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Saturday, 04 June 2016 12:48

Section 9(1) - Income Earned by the Assessee would be Treated as Royalty only where it is Received as Consideration for the Use of the Equipment - Delhi High Court Featured

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Mobilisation/Demobilisation Services Mobilisation/Demobilisation Services

Consideration for Installation Cannot be Characterized as Fee for Technical Services

1. Installation services are not incidental to the mobilisation/demobilisation service

2. Mobilisation/demobilisation cannot be termed as royalty

3. Consideration for installation cannot be characterized as FTS (Fees and Technical Services) and brought within the ambit of Article 12.4(a) of the DTAA

4. For the payment to be characterised as one for the use of the equipment, factually, the equipment must be used by IOCL

5. Income earned by the Assessee would be treated as royalty only where it is received as consideration for the use of the equipment, i.e., industrial, commercial or scientific. It can also be for use of or the right to use any copyright or for information concerning industrial, commercial or scientific experience

6. Petitioner can be said to have a PE in India only if the installation or construction activity is carried on in India for a period exceeding 183 days in any fiscal year

Facts

1. An order dated 15th February 2012 passed by the Authority for Advance Rulings ('AAR') (Income Tax) in AA No. 936 of 2010 has been challenged in this writ petition filed by Technip Singapore Pte Ltd. (formerly known as Global Industries Asia Pacific Pte. Ltd.), a company incorporated in Singapore. The Petitioner, a resident of Singapore, is admittedly entitled to the benefit of India-Singapore Double Tax Avoidance Agreement (hereinafter „DTAA‟)

2. The Petitioner states that it is a leading solutions provider of offshore construction, engineering, project management and support services to the oil and gas industry worldwide

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

4. By a letter dated 17th July 2008, IOCL gave the Petitioner the details of the work of "Residual Offshore construction' at Paradip

5. On 5th September 2008, the Petitioner signed a contract with IOCL for the above offshore construction work involving installation of IOCL supplied SPM including anchor chains, floating and subsea hoses

6. Under Clause 3.1.2, the Contractor was to provide “all marine spread, specialized manpower and equipments, installation tools and tackles, consumables, labour, logistic supplies, planning, engineering, documentation, etc. to fulfil the project specifications upto the commissioning stage." Under Clause 3.1.3, the Contractor shall be responsible for taking over all the Owner supplied project materials from the place designated by the Owner required for installation of complete CALM SPM system including their sub systems." Under Clause 3.1.4, the SBM Inc. is required to depute an installation engineer during the entire installation period of SPM system for assisting and advising the Installation Contractor in the installation of the SPM system."

7. IOCL sent to the Petitioner a 'Letter of Acceptance' dated 4th September 2008 in which it inter alia set out the 'contract value and price schedule'. It was stated therein that the contract value would be US$ 18,598,140

8. The Petitioner states that it does not have any project office or any other premises in India for executing of the work under the above contract. The Petitioner‟s obligations under the contract were fulfilled by deputing men and materials at the offshore site where the activity was performed

9. On 25th May 2010, the Petitioner filed an application in the AAR under Chapter XIX B of the Income Tax Act, 1961 („Act‟) for determination of certain questions regarding its tax liability in respect of the services rendered by it under the above contract. The ITO (International Taxation) (Respondent No. 2) in response to the above application filed a report dated 6 th September 2011 before the AAR. According to Respondent No.2, the income of the Petitioner under the contract was taxable in India as fees for technical services („FTS‟) both under the Act and the DTAA

10. The Petitioner contended that the mere fact that the equipments were used for rendering services to IOCL cannot alter the nature of the contract with IOCL from a contract for services to a contract for hiring of vessel and equipment. It is pointed out that the IOCL did not use any commercial or scientific equipment of the Petitioner

11. By the impugned order dated 15th February 2012, the AAR held that - As installation was ancillary and subsidiary to the use of equipment or enjoyment of the right for such use, the payment for the installation would fall under the definition of FTS in terms of Article 12.4(a) of the DTAA

12. Honb. High Court allowed the writ petition and held that no part of the income earned by the Petitioner from the contract with IOCL can be taxed in India 

Adjudication

The Petitioner is right in contending that the services rendered by it to IOCL under the contract fell under the exclusionary portion of Explanation 2 viz., “consideration for any construction, assembly, mining or like project undertaken by the recipient” This has been unable to be denied by the Revenue.

Therefore, on two counts the finding of the AAR on FTS cannot be sustained. The first being that the installation services are not incidental to the mobilisation/demobilisation service. The contract was in fact for installation, erection of equipment. Mobilisation/demobilisation constituted an integral part of the contract. Secondly, the AAR has proceeded on a factual misconception that the dominion and control of the equipment was with IOCL. It was erroneously concluded that the payment for such mobilisation/demobilisation constitutes royalty. In that view of the matter, the consideration for installation cannot not be characterized as FTS and brought within the ambit of Article 12.4(a) of the DTAA. The resultant position is that no part of the income earned by the Petitioner from the contract with IOCL can be taxed in India.

Cases Referred to

1. Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408

2. Asia Satellite Telecommunications Co. Ltd. v. Director of Income Tax (2011) 332 ITR 340 (Del)

Additional Info

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