2021 (2) TMI 507 - AAR - Income Tax

Taxability of Bare Boat Charter payments for seismic vessels in India under Section 44BB

Sea Bird Exploration FZ LLC, In re

Sea Bird Exploration FZ LLC, In re - TMI Issues Involved:1. Taxability of sums paid under Bare Boat Charter (BBC) Agreements.2. Applicability of Section 44BB of the Income-tax Act, 1961.3. Classification of payments as 'Royalty' under Section 9(1)(vi) of the Act.4. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Cyprus.Detailed Analysis:Issue 1: Taxability of Sums Paid under BBC AgreementsThe applicant, a UAE-based company, entered into BBC agreements with vessel providing companies (VPCs) for seismic survey vessels used in India. The core question was whether the sums paid to VPCs under these agreements could be said to accrue or arise or be deemed to accrue or arise in India, making them subject to withholding tax in India.Findings & Ruling:The income of the VPCs from the BBC agreements is deemed to accrue or arise in India. The Authority held that the source of the business income was embedded in the contract awarded by ONGC to the applicant, and the deployment of seismic vessels in Indian waters constituted a clear territorial nexus. Therefore, the sums paid are liable to tax in India and subject to withholding tax.Issue 2: Applicability of Section 44BB of the Income-tax ActThe applicant argued that if the sums paid under the BBC agreements were taxable in India, they should be computed under Section 44BB of the Act, which deals with the taxation of non-residents providing services or facilities in connection with the prospecting for, or extraction of, mineral oils.Findings & Ruling:The Authority agreed with the applicant, stating that the sums paid to VPCs were for the supply of plant and machinery on hire used in the prospecting for mineral oil in India. Consequently, these sums are covered under Section 44BB of the Act and should be assessed as business income under this provision.Issue 3: Classification of Payments as 'Royalty'The Revenue contended that the sums paid to VPCs should be classified as 'Royalty' under Section 9(1)(vi) of the Act, arguing that the seismic vessels are scientific equipment.Findings & Ruling:The Authority rejected this contention, stating that the payments made by the applicant to VPCs are covered under Section 44BB of the Act, which specifically excludes such sums from being classified as 'Royalty' under Section 9(1)(vi). Thus, the sums paid do not constitute 'Royalty'.Issue 4: Applicability of DTAA between India and CyprusThe applicant sought to determine if the sums paid under the BBC agreements could be construed as 'Royalty and fees for included services' under Article 12 of the India-Cyprus DTAA and if the income chargeable to tax in India should be computed as per Section 44BB of the Act.Findings & Ruling:Given that the sums paid are covered under Section 44BB and not classified as 'Royalty', the question of applying Article 12 of the India-Cyprus DTAA does not arise. The computation mechanism under Section 44BB of the Act would apply, making further analysis under the DTAA unnecessary.Conclusion:1. The sums paid under the BBC agreements are deemed to accrue or arise in India and are subject to withholding tax.2. These sums are to be assessed as business income under Section 44BB of the Income-tax Act.3. The payments do not constitute 'Royalty' under Section 9(1)(vi) of the Act.4. The computation mechanism under Section 44BB of the Act applies, rendering the DTAA analysis unnecessary.