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TMI Blog2021 (2) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... bare boat charter agreement (BBC Agreement) with different vessel providing companies (VPCs) for provision of requisite seismic survey vessels on global usage basis, in respect of which two separate applications have been filed. The detail of seismic vessels hired by the applicant for executing contracts with ONGC in India is as under: Sl. No. Name of the vessel Name of vessel providing company (VPC) Country of incorporation of VPC Application No. 1 M/V Munin Explorer M/s. Munin Navigation Company Limited Cyprus A.A.R./1284/2012 2 M/V Hugin Explorer M/s. Seabed Navigation Company Limited Cyprus A.A.R./1285/2012 2. It is stated that the BBC agreement between the applicant and the VPCs were executed outside India, the vessel were delivered outside India and the payments were also made outside India. The applicant has filed two applications in respect of two separate contracts for the vessel under section 245Q(1) of the Act with a request for ruling on the following common questions in both the applications in respect of the BBC agreement. 1. Whether sum paid by the applicant to the vessel providing company ('VPC') under global usage bare boat charter agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the clauses of the present global usage BBC agreement with M/s. Munin Navigation Company Limited and M/s. Seabed Navigation Company Limited were identical with the four projects with various VPC, for which the aforesaid ruling was obtained. All the agreements were entered into by the applicant in the format of BIMCO Standard Bareboat Charter BARECON, 2001. Accordingly, the ratio of ruling of this Authority in the four projects was squarely applicable to the facts of the present case. 4. The Ld. AR explained that as per provision of section 5(2) of the Act, any income of the non-resident is taxable in India, only when it is received by such non-resident in India or it accrues or arises; or is deemed to accrue or arise in India. Our attention was drawn to clause 2 of the agreement read with Box 21 and Box 22 which stipulated that in consideration of USD 10,000 per day for M/V Munin Explorer and USD 31,600 per day for M/V Hugin Explorer, the owners had agreed to let and the applicant had agreed to hire the vessel for 165 days. Further, as per clause 11 read with Box 26 the payment was to be made to bank account in Dubai, United Arab Emirates. Therefore, in the instant case of glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charterer. It is the charterer who employs the captain and crew and not the vessel owner. Thus, this was a mere act of letting the ship on rent to operate in Indian territorial waters and nothing more than that was done by the vessel owner. The clause 10 of the agreement stipulated that the vessel will be in full possession and at the absolute disposal of the applicant. Further, the applicant shall at its own expense and on its own procurement, navigate, operate, supply, fuel and repair the vessel during the charter period. The applicant shall pay all the charges and expenses incidental to the use and operation of the vessel including all taxes and fees payable to the State and other authorities. The Masters, officers and crew of the vessel shall be servants of the applicant. In view of these facts, the Ld AR emphasized that the vessel owner had carried out no operations in India and no part of bare boat rental income can be attributed to VPC, even where a business connection is said to be established. 8. The applicant has submitted that under the provisions of the Act, any income arising from any asset/property in India is considered as deemed to accrue or arise in India. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seismic vessel which would enable the applicant to undertake its scope of work of seismic data acquisition and processing under its contracts with ONGC. It was submitted that provision of such vessels on hire to be used in the prospecting or extraction of mineral oil would be covered under section 44BB of the Act. The reliance in this regard was placed on the decisions in the case of Wavefield Inseis 'ASA' (AAR No. 823 of 2009 and 844 of 2009) and in the case of Siem Offshore Inc. (AAR No. 875 of 2010). 11. On the question of royalty, it was submitted that the definition of royalty specifically excludes income from use or right to use equipments referred to in section 44BB. It was submitted that the sum paid/payable by the applicant to VPCs was covered under the ambit of section 44BB of the Act and, therefore, the same would not be taxable as royalty as per the provision of section 9(1)(vi) of the Act. It was further submitted that even if the sum paid by the applicant to VPC under BBC agreement was considered taxable under Article 12 of Tax Treaty as "Royalty", the provision of Section 44BB of the Act being more beneficial would be applicable, considering the provision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merits of the application, the Ld. DR submitted at the outset that in the instant cases the transaction was between one non-resident with other non-residents. Therefore, the applicant was not eligible to derive benefit of the DTAA between India and Cyprus as claimed in the application; as the payment to VPCs was not being made by an entity located in India. It was submitted that in such an eventuality only the provisions of the Income-tax Act has to be considered to examine the taxability of the payments being made by the applicant to VPCs. It was stated that section 5 read with section 9 of the Income-tax Act provides the necessary domestic legislation with regard to taxability of income of the non-resident. Further, as section 5(2) was "subject to provisions of this Act", the deeming provisions of section 9 of the Act was equally applicable in the case of the applicant. 14. The Revenue has submitted that even in the case of BBC agreements the non-resident lessor would create a PE in India, for which reliance has been placed on the ruling of the Authority in the appellant's own case vide no. 1295 of 2012 dated 28th March, 2018. As regarding business connection of the non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Therefore, the contention of the appellant that the lease income of the VPCs was not sourced in India as they had no business connection in India, was devoid of merit. 16. The Revenue also submitted that in the Ruling No. 829 of 2009 dated 23rd July, 2010, the Authority had held since the income was assessable u/s 44BB of the Act, it would not partake the nature of Royalty under sub clause (iva) of Explanation 2 of section 9(1)(vi) of the Act. It was, however, submitted that apparently this ruling was without considering the Explanation to section 9(2) inserted vide Finance Act, 2010 with retrospective effect from 1-6-1976. It was emphasised that the income of the VPC was liable for taxation in India, either as business income or as royalty. Rejoinder of the Applicant 17. In rejoinder the Ld. A.R. strongly denied the allegation of the Revenue that there was mis-representation of certain facts by the applicant. It was submitted that there was no bar in law to amend the contract with mutual consent of the parties, for which reliance was placed on section 62 of Indian Contracts Act. The Ld. A.R. submitted that when the ONGC had not disputed the agreement, it was not open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace of accrual of income is to be determined. Hence, the situs has to be determined according to the general principles of law. It was submitted that the income from letting of property would accrue or arise at the place where the property was given to the payer by the payee or where the payee could enforce the rights under the contract for such payment against the payer. Accordingly, the income of VPCs did not accrue or arise in India but outside India. 20. On the issue of income u/s 44BB of the Act the applicant has submitted that the interplay between section 44BB and section 4, 5 and 9 of the Act was considered by the Hon'ble Supreme Court in the case of Sedco Forex International Inc. v. CIT (87 taxmann.com 29) (SC) wherein it was held that only that income of a non-resident is taxable in India which is attributable to operations within the Indian Territory. On the contention of the Revenue regarding non-applicability of India-Cyprus treaty, the Ld. AR submitted that as the payment was made to the resident of Cyprus the benefit of the treaty has to be allowed if any part of that income was held taxable in India. Findings & Ruling 21. We have carefully considered the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re filed by the applicant. These agreements were in respect of Munin Explorer and Hugin Explorer which are mentioned as shortlisted seismic survey vessels in the NOA dated 19/08/2011. It was stipulated in the contract that the shortlisted seismic survey vessels should be available against this particular work on award of contract and that the contractor had to ensure deployment of the vessels out of shortlisted vessels only. There is no dispute to the fact that the two shortlisted vessels Munin Explorer and Hugin Explorer were deployed for executing the contract work with ONGC. The contention of the Revenue that the revised agreement dated 06/09/2011 was not filed with ONGC is irrelevant as long as the shortlisted two vessels were deployed for actual work. The objection of the Revenue that the cancellation of the original agreement was on a plain paper without mentioning the place and name of the signatories is also not found relevant for deciding the questions raised in the present application. It is not the case of the Revenue that the agreements dated 06/09/2011 filed with the applications are not genuine. The Revenue has not brought anything on record to substantiate that payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. (a) Business Income, and (b) Income from interest or royalty or fee for technical services. The conditions for deemed accrual or arisal of these two categories of income is different. Therefore, it will be prudent to first determine what is the nature of income received by VPCs from the applicant and thereafter it would be examined whether the said nature of income is deemed to accrue or arise in India or not. 24. The Revenue has contended that Income of the VPCs is in the nature of royalty, whereas the applicant has strongly denied this. According to Revenue the income of the VPC is covered under the provision of Section 9(1)(vi)(c) of the Act read with sub-clause (iva) of the Explanation 2, which is reproduced below: 9. (1) (vi) income by way of royalty payable by- (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. 2) The amounts referred to in sub-section (1) shall be the following, namely :- (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. (3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was contended that in view of this Explanation the income of the non-resident VPCs being royalty income shall be deemed to accrue or arise in India. This submission of the Revenue also cannot be accepted. The Act has given preference to the provisions of Section 44BB of the Act over the definition of royalty and once it is held that the payment made by the applicant to VPCs is covered u/s 44BB of the Act, the same cannot be brought within the purview of section 9(1)(vi) of the Act. Accordingly, the income of the VPCs is not found to be in the nature of royalty. 28. As discussed above, the amounts paid by the applicant to the VPCs is found to be covered under the provision of section 44BB of the Act. In fact, the applicant has no serious objection to treat the revenue in the hands of VPCs as income u/s 44BB of the Act. It was admitted that the applicant conducts seismic surveys offshore for which it requires seismic vessels and agreements were made with VPCs for providing such vessels. It was further admitted that provision of such vessels on hire to be used in prospecting of mineral oil is covered u/s 44BB of the Act. In fact this issue was already decided by the Authority in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of the section are satisfied. (emphasis supplied) The status of VPCs in the present cases is identical with the status of PF Thor in the above referred case and, therefore, the ruling of that decision is squarely applicable to the present case. 30. Having decided that the nature of sum paid by the applicant to VPCs is business income taxable u/s 44BB of the Act, we have to address the second issue as to whether this income can be said to accrue or arise or deemed to accrue or arise in India. The provision of section 9(1)(i) of the Act stipulates that 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 shall be deemed to accrue or arise in India. The expression "business connection" is too wide to admit of any precise definition and has to be determined on the facts and circumstances of each case. The applicant has contended that all the taxable events had taken place outside India, there was no nexus with the taxable territory in India and the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered. Further, the findings and the principle of accrual as given in the case of earlier ruling in the case of Wavefield (supra) was also not considered in that order. In addition the concept of 'source rule' as explained by the Supreme Court in the subsequent decisions has also to be taken into account. 31. As already discussed earlier the services provided by the VPCs was in connection with prospecting of oil and is business income u/s 44BB of the Act. As per common parlance the source of income is the place where the income generating activity takes place and in the case of business income it has to be the place where the business is conducted. In the case of Wavefield (supra) it was held that the vessel was inextricably linked to the prospecting operations. Therefore, the vessel would be deemed to be the source of income as the business of the VPCs was conducted only through the vessels. The seismic vessel cannot generate any income at the place where the contract for hiring is signed or where the ship is delivered. The business activity of the seismic vessel can only be at the place where it is utilised for marine acquisition of seismic data. If the accrual of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isation charges $ 534,600.00 (ii) Acquisition of 4C-3D Base Survey Seismic Data $ 31,953,528.00 (iii) Processing of 4C-3D Base Survey Seismic Data $ 3,768,696.72 (iv) Interpretation of 4C-3D Processed Seismic and related Geo-Scientific Data and submission of Report $ 1,918,144.80 (v) De-Mobilisation charges $ 252,720.00 (vi) Standby Charges per day for complete marine spread $ 1,205,280.00 Lump sum contract price $ 39,632,969.52 33. It was pursuant to this contract of ONGC that the applicant had utilized the services of seismic vessels of the VPCS for acquisition of 4C-3D Base Survey Seismic Data. It is crystal clear from the terms of the contract that the source of the business income of the VPCs was embedded in the contract awarded by ONGC to the applicant. The acquisition of 4C-3D Base Survey Seismic Data for which the vessels were deployed was only a part of the composite lump-sum contract awarded by ONGC. The deployment of the seismic vessels in Mumbai High Field by the applicant was pursuant to this contract in the area as earmarked in the contact document. The payment made by the applicant to VPCs was in connection with the utilization of the vehic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined by the place as mentioned in the contract but by the place of their actual deployment. The place of business of seismic vessels will invariably be at the place where the vessel is deployed for acquisition of seismic data. In the instant case, as the seismic vessels were deployed in the Indian Territory, there is certainly a territorial link to the income earned by them during such deployment. 35. The appellant has relied upon the decision of Hon'ble Supreme Court of GVK Industries Limited (supra) to emphasis the source rule and submitted that in order to apply the source rule, the nexus with the taxable territory had to be necessarily established. The Apex Court has held in that case that the "Source state taxation" rule confers primacy to right to tax to a particular income or transaction to the state/nation where the source of said income is located. It was explained that the nexus of the right to tax which is "the source rule" was founded on the right of a country to tax the income earned from a source located in the said State, irrespective of the country of the residence of the recipient. That the source rule was in consonance with the nexus theory and does not fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 9, i.e. whether it can be attributed as having arisen or deemed to arise in India. The Hon'ble Court examined the provisions of section 44BB of the Act and held that such mobilization fee was income as per section 5 of the Act. To quote from the order: 48. From the bare reading of the clauses, amount paid under the aforesaid contracts as mobilisation fee on account of provision of services and facilities in connection with the extraction etc. of mineral oil in India and against the supply of plant and machinery on hire used for such extraction, clause (a) stands attracted. Thus, this provision contained in Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be "income" as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the Act as well. In the present case the sums paid to VPCs by the applicant has been found to be business income of the VPCs taxable u/s 44BB of the Act. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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