AI Drafter 
TaxTMI 
TaxTMI 
2016 (6) TMI 137
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....neering, project management and support services to the oil and gas industry worldwide. The Income Tax Officer (International Taxation) Dehradun is stated to be the Assessing Officer ('AO') as far as the Petitioner is concerned. 3. By a letter dated 12th June 2008 Indian Oil Corporation Ltd ('IOCL') invited tenders for the "Residual Offshore Construction work" at Paradip. The letter explained that IOCL was "setting up offshore crude oil receiving facility having Single Point Mooring (SPM) terminal about 20 Kms. off the coast of Paradip port in the east coast of India." The said facility would enable unloading the crude oil from the Very Large Crude Carriers (VLCCs) "to meet the crude oil requirement of its Refineries located in the eastern part of India." The work involved installation of IOCL supplied SPM including anchor chains, floating and subsea hoses. Relevant clauses of the contract 4. By a letter dated 17th July 2008, IOCL gave the Petitioner the details of the work of "Residual Offshore construction' at Paradip. It mentioned that the work was divided into three groups as under: Group-1: Installation of Single Point Mooring (SPM) including an....
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....CL supplied SPM including anchor chains, floating and subsea hoses. The general description of the SPM as give in the contract is that it is a floating equipment/device that serves as a loading/offloading station and a mooring point for oil tankers for loading/offloading crude and other petroleum products to/from the onshore refinery/process platform. SPMs are connected to an onshore refinery/process platform through a submarine pipeline. SPM systems are also called as CALM systems i.e. "Catenary Anchor Leg Mooring system". The SPM system is stated to consist of floating buoy anchored to the seabed by catenary chain legs, which are secured to anchors. One twin mooring hawser arrangement holds the tanker captive to a rotating part. The rotating part freely weathervanes so that the tanker can take up the position of least resistance to the prevailing weather at all times. Fluid product is transferred via the CALM from or to the tanker by floating and subsea hose systems. When the tanker moves off station, due to the effects of wind, wave and current, anchor chain legs are lifted which generate a restoring force tending to return the system to the equilibrium position, thus limitin....
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....tallation spread including, pipelines lay spread, trenching spread, diving spread etc. Contractor shall deploy all the marine spread of the requisite specifications as approved at the time of the award of work. The Contractor shall obtain prior approval from Owner for any replacement of any spread/equipment proposed and accepted. The owner shall evaluate such proposal and acceptance for the same shall be granted only if the contractor proves to the satisfaction of the Owner that the proposed spread/equipment is equivalent/superior to the one proposed in the bid. The decision of the Owner in this regard shall be final and binding on the Contractor." 11. Clause 19 thereunder talked of 'Mobilization of marine spread' and Clause 20 of 'De-Mobilization of marine spread.' Clauses 19.1 and 19.2 read as under: "19.1The marine spread shall comprise of barge/vessel equipped with suitable equipments, diving spread, anchor handling, tug support vessel, survey spread, operating and construction crew, specialized expertise equipped with all required vessel certificates and statutory clearances including Customs & Port permissions as applicable in India. 19.2. The m....
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....y of installation, the income in the nature of royalty or fees or FTS or interest or of any other nature arises then such income has to be assessed under that head. (ii) IOCL paid for each of the items of work separately although the work was a composite one. In the present contract, the payment made for use of equipment, i.e., the barges, and stated as mobilization and demobilization expenses comprised a substantial part of the payment and therefore fell within the definition of royalty under Article 12.3(b) of the DTAA. (iii) The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408 held that the consideration for each portion of the contract, if separately specified, can be separated from the whole. In the present case, the contract was divisible one. The expenses were loaded in favour of mobilization. As observed in State of Madras v. Richardson (1968) 21 STC 245, even in the works contract, a contract of sale of material utilized in the works can be inferred. (iv) Installation was to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, adding to the length of the anchor chain where it is fal....
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.... erred in concluding that the installation activity was ancillary and subsidiary to the use of the equipment. The Respondent has never disputed that the income earned by the Petitioner could not be regarded as royalty either under Section 9(1) (vi) or Article 12 of the DTAA. The conclusion arrived at by the AAR was without giving the Petitioner any opportunity of addressing the issue. The AAR proceeded to decide against the Petitioner on a point on which there was no dispute between the parties. Reliance was placed on the decision in Asia Satellite Telecommunications Co. Ltd. v. Director of Income Tax (2011) 332 ITR 340 (Del). (iv) The income earned by the Petitioner from the contract in question did not fall within the definition of the 'royalty' under Article 12.3 (b) of the DTAA. 20. In reply to the above submissions, Mr. Rahul Chaudhary pointed out that as regards the contract to the L&T, the AAR has held that the Petitioner has a PE in India and that the consideration received under that contract by the Petitioner, including for mobilisation and demobilisation, was liable to tax in India in terms of Section 44BB of the Act. According to him, although the A....
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....ntract, as noted hereinbefore, it is evident that IOCL did not have dominion or control over the equipment. The clauses of the contract make it clear that at all times during the execution of the contract the control over the equipment brought by the Petitioner was to remain with the Petitioner. While the SPM system was supplied by IOCL, the task of installation, testing and pre-commissioning was the work of Petitioner. The system was to be capable of satisfactorily functioning as a complete terminal for discharge of crude oil from vessels to the onshore tankfarm. Clause 3.1.2 made it clear that it was the Petitioner which had to supply "all marine spread specialized manpower and equipments, installation tools and tackles, consumables, labour, logistic supplies, planning, engineering, documentation etc". Further under Clause 3.1.3 the Petitioner was made responsible for taking over all the IOCL supplied project materials from the place designated by the IOCL which was required for installation of complete CALM SPM system including their sub systems. In the circumstances, the Court is unable to appreciate how the AAR could conclude that the de facto control of the equipment was with....
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....Petitioner is right in its contention that the Revenue did not contend before the AAR that the income earned by the Petitioner from the contract towards mobilisation/demobilisation charges should be treated as royalty under Section 9(i) (vi) of the Act or Article 12.3(b) of the DTAA. The fact that in the certificates issued under Section 197 of the Act the Revenue may have earlier characterized the payment as royalty cannot change its stand taken subsequently before the AAR. Therefore, there was no occasion for the AAR to examine the question as to whether the payment received for mobilisation/demobilisation could be treated as royalty under Section 9(i) (vi) of the Act read with Article 12.3(b) of the DTAA. 30. The term 'royalty' is defined in Article 12.3 of the DTAA as under: "The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information co....
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....n (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broad....
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....ammes ; thereafter the satellite received the signals and after amplifying and changing their frequency relayed it down in India and other countries where the cable operators caught the signals and distributed them to the public. Any person who had a dish antenna could also catch the signals relayed from these satellites. The role of ASTC was that of receiving the signals, amplifying them and after changing the frequency relaying them on the earth. For this service, the TV channels paid ASTC. 35.3 The Court held that ASTC was the operator of the satellites and in control of the satellite. It had not leased out the equipment to the customers. ASTC had merely given access to a broadband width available in a transponder which could be utilized for the purpose of transmitting signals of the customer. It was held that the terms "lease of transponder capacity", "lessor", "lessee" and "rental" used in the agreement would not be the determinative factors. There was no use of "process" by the television channels. Moreover, no such purported use had taken place in India. It was held that the services provided were an "integral part of the satellite" and remained "under the control of the ....
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....ing/hiring/letting simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of 'sale'. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of 'sale'." 38. Consequently, this Court is unable to concur with the finding of the AAR that in the instant case the consideration received for mobilisation/demobilisation should be considered as royalty paid by IOCL to the Petitioner. Are installation charges FTS? 39. Turning to the other question of the n....
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....alty under Article 12.3. In the light of the finding of this Court that payment of mobilisation/demobilisation cannot be termed as royalty, the question of treating the work of installation as ancillary to such work and the payment for installation as FTS does not arise. Further, in terms of the contract with IOCL, the Petitioner provides services of construction and installation of SPM. This does not involve any transfer of any technology, skill, experience or know-how, to enable IOCL to undertake such activities on its own. 41. The Revenue's contention that the work of mobilisation/de-mobilisation and the work of installation are separable components of the work as a whole is not borne out by the documents constituting the written contract. Consequently, the decision in Ishikawajima-Harima Heavy Industries Ltd. v. DIT (supra) is not of assistance to the Revenue. IOCL's letter dated 17th July 2008 to the Petitioner clarified that the work of "Residual Offshore construction' at Paradip was a composite one comprising three groups viz., installation of the SPM; post trenching of the 48" and 14" pipeline and all balance works required to complete the 14" effluent pip....