2012 (8) TMI 161 - AAR - Income Tax

DTAA between India and Austria - claim of absolute exemption from levying of tax in India - assignment of work to sub contractor by original assessee/applicant - Held that - That under paragraph 3 of Article 5 of the DTAC, the applicant shall be deemed to have a PE in India and to carry on business through that PE if it provided services and facilities in connection with prospecting or extraction or exploration of mineral oil in India - as activities of the applicant are by its PE or deemed PE and consequently, the whole of the income arising out of the contract will be attributable to that PE. Exception contained in section 9(1)(vii) was confined to consideration received for mining or like project undertaken by the recipient - As in a case before us where the applicant had only surveyed the area earmarked by the contractor who had undertaken the mining project and rendered technical services to enable that person to perform the mining job itself, the exemption contained in Explanation 2 to section 9(1)(vii) of the Act was held to have no application - That person can at best be said to render technical services or services in connection with the mining activity undertaken by the original contractor - the revenues earned by the applicant are not taxable in accordance with section 44BB and are taxable only as fees for technical services. Taxes on payments made by Essar Oil Limited under the sub-contract in question to be withheld under section 195 would be at 10.56% of the amount to be paid.

Summary

Issues Involved:
1. Permanent Establishment (PE) status under Article 5 of DTAA between India and Austria.
2. Attribution of profits to PE under Article 7(1) of DTAA.
3. Taxability of revenues under Section 44BB of the Income-tax Act, 1961.
4. Tax Deducted at Source (TDS) percentage under Section 195 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Permanent Establishment (PE) Status:
The first issue was whether the applicant's sub-contractor could be treated as a Permanent Establishment (PE) under Article 5 of the Double Taxation Avoidance Convention (DTAC) between India and Austria. The applicant conceded that under paragraph 3 of Article 5 of the DTAC, it would be deemed to have a PE in India if it provided services in connection with the prospecting or extraction of mineral oil. Thus, the ruling stated that the applicant has a PE in India.

2. Attribution of Profits to PE:
The second issue was whether the profits taxable in India could exceed the extent attributable to the PE as per Article 7(1) of the DTAC. The applicant conceded that all activities were conducted by its PE or deemed PE, making the entire income from the contract attributable to that PE. Consequently, this question did not require a separate ruling.

3. Taxability of Revenues under Section 44BB:
The main controversy centered on whether the revenues earned by the applicant under the seismic data acquisition and processing contracts with Essar Oil Limited were taxable under Section 44BB of the Income-tax Act. The applicant argued that its activities were related to mining and thus should be assessed under Section 44BB, citing previous rulings and definitions from the Mines Act and Petroleum guide. However, the Revenue contended that the consideration received was not exempt under Explanation 2 to Section 9(1)(vii) and should be treated as fees for technical services, especially after the amendment to the proviso to Section 44BB(1) effective from 1.4.2011. The ruling concluded that the applicant, who merely gathered seismic data for a contractor, did not undertake a mining project and thus could not be assessed under Section 44BB. The revenues were deemed taxable as fees for technical services.

4. TDS Percentage under Section 195:
The final issue was the percentage of TDS to be applied under Section 195 of the Income-tax Act. The ruling determined that taxes on payments made by Essar Oil Limited to the applicant under the sub-contract should be withheld at a rate of 10.56%.

Summary of Rulings:
- Question 1: The applicant has a Permanent Establishment in India within the meaning of Article 5 of the DTAA between India and Austria.
- Question 2: The income derived from the contract with Essar Oil Limited is attributable to the applicant's PE in India.
- Question 3: Revenues earned under the seismic data acquisition and processing contracts are not taxable under Section 44BB but as fees for technical services.
- Question 4: TDS on payments made by Essar Oil Limited should be withheld at 10.56%.

Conclusion:
The ruling pronounced on July 31, 2012, addressed all four questions comprehensively, determining the tax implications and obligations of the applicant under the relevant sections of the Income-tax Act and the DTAA between India and Austria.