9911796707
TMI Blog2022 (2) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... oils, than income shall be computed as per the provisions of Sec. 44BB of the Income Tax Act, 1961. Therefore, to decide the impugned dispute of taxability of income received by the assessee, one has to examine the receipts in the light of the definition of royalty as per the Income Tax Act, 1961 and also Article-12 of the India Singapore Tax Treaty. In the present case, there is no dispute with regard to the nature of work carried out by the assessee which falls under the special provisions of Sec. 44BB of the Act. Therefore, it is necessary to examine the taxability of income of the assessee in the light of the provisions of Sec. 44BB of the Act and also Article-7 r/w Article-5 of the India Singapore Tax Treaty, which deals with taxation of business profits of an enterprise. The assessee is a tax resident of Singapore and therefore, it is entitled to apply the provisions of the India Singapore Tax Treaty for determination of its tax liability in India. It is also settled position of law that, to the extant tax treaty provisions are more beneficial to a tax payer, then tax payer can adopt treaty provisions which is beneficial and further, treaty provisions would override the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, the assessee has furnished Tax Residency Certificate, as per which, the assessee will be regarded as resident in Singapore for Income Tax purpose for the impugned Asst. Year. Moreover, the assessee has obtained a Certificate from the AO u/s. 197 dated 25.01.2017, wherein, the AO has issued lower rate of tax deduction at source on income of the assessee which is based on the provisions of Sec. 44BB of the Act, which taxes income sum equal to 10% of aggregate amount received by the assessee from the said business. From the above, it is very clear that, income of the assessee is in the nature of business profits which can be dealt with as per article 7 r/w article 5 of the India Singapore tax treaty, but not royalty as considered by the AO as well as the ld. DRP under section 9(1) and article 12 of the India Singapore tax treaty. Consideration received by the assessee for providing rig services to M/s. CAIRN India Ltd., is not liable to tax in India as royalty u/s. 9(1)(vi) and Article-12 of the India Singapore Tax Treaty. Further, income of the assessee is also not taxable as business profits in terms of the provisions of Sec. 44BB of the Act, because business profits of an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... days as it required for considering as service PE in relation to FTS. Rs. 24,58,68,872/- 7 The Ld.AO ought to have appreciated the fact that the provisions of the DTAA or ITA as per the section 90 of the Act, which are more beneficial to the assessee shall be taken into consideration for the purpose of tax liability. Rs. 24,58,68,872/- 8 The Ld.AO ought to have appreciated the fact that the tax treaty provisions are more beneficial to the assessee and thus, treatyprovisions would override the provisions of ITA. Rs. 24,58,68,872/- 9 The Ld.AO ought to have appreciated the fact that the assessee company is governed by the Article 7 read with Article 5 of IndiaSingapore tax treaty with respect to taxation of business income and not by the Article 12/ Article 13. Rs. 24,58,68,872/- 10 Without prejudice to above, the Ld.AO erred in appreciating the fact that the mining activity not covered in the explanation to section 9(l)(vii) of the Act and payment in relation to mining activity is covered under section 44BB and not under section 115A r.w.s. 44D of the Act. Rs. 24,58,68,872/- 11 The Ld. AO ought to appreciate that the payments to a foreign company for services in relation to prospect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income for the AY 2017-18 on 31.10.2017 as per Sec. 44BB(3) of the Act and claimed TDS credit of Rs. 1,06,36,301/-, as there is no Permanent Establishment (in short PE ) in India because of the presence of the assessee company in India only for 53 days (i.e. from 07.02.2017 to 31.03.2017). The assessee claimed that it is covered under Article-7 r/w Article-5 of the India Singapore Tax Treaty dealing with the taxation of business income and claimed that in terms of Article-7 of DTAA between India and Singapore, business of profit of enterprise of Singapore is not taxable in India unless the enterprise of Singapore carries a business in India through a PE situated in India. 5. The case was taken up for scrutiny and during the course of assessment proceedings, the Assessing officer after considering the above submissions of the appellant, held that the appellant's contention that provisions of Article 7(1) r/w Article 5(5) of India Singapore DTAA is applicable is not accepted. The Assessing officer held that the appellant has received income from hiring drilling equipment which is nothing but equipment hire charges and hence, falls under the purview of Equipment Royalty as per A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the details filed it is found that the assessee is engaged in hiring of deep drilling rig named Deep drillers' and has received hiring charges from M/s. Vedanta Limited which has paid Rs. 24,58,68,723/- during the year 2016-17 and deducted TDS u/s. 195 amount to Rs. 1,06,36,301/-. The income earned by the assessee as reported in the Form 26AS is treated as income accrued and arising in India under section 9(1) of the Income Tax Act from Indian operations. The assessee has filed online Form 26AS, Independent Auditor's report, profit and loss account and balance sheet of project office for the year 2016-17 relevant to AY 2017-18. In the profit and loss account filed the income shown is nil and various expenses are claimed and loss is arrived at Rs. 4,45,43,997/-. In notes to financial statements it is mentioned that the period of contract was less than 183 days during the year 2016-17 and therefore as per the provisions of Article 7(1) read with 5(5) of the DTAA between the Government of the Republic of India and the Government of the Republic of Singapore the assessee does not form a permanent establishment in India and hence not liable to income tax in India (Note X) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is received; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person. 5. Notwithstanding paragraph 4, fees for technical services does not include payments: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; (e) to an employee of the person making the payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Submitted by Notification No. SO 1022(E), Dated 18-07/2005. 4. The assessee is incorporated in 15.02.2015 and this is the project office in India for which return of income is filed. The assessee has received hire charge from hiring the deep drilling equipment to Indian entity in India and received income which is taxable under section 9(1) of the Income Tax Act since the same is accrued or arising in India. Therefore, it is held that the income accruing and arising in India as reported in Form 26 AS is taxable under section 9(1) of the Income Tax Act. applying the provisions of section 9(1) of Income Tax Act and Article 12 of the India-Singapore DTAA, the income is treated as equipment and royalty taxable at 10% of the hire charge received. 5. On counter checking of the TDS amount made by the deductor i.e. M/s Vedanta limited which is engaged in the business of oil exploration, it is found that the TDS amount is computed applying the provisions of selection 44BB of the Income Tax Act which is a presumptive tax levied to non-residents engaged in field of oil, exploration. Science there is no such claim made by the assessee in the return filed, the applicability of this provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sec. 9(1)(vii) of the Income Tax Act, 1961. The DRP had also rejected argument of the assessee in the light of the provisions of Sec. 44BB of the Income Tax Act, 1961 on the ground that the activities carried out by the assessee will not come under the provisions of Sec. 44BB of the Income Tax Act, 1961 and hence, applicability of the said provisions and computing income as per said provisions does not arise. Therefore, rejected the arguments taken up by the assessee and sustained the additions made by the AO. The relevant findings of the DRP are as under: 3.1 Panel: The assessee's submission has been pursued and considered. The assessee is a non-resident company incorporated in Singapore, and is engaged in the business of Deep drilling rig Deep Driller 5 used for Oil exploration. It has received hiring charges M/s. Vedanta Ltd of Rs. 24,58,68,723/-. A TDS u/s 195 amounting to Rs. 1,63,36,301/-was deducted. The return was filed as a project office of the assessee disclosing Nil taxable income and claiming TDS credit of Rs. 1,06,36,301/-. The Assessee claim that the assessee is not governed by Article 7 read with Article 5 of India-Singapore Tax Treaty, Since, the operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lling activities of Vedanta Ltd. The Deep Driller 5 will come under the definition of the any Industrial, commercial or scientific equipment as per Explanation 2(iva) to the Section 9(1) (vi)and also as per the definition of Royalty as per Article 12 (3)(b), Therefore, the action of the AO is upheld and the ground of objection is rejected. 3.7 The assessee has without prejudice to the above, sought to be covered under Section 44BB of the Act for the sum received. The AO in the draft Assessment Order had rejected the assessee's claim by stating that he had not claimed the same while filing the Return so it cannot be entertained. 3.8 Section 44BB is a special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. In the present case, the assessee is not in the business of exploration, etc., as it does not have permanent establishment due to fact that it has operated only for 45 days during the financial year. Article 7 read with Article 5 deals with the taxation of business income of an entity having a permanent establishment situated in India. Since the assessee does not fulfill the conditions laid in the Article of it be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2017, submitted that the AO had allowed the payer of the assessee for deduction of TDS at lower rate and has fixed TDS @4.3% including Education Cess and Surcharges and further, said rate has been determined as per the provisions of Sec. 44BB of the Income Tax Act, 1961. The AO as well as the DRP without appreciating the facts simply assessed the income of the assessee as per Sec. 9(1)(vii) and Article-12 of India Singapore Tax Treaty and taxed @10% on total receipts. Therefore, he submitted that the additions made by the AO should be deleted. In this regard, he also relied upon the following judicial precedent: 1. UOI vs. Azadi Bachao Andolan reported in 263 ITR 706 (SC) 2. CIT vs. Visakhapatnam Port Trust reported in 144 ITR 146 (AP) 3. Dy. Director of Income Tax vs. Serum Institute of India Ltd. reported in 40 ITR (T) 684 [Pune-Tribunal] 4. DCIT vs. Infosys BPO Ltd. reported in 154 ITD 816 [Bangalore-Tribunal] 10. The Ld. DR, on the other hand, strongly supporting the order of the AO as well as the DRP submitted that the DRP has rightly sustained the additions made by the AO towards assessment of income of the assessee in terms of Sec. 9(1)(vii) and Article-12 of India Singapo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are on the following lines viz., The Assessing Officer failed to appreciate that the provisions of DTAA or the Act, as per section 90 of the Act, whichever is beneficial to the appellant are to be applied. The Assessing officer failed to appreciate that as per India Singapore DTAA the appellant does not have a PE in India and thus treaty provisions being more beneficial would be applicable in the case of appellant(Ground Nos). Without prejudice the above, the appellant also argues that the payments to a foreign company for services in relation to prospecting for, or extraction or production of, mineral oil will be income chargeable to tax under the provisions of sec 44BB of the Income Tax Act and appeals that only 10% of the aggregate receipts during the year is to be charged to tax as business income in India(Ground Nos 10-13). Now the questions raised before the Hon ble Tribunal can be phrased as follows: Qn 1 Whether the income received by the appellant in the nature of hire charges for use of drilling rig and other associated equipment and the services of the personnel constitute a Royalty as held by the Assessing Officer. Qn 2 Without prejudice to the above whether the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as given in the DTAA is to be followed or that given in the Act. In this regard it would be pertinent to quote the Board circular no.333 dated April 2, 1982, which states as follows: 'The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact, the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e, the Income-tax Act, that will govern the taxation of income.' It is evident that the conclusion is inescapable that in case of inconsistency between the terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is considered the same would operate even if the same is inconsistent with the provisions of the Act. Relying on the above it is contended that the action of the AO in holding the payments received by the appellant towards hiring of drilling and other associated equipment and personnel is to be held as Royalty by following the definition of Royalty as per the DTAA only as DTAA overrides the Act to an extent that the same prevails over even the charging sections and hence also the section 9 of the Act. Qn 2 Without prejudice to the above whether the income received by the appellant in the nature of hire charges for drilling rig and other associated equipment and the services of the personnel is in the nature of business income and hence to qualify to be taxed in India, the appellant should have carried out its operations in India for more than 183 days in the Financial year and if so the entire profits earned are to be taxed in India Our first and foremost submission is that the presence in India of the appellants activities for more than 183 days is purely a finding of fact on which the observations of the Assessing Officer are as under: On counterchecking of the TDS amount mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the appellant being on the presence or otherwise of the appellants business activities in India for 183 days or more, it is imperative on the part of Hon ble ITAT to go into the facts involved in detail. Hence as it is the duty cast on the Departmental Representative to present the appropriate facts before the Hon ble Tribunal to make an informed and fair decision, herewith I endeavor to present certain facts relating to the contract which would prove otherwise the contention of the appellant. To quote the Contract for Provision of a Drilling Unit for Drilling Operations Offshore India between Cairn India Limited and Deep Drilling 5 Pte Ltd Contract No 4600007146, Block PR-OSN-2004/1, Provision of Independent Leg Jack up Drilling Unit, Schedule II-Scope of Work. 2. PROPOSED DRILLING SCHEDULE Likely commencement date 1st Feb 2017 to 15th Feb 2017 Likely duration of Program 2 Firm wells (71 days) + 1 Optional well (31 days) Logistical support / supply Base To be confirmed (Krishnapatnam/Chennai/Kakinada) Helibase To be confirmed (Chennai/Tirupati) Excerpts from Schedule-II Scope of Work Annexure-2, Description of Services 1.4 CONTRACTOR'S BASE Office: To be established in G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nager permanent resident position based in Gurgaon. (Rig managers are not allowed on rotational shift) Logistics Manager- permanent or rotational position based in Gurgaon or Operating Base. Warehouseman - permanent or rotational position based in Operating Base. Office support staff (e.g. accountants, secretaries, etc.) as required. 4.4 HSE BRIDGING DOCUMENT Prior to the COMMENCEMENT DATE, a Bridging Document shall be prepared linking COMPANY'S and CONTRACTOR'S HSE Management Systems. This Bridging Document shall govern all operations and procedures on board the DRILLING UNIX in the CONTRACTOR'S Operating Base or otherwise under the CONTRACTOR'S control. 5.5 OPERATIONAL FACILITIES 5.5.1 OPERATING BASE CONTRACTOR shall set: up for its use office(s), warehousing and shore-based equipment storage and handling facilities, hereinafter collectively referred to as the Operating Bam , Such Operating Base Should preferably be located near to the proposed area of operations and either within or with access to COMPANY'S own Supply Base or Port facility, COMPANY reserves the right to provide space within its own supply base, CONTRACTOR'S Operating Base should be capabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the contract, the actual conduct of the parties involved, how the tender was participated, whether tender was prepared by appellant s personnel in India, the appellants directors in India were the same as that of the holding company Aban Offshore Limited directors and whether there exists any business connection in them for appellant etc., Incidentally all these facts were never examined by both the Assessing Officer and the DRP as both the authorities went on the sole premise of treating the receipts as Royalty. Now given the prime ground of the appellant before the Hon ble Tribunal being that on the fact of nonexistence of PE for appellant in India which facts were not available with the Assessing Officer at the first place, it is the plea of the revenue that for adjudicating the above ground of the appellant further facts need be ascertained and hence the matter need to be set aside to the file of the AO for examining the facts relating to the presence or otherwise of PE for appellant in India. Without prejudice to the above, it is submitted that the mandate of 183 days is not a watertight requirement. Even if the presence in India in respect of number of days less than 183 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re such non-resident carries on business in India through a permanent establishment situated therein, or performs services from a fixed place of profession situated in India and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with the permanent establishment or fixed place of profession situated in India. One more distinction between sections 44 DA and 44 BB is that, in section 44 BB one does not find any reference to a permanent establishment in India and the services contemplated therein are more specific than what is contemplated in section 44 DA. Thus, Section 44BB is a special provision in so far as it relates to the applicability of the provision in the context of the specified services. In this regard it is pertinent to rely on the legislative intent embodied in the memorandum to the Finance Bill 2010 which is as follows: The legislative intent behind the amendment is also evident from the memorandum to the Finance Bill 2010 which reads as under: Under the existing provisions contained in section 44BB(1) of the Income-tax Act, income of a non-resident taxpayer who is engaged in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oil exploration. The assessee had entered into an agreement with M/s. CAIRN India Ltd. (Vedanta) to carry out certain activities including well drilling at off-shore location designed by CAIRN in PR-OSN-2004/1 Palar-Pennar Block on the east coast of India. As per the agreement between the assessee and M/s. CAIRN India Ltd., if you go through the scope of work, the assessee shall deploy equipments necessary for drilling work including drilling rig and other incidental equipments and also necessary supplies, materials and tools required for the said work. The assessee shall also provide necessary manpower including Rig Manager, Logistic Manager, warehouse man, Office supporting staff and sufficient personnel to perform the services. From the scope of work as referred to in the agreement between the parties, it is undoubtedly clear that it is not a case of simple hiring of drilling rig with other equipment, but a comprehensive contract for drilling work with all men and materials to be provided by the assessee. Further, said agreement was remain in force till the contract completes and as per the facts available on record, the assessee was present in India only for 53 days (i.e. from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat work carried out by the assessee which falls under the provisions of Sec. 44BB of the Act as business receipts. Further, the scope of work as per the agreement clearly indicates that it is not a case of simple hiring of the equipments for drilling work but a comprehensive contract for drilling work which involves machine, materials and men required for the said work. Therefore, we are of the considered view that consideration received by the assessee from M/s. CAIRN India Ltd., is not a equipment hiring charges which can be treated as royalty in terms of Sec. 9(1)(vi) of the Act rws Article-12 of the India Singapore Tax Treaty. 14. Having said so, let us examine the issue in the light of the provisions of Sec 44BB of the Act. As we have already stated in the earlier paragraphs, provisions of Sec. 44BB deals with special provision for computing profit and gains in connection with the business exploration of mineral oils, etc. As per the said provisions, any consideration received for providing services or facilities in connection with, plant and machinery on hire used or to be used in the prospecting for extraction, production of mineral oils, then income should be computed as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prise of a contracting state is taxable in other contracting state, if the enterprise has a PE in other contracting state. In the case of an installation or structure used for exploration of natural resources, the existence of PE will come into play, only such installation or structure is used for a period of more than 120 days in any financial year. In the present case, the assessee carried out the work in India only for a period of 53 days and hence, as per Article-7 r/w Article-5 of the India Singapore Tax Treaty, business profits of the assessee is not liable to tax in India, because the assessee does not have a Permanent Establishment situated in India. In absence of Permanent Establishment (PE), business profits of Singapore Tax Resident cannot be taxed in India, if such profits are in the nature of business profits as per Article-7 rws Article 5 of the India Singapore Tax Treaty. In the present case, there is no doubt with regard to the nature of receipts of the assessee which falls under the category of business profits and thus, same cannot be taxed in India because it is taxable only in residence country. In the present case, the stay of the assessee in India is less than ..... X X X X Extracts X X X X X X X X Extracts X X X X
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