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2009 (4) TMI 16 - AAR - Income TaxProfessional services to the energy and resource industries including engineering, procurement and project management services - six separate contracts with ONGC - After hearing the matter, AAR has decided that in certain cases there is no royalty which is taxable in India and No PE in India and in certain other cases, appellant is liable to pay Income Tax on Royalties in India and Royalties are taxable irrespective there is PE in India or not.
Issues Involved:
1. Nature of receipts under various contracts (royalties or not). 2. Existence of a Permanent Establishment (PE) in India. 3. Taxability of receipts from contracts in India. 4. Apportionment of royalty income under Contract No. 5. Detailed Analysis: 1. Nature of Receipts under Various Contracts: Issue: Whether the receipts under Contract Nos. 1, 2, 3, and 4 with ONGC are in the nature of royalties as defined in Article 12 of the DTAA between India and Australia. Analysis: - The applicant contended that the services under various contracts, except Contract No. 5, cannot be brought within the definition of 'royalties' as per Article 12 of the DTAA. - Article 12.3(g) of the DTAA defines royalties to include payments for services that "make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design." - The ruling emphasized that merely rendering technical services does not suffice to classify them as royalties. The services must impart technical knowledge or skills to the recipient, enabling them to use it independently in the future. - The Authority concluded that the services provided under Contracts 1 to 4 did not make available technical knowledge or skills to ONGC. Therefore, the receipts under these contracts were not considered royalties. Conclusion: The amounts received under Contract Nos. 1, 2, 3, and 4 are not in the nature of royalties. 2. Existence of a Permanent Establishment (PE) in India: Issue: Whether the applicant has a PE in India in respect of the contracts. Analysis: - The applicant did not carry on business activities in India from any fixed place, thus no PE under Article V(1) or V(2) of the DTAA. - The focus was on Article V(3)(c), which deals with 'Service PE', requiring services to be furnished in India for more than 90 days within any 12-month period. - The ruling considered whether the services under multiple contracts should be aggregated to determine the existence of a PE. - It was concluded that Contracts 2, 3, and 4 should be aggregated, and the total duration of services furnished in India exceeded 90 days within a 12-month period, thus creating a deemed PE. - Contract No. 1 did not contribute to the PE as it was completed before the other contracts commenced. - Contract No. 5, being related to royalty, was excluded from PE consideration. - Contract No. 6 independently created a PE due to the duration of services exceeding 90 days. Conclusion: The applicant had a PE in India in respect of Contracts 2, 3, 4, and 6. 3. Taxability of Receipts from Contracts in India: Issue: Whether the receipts from these contracts are taxable in India. Analysis: - For Contracts 2, 3, and 4, the receipts are taxable as business income attributable to the PE, in accordance with Article VII of the DTAA. - For Contract No. 1, there was no PE during its currency, so the receipts are not taxable. - Contract No. 6's receipts are taxable as business income attributable to the PE. Conclusion: Receipts under Contracts 2, 3, and 4 are taxable as business income attributable to the PE. Receipts under Contract No. 1 are not taxable. Receipts under Contract No. 6 are taxable as business income attributable to the PE. 4. Apportionment of Royalty Income under Contract No. 5: Issue: Whether the royalty income from Contract No. 5 should be apportioned based on the location of services rendered. Analysis: - The applicant argued for apportionment of royalty income, citing the Supreme Court decision in Ishikawajima-Harima Heavy Industries Ltd. v. DIT. - The ruling referenced previous decisions (AAR Nos. 747 and 748 of 2007) and concluded that if part of the services were rendered in India, the entire income is taxable under Section 9(1)(vi) of the IT Act. - The royalty income under Contract No. 5, involving the development and transfer of a technical plan/design, has sufficient territorial nexus with India and is taxable on a gross basis at 15%. Conclusion: The royalty income from Contract No. 5 is taxable on a gross basis at 15%, without apportionment. Final Rulings: 1. Question Nos. 1 to 4: - (a) Receipts under Contract Nos. 1, 2, 3, and 4 are not royalties. - (b) No PE for Contract No. 1; PE exists for Contracts 2, 3, 4, and 6. - (c) Receipts under Contracts 2, 3, and 4 are taxable as business income attributable to the PE. 2. Question No. 5: - (a) Receipts under Contract No. 5 are royalty income. - (b) Existence of PE is irrelevant for Contract No. 5. - (c) Royalty income under Contract No. 5 is taxable at 15%. 3. Question No. 6: - Receipts under Contract No. 6 are not royalties. - The applicant has a PE in India for Contract No. 6. - Only receipts attributable to the PE are taxable as business profits in India.
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