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2016 (1) TMI 813 - THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI

2016 (1) TMI 813 - THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI - [2016] 381 ITR 489 - Consideration received under the ‘Change Order’ - whether is in the nature of business profits? - Taxability of income - providing ‘Floating Production Storage and Offloading’ (FPSO) - Fabrication and installation of new living quarters onboard the FPSO facility and procurement and installation of Heating, Ventilation Air Conditioning system (‘HVAC’) system onboard the living quarters - Major work was done outs .....

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the Act.

The entire consideration received for mobilization of the FPSO is taxable under the provisions of Section 44BB of the Act without splitting the same on the basis of travel of the FPSO outside or in India.

The consideration received on account of insurance receipts for loss of hire is not taxable in India. - A.A.R. No 867 of 2010 - Dated:- 2-12-2015 - Mr V.S. Sirpurkar (Chairman) and Mr. A.K. Tewary, Member (Revenue) For The Applicant : Mr. Percy Pardiwala, Sr. Advo .....

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Storage and Offloading (FPSO) facilities which is a type of floating production system used in the offshore oil and gas industry. The applicant is a tax resident of Norway. The applicant entered into a contract on 9th May 2007 (being referred to as original contract) with M/s Reliance Industries Limited (RIL). Under this contract the applicant was required to provide FPSO at the assigned oil and gas field in connection with extracting, prospecting or production of mineral oil, the consideration .....

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ration for providing FPSO facility was for supplying plant and machinery on hire used or to be used in the prospecting, extraction or production of mineral oil and such income having accrued in India was computed in terms of Section 44BB of the Income-tax Act and offered to tax accordingly. Similarly, the mobilization Revenue was also offered to tax on the same basis. 2. On 27th July 2008, the applicant signed a Change Order with RIL to facilitate the following amendments in the scope of work of .....

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presentatives four months prior to the FPSO sailing to India instead of six weeks prior to the FPSO sailing to India as envisaged in the original contract USD 15 million (c) Extending the dry-docking as envisaged in the original contract to 15 years. USD 25 million (However, RIL agreed and finally paid only USD 7 million to which the Applicant also agreed) (d) Expediting deliveries of topside modules and increasing productivity at Jurong Shipyard. USD 15 million (e) Timely installation of buoy a .....

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al contract under which tax was to be deducted in accordance with provisions of section 44BB of the Act. 4. The events are summarized in chronological order as under:- Date Event 9th May 2007 Original contract with RIL December 2007/January 2008 Installation work in Indian waters 27th July 2008 Change Order with RIL signed August 2008 FPSO sailed from Singapore on 6 August 2008 and reached Indian waters on 12 August 2008. FPSO reached production site in Kakinada, India on 14 August 2008 Septembe .....

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icant filed revised questions on 17th February, 2011, which are as under:- 1) Whether based on the stated facts of the case and in law, the consideration received by the Applicant under the Change Order for undertaking the following [before the floating production storage and offloading system, ( FPSO ) arrived in India], is in the nature of business profits or in the nature of fees for technical services as defined in the Explanation 2 of section 9(1)(vii) of the Income Tax Act, 1961 ( Act )?: .....

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ntity which operates and maintains the FPSO) and major vendor representatives four months prior to the FPSO sailing to India instead of the scheduled timeline of six weeks prior to the FPSO sailing to India. 2) If the scope of work is in nature of business profits, would the consideration for the scope of work, as mentioned in question 1 above, be taxable in India even though it pertains to work performed wholly outside India? 3) Whether on the stated facts and in the circumstances of the case, .....

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tax ought to be computed having regard to the computational under section 44BB of the Act? 5) Whether based on the stated facts and in law, the consideration received by the Applicant that is attributable to mobilization of the FPSO to the extent of the distance travelled by the FPSO outside India is taxable in India? 6) Whether on the stated facts and in the circumstances of the case, the consideration received by the Applicant on account of insurance receipts for loss of hire are chargeable to .....

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managerial, technical or consultancy in nature nor in the nature of royalty. The work performed by the applicant is in the nature of business profits because such receipts are arising from execution of a contract. Even in respect of work relating to mobilization it was stated that the applicant is simply undertaking the mobilization of the commissioning team along with members of Aker Borgestad (entity which will operate and maintain the FPSO) and major vendor representatives four months prior .....

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……………. The work performed by the applicant is in the nature of business profits. B. Work performed outside India. The applicant has stated that as the entire scope of work was performed outside India, the consideration received cannot be said to accrue or arise in India. C. Income should be computed under section 44BB of the Act The applicant further states that in the event consideration received under the Change Order for revenue streams mentioned in question .....

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ion of FPSO to the extent of distance travelled outside India is not taxable. The mobilization revenue taxable in hands of the applicant should be restricted only to the revenues attributable to the distance travelled in Indian territorial waters as compared to the total distance travelled from Singapore yard to India. D. Work as per change order cannot be attributed to PE According to the applicant the STP buoy and moorings were installed in Indian waters in January 2008 and FPSO arrived at the .....

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l within the exclusion to Section 9(1)(vii) of the Act and they would be classified as Mining or like project and accordingly would not be in the nature of FTS. Such activities should be liable to tax in accordance with the provisions of Section 44BB of the Act. Such installation services are the services or facilities in connection with the production of mineral oil and clearly fall under the ambit of Section 44BB of the Act. Accordingly, the additional compensation for timely installation of S .....

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section 44BB because such receipts neither are the services or facilities in connection with prospecting, extraction or production of mineral oil nor are for the supply of plant or machinery on hire for prospecting, extraction or production of mineral oil. Submissions during the course of arguments 7. During the course of arguments, the counsel of the applicant Mr. Pardiwala raised the following points also:- A. Even though the application filed did not address the issue as to whether the compen .....

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sis in the original contract it is a further contract enabled into with its own independent application and consideration thereof. The amount payable under the Change Order was not to be refunded or adjudicated in case of termination or pre-termination of the original contract. C. The consideration received towards the scope of work performed is entirely outside India and, therefore, it falls outside the purview of section 5 of the Act. The reliance was placed on the decision of Mumbai ITAT in t .....

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gh the work as per Change Order would have been done, yet the applicant would not be entitled for any consideration. F. The communication dated 6/8/2007 between RIL and the applicant show that the Applicant brought to the attention of the RIL that there will be a delay in delivery of topside module due to which the due date of first production of oil as agreed (under original contract) may not be achieved. Further, the applicant also provided a lump sum cost that would be incurred to accelerate .....

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Change Order was entered into to make the vessel ready to sail/ready to use. G. The provisions of section 44 BB of the Act provides for a method of computing income, if the same is chargeable to tax in India under section 4 read with section 5 of the Act. Thus, only once it is established that the consideration for the work executed under the change order is taxable in India, the computation provisions of section 44BB come into the picture. Accordingly, the scope of work mentioned being execute .....

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t establishment. The applicant had no PE in India. Further as per Article 23 of the Treaty a person who is a resident of a Contracting State (Norway, in the instant case) and carries on activities offshore in the other Contracting State (India), in connection with exploration or exploitation of the sea bed and sub-soil situated in that other state (India), shall subject to para 3 and 4 of this Article, be deemed in relation to those activities to be carrying on business in that other state (Indi .....

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oning of FPSO as envisaged in the original contract and consideration received was revenue in nature. It was categorically categorized as business profits. The Revenue also objected to the new pleadings introduced during the course of arguments. 8. Department s Submissions A. Change Order is not a contract independent of the original contract. The Department has analyzed the terms of the original contract and various clauses and exhibits and has concluded as under:- (i) Clause 25 of the Original .....

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o called Change Order. Also, the dry docking period has been increased to 15 years in the Change Order in order to cover the design life of FPSO and moorings as prescribed in Exhibit B of the original order. In any case, the designed life was for a period of 15 years and it continues to remain so, the dry docking period only getting extended by a few years. (ii) The changes in Exhibit A and /or Exhibit B as contained in the Change Order falls under the definition of works as defined in the Origi .....

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racted period. The use being the only benefit arising to the lessee, any compensation paid whether by way of lump sum consideration or in installments can only represent the lease rentals. RIL had nothing to do with the changes if the vessel was not available for its use. The consideration paid by RIL cannot represent any other character than the lease rentals. (iii) As per the responsibility matrix in Exhibit A as well as Clause 30.1 of Annexure - I of the Contract, it is the responsibility of .....

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he change order is subsidiary to the original contract and the payments on account of it are integral transactions to the principal transactions that arise out of the original contract. In the cases of Hindalco Ind 94 ITD 242(Del), Mitsui Engg & Ship Building 259 ITR 248(Del), Ansaldo Energia SPA 210 ITR 237 (Mad), Motorola Inc 95 ITD 269 (Del)(SB), 107 ITD 120 (Del), HMS Real Estate 325 ITR 71 (AAR) and Alstom Transport 349 ITR 292 (AAR) it has been held that subsidiary and integral transac .....

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to the Department the applicant is in the business of providing such services as mentioned in the contracts that it had entered into with RIL. Therefore the entire consideration that it has received from RIL has to be taken together, the applicant cannot bifurcate them as lease rentals (which has been offered to tax u/s 44BB of the Act) and lump sum consideration for carrying out the works as specified in the change order (not offered to tax in India). C. The Department relies on the decision o .....

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ch payments be taxable on a presumptive basis under Section44BB of the Act ? The Department has further stated that the Hon ble Supreme Court held that the services rendered by various non-resident companies with which ONGC had entered into separate agreements for availing of diverse services (such as proviso of personnel with expertise and experience in operation and management of an oil rig, engineering and technical support, processing of seismic data, consultancy and training service, analys .....

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the business of providing products, systems and services to the oil and gas industry. In this particular instance it is providing its FPSO on lease to RIL. The lease rental received from RIL has been offered to tax as per the provisions of 44BB of the Act. (ii) The consideration received from RIL out of the change order, even if these be genuine orders for change in specifications, are on account of the modifications made in the FPSO to meet the requirements of RIL. It is not unusual for a custo .....

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be treated separately from the main consideration. The lump sum payment received subsequent to the Change Order would receive the same treatment as the consideration flowing from the original agreement. (iii) The facilities on the FPSO prior to the modification by the Change Order and modification carried on consequent to the Change Order are inextricably linked with prospecting, extraction or production of mineral oil and, hence, were for mining and related/ancillary services, and, therefore, .....

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on of FPSO facility is not material. What is material is situs of income developing operations which is in India. E. The Department has argued that the applicant has installed buoy and moorings in India in order to fulfill its obligations (i.e. to provide its FPSO on lease rental basis to RIL to extract, receive, process, produce, store and offload crude oil and natural gas from the fields in India) as contained in the original contract that it had entered into with RIL. For this, the applicant .....

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and the modification were carried out as per the request and requirements of RIL and hence they are all attributable to the business operations carried in India and thus have business connection in India. F. It has been further argued by the Department that the considerations received by the applicant pursuant to the Change Order as mentioned by the applicant at point nos. 4(a) to 4(d) of their submission dt.7.10.2015 have not been offered to tax in India while the consideration out of the Chang .....

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ws: S.No. AY Returned Income (Rs) Tax Payable (Rs) Date of filing 1. 2009-10 29,24,80,050* 12,35,14,326 30.09.2009 2. 2010-11 46,06,81,020 19,45,45,595 15.10.2010 3. 2011-12 51,27,67,040 21,65,41,521 29.09.2011 4. 2012-13 59,99,61,580 23,95,20,650 28.09.2012 5. 2013-14 62,32,74,620 26,19,24,922 30.09.2013 6. 2014-15 72,15,02,880 31,21,22,146 30.09.2014 * Includes payments on account of installation of buoy and moorings in India as per the Change Order H. Reliance has been placed by the Departmen .....

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inted out by the Department that the use of words in connection with has been interpreted in the wider sense by various courts in the cases of G&T Resources 1389 ITJ 568 (Del), ONGC 133 TTJ 663 (Del) etc. The use of the phrase in connection with would take care of the amount received by the applicant in connection with the Change Order. In the case of Sedco Forex International Inc. Vs CIT reported in 299 ITR 238, the Hon ble High Court of Uttaranchal has held that section 44BB(1) is a code i .....

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TAA because the applicant is carrying on the activity of leasing business in India. The Department has further pointed out that the applicant has already offered the entire mobilization fee as per the original contract to tax u/s 44BB of the Act and the claim that the distance travelled outside is not taxable in India is an afterthought. The entire consideration arising out of the original contract as well as the Change Order is to be taxed similarly u/s 44BB of the Act. Inferences 9. We have ex .....

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for chartering of FPSO, following the discovery of crude oil and natural gas at the development area on lease rental basis, to extract, receive, process, produce, store and offload crude oil and natural gas from the field. II) The applicant (referred to as contractor in the agreement for chartering of FPSO in the agreement dated 9th May 2007) got the contract for carrying out the work in accordance with the terms and conditions contained in this agreement. In the agreement it has been mentioned .....

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B, and includes supplying FPSO, materials, and, up to completion of FPSO Commissioning, Contractor s Personnel and technical support necessary for the performance of its obligations on the Work Site. IV) FPSO or Contractor s Equipment shall mean the Vessel converted to a floating, production, processing, storage and offloading facility with STP buoy and moorings meeting the FPSO Classification and including all equipment, materials, spare parts and supplies to be provided and/or supplies on suc .....

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her contractors. VI) Exhibit B contains functional requirements and includes general facilities/requirements for operations including 104 air-conditioned living quarters with configuration of one bed, 2 beds and four bed cabins. VII) Clause 25 of the contract, under the headlines changes , contains provisions for changes in the original agreement. As per clause 25.1 RIL has the right at any time to require any reasonable change to Exhibit A and/or to Exhibit B by notice (Change Notice) provided .....

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th the sentence facilitating amendments are hereby agreed in the above referred contract , which is contract dated 9th May, 2007 for chartering of FPSO in connection with the extraction and production of oil and gas as mentioned above. IX) The relationship of scope of work in the Change Order with that of the original contract is as under: (a) Fabrication and installation of all of 104 living quarters (Exhibit B Part-I clause 6E of the original contract already provided that the FPSO will have 1 .....

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stallation of buoy and moorings. (Installation of buoys and moorings is as per the original contract.) (e) Extending the dry docking period from 10 to 15 years. Clause 10 of the Change Order also mentions that changes agreed would not entitle the contractor to an extension of time under the contract and/or achieving of date of first production of oil except as specifically extended by this Change Order. X) Clause 30.1 of the original contract reads as under:- Contractor shall be responsible for .....

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the change order were integral to the provisioning of the FPSO and the consideration for the work performed as per the change order by the applicant is in the nature of business profits . Repeatedly in respect of all 15 questions framed in the application it was argued by the applicant that the receipts arising from execution of a contract under the Change Order were in the nature of business profits. The applicant cited a number of Court Judgments to support this stand. When the questions were .....

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XII) Similarly, in the original application and in the revised application the applicant s interpretation of law regarding applicability of Section 44BB of the Act was that: Installation of STP buoy and moorings form an essential and integral part of operations of FPSO and the said activities are covered by provisions of Section 44BB of the Act. The applicant also referred to CBDT instructions and judicial precedents and in view of the same stated that the income arising to the applicant fall un .....

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ew of CBDT s instructions and judicial precedents, the same should be computed having regard to computational mechanism under Section 44BB of the Act and as regards mobilization revenue it was mentioned that the taxability of this should be restricted only to the revenue contributed to the distance travelled in the Indian territorial waters as compared to the distance covered from Singapore yard to India. XIII) As regards considerations received as per original contract the applicant (including .....

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to considerations received pursuant to change order also as he is offering consideration for installation of buoys and moorings for tax under section 44BB of the Act and for other amount it is taking the stand that the same is not taxable. Further, during the course of arguments the applicant s counsel Mr. Pardiwala took some different stands. His first changed stand was that the consideration received pursuant to Change Order was a receipt on capital account contrary to the stand taken in the .....

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d to give a ruling on an issue which is not part of the questions in the application. Having said this, we are going to deal with this argument. This argument is also based on the premise that the Change Order is independent of the original contract and has a separate scope of work for which separate consideration was received. This argument is completely flawed because as mentioned in earlier paragraphs the Change Order emanates from the original contract only. As mentioned in the facts narrate .....

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ct and of the Change Order done above further shows that the Change Order is nothing but amendments in their original contract No.0GF/13627982 dated 9.5.2007. It is mentioned upfront in clear terms in the change order. We have also seen that the original contract already had Clauses pertaining to provisioning of 104 living quarters and for HVSC systems. As per the Change Order the applicant has made 104 living quarters livable and installed new HVAC system by dismantling the existing one. In par .....

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ation and commissioning team is also inextricably linked with the original contract as per which the contractor was to make the equipment suitably equipped with all necessary tools, equipments and manned with qualified and experienced personnel during commissioning. In the circumstances to separate the consideration for mobilization pursuant to the Change Order from mobilization consideration as per original contract is not at all possible. The fact remains that the Change Order does not alter t .....

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change order can be seen in isolation. It has no legs of its own. The efforts made by the applicant s counsel to make an artificial distinction between these two are not of any use. The case laws cited by him (CIT vs. Poona Electricity Company 14 ITR 622 and of Hoshiarpur Electricity Company vs. CIT 41 ITR 608) are in respect of definition of the term actual cost in Section 43(1) of the Act and are in entirely different and unrelated context which has not even remote application in the present .....

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have accrued or arisen in India and, therefore, computational provisions of Section 44BB cannot be invoked. He has cited the decision of Mumbai ITAT in the case of J Ray McDermott Eastern Hemisphere Stern Ltd (supra). In this context it is important to reiterate that as regards the consideration pursuant to the original contract the applicant has filed return in accordance with provisions of Section 44BB of the Act. As established clearly in earlier paragraph, the consideration received from th .....

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ssessable as business income. It is in such circumstances that we do not find that any substantial question of law with regard to status of the assessee or having a permanent establishment or not will arise for consideration. The appeal is clearly devoid of any merits and, therefore, it is dismissed. In this context the provisions of Section 44BB (2) (a) is reproduced below: (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of t .....

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ndia despite the fact that major part of the said activity was carried outside India and whether provisions of section 44BB would override Section 5. It was held by the Hon ble High Court of Uttrakhand as under:- Here in the present case, provisions of Section 5 and Section 9 are not attracted. Section 4 is a charging Section and Section 5 contains the scope of total income, which provides that subject to the provisions of this Act, the total income of any previous year of a person who is a resi .....

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e. @ 10 per cent of the amount specified in sub-section (2) of Section 44 BB. Section 44BB is a special provision relating to non-resident assessee who is providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in or outside India. The Section is a complete code in itself. This Authority has also taken a view in the case of Geofizyka Torun Sp.zo and Bergen Oilfield Ser .....

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ct from 1.4.1983, as it was felt that the computation of income on net basis in such a business was complicated. So, a lower tax @ 10% (as against higher tax on FTS and on net basis) on deemed profits and gains of the aggregate amount as specified in sub section (2) was prescribed, without splitting up the amount on the basis of place of payment. The Memorandum explaining the provisions (165 ITR st 161-62) stated that The computation of the taxable income of a taxpayer engaged in the business of .....

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or payable to the tax payer or to any person on his behalf whether in or out of India, on account of provision of such services or facilities or supplying plant and machinery for the aforesaid purposes…… Therefore, there is no scope of splitting up the amount paid in or outside India. 12. It is established beyond doubt in earlier paragraphs that the consideration received as per Change Order is similar to consideration received as per original contract. It is also established that .....

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ore & offload crude oil & natural gas from development area in India, it is immaterial whether work relating to preparation of the FPSO was done in India or outside India. Further Section 44BB does not make any distinction between amount paid in India or outside India and, therefore, the entire amount has to be considered for the purpose of computation under this Section. This is the reason that applicant has taken the same stand in the return filed from Assessment Year 2009-10 onwards a .....

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Change Order is not taxable under the DTAA between India and Norway. It is relevant to point out that the scope of work as per Change Order has not changed as compared to that in the original contract. The applicant s arguments is based on the stand that it, being a resident of Norway, does not carry on any activity offshore in India while performing its obligations under the Change Order and, therefore, provisions of Article 23 are not applicable. Again, this stand is based on the distinction b .....

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e of work is to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil and natural gas from development area in India and all activities and works connected with this including its preparation for chartering are inextricably linked with the main work. In fact the applicant is carrying on its primary business activity, i.e., providing the FPSO on lease rental basis to extract, receive, process, produce, store .....

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