2023 (12) TMI 1467 - AT - Income Tax

Article 23(4) relief granted for offshore supply and tugboat services after AO wrongly isolated a contract clause

ITAT upheld CIT(A)'s grant of Article 23(4) relief under the India-Norway DTAA, finding the AO erred by isolating a contract clause and ignoring the ... Eligibility of benefit of Article 23(4) of convention between India and Norway - assessee was not engaged solely in the supply operations - whether CIT(A) has erred in allowing benefit of Article 23(4) of convention between India and Norway by picking the offshore supply operations part in isolation out of the scope of work carried out by the assessee that consists of a number of other activities/services which are not covered by the special provisions of Article 23 of DTAA between India and Norway. HELD THAT:- AR stated that the contract which had generated revenue to the assessee during the year under consideration is continuing contract from earlier year which fact is not disputed at all. The very same issue and argument advanced by the ld DR before us were already considered by this Tribunal in assessee's own case for AY 2010-11 [2019 (6) TMI 924 - ITAT DELHI]. We have gone through the said order and we find that similar grounds were raised by the revenue during AY 2010-11 also before this Tribunal as held assessee provided a vessel i.e. tugboats for ONGC work. Assessing Officer has given a very restricted meaning of Article 23(4) by ignoring the second of the two limbs of the Article. It amply covers the tugboats services provided by the assessee to ONGC. In our view CIT(A) has rightly considered the issue allowing the relief to the assessee, which we uphold. CIT(A) rightly held that Article 23(4) of the Norway DTAA speaks of a case whereby transportation of personnel or materials to an oil drilling site would attract lesser rates of tax. The Assessing Officer wrongly placed reliance on the isolated clause (d) of the contract with M/s. GSPC to deny the benefit to the assessee. In fact the entire contract should have been considered properly by the Assessing Officer which he failed to do so. Therefore, in light of the decision of the Tribunal which is having identical facts in the present year as well, this issue is decided in favour of the assessee. Ground of the Revenue's appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether profits derived from operation of offshore supply/anchor-handling vessels performing a suite of services (transportation of supplies/personnel, anchor handling, towing, standby, surveillance, evacuation, rig mobilization/demobilization) fall within the scope of Article 23(4) of the India-Norway DTAA (taxation of profits of an enterprise from operation of ships or activities auxiliary to transportation)? 2. Whether amounts collected as service tax (statutory indirect tax collected on service charges) form part of 'gross receipts' for computation of presumptive profits under section 44BB of the Income-tax Act (i.e., whether service tax is includible in the turnover on which the presumptive percentage applies)? 3. Whether the assessee is liable to pay interest under section 234B for failure to pay advance tax where taxability is governed by DTAA provisions and where issues of withholding/advance tax liability have been contested (i.e., interplay between withholding obligations of payer, assessee's liability to pay advance tax, and applicability of interest under section 234B)? ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Article 23(4) of the DTAA to the assessee's activities Legal framework: Article 23(4) of the India-Norway DTAA provides favorable tax treatment for profits attributable to transportation of supplies or personnel to an oil drilling site and for operation of vessels auxiliary to such transportation activities. Section 44BB of the Income-tax Act prescribes a presumptive profit scheme for non-resident enterprises engaged in certain specified activities (including operation of ships) where income is computed at a prescribed percentage of gross receipts. Precedent treatment: The Tribunal and the relevant High Court have previously construed Article 23(4) to cover not only narrow transportation of supplies or personnel but also vessels engaged in auxiliary activities connected with such transportation (including tugboat/anchoring-type services) where the contractual scope and real nature of operations demonstrate integration with transportation functions. Earlier Tribunal decisions in the assessee's own cases and a jurisdictional High Court decision have been relied on by the Tribunal to interpret Article 23(4) broadly to include such services. Interpretation and reasoning: The Court examined the contract as a whole rather than isolating specific clauses; it held that the appropriate enquiry is the true nature of activities performed and whether those activities are ancillary or auxiliary to transportation of supplies/personnel to offshore drilling sites. The Tribunal found the contract to be an integrated continuing contract comprising supply of vessels for offshore drilling support, which necessarily included anchoring, towing, standby, surveillance and evacuation services that are auxiliary to transportation/supply operations. The Assessing Officer's reliance on an isolated contractual clause to deny treaty benefit was rejected; the substantive commercial character of the services across years and prior appellate findings were treated as determinative. The Tribunal applied its earlier orders in identical factual situations, considering them binding on the year under appeal. Ratio vs. Obiter: Ratio - where the contract is an integrated supply/ offshore support contract and the activities (including anchor handling, towing, standby, surveillance and evacuation) are ancillary/auxiliary to transportation of supplies/personnel to a drilling site, Article 23(4) covers the profits and treaty benefit applies; isolated clauses cannot override the contract's overall character. Obiter - incidental remarks on contract particulars not necessary to the holding. Conclusion: Article 23(4) of the DTAA is applicable to the assessee's profits from the continuing offshore supply/anchor handling contract; therefore income should be taxed under the DTAA provision rather than treated as assessable under section 44BB by the Assessing Officer in the assessment years under consideration. The revenue's grounds denying treaty benefit were dismissed. Issue 2: Inclusion of service tax in gross receipts for computation under section 44BB Legal framework: Section 44BB computes taxable income for specified non-resident activities as a percentage of gross receipts; the key question is whether statutory indirect taxes collected by the service provider (service tax) constitute 'gross receipts' for application of the statutory percentage. Precedent treatment: Jurisprudence is examined, including binding decisions of the relevant High Court and Tribunal rulings. The jurisdictional High Court has held that service tax collected by an assessee for passing to government is not an amount paid/received by the assessee for services rendered and therefore is not to be included in gross receipts for section 44BB computation. The Tribunal followed that High Court authority and consistent earlier Tribunal rulings which excluded service tax from gross receipts in similar offshore services contexts. Interpretation and reasoning: The Court treated service tax as an element collected on account of the government rather than a part of consideration for services rendered by the contractor. Consequently, including service tax in the gross receipts would import into the presumptive scheme an amount that the assessee merely collects as agent of the government, thereby inflating the turnover and defeating the statutory intent of the presumptive computation. The Court also observed that section 44BB is a self-contained code for presumptive profits, but that does not mandate inclusion of amounts which are not consideration paid to the assessee in law (i.e., statutory taxes collected on behalf of third parties). Decisions cited by revenue that treated such collections differently were distinguished on their facts or on the legal point decided by higher judicial authority in the jurisdiction. Ratio vs. Obiter: Ratio - service tax collected and payable to government is not includible in gross receipts for purposes of computing presumptive profits under section 44BB where binding High Court authority so holds. Obiter - references to other appellate decisions that treated service tax differently where facts/legal questions differed. Conclusion: Service tax receipts are to be excluded from gross receipts for computation under section 44BB in the facts of these appeals; the Assessing Officer's inclusion of service tax was reversed and the CIT(A)'s deletion upheld. Issue 3: Liability for interest under section 234B on advance tax shortfall Legal framework: Section 234B levies interest for shortfall in payment of advance tax. Liability to pay advance tax depends on whether the assessee was obliged to pay advance tax under applicable provisions; interplay arises where income is subject to withholding by payer and when treaty/withholding considerations affect the assessee's direct liability to pay advance tax. Precedent treatment: The Tribunal applied binding High Court authority which held that where tax is required to be deducted at source by the payer (or where the nature of liability means the assessee was not required to pay advance tax under the statutory scheme), the assessee may not be liable for interest under section 234B. Authority was contrasted with other High Court decisions that emphasize examining the assessee's role in inducing non-deduction; those were distinguished on facts. Interpretation and reasoning: The Tribunal accepted that, on facts, the assessee was not liable to pay advance tax during the financial year because taxability depended on withholding or later self-assessment stages; consequently, interest under section 234B did not arise. The Court relied on the principle that the stage for self-assessment differs from advance tax timelines and that an assessee not required to pay advance tax under the statutory framework should not be saddled with section 234B interest. The Tribunal noted that cases where interest is charged under section 234B require assessment of whether the assessee played a role in causing non-deduction/short deduction by the payer - an element absent on these facts. Ratio vs. Obiter: Ratio - absence of a statutory obligation on the assessee to pay advance tax during the relevant financial year (e.g., because tax was to be deducted by payer or liability crystallizes later) negates liability to interest under section 234B; the assessee's lack of causal role in non-deduction is material. Obiter - commentary on contrasting authorities where assessee's conduct caused non-deduction. Conclusion: Interest under section 234B was not leviable in the circumstances of these appeals; the CIT(A)'s direction not to levy such interest is affirmed. Cross-references and consolidation 1. Issue 1 and Issue 2 are factually interlinked: treaty characterisation (Issue 1) determines whether taxation under DTAA or presumptive section 44BB applies; if DTAA applies, section 44BB computation (and the service tax inclusion question) may be moot but was considered because the Assessing Officer invoked section 44BB. The Tribunal resolved both issues in favour of the taxpayer on the merits. 2. Issue 3 depends on the assessment of advance tax obligation and withholding regime; the Tribunal applied binding High Court authority to hold no section 234B interest where the assessee had no advance tax obligation in the relevant financial year and did not induce non-deduction.