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TMI Blog2016 (6) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was required for installation of complete CALM SPM system including their sub systems. In the circumstances, the Court is unable to appreciate how the AAR could conclude that the de facto control of the equipment was with IOCL. This Court is unable to concur with the finding of the AAR that in the instant case the consideration received for mobilisation/demobilisation should be considered as royalty paid by IOCL to the Petitioner. The Petitioner is right in contending that the services rendered by it to IOCL under the contract fell under the exclusionary portion of Explanation 2 viz., “consideration for any construction, assembly, mining or like project undertaken by the recipient” This has been unable to be denied by the Revenue. Therefore, on two counts the finding of the AAR on FTS cannot be sustained. The first being that the installation services are not incidental to the mobilisation/demobilisation service. The contract was in fact for installation, erection of equipment. Mobilisation/demobilisation constituted an integral part of the contract. Secondly, the AAR has proceeded on a factual misconception that the dominion and control of the equipment was with I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract 4. By a letter dated 17th July 2008, IOCL gave the Petitioner the details of the work of Residual Offshore construction' at Paradip. It mentioned that the work was divided into three groups as under: Group-1: Installation of Single Point Mooring (SPM) including anchor chains, floating subsea hoses. Group-2: Work of Post Trenching of 48 14 pipeline. Group-3: All balance works required to complete the 14 effluent pipeline. 5. The clarifications in relation to the work were enclosed as Annexure I and II to the said letter. The expression 'Contractor' connoted the Petitioner and the expression 'Owner' means IOCL. Clause 19 of Annexure II to the letter dated 17th July 2008 of IOCL provided for the various indemnities to be provided by the Contractor to the Owner in the execution of the work. Clauses 19.4.0, 19.5.0 and 19.6.0 read thus: 19.4.0 Owner shall defend, indemnify, and hold harmless Contractor Group for all loss or damage to Owner's property, equipment, and vessels, either owned or rented and operated by Owner arising out of or relating to the performance of the Work and regardless of whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l times. Fluid product is transferred via the CALM from or to the tanker by floating and subsea hose systems. When the tanker moves off station, due to the effects of wind, wave and current, anchor chain legs are lifted which generate a restoring force tending to return the system to the equilibrium position, thus limiting the tanker's excursion. 7. The definition of 'work' in the above contract is contained in its preamble which reads as under: Whereas The owner desires to have executed the work of Residual Offshore Construction Work At Paradip. Group-1-Installation Of Spm Including Anchor Chains, Floating Subsea Hoses (Tender No. PLCC/PHCPL/SPM/0825) more specifically mentioned and described in the contract documents (hereinafter called the 'work' which expression shall include all amendments therein and/or modifications hereof) and has accepted the tender of the Contractor for the said work. 8. Clause 3.1.1 of the Contract defined the scope of the work to include the following: 3.1.1 Bidder's scope of work shall include pre-installation survey, review of owner supplied documents, handling of owner supplied project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.1The marine spread shall comprise of barge/vessel equipped with suitable equipments, diving spread, anchor handling, tug support vessel, survey spread, operating and construction crew, specialized expertise equipped with all required vessel certificates and statutory clearances including Customs Port permissions as applicable in India. 19.2. The marine spread equipped with above (22.1) shall be considered mobilized after reaching at site and its readiness to commence the work. 12. IOCL sent to the Petitioner a 'Letter of Acceptance' dated 4th September 2008 in which it inter alia set out the 'contract value and price schedule'. It was stated therein that the contract value would be US$ 18,598,140. The letter also indicated the amount in US dollar agreed to be paid for each item of work. Broadly the break up was as under (in US Dollars): (i) Mobilization and demobilization of Marine Spread 12,980.959 (ii) Pre and post erection work 877,288 (iii) Actual installation work 4,652,381 (iv) Documentation, Misc 87,512 13. The Petitioner states that it does not have any project office or any other premises in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract was divisible one. The expenses were loaded in favour of mobilization. As observed in State of Madras v. Richardson (1968) 21 STC 245 , even in the works contract, a contract of sale of material utilized in the works can be inferred. (iv) Installation was to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, adding to the length of the anchor chain where it is falling short of the desired length, towing and setting up the Buoy from the port to the location and fixing the chain to the SPM Buoy, testing the leakages of the floating hose strings, affixing the umbilical to the valves outlets and installing all end connection, installing navigational aids, pressure gauge. (v) As installation was ancillary and subsidiary to the use of equipment or enjoyment of the right for such use, the payment for the installation would fall under the definition of FTS in terms of Article 12.4(a) of the DTAA. 17. It may be noted here that the impugned order of the AAR was common to two contracts entered into by the Petitioner, one with IOCL and the other with M/s Larsen Toubro ('L T'). That portion of the impugned orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nition of the 'royalty' under Article 12.3 (b) of the DTAA. 20. In reply to the above submissions, Mr. Rahul Chaudhary pointed out that as regards the contract to the L T, the AAR has held that the Petitioner has a PE in India and that the consideration received under that contract by the Petitioner, including for mobilisation and demobilisation, was liable to tax in India in terms of Section 44BB of the Act. According to him, although the AAR may not have given a finding as regards the Petitioner having PE in respect of the contract with IOCL, the Petitioner could not take advantage of that fact and claim that the AAR did not hold that the Petitioner has a PE in India in relation to the contract with IOCL. 21. Referring to the certificates dated 30th January 2009 and 13th July 2009, issued by the Revenue under Section 197 of the Act in respect of the consideration received or receivable, it had been mentioned thereunder that the consideration was in the nature of royalty. He pointed out that the Petitioner did not accept the tax withholding certificates and raised a specific question whether the consideration received by the Petitioner for services provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumables, labour, logistic supplies, planning, engineering, documentation etc . Further under Clause 3.1.3 the Petitioner was made responsible for taking over all the IOCL supplied project materials from the place designated by the IOCL which was required for installation of complete CALM SPM system including their sub systems. In the circumstances, the Court is unable to appreciate how the AAR could conclude that the de facto control of the equipment was with IOCL. No PE in India 25. The AAR was not called upon to decide whether, in the context of the contract with IOCL, the Petitioner had any PE in India. That was not even the contention of the Revenue before the AAR. That question arose in the context of the Petitioner's contract with L T and not IOCL. The finding of the AAR that the Petitioner had a PE in India was rendered in the context of contract that the Petitioner had with the L T. Therefore, it is not open for the Revenue to now contend that the Petitioner cannot take advantage of the absence of a finding by the AAR as regards the existence of a PE qua the contract with IOCL. 26. The Revenue has been unable to counter the factual position t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. 30. The term 'royalty' is defined in Article 12.3 of the DTAA as under: The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 31. As far as the Act is concerned, Section 9(1) (vi) states that the following incomes shall be deemed to accrue or arise in India: (vi) income by way of royalty payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 33. Further, Explanation 5 below Section 9(vi) reads as under: Explanation 5.- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It had not leased out the equipment to the customers. ASTC had merely given access to a broadband width available in a transponder which could be utilized for the purpose of transmitting signals of the customer. It was held that the terms lease of transponder capacity , lessor , lessee and rental used in the agreement would not be the determinative factors. There was no use of process by the television channels. Moreover, no such purported use had taken place in India. It was held that the services provided were an integral part of the satellite and remained under the control of the satellite/transponder owner (like the appellant in this case) and it does not vest with the telecast operator/ television channels. The Court rejected the plea that the payment made to ASTC could be 'royalty' within the meaning of Section 9 (1) (vi) of the Act. The Court reiterated that the fact remains that there is no use of 'process' by the television channels. Moreover, no such purported use has taken place in India. 35.4 The Court has held that the concept of dominion or control is sine qua non use. Further Explanation 5 below Section 9 (vi), to the extent it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of 'sale'. 38. Consequently, this Court is unable to concur with the finding of the AAR that in the instant case the consideration received for mobilisation/demobilisation should be considered as royalty paid by IOCL to the Petitioner. Are installation charges FTS? 39. Turning to the other question of the nature of the consideration received by the Petitioner for installation, the definition of FTS in Article 12(4) is relevant. It reads as under: The term fees for technical services as used in this Article means payments of any kid to any person in consideration for services or a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment describ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities on its own. 41. The Revenue's contention that the work of mobilisation/de-mobilisation and the work of installation are separable components of the work as a whole is not borne out by the documents constituting the written contract. Consequently, the decision in Ishikawajima-Harima Heavy Industries Ltd. v. DIT (supra) is not of assistance to the Revenue. IOCL's letter dated 17th July 2008 to the Petitioner clarified that the work of Residual Offshore construction' at Paradip was a composite one comprising three groups viz., installation of the SPM; post trenching of the 48 and 14 pipeline and all balance works required to complete the 14 effluent pipeline. However, as far as the Petitioner was concerned it had to perform all the three 'groups' of work and the payment was for execution of the composite contract. 42. While the payment was a lumpsum of US$ 18,598,140, the said sum was broken up for the individual components like mobilization and demobilization of Marine Spread; Pre and post erection work; Actual installation work and documentation and miscellaneous. This again did not mean that mobilisation and de-mobilisation of mar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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