9911796707
TMI Blog2010 (7) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... w water data acquisition and processing. In India, the applicant has been providing offshore 2D and 3D seismic data acquisition and processing services to Oil & Natural Gas Corporation Limited ('ONGC') and other oil companies in India. For the purpose of executing the scope of work under such contracts, the applicant requires seismic survey vessels. Seismic survey vessels are special kind of vessels which are fitted with seismic recording systems and receiver units which are used for undertaking seismic data acquisition and on-board data processing. 1.2. In this regard, the applicant has entered into "Bareboat charter" agreements" ('BBC agreement') with various vessel providing companies ('VPC') for provision of requisite seismic survey vessels on global usage basis. BBC agreement is one where the lessor provides only the vessel (without provision of services associated with the vessel) on hire to the lessee. It is also referred to as 'dry lease arrangement'. Further, a global usage BBC agreement is one where the charterer is free to use the vessel anywhere around the world. 1.3. The details of seismic vessels hired by the applicant for executing contracts in India and elsewhere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between India and Cyprus and India and Malta respectively ('tax treaty'), the income chargeable to tax in India ought to be computed as per the computational mechanism under section 44BB of the Act? 2.1. Inspite of giving sufficient opportunities, the Department has not chosen to file comments or written submissions. On 23rd February, 2010, the case was adjourned on the request of the Addl. DIT (Intl.Taxation), Dehradun, though the request for adjournment was made at the last minute. Thereafter, by a communication received on 9.3.2010 (wrong date is given in the letter), the Addl. DIT, Dehradun, has raised some queries about the ownership of the vessels which was replied to by the applicant, as stated in the following para. Thereafter, though the Department received the written submissions filed by the applicant, no comments were offered on behalf of the Revenue nor any one appeared for the department. An indifferent attitude seems to have been adopted. 3. Before we proceed further to deal with the question, we would like to advert to the fact that the Department, in its comments dated 23rd February, 2010, has pointed out certain discrepancies in regard to the ownership of the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the possession and control of the ship including the right to appoint a master and crew. In Black's Law Dictionary, the meaning of Bareboat Charter is given as: "bareboat charter - A charter under which the shipowner provides the ship, and the charterer provides the personnel, insurance, and other materials necessary to operate it." 'Time Charter', on the other hand, is defined as: 'time charter - A charter for a specified period, rather than for a specific task or voyage; a charter under which the shipowner continues to manage and control the vessel, but the charterer designates the ports of call and the cargo carried.' " 5. The Agreement entered into by the applicant is in the format of Standard Bareboat Charter (BARECON 2001). Clause 2 of the Agreement read with Box 21 states that in consideration of the charter hire of US dollars 25,000 per day, the owners have agreed to let and the charterer has agreed to hire the vessel for a period of 12 months with charterer's option to extend it to another 12 months subject to increase of charter hire by 10%. Charterer may terminate the hire on giving 3 months' notice. Clause 3 relates to delivery. The vessel shall be delivered by the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after giving due notice to the owner. These are the relevant clauses in the agreement and there is no need to refer to the other terms and conditions. 6. Section 5 of the Income-Tax Act, 1961 defines the scope of total income. As far as non-resident is concerned, section 5(2) is relevant. It says: "5 (2) subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year." 6.1. This provision shall be read along with section 9 which defines the income deemed to accrue or arise in India. Section 9(1)(i) lays down: "9(1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India." 7. Leaving apart section 5(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hire transaction. It must be followed by the delivery of the thing hired. The stipulations in the agreement in the instant case specifically contemplate the delivery of the vessel. The delivery, it is stated, could be in any port in the world. If the vessel was physically located in India at the time the Bareboat Charter agreement was entered into or renewed, obviously, the transaction could materialize only with the delivery of the vessel in India. Of course, the delivery could be actual or constructive. 8. In the case of Commissioner of Inland Revenue vs. HK-TVB International Limited{1992 Simons Tax cases p.723 : 1992 WLR 439 (CA)}, the Privy Council explained that the words "place where the property was let"{These are the words falling from Lord Bridge in Hangseng Wang's case [1991 (1) AC 306]} as having reference "to the place where the property let was situated and not to the place or places where the lease happened to have been signed". This statement of law in fact accords with the understanding of the applicant itself as seen from para 1.2 of Annexure IV. If the transaction of hire had become effective only on the delivery of the vessel as noted above, there is no difficul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th March, 2008 to 22nd June 2008 in connection with the contracts with Cairn Energy. Earlier it was in Tanzania. At page 16-A of Agreement to the Paper Book, it has been shown to be in India in May/June, 2008 in connection with the contract with MOZ petroleum. But, it is not stated so at page 2 of the same volume. The date of BBCA between the applicant and the owner of Geo-Mariner was 26th Feb. 2008. Thus, as far as this vessel is concerned, there is nothing to show that the vessel was located in India on the date of entering into the Agreement and the delivery took place here. 8.5. In the Bareboat Charter Agreement, the port or place of delivery is not specifically mentioned. However, the port or place of re-delivery is mentioned as "Safe Port world-wide". It is obvious that the delivery of the vessel could also be in any port in the world. In the absence of specific stipulation, it stands to reason and commonsense that the delivery pursuant to the agreement would take place at the place where the vessel is situated on the date of entering the Agreement. The delivery could be constructive in nature having regard to the fact that the vessels, were located outside the country where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sense, keeping at the back of the mind the literal meaning of the expression. 9.1. We may refer to certain other decisions which throw light on the situs wherefrom the income can be said to have been derived. 9.2. The following passage in the decision of Privy Council in the case of Commissioner of Inland Revenue vs. Hang Seng Bank Ltd. [1991 (1) AC 306] is very relevant to the issue in the present case. Lord Bridge stated the principle thus: "the question whether the gross profit resulting from a particular transaction arose in or derived from one place or another is always in the last analysis a question of fact depending on the nature of the transaction. It is impossible to lay down precise rules of law by which the answer to that question is to be determined. The broad guiding principle, attested by many authorities, is that one looks to see what the taxpayer has done to earn the profit in question. If he has rendered a service or engaged in an activity such as the manufacture of goods, the profit will have arisen or derived from the place where the service was rendered or the profit making activity carried on. But if the profit was earned by the exploitation of property a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Kong and thereafter, towed her for four days to the dock in Hong Kong. The Supreme Court (Appellate Jurisdiction) held that the profits from the salvage operation were not "profits arising in or derived from the Colony". The view taken by the appellate court is discernible from the following passage: "Here the contract of salvage was entered into in the Paracels and all the work of refloating and putting the vessel into a condition to be towed to Hong Kong and nearly all the tow, except for the last three miles, were completely beyond the territorial limits of Hong Kong and consequently I take the view that the profits must be said to arise outside of Hong Kong rather than inside". It was then held in HK-TVB International case "In their Lordship's view, the court of appeal failed to give proper consideration to the fundamental question of what were the operations of the tax payer company which produced the relevant profit". It was pointed out that the profit-making activity of the sub-licences was carried on outside Hong Kong but the grant of the sub-licences took place in Hong Kong where the tax payer company operated. It was held that the court of Appeal erred in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-triggering business operation in India. The income accruing on day-to-day basis is not attributable to a source in India but it arises by reason of a hire transaction entered into and given effect to outside India. The VPC was not concerned with the place of user by the applicant. In fact, the VPC is not bothered whether the vessel is actually being put to use because even for the 'idle period', the hire charges are payable. Having regard to the legal principles that could be culled out from the decisions adverted to above, this Authority is of the view that where the agreement was executed outside India and the delivery of the vessel also took place outside India, by reason of the mere presence of the vessel in India without the volition of VPC, the source of income cannot be said to be located in India. To this extent, the hire charges paid by the applicant are liable to be excluded from the taxable profits of the VPC. 10.1. To be more specific, the hire charges realized by VPC during the following periods are liable to be taxed under the Income-tax, 1961 and the rest of them ought to be excluded. (1) Osprey Explorer - from 1st November, 2008 to June, 2009. In regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particulars sought by the Revenue were not furnished. At present and for the purpose of this application, we go by the statement of the applicant that VPC did not provide any personnel for the operation/maintenance of the vessel as contemplated by the last portion of sub-clause (b) of clause (10) of the Agreement. If contrary to the assertion of the applicant, it is found that the services of VPC personnel were actually utilized in operating the vessel, what bearing will it have on the stand taken by the applicant need not be decided in this case. We are leaving that question open if at all the Revenue would like to probe into that aspect for good reasons. 12. The next question is whether the income chargeable to tax in India ought to be computed as per the provisions of sub-section (1) of section 44BB which reads as under: (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident engaged in the business of providing services, or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(vi) of the Act (which deals with 'royalty'). It is unnecessary to go into the provisions of DTAA to arrive at the conclusion in this regard. Nor it is necessary to go into the question whether 'use or right to use' is in respect of an equipment intended by both parties to be used in India. 14. The answers to the questions are, therefore, as follows: Question 1: The answer is partly in affirmative and partly in negative. The receipts representing hire charges are liable to be taxed in India under the Income-tax Act, 1961 for the period specified in para 10.1(supra) and in respect of the three vessels mentioned therein. As regards the remaining period and the vessel - Geo Mariner, no income accrues or arises in India either on actual or deemed basis. Question 2: Question no. 2 is answered in the affirmative by holding that the portion of income liable to be taxed in India has to be assessed under Section 44BB of the Act. Question 3: The answer is in the negative as the consideration received by VPC cannot be held to be 'royalty' income within the meaning of Sectio 9(1)(vi) of the Act. Question 4: It is unnecessary to answer this question except reiterating that the computat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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