2016 (6) TMI 137 - HC - Income Tax

Income from IOCL contract not taxable as royalty or technical fees under Income Tax Act.

The court held that the income earned by the Petitioner from the contract with IOCL was not taxable as royalty or fees for technical services under the ... 'Royalty' receipt - assessment under Section 9(1) (vi) of the Act or under Article 12 of the DTAA - existence of PE in India - Re-characterization of contract - Held that:- The clauses of the contract make it clear that at all times during the execution of the contract the control over the equipment brought by the Petitioner was to remain with the Petitioner. While the SPM system was supplied by IOCL, the task of installation, testing and pre-commissioning was the work of Petitioner. The system was to be capable of satisfactorily functioning as a complete terminal for discharge of crude oil from vessels to the onshore tankfarm. Clause 3.1.2 made it clear that it was the Petitioner which had to supply “all marine spread specialized manpower and equipments, installation tools and tackles, 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. 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 IOCL. It was erroneously concluded that the payment for such mobilisation/demobilisation constitutes royalty. In that view of the matter, the consideration for installation cannot not be characterized as FTS and brought within the ambit of Article 12.4(a) of the DTAA. Revenue was not able to show that the Petitioner had a PE in India, the income earned by the Petitioner from the contract with IOCL cannot be brought to tax in India in terms of Article 7 of the DTAA. - Decided in favour of assessee. Issues Involved:1. Whether the income earned by the Petitioner from the contract with IOCL is taxable in India as fees for technical services (FTS) or royalty under the Income Tax Act, 1961 and the India-Singapore Double Tax Avoidance Agreement (DTAA).2. Whether the Petitioner has a Permanent Establishment (PE) in India in connection with the contract with IOCL.Issue-wise Detailed Analysis:1. Taxability of Income as FTS or Royalty:- Contract Nature and Control Over Equipment:The court analyzed the contract between the Petitioner and IOCL, noting that IOCL did not have dominion or control over the equipment. The Petitioner retained control over its equipment, which was used solely for rendering services to IOCL. The contract was primarily for offshore construction work, including the installation of IOCL-supplied Single Point Mooring (SPM) systems, and not for the hiring of equipment.- AAR's Findings:The AAR had concluded that the contract was divisible and that the payment for mobilization and demobilization of equipment constituted royalty under Article 12.3(b) of the DTAA. It also held that the installation services were ancillary to the use of equipment and thus constituted FTS under Article 12.4(a) of the DTAA.- Court's Analysis on Royalty:The court disagreed with the AAR, stating that the mobilization/demobilization charges could not be treated as royalty since IOCL did not use or control the equipment. Citing the decision in Asia Satellite Telecommunications Co. Ltd. v. Director of Income Tax (2011) 332 ITR 340 (Del), the court emphasized that for a payment to be characterized as royalty, the equipment must be used by the payer (IOCL), which was not the case here.- Court's Analysis on FTS:The court found that the installation services provided by the Petitioner were not ancillary to the mobilization/demobilization services. The contract was for the comprehensive installation and erection of equipment, and the mobilization/demobilization was an integral part of this contract. The services did not involve the transfer of any technology, skill, or know-how to IOCL, which would enable IOCL to perform such activities independently.2. Permanent Establishment (PE) in India:- AAR's Scope of Decision:The AAR did not address the issue of whether the Petitioner had a PE in India in relation to the contract with IOCL. This issue arose in the context of a separate contract with Larsen & Toubro (L&T), and the AAR's findings on PE were specific to that contract.- Court's Findings:The court noted that the Revenue did not contend that the Petitioner had a PE in India concerning the IOCL contract. The Petitioner was present in India for only 41 days during 2008-09, which did not exceed the 183-day threshold required under Article 5(3) of the DTAA for establishing a PE. The Petitioner also did not have a project office in India for executing the contract with IOCL.Conclusion:The court concluded that:- The income earned by the Petitioner from the contract with IOCL could not be treated as royalty or FTS under the Act or the DTAA.- The Petitioner did not have a PE in India in connection with the IOCL contract.- The impugned order dated 15th February 2012 of the AAR was set aside, and the petition was allowed with no order as to costs.Significant Phrases:- 'The equipment was being used only by the Petitioner for rendering services for the offshore construction work.'- 'The control of the equipment throughout remained with the Petitioner and did not get transferred to IOCL.'- '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 comprehensive analysis ensures that the legal terminology and significant phrases from the original text are preserved while providing a detailed summary of the judgment.