Withdrawal of Instruction No. 1829, dated 21-9-1989

1.Instruction No 1829, dated 21-9-1989 (hereinafter called "the instruction") issued by the Central Board of Direct Taxes deals with the taxability of income arising to non-residents from the execution of power projects on turn key basis involving activities to be carried out in India as well as outside India. The instruction analyses a hypothetical situation and taxability thereof. The instruction lays down the basis of taxation with regard to the four activities listed therein. With regard to the activity relating to profits from sale of equipments and materials on FOB basis, delivered at port outside India, where the payments are also made outside India, it instructs that on the given facts no part of the income will be deemed to accrue or arise in India.

2. This instruction was issued in 1989 with regard to execution of power projects on turn key basis with certain specified features. Further, the instruction quite clearly covers a specific situation in which there is actually a consortium of foreign companies.

3. In practice, however, the assessees rely on the instruction for not only the power projects but other projects as well. Further, a single project is split into various components like offshore supply of equipments/services, onshore supply equipments and onshore services. Sometimes, the contract is split even when only one contractor/supplier bid for the project. In such cases the contract is split into various components to be executed by the bidder and its associate concerns. Thus consortium of foreign companies is not in existence but is created to take advantage of the instruction. This is not the same case as "consortium of foreign companies" envisaged in the instruction.

4. It is also noticed that most of the profit is loaded in the offshore supply and the payments for the Indian portion of the contracts barely meets the expenses resulting into either losses in India or very low profit. The Assessing Officer's attempt to apportion profit correctly into various components of the overall project on the basis of functions, risks and assets is often resisted by the assessee taking recourse to the instruction. Further, even if it is proved that a part of the operations relating to supplies have taken place in India or the permanent establishment of the assessee had a role in offshore supply, the profit from offshore supply is claimed to be exempt under the instruction.

5. Thus the instruction which was originally intended for only a particular type of turnkey power project, for a given situation, is being relied upon by assessees in all cases, in all situations, to align their business operation in a manner to avoid payment of taxes in India, This was never the purpose of issuance of this instruction. Accordingly, the Central Board of Direct Taxes hereby withdraws the instruction No 1829, dated 21-09-1989 with immediate effect.

6. It is clarified that the withdrawal of instruction will not in any way prejudice the plea of the Income-tax Department, in any appeal, reference or petition, that the instruction No. 1829 does not apply to a particular case on the given facts even though it was in force at the time of making the assessment,

7. This may be brought to the knowledge of all officers within your region.