Singapore company providing drilling services for 53 days not taxable in India under tax treaty

ITAT Chennai held that a Singapore tax resident company providing drilling services to an Indian entity for 53 days was not liable to tax in India. The tribunal determined that income from drilling work constituted business profits under Article 7 read with Article 5 of the India-Singapore Tax Treaty, not royalty under Section 9(1)(vii) and Article 12. Since the assessee operated in India for less than 120 days, no Permanent Establishment was created. Without PE, business profits could only be taxed in Singapore as the residence country. The AO's addition treating receipts as taxable royalty was deleted, and the assessee's appeal was allowed.

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Issues Involved:
1. Validity of the Final Assessment Order.
2. Addition towards income computed as equipment royalty/fee for technical services.
3. Permanent Establishment (PE) status in India.
4. Applicability of Double Taxation Avoidance Agreement (DTAA) provisions.
5. Taxability of business income under Section 44BB of the Income Tax Act, 1961.

Summary:

Issue 1: Validity of the Final Assessment Order
The assessee challenged the final assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, contending it was bad in law and on facts.

Issue 2: Addition towards income computed as equipment royalty/fee for technical services
The AO made an addition of Rs. 24,58,68,872/- towards income computed as equipment royalty/fee for technical services, treating the hire charges received by the assessee from M/s. Vedanta Limited as equipment royalty under Article 12 of the India-Singapore DTAA. The AO relied on clause 3(b) of Article 12, which defines royalty to include payments for the use of industrial, commercial, or scientific equipment.

Issue 3: Permanent Establishment (PE) status in India
The assessee argued that it did not have a PE in India as its presence was only for 53 days. The AO and DRP rejected this, stating that the income received fell under the purview of equipment royalty, not requiring a PE for taxability under Article 12 of the India-Singapore DTAA.

Issue 4: Applicability of DTAA provisions
The assessee contended that the provisions of the DTAA or the Income Tax Act, whichever is more beneficial, should apply. The AO and DRP applied Article 12 of the DTAA, treating the income as royalty, which the Tribunal found incorrect, stating the income should be considered under Article 7 r/w Article 5, which deals with business profits and requires a PE for taxability.

Issue 5: Taxability of business income under Section 44BB of the Income Tax Act, 1961
The assessee argued that if the income is taxable, it should be under Section 44BB, which deals with non-residents engaged in oil exploration, taxing only 10% of gross receipts. The AO and DRP rejected this, but the Tribunal found that the assessee's activities fell under Section 44BB and Article 7 r/w Article 5 of the DTAA, and since there was no PE, the income was not taxable in India.

Conclusion:
The Tribunal concluded that the income received by the assessee from M/s. Vedanta Limited was not liable to tax as royalty under Section 9(1)(vi) and Article 12 of the India-Singapore DTAA. The income was also not taxable as business profits under Section 44BB and Article 7 r/w Article 5 of the DTAA due to the absence of a PE. The AO was directed to delete the addition made. The appeal filed by the assessee was allowed.

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