2018 (8) TMI 52 - AT - Income Tax

Tax Appeals: Separate Activities' Taxability Upheld under ONGC Contract

The court upheld the CIT(A)'s decision regarding the taxability of revenues from separate, independent, and divisible activities under the ONGC contract. ... Independently determine the taxability of revenues from separate, independent and divisible scope of work under the contract - installation PE - Held that:- Activities carried out by the assessee viz. (i) supply of offshore products/equipment; (ii) offshore repair work (including related warehousing costs and reimbursement for transport and logistic support); (iii) equipment rental; (iv) project management services; and (v) installation and commissioning activities (though not rendered during the year under consideration) are separate, divisible and independent of each other, therefore, the CIT(A) in the backdrop of the settled position of law as laid in the case of Ishikawajima-Harima Heavy Industries Limited (2007 (1) TMI 91 - SUPREME COURT) and Hyundai Heavy Industries Company Ltd. (2007 (5) TMI 196 - SUPREME COURT), had rightly concluded that the taxability of the revenues received there from by the assessee from such separate, independent and divisible activities were required to be undertaken independently. We thus, finding ourselves to be in agreement with the view taken by the CIT(A), uphold the same. The Ground of appeal No. 1 raised by the revenue is dismissed. Composite taxability of aggregate revenue from ONGC contract -taxability of revenue received by the assessee from offshore supply of equipments under the ONGC contract, being a case of outright transfer of title in the products by the assessee to ONGC outside India, thus, cannot be construed to be FTS or Royalty and brought to tax in India - Held that:- CIT(A) observed that as the products identified by ONGC are requested on need basis as per their requirements, therefore, the interconnection of the revenue received by the assessee from offshore supply of goods with other activities under the ONGC contract was unwarranted. We find that the CIT(A) had observed that in case of offshore supplies made under the ONGC contract, the property in goods were transferred by the assessee to ONGC outside India and the entire sale was executed outside India. The CIT(A) had further observed that no part of the activities of the offshore supply of equipments were carried out in India. Further, the PE of the assessee in India also had no role to play in effectuating such transactions either pre or post such offshore supply - as in the case of the assessee no part of the activities of offshore supply of equipments by the assessee were undertaken in India, hence the revenue received by the assessee there from could not be taxed in India. We have deliberated at length on the aforesaid observations of the CIT(A) and find ourselves to be in agreement with the view arrived at by him that the revenue received by the assessee from offshore supply of goods to ONGC could not be taxed in India. We thus finding no infirmity in the order of the CIT(A) - decided against revenue Revenue received the assessee from repair work (and related activities) undertaken by the assessee under the ONGC contract - income accrued in India - whether not falling either within the sweep of FTS as provided in Explanation 2 to Sec.9(1)(vii) or Royalty as per Article XII(3) of the India-Australia DTAA - taxability in India - Held that:- as the consideration received by the assessee for providing the repair work (and related activities) to ONGC are in context of 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, thus, the receipts in the hands of the assessee from providing such services would clearly fall within the sweep of the exclusion contemplated in Explanation 2 to Sec. 9(1)(vii) of the Act. We thus, in terms of our aforesaid observations are of the considered view that the revenue received by the assessee from providing repair services to ONGC would not fall within the sweep of FTS under Sec.9(1)(vii) of the Act. As per Article XII(3)(g) of the said tax treaty, payments made as consideration for rendering of services (including provision of technical or other personal) would result in royalty, if such services make available technical knowledge, expertise, skill, know how or process, which enables the person acquiring the service to apply the technology contained therein. In other words, if the service provider does not make available the technical knowledge, experience, skill know how or process etc., then the consideration received for rendering of such services cannot be characterised as royalty for the purpose of Article XII(3)(g) of India-Australia DTAA. Whether the repair activities provided by the assessee to ONGC can be brought within the sweep of royalty, as defined in Article XII(3)(g) of the India-Australia tax treaty? - Held that:- We find that the CIT(A) after relying on a host of judicial pronouncements and the scope of the term “make available” as used in India- USA DTAA, had observed that mere rendering of the repair services by the assessee at its overseas work station did not satisfy the ‘make available’ condition as contemplated under Article XII(3)(g) of the India- Australia tax treaty. We thus, are persuaded to subscribe to the view taken by the CIT(A) that the rendering of the repair services by the assessee to ONGC cannot be characterised as royalty. Still further, we may herein observe that as the equipment is owned by ONGC itself, therefore, while rendering the repair services, no right to use the equipment can be said to have been provided by the assessee to ONGC. We thus, finding no infirmity in the order of the CIT(A) holding that the revenue received by the assessee from rendering of the repair services to ONGC cannot be brought within the sweep of FTS or Royalty, uphold the same. As the repair works are undertaken at the overseas work stations of the assessee, therefore, the question of taxability of such receipts from rendering of the repair work as attributable to PE of the assessee in India does not arise. We thus, in terms of our aforesaid observations conclude that the A.O had erred in holding that the revenue from repair activities rendered by the assessee to ONGC was taxable in India under Sec. 44DA Issues Involved:1. Composite taxability of aggregate revenue from ONGC contract.2. Taxability of revenue from offshore supplies under the contract with ONGC.3. Taxability of revenue from repairs (and related activities) under the contract with ONGC.4. Taxability of revenue from equipment rental under the contract with ONGC.Issue-wise Detailed Analysis:1. Composite Taxability of Aggregate Revenue from ONGC Contract:The CIT(A) observed that the assessee had entered into a contract with ONGC for various activities, including inspection, refurbishment, supply of tools, and project management. The A.O. treated the entire revenue as a single composite contract, taxable under Sec. 44DA, without segregating different activities. The CIT(A), however, concluded that the contract's activities were separate, divisible, and independent, requiring independent tax evaluation. The CIT(A) relied on the judgments of the Supreme Court in Ishikawajima-Harima Heavy Industries Limited and Hyundai Heavy Industries Company Ltd., which support the principle of apportionment for tax purposes in composite contracts. The CIT(A) directed the A.O. to independently determine the taxability of revenues from separate, independent, and divisible works under the ONGC contract.2. Taxability of Revenue from Offshore Supplies under the Contract with ONGC:The CIT(A) noted that the assessee supplied products from its foreign location to ONGC on an FOB basis, with the title and risk transferred outside India. The A.O. taxed these receipts under Sec. 44DA, treating them as royalty and FTS. However, the CIT(A) concluded that since the offshore supply was a separate and independent activity, and no part of the activities was carried out in India, the income from such supplies could not be taxed in India. The CIT(A) relied on the Supreme Court judgments in Ishikawajima-Harima Heavy Industries Limited and Hyundai Heavy Industries Company Ltd., which held that income from offshore supply of equipment could not be taxed in India if no part of the activities was undertaken in India.3. Taxability of Revenue from Repairs (and Related Activities) under the Contract with ONGC:The CIT(A) observed that the repair activities were carried out at the assessee's overseas workstations, and the Indian PE had no role in these activities. The A.O. treated the repair income as FTS and royalty, arguing that it involved technical expertise. The CIT(A) disagreed, noting that the repair work did not 'make available' any technical knowledge to ONGC, a requirement under Article XII(3)(g) of the India-Australia DTAA for characterizing income as royalty. The CIT(A) concluded that the repair services did not fall within the scope of FTS or royalty and were not taxable in India.4. Taxability of Revenue from Equipment Rental under the Contract with ONGC:The CIT(A) noted that the assessee earned rental income by providing equipment to ONGC for use in extraction and exploration of mineral oil. The A.O. taxed this income under Sec. 44DA, treating it as royalty. However, the CIT(A) concluded that the rental income fell under Sec. 44BB, which provides a presumptive basis for taxing non-residents supplying plant and machinery on hire for mineral oil extraction. The CIT(A) relied on Explanation 2 to Sec. 9(1)(vi), which excludes amounts referred to in Sec. 44BB from the definition of royalty. The CIT(A) directed the A.O. to tax the rental income under Sec. 44BB, not Sec. 44DA.Conclusion:The appeal by the revenue was dismissed, and the CIT(A)'s order was upheld, concluding that the taxability of revenues from separate, independent, and divisible activities under the ONGC contract should be evaluated independently. The cross-objection by the assessee was rendered infructuous and dismissed.