April 02, 2007 | By Keith Martin in Washington, DC

INDIA said only part of the fee a construction contractor earned from a turnkey contract to build an LNG terminal was taxable in India. Companies undertaking construction jobs in another country usually break the job into two contracts. Work that will be done outside the country where the project is located is addressed in an “offshore”contract.The work that will be done at the project site in the country is in an “onshore” contract.Most countries only tax income that has its source in the country.Fees are generally treated as earned where the services are performed.

Ishikawajima-Harima Heavy Industries signed a single turnkey contract to build a large terminal to receive liquefied natural gas from tankers and regasify it.

The contract quoted separate prices for the onshore and offshore work. The contractor applied for a ruling confirming that it had to pay taxes in India only on the fees for the onshore work.The Authority for Advance Rulings refused, responding that the contract was an integrated whole. The work done outside India was too closely linked to the work in the country, with the result that the entire contract would collapse if the offshore work was not done.

The Supreme Court sided with the contractor in a decision in January. It said that a contract will not be considered an integrated whole simply because it is a turnkey contract. It also said it is  immaterial that the contract was signed in India. 

The case is Ishikawajima Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai.