Offshore drilling contract receipts treated as business profits, not royalty, where no permanent establishment existed in India.

A composite offshore drilling contract requiring the supply of the drilling unit, equipment, materials and personnel was treated as a service arrangement, not a mere hiring of equipment. The receipts were therefore not characterised as equipment royalty under section 9(1)(vi) of the Income-tax Act, 1961 or Article 12 of the India-Singapore DTAA, and instead fell within the special business regime of section 44BB. As the assessee was a Singapore resident and had no permanent establishment in India under Article 5, its business profits were taxable only in Singapore under Article 7 and could not be taxed in India. The addition was deleted.

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Issues: Whether the receipts from offshore drilling operations were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore DTAA, or as business profits under Article 7 read with Article 5 of the DTAA and section 44BB of the Income-tax Act, 1961.

Analysis: The contract was not treated as a mere hiring of drilling equipment. It required the assessee to provide the drilling unit, associated equipment, supplies, materials and personnel for the drilling work, showing a composite offshore drilling service arrangement. On that basis, the receipts were held not to be equipment royalty within section 9(1)(vi) of the Income-tax Act, 1961 or Article 12 of the India-Singapore DTAA. The activity was found to fall within the special business regime of section 44BB of the Income-tax Act, 1961. The assessee being a Singapore resident, its business profits were held taxable only in Singapore unless it carried on business in India through a permanent establishment. Since the assessee's presence in India was only for 53 days, no permanent establishment was found under Article 5 of the India-Singapore DTAA, and the business profits could not be taxed in India under Article 7.

Conclusion: The receipts were not taxable in India as royalty, and in the absence of a permanent establishment they were also not taxable as business profits; the addition was therefore deleted.

Ratio Decidendi: A composite drilling contract involving supply of rig, equipment, materials and personnel is not equipment royalty; where the non-resident has no permanent establishment in India, its business profits are taxable only in the residence State and not in India.

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