Introduction:

Export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively referred to as ‘Project Exports’.

Project export contracts are generally of high value and exporters undertaking them are required to offer competitive credit terms to be able to secure orders from foreign buyers in the face of stiff international competition. Indian exporters offering deferred payment terms to overseas buyers in respect of export of goods and those who have been awarded turnkey, civil construction contracts by overseas parties have to secure prior approval at post award stage from Authorised Dealer (“AD”) / Exim Bank for credit terms to be offered, third country imports etc. Regulations relating to Project Exports and Service Exports are laid down in the Project Exports Manual (“PEM”) issued by RBI.

RBI vide its A.P. (DIR Series) Circular No. 39, dated 14th January, 2016 has done away with the limits on the delegated powers of AD and has updated the PEM.

Exporters who have secured orders for undertaking supply contracts on deferred payment terms, those who have secured turnkey/civil construction contracts abroad or for export of services in the area of management, technical consultancy, etc. where execution of the contracts involves grant of fund-based and/or non-fund-based facilities from the Indian banking system or where deferred payment terms are to be offered require approval from Authorised Dealer / Exim Bank.

.Meaning of “Deferred Payment exports”

Contracts for export of goods against payment to be received partly or fully beyond the period statutorily prescribed for realisation of export proceeds (at present 9 months) are treated as deferred payment exports. Ordinarily, contracts providing for deferred payment terms will be allowed only for export of engineering goods (capital goods and consumer durables).

Meaning of “Turn Key Project”

Projects involving rendering of services like designing, civil construction and erection and commissioning of plant / factory along with supply of machinery, equipment and materials

Meaning of “Civil Construction Contracts”

Execution of civil construction contracts abroad involving mainly erection and civil construction work and supply of construction materials and equipment going into the civil works. It may also include turnkey engineering contracts, process and engineering consultancy services and Project construction items (excluding steel & Cement) along with civil construction contracts

Export of Services

Contracts for export of consultancy, technical and other services by Indian companies/firms generally fall in the following categories:

• Preparation of project/feasibility reports, drawings, designs, etc.
• Supply of technical know-how/engineering services in different fields.

• Operation, maintenance and supervision of manufacturing plants, buildings and structures, etc.

• Management contracts for commercial concerns.

Period of Deferred Credit

The periods for which credit may be offered for export of goods, consumer durables, turnkey contracts and civil construction contracts will depend on merits of individual case and may be determined by the exporter and his banker in mutual consultation on the basis of commercial judgement.

However, consumer durables and miscellaneous engineering goods listed in the PEM should ordinarily be exported on cash terms. Four major factors viz. anticipated life of the goods to be exported, extent of foreign competition, nature of the foreign market and the contract value constitute the criteria for determining the overall terms of credit.

Approval from AD / EXIM Bank

Each project export contract or Service Export Contract involving Deferred Payments need to be approved either by AD/ EXIM Bank in India. Such approval need to be obtained on post award stage but before actual execution of the project.

After entering into Engineering or Civil contract, the exporter should submit to his AD bankers an application in form DPX-1 (in respect of turnkey and deferred payment supply contracts) or in form PEX-1 (in respect of civil construction contracts), as the case may be, in six copies along with six copies of the contract. Now ADs are permitted to approve the contract without any limit. However, in case the participation of EXIM Bank or ECGC is involved for credit facilities or insurance etc., then the AD need to furnish the details of contracts etc., to them accordingly

In case of export of Service Contracts, requiring furnishing a performance guarantee to the overseas employer in respect of the project as a whole especially for contracts in the field of erection/installation of plant and machinery as well as services like electrical or air-conditioning installations associated with civil construction work. The details of contract need to be submitted to AD in Form TCS-1 in six copies along with six copies of contract for necessary post-award clearance

Follow-up of Turnkey / Construction Contracts/ Service Contracts

Exporters and all their Indian sub-contractors executing turnkey contracts or civil construction contracts or Service Contracts of specified nature, abroad should furnish progress reports in form DPX 2 on a half-yearly basis (June and December) to concerned approving authority. The final Report in Form DPX 2 should clearly indicate the fact of completion of the project and full compliance with the requirements relating to completed projects

Foreign Currency Accounts/Site Offices Abroad/ Agency Commission/Financial Requirements

Project/ Service exporters may avail of facilities such as opening of foreign currency accounts, temporary site offices, payment of agency commission and availing of temporary overseas borrowings subject to the conditions as may be stipulated Exim Bank/AD. The project exporters may also be permitted to open temporary liaison offices overseas in connection with the execution of the contract abroad by the authority approving the relative project export proposal subject to the conditions as may be specified by the said authority.

Third Country Purchases

While granting package approval for turnkey/civil construction contracts involving purchase of machinery/equipment/materials from third country sources, the AD or Exim Bank will indicate the extent upto which such purchases may be made.

Ordinarily, the third country purchases should be paid for separately by the overseas project authority or by the Indian exporter out of advance/down payment received from the project authority. Where the payments for the contract are receivable on deferred payment basis, the exporter should, as far as possible, try to secure matching deferred payment terms in respect of third country purchases required for the project to avoid a net outlay of funds in foreign exchange.

Export of Construction Equipment and other equipment from India

Exporters executing turnkey/ construction/ service contracts abroad should normally take from India construction and other equipment required for performance of the contracts. AD may permit, on application, export of equipment from India on the condition that it will be re-imported into India on completion of the contract and if let out /sold, the full hire charges/sale proceeds will be promptly repatriated to India.

Exporters will also be permitted to purchase construction etc. equipment abroad, where necessary.

Transfer pricing provisions in India and globally seek to ensure that there is no shift of profits or funds as against the functions being performed, risks absorbed and capital deployed in a specific jurisdiction i.e.,correct allocation of taxable profits amongst tax jurisdictions. In cases where the underlying transaction was not undertaken at arm’s length, a primary adjustment is made to the taxable profits of the taxpayer to align the transfer price with the arm’s length price (“ALP”). This primary adjustment may be made by the tax payer (voluntarily) or by the tax authorities.

Thus as per the Indian tax laws, currently, there is no concept or issue of remittance of the difference between the transaction price and the arm’s length price. There would only be a single TP adjustment that increases the taxable income of the taxpayer and Income tax would likely be required to be paid on such notional TP adjustment. In effect, the Associated Enterprise (AE) would effectively retain the excess/differential funds due to any Transfer Pricing (TP) disconnect.

International Scenario:

The secondary adjustment rules are an internationally recognised including the United States, Canada, France and other EU Member States, albeit in different forms/approaches. Recently, in 2016, the UK Government also sought consultation from stakeholders on whether a secondary adjustment rule should be introduced into the UK's transfer pricing legislation and if so, in what form.

Secondary adjustments may take the form of constructive dividends, constructive equity contributions or constructive/ deemed loans. While a rule based on constructive dividends would treat the excess profits transferred to the overseas company as a deemed dividend (which may be subject to withholding tax), an equity contribution rule would treat the excess profits as deemed equity contribution.

The OECD Transfer Pricing Guidelines for Multinational Corporations and Tax Administrations (“OECD Guidelines”) define the term secondary adjustments as “an adjustment that arises from imposing tax on a secondary transaction”. A secondary transaction is further defined as “a constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment”

Indian Scenario: Union Budget 2017:

The Indian government has introduced the concept of secondary adjustments (Sec 92 CD &CE) under the

TP provisions. The Budget specifies that where a primary adjustment to transfer price:

1. has been made by the Assessing Officer and accepted by the tax payer; or
   1. has been made by the tax payer suo-moto in the return; or

• Is determined under APA/ MAP/ safe harbour

then secondary adjustment is required to be done.

The Union Budget specifies that the amount of difference between arm’s length price as determined and actual transaction price (referred as “excess money” = ALP in primary adjustment – actual transfer price of international transaction) is not received by the taxpayer from the AE within the prescribed time, then such excess money shall be deemed to be an advance made by the taxpayer to the AE and interest shall be computed on such advance. The time limit for repatriation to India and manner of computation of such interest including rate & method will be prescribed.

However, the following proviso has also been supplemented to the above proposed new section:

“Provided that nothing contained in this section shall apply, if,–

• the amount of primary adjustment made in any previous year does not exceed one crore rupees; and

• the primary adjustment is made in respect of an assessment year commencing on or before the 1st day of April, 2016.”

Thus, the above proviso specifies that the new proposal would not be applicable if the amount of primary adjustment is less than Rs 1 Crore in any financial year on or before FY 2015-16.

Questions that need answers in the form of clarification–

There is certain ambiguity in the above mentioned provisions as follows:

1. Applicability of threshold of Rs 1 crores for future years?
2. Applicability of these provisions for past years (where adjustment is more than 1 crores)?
3. Applicability of these provisions for AY 2017-18?

4. Applicability of the above said provisions in scenarios where non filing of appeal by taxpayer pursuant to unfavourable HC/ITAT order?

5. MAT implications and is the interest calculations on cumulative basis?

6. How will the section impact counterparty if transfer price is not acceptable in overseas jurisdiction?

7. Does it make any difference that there is no corresponding amendment in Section 4,5 and 9 of ITA?

8. Does it make any difference if F Co ceases to be AE at a later date, while being AE on the date of transaction?

9. Whether interest needs to be computed from the date of primary adjustment or when the assessment is completed?

10. Cases where the AE also has a presence in India (say, in the form of Permanent Establishment)?

11. Window period of getting funds into the country and the manner of computation of interest?

As mentioned above, there is a need to have clarity on the ambiguity and already representations on this matter are being made before the CBDT/ Finance Ministry to get appropriate clarifications.

Key Topics Covered:

• International Taxation
• Audit
• Direct Taxes
• Service Tax

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Key Topics Covered:

• International Taxation
• Income Tax
• Service Tax
• FEMA
• Companies ACT

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.