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POWER PROJECTS – UTTAR PRADESH
REDUCTION IN POWER GENERATION COST BY
CONTRACT STRUCTURING AND TAX OPTIMIZATION
December 23, 2011 | Radisson Hotel | Noida
Abhishek Jain | Director | BMR Advisors
DISCLAIMER
All rights reserved | Preliminary & Tentative
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
Power Projects – Destination Uttar Pradesh | 3
Contents

INDIRECT TAX

TYPICAL INDUSTRY ISSUES

TAX OPTIMIZATION

DRAFTING POWER EPC
CONTRACTS – KEY CAUTION
All rights reserved | Preliminary & Tentative
POINTS
All rights reserved | Preliminary & Tentative
INDIRECT TAX ON
POWER PROJECTS
INDIRECT TAX COST STACK UP FOR ENERGY
PROJECTS (A HIGH LEVEL OVERVIEW)
Project
Customs
Nil for UltraMega/Mega projects
Thermal
Wind
20.94 percent for
others (under project
import)
9.36 percent for
WOEG and parts
thereof
Excise
NIL for UltraMega/Mega
projects
10.3 percent for
others
NIL
VAT /CST /works
contract tax
Service tax
VAT - State specific
exemptions
CST – 2 percent [C
Form]
In-transit
mechanism to
further optimize
taxes
10.3 percent
10.3 percent
Solar – PV
Solar
-Thermal
Biomass
NIL
10.3 percent
9.36 percent
NIL
10.3 percent
9.36 percent
NIL
10.3 percent
9.36 percent for other
equipments
** Building Cess applicable @ 1 percent – a cess on all building and construction activities including in relation to generation,
transmission and distribution of power. Several States levy entry tax as well on entry of goods – specific exemptions in
Rajasthan and Bihar for renewable power projects (in general or specific to a type of renewable energy project)
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Nil for PV modules
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PROVISIONAL MEGA
STATUS CERTIFICATE
PROVISIONAL MEGA STATUS
Key conditions for provisional mega status:
 The CEO of the Project Owner (ie power generation company) is
required to furnish fixed deposit receipts (‘FDR’) for an amount equal to
customs duty / excise duty saved to the jurisdictional DC / AC;
Lack of clarity in terms of many procedural aspects vis a vis
provisional mega status
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 In case the developer does not produce the final MPP status certificate
within a period of 36 months from the date of importation / date of
clearance of excisable goods, then the security shall be apportioned
towards the customs / excise duty saved
PROVISIONAL MEGA STATUS (CONT)
Key points which require clarity:
 FDR – whether upfront on the entire estimated value of duty exemption
claimed or on the basis of actual clearance of goods from time to time?
 In case the Project Owner is unable to obtain the final MPP status
certificate from the Ministry of Power within 36 months:
 Who would be entitled to the interest on the FDR (Government or the
Project Owner)
 Where the procurements are made by the Project Owner from OEM/s
located in India having factories in several locations across the country,
where will the Project Owner be required to furnish the FDR?
 Excise range of the OEM; or
 Excise range of Project Owner
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• Whether Project Owner would be required to pay interest at 18 percent on
the duty saved
PROVISIONAL MEGA STATUS (CONT)
 If FDR submitted at the Excise Range of Project Owner
 What will be the manner in which the control would be ensured by the
revenue authorities of OEMs to check that at any given point of time the
value of customs / excise duty exemption does not exceed the value of FDR?
 Will the customs / excise exemption be restored to the Project Owner in
case the MPP status certificate is received by them from the Ministry of
Power post 36 months from the date of importation / clearance of
excisable goods?
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 Will the period of 36 months be reckoned from the date of importation /
clearance of excisable goods for each consignment separately or from
the date of first importation / clearance of excisable goods?
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DUTY BENEFITS FOR
GOODS ALREADY
RECEIVED PRIOR TO
MEGA APPROVAL
DUTY BENEFITS FOR GOODS RECEIVED PRIOR
TO APPROVAL
Whether the Mega Power Project status will be reckoned from the
date of in principle / provisional approval granted by Ministry of
Power or from the date of filing of the application with the Ministry of
Power for grant of Mega status?
 where there is a deeming fiction to the contrary in the governing laws/
regulations as may be relevant; or
 there is an express stipulation of the date of effect on the approvals,
licenses, registrations itself
Worth exploring – on a favorable conclusion duty benefits may be
explored even for goods received prior to Mega status approval
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Judicial precedents exist which lay down that grant of approvals,
licenses, registrations takes effect from the date of application
except
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TAX OPTIMIZATION
STRUCTURING EPC CONTRACTS
Contract
Scope
Off-shore supply
Offshore supply of imported
equipment and materials for the plant
Off-shore service
Offshore services encompasses
basic and detailed engineering,
project management etc.
Onshore supply
Onshore supply of equipment and
materials
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More often than not, the scope of work under an EPC contract is
divided into separate contracts, with distinct scope of work and
related considerations – power project EPCs also follow this tend
Typically an EPC contract is split into the following:
Contract
Scope
Onshore service
Local engineering, erection &
commissioning, site supervision,
customs clearance, inland
transportation including loading/
unloading and transport from port to
site
Onshore construction/civil works
Site construction work and related
activities
The above 5 packages together represent the consolidated work
schedule under an EPC contract
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STRUCTURING EPC CONTRACTS
SPLITTING OF CONTRACTS – TYPICAL
EFFICIENCIES
Splitting of contracts evolved to build the following efficiencies:

To eliminate the exposure of sale of plant and equipment (supplied
from offshore) being subject to income tax in India

To restrict the impact of customs duty only to value of equipment and
designs imported

To mitigate the contractors’ liability to VAT/WCT by segregating the
onshore scope of work into various components
Ensure that there is no exposure vis a vis benefit of ‘in-transit’ sale

To mitigate liability under service tax composition scheme

To mitigate liability of addition of the entire supply portion for the
purposes of calculation of Building Cess
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–
SPLITTING – OWNER’S PERSPECTIVE
How to preserve the turnkey nature of the entire contract

Umbrella co-ordination agreement* or cross-default clauses?
SPLITTING OF CONTRACTS IS NOT A MUST……

In a purely domestic procurement scenario, a single lumpsum contract
may occasionally be more tax efficient
* Please note that this co-ordination agreement is in addition to the
operating contract documents
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Project owner ought to carry out detailed comparative analysis of
the tax costs to decide between split contracts versus a single
contract
STRUCTURING O&M CONTRACTS
Structuring Operations and Maintenance Contract
Composite O&M contract (for both goods and services) would qualify
as a ‘works contract’ under VAT laws but not as a ‘works contract
service’ under service tax laws thereby attracting a higher rate of
10.3% on the entire O&M value

If tax planning flexibility exists (like in a scenario where Project Owner
and O & M Co. are group companies), separate contracts to be
entered between Project Owner and O & M Co. for:
–
Supply of goods
–
Supply of services
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
Power Projects – Destination Uttar Pradesh | 18
TRADING MODEL
The option of trading model may be explored by EPC Contractors
wherein EPC Contractor will make inter-State sales to the Project
Owner against Form C.
However, this would enable EPC Contractor to claim refund of ACD
paid on imports under section 3 (5) of the Customs Tariff Act in
terms of Notification No. 102/ 2007 - Cus, which in turn would help
in reducing the overall cost of imported procurements by
approximately 2.3% (ie, ACD - CST).
Effective only where imported goods are subject to levy of ACD
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The inter-State sales effected by EPC Contractor would attract
CST at concessional rate of 2 percent.
OTHERS
Elimination of excess cost on account of CST by following ‘Intransit sales’
Use of ‘High Sea Sales Model’ where customs duty on import of
goods is Nil

Basis the judgments in case of Maihar Cement v Asst Commissioner
of Sales Tax [(1985) 60 STC 210 (MP)], etc an option of non-levy of
entry tax may be explored by the Project Owner and EPC Co,

A position may be explored that where the goods are imported at the
stage of construction, it cannot be said that the entry of the goods has
been made 'in the course of business' and therefore entry tax cannot
be imposed on such entry of goods.
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Where the charging section for levy of entry tax legislation uses the
phrase "in the course of business" for levy of entry tax (for eg, entry
tax legislations in the States of Madhya Pradesh and Chhatisgarh)
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DRAFTING POWER
EPC CONTRACTS –
KEY CAUTION POINTS
DRAFTING EPC CONTRACTS – KEY CAUTION
POINTS
Transfer of title clause for ‘In-transit Sales’

Judgment of A & G Projects & Technologies Ltd v State of Karnataka
[2008 VIL 40 SC]

Contract / Agreement for onshore supply should clearly provide that
the title transfer is only when documents of title are endorsed during
transit of goods

The contract of sale entered into between Owner and EPC Contractor
should clearly specify the intent to enter into a ‘High Sea Sale’
arrangement (and preferably agree on the format of the high-sea sale
agreement to avoid future dispute)
Impact of ‘change in taxes’ – a common area of dispute

Should it include sub-contractor level taxes as well?

Price schedule to specify quantum and rate of taxes factored for ease
of calculation
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Clause specifying mechanism for import sales – whether ‘High Sea
Sales’ or ACD refund mechanism?
DRAFTING EPC CONTRACTS – KEY CAUTION
POINTS (CONT)

GST
Definition of ‘tax laws’

POTR mandatory wef July 1, 2011

To be ensured that contract / agreement falls under ‘Continuous
Supply of Services’

To ensure that points of completion of services / milestone payments
are clearly determined by the contract document
Obligation to cooperate vis a vis documentation requirements for
customs/excise exemptions
Clear provisions for withholding taxes under works
contracts/Income tax

Grossing-up provisions for Income Tax withholding?
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Clauses consequent to Point of Taxation Rules, 2011 (“POTR”)
CONTACT US
Director with BMR Advisors and based in New Delhi, India
Specialist in Customs, VAT and Service Tax and expert in
Infrastructure Industry ( Infrastructure, Financial Services, IT
Sector, etc)
Abhishek has a varied experience ranging from infrastructure
projects, financial services, IT giants, etc. He has been involved in
indirect tax advisory, structuring, litigation, compliance, etc
He is a assistant lead advisor to IDFC, GSPL and Sabarmati Gas
He is a regular speaker at various industry forums including the
Power Associations and has published many articles to his credit
In the realm of EPC contracts, he has been the one of the key
speaker for the Seminar organized by Infraline for the years 2006,
2007, 2008 , 2009, 2010 and 2011
A Lawyer by qualification
Power Projects – Destination Uttar Pradesh | 24
All rights reserved | Preliminary & Tentative
Abhishek Jain
Director
Specialist – Indirect Tax Advisory,
Litigation and Compliance
DID: +91 124 339 5082
Cell: +91 98101 35428
abhishek.jain@bmradvisors.com
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