2012 (2) TMI 260 - AAR - Income Tax

DTAA with Singapore Singapore company entered into contract with IOCL for residual offshore construction work and Installation of SPM - contract with L&T Ltd for installation and construction services for Single Point Mooring (SPM) - applicant contending non-existence of PE in India and presence in India for less than 180 days taxability of revenue - FTS or Royalty applicability of Section 44BB in respect of the contract with L&T - Held that - In case of Ishikawajima-Harima Heavy Industries Ltd.(2007 - TMI - 3467 - Supreme Court) it is specified that where consideration of each portion of the contract is separately specified, it can be separated from the whole. Since payment in respect of contract with IOCL specifies separately consideration for mobilization and demobilization falling under the definition of royalty under Article 12.3(b) of the DTAA , consideration for actual installation falling under the definition of FTS as per Article 12.4(a) of the DTAA, and the rest relating to pre and post execution work and drawing/design documentation. Therefore, part of consideration is in nature of FTS and part of consideration is in nature of royalty u/s 9(1)(vii) & (vi) of the Act and under Article 12 of DTAA In respect of contract with L&T it is noted that services and facilities being rendered by the applicant go beyond installation and include pre-installation services, post-installation services, procurement and transportation and sub-contract is effective as of 23.04.2008 and obligations under the contract continued to exist even after the vessels left the shores of India. The applicant s plea of counting the duration of services from 3.12.2008 when the applicant s vessels were mobilized to India till 19.05.2009 when the vessels left the shores of India is untenable and unacceptable. Hence the applicant has a PE in India in terms of Article 5.5 of the DTAA and falls within the ambit of Section 44BB of the Act. The consideration received by the applicant for mobilization and demobilization is taxable in India u/s 44BB of the Act.

Issues Involved:
1. Classification of consideration as 'Fees for Technical Services' (FTS) under section 9(1)(vii) of the Income-tax Act, 1961 (Act).
2. Classification of consideration as FTS under Article 12 of the India-Singapore Double Tax Avoidance Agreement (DTAA).
3. Classification of consideration as 'Royalty' under section 9(1) of the Act and/or Article 12 of the DTAA.
4. Existence of a Permanent Establishment (PE) in India under Article 5 of the DTAA.
5. Taxability of income earned from contracts with IOCL and L&T in India.
6. Computation of income under section 44BB of the Act.
7. Taxability of mobilization and demobilization revenues.

Issue-wise Detailed Analysis:

1. Classification of Consideration as 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Act:
The applicant argued that the contracts with IOCL and L&T were for installation services and thus should be considered business receipts rather than FTS. The Revenue contended that the services provided were technical and should be classified as FTS. The ruling concluded that part of the consideration under the IOCL contract is indeed in the nature of FTS under section 9(1)(vii) of the Act.

2. Classification of Consideration as FTS under Article 12 of the DTAA:
Similar to the first issue, the applicant maintained that the contracts did not involve making available technical knowledge, skills, or experience to IOCL and L&T, which would qualify them as FTS under Article 12.4(b) of the DTAA. The ruling held that part of the consideration under the IOCL contract qualifies as FTS under Article 12 of the DTAA.

3. Classification of Consideration as 'Royalty' under Section 9(1) of the Act and/or Article 12 of the DTAA:
The Revenue classified the payments under the IOCL contract as Royalty. The ruling agreed, stating that the payments for mobilization and demobilization related to the use of equipment fall under the definition of Royalty under section 9(1) of the Act and Article 12 of the DTAA.

4. Existence of a Permanent Establishment (PE) in India under Article 5 of the DTAA:
The applicant claimed no PE in India, arguing their presence was below the threshold period specified in the DTAA. The ruling determined that the applicant had a PE in India for the L&T contract, as the services extended beyond 183 days, fulfilling the requirements under Article 5.5 of the DTAA.

5. Taxability of Income Earned from Contracts with IOCL and L&T in India:
The ruling concluded that the income derived by the applicant from both contracts is taxable in India. This includes the portion of the income classified as FTS and Royalty under the respective sections and articles of the Act and DTAA.

6. Computation of Income under Section 44BB of the Act:
For the L&T contract, the ruling found that the income should be computed under section 44BB of the Act, which deals with the business of providing services or facilities in connection with the extraction or production of mineral oils. The applicant's services were considered integral to these activities, thus falling within the ambit of section 44BB.

7. Taxability of Mobilization and Demobilization Revenues:
The ruling held that the entire mobilization and demobilization revenues received by the applicant are taxable in India under section 44BB of the Act. The applicant's argument for excluding the portion of revenues attributable to activities outside India was rejected.

Summary of Rulings:
1. Part of the consideration under the IOCL contract is FTS under section 9(1)(vii) of the Act and Article 12 of the DTAA.
2. Part of the consideration under the IOCL contract is Royalty under section 9(1) of the Act and Article 12 of the DTAA.
3. The applicant has a PE in India in respect of its contract with L&T.
4. The income derived by the applicant from both contracts is taxable in India.
5. The income from the L&T contract is taxable under section 44BB of the Act.
6. The mobilization and demobilization revenues are taxable in India under section 44BB of the Act.

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