Treaty taxation of equipment and installation receipts turns on effective control, permanent establishment, and make-available criteria.
Equipment-related receipts are taxable as royalty only where the payer obtains use of, or right to use, the equipment with effective dominion or control; here, the payer did not, so mobilisation and demobilisation charges were not royalty. A permanent establishment in India was not shown because the contract work was performed offshore through the assessee's own marine spread and personnel, so business profits could not be taxed under the treaty article. Installation charges also were not fees for technical services because the contract was for construction and installation, fell within the construction exclusion, and did not make available technical knowledge, skill, or know-how to the payer. The advance ruling was therefore not sustainable.
Issues: (i) Whether the assessee had a permanent establishment in India for the contract in question and whether the income could be taxed under the business profits article of the treaty; (ii) Whether mobilisation and demobilisation charges were taxable as royalty; and (iii) Whether installation charges were taxable as fees for technical services.
Issue (i): Whether the assessee had a permanent establishment in India for the contract in question and whether the income could be taxed under the business profits article of the treaty.
Analysis: The contract showed that the assessee retained control over the equipment and executed the offshore work through its own marine spread and personnel. The Revenue was unable to establish a fixed place of business or a construction or installation presence in India for the period required under the treaty. The absence of a permanent establishment meant that business profits could not be brought to tax under the treaty article dealing with business profits.
Conclusion: The assessee did not have a permanent establishment in India for this contract, and the income could not be taxed under the business profits article.
Issue (ii): Whether mobilisation and demobilisation charges were taxable as royalty.
Analysis: Royalty under the treaty required payment for the use of, or right to use, industrial, commercial or scientific equipment. The contract did not transfer dominion, possession, or effective control of the equipment to IOCL. The equipment was used by the assessee for performing the work, not by IOCL for its own use. A mere payment for services involving equipment does not convert the arrangement into hiring or use of equipment by the payer.
Conclusion: Mobilisation and demobilisation charges were not royalty.
Issue (iii): Whether installation charges were taxable as fees for technical services.
Analysis: Fees for technical services under the treaty and the Act require services of a managerial, technical or consultancy nature, or services that make available technical knowledge, experience, skill, know-how or processes. The work under the contract was construction and installation of the SPM system and fell within the exclusion for construction or similar projects. The installation activity was part of a composite offshore construction contract and did not make available any technical knowledge or skill to IOCL. Since the mobilisation and demobilisation charges were not royalty, the ancillary-and-subsidiary route also failed.
Conclusion: Installation charges were not fees for technical services.
Final Conclusion: The advance ruling could not be sustained because the contract did not amount to use of equipment by the payer, the assessee had no permanent establishment in India for the contract, and no part of the consideration was taxable as royalty or fees for technical services.
Ratio Decidendi: For treaty purposes, equipment-related receipts are taxable as royalty only where the payer has use of or right to use the equipment with effective control or dominion, and construction or installation receipts do not become fees for technical services unless they make available technical knowledge or fall outside the construction exclusion.
TaxTMI 
AI Drafter ✕
TaxTMI 
