2016 (1) TMI 813 - AAR - Income Tax

Consideration received under the Change Order - whether is in the nature of business profits? - Taxability of income - providing Floating Production Storage and Offloading (FPSO) - Fabrication and installation of new living quarters onboard the FPSO facility and procurement and installation of Heating, Ventilation Air Conditioning system ( HVAC ) system onboard the living quarters - Major work was done outside India. Held that - The consideration received by the applicant under the Change Order for undertaking the scope of work is in the nature of business profits. The entire consideration received for the scope of work is taxable in India under the provisions of section 44BB of the Act. The consideration received for installation of STP buoy and moorings in India is in the nature of business profits and is chargeable to tax under the provisions of section 44BB of the Act. The entire consideration received for mobilization of the FPSO is taxable under the provisions of Section 44BB of the Act without splitting the same on the basis of travel of the FPSO outside or in India. The consideration received on account of insurance receipts for loss of hire is not taxable in India.

Summary

Issues Involved:
1. Nature of consideration received under the Change Order.
2. Taxability of consideration for work performed outside India.
3. Taxability of consideration for installation of buoy and moorings in India.
4. Applicability of Section 44BB of the Income Tax Act.
5. Taxability of mobilization consideration based on distance traveled outside India.
6. Taxability of insurance receipts for loss of hire.

Detailed Analysis:

1. Nature of Consideration Received Under the Change Order:
The applicant argued that the consideration received under the Change Order is in the nature of business profits and not fees for technical services (FTS). The applicant contended that the work performed was integral to the original contract and did not involve rendering managerial, technical, or consultancy services. The Authority for Advance Rulings (AAR) agreed with the applicant, stating that the Change Order emanates from the original contract and the consideration received is in the nature of business profits. The AAR emphasized that the Change Order is not independent of the original contract and is merely an amendment to it.

2. Taxability of Consideration for Work Performed Outside India:
The applicant claimed that since the scope of work was performed outside India, the consideration received should not be taxable in India. However, the AAR held that the entire consideration received under the Change Order is taxable in India under Section 44BB of the Income Tax Act. The AAR noted that Section 44BB does not distinguish between amounts paid in or outside India and includes all amounts in connection with the provision of services and facilities for the extraction or production of mineral oils in India.

3. Taxability of Consideration for Installation of Buoy and Moorings in India:
The applicant argued that the consideration received for the installation of buoy and moorings should be computed under Section 44BB of the Act. The AAR agreed, stating that the activities performed for the installation of buoy and moorings are in connection with the production of mineral oil and fall under the ambit of Section 44BB. The AAR ruled that the consideration received for this work is in the nature of business profits and is chargeable to tax under Section 44BB.

4. Applicability of Section 44BB of the Income Tax Act:
The applicant contended that if the consideration received under the Change Order is deemed taxable in India, it should be computed under Section 44BB of the Act. The AAR concurred, stating that the entire consideration received under the Change Order is taxable under Section 44BB. The AAR emphasized that Section 44BB is a special provision for computing income from services and facilities provided in connection with the extraction or production of mineral oils and does not allow for splitting the consideration based on the location of work.

5. Taxability of Mobilization Consideration Based on Distance Traveled Outside India:
The applicant argued that the mobilization revenue should be restricted to the distance traveled in Indian territorial waters. The AAR rejected this argument, stating that Section 44BB does not allow for splitting the mobilization consideration based on distance traveled. The AAR held that the entire mobilization consideration is taxable under Section 44BB without any distinction based on travel distance.

6. Taxability of Insurance Receipts for Loss of Hire:
The applicant claimed that insurance receipts for loss of hire should not be taxable in India as they were received outside India pursuant to an insurance policy signed outside India. The AAR accepted this argument, stating that such receipts are not taxable in India since they do not arise from services or facilities in connection with the extraction or production of mineral oil.

Rulings:
1. The consideration received under the Change Order is in the nature of business profits.
2. The entire consideration received for the scope of work under the Change Order is taxable in India under Section 44BB.
3. The consideration received for the installation of buoy and moorings in India is in the nature of business profits and chargeable to tax under Section 44BB.
4. The entire mobilization consideration is taxable under Section 44BB without splitting based on travel distance.
5. Insurance receipts for loss of hire are not taxable in India.

The ruling was pronounced on 2nd December 2015.