TMI Blog2010 (7) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of mineral oil and the seismic survey vessel plays a crucial role in such operations undertaken by the applicant. - as the applicant engaged in the business of providing services or facilities in connection with prospecting for or extraction of mineral oil or supplying of plant (including ships) on hire used or to be used in the prospecting or extraction of mineral oil, Section 44BB is squarely attracted - Having regard to the fact that Section 44BB comes into play as held earlier, the receipts cannot be brought within the section 9(1)(vi) of the Act - the consideration received by VPC cannot be held to be 'royalty' income within the meaning of Sectio 9(1)(vi) of the Act. - A.A.R. No. 829 of 2009 - - - Dated:- 23-7-2010 - Mr Justice. P.V. Reddi (Chairman) and Mr. J. Khosla (Member) and Mr. V.K. Shridhar (Member), JJ. Present for the applicant - Mr. N. Venkataraman, Sr. Advocate, Mr. Achin Goel, Advocate, Mr. Taranpreet Singh , C.A. , Mr. Hitesh Jain , C.A. , Mr. Sanjay Aggarwal, C. A. Present for the Department: On 23rd Feb. 2010 Mr. S.M.J.Abidi, Addl.DIT, appeared. (appearance on 1st date of hearing) RULING [ P.V. Reddi J.- Hon'ble Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, the vessels would be delivered to and redelivered by the applicant outside India. In addition, all payments due by the applicant to VPC under the agreement would be received/paid outside India. The factual details relating to the hiring of vessels are given hereinafter. 1.5. The applicant filed a withholding tax application under section 195 of the Income-tax Act, 1961 ('Act') for payments due to VPC requesting for a NIL withholding tax order since VPC do not have any income chargeable to tax in India. However, the assessing officer passed an order directing the Applicant to deduct tax at source at the rate of 4.224% of gross payments being income computable under section 44BB of the Act. 2. On the basis of the above facts, the applicant has approached this Authority seeking advance ruling on the following questions: 1. Whether sum paid by the applicant to the vessel providing companies ('VPC') under global usage bare boat charter agreements ('BBC agreements') could be said to accrue or arise or deemed to accrue or arise in India under the provisions of the Income Tax Act, 1961 ('Act') and therefore subject to withholding tax in India? 2. If the answer to question 1 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in public domain as owned by the applicant. As regards Osprey Explorer and Munin Explorer, it has been pointed out by the Revenue that the names of the owners of the vessels are shown differently in different documents. To meet this point, the certificate of ownership issued by DG of Merchant Marine, Panama regarding Osprey Explorer has been filed by the applicant in confirmation of what it stated in the application. As regards Munin Explorer, two comments are made by the Revenue (vide written note dt. 4.2.2010): (i) as per the letter of ONGC, the said vessel is owned by Ordinate Shipping AS whereas the assessee has shown the owner of the vessel as Munin Navigation Co. Ltd. and (ii) the BBC agreement submitted to ONGC was between Ordinate Shipping (AS) and Seabird Exploration Ltd. and not with Seabird Explorer F-2 LCC - the applicant. No specific clarification has been furnished by the applicant on this aspect. 3.1. In the affidavit signed by the Executive Vice-President of the applicant on 1st March, 2010, it is asserted that there was no MOU between the owner of the vessel and the applicant which cast an obligation on the owner to assure uninterrupted supply of the vessel to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and lawful merchandise within the trading limits indicated in Box 20. Box 20 indicates the trading limits as "worldwide within institute warranty limits". The owners shall have the right at any time after giving reasonable notice to the charterer to inspect or survey the vessel to satisfy themselves that the vessel is being properly repaired and maintained (vide clause 8). Further, the charterer shall also permit the owner to inspect the vessel's log book whenever requested. Clause 10 stipulates that during the charter period, the vessel shall be in full possession and at the complete control of the charterer. Sub-clause (b) of clause 10 which bears the heading "operation of the vessel" says that the charterer shall at its own expense and on its own procurement, man, navigate, operate fuel and whenever required, repair the vessel during the charter period and shall pay all charges and expenses incidental to the use and operation of the vessel including all taxes and fees payable to the State and other authorities. It is then stated in sub-clause (b) of clause 10 that the master, officers and crew of the vessel shall be the servants of the charterer for all purposes, "even if for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te a permanent establishment'. The non-resident owner of the vessel, according to the pleadings and Agreement on record did not indulge in any business operations in India. Thus, the first criterion of business connection is ruled out. In fact, no such case has been set up by the Revenue in its comments. It would, therefore, be appropriate to consider whether the third limb of sub-clause (1) i.e. "through or from any asset or source of income in India" is attracted. The learned senior counsel for the applicant has concentrated on this point and submitted that the income was not derived by the non-resident ship owner from a source of income in India. It is the contention of the applicant's counsel that the source is traceable to India only if the income generating activity is contingent upon the use in India. According to the applicant, the source of income for the owner of the vessel lies in delivering and transferring the control of the vessel to the applicant and not its subsequent utilization in India and elsewhere. On behalf of the applicant, stress was laid on the fact that the hire charges were payable irrespective of the usage of the vessel and, even if the vessel was kept i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve - had taken place in India pursuant to the renewed agreement. In this context, let us notice the relevant facts having a bearing on the aspect of delivery. 8.1. As per the details given by the applicant, the vessel Northern Explorer was brought to India on two days i.e. 6.3.2008 and 23.10.2008. It remained in India during March / April, 2008. It was deployed in the contract work with ONGC (contract No. 2038). In the second spell, it remained in India from Nov., 2008 to May 2009 in connection with the execution of another contract (No.2139) with ONGC. Thus, when the Agreement was renewed on 1.11.2008, the vessel was very much in the territorial waters of India. The said vessel stayed in India in connection with ONGC Contract No.2139 for 7 months. 8.2. The vessel HV Munin Explorer was in India from October, 2007 upto May, 2008 in connection with contract No. 2137 with ONGC (vide Annexure A of the Paper Book). The Bareboat contract was entered into on 1st November, 2007 and it was renewed on 1st November, 2008. That means, the vessel was in territorial waters of India on the date of renewal of Charter. There is no mention in Annexure-A of any other period during which the vesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self that the place of delivery is relevant to fix the source of income arising from the hire of the vessel under the Bareboat Charter. The reason obviously is that in the case of moveable property, the income arises at the place where the property is delivered to the hirer, unless there are any special stipulations. 9. Now we shall address the crucial question whether the income accrues or arises in any manner to the non-resident owner of the vessel (VPC) through or from the source of income in India. If so, the deemed income provision contained in section 9(1)(i) is attracted. How the expression 'source of income' has to be understood? The ordinary and literal meaning of the word 'source' is that from which any act, movement or effect precedes; an originator, creator, origin" (vide Webster's Comprehensive Dictionary). Black's Law Dictionary defines 'source' as the originator or primary agent of an act, circumstance, or result. In short, the expression 'source' means the origin vide the dicta in Raja Bahadur Kamakshya Narain Singh of Ramgarh Vs. CIT{11 ITR 513}. In the case of Seth Shiv Prasad vs. CIT {4 84 ITR 15}, the Allahabad High Court described the source of income as a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to manufacturing and finishing processes which took place partly in Hong Kong and partly overseas". 9.3. The question in the appeal before Privy Council was whether the respondent-bank was liable to profits tax on profits accruing from the purchase and resale outside Hong Kong of certificates of deposit, bonds and guilt-edged securities. The Revenue's argument that the gross profit from the trading in certificates of deposit arose in or derived from Hong Kong because it was in Hong Kong that the investment decisions were taken on a day-to-day basis in the exercise of the skill and judgment of officers of the banks' foreign exchange department was refuted and the appeal was dismissed. It was in that context that the above-quoted observations were made. The said decision was referred to in a case decided by the Privy Council two years later, i.e. in (1992 Simons Tax Cases 723) Commissioner of Inland Revenue vs. HK-TVB International Ltd. Explaining Lord Bridges' dicta in Hang Sang Bank case, Lord Jauncey made the following crucial observations: "Thus, Lord Bridge's guiding principle could properly be expanded to read one looks to see what the tax payer has done to earn the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Australian company for instruction except an engineer who was loaned to the Australian company and became, for the time being, its officer: All payments under the agreement were made in America in dollars. In fact, and I so find, the income in respect of which the appellant was assessed was not derived directly or indirectly from any source in Australia, or, in other words, directly or indirectly from any business operations carried on by the appellant in Australia". While affirming this decision, Latham CJ made the following pertinent observations: "a person who neither owns anything in a country nor has done anything in that country cannot in my opinion derive income from that country". It was further observed thus: "Thus, in my opinion it is impossible to point to any source in Australia which can be described as the source of the 5,092 pounds paid to the American company. The American company did nothing in Australia and owned no property in Australia. That which produced the income of the American company was the agreement made in New York, together with the performance of that agreement, which took place in America". 10. In the instant case, it cannot be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actual number of days in respect of which hire charges received by VPC are liable to be taxed in India in the light of the principle laid down in this ruling, the assessing authority is at liberty to recheck the details, notwithstanding what is broadly indicated above. In this context it may be mentioned that the bills of entry filed by the applicant do not relate to the entry of vessels into India, but they are bills for home consumption (presumably relating to fuel). 11. One more aspect which we would like to mention before closing the discussion on the main question is whether the master and/or other crew was deputed by VPC in order to assist the applicant in carrying out the operations. Adverting to the comment of the Revenue that it is not clear whether the crew including the Party Chief/Shore Manager were employed by the applicant itself or whether the services of the crew employed by the vessel owner have been utilized by the applicant, the applicant replied that there was neither supply of crew nor payment of consideration for that (vide written submissions filed on 3.3.2010). Without prejudice to the said statement, the applicant has further stated that "any Crew serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and natural gas" As stated by the applicant, for any oil and gas exploration activity seismic survey is the first important step and in order to undertake seismic operations offshore, the applicant needs support of seismic vessel which has specialized equipments for use in seismic data acquisition and process. It cannot be disputed that the seismic activities are inseparable part of prospecting of mineral oil and the seismic survey vessel plays a crucial role in such operations undertaken by the applicant. In the case of a non-resident such as the applicant engaged in the business of providing services or facilities in connection with prospecting for or extraction of mineral oil or supplying of plant (including ships) on hire used or to be used in the prospecting or extraction of mineral oil, Section 44BB is squarely attracted. The controversy has been settled by the ruling of this Authority in more than one case. The ruling was given in the case of the applicant itself vide order dated 22.12.2009 in AAR No. 815 of 2009. In the earlier ruling in Geofizyka Torun, Poland (AAC No. 813/2009) also, this Authority held that Section 44BB is the appropriate provision to be applied. 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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