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TMI Blog2012 (2) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... installation of a system which acts as a complete terminal for discharge of crude oil from vessels stationed in the sea to the onshore tank farm. The total nominal contract value for the purpose of calculating the security deposit is US $ 18,598,140. The remunerations are to be calculated on the basis of the rates indicated in the schedules including service tax. For undertaking the above operations resources including vessels were mobilized to India. The work is to be completed by 28.11.2008. The applicant submits that its presence in India in the FY 2008-09 is only for 41 days and that would not constitute a Permanent Establishment (PE) in terms of the Tax Treaty with Singapore (DTAA). Contract with L&T: On 17.03.2008, L&T entered into contract No. MR/OW/MH/MHSRP-II/T-1/13/2007 with Oil and Natural Gas Corporation Ltd. (ONGC) for the Mumbai High South Redevelopment Project Phase-II (MHSRPII).The contract was subcontracted to the applicant on 23.04.2008 to execute the work of installation and construction services for Single Point Mooring (SPM) in the waters of Mumbai High South field. It is stated elsewhere that it is a contract for installation of bridge, pipelines and cables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question 1, 2, 3 or 4 is in the affirmative, whether on the facts and in law, can the income derived by the Applicant in respect of the contract with L&T be computed in accordance with provisions of section 44BB of the Act? 7. If answers to 1, 2, 4 and 6 is in the affirmative, whether and based on the facts and in law, can it be said that the consideration received by the Applicant for mobilization and demobilization of the vessels and resources to the extent of the distance travelled outside India be considered as not attributable to activities carried out in India and hence, not liable to tax in India? 3. The Revenue submits that the consideration for both the contracts is fee for technical services under the Act and under the DTAA. The services of installation of SPM under the IOCL contract is a post wellhead operation. The services of providing transportation of bricks, pipeline, cable etc. for construction under the L&T contract is also a post exploration services. It is argued that even if it is prospecting for, or extraction or production of mineral oils but being a sub contract, cannot be taxed under section 44BB of the Act. The services imparted are technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA. The period of the contract was for 41 days i.e. from 15.11.08 to 4.1.09. Article 5.5 of the DTAA would apply for L&T project as the services and the facilities provided under the contract were in connection with the exploration, exploitation or extraction of mineral oil in India. Since the applicant's contract was for 168 days i.e. from 3.12.08 to 19.5.09, the applicant would not have a PE in India. It is further submitted that Article 5.3 and 5.5 being specific, would apply in determining the PE under the DTAA rather than the general provision under Article 5.1 of the DTAA. Alternatively, the contract with L&T, carried out for ONGC, is an integral part of the process of extraction or production of mineral oil and would fall within the ambit of Section 44BB of the Act. Contract with IOCL: 7. IOCL is setting up an offshore crude oil receiving facility having Single Point Mooring (SPM) terminal about 20 km. off the coast of Paradip in the east coast of India. The facility available will unload the crude oil from Very-Large Crude Carriers (VLCCs) to meet the crude oil requirement of its refineries located in the eastern part of India. It is stated that the major part of the cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... location upto PLEM location. After connecting SPM buoy with the anchor chains, it is to be connected to the PLEM with two strings. Any technical clarification during installation is to be provided by SBM installation supervisor available on board the vessel. 9. The payment under the arrangement is as per the Schedule of Rate (SOR) annexed to the letter of acceptance-dated 04.09.2008. The payment is divided under seven heads. The character of amount payable is linked to the nature of work and amount is not lump sum for the whole contract. As per para 1.0 of Letter of Acceptance (LOA), the lump sum amount has been considered only for the purpose of security deposit. However, lump sum amount is also fixed for mobilization and demobilization, built documentation. Only the amount for SPM installation and leak testing is variable as per note 4 and 5 to the SOR, indicating that the payments are according to the number of day(s). 10. In the SOR, the payment for various items is as under: (US $) (i) Mobilization and demobilization of Marine Spread 12,980,959 (ii) Pre and post erection work 877,288 (iii) Actual installation work 4,652,381 (iv) Documentation, Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource and nature of the receipt. Here we have noted that 68% of the total consideration relates to mobilization and demobilization, 25% on actual installation and the rest relates to pre and post execution work and drawing/design documentation. Considering the entire payment, the payment made for use of equipment i.e. the barges and stated as mobilization and demobilization expenses determine the predominant character and nature of the payment. Though the purpose of the contract is to install the buoy but the form of payment is for the use of equipment. The payment for mobilization and de-mobilization relates to use of equipment for undertaking installation work and falls under the definition of royalty under Article 12.3(b) of the DTAA. The installation is to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, add to the length of the anchor chain where it is falling short of the desired length, towing and setting up the Buoy from the port to the location and fixing the chain to the SPM Buoy, testing the leakages of the floating hose strings, affixing the umbilical to the valves outlets and installing all end connection, installing navigati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for a period of more than 183 days in any fiscal year in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State." The scope of Article 5.5 is wide and deals with provision of "services or facilities" in connection with the exploration, exploitation or extraction of mineral oils. Article 5.5 should be distinguished from Article 5.3 which deals with 'building site or construction, installation or assembly project.' While for a PE to exist under Article 5.3, the question would relate to the duration of installation and under Article 5.5, the question that needs to be answered is the duration for which services or facilities were provided. We are to examine the subcontract and other material on record to find the answer. 14. On a bare perusal of the documents on record, it is obvious that the applicant and L&T were under negotiation with regard to the services in question even prior to L&T entering into the contract with ONGC on 17.03.2008. In fact, a list of 45 emai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with relation to materials and workmanship provided by it. Under Clause 25, a performance guarantee is to be given by the Parent company of the applicant to L&T within 30 days of the signing of the sub-contract. It is pertinent to note that the performance guarantee shall be valid till the end of warranty period. A performance guarantee is typically taken to ensure the performance of the obligations of a Party under a contract. Hence, unless performance of contractual obligations commence, a performance guarantee will not be required to be tendered. Thus, it is clear that the services under the sub-contract commenced not later than 23.04.2008, which is date on which the subcontract was concluded and continued even after the vessels left the shores of India in lieu of the services to be provided post-installation including surveys. Hence, the obligations under the contract continued to exist even after the vessels left the shores of India. The applicant's plea of counting the duration of services from 3rd December, 2008 when the applicant's vessels were mobilized to India till 19th May, 2009 when the vessels left the shores of India is untenable and unacceptable. 17. It is to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. Section 44BB does not close its doors to an applicant who desires to know which part of its income accrues or arises in India and how much. The applicant can exercise its rights provided it opts to get the income computed under section 44BB(3) of the Act. The scheme of computation of income under this section does not provide any leeway to apply simultaneously both the sub-sections (1) and (3) of section 44BB to the income arising from the business activities falling under the ambit of section 44BB(1) of the Act. It even goes to the extent that if a part of the income falls under 'Royalties' or 'Fees for Technical Services', there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged under section 44BB. We are of the view that the applicant has to first exercise the option to get its income computed under section 44BB(3). In view thereof, the entire mobilization/demobilization revenues received by the applicant would be taxable in India. Que.l & 2 Out of the consideration for services provided by the applicant, only a part of the consideration under the IOCL contract is in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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