AI Drafter 
TaxTMI 
TaxTMI 
2022 (2) TMI 1447
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in making an addition for an amount of Rs. 24,58,68,872/- towards income computed as equipment royalty/ fee for technical services without appreciating the facts and circumstances of the case. Rs. 24,58,68,872/- 3 The Ld.AO ought to have appreciated the fact that the assessee company is a non-resident and doesn't have PE in India for the year under consideration. Rs. 24,58,68,872/- 4 The Ld. AO ought to appreciate the fact that the assessee company's income is not liable to tax in India as per the provisions of the Act and DTAA. Rs. 24,58,68,872/- 5 The Ld.AO ought to have appreciated the fact that the liability for taxability of business income in India in respect to foreign company would arise only when such entity has Permanent Establishment in India. Rs. 24,58,68,872/- 6 The Ld.AO ought to have appreciated the fact that the assessee's presence in India is less than the period of 183 days as it required for considering as service PE in relation to FTS. Rs. 24,58,68,872/- 7 The Ld.AO ought to have appreciated the fact that the provisions of the DTAA or ITA as per the section 90 of the Act, which are more beneficial to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sonnel to carry out the well drilling operations. Further, as per the said agreement, the nature of equipments to be provided by the assessee, relevant materials required for drilling and also personnel required for the work has been specified, as per which, the drilling rig and other incidental equipments, necessary materials and other equipments and further, personnel required for carrying out the work shall be provided by the assessee. The assessee has mobilized the drilling rig to carry out the contract from Batam, Indonesia and said drilling rig entered into India in the month of February, 2017 and thereafter, it is commenced its operations in February, 2017. In the said agreement, it was further stated that duration of the work as per the contract with CAIRN is for two wells and one additional well to last till 30.04.2017 and hence, the period of operations in India for the FY 2016-17 would be only 45 days. 4. The assessee has filed return of income as Project Office of the assessee in India declaring NIL taxable income for the AY 2017-18 on 31.10.2017 as per Sec. 44BB(3) of the Act and claimed TDS credit of Rs. 1,06,36,301/-, as there is no Permanent Establishment (in sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Article-7 r/w Article-5 of India Singapore Tax Treaty is not applicable, because the assessee has received income from hiring the drilling equipment which is nothing but equipment hire charges and hence falls under the purview of equipment royalty as per Article-12 of the India Singapore Tax Treaty DTAA. Therefore, the AO placing reliance on the Clause-3(b) of Article-12 of India Singapore Tax Treaty which covers royalty and fee for technical services observed that consideration received by the assessee is for use of, or the right to sue of any industrial, commercial or scientific equipment other than payments derived by the enterprise from activities described in paragraph 4(b) or 4(c) of Article-8 and thus, opined that hire charges received by the assessee from hiring deep drilling equipments to an India entity is an income accruing and arising in India of the nature of the royalty and hence, brought to tax income of the assessee @10% of gross amount received. The relevant findings of the AO are as under: 2. On verification of the details filed it is found that the assessee is engaged in hiring of deep drilling rig named "Deep drillers' and has received hiring char....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature(including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g provisions of Sec. 44BB of the Income Tax Act, 1961. The AO rejected arguments of the assessee on the ground that no such claim was made by the assessee in the return of income filed and hence, unless a claim is made in the return of income, then such claim cannot be entertained by the AO. Thus, the AO has rejected alternative claim of the assessee. 7. being aggrieved by the draft assessment order, the assessee has filed objections before the DRP against the draft Assessment Order and challenged the additions made by the AO towards income as Royalty within the meaning of Sec. 9(1)(vii) of Income Tax Act, 1961 and also Article-12 of India Singapore Tax Treaty. The assessee had also made an alternative argument without prejudice to the first argument of nontaxability of income in India, in that case, income is liable to tax in India then it should be computed in accordance with the provisions of Sec. 44BB of the Income Tax Act, 1961. 8. The DRP after considering the relevant submissions of the assessee and also on analyzing various clauses of the agreement between the parties concluded that the activity of the assessee in providing deep driller 5 for drilling activities will ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce with the terms and conditions of this Contract and, in consideration of its provision of the Drilling Unit, the other Contractor's Equipment and the Contractor's Personnel and the performance of the work, the Company agree to pay the Contractor according to the rates, terms and conditions herein contained. 4. The Drilling unit shall be DEEP DRILLER 5 5. The Operating Area shall be PR-OSN-2004/1 (PALAR-PENNAR) BLOCK 3.3 In Explanation 2 (iv a) to section 9(1) (vi) royalty has been defined as follows: - "the use or right to use, any industrial, commercial or scientific equipment buy not including the amounts referred to in section 44BB" 3.4 Article 12 of the India-Singapore DTAA defined royalty and Fees for Technical services. As per clause 3(b) of Article 12. the term royalty includes payments of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment other than payments derived by an enterprise from activities described in para 4 (b) and 4(c) of Article 8. 3.5 From the plain reading of the above provisions of the Income Tax Act and DTAA between India ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en India and Singapore and as per the said Article, business profit of an enterprise of Singapore is not liable to tax in India, unless the enterprise of Singapore carries on a business in India through a PE. The Ld.AR further referring to the provisions of Sec. 44BB of the Income Tax Act, 1961 submitted that, provisions of section 44BB deal with taxation of non-resident involved in oil exploration business. If you go through the nature of activity carried out by the assessee in terms of agreement between the assessee and CAIRN, the assessee has carried out deep drilling work for exploration of oil, as a contractor which involves providing required drilling and other equipments, materials required for the said work and also necessary manpower requiring for carry out the work. Therefore, from the scope of work, it is very clear that the assessee is in the business of exploration of mineral or oil which falls under the provisions of Sec. 44BB of the Income Tax Act, 1961. Once, the nature of the activity falls under the provisions of Sec. 44BB of the Income Tax Act, 1961 in terms of Tax Treaty between India and Singapore, the assessee can adopt beneficial provisions as per which Artic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t accepted. The Assessing officer held that the appellant has received income from hiring the drilling equipment which is nothing but equipment and hire charges and hence falls under the purview of Equipment Royalty as per Article 12 of India Singapore DTAA. The Assessing officer placing reliance on the clause 3(b) of the Article 12 of India Singapore which defines the term Royalty as to be the payments of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8, held that the hire charges received by the appellant from hiring the deep drilling equipment to an Indian entity in India as an income accruing and arising in India of the nature Royalty and brought the same to tax at 10% of the gross amount received. The Appellant filed objections before the Hon'ble DRP. The Hon'ble DRP after considering the appellant submissions and analysing the various clauses of the agreement of the appellant with Cairn India concluded that the activity of the appellant in providing Deep Driller 5 for deep drilling ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r use of drilling rig and other associated equipment and the services of the personnel constitute a Royalty as held by the Assessing Officer The name of the present contract under consideration is a Block PR-OSN-2004/1 Contract for provision of a Drilling Unit for drilling operations offshore India. There are various heads under which an income of a foreign company can be taxed in India as per various treaties and section 9 of the Income Tax Act. The India Singapore DTAA describes Royalty as to include Article 12 Royalties and Fee for Technical Services 3. 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)............. (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. While as per the the Income Tax Act the clause (iva) to Explanation 2 of section 9(1)(vi) of the Act defines the Royalty as For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any considerat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. [Para 26] The contention of the respondents, which weighed with the High Court, viz., that the impugned circular No. 789, is inconsistent with the provisions of the Act, is a total non sequitur. Circular No. 789 is a circular wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olding the income to be Royalty, has not gone into detail on the business income aspect of the receipts, but just w.r.to the specific request of the appellant to be considered u/s 44BB of the Act, mentioned as follows: "Section 44BB is a special provision for computing profits and gains in connection with the business of exploration etc., of mineral oils. In the present case, the appellant is not in the business of exploration etc., as it does not have permanent establishment due to fact that it has operated only for 45 days during the financial year. Article 7 read with Article 5 deals with the taxation of business income of an entity having a permanent establishment situated in India. Since the appellant does not fulfil the conditions laid in Article of it being treated as business income, therefore the appellant will not come under section 44BB of the Act." Now it is to be noted that the above observation of DRP is made in the context of claim u/s 44BB of the Act, without appreciating the fact that for the purposes of section 44BB the presence of a permanent establishment is not material. A detailed analysis of the above contention is provided in reply to quest....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2.2.2 DEPLOYMENT CONTRACTOR shall carry out a desktop study on the feasibility of deployment of the DRILLING UNIT at the locations specified by COMPANY. The feasibility study shall be submitted to the COMPANY the tender. The findings of the feasibility study shall include but not be limited to; * The expected leg penetration at the specified location; * Confirmation that punch-through or similar events shall not occur; and * Confirmation that seabed scouring around and below the spud cans shall not lead to excessive splaying or other deformation of the legs nor shall it otherwise compromise the stability and position of the DRILLING UNIT 2.4.4 CONTRACTOR'S EQUIPMENT CONTRACTOR shall at its cost provide all transportation for CONTRACTOR'S EQUIPMENT: * Between its Point of Origin and the CONTRACTOR'S Operating Base; and * Between the CONTRACTOR'S Operating Base and the COMPANY'S Port Facility, Helicopter Base or any other mutually agreed location, COMPANY shall provide transportation for CONTRACTOR'S EQUIPMENT between COMPANY'S Port Facility or Helicopter Base and the DRILLIN....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ide at its cost all specialized equipment, materials, spare parts and tools as may be required for the maintenance, overhaul, inspection, repair or refurbishment of CONTRACTOR'S EQUIPMENT stored at the Operating Base. CONTRACTOR shall have appropriate personnel at such Operating Base sufficiently in advance of the COMMENCEMENT DATE in order to ensure smooth and timely start-up of the SERVICES and thereafter shall have sufficient operating personnel at such location throughout the duration of the SERVICES arid for the entire Term of this CONTRACT. All costs for the accommodation, including board, lodging and personal transportation of CONTRACTOR'S PERSONNEL assigned to the Operating Base shall be to CONTRACTOR'S account A perusal of the above contents of the appellant's agreement with Cairn India Limited clearly confirms the fact that apart from the offshore drilling unit which appellant claims to have brought inside the country in the month of January 2017, there was another permanent base called 'Operating Base' available to the appellant onshore located close to the proposed area of operations along with the office premises at Gurgaon. In th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... placed on the decision of the Hon'ble SC in the case of Formula One World Championship Limited vs Commissioner of Income Tax CIVIL APPEAL NO. 3849 OF 2017 Supreme court. which held as follows: ....... existence of PE has to be examined considering that even though the race was conducted only three days in the year, FOWC has full access to the circuit for the entire duration of the Event (including two weeks prior and a week succeeding the Event). In this regard, the SC quoted following observations of the HC - - At all material times FOWC had exclusive access to the circuit and places where teams were located, whereas Jaypee's capacity, whilst designated as promoter of the Event, was extremely restricted. - The nature of activity, i.e., racing and exploitation of rights vested with FOWC in the capacity of commercial rights holder, implied a moving and shifting presence. With such activity, whilst there may not be substantiality in an absolute sense with regard to the time period, both the exclusive nature of access and the period for which it is accessed, creates a 'fixed' presence as contemplated in Article 5(1) of the India-UK tax treaty. Q 3 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r who is 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 or production of, mineral oils is computed at ten per cent of the aggregate of the amounts paid. Section 44DA provides the procedure for computing income of a non-resident, including a foreign company, by way of royalty or fee for technical services, in case the right, property or contract giving rise to such income are effectively connected with the permanent establishment of the said non-resident. This income is computed as per the books of account maintained by the appellant. Section 115A provides the rate of taxation in respect of income of a non-resident, including a foreign company, in the nature of royalty or fee for technical services, other than the income referred to in section 44DA i.e., income in the nature of royalty and fee for technical services which is not connected with the permanent establishment of the non-resident. From the above it is evident the legislature in its wisdom while stipulating the requirement of permanent establishment for taxing the i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd, the assessee was present in India only for 53 days (i.e. from 07.02.2017 to 31.03.2017). 12. In the light of above factual back ground, if you examine the reasons given by the AO to treat consideration received by the assessee for carrying out drilling work for M/s. CAIRN India Ltd., one has to examine the reasons given by the AO to bring said payments within the definition of royalty as defined u/s. 9(1) of the Act, r/w Article-12 of the India Singapore Tax Treaty. The provisions of Sec. 9(1) defines the term royalty, as per which, royalty means consideration (including with lump sum consideration but excluding any consideration which would be income of the recipient chargeable under the head 'capital gains') for the use or right to use an industrial, commercial or scientific equipment but not including amounts referred to in Sec. 44BB of the Income Tax Act, 1961. Similarly, Article-12 of the India Singapore Tax Treaty (DTAA) defines the term royalty, as per which, payments of any kind received as a consideration for the use of, or the right to use an industrial, commercial or scientific equipment other than payment derived by an enterprise from activities described in para....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g for extraction, production of mineral oils, then income should be computed as per the said provisions. In the present case, there is no dispute with regard to the nature of work carried out by the assessee which falls under the special provisions of Sec. 44BB of the Act. Therefore, it is necessary to examine the taxability of income of the assessee in the light of the provisions of Sec. 44BB of the Act and also Article-7 r/w Article-5 of the India Singapore Tax Treaty, which deals with taxation of business profits of an enterprise. 15. The assessee is a tax resident of Singapore and therefore, it is entitled to apply the provisions of the India Singapore Tax Treaty for determination of its tax liability in India. It is also settled position of law that, to the extant tax treaty provisions are more beneficial to a tax payer, then tax payer can adopt treaty provisions which is beneficial and further, treaty provisions would override the provisions of Income Tax Act, 1961. This legal principle is supported by the decision of Hon'ble Supreme Court, in the case of Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and other host of cases. In this case, there is no doubt....