TaxTMI 
TaxTMI 
TaxTMI 
2022 (2) TMI 1447
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 the assessee shall be taken into consideration for the purpose of tax liability. Rs. 24,58,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee, 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 short "PE") in India because of the presence of the assessee company in India only for 53 days (i.e. from 07.02.2017 to 31.03.2017). The asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 charges from M/s. Vedanta Limited which has paid Rs. 24,58,68,723/- during the year 2016-17 and deducted TDS u/s. 195 amount to Rs. 1,06,36,301/-. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g 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 regard being had to the other provisions of this Agreement. 1. Submitted by Notification No. SO 1022(E), Dated 18-07/2005. 4. The assessee is incorporated in 15.02.2015 and this is the project office in India for which return of income is filed. The assessee has received hire charge from hiring the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee. 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 come under the definition of the royalty as defined under Article-12 of India Singapore Tax Treaty and further, the provisions of Sec. 9(1)(vii) of the Income Tax Act, 1961. The DRP had also rejected argument of the assessee in the light of the provisions of Sec. 44BB of the Income Tax Act, 1961 on the ground that the activities carried out by the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll 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 and Singapore, it can be seen that any sums received for use or right to use any industrial, commercial or scientific equipment would be taxable in India. 3.6 The assessee has entered into a contract for providing Deep Driller 5 for deep drilling activities of Vedanta Ltd. The Deep Driller 5 will come under the definition of the any Industrial, commercial or scientific equipment as per Explanation 2(iva) to the Section 9(1) (vi)a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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 Article-7 r/w Article-5 income of a non-resident in India and tax resident of Singapore is liable to be taxed in residence country and thus, income received by the assessee is not taxable in India. The AR, further, referring to Certificate issued by the AO u/s. 197 dated 25.01.2017, submitted that the AO had allowed the payer of the assessee for deduction of TDS at lower rate and has fixed TDS @4.3% including Education Cess and Surcharges and further, said ra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al, 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 activities will come under the definition of any industrial, commercial or scientific equipment and hence Royalty. The Assessing officer passed the final assessment order in conformation with the directions of DRP and hence the present appeal of the appellant before the Hon'ble Tribunal. The appellants argument before the Tribunal are on the following lines viz., The Assessing Officer failed to appreciate that the provisions of DTAA or the Act, as per section 90 of the Act, whichever is benefi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; i.e. the Act as well as DTAA defines the Royalty in same terms except that the Act provides a specific exclusion to incomes covered u/s 44BB of the Act from the definition of Royalty, which the appellant seeks to take advantage of. Now the question is whether the definition as given in the DTAA is to be followed or that given in the Act. In this regard it would be pertinent to quote the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 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 within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section (2) of section 90. In other words, the circular shall prevail even if inconsistent with the provisions of Income-tax Act, 1961 insofar as appellants covered by the provisions of the DTAC are concerned. There was no merit in the contention that the delegate of a legislative power cannot exercise the power of exemption in a fiscal statute. [Paras 27 & 29] The conclusion that emerges from the above judgement is that when the provisions of DTAA which applies in the case of appellant is considered the same would operate even if the same is inconsistent with the provisions of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 question number 3. Our contention regarding the observations of the DRP on these lines is that the facts relating to the question of PE is a pure matter of fact which requires detailed examination of the contract in question, actual conduct, the presence of appellants personnel to India etc., which the DRP has failed to do so. The DRP has simply reproduced the appellant contention on presence in India and have come to the conclusion in a different context. Given the above, w.r.to the question before us in the absence of examination by the AO and the DRP, the Hon'ble ITAT being ultimate and final fact authority and given the fact that the first and foremost of the appeal of the appellant being on the presence or otherwise of the appellants b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....OR'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 DRILLING UNIT, 2.4.3 CONTRACTOR'S SUPPLIES CONTRACTOR shall at Its cost provide all transportation for CONTRACTOR'S Supplies: * Between their Point(s) 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. All Supplies, Materials, Tools and other Equipment are required to be labelled and packaged or containerized in a pre-slung condition. COMPANY shall provide transportation for CONTRACTOR'S Supplies between COMPANY'S Port Facility or Helicopter Base and the DRILLING UNIT. 13.4 NUMBER AND CATEGORIES PERSONNEL CONTRACTOR shall have available, from the COMMENCEMENT DATE, sufficient personnel to perform the SERVICES. This shall include as a minimum the number and categories of personnel as specified herein. 13.4.1 ONS....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 this regard it would be relevant to note the fact as per audited accounts of the project office prepared by the appellant Note 7 Notes attached to and forming part of the accounts "In order to provide service a Jack up drilling rig of the company was brought into the country and a project office was established in India. As required under the Companies Act 2013, the accounts relating to the operations in India for the period 07th February 2017 to 31st March 2017 covering the Financial Year 201617 is being presented based on the following significant accounting policies" In this regard it is to be noted that while the above disclosure in the accounts mentions about the project office, it does not mention about the date of establishment of the Office and the Operating base in India and has simply mentioned about the dates involved with the drilling rig. Given the above facts it is the submission of revenue that presence in India for 183 days or more and hence an existence of PE or otherwise for appellant is a matter of fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s accessed, creates a 'fixed' presence as contemplated in Article 5(1) of the India-UK tax treaty. Q 3 Without prejudice to the above, whether the business income of the appellant is to be taxed as per section 44BB of the Act and hence 10% of the gross receipts are to be deemed as the profits of the business of the appellant This is an alternative plea of the appellant, wherein appellant itself agrees to the fact of its liability to tax in India u/s 44BB of the Act even in the absence of a Permanent Establishment for appellant in India. In this regard it would be pertinent to draw the distinction between section 44BB, section 44DA and section 115A as brought out in the judgement of Hon'ble Delhi HC in the case of Paradigm Geophysical Pty Ltd. Vs CIT (Delhi High Court) W.P.(C) No. 1370 of 2019 Section 44 BB is a special provision for computing profits and gains of a nonresident from 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, including petroleum and natural gas. Section 44DA is broader and more general in nature and provides for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ement of permanent establishment for taxing the incomes of the non-residents of the nature Royalties and Fee for Technical Services, for the purposes of section 44BB of the act doesn't have a mention of permanent establishment which fact has also been well appreciated by the appellant as well, while raising grounds without prejudice acceding to the taxability of income u/s 44BB of the Act @ 10% of the profits earned. The same plea has been raised by the appellant both before the AO and the ld.DRP, the AO while not adjudicating on the same, the DRP has failed to appreciate the nuances of the provision in this respect. Hence without prejudice to our arguments on the payments under consideration being in the nature of Royalty or business income under Article 7 of DTAA, it is submitted that the income under consideration are clearly covered by the provisions of section 44BB of the Act and 10% of the gross receipts need to be brought to tax as income in India. 11. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered detailed Written Submissions filed by the Revenue in light of certa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... enterprise from activities described in paragraph 4(b) & 4(c) of Article-8 of the India Singapore Tax Treaty. Similarly, the provisions of Sec. 44BB of the Act, deals with computation of profit & gains in connection with the business of exploration, etc., of mineral oils. As per the said provisions, in the case of the assessee being a non-resident engaged in the business providing services or facilities in connection with or supplying plant & machinery on hire, used or to be used in the prospecting for or extraction or production of mineral oils, than income shall be computed as per the provisions of Sec. 44BB of the Income Tax Act, 1961. Therefore, to decide the impugned dispute of taxability of income received by the assessee, one has to examine the receipts in the light of the definition of royalty as per the Income Tax Act, 1961 and also Article-12 of the India Singapore Tax Treaty. 13. The definition of royalty as per Sec. 9(1) and Article-12 of the India Singapore Tax Treaty DTAA is one and the same. As per which, consideration for the use or right to use industrial, commercial or scientific equipment but not including the amounts referred to Sec. 44BB of the Act. In the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... cases. In this case, there is no doubt that, the assessee activity falls under the provisions of Sec. 44BB of the Act, and Article-7 r/w Article-5 of the India Singapore Tax Treaty. Therefore, we are of the considered view that the findings recorded by the lower authorities that the activities carried out by the assessee are not coming under the provisions of Sec. 44BB of the Act and Article-7 r/w Article-5 of the India Singapore Tax Treaty DTAA is incorrect and unfounded under law. 16. As regards, taxation of income of the assessee, it is an admitted fact that the assessee is a tax resident of Singapore and as per Article-7 r/w Article-5, the profits of an enterprise of a contract in state shall be taxable in that state unless the enterprise carries on business in the other contracting state through a Permanent Establishment situated therein. Article-5 defines, the concept of PE and as per the said Article, it includes mines, oil or gas well, quarry and other place of extraction of natural resources and further an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any financial year. ....