Ship character and treaty conditions determine tax exemption for drilling vessel remuneration and foreign salary treatment

A drilling vessel was treated as a ship because it was self-propelled, navigable, registered as a ship and retained the character of a sea-going vessel despite offshore drilling use, so the exemption under section 10(6)(viii) was available. Salary attributable to the field break period received outside India was held not to accrue or arise in India under section 9(1)(ii), and was therefore not taxable in India. Treaty relief under Article XIV of the India-France DTAA was denied because the exemption depended on cumulative conditions and the record did not establish that each condition was satisfied.

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Issues: (i) whether the drilling vessel constituted a ship for purposes of exemption under section 10(6)(viii); (ii) whether salary received during the field break period outside India was taxable in India under section 9(1)(ii); and (iii) whether the remuneration was exempt under Article XIV of the Double Taxation Agreement between India and France.

Issue (i): whether the drilling vessel constituted a ship for purposes of exemption under section 10(6)(viii).

Analysis: The term ship was not defined in the Act, so its ordinary meaning and allied legal meanings were examined. The vessel was self-propelled, capable of navigation, registered as a ship, and had the characteristics of a sea-going vessel. Its use for offshore drilling did not destroy its essential character as a ship. The exemption provision was also construed in light of its incentive purpose.

Conclusion: The vessel was held to be a ship, and the exemption under section 10(6)(viii) was available. The issue was decided in favour of the assessee.

Issue (ii): whether salary received during the field break period outside India was taxable in India under section 9(1)(ii).

Analysis: The same issue had been decided in earlier tribunal decisions in favour of the assessee. On that basis, the salary relatable to the break period, being received outside India, was held not to accrue or arise in India and not to be assessable there.

Conclusion: The salary for the field break period was held not taxable in India. The issue was decided in favour of the assessee.

Issue (iii): whether the remuneration was exempt under Article XIV of the Double Taxation Agreement between India and France.

Analysis: The agreement was held to override the Act, but the exemption under Article XIV required satisfaction of all its conditions. While residence in India for less than 183 days and payment by a non-resident employer were satisfied, the record did not establish that the third condition concerning deduction in computing profits of a permanent establishment was unmet. The assessee therefore failed to discharge the burden on this aspect.

Conclusion: The claim under Article XIV was rejected. The issue was decided against the assessee.

Final Conclusion: Relief was granted on the first two issues, but treaty-based exemption was not established, resulting in only partial success for the assessee.

Ratio Decidendi: A vessel retains the character of a ship if it is a sea-going, navigable vessel notwithstanding its specialised offshore drilling function, and a treaty exemption requiring cumulative conditions fails unless each condition is affirmatively established.

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