Work kickoff to set tax for foreign realty

Work kickoff to set tax for foreign realty
The Economic Times, June 29, 2009, Page 9

Souvik Sanyal NEW DELHI

THE Authority of Advance Rulings (AAR) has cleared the air on taxation of a foreign realtor that has a tie-up with an domestic entity by ordering that the duration of work must be calculated from the day the effective work on the project begins rather than from the date of signing the contract.

Calculating of the number of days of work is crucial for a foreign company as it determines the tax liability of its earnings.

Foreign firms are often signed up by Indian infrastructure developers to do a part of the construction work. Examples of such arrangements include the Dahej LNG project where Petronet LNG awarded contracts to a consortium of foreign companies.

The AAR ruling came in the case of Cal Dive Marine Construction (Mauritius) Ltd, which signed an agreement with Hindustan Oil Exploration Company (HOEC) for laying undersea pipelines in the Cauvery basin. The AAR was hearing the calculation of “the period of activity undertaken” by Cal Dive, a bone of contention between the I-T authorities and the company.

Cal Dive inked the pact with HOEC on December 4, 2007 for $59,174,200. As per the double taxation avoidance agreement between India and Mauritius, the construction project undertaken by the foreign company must continue for nine months so as to make its income taxable in India. While the revenue department contended that the duration of operations for Cal Dive should be calculated from the date of signing the contract, the company argued that the period of work was lesser than the ninemonth period. In a relief to Cal Dive, the AAR ruled that the date of calculation should be the date from when the work has begun.

Commenting on the AAR ruling, Ernst & Young tax partner Amitabh Singh said the decision will provide guidance on how to calculate the number of days for taxing foreign companies involved in construction in the country.