TMI Blog2016 (1) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. Advocate, Ms. Urvi Thakkar, CA, Mr. Rahul Jain, CA, Mr. R.Satish Kumar, Advocate For The Department : Mr. G.C.Srivastava, Advocate Spl. Counsel Ms Sukhvinder Khanna,CIT-DR(AAR),ND, Mr. S.S Negi, JCIT-DR (AAR), ND, Mr. Sachin Dhania, DCIT DR(AAR), ND, Mr. Lalmalsawma Pachuao, DCIT(IT),1(1)(i), Mumbai, Mr. S.M.Nigam, Advocate RULING (by A.K. Tewary) The applicant, Aker contracting FP ASA, is a company incorporated under the laws of Norway and is engaged in the business of providing Floating Production 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Timely installation of buoy and moorings in India USD 15 million 3. The consideration received as per the Change Order has not been offered to tax by the applicant. In the application before this Authority the applicant mentions that the Change Order provides for additional scope of work out of which a substantial portion of work was performed outside India. However, RIL has been withholding tax on payments made under the Change Order also based on the withholding order obtained from the Income Tax Department for the original 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax ought to be computed having regard to the computational mechanism under section 44BB of the Act? 4) If for any reason the amount as received by the Applicant for performing the scope of work as mentioned in Question 1 is taxable in India, whether the income chargeable to 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 tax in India? Applicant s Submissions in the Application 6. Applicant s submission in the original application dated 17 January 2010 and in the letter dated 17 February 2011 while filing revised questions are same and main points are as under:- A. Consideration received under the Change Order is in the nature of business profits According to the applicant it has not render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant the STP buoy and moorings were installed in Indian waters in January 2008 and FPSO arrived at the production site only in August 2008. The consideration received was for the work done as per the change order and cannot be attributed to PE in India on the ground that the work has been carried out outside India. E. Income out of consideration to STP Buoys Moorings should be computed under Section 44BB of the Act. As regards the consideration received for the installation of buoy and moorings in India, it was stated by the applicant that the activities performed on this account would fall 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 STP buoy and moorings should be computed having regard to the computational mecha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay date and date of production on the oil is breached, though 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 the conversion of the FPSO and expediting the delivery of topside module at Jurong Shipyard. In response thereto, RIL stated that it was exploring the possibility of expediting the deliveries and acceleration of FPSO conversion and asked the Applicant to provide a more realistic estimate. Subsequently, the cost of acceleration of the FPSO conversion and the expediting delivery of topside module was negotiated between both the parties. The communication between RIL and the applicant show that the 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t contains in itself the provision for the changes to be made as per specifications of the lessee. This change is with respect to obligations already contemplated in Exhibit A and / or Exhibit B. It does not render the two Exhibits redundant so as to represent a separate scope of work. For instance, the number of beds in the FPSO (104 in number) as contained in Exhibit B remains unchanged; there is only refurbishment of rooms and changes in the HVAC system which is contemplated in the so 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 Original Agreement. Hence, the amount received on account of this is covered by the definition of contract price as contained in the contract itself. The extra cost that the Licensor may have to bear on this acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 of Hon ble Supreme Court in the case of Oil and Natural Gas Corporation Limited ( ONGC ) [Civil Appeal No 731 of 2007 (unreported)] on the following question of law: Whether the amounts paid by the ONGC to the non-resident assesses / foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as fees for technical services under Section 44D read with Explanation 2 to section 9(1)(vii)of the Income tax Act or will such 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 dive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has by itself no utility unless it is tied to the subsea wells by the moorings. Therefore, the consideration arises out of business connection in India and entire amount is attributable to operations carried out in India which comes under the purview of Section 9(1)(i) of the Act. The location of expenditure incurred for creation 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 was paid USD 15 million and the same was offered to tax in India u/s 44BB of the Act. The other considerations received under the Change Order are also on account of the applicant fulfilling the same obligations towards RIL as contained in the original contract. Therefore such considerations received by the applicant cannot be considered differently just because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of 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 India. (Emphasis supplied) It has been further pointed 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 in itself. I. According to the Department the amount received by the applicant pursuant to the Change Order is revenue receipt falling under the provisions of Section 5 and 9 of the Act as well as Article 7 of the DTAA between India and Norway. The Change Order does not represent a separate scope of work from that of the original contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such facility in order to meet the requirements of Exhibit A and Exhibit B. V) Exhibit A is scope of work according to which the contractor s equipment shall be equipped with all necessary tools, equipment and manned with qualified and experienced contractor s personnel during the commissioning and until handing over to O M contractor. The contractor was to provide living quarters, office space with furnishing, sick bay, galleys, mess rooms and other requirements of contractor, RIL and RIL s other 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19; all in accordance with the terms of the Contract. XI) When the application was filed the applicant filed its detailed interpretation of law and took a clear stand in respect of all questions framed that all activities pursuant to 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 revised vide letter dated 17 February, 2011, the applicant again enclosed its own detailed interpretation of law in respect of revised questions and again repeatedly took the same stand that the considerations as per Change Order were in the nature of business profits . There was not even a whisper regarding considerations being capital receipts. The applicant had already taken similar stand regarding considerations as per original contract and had fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. 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 original as well as revised application that it was in the nature of business profits (revenue streams). In fact, the applicant s question is whether the consideration received pursuant to the change order is business profits or FTS. It has never asked any question as to whether such consideration is in the nature of capital or revenue receipts. Therefore, to raise such an issue during the course of argument is completely out of place and has no bearing on the questions asked. We are not supposed 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 narrated above, it is clearly seen that the Change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original agreement. There is no way in which the 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 case. Here the facts are strong enough to suggest and speaking loudly that Change Order originates from the original contract. Any other interpretation will be nothing but alteration of facts. Therefore the new argument brought in by Mr. Pardiwala regarding consideration being capital receipt has no merits at all. 11. The second argument of Shri Pardiwala is that consideration received pursuant to the Change Order was outside India and, therefore, no income accrued or arose in India or deemed to have accrued or arisen in India and, therefore, computational provisions of Section 44BB cannot be invoked. He has cited the decision of Mumb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed under this Section and Section 9 provides the incomes deemed to accrue or arise in India in the contingencies described under this Section. Therefore, Section 5 and Section 9 both are aimed at the income for the taxability under Section 4 of the act, while Section 44 BB does not take into account the income for calculating the aggregate amount to calculate 10 per cent profit and gains. Profit and gains is a type of income to be taxed under a legal fiction i.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 Services AS that there is no scope under the provision of Section 44BB to split revenue attributable to activities in India and outside India, where the income is offered to tax on deemed profit basis. Accordingly the mobilizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and has offered the consideration received as per original contract as per the provisions of Section 44BB and paid taxes accordingly on the entire amount without making any distinction either on the location where work preparing the FPSO was done or on the basis of distance travelled outside India or in India. We do not find any reason to give a different treatment to the consideration received pursuant to the Change Order. 13. The applicant has also argued that the consideration received as per 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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