2021 (3) TMI 1041 - AAR - Income Tax

Income accrued in India - Withholding of tax in India - vessel engaged in seismic survey at high sea constitutes a fixed place permanent establishment - Whether the sum paid by the applicant to the vessel providing company ( VPC ) under global usage bareboat charter agreements ( BBC Agreements ) could be said to accrue or arise or deemed to accrue or arise in India under the provisions of the Income-tax Act, 1961 and, therefore, subject to withholding tax in India ? - whether the sum paid by the applicant to the VPC's under the global usage BBC agreements are taxable in India under the provisions of section 44BB ? - sum paid or to be paid by the applicant to VPC's under global usage BBC agreements be construed to be in the nature of Royalty under section 9(1)(vi) - HELD THAT - When we examine the facts of the present case in the perspective of the principle of source rule propounded by the apex court, it is seen that the payer, i. e., the applicant was located in the Indian Territory, i. e., in Bombay High where it was carrying the contract of ONGC. The commercial need of the deployment of vessel was generated by the contract of the applicant with ONGC and the services of the seismic vessels were utilized within the Indian Territory. Thus, all the parameters of the source rule as explained by the apex court in the case of GVK Industries is found fulfilled in this case and the business activity of the VPCs is found to have a clear nexus with the Indian Territory. There was existence of close, real, intimate relationship and commonness of interest between the non-resident VPCs and the applicant both of whom were operating in Indian Territory and which satisfies the essence of business connection and territorial nexus . The applicant has emphasized that sections 4, 5 and 9 of the Act are to be kept in consideration even in those cases where assessment is done under section 44BB of the Act, as held by the hon'ble Supreme Court in the case of Sedco Forex International Inc. 2017 (11) TMI 78 - SUPREME COURT In this case the issue was whether mobilization fee on account of mobilization/movement of rig from foreign soil/country to offshore site at Mumbai (India) received by the non-resident assessees can be treated as income under section 5 of the Act and would fall within section 9, i. e., whether it can be attributed as having arisen or deemed to arise in India. The seismic vessels of the VPCs also constitute a permanent establishment (PE) for the business operation carried out by them The sum paid by the applicant to the vessel providing companies (VPCs) under global usage under bareboat charter (BBC) agreements is deemed to accrue and arise in India and is liable to tax in India under the Income-tax Act and, therefore, subject to withholding tax in India. The income liable to tax is to be assessed as business income under the provisions of section 44BB of the Act. The sum received by VPCs is not in the nature of royalty under section 9(1)(vi) of the Act. As already mentioned earlier the computation mechanism under section 44BB of the Act would apply. Therefore, the answer to this question is not found necessary.

Issues Involved:
1. Whether the sum paid by the applicant to the vessel providing company (VPC) under global usage bareboat charter agreements (BBC Agreements) could be said to accrue or arise or deemed to accrue or arise in India under the provisions of the Income-tax Act, 1961 and, therefore, subject to withholding tax in India.
2. If the answer to question 1 is in the affirmative, whether the sum paid by the applicant to the VPCs under the global usage BBC agreements are taxable in India under the provisions of section 44BB of the Act.
3. Whether the sum paid or to be paid by the applicant to VPCs under global usage BBC agreements can be construed to be in the nature of "Royalty" under section 9(1)(vi) of the Act.
4. Whether the sum paid by the applicant to VPC under global usage BBC agreements are construed to be in the nature of "Royalty and fees for included services" under article 12 of the Double Taxation Avoidance Agreement between India and Cyprus, the income chargeable to tax in India is ought to be computed as per the computational mechanism under section 44BB of the Act.

Detailed Analysis:

Issue 1: Accrual or Arising of Income in India
The applicant, a UAE-based company, entered into BBC agreements with VPCs for seismic survey vessels used in India. The applicant contended that the agreements were global, payments were made outside India, and the vessels were delivered outside India, arguing that no income accrued or arose in India. The Revenue countered that the vessels were used in India for ONGC contracts, establishing a business connection in India, thus deeming the income to accrue or arise in India. The ruling found that the source of income was linked to the business operations in India, deeming the income to accrue or arise in India, subject to withholding tax.

Issue 2: Taxability under Section 44BB
The applicant argued that if the income was taxable in India, it should be computed under section 44BB, which deals with income from services or facilities in connection with the prospecting for, or extraction or production of, mineral oils. The Revenue agreed, citing previous rulings and the nature of the services provided. The ruling confirmed that the income from the BBC agreements was covered under section 44BB, as the vessels were used for prospecting mineral oil in India.

Issue 3: Nature of Income as Royalty
The applicant contended that the income should not be considered "Royalty" under section 9(1)(vi) of the Act, as it was covered under section 44BB. The Revenue argued that the income was royalty, as it was for the use of scientific equipment (seismic vessels) in India. The ruling determined that the income was not royalty, as section 44BB specifically excluded such income from being categorized as royalty.

Issue 4: Computation under DTAA
The applicant argued that if the income was considered royalty under the India-Cyprus DTAA, the computational mechanism under section 44BB should apply. However, since the ruling determined that the income was not royalty but business income under section 44BB, this question was deemed unnecessary.

Findings and Ruling:
1. The sum paid by the applicant to the VPCs under BBC agreements is deemed to accrue or arise in India and is subject to withholding tax.
2. The income is taxable as business income under section 44BB of the Act.
3. The income is not in the nature of "Royalty" under section 9(1)(vi) of the Act.
4. The computational mechanism under section 44BB applies, making further discussion on DTAA unnecessary.

Conclusion:
The ruling concluded that the payments made by the applicant to the VPCs under the BBC agreements are taxable in India under section 44BB as business income, not as royalty, and are subject to withholding tax.

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