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TMI Blog2009 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... application is filed seeking advance ruling in connection with the six contracts entered into with Oil and Natural Gas Corporation Ltd. (for short ONGC) during the years 2001, 2002 and 2003. Six questions are formulated by the applicant. Questions (1) to (4) are identical though related to different contracts. They are as follows: Whether on the facts and circumstances of the case, (a) the receipts of the applicant under Contract Nos. 1,2,3, 4 with ONGC are not in the nature of royalties as defined in Article 12 of the DTAA between India and Australia? (b) The applicant does not have a PE in India in respect of this contract? (c) If answers to (a) (b) above are in affirmative, the receipts from this contract are not taxable in India? Question No. 5 In Qn.No.5 - which relates to contract no.(5), (a) (b) are the same as above. Qn.No.5 (c) reads thus: "If answers to (a) (b) above are in affirmative, the receipts from this contract are chargeable @15%." Question No. 6 In Qn.No.6 - which relates to contract no.(6), (a) (b) are the same as above. (c) and (d) are as follows : "(c) If answers to (a) (b) above are in affirmative, only so much of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sk-top review of workings prepared by a third party in Worley's facilities in Australia. As the work entrusted to the applicant required inputs from the field and the ONGC staff, the employees of the applicant came to India and stayed for duration of 39 days in all in the financial year 2002-03. The applicant states that the services for this contract were thus provided partly from Australia and partly in India in the year 2002-03. However, in the succeeding year, the work was carried out only from Australia. 2.3. Contracts No. 3 to 6 relate to Mumbai High South Offshore Field (for short 'MHS) development. ONGC prepared a scheme to implement seven separate packages for developing Integrated Process-cum-Gas Compressor Platform, several well platforms, drilling of new wells and new pipeline segments of 245 kms. Package I related to installation of ZA platforms and associated works. In connection therewith, Contract No. 3 was entered into. The applicant had to review the existing design philosophy, study the adequacy of existing processing facilities and also conduct study to arrive at optimum requirement of additional compression and other facilities. This involved review of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 'royalties' as defined in Art. XII.3 of the Double Taxation Avoidance Agreement (hereinafter referred to as 'DTAA' or 'Treaty'), that there was no permanent establishment in India except in relation to Contract no.6 and that royalty income in respect of the contract no. 5 has to apportioned in such a manner that only income attributable to the Indian operations is taxed in India. Though initially in the application the applicant conceded to pay tax at 15 per cent on the royalty income under Contract no. 5, the above contention was raised drawing support from the decision of the Supreme Court in Ishikawajima - Harima Heavy Industries Ltd. v. DIT [268 ITR 408]. 4. The Revenue has disputed the propositions advanced by the applicant and contends that the payments made by ONGC under Contract nos. 1 to 6 are in the nature of royalties within the meaning of clause (g) of Art. XII.3 of DTAA, and therefore, taxable in India in view of the Art. XII.2 read with Section 9(1)(vi)/(vii) of the Income-tax Act, 1961. It is also contended that all the contracts which pertained to the two projects of Mumbai High should be seen together in order to ascertain whether a service PE as contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technical services are separately dealt with under section 9(1)(vi) and (vii) respectively. Art.XII of the DTAA, is a veritable combination of both royalties and f.t.s. which are treated separately under domestic law. The Income-tax Act defines, 'fees for technical services' as any consideration including lumpsum consideration for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). The concept of technical services liable to tax under the DTAA is not as wide as that contained in the corresponding provision in I.T.Act. There are two limbs in clause (g) Art.12.3 of DTAA: (i) rendering of services which make available (emphasis supplied) technical knowledge, experience, skills, know-how or processes, (ii) transfer of a technical plan or design. The question argued before us is whether one of the two limbs of (g) is attracted in the instant case. Of course, attention was focused more on the first part of clause (g). It is well settled that whenever there is conflict between the provision contained in the Treaty and the corresponding provision in the domestic law the provision in the Treaty will pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia (P) Ltd. (307 ITR 418) (AAR) "Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13(4) does not stop at that. It carves out a qualification thereto by employing the words "which make available technical experience, skill, know-how or processes". Rendering technical or consultancy service is followed by a relative pronoun "which" and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject. CONTRACT NO. 3 Review the existing design philosophy, study adequacy of existing facilities, conduct study of optimum requirement of additional compression and other facilities. CONTRACT NO. 4 Undertaking (i) Package 2 (Pre award activities including bid package preparation for Process Platform) of Mumbai High South Redevelopment Scheme. (MSW project) (ii) Package 4 (review of bid package of 5 well platforms) and (iii) Monitoring, vetting incorporation of Brown-field bid package work (to be carried out by Indian Consultant JBTI) of Mumbai High South Redevelopment Scheme. CONTRACT NO. 6 Review the documents prepared by Hyundai Heavy Industries (HHI) for design and procurement stage of MHS Process Platform Project (MHS Project). 6.3. By undertaking such services, the applicant no doubt furnished to ONGC valuable information or inputs of technical nature in order to proceed with the work relating to the two projects. The reports/recommendations furnished by the applicant undoubtedly have a technical content which in turn helped ONGC in many ways. ONGC derived benefit from the use of end-product, namely, reports/recommendations provided by the applicant. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to clause (v) of the Agreement relating to the ownership and confidentiality clauses contained in clauses (v) and (vi) of the Agreement. The applicant submits that the ownership of all the documents remains with ONGC and that the applicant shall ensure confidential handling of all matters pertaining to plans, policies and other information relating to the project and that the consultants shall not prepare articles or photographs relating to the services and/or the project or facilities or installations. Reliance has been placed on the decision of ITAT Bangalore Bench in the case of ITO vs. De Beers India Minerals (P) Ltd. In that case the question arose whether the respondent company was liable to deduct tax at source on the payments made to a foreign company for conducting air-borne geo-physical survey and providing report for locating the potentials parts for the exploration of diamonds. The learned members of the Tribunal observed thus: " 'Fugro' has surveyed, collected and processed the data on behalf of De Beers. There is no doubt that 'Fugro' performed the services using substantial knowledge and expertise but such technical experience, skill or knowledge has not been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no PE within the meaning of para 1 or 2 of art.(v). Hence, the only question debated before us turns on the applicability of para 3 of Art.V which is a deeming provision. Clause (c) of Art.V.3 deals with what is popularly known as 'Service PE'. It reads thus : "3. An enterprise shall be deemed to have a PE in one of the contracting states and to carry on business through that PE if (a) ……………… (b) ……………… (c) it furnishes services, including managerial services and those mentioned in sub-paragraph (3)(h) to (k) of Article 12 but not those services in respect of which payments or credits that are royalties as defined in Article 12 are made, within one of the Contracting States through employees or other personnel, but only if those services are furnished within that State : (i) for a period or periods aggregating to more than 90 days within any 12-month period; 7.1 We are not concerned with sub-clause (ii). Clause (c) excludes from the purview of PE the services that give rise to royalties under Art.XII (other than those mentioned in sub-paragraphs (h) to (k)). Hence, Contract No.5 under which the payments received by the applicant were in the nature of royalties cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order to see whether clause (c) of Art.V.3 applies, the question to be asked and answered is whether the foreign enterprise furnished services in India to the other contracting party i.e. ONGC for an aggregate period of more than 90 days in a span of 12 months. The expression 'furnishing of services' should legitimately include doing activities or operations which are integral or contributory to the provision of services. In fact, there is no dispute on this point. The point of controversy, as already noted, is whether the word 'services' should be confined to a single contract where there is more than one with the same party and the number of days specified in sub-clause (i) of clause (c) should be counted Contract-wise. On the facts of the present case, we do not find any warrant to understand the expression 'services' in such a truncated manner. Firstly, various contracts involving rendering of services in India were with one party, namely, ONGC. Secondly, the contracts related to redevelopment of Bombay High South and North off-shore Oil Fields aimed at stepping up the recovery of oil and gas. The activities in connection with the contracts were to be carried out in and aroun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because, as admitted by the applicant, it is a clear case of royalty-related services which cannot be brought within the purview of clause (c) of Art.V(3). 7.7. As regards Contract No.6, there is no dispute about the existence of PE in view of the number of days the applicant's personnel worked in India. 7.8. In the light of the above discussion, a PE must be deemed to be in existence within the meaning of clause (c) of Art.V.(3) of DTAA in so far as Contracts 2 to 4 and 6 are concerned and the business income therefrom will have to be computed in accordance with Art.VII of DTAA. The receipts under Contract No.1 are not taxable at all in view of our finding that during the period of currency of Contract, there was no PE at all. 8. The learned Departmental Representative has endeavored to bring the case of the applicant within clause (b) of para 1 of Art.VII which declares inter alia that the profits attributable either to the PE or other business activities of the same or similar kind as those carried on through the PE are liable to be taxed. Clause (b) of Art.VII.1 gives effect to the principle of 'force of attraction' in a limited way. This argument which is raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to 4 (a) The answer is in the affirmative. The amounts received by the applicant under Contract Nos. 1,2,3 and 4 are not in the nature of royalties; (b) At the time when Contract No.1 was entered into and implemented, the applicant did not have a PE in India. However, as regards the other three Contracts (no. 2, 3 4) as well as Contract No.6, PE must be deemed to exist in view of para 3(c) of Art. V of DTAA. (c) Receipts under Contracts 2,3 and 4 are liable to be taxed as business income under the Income-tax Act but only to the extent attributable to PE and in accordance with Art. VII. Question No. 5 (a) The amount received under Contract No.5 is royalty income. (b) The existence or otherwise of PE is irrelevant especially in view of the fact that the applicant has not invoked para 4 of Art. XII. (c) Answer is in the affirmative. The applicant is liable to be charged on royalty income on gross basis at the rate of 15%. Question No. 6 All the answers are in the affirmative. That means the receipts are not in the nature of royalties, the applicant has a PE in India in respect of Contract No.6 and thirdly only so much of receipts as are attributable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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