TaxTMI 
TaxTMI 
2016 (1) TMI 813
X X X X Extracts X X X X
X X X X Extracts X X X X
....eliance Industries Limited (RIL). Under this 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 amendmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....010. While admitting the application it was noted by the Authority that the number of questions (15) framed in the 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 Mobiliz....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elating to mobilization it was stated that the applicant is simply undertaking the mobilization of the commissioning team along with members of Aker Borgestad (entity which will operate 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... receipts are not taxable in India. The same is not taxable even under the provisions of section 44BB because such receipts neither are the 'services or facilities' in connection with prospecting, extraction 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 indep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture. Accordingly, the scope of work mentioned being executed wholly outside India, the income earned by the applicant does not accrue or arise or is deemed to accrue or arise in India, and hence, the same is not chargeable to tax in India. Hence, the 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 carr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....contracted period. The 'use' being the only benefit arising to the lessee, any compensation paid whether by way of lump sum consideration or in installments can only represent the lease rentals. RIL had nothing to do with the changes if the vessel was not available for its use. The 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bility study, inspection and repairs service etc.) were inextricably linked with prospecting, extraction or production of mineral oil and, hence were mining and related/ancillary services, so as to get excluded from the definition of FTS as provided under the Act. Accordingly, the non-resident companies would be governed by the provisions 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 l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce they are all attributable to the business operations carried in India and thus have business connection in India. F. It has been further argued by the Department that the considerations received by the applicant pursuant to the Change Order as mentioned by the applicant at point nos. 4(a) to 4(d) of their submission dt.7.10.2015 have not been offered to tax 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 &nb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....BB of the Act. Inferences 9. We have examined carefully the applicant's interpretation of law filed along with the original as well as revised applications, the arguments put forward by both sides and written submissions furnished by them. The main thrust of the argument of the applicant is based on the premise that the 'Change Order' is a contract independent of the original contract between RIL and the applicant. Therefore, it is necessary to first set out the facts which are as under:- 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 (wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... July, 2008 starts with the sentence 'facilitating amendments are hereby agreed in the above referred contract', which is contract dated 9th May, 2007 for chartering of FPSO in connection with the extraction and production of oil and gas as mentioned above. IX) The relationship of scope of work in the Change Order with that of the original contract is as under: (a) Fabrication and installation of all of 104 living quarters (Exhibit B Part-I clause 6E of the original contract already provided that the FPSO will have 104 quarters). (b) Installation 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng to the applicant fall under the purview of Section 44BB and would be taxed as per the computational mechanism of the said Section. As regards consideration for fabrication and installation of living quarters, HVAC system, expediting deliveries of topside modules, increasing dry dock period up to 15 years and mobilizing and commissioning the team four months prior to FPSO sailing to India instead of 6 weeks, the applicant took the stand that if for any reason the considerations received were taxable in India, then in view of CBDT's instructions and judicial precedents, the same should be computed having regard to computational 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Change Order is nothing but amendments in their original contract No.0GF/13627982 dated 9.5.2007. It is mentioned upfront in clear terms in the change order. We have also seen that the original contract already had Clauses pertaining to provisioning of 104 living quarters and for HVSC systems. As per the Change Order the applicant has made 104 living quarters livable and installed new HVAC system by dismantling the existing one. In paragraph 9(IX) we have seen that the entire scope of work in the change order is nothing but modifications/amendments in the original contract. As per Exhibits A & B to the original agreement the applicant 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... had not gone into the issue of application of provisions of Section 44BB (2) (a) of the Act on merits and had noted that 'the department as also the assessee proceeded on the undisputed position that the assessee is non-resident based in Mauritius. It has a permanent establishment in India. The income from the permanent establishment is assessable as business income. It is in such circumstances that we do not find that any substantial question of law with regard to status of the assessee or having a permanent establishment or not will arise for consideration. The appeal is clearly devoid of any merits and, therefore, it is dismissed." 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as specified in sub section (2) was prescribed, without splitting up the amount on the basis of place of payment. The Memorandum explaining the provisions (165 ITR st 161-62) stated that "The computation of the taxable income of a taxpayer engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire, used or to be used in the exploration for, and exploitation of, mineral oils involves a number of complications. As a measure of simplification, the Bill seeks to insert a new section 44BB in the Incometax Act providing for determination of income of such tax payers at ten per cent of the aggregate 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... give different treatments to them. Having said this, it is not acceptable that the applicant is not carrying on any activity in India. Moreover, the scope of work is to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil and natural gas from development area in India and all activities and works connected with this including its preparation for chartering are inextricably linked with the main work. In fact the applicant is carrying on its primary business activity, i.e., providing the FPSO on lease rental basis to extract, receive, process, produce, store and offload crude oil and natural gas from the development area (contract area in India) as mentioned in exhibit G of the contract. Against this factual position, it cannot be said that the applicant is not carrying on any activity offshore in India pursuant to the work under the change order, and, therefore, it is not possible to accept the stand of the applicant. 14. As regards consideration received on account of loss of lease rentals on account of insurance policy signed outside India, the Department has also not disputed the stand of th....