2018 (4) TMI 460 - AAR - Income Tax

Nature of income derived - Royalty - Services provided by the Applicant to ONGC - whether to be construed to be in the nature of Fees for Technical Services ( FTS ) under section 9(1)(vii) - DTAA between India and UAE - PE in India - Held that - The consideration for services provided by the Applicant to ONGC will not be construed to be in the nature of Fees for Technical Services under section 9(1)(vii) of the Act. The consideration for services provided by the Applicant will not be construed to be in the nature of Royalty under section 9(1)(vi) of the Act and/ or under Article 12 of the India UAE DTAA. The Applicant has a Permanent Establishment in India under Article 5 of the India UAE DTAA, in respect of its contract with ONGC. The income of the Applicant earned from its contract with ONGC would be taxable in India as business income. The income derived by the Applicant in respect of the contract with ONGC will be computed in accordance with provisions of section 44BB of the Income tax Act, 1961.

Issues Involved:
1. Whether the consideration for services provided by the Applicant to ONGC can be construed as 'Fees for Technical Services' (FTS) under section 9(1)(vii) of the Income Tax Act, 1961.
2. Whether the consideration for services provided by the Applicant can be construed as 'Royalty' under section 9(1)(vi) of the Income Tax Act and/or under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and UAE.
3. Whether the Applicant has a Permanent Establishment (PE) in India under Article 5 of the India-UAE DTAA in respect of its contract with ONGC.
4. If the answer to questions 1, 2, and 3 is negative, whether the Applicant is not taxable in India on income earned from its contract with ONGC.
5. If the answer to questions 1, 2, or 3 is affirmative, whether the income derived by the Applicant in respect of the contract with ONGC can be computed in accordance with the provisions of section 44BB of the Income Tax Act.

Detailed Analysis:

1. Fees for Technical Services (FTS):
The Applicant argued that its income is neither in the nature of Fees for Technical Services (FTS) nor Royalty, and is not taxable as business income due to the absence of a Permanent Establishment (PE) in India. The Revenue accepted that the nature of activities carried out by the Applicant and the decision of the Hon’ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. vs CIT (2015) 376 ITR 306 (SC) imply that the revenue from such activities would not be taxable as FTS within the meaning of section 9(1)(vii) of the Income Tax Act, 1961. The Authority agreed with this view, noting that the consideration received cannot be considered as FTS.

2. Royalty:
The Revenue also accepted that since ONGC does not use or obtain the right to use the vessel/equipment of the Applicant, receipts from ONGC would not be taxable as Royalty, both under the India-UAE DTAA and the provisions of the Act. The Authority concurred, stating that the consideration received cannot be termed as Royalty since ONGC has not paid for any rights of survey or exploration transferred to it by the Applicant.

3. Permanent Establishment (PE):
The Revenue contended that the Applicant has a PE in India in the form of the vessels, arguing that the seismic vessel itself constitutes a "Fixed Place Permanent Establishment" within the meaning of Article 5(1) of the India-UAE DTAA. The Authority noted that the vessels used by the Applicant pass all three tests for constituting a PE: permanence of duration, a fixed place in a definite and composite geographical area, and the place being at the disposal of the Applicant. The Authority concluded that the Applicant has a fixed place PE in India under Article 5(1) of the India-UAE DTAA.

4. Taxability in India:
Given the conclusion that the Applicant has a PE in India, the income arising from the PE shall be subject to tax in India as business income of the Applicant. The Authority noted that the period of operation being only 113 days does not negate the existence of a PE, as a permanent establishment need not be permanent or for all times.

5. Computation of Income under Section 44BB:
Since the answer to the existence of a PE and taxability in India is affirmative, the Authority examined whether the income derived by the Applicant from its PE would be computed in accordance with the provisions of section 44BB of the Act. The Authority concluded that the special provisions of section 44BB apply, and the income of the Applicant would be computed as laid out therein, in line with their earlier ruling in the Applicant’s own case (AAR 815 of 2009).

Conclusion:
1. The consideration for services provided by the Applicant to ONGC will not be construed as 'Fees for Technical Services' under section 9(1)(vii) of the Act.
2. The consideration for services provided by the Applicant will not be construed as 'Royalty' under section 9(1)(vi) of the Act and/or under Article 12 of the India-UAE DTAA.
3. The Applicant has a Permanent Establishment in India under Article 5 of the India-UAE DTAA in respect of its contract with ONGC.
4. The income of the Applicant earned from its contract with ONGC would be taxable in India as business income.
5. The income derived by the Applicant in respect of the contract with ONGC will be computed in accordance with the provisions of section 44BB of the Income Tax Act, 1961.

This Ruling was pronounced on the 28th day of March, 2018.

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