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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 ..... Explanation to the section 44BB clarifies that 'plant' includes ship or any scientific apparatus or equipment used for the purpose of said business. Thus, the research vessel employed by the applicant is found to be covered within the scope of plant as defined in this section. Therefore, the payment made by VPCs is found to be for supply of plant and machinery on hire used in the prospecting for mineral oil in India and is squarely covered under the provision of section 44BB(2)(a) of the Act. Since the receipt is found to be covered under the provision of Section 44BB it cannot partake the character of royalty in view of specific exclusion under clause (iva) of Explanation 2, to section 9(1)(vi) of the Act. 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 hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of rendering geophysical services to oil and gas exploration industry. Its business activity involves 4C-3D seismic data acquisition and processing. In India the applicant is providing offshore seismic data acquisition and processing services to ONGC and other oil companies. For executing such work the applicant requires seismic survey vessels, which are special kind of vessels fitted with seismic recording systems and receiver units and which are used for undertaking seismic data acquisition and on-board data processing. The applicant has entered into two 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 Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments were to be made by the applicant even if the vessel was not in use. The Ld. AR had drawn our attention to the advance ruling obtained earlier by the applicant in connection with four BBC agreements entered into with various VPC's vide Ruling No. 829 of 2009 dated 23rd July, 2010, wherein the Authority had held that no income was taxable in India in case the vessels were delivered and re-delivered outside India under a global usage BBC agreement. However, in case the vessels were present in the territorial water of India on the day of entering into/renewal of the BBC agreement, the income was taxable in India under the provision of section 44BB of the Act. The Authority had further held that the income can't be held to be royalty income under section 9(1)(vi) of the Act. The applicant submitted that 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de for the carriage of suitable and lawful merchandise within the trading limits indicated in Box 20, which indicated the trading limits as worldwide within institute warranty limits . In view of the above, in the present case of the BB charter agreements where the vessels were provided outside India to the charterer and the latter had brought the vessels to India for use in its operations, there was no business connection so far as the owners were concerned. 7. It was further submitted that in the case of BBC agreement, the vessel owner makes available the ship to the charterer and then, it is for the charterer to maintain and operate the ship in the manner it desires. The vessel owner has no role to play either in navigation or any other day-to-day operations of the ship and the ship is at complete disposal of the 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 applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted by the applicant that even if it was held that income arising from global BBC agreement was taxable in India, the revenue in the hands of the VPCs should be computed as per the provision of Section 44BB of the Act. It was submitted that the applicant is a marine geophysical company that conducts seismic surveys and provides offshore seismic data acquisition and other associated services to global oil companies. For any oil and gas explosion activity, seismic survey is the first step and the most critical part of the activity. In order to undertake seismic operations offshore, the applicant needs support of seismic vessels which have specialised seismic equipments installed in it for use in seismic data acquisition and processing functions. The applicant had entered into global BBC agreement with VPCs for the provision of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement during the entire contract period was in the nature of Time Charter and the applicant had never filed the BBC agreements with ONGC. Further, as per the clause of contract with ONGC, the agreements could not have been cancelled unless some formalities were completed and it was apparent that those formalities were never undertaken. The applicant had thus misrepresented the facts before this Authority by not producing the actual agreements between itself and the Vessel Providing Companies (VPCs). The Revenue has contended that the change of stand by the appellant was motivated to avoid payment of taxes in India. In the case of a Time Charter agreement, the PE of the vessel was established as the control and management of the vessel which was earning its income from Indian waters, existed with the vessel owner company. 13. On the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar period during which the vessels were in Indian water in connection with the applicant's contract with ONGC, the VPCs were earning income from a source in India only. Hence, such income was in the nature of royalty in the hands of the VPC under the provision of section 9(1)(vi)(c) of the Act read with sub-clause(iva) of Explanation 2 of that section, which defines royalty. It was explained that section 9 of the Act deals with source rule explicitly and in this regard the Explanation to section 9(2) inserted vide Finance Act, 2010 with retrospective effect from 1-6-1976 was referred to. It was submitted that considering this Explanation, the income of the non-resident VPCs being royalty income shall be deemed to accrue or arise in India, whether or not, such non-resident VPCs had residence or place of business or business connection 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the payment made to VPCs was taxable as royalty; the applicant submitted that there was no nexus between the source of royalty and the taxable territory. It was contended that the source of royalty, if at all, was in UAE or at the place where the vessels were handed over to the applicant. The applicant has strongly relied on the earlier ruling of the Authority in AAR No. 829 of 2009 in support of the contention that the taxable event had happened outside India and there was no nexus with the taxable territories of India and, therefore, the transactions were not exigible to tax in India. The applicant has also relied on the decision of Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries v. DIT (288 ITR 408) (SC) in this regard. It was further submitted that neither the Income-tax Act nor India-Cyprus DTAA set out how the place 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 contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this particular tender/work on award of the contract. c. The number of suitable short listed seismic/source vessels out of the offered vessels will be communicated to the successful Contractors before the price bid is opened. The Contractors will have to ensure deployment of vessel(s) out of short-listed vessels only. The shortlisted Seismic survey vessels as mentioned in the Notification of Award (NOA) dated 19/08/2011 by ONGC is found to be as under: Shortlisted Seismic Survey Vessels for the subject tender as confirmed by the contractor i.e. M/s Seabird Exploration FZ,LLC, Dubai; 1. Munin Explorer (IMO no. 8915782) 2. Hugin Explorer (IMO no. 9366005) 22. It is found from the contract document that contractor was required to submit hire/lease agreement of the vessels along with techno-commercial bid and accordingly the agreements dated 01/11/2010 were 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 awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the payees is non-resident. The scope of total income is provided u/s 5 of the Act and the relevant provision of Section 5(2) applicable to non-resident is as under: 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. The income of the non-resident VPCs was not received in India in this case. Therefore, we have to examine whether their income accrues or arises or is deemed to accrue or arise in India. In order to find out what income is deemed to accrue or arise in India we have to refer to Section 9 of the Act, which has two broad categories of taxable income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out whether the vessels, which are scientific equipment, is covered under the provision of Section 44BB of the Act or not, it will be relevant here to reproduce that section. 44BB. (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, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession : Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the payment made by VPCs is found to be for supply of plant and machinery on hire used in the prospecting for mineral oil in India and is squarely covered under the provision of section 44BB(2)(a) of the Act. Since the receipt is found to be covered under the provision of Section 44BB of the Act, it cannot partake the character of royalty in view of specific exclusion under clause (iva) of Explanation 2, to section 9(1)(vi) of the Act. 27. The Revenue has relied upon the Explanation to section 9(2) of the Act inserted vide Finance Act, 2010 with retrospective effect from 01/06/1976 which stipulates that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1); whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f mineral oil. The requirement of sub-section (1) of section 44BB is that the vessel/ship must be used in the prospecting for or extraction of mineral oils. The function and utility of chase vessel in the operations relating to seismic survey and data acquisition which are integral to prospecting has been explained earlier. A chase vessel, provided by PF Thor is thus inextricably linked to the prospecting operations. Once the deployment of the vessel in the prospecting operations is considered to be integral part of such operations, the second part of section 44BB(1) is triggered. It is immaterial whether the vessel is deployed in the prospecting activities pursuant to a direct contract with the oil producing company or pursuant to a contract with the seismic survey services provider. The person at whose instance the chase vessel participates in the seismic survey is not relevant to decide whether the requirements 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led 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. It has to be kept into consideration that this ruling was given on the basis of the submissions made by the applicant only and without the benefits of any comment from the Department. It was clearly mentioned in Para-2.1 of that order that In spite of giving sufficient opportunities, the Department has not chosen to file comments or written submissions. In the present case, however, the Department has given comments on the merits of the case, which requires to be considered. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be acquired using Ocean Bottom Nodes technology during the filed season 2011-2012 (between 15th October 2011 to 15th May 2012) over an area of about 60 Km (full fold excluding migration aperture) of Mumbai High Field, which is located about 165 Km west-northwest of the city of Mumbai in the Western Offshore, India at about 70-80m water depth. The details of the area are given in Plate-1 annexed to the scope of work. The coordinates of the area showing full fold coverage excluding the migration aperture are given below in Table-1. The acquired 4C-3D data is to be processed and interpreted in India by the experts of the Contractor to meet the desired objectives stated below and to submit outputs as per the given list of deliverables. It is also found from the NOA that though the contract was a composite lump-sum contract, the charges for various components of the survey were mentioned in the NOA as under: (i) Mobilisation charges $ 534,600.00 (ii) Acquisition of 4C-3D Base Survey Seismic Data $ 31,953,528.00 (iii) Processing of 4C-3D Base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d crew of the seismic vessel are. Seismic vessels are in fact research vessel and are used to study the geology of the ocean/sea and help in research of their beds. A seismic vessel is fitted with technological gadgets like GPS, computers, nautical charts and other scientific equipments that facilitate the process of seismic survey. The main component of the seismic survey is analysis of seismic waves. The process involves a seismic detector that shoots seismic waves to a selected underwater point and the time taken for the waves to refract back to their origin point determines whether that particular subsea area is feasible for the oil drilling purpose. It is imperative that in such a scientific process; the Masters, crew or manpower on board have no role to play. Therefore, whether the vessel is hired on time charter basis along with the Masters and crew or on BBC basis without them, has no impact on the place of business of the seismic vessel. Further, even if hired on worldwide basis, it is clear from the terms of the contract as discussed earlier that from the very beginning - even before the award of the contract by ONGC - the vessels were intended to be deployed in Indian wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying 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 . 36. 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 v. CIT 87 taxmann.com 29 (SC). 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-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed by the Applicant, as a permanent establishment need not be permanent or for all times, as explained in the cases cited by the Revenue and also held in the case of Formula One World Championship (supra). Hence, the income arising from the PE shall be subject to tax in India as business income of the Applicant. This ruling was given in the context of India - UAE DTAA. The definition of PE in India - Cyprus DTAA is identical with the definition in India - UAE DTAA. As per Article 5.1 of India - Cyprus DTAA a fixed place of business through which the business of an enterprise is wholly or partly carried on qualifies as PE. As discussed earlier the business of the VPCs was carried through the seismic vessels deployed in Mumbai High region, which constitute a fixed place PE. The period of operation of the vessels is immaterial as held by the Supreme Court in the case of Formula One World Championship Ltd. v. CIT (International Taxation) [2017] 80 taxmann.com 347/248 Taxman 192/394 ITR 80. The income derived by the VPCs is found intrinsically linked with this PE and the income arising from the PE located in India is liable to tax in India as business income. 38. In view of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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