence of a business connection and the income accruing or arising out of such business connection.

f) If a PE exists, it would be the taxable entity. However, existence of a PE would not constitute sufficient “business connection”. The fiscal jurisdiction of a country would not extend to taxing the entire income attributable to the PE.

g) Even though the project may be a turnkey project and the contract may be a turnkey contract, the entire contract need not be considered an integrated one so as to make EPC Contractor pay tax in India.

h) In the context of paragraph 6 of the Protocol to India- Japan DTAA, for the profits to be attributable directly or indirectly, the PE must be involved in the activity giving rise to the profits.

2. Taxability of Offshore Supplies of Services:-

In case of services, the issue may be limited to whether the service has a business connection or permanent establishment. If, on examination, it is found that such business connection or permanent establishment did not exist, tax incidence could arise.

However, if such business connection or permanent establishment did exist, the issue would arise as to the profit that should be attributable to such business connection or permanent establishment.

Exceptions: Income not taxable in India if-

  • Services rendered from outside India; and
  • The PE in India had not played any role in respect of services.

In the context of offshore supplies of services, the following propositions are expounded by the Supreme Court in  

Ishikawajima- Harima Heavy Industries Ltd. Vs. DIT [(2007) 288-ITR-408 (SC)] 

a) Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable.

b) If the offshore elements form an integral part of the contract, the entire contract would not be attributable to the operations in India even if the place of execution of the contract is in India.

c) Section 9(1)(vii) of the Act, read with the explanatory memorandum, cannot be given a wide meaning so as to hold that the amendments was only to include the income of non-resident tax payers received by them outside India from Indian concerns for services rendered outside India.

d) The test of residence, as applied in international law also, is that of the tax payer and not that of the recipient of such services.

e) For section 9(1) (vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a “live link” with India that the entire income from fees as envisaged in Article 12 of the DTAA becomes taxable in India.

f) The terms “effectively connected” and attributable to” are to be construed differently even if the offshore services and the permanent establishment were connected.

g) Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, entire services have been rendered outside India, and have nothing to do with permanent establishment, and can thus not be attributable to the permanent establishment and thereon not taxable in India.

h)  Applying the principle of appropriation to composite transactions, which have some operations in one territory ad some in others, is essential to determine the taxability of various operations.

i) The location of the source of income within India would not render sufficient nexus to tax the income from that source.

j)  If the test applied by the Authority for Advanced Ruling is to be adopted here too, then it would eliminate the difference between the connection between Indian and foreign operations, and the apportionment of income accordingly.

k) The services are inextricably linked to the supply of goods, and it must be considered in the same manner.

3. Taxability of Onshore Supplies of Plant and Equipment & Services:-

Onshore supplies of plant and equipment would be taxable in the normal course and hence, no specific tax issue other than those which would arise in case of a resident, arise in such case.

Relevant Case Study:-

1. Anglo-French Textile Co. Ltd. Vs. CIT [(1954) SCR 523]

The questions which arose for consideration was:

“(2) Can the income received in India be said to arise in India within the meaning of sec.4A(c)(b) of the Act? If not, should only those profits determined under sec. 42(3) as attributable to the operations carried out in India be taken into account for applying the test laid down in sec. 4A(c)(b), and remanded the case to the High Court with the direction that it should give its opinion on these two questions.”

In regard to the first question it was opined that’s 42(3) had nothing to do with the determination of the income arising in the taxable territories as distinguished from the income arising without taxable territories as understood in sec. 4A(c)(b) of the Act, it was held;

“The phraseology of sec. 42(3) of the Act also repeals the contention in so far as the profits and gains of the business which are referred to therein and which are capable of apportionment as therein mentioned are deemed to accrue or arise in the taxable territories thus using the words ‘accrue’ and ‘arise’ as synonyms with each other.

The above passage is also sufficient in our opinion to establish that the apportionment of income, profit or gains between those arising from business operations carried on in taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of sec. 42(3) of the Act but on general principles of apportionment of income, profit or gains..”

While the first question was answered in negative, question no. 2 was answered in the following terms:

“Question 2- The income received in British India cannot be said to wholly arise in India within the meaning of sec. 4A (c) (b) of the Act and that that there should be allocation of the income between the various business operations of the assessee company demarcating the income arising in the taxable territories in the particular year from the income arising without the taxable territories in that year for the purpose of sec. 4A(c) (b) of the Act.”

2. CIT Vs. RD Aggarwal & Co. & Anr. [(1965) 56-ITR-20 (SC)]

15. On a plain reading of sub-sec. (1) and (3) of sec. 4 it would appear that income accruing or arising from any business connection in the taxable territories – even though the income may accrue or arise outside the taxable territories will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-sec. (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profit and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonable attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under sub-sec.(3) of sec. 42.

3. CIT Vs. Mitsui Engineering & Ship Building [(2002) 174-CTR-66 (Del.)]  

In this case reliance was placed; the contention was that the finding that the contract for designing, engineering, manufacturing, shop testing and packing upto f.o.b. port of embarkation could not be split up since the entire contract was to be read together and was for one complete transaction. It was in the said fact situation held that it was not possible to apportion the consideration for design on one part and the other activities on the other part. The price paid to the assessee was the total contract price which covered all the stages involved in the supply of machinery.

4. ITO & Ors. Vs. Shriram Bearings Ltd. [(1997) 138-CTR-169(SC)]

Division Bench, opined: “We are not prepared to agree that the High Court has not correctly understood the purport of the agreement between the respondent and M/s Nippon Seike Kabushiki Kaisha (NSK). The agreement is in two parts. It is true that the two parts are independent but yet the consideration for the sale of trade secrets and consideration of technical assistance is separately provided for and mentioned under separate sections. So far as the consideration for the technical assistance is concerned, its taxability is in doubt. The only controversy is with respect to the taxability of 1,65,000 US Dollars which is stipulated as the consideration for sale of trade secrets. The agreement specifically says that the said sale is effected in Japan. We are unable to see on what basis it can be said that any part of the said amount has been earned in India.”

5. CIT Vs. Fried Krupp Industries [(1980) 19-CTR-297 (Mad.)]

“ …. Nowadays we have what are called turnkey projects, and in such projects until the machinery is actually run and proves its performance, the responsibility of the foreigner would continue. But in the present case the contract cannot be equated to a turnkey contract. The operations in India for the erection of the machinery are only the responsibility of the Indian company. It is only any defect in the machinery or any negligence in the performance of the foreign engineer, that may give rise to a claim for damages. But that is not the same as the foreign company performing any operation in pursuance of this contract in India. Whatever we have said above would apply also to deputation of foreign personnel for procuring Indian spare parts. It was obviously considered necessary to get foreign personnel from abroad for this purpose only because the type of spare parts required for the foreign machinery could be better picked up by these personnel, who have experience in running the machinery. It is merely an assistance provided to the Indian company. Having gone through the terms of the agreement in full, we are satisfied that there are no operations in India attributable to the foreign company which can give rise to any profits being earned in India. The agreement itself says that the terms of the payments were in Germany. Thus, there is absolutely no operation in India which would give rise to tax liability in India as far as the foreign company is concerned….”          

Relevant CBDT Circulars & Instructions & Others:-

1. Circular No. 23 dated 23rd July, 1969:-

Same explains the scope and ambit of ‘business connection’ in the case of a   non-resident.

2. Instruction No. 1767 dated 1st July,1987:-

      These instructions contain the guidelines for computation of income of foreign contractors engaged in the business of exploration and exploitation of oil and natural gas in India.

3. Instruction No. 1829 dated 21st September,1989:-

      These instructions contain the guidelines regarding taxability of non-residents engaged in the execution of power projects of turnkey basis.

4. Klaus Vogel on Double Taxation Conventions:-

      “(g) No force of attraction principle: The second sentence of article 7 (1) allows the State of the permanent establishment to tax business profits, ‘but only so much of them as is attributable to that permanent establishment’. The MC has thus decided against adopting the so-called ‘force of attraction of the permanent establishment’, i.e. against the principle that, where there is permanent establishment, the State of he permanent establishment should be allowed to tax all income derived by the enterprise from sources in that State irrespective of whether or not such income is economically connected with the permanent establishment. In line with the domestic law then prevailing in the USA, such a ‘force of attraction’ was, for instance, incorporated in Germany’s 1954 with USA [second sentence of art. III (I)]. In contrast, the second sentence of art. 7(1) MC allows the State of the permanent establishment to tax only those profits which are economically attributable to the permanent establishment, i.e. those which result from the permanent establishment (cf. Also para 5 MC Comm. Art. 7, supra m. No. 10). As regards the profits made by the enterprise in the State of the permanent establishment, a distinction must always be made between those profits which result from the permanent establishment’s activities and those made, without any interposition of the permanent establishment, by the head office or any other part of the enterprise (also for mere assembly permanent establishment: BFH 37 RIW 258 (1991)]. It is only when there is a connection with the permanent establishment that the State of the permanent establishment is entitled to impose tax. Conversely, losses incurred in connection with direct transactions may not be set off against permanent establishment’s profits. Since a DTC may not increase tax liability, the USA, it is true, imposes tax at the lower amount that would ensue if the permanent establishment’s business and direct transactions were combined and treated as if no DTC existed (of course, the taxpayer may, in such event, not only set off the result of individual direct transactions, which amounted to a loss against the permanent establishment’s positive operating result: I.R.S. Rev. Rul. 84-17, 198-I Cum Bull.308. According to the ruling, the taxpayer is in such cases entitled to elect taxation which discounts the DTC. Supra art. I, at  m. No.44)”


Relevant Sections:-

Θ  Under Income Tax Act:-

i.      Section 4
ii.      Section 5
iii.      Section 6
iv.      Section 9(1)(i),(v),(vi),(vii)
v.      Section 44BBB
vi.      Section 44C
vii.      Section 44DA
viii.      Section 115A

 Θ   Under DTAA:-

ix.      Article 3(1)(a)
x.      Article 4
xi.      Article 5
xii.      Article 7
xiii.      Article 12 & 13

(Author can be reached at [email protected])

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October 2021