By Asitendu Modak

Abstract
EPC contracts in power projects often raise disputes around when possession passes, how taxation applies, and whether bifurcated supply and service arrangements can withstand scrutiny under GST and TDS provisions. This article explores the legal and financial embargoes linked to possession, ownership, and payment in EPC frameworks, and offers practical strategies for power plant owners to structure contracts that ensure compliance while minimizing tax risks.

Handling Possession and Taxation in EPC Contracts for Power Plants

Setting up a power plant in India is not merely an engineering challenge; it is also a legal and tax management exercise. The execution of power projects commonly follows the EPC (Engineering, Procurement and Construction) model, where the contractor undertakes to design, procure, supply, erect, test and commission the plant on a turnkey basis. While this approach ensures technical integration, it raises complex questions under the Goods and Services Tax (GST) regime and the Income Tax Act, particularly with respect to when possession of goods passes, and how taxation—GST, TDS, or TCS—should apply.

The Core Issue: Possession vs. Taxability

At the heart of the problem is the timing and nature of possession. In EPC projects, the contractor often supplies substantial plant and machinery under a supply arrangement. Simultaneously, it provides erection, testing and commissioning services. The complication arises because:

In many cases, title in goods passes ex-works (at the point of dispatch from the manufacturer), but actual physical possession remains at site with the contractor until commissioning.
Meanwhile, the power plant owner may have received land, infrastructure or approvals from the government, making it clear that any installation done on that land forms part of immovable property.
Tax authorities therefore tend to reclassify even bifurcated contracts (supply + services) as a composite works contract service, leading to GST @ 18% on the entire value.

This reclassification can distort the intended financial structure, create disputes on input tax credit, and even trigger multiple layers of deduction under GST TDS and Income Tax TDS/TCS.

Three Contract Patterns and Their Tax Treatment

1. Standalone Supply Contract

If plant and machinery are supplied under a separate contract, title may transfer at dispatch. In such cases:

GST: Payable at the applicable goods rate (e.g., turbines, boilers @ 18%).
Income Tax TDS/TCS: Section 194Q (TDS by buyer) or 206C(1H) (TCS by seller) may apply if transaction value exceeds ₹50 lakh and annual turnover by Rs 10 crs.
GST TDS: Not applicable, since this is not a works contract service.

Embargo: Authorities may argue that since goods are destined for installation at the owner’s immovable facility, this is inseparable from services. Litigation risk is high.

2. Standalone Services Contract

If the contract only covers erection, testing and commissioning (under Bailment basis) i.e. where the supplied equipments are free issued to bailee on temporary basis for a specific purpose and handover to owner after execution or incorporation:

GST: Service rate @ 18%.
GST TDS: Deductible if owner is government, PSU or notified entity.
Income Tax TDS/TCS: Not applicable, as no goods are supplied.

Embargo: If the contractor uses consumables like cement or steel, it may be reclassified as a works contract. Careful drafting is needed to specify that all materials are provided by the owner.

3. Composite EPC Contract (Works Contract)

When supply, erection, and commissioning are bundled:

GST: Entire contract taxed as works contract service @ 18%.
GST TDS: Deductible by government/PSU owners.
Income Tax TDS/TCS: Not applicable, since this is classified as service.

Embargo: None from a classification standpoint. But possession and ownership clauses need careful drafting to avoid premature transfer of risk.

Managing Possession and Ownership in Contracts

The real embargo arises when the owner attempts to take “possession” of equipment delivered at site before commissioning. Under GST law, possession combined with transfer of title is supply of goods. But in EPC works contracts, supply is inseparable from services and must be treated as service.

Therefore, contracts should:

State that ownership and risk remain with the contractor until successful commissioning and acceptance.
Clarify that progressive payments are only on account, not conferring ownership.
Provide that possession of the works by the owner occurs only after commissioning and Taking Over Certificate.

Model Clause Illustration

“Ownership of all Plant, Equipment and Materials supplied for incorporation into the Works shall remain with the Contractor until successful erection, testing and commissioning and issuance of the Taking Over Certificate. Interim delivery or storage of goods at site shall not constitute transfer of ownership or possession. Payments released under the Contract are interim and conditional, and shall not confer title until acceptance of the Works.”

This formulation ensures that goods lying at site are treated as contractor’s inventory, not the owner’s property, until commissioning. It prevents misinterpretation as a standalone supply of goods.

Payment Structure and Tax Compliance

Linking payments to milestones is standard in EPC projects. To avoid tax disputes:

Advance Payments: Secure with bank guarantees, clearly stating that advances do not transfer ownership.
Progressive Payments: Release against certification, but treat as provisional.
Retention Money: Hold back a percentage until commissioning, reinforcing that completion is the point of ownership transfer.

For tax purposes:

Owners must deduct GST TDS (if government or PSU) on works contracts.
Owners need not apply 194Q TDS if the contract is classified as works contract service.
Contractors should structure supply-only contracts carefully to avoid overlap with 194Q/TCS obligations.

Conclusion: Structuring for Clarity

For power plants, possession and taxation are interlinked in EPC contracts. While splitting supply and service contracts may appear attractive, the risk of reclassification and double deduction under GST and Income Tax is significant, especially when government facilities are involved.

The most robust approach is to:

Adopt a works contract EPC model where possible, aligning with law and precedent.
If supply and service contracts are split, ring-fence them with clear clauses on possession, ownership and payment.
Ensure payment terms preserve the contractor’s ownership until commissioning.
Deduct TDS/TCS only in line with the contract type—194Q/TCS for pure supply, GST TDS for works contracts.

Handled with foresight, these measures allow power plants to avoid embargoes related to possession and taxation, and to execute projects with clarity and compliance.

Mr Asitendu Modak is the General Manager, Purchase of Uniseven Engineering & Infrastructure Pvt. Ltd. Uniseven handles various EPC projects. However, views expressed by Mr Modak is personal.