TaxTMI 
TaxTMI 
2016 (1) TMI 813
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....is contract the applicant was required to provide FPSO at the assigned oil and gas field in connection with extracting, prospecting or production of mineral oil, the consideration for this was on day rate release rental basis. Further the original contract specified USD 18.79 million as the fee towards mobilization of the vessel from Singapore to India to the offshore location in India. The consideration for FPSO facility and the fees towards mobilization of the vessel as per the original contract have been offered to tax from Assessment Year 2009-10 onwards. The applicant, in the return of income filed from the Assessment Order 2009-10 onwards, accepted that the consideration for providing FPSO facility was for supplying plant and machinery on hire used or to be used in the prospecting, extraction or production of mineral oil and such income having accrued in India was computed in terms of Section 44BB of the Income-tax Act and offered to tax accordingly. Similarly, the mobilization Revenue was also offered to tax on the same basis. 2. On 27th July 2008, the applicant signed a 'Change Order' with RIL to facilitate the following amendments in the scope of work of the original cont....
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.... application could be reduced and they could be more precise and, accordingly, the applicant was directed to recast the questions. The applicant filed revised questions on 17th February, 2011, which are as under:- 1) Whether based on the stated facts of the case and in law, the consideration received by the Applicant under the Change Order for undertaking the following [before the floating production storage and offloading system, ('FPSO') arrived in India], is in the nature of business profits or in the nature of 'fees for technical services' as defined in the Explanation 2 of section 9(1)(vii) of the Income Tax Act, 1961 ('Act')?: i Fabrication and installation of new living quarters onboard the FPSO facility and procurement and installation of Heating Ventilation Air Conditioning System ('HVAC'') system onboard the living quarters. ii Expediting deliveries of topside modules and increasing productivity at the Singapore yard. iii Performing scope of work to avoid the dry-docking period up to a period of 15 years. iv Mobilizing the commissioning team of the Applicant along with the members of Aker Borgestad Operations AS (entity which operates and maintains the FPSO)....
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....erate and maintain the FPSO) and major vendor representatives four months prior to the FPSO sailing to India instead of six weeks prior to the FPSO sailing to India, as stipulated under the Change Order executed with RIL. The same essentially amounted to execution of the contract and not rendering any service to RIL. The mobilization of the commissioning team is integral to the provision of the FPSO (as envisaged by the original contract). ................................................................... 'The work performed by the applicant is in the nature of business profits.' B. Work performed outside India. The applicant has stated that as the entire scope of work was performed outside India, the consideration received cannot be said to accrue or arise in India. C. Income should be computed under section 44BB of the Act The applicant further states that in the event consideration received under the Change Order for revenue streams mentioned in question No.1 is deemed to be taxable in India, the income chargeable to tax should be computed as per computational mechanism under section 44BB of the Act. The activities performed are integral part of provisions of the FPSO an....
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....raction or production of mineral oil nor are for the supply of plant or machinery on hire for prospecting, extraction or production of mineral oil. Submissions during the course of arguments 7. During the course of arguments, the counsel of the applicant Mr. Pardiwala raised the following points also:- A. Even though the application filed did not address the issue as to whether the compensation paid pursuant to the Change Order is a capital or revenue receipt, it needs to be decided. B. Change Order is a contract independent of the original contract. The obligations to be performed by the applicant in terms of the Change Order were solely at the behest of the RIL based on specific requirements. According to clause 25 of the original contract a detailed procedure was prescribed to enter into a Change Order which was followed. Therefore, although the Change Order may have its genesis in the original contract it is a further contract enabled into with its own independent application and consideration thereof. The amount payable under the Change Order was not to be refunded or adjudicated in case of termination or pre-termination of the original contract. C. The consideration ....
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....question of invoking the provisions of section 44BB (computation provisions) does not arise. H. The consideration is not chargeable to tax under the DTAA between India and Norway. As per Article 7 of the Treaty the consideration can be taxable if the applicant carries on business in India through a permanent establishment. The applicant had no PE in India. Further as per Article 23 of the Treaty "a person who is a resident of a Contracting State (Norway, in the instant case) and carries on activities offshore in the other Contracting State (India), in connection with exploration or exploitation of the sea bed and sub-soil situated in that other state (India), shall subject to para 3 and 4 of this Article, be deemed in relation to those activities to be carrying on business in that other state (India) through a PE or fixed based situated therein." However, in the instant case, the Applicant, a resident of Norway, does not carry on any activity offshore in India whilst performing its obligations under the change order. Thus, the provisions of Article 23 - Offshore Activities are not applicable in the case of the Applicant. It was pointed out to the Applicant's counsel that in the ....
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....consideration paid by RIL cannot represent any other character than the lease rentals. (iii) As per the responsibility matrix in Exhibit A as well as Clause 30.1 of Annexure - I of the Contract, it is the responsibility of the contractor to bear the costs in relation to the delivery and landing of FPSO and materials at the designated location and thereafter and in connection with the commissioning of the FPSO. The payment made by RIL in pursuance of the Change Order can only be considered under Exhibit - C of the original contract. The original agreement does not stipulate payment of any other nature. Clause 25 also stipulates only enhancement in the value of compensation which is elucidated in Exhibit - C. (iv) The change order is subsidiary to the original contract and the payments on account of it are integral transactions to the principal transactions that arise out of the original contract. In the cases of Hindalco Ind 94 ITD 242(Del), Mitsui Engg & Ship Building 259 ITR 248(Del), Ansaldo Energia SPA 210 ITR 237 (Mad), Motorola Inc 95 ITD 269 (Del)(SB), 107 ITD 120 (Del), HMS Real Estate 325 ITR 71 (AAR) and Alstom Transport 349 ITR 292 (AAR) it has been held that subsidia....
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....rovisions of presumptive taxation u/s 44BB of the Act. The following conclusions can be drawn by the Department: (i) The applicant is in the business of providing products, systems and services to the oil and gas industry. In this particular instance it is providing its FPSO on lease to RIL. The lease rental received from RIL has been offered to tax as per the provisions of 44BB of the Act. (ii) The consideration received from RIL out of the change order, even if these be genuine orders for change in specifications, are on account of the modifications made in the FPSO to meet the requirements of RIL. It is not unusual for a customer to seek specific modifications. Had all the requirements in the FPSO been met without requiring the said modifications, the lease rental would have been fixed accordingly without any requirement of a separate lump sum payment. As these modifications were carried out just because the requirements of RIL were not met initially by the FPSO owned by the applicant or these came before the sail away, the considerations for carrying out the said modifications as contained in the Change Order cannot be treated separately from the main consideration. The lum....
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....in India while the consideration out of the Change Order mentioned in point no.4(e) (i.e. installation of buoy and moorings in India) of the same change order have been offered to tax u/s 44BB of the Act. The applicant has not only treated the considerations it received out of the Change Order differently from that of the original contract for tax purposes but has even treated the considerations received out of the same Change Order differently. G. The Department has pointed out that the applicant has already paid taxes over the years as follows: S.No. AY Returned Income (Rs) Tax Payable (Rs) Date of filing 1. 2009-10 29,24,80,050* 12,35,14,326 30.09.2009 2. 2010-11 46,06,81,020 19,45,45,595 15.10.2010 3. 2011-12 51,27,67,040 21,65,41,521 29.09.2011 4. 2012-13 59,99,61,580 23,95,20,650 28.09.2012 5. 2013-14 62,32,74,620 26,19,24,922 30.09.2013 6. 2014-15 72,15,02,880 31,21,22,146 30.09.2014 * Includes payments on account of installation of buoy and moorings in India as per the Change Order H. Reliance has been placed by the Department on the following language of Section 44BB(2)(a) of the Act: The ....
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....- I) RIL floated a tender on 20th September 2006 for chartering of FPSO, following the discovery of crude oil and natural gas at the development area on lease rental basis, to extract, receive, process, produce, store and offload crude oil and natural gas from the field. II) The applicant (referred to as contractor in the agreement for chartering of FPSO in the agreement dated 9th May 2007) got the contract for carrying out the 'work' in accordance with the terms and conditions contained in this agreement. In the agreement it has been mentioned that the contractor had sufficient technical capability, resources, equipment, man power, infrastructure and financial capability (with capacity to augment these) to carry out the work. III) As per the agreement "Work" shall mean the chartering out of the FPSO and all activities and works to be performed by the Contractor and all other obligations to be performed by Contractor under the contract, including preparation of the FPSO for chartering as described in the contract including Exhibits A and B, and includes supplying FPSO, materials, and, up to completion of FPSO Commissioning, Contractor's Personnel and technical support necessa....
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....tion of an independent HVSC system in the living quarters after dismantling and scrapping the existing HVSC system (exhibit Part I Clause 6E of the original contract already provided for air-conditioned living quarters.) (c) Mobilizing the commissioning team four months prior to the FPSO sailing to India instead of six weeks. (It relates to the modification in the mobilization schedule in the original contract.) (d) Expediting deliveries of topside modules and timely installation of buoy and moorings. (Installation of buoys and moorings is as per the original contract.) (e) Extending the dry docking period from 10 to 15 years. Clause 10 of the Change Order also mentions that changes agreed would not entitle the contractor to an extension of time under the contract and/or achieving of date of first production of oil except as specifically extended by this Change Order. X) Clause 30.1 of the original contract reads as under:- "Contractor shall be responsible for all activities in connection with and make all arrangements for and bear all costs in relation to the delivery and landing of FPSO and materials at the Designated Location and thereafter and in connection with the c....
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....ional mechanism under Section 44BB of the Act and as regards mobilization revenue it was mentioned that the taxability of this should be restricted only to the revenue contributed to the distance travelled in the Indian territorial waters as compared to the distance covered from Singapore yard to India. XIII) As regards considerations received as per original contract the applicant (including mobilization revenue) in its returns filed from Assessment year 2009-10 to 2014-15 has already paid taxes in accordance with provisions of Section 44BB of the Act. No distinction has been made based on distances travelled in Indian waters and entire considerations were offered to tax. 10. As against above-mentioned facts, the applicant is giving different treatment to considerations received as per the original contract and as per the change order. Not only that, it is giving different treatment to considerations received pursuant to change order also as he is offering consideration for installation of buoys and moorings for tax under section 44BB of the Act and for other amount it is taking the stand that the same is not taxable. Further, during the course of arguments the applicant's coun....
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....nt was bound to provide 104 living quarters with airconditioning facilities. If these facilities were not found up to the mark, it was duty of the applicant to ensure that the same should be provided and it did so after dismantling old HVAC systems. Similarly, consideration received for mobilization and commissioning team is also inextricably linked with the original contract as per which the contractor was to make the equipment suitably equipped with all necessary tools, equipments and manned with qualified and experienced personnel during commissioning. In the circumstances to separate the consideration for mobilization pursuant to the Change Order from mobilization consideration as per original contract is not at all possible. The fact remains that the Change Order does not alter the character of consideration received which is identical with that of consideration received as per original contract. Clause 25 of the agreement already mentions about changes relating to additions, deletions, substitutions, alterations and/or changes in quantity, form, kind, position, and/or dimension. These are definitely part of obligations of the applicant to prepare the FPSO for chartering and c....
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...." In this context the provisions of Section 44BB (2) (a) is reproduced below: (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India. The word 'in connection with' has been interpreted in a very wide sense by various Courts (G&T Resources and ONGC - supra). In the case of Sedco Forex International Inc. the Hon'ble High Court of Uttrakhand considered the question whether the entire mobilization revenue was chargeable to tax in India despite the fact that major part of the said activity was carried outside India and whether provisions of section 44BB would override Section 5. It was held by the Hon'ble High Court of Uttrakhand as under:- Here in the present case, provisions of Section 5 and Section 9 are not attracted. Section 4 is a charging Section and Section 5 contains the scope of total income, which provides that subject to the provisions of this Act, the total income of any previous year of a person who is a r....
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....gate of certain amounts. The amounts in respect of which the provisions will apply would be the amounts paid or payable to the tax payer or to any person on his behalf whether in or out of India, on account of provision of such services or facilities or supplying plant and machinery for the aforesaid purposes......' Therefore, there is no scope of splitting up the amount paid in or outside India. 12. It is established beyond doubt in earlier paragraphs that the consideration received as per Change Order is similar to consideration received as per original contract. It is also established that both original contract and amendments therein by way of Change order are inextricably linked with extraction, processing, production, storing & offloading of crude oil and natural gas for which RIL had floated tender and granted the contract to the applicant. Hence, the applicant would be governed by provisions of Section 44BB of the Act. As the 'work' as per the contract was to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil & natural gas from development area in India, it is immaterial whether work re....