2022 (2) TMI 1447 - AT - Income Tax

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

M/s. Deep Drilling 5 PTE Ltd. Versus The Dy. Commissioner of Income Tax, International Taxation-1 (1), Chennai.

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 ... Income taxable in India or not - assessment of income of the assessee in terms of Sec. 9(1)(vii) and Article-12 of India Singapore Tax Treaty - consideration received by the assessee for carrying out drilling work - income computed as equipment royalty/fee for technical services - Permanent Establishment (PE) in India or not? - HELD THAT:- If examine the reasons given by the AO to treat consideration received by the assessee for carrying out drilling work for M/s. CAIRN India Ltd., one has to examine the reasons given by the AO to bring said payments within the definition of royalty as defined u/s. 9(1) of the Act, r/w Article-12 of the India Singapore Tax Treaty. As per the said provisions, in the case of the assessee being a non-resident engaged in the business providing services or facilities in connection with or supplying plant & machinery on hire, used or to be used in the prospecting for or extraction or production of mineral oils, than income shall be computed as per the provisions of Sec. 44BB of the Income Tax Act, 1961. Therefore, to decide the impugned dispute of taxability of income received by the assessee, one has to examine the receipts in the light of the definition of royalty as per the Income Tax Act, 1961 and also Article-12 of the India Singapore Tax Treaty. In the present case, there is no dispute with regard to the nature of work carried out by the assessee which falls under the special provisions of Sec. 44BB of the Act. Therefore, it is necessary to examine the taxability of income of the assessee in the light of the provisions of Sec. 44BB of the Act and also Article-7 r/w Article-5 of the India Singapore Tax Treaty, which deals with taxation of business profits of an enterprise. The assessee is a tax resident of Singapore and therefore, it is entitled to apply the provisions of the India Singapore Tax Treaty for determination of its tax liability in India. It is also settled position of law that, to the extant tax treaty provisions are more beneficial to a tax payer, then tax payer can adopt treaty provisions which is beneficial and further, treaty provisions would override the provisions of Income Tax Act, 1961. This legal principle is supported by the decision of Azadi Bachao Andolan (2003 (10) TMI 5 - SUPREME COURT) and other host of cases. In this case, there is no doubt that, the assessee activity falls under the provisions of Sec. 44BB of the Act, and Article-7 r/w Article-5 of the India Singapore Tax Treaty. Therefore, we are of the considered view that the findings recorded by the lower authorities that the activities carried out by the assessee are not coming under the provisions of Sec. 44BB of the Act and Article-7 r/w Article-5 of the India Singapore Tax Treaty DTAA is incorrect and unfounded under law. Taxation of income of the assessee, it is an admitted fact that the assessee is a tax resident of Singapore and as per Article-7 r/w Article-5, the profits of an enterprise of a contract in state shall be taxable in that state unless the enterprise carries on business in the other contracting state through a Permanent Establishment situated therein. As from Article-7 r/w Article-5 of the India Singapore Tax Treaty, business income of an enterprise of a contracting state is taxable in other contracting state, if the enterprise has a PE in other contracting state. In the case of an installation or structure used for exploration of natural resources, the existence of PE will come into play, only such installation or structure is used for a period of more than 120 days in any financial year. In the present case, the assessee carried out the work in India only for a period of 53 days and hence, as per Article-7 r/w Article-5 of the India Singapore Tax Treaty, business profits of the assessee is not liable to tax in India, because the assessee does not have a Permanent Establishment situated in India. In absence of Permanent Establishment (PE), business profits of Singapore Tax Resident cannot be taxed in India, if such profits are in the nature of business profits as per Article-7 rws Article 5 of the India Singapore Tax Treaty. In the present case, there is no doubt with regard to the nature of receipts of the assessee which falls under the category of business profits and thus, same cannot be taxed in India because it is taxable only in residence country. In the present case, the stay of the assessee in India is less than 120 days, which is not disputed by the AO. As per the AO, the assessee stayed in India only for 53 days. Further, the assessee has furnished Tax Residency Certificate, as per which, the assessee will be regarded as resident in Singapore for Income Tax purpose for the impugned Asst. Year. Moreover, the assessee has obtained a Certificate from the AO u/s. 197 dated 25.01.2017, wherein, the AO has issued lower rate of tax deduction at source on income of the assessee which is based on the provisions of Sec. 44BB of the Act, which taxes income sum equal to 10% of aggregate amount received by the assessee from the said business. From the above, it is very clear that, income of the assessee is in the nature of business profits which can be dealt with as per article 7 r/w article 5 of the India Singapore tax treaty, but not royalty as considered by the AO as well as the ld. DRP under section 9(1) and article 12 of the India Singapore tax treaty. Consideration received by the assessee for providing rig services to M/s. CAIRN India Ltd., is not liable to tax in India as royalty u/s. 9(1)(vi) and Article-12 of the India Singapore Tax Treaty. Further, income of the assessee is also not taxable as business profits in terms of the provisions of Sec. 44BB of the Act, because business profits of an enterprise of a contracting state shall be taxable only in that state unless such enterprise is carried out its business in other contracting state through a Permanent Establishment. Since, there is no Permanent Establishment in the case of the assessee the question of taxation of business profits in India does not arise. Therefore, AO as well as the ld. DRP completely erred in taxing income of the assessee in India. Hence, we direct the AO to delete the addition made towards income of the assessee in terms of Sec. 9(1) and Artlce-12 of the India Singapore Tax Treaty. Appeal filed by the assessee is allowed. 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 OrderThe 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 servicesThe 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 IndiaThe 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 provisionsThe 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, 1961The 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.