TaxTMI 
TaxTMI 
2021 (3) TMI 1041
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....r executing such work the applicant requires seismic survey vessels, which are special kind of vessels fitted with seismic recording systems and receiver units and which are used for undertaking seismic data acquisition and on-board data processing. The applicant has entered into two bareboat charter agreement (BBC Agreement) with different vessel providing companies (VPCs) for provision of requisite seismic survey vessels on global usage basis, in respect of which two separate applications have been filed. The details of seismic vessels hired by the applicant for executing contracts with ONGC in India is as under : Sl. No. Name of the vessel Name of vessel providing company (VPC) Country of incorporation of VPC Application No. 1 M/V Munin Explorer M/s. Munin Navigation Company Limited Cyprus A.A.R./1284/2012 2 M/V Hugin Explorer M/s. Seabed Navigation Company Limited Cyprus A.A.R./1285/2012 2. It is stated that the BBC agreement between the applicant and the VPCs were executed outside India, the vessel were delivered outside India and the payments were also made outside India. The applicant has filed two applications in respect of tw....
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....ered and re-delivered outside India under a global usage BBC agreement. However, in case the vessels were present in the territorial waters of India on the day of entering into/renewal of the BBC agreement, the income was taxable in India under the provisions of section 44BB of the Act. The authority had further held that the income cannot be held to be royalty income under section 9(1)(vi) of the Act. The applicant submitted that the clauses of the present global usage BBC agreement with M/s. Munin Navigation Company Limited and M/s. Seabed Navigation Company Limited were identical with the four projects with various VPC, for which the aforesaid ruling was obtained. All the agreements were entered into by the applicant in the format of BIMCO Standard Bareboat Charter BARECON, 2001. Accordingly, the ratio of the ruling of this authority in the four projects was squarely applicable to the facts of the present case. 4. The learned authorised representative explained that as per the provisions of section 5(2) of the Act, any income of the non-resident is taxable in India, only when it is received by such non-resident in India or it accrues or arises or is deemed to accrue or arise ....
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....o India for use in its operations, there was no business connection so far as the owners were concerned. 7. It was further submitted that in the case of BBC agreement, the vessel owner makes available the ship to the charterer and then, it is for the charterer to maintain and operate the ship in the manner it desires. The vessel owner has no role to play either in navigation or any other day-to-day operations of the ship and the ship is at complete disposal of the charterer. It is the charterer who employs the captain and crew and not the vessel owner. Thus, this was a mere act of letting the ship on rent to operate in Indian territorial waters and nothing more than that was done by the vessel owner. Clause 10 of the agreement stipulated that the vessel will be in full possession and at the absolute disposal of the applicant. Further, the applicant shall at its own expense and on its own procurement, navigate, operate, supply, fuel and repair the vessel during the charter period. The applicant shall pay all the charges and expenses incidental to the use and operation of the vessel including all taxes and fees payable to the State and other authorities. The Masters, officers and ....
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.... geophysical company that conducts seismic surveys and provides offshore seismic data acquisition and other associated services to global oil companies. For any oil and gas explosion activity, seismic survey is the first step and the most critical part of the activity. In order to undertake seismic operations offshore, the applicant needs support of seismic vessels which have specialised seismic equipment installed in it for use in seismic data acquisition and processing functions. The applicant had entered into global BBC agreement with VPCs for the provision of seismic vessel which would enable the applicant to undertake its scope of work of seismic data acquisition and processing under its contracts with ONGC. It was submitted that provision of such vessels on hire to be used in the prospecting or extraction of mineral oil would be covered under section 44BB of the Act. The reliance in this regard was placed on the decisions in the case of Wavefield Inseis ASA, In re [2010] 320 ITR 290 (AAR) and Wavefield Inseis ASA, In re [2010] 322 ITR 645 (AAR) (AAR No. 823 of 2009 and 844 of 2009) and in the case of Siem Offshore Inc., In re [2011] 337 ITR 207 (AAR) (AAR No. 875 of 2010). ....
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....led the BBC agreements with ONGC. Further, as per the clause of contract with ONGC, the agreements could not have been cancelled unless some formalities were completed and it was apparent that those formalities were never undertaken. The applicant had thus misrepresented the facts before this authority by not producing the actual agreements between itself and the Vessel Providing Companies (VPCs). The Revenue has contended that the change of stand by the appellant was motivated to avoid payment of taxes in India. In the case of a Time Charter agreement, the permanent establishment of the vessel was established as the control and management of the vessel which was earning its income from Indian waters, existed with the vessel owner company. 13. On the merits of the application, the learned Departmental representative submitted at the outset that in the instant cases the transaction was between one non-resident with other non-residents. Therefore, the applicant was not eligible to derive benefit of the DTAA between India and Cyprus as claimed in the application ; as the payment to VPCs was not being made by an entity located in India. It was submitted that in such an eventuality o....
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....waters by deploying those vessels. Thus for the particular period during which the vessels were in Indian waters in connection with the applicant's contract with ONGC, the VPCs were earning income from a source in India only. Hence, such income was in the nature of royalty in the hands of the VPC under the provisions of section 9(1)(vi)(c) of the Act read with sub-clause (iva) of Explanation 2 of that section, which defines royalty. It was explained that section 9 of the Act deals with source rule explicitly and in this regard the Explanation to section 9(2) inserted vide the Finance Act, 2010 with retrospective effect from June 1, 1976 was referred to. It was submitted that considering this Explanation, the income of the non-resident VPCs being "royalty income" shall be deemed to accrue or arise in India, whether or not, such non-resident VPCs had residence or place of business or business connection in India. Therefore, the contention of the appellant that the lease income of the VPCs was not sourced in India as they had no business connection in India, was devoid of merit. 16. The Revenue also submitted that in the Ruling No. 829 of 2009 dated July 23, 2010 (Seabird Explo....
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....side India, the delivery of the vessels was given outside India and the payments were also made outside India ; there was lack of any nexus between the income of the VPCs and the taxable territory in India. 19. On the contention of the Revenue that the payment made to VPCs was taxable as royalty ; the applicant submitted that there was no nexus between the source of royalty and the taxable territory. It was contended that the source of royalty, if at all, was in UAE or at the place where the vessels were handed over to the applicant. The applicant has strongly relied on the earlier ruling of the authority in Seabird Exploration FZ, LLC, the U. A. E., In re [2010] 326 ITR 558 (AAR) AAR No. 829 of 2009 in support of the contention that the taxable event had happened outside India and there was no nexus with the taxable territories of India and, therefore, the transactions were not exigible to tax in India. The applicant has also relied on the decision of the hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) in this regard. It was further submitted that neither the Income-tax Act nor India-Cyprus DTAA set out how the p....
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....r equipment as per specification and other utility vessel(s) for the purpose evaluation. (b) In case the offered vessels are not owned by the contractor and are hired/leased from other companies, MOU/Hire or Lease Agreement from the owner of the vessel(s) has to be submitted by the con tractor along with techno-commercial bid stating that the particular offered vessel(s) (not owned by the contractor) will be available against this particular tender/work on award of the contract. (c) The number of suitable short listed seismic/source vessels out of the offered vessels will be communicated to the successful contractors before the price bid is opened. The contractors will have to ensure deployment of vessel(s) out of short-listed vessels only. The short-listed Seismic survey vessels as mentioned in the Notification of Award (NOA) dated August 19, 2011 by ONGC is found to be as under : Short-listed Seismic Survey Vessels for the subject tender as confirmed by the contractor, i. e., M/s. Seabird Exploration FZ, LLC, Dubai : 1. Munin Explorer (IMO No. 8915782) 2. Hugin Explorer (IMO No. 9366005) 22. It is found from the contract do....
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....ions raised in the present application. 23. In order to answer the questions raised in the present applications we will have to first decide these two basic issues : (i) What is the nature of the sum paid by the applicant to the VPCs under the BBC agreement, i. e., whether it is business income taxable under section 44BB of the Act or royalty income under section 9(1)(vi) of the Act ? (ii) Whether the income of the VPCs can be said to accrue or arise, or deemed to accrue or arise in India ? In the present case the status of both the payer and the payees is nonresident. The scope of total income is provided under section 5 of the Act and the relevant provisions of section 5(2) applicable to non-resident is as under : "5. (2) Subject lo the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year." The income of the non-resident VPCs was no....
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....find the best possible subsea areas to drill oil. In essence, the vessels hired are research ship which is used for marine acquisition of seismic data and is in the nature of scientific equipment. As per the contract document with ONGC. the vessels taken on hire by the applicant were utilised for 4C-3D Seismic Data Acquisition. Therefore, any con sideration received for use or right to use such scientific equipment would be in the nature of royalty. However, as per clause (iva) of Explanation 2, it will be excluded from the ambit of royalty if it is found that such scientific equipment is covered under the provisions of section 44BB of the Act. 25. In order to find out whether the vessels, which are scientific equipment, is covered under the provisions of section 44BB of the Act or not, it will be relevant here to reproduce that section : "44BB. (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction....
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....aid outside India. Such excluded amount is in respect of 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. There is no dispute that the vessels were used in prospecting of mineral oil in India. The hiring of the vessels by the applicant, pursuant to the contract with ONGC, was for this purpose only. Further, the Explanation to section 44BB clarifies that "plant" includes ship or any scientific apparatus or equipment used for the purpose of the said business. Thus, the research vessel employed by the applicant is found to be covered within the scope of "plant" as defined in this section. Therefore, the payment made by VPCs is found to be for supply of plant and machinery on hire used in the prospecting for mineral oil in India and is squarely covered under the provisions of section 44BB(2)(a) of the Act. Since the receipt is found to be covered under the provisions of section 44BB of the Act, it cannot partake the character of royalty in view of specific exclusion under clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. 27.....
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....xable under section 44BB of the Act or as royalty. It was held that the income of PF Thor was taxable under section 44BB even if the vessel was deployed in the prospecting activity not in a direct contract with oil producing company and that the person at whose instance the vessel was deployed in seismic survey was immaterial to decide the requirements of section 44BB of the Act. The relevant portion of the ruling is as under : "10.1 We are of the view that the second limb of section 44BB is clearly attracted in the instant case. There is no doubt that PF Thor is engaged, inter alia, in the business of letting out the ships/vessels on hire. There is also no doubt that the vessel has been taken on hire by the applicant for the purpose of enabling the applicant to carry on the seismic survey and data acquisition operations which are essential for prospecting of mineral oil. The requirement of sub-section (1) of section 44BB is that the vessel/ship must be used in the prospecting for or extraction of mineral oils. The function and utility of chase vessel in the operations relating to seismic survey and data acquisition which are integral to prospecting has been explained earl....
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....e India, neither the origin of the income, that is to say, the property or asset nor the activity giving rise to income can be said to be located in India. The vessel owner has not carried out any operations in India either directly or through the crew. Even if the vessel owner carried out inspection of the vessel in India to ensure its proper maintenance by the applicant and its safety, that cannot be considered to be an income-triggering business operation in India. The income accruing on day-to-day basis is not attributable to a source in India but it arises by reason of a hire transaction entered into and given effect to outside India. The VPC was not concerned with the place of user by the applicant. In fact, the VPC is not bothered whether the vessel is actually being put to use because even for the 'idle period', the hire charges are payable. Having regard to the legal principles that could be culled out from the decisions adverted to above, this authority is of the view that where the agreement was executed outside India and the delivery of the vessel also took place outside India, by reason of the mere presence of the vessel in India without the volition of VPC, th....
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.... though the vessel was operating in India during the entire period of contract. In our considered opinion such a concept of accrual of income is not only anomalous but also fraught with manipulation as one can take the vessel away from the place of operation on the date of agreement/renewal and redeploy it at the site afterwards, to escape the rigour of source or territorial nexus. As the business activity in the nature as described in section 44BB of the Act was carried out by the VPCs through the seismic vessels, we are of the opinion that the place where the vessels are deployed for operation would be deemed to be the source of such business income. 32. It is found that the contract of the applicant with ONGC was for "Hiring of services for 4C-3D Seismic API Pilot Project in Mumbai High". The scope of work as awarded by the ONGC to the applicant was explained in the contract document as under : "4C-3D seismic data shall be acquired using Ocean Bottom Nodes technology during the filed season 2011-12 (between October 15, 2011 to May 15, 2012) over an area of about 60 kms. (full fold excluding migration aperture) of Mumbai High Field, which is located about 165 kms. wes....
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.... not specific to activities in India. Even if the vessels were hired on worldwide basis, in the present case we are concerned only with their period of deployment in Indian Territory as the payment made by the applicant pertains to this deployment. Further, the nature of agreement, whether time charter or BBC agreement, will not be relevant to decide the place of the business of seismic vessels. In the case of seismic vessel, the business is not conducted by the Masters, crew or manpower on board but by the scientific equipment on the vessel which emits seismic waves and recaptures it. It is immaterial under whose control the Masters and crew of the seismic vessel are. Seismic vessels are in fact research vessel and are used to study the geology of the ocean/sea and help in research of their beds. A seismic vessel is fitted with technological gadgets like GPS, computers, nautical charts and other scientific equipment that facilitate the process of seismic survey. The main component of the seismic survey is analysis of seismic waves. The process involves a seismic detector that shoots seismic waves to a selected underwater point and the time taken for the waves to refract back to th....
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.... country where the commercial need for the product originated, that is, for example, where the consultancy is utilized in this case, the issue involved was fee for technical services chargeable under section 9(1)(vii)(b) of the Act and the apex court has held that the income of the recipient will be charged or chargeable in the country where the source of payment is located or the payer is located. When we examine the facts of the present case in the perspective of the principle of "source rule" propounded by the apex court, it is seen that the payer, i. e., the applicant was located in the Indian Territory, i. e., in Bombay High where it was carrying the contract of ONGC. The commercial need of the deployment of vessel was generated by the contract of the applicant with ONGC and the services of the seismic vessels were utilized within the Indian Territory. Thus, all the parameters of the "source rule" as explained by the apex court in the case of GVK Industries is found fulfilled in this case and the business activity of the VPCs is found to have a clear nexus with the Indian Territory. There was existence of close, real, intimate relationship and commonness of interest between th....
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....business operation carried out by them. It was held in the case of the applicant in AAR No. 1295 of 2012 dated March 28, 2018 reported as Seabird Exploration FZ LLC, In re [2018] 403 ITR 82 (AAR) ; [2018] 92 taxmann.com 328 (AAR - New Delhi) that the vessel engaged in seismic survey at high sea constitutes a fixed place permanent establishment. To reproduce from the order (page 96 of 403 ITR) : "We conclude therefore that the applicant has a fixed place permanent establishment in India, as per para I of article 5, in the form of its vessels engaged in seismic surveys on the High seas, in connection with the exploration of mineral oil/natural resources under agreement with the ONGC, through which it carries on its business. It is immaterial that the period of their operation was only 113 days, as conveyed by the applicant, as a permanent establishment need not be permanent or for all times, as explained in the cases cited by the Revenue and also held in the case of Formula One World Championship (supra). Hence, the income arising from the permanent establishment shall be subject to tax in India as business income of the applicant." This ruling was given in the cont....