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Technip Singapore Pte Ltd. Versus Director of Income Tax & Anr.

2016 (6) TMI 137 - DELHI HIGH COURT

'Royalty' receipt - assessment under Section 9(1) (vi) of the Act or under Article 12 of the DTAA - existence of PE in India - Re-characterization of contract - Held that:- The clauses of the contract make it clear that at all times during the execution of the contract the control over the equipment brought by the Petitioner was to remain with the Petitioner. While the SPM system was supplied by IOCL, the task of installation, testing and pre-commissioning was the work of Petitioner. The system .....

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from the place designated by the IOCL which was required for installation of complete CALM SPM system including their sub systems. In the circumstances, the Court is unable to appreciate how the AAR could conclude that the de facto control of the equipment was with IOCL. - This Court is unable to concur with the finding of the AAR that in the instant case the consideration received for mobilisation/demobilisation should be considered as royalty paid by IOCL to the Petitioner. - The Pet .....

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ract 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( .....

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r Standing Counsel with Mr. Raghvendra Singh, Junior Standing counsel. J U D G M E N T Dr. S. Muralidhar, J.: 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 a .....

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. 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 .....

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ng (SPM) including anchor chains, floating & subsea hoses. Group-2: Work of Post Trenching of 48" & 14" pipeline. Group-3: All balance works required to complete the 14" effluent pipeline. 5. The clarifications in relation to the work were enclosed as Annexure I and II to the said letter. The expression 'Contractor' connoted the Petitioner and the expression 'Owner' means IOCL. Clause 19 of Annexure II to the letter dated 1 .....

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out by any member of Contractor Group's negligence (including active, passive, sale, joint, and concurrent negligence) or any other theory of legal liability, including strict liability or the' non-seaworthiness of any vessel or' the non-airworthiness of. any aircraft, and Owner shall release, defend, protect, indemnify and hold harmless all members of Contractor Group from and against any loss, cost, claim, obligation to indemnify another, suit, judgment, award or damage (including .....

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er party or his equipment. 19.6.0 For the purposes of this Article, "Property which is the subject of the Work" shall include any materials, equipment, structures or components whether temporary or permanent, and specifically includes any existing pipeline and risers and shall also include any items lifted or transported from one location to another." 6. On 5th September 2008, the Petitioner signed a contract with IOCL for the above offshore construction work .....

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also called as CALM systems i.e. "Catenary Anchor Leg Mooring system". The SPM system is stated to consist of floating buoy anchored to the seabed by catenary chain legs, which are secured to anchors. One twin mooring hawser arrangement holds the tanker captive to a rotating part. The rotating part freely weathervanes so that the tanker can take up the position of least resistance to the prevailing weather at all times. Fluid product is transferred via the CALM from or to the tanker by .....

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Construction Work At Paradip. Group-1-Installation Of Spm Including Anchor Chains, Floating & Subsea Hoses (Tender No. PLCC/PHCPL/SPM/0825) more specifically mentioned and described in the contract documents (hereinafter called the 'work' which expression shall include all amendments therein and/or modifications hereof) and has accepted the tender of the Contractor for the said work." 8. Clause 3.1.1 of the Contract defined the scope of the work to include the follo .....

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arge of crude oil from vessels to the onshore tankfarm. 9. 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 p .....

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describes 'Spread equipment' as under: The complete information regarding the Marine spread, the bidder intends to mobilize shall be included along with the bid. This shall essentially consist of but not limited to installation spread including, pipelines lay spread, trenching spread, diving spread etc. Contractor shall deploy all the marine spread of the requisite specifications as approved at the time of the award of work. The Contractor shall obtai .....

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pread' and Clause 20 of 'De-Mobilization of marine spread.' Clauses 19.1 and 19.2 read as under: 19.1The marine spread shall comprise of barge/vessel equipped with suitable equipments, diving spread, anchor handling, tug support vessel, survey spread, operating and construction crew, specialized expertise equipped with all required vessel certificates and statutory clearances including Customs & Port permissions as applicable in India. 19.2. The marine spr .....

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r (in US Dollars): (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, Misc 87,512 13. 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 materia .....

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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. 15. According to the Petitioner, Respondent No.2 did not dispute the Petitioner's stand that the income earned could not be regarded royalty either under Section 9 (1) (vi) of the Act or Article 12 (3) (b) of the DTAA. The Petitioner contended that the mere fact that the equipments we .....

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lation, the income in the nature of royalty or fees or FTS or interest or of any other nature arises then such income has to be assessed under that head. (ii) IOCL paid for each of the items of work separately although the work was a composite one. In the present contract, the payment made for use of equipment, i.e., the barges, and stated as mobilization and demobilization expenses comprised a substantial part of the payment and therefore fell within the definition of royalty under .....

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orks can be inferred. (iv) Installation was to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, adding 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 navigational aids .....

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concerning the contract with L&T is outside the ambit of the present petition. Pursuant to the notice issued in the present petition, a counter affidavit has been filed by the Respondent reiterating the stand taken by it before the AAR. A rejoinder thereto has been filed by the Petitioner. Submissions of counsel 18. This Court has heard the submissions of Mr. Percy Pardiwala, learned Senior counsel for the Petitioner and Mr. Rahul Chaudhary, learned Senior Standing co .....

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n over the movement of the vessel or the equipment brought to the site and used by the Petitioner for the purposes of rendering services under the contract. (ii) The contract made it clear that in case of any damage or loss to the property, equipment etc., supplied to IOCL while being installed or during the movement, the responsibility will be of the Petitioner alone. (iii) The very purpose of the mobilisation of the equipment was to install the IOCL supplied SPM. The pri .....

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without giving the Petitioner any opportunity of addressing the issue. The AAR proceeded to decide against the Petitioner on a point on which there was no dispute between the parties. Reliance was placed on the decision in Asia Satellite Telecommunications Co. Ltd. v. Director of Income Tax (2011) 332 ITR 340 (Del). (iv) The income earned by the Petitioner from the contract in question did not fall within the definition of the 'royalty' under Article 12.3 (b) of the DTAA.

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CL, the Petitioner could not take advantage of that fact and claim that the AAR did not hold that the Petitioner has a PE in India in relation to the contract with IOCL. 21. Referring to the certificates dated 30th January 2009 and 13th July 2009, issued by the Revenue under Section 197 of the Act in respect of the consideration received or receivable, it had been mentioned thereunder that the consideration was in the nature of royalty. He pointed out that the Petitioner did not acce .....

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mp sum price for the whole contract. The consideration for mobilisation and demobilisation constituted 68% of the total consideration and the actual installation constituted 25%. Therefore a large percentage of the consideration related to supply/use of the equipment. It was not necessary that the equipment should be in the direct dominion and control of the IOCL for the payment to constitute royalty. As long as the equipment can be exploited by or by the order of IOCL, the requirement of domini .....

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definition of royalty under Article 12.3(b) of the Act and the payment for installation was FTS under Article 12.4(a) of the DTAA. Contract cannot be re-characterised. 24. The Revenue's attempt at re-characterising the contract as one for hire of equipment must fail. From the various clauses of the contract, as noted hereinbefore, it is evident that IOCL did not have dominion or control over the equipment. The clauses of the contract make it clear that at all times duri .....

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ed manpower and equipments, installation tools and tackles, consumables, labour, logistic supplies, planning, engineering, documentation etc . Further under Clause 3.1.3 the Petitioner was made responsible for taking over all the IOCL supplied project materials from the place designated by the IOCL which was required for installation of complete CALM SPM system including their sub systems. In the circumstances, the Court is unable to appreciate how the AAR could conclude that the de facto contro .....

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;T. Therefore, it is not open for the Revenue to now contend that the Petitioner cannot take advantage of the absence of a finding by the AAR as regards the existence of a PE qua the contract with IOCL. 26. The Revenue has been unable to counter the factual position that in terms of Article 5 (1) of the DTAA, the Petitioner has no fixed place of business in India. Under Article 5 (3) the Petitioner can be said to have a PE in India only if the installation or construction activity is .....

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a only if it carries on business in India through a PE in India and the profits earned by it in India are attributable to the activities carried out through such PE. Since factually the Revenue was not able to show that the Petitioner had a PE in India, the income earned by the Petitioner from the contract with IOCL cannot be brought to tax in India in terms of Article 7 of the DTAA. 28. Turning to the other main issues that arise from the impugned order of the AAR, the question is w .....

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ght in its contention that the Revenue did not contend before the AAR that the income earned by the Petitioner from the contract towards mobilisation/demobilisation charges should be treated as royalty under Section 9(i) (vi) of the Act or Article 12.3(b) of the DTAA. The fact that in the certificates issued under Section 197 of the Act the Revenue may have earlier characterized the payment as royalty cannot change its stand taken subsequently before the AAR. Therefore, there was no occasion for .....

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stic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in par .....

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outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to s .....

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rovided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 .....

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nt, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, comme .....

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g consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 33. Further, Explanation 5 below Section 9(vi) reads as under: Explanation 5.- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, .....

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mmercial 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. It is clear from the contract itself that the control of the equipment throughout remained with the Petitioner and did not get transferred to IOCL. 35.1 In this context, it is necessary to refer to the decision of this Court in Asia Satellite Telecommunications Co. Ltd (supra). The facts were that the Assessee in that case, .....

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vailable on the assessee's satellite to relay their signals. The customers had their own relaying facilities, which were not situated in India. From these facilities, the signals were beamed in space where they were received by a transponder located in the assessee's satellite. 35.2 The process of transmission of TV programmes started with TV channels (customers of ASTC) uplinking the signals containing the television programmes ; thereafter the satellite received the signals .....

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tor of the satellites and in control of the satellite. It had not leased out the equipment to the customers. ASTC had merely given access to a broadband width available in a transponder which could be utilized for the purpose of transmitting signals of the customer. It was held that the terms lease of transponder capacity , lessor , lessee and rental used in the agreement would not be the determinative factors. There was no use of process by the television channels. Moreover, no such purported u .....

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s no use of 'process' by the television channels. Moreover, no such purported use has taken place in India." 35.4 The Court has held that the concept of dominion or control is sine qua non use. Further Explanation 5 below Section 9 (vi), to the extent it is not beneficial to the Assessee, will have to in terms of Section 90 (2) of the Act, make way for the provision of the DTAA which is more beneficial to the Assessee. This aspect too has been clarified by the Court in A .....

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f the Act and of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2), the provisions of this Act will apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-tax Act which will govern the taxation of income." 36. For the p .....

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:p> 37. As observed in Visual Inc. v. Asst. CCT 124 STC 426 (Karn): "9. Thus if the transaction is one of leasing/hiring/letting simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and .....

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nition of 'sale'." 38. Consequently, this Court is unable to concur with the finding of the AAR that in the instant case the consideration received for mobilisation/demobilisation should be considered as royalty paid by IOCL to the Petitioner. Are installation charges FTS? 39. Turning to the other question of the nature of the consideration received by the Petitioner for installation, the definition of FTS in Article 12(4) is relevant. It reads as .....

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ble technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or .....

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national traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or idividuals making the payment; (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14; (f) for services rendered in connection with an installation or structure used for the exploration or exploitation of nat .....

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alty, the question of treating the work of installation as ancillary to such work and the payment for installation as FTS does not arise. Further, in terms of the contract with IOCL, the Petitioner provides services of construction and installation of SPM. This does not involve any transfer of any technology, skill, experience or know-how, to enable IOCL to undertake such activities on its own. 41. The Revenue's contention that the work of mobilisation/de-mobilisation and the wor .....

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the 48" and 14" pipeline and all balance works required to complete the 14" effluent pipeline. However, as far as the Petitioner was concerned it had to perform all the three 'groups' of work and the payment was for execution of the composite contract. 42. While the payment was a lumpsum of US$ 18,598,140, the said sum was broken up for the individual components like mobilization and demobilization of Marine Spread; Pre and post erection work; Actual installati .....

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(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non- resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in .....

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