2017 (7) TMI 731 - AT - Income Tax

PE in India - for how many days the assessee was engaged in the activity of exploration, exploitation or extraction of mineral oils in India? - stay in India - Held that - An enterprise shall be deemed to have a permanent establishment in contracting state to carry on business through that permanent establishment if it provides services or facilities in that state for a period of more than 183 days in connection with the exploration, exploitation or extraction of minerals oils in that state. In the present case we note that the drilling rig of the assessee was brought into India on 26.04.2010. Thereafter as evident from the minutes of meeting held on 27.04.2010 between GSPC as mentioned in page 4 of the A.O s order the Rig was undergoing necessary fabrication, upgradation & positioning to meet GSPC requirements and as proposed in their bid. For providing the service and facility in this case it was required to properly position the rig, fabricate and modify of the same as per the needs of the GSPC. By no stretch of imagination it can be said that the Rig was ready for use. It was only after the aforesaid fabrication, upgradation and enabling operations were carried out that further drilling operations were commenced from 3.11.2010 and continued till the end of the financial year. Thus, the assessee was having in PE in India to carry on business from the day when it commenced in India operation to fabricate, to upgrade to prepare, to position and to enable the Rig to perform the drilling activity. Hence assessee had deployed the rig in connection with the exploration activity from 26.04.2010. Hence, since service and the operation continued till the end of the financial year, the number of days of the deployment of rig was more than 183 days. Hence assessee had a PE in India. - Decided against assessee.

Summary

Issues Involved:
1. Determination of Permanent Establishment (PE) in India.
2. Applicability of Section 44BB of the Income Tax Act.
3. Assessment of income and tax liability.

Detailed Analysis:

1. Determination of Permanent Establishment (PE) in India:
The primary issue was whether the assessee, a foreign company incorporated in Singapore, had a Permanent Establishment (PE) in India during the assessment year 2011-12. The assessee provided offshore drilling services and entered into a contract with Gujarat State Petroleum Corporation Ltd (GSPC). The Assessing Officer (AO) contended that the rig was brought into India on 26.04.2010 and was undergoing necessary upgrades and repairs, thus constituting a PE from that date. The AO argued that the rig's presence and preparatory activities in India should be included in the 183-day threshold as per the Indo-Singapore DTAA, thereby establishing a PE.

The assessee, however, argued that the actual drilling operations commenced on 03.12.2010 and continued for 119 days, which is less than the 183-day threshold required to establish a PE under the Indo-Singapore DTAA. The assessee contended that preparatory activities should not be counted towards the PE threshold.

2. Applicability of Section 44BB of the Income Tax Act:
The AO applied Section 44BB of the Income Tax Act, which pertains to the taxation of non-resident entities involved in the business of providing services or facilities in connection with the extraction or production of mineral oils. The AO held that since the rig was in India for more than 183 days, the provisions of Section 44BB were applicable, and 10% of the gross revenue received from GSPC was deemed taxable income.

The assessee argued that Section 44BB was not applicable as the rig was operational for only 119 days, and the income for the previous years was offered under Section 44BB due to a lack of appropriate tax advice.

3. Assessment of Income and Tax Liability:
The AO assessed the total revenue earned by the assessee from GSPC at ?64,88,90,227 and held that 10% of this amount was taxable under Section 44BB. The AO also noted that the assessee had furnished inaccurate particulars of income and concealed income details.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, relying on the Uttarakhand High Court's decision in DIT(IT) v. R & B Falcon Offshore Ltd., which held that only the actual days of service should be counted for determining the existence of a PE.

Tribunal's Decision:
The Tribunal reviewed the facts and arguments presented by both parties. It referred to Article 5(5) of the Indo-Singapore DTAA, which states that an enterprise is deemed to have a PE if it provides services or facilities for more than 183 days in a fiscal year in connection with the exploration, exploitation, or extraction of mineral oils.

The Tribunal found that the rig was brought into India on 26.04.2010 and was undergoing necessary fabrication, upgradation, and positioning to meet GSPC's requirements. These activities were essential for the rig to perform the contracted drilling operations and could not be considered in isolation from the actual drilling activities. Therefore, the Tribunal concluded that the rig was effectively in use from the date it entered India and was undergoing preparatory activities.

The Tribunal held that the period from 26.04.2010 to the end of the financial year should be counted towards the 183-day threshold, thereby establishing a PE in India. Consequently, the provisions of Section 44BB were applicable, and the AO's assessment was justified.

Conclusion:
The Tribunal set aside the CIT(A)'s order and restored the AO's assessment, ruling that the assessee had a PE in India and was liable to tax under Section 44BB of the Income Tax Act. The appeal by the revenue was allowed.