TMI Blog2018 (8) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... , finding ourselves to be in agreement with the view taken by the CIT(A), uphold the same. The Ground of appeal No. 1 raised by the revenue is dismissed. Composite taxability of aggregate revenue from ONGC contract -taxability of revenue received by the assessee from offshore supply of equipments under the ONGC contract, being a case of outright transfer of title in the products by the assessee to ONGC outside India, thus, cannot be construed to be FTS or Royalty and brought to tax in India - Held that:- CIT(A) observed that as the products identified by ONGC are requested on need basis as per their requirements, therefore, the interconnection of the revenue received by the assessee from offshore supply of goods with other activities under the ONGC contract was unwarranted. We find that the CIT(A) had observed that in case of offshore supplies made under the ONGC contract, the property in goods were transferred by the assessee to ONGC outside India and the entire sale was executed outside India. The CIT(A) had further observed that no part of the activities of the offshore supply of equipments were carried out in India. Further, the PE of the assessee in India also had no role ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he repair activities provided by the assessee to ONGC can be brought within the sweep of royalty, as defined in Article XII(3)(g) of the India-Australia tax treaty? - Held that:- We find that the CIT(A) after relying on a host of judicial pronouncements and the scope of the term “make available” as used in India- USA DTAA, had observed that mere rendering of the repair services by the assessee at its overseas work station did not satisfy the ‘make available’ condition as contemplated under Article XII(3)(g) of the India- Australia tax treaty. We thus, are persuaded to subscribe to the view taken by the CIT(A) that the rendering of the repair services by the assessee to ONGC cannot be characterised as royalty. Still further, we may herein observe that as the equipment is owned by ONGC itself, therefore, while rendering the repair services, no right to use the equipment can be said to have been provided by the assessee to ONGC. We thus, finding no infirmity in the order of the CIT(A) holding that the revenue received by the assessee from rendering of the repair services to ONGC cannot be brought within the sweep of FTS or Royalty, uphold the same. As the repair works are undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company which is incorporated under the laws of Australia is engaged in the business of supply of products, provision of services and undertaking activities relating to drilling and production systems etc. to various oil and gas producers across the globe. The assessee which is a tax resident of Australia had filed its return of income for A.Y 2011-12 on 04.03.2013, declaring a total income of ₹ 62,01,500/-. The case of the assessee was thereafter selected for scrutiny assessment 143(2) of the Act. 3. During the course of the assessment proceedings it was observed by the A.O that the assessee had received revenue from two contracts in India viz. (i) Northern Offshore Drilling Pte ltd; and (ii) Oil and Natural Gas Corporation ltd (for short ONGC ). The revenue from the aforesaid contracts was offered by the assessee in its return of income, as under: Sr. No. Name of the contracting party Scope of services Taxability 1. Northern Offshore Drilling Pte. Ltd. Assistance in well intervention, retrieval and tie-in in relation to specific oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment project. The assessee had in its return of income offered revenue of ₹ 5,39,47,447/- in respect of ONGC contract for taxation under Sec. 44BB of the Act. It was observed by the CIT(A) that the said revenue comprised of viz. (i) Project management fees: ₹ 2,96,17,267/-; and Equipment rental: ₹ 2,43,30,180/-. Still further, a perusal of the notes forming part of the computation of income of the assessee revealed that the assessee had also received an amount aggregating to ₹ 4,97,76,660/- towards offshore supply of spare tools and fees for repair of equipments carried outside India. The CIT(A) observed that the assessee had during the course of the assessment proceedings submitted before the A.O that since both the supply/sale of spare tools and the repair works were carried outside India, thus, the same were not taxable in India. However, the A.O declined to accept the said claim of the assessee. It was noticed by the A.O that there was only one contract awarded by ONGC in respect of all the activities undertaken by the assessee and the same did not specify the scope of work according to the nature of activity. It was observed by the A.O that the ONGC c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ameron's works in Melbourne. This work can be further divided into: i) Fixed Scope a) Cleaning, dismantling of tree into components, carry out QA/QC checks on the components and f irm up the requirement of repair/ replacement of components, if any. b) Reassembling and testing of tree. ii) Variable Scope: Replacement/ refurbishment of components based on QA / QC checks and jointly decided by Cameron, ONG, DNV Perusal of above scope shows that this scope of work includes Products supply, repairs, equipment , rental , installation and commissioning activities and also project management activities. Further, the fact that para 1.7 provides for Co-ordination and service support personnel mandates providing of project Manager and project team for all the activities under the subject contract, shows that the contract is one only. Even, the t raining to be provided by assessee, supply of installation and commissioning spares is in respect of all the items of scope of work and indivisible. vi) Merely because assessee has segmented these activities artificially to sui t i ts own objectives, when the f acts tel l otherwise cannot be accepted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee that based on commercial negotiations between the parties and for administrative convenience a single contract was executed with ONGC for different independent activities, instead of executing multiple contracts for such independent activity between them. The assessee in order to buttress his contention that the ONGC contract contemplated separate, divisible and independent scope of work, submitted before the CIT(A), as under: 2.6 the appellant wishes to mention that the scope of work under the contract clearly identifies following broad separate independent and distinct activities; * Products supply: - Supply of isolation sleeve (refer para 1.5 of scope of work) - Supply of pressures cap and protective covers (refer para 1.9 of scope of work) - Supply of insurance items (refer para 1.10 of scope of work) - Supply of spool tree (refer para 1.11 of scope of work) * Repairs services - Refurbishment of HXT (refer para 1.1 of scope of work) - Testing of other four HXTs (refer para 1.2 of scope of work) - Storage and transportation iii relation to same (refer para 1.3 of scope Of work) - Removi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other activities were carried out in India. The CIT(A) observed that in case of composite contracts, as per the settled position of law the taxability of each separate, divisible and independent activity was required to be evaluated independently. The CIT(A) while concluding as hereinabove, relied on the judgments of the Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Limited. Vs. DIT (2007) 288 ITR 408 (SC) and CIT Anr. Vs. Hyundai Heavy Industries Company Ltd. 291 ITR 482 (SC). Still further, the CIT(A) in order to fortify his view that in a case where the scope of work was divisible the taxability of independent revenue streams would need to be evaluated separately, relied on the judgment of the Hon ble High Court of Delhi in the case of Linde AG, Linde Engineering Division Vs. DDIT (2014) 361 ITR 1 (Del). On the basis of his aforesaid observations, it was concluded by the CIT(A) that though the contract may be an indivisible one, however, for the tax purpose, if the contract did specify the amounts that were payable with respect to various activities carried out by the parties, then the income could accrue or arise at various stages on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AG, Linde Engineering Division (supra) , concluded that the claim of the assessee that the taxability of the different streams of revenues earned by it under the ONGC contract from each separate, independent and divisible work was to be considered independently, was found in order. In the backdrop of the aforesaid observations the CIT(A) directed the A.O to independently determine the taxability of revenue in the hands of the assessee from the aforementioned separate, independent and divisible works under the ONGC contract. ( B ) Taxability of revenue from offshore supplies under the contract with ONGC: The CIT(A) observed that the assessee had during the year under consideration supplied certain products which were ordered by ONGC on need basis from its foreign location. The A.O had held that the income from supply of equipments was liable to be brought to tax in India as per the provisions of Sec. 44DA of the Act. The contention advanced by the assessee that since supply/sale of products were carried out offshore, and the repairs also carried out outside India, therefore, the same could not be taxed in India, did not find favour with the A.O. The A.O observing that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down by the Hon ble Apex court in the case of Ishikawajima-Harima Heavy Industries Limited (supra) and Hyundai Heavy Industries Company Ltd. (supra) , observed that in case of composite contracts income from offshore supply of equipment could not be subjected to tax in India, provided no part of the activities of such offshore supply was undertaken in India. On the basis of his aforesaid observations the CIT(A) concluded that as the property in the goods supplied by the assessee was transferred to ONGC outside India and the entire sales were also executed outside India, therefore, no part of the activities pertaining to the offshore supply of products by the assessee were carried out in India. It was further observed by the CIT(A) that the PE of the assessee in India also had no role to play in effectuating such transaction either pre or post such offshore supply. On the basis of the aforesaid deliberations, it was concluded by the CIT(A) that the income from offshore sale of products could not be construed to be FTS or royalty, as it was a case of an outright transfer of title in the products by the assessee to ONGC. Thus, in the backdrop of the aforesaid observations the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see; (v). the assessee would replace the spares in the course of repairing the overall equipment; (vi) the Indian PE of the assessee had no role to play in its aforesaid activities; (vii) that separate invoices were raised by the assessee for the repair activities and the consideration for the same was received outside India; (viii) that the activities of installation and commissioning of equipment was separately covered under the installation and commissioning activities; and (ix) that as during the year under consideration no installation/commissioning activities were carried out by the assessee, thus the taxability of income from such activities did not arise. The assessee further rebutting the observations of the A.O that as the repairs itself involved technical expertise, thus the income from such activities would fall within the sweep of the definition of FTS, submitted that the A.O while concluding as hereinabove had lost sight of the host of judicial pronouncements which were relied upon during the course of the hearing before him. The assessee further dislodging the claim of the A.O that the receipts of the assessee from the aforesaid repair activities were to be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) further dislodging the claim of the A.O that the repair services rendered by the assessee brought the same within the sweep of FTS observed that undoubtedly the repairs carried out by the assessee involved technical expertise, however, the said repair work (and related activities) undertaken by the assessee under the ONGC contract did not make available any technical knowledge, experience, skill or processes etc. to ONGC. Still further, it was observed by the CIT(A) that as the repair work was undertaken by the assessee at its overseas work stations, therefore, the question of taxability of such receipts from repair work as attributable to the PE of the assessee was also not warranted. ( C) Taxability of Revenue from equipment rental under the contract with ONGC:- The assessee had also assailed before the CIT(A) the order passed by the A.O, on the ground that he had erred in holding that the revenue from equipment rental was liable to be brought to tax under Sec. 44DA and as such had wrongly declined the applicability of Sec.44BB of the Act. The CIT(A) observed that the assessee as per the terms of the contract had provided certain equipments on hire basis to ONG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial provisions for computing profit and gains in connection with the business of exploration etc. of mineral oils, observed that the same provided a presumptive basis for taxation of a nonresident engaged in the business of providing services or facilities in connection with or supplying plant and machinery on hire, used or to be used, in the prospecting for or the extraction or production of mineral oils. In the backdrop of the aforesaid facts, it was observed by the CIT(A) that since the equipments supplied by the assessee to ONGC on hire basis were used in the prospecting for, or extraction of, mineral oils, therefore, the consideration thereof would be covered under Sec.44BB of the Act. 11. The CIT(A) in the backdrop of his aforesaid deliberations on the facts and the aforesaid statutory provisions viz. Sec.44DA, Sec. 44BB and Sec.9(1)(vi) of the Act, observed that the provisions of Explanation 2 to Sec.9(1)(vi) explicitly provided that in the case of use of industrial, commercial or scientific equipment, the amounts referred to in Sec. 44BB would be excluded from the definition of royalty under the Act. Thus, the CIT(A) was of the view that as the scope of Sec. 44BB incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. We find that admittedly only one contract was awarded by ONGC with respect to all the activities for inspection and refurbishment of subsea equipment, supply of well completion tools and technicians for completion of balance work of fields development project. As observed by us hereinabove, some of the activities under the contract were undertaken by the assessee outside India and the other activities had taken place in India. We find that the CIT(A) after deliberating at length on the issue under consideration, had observed that the activities carried out by the assessee under the ONGC contract were clearly separate, divisible and independent to each other. The CIT(A) further in support of his observation that the aforementioned activities carried out by the assessee under the ONGC contract were not inextricably interwoven or inter dependant, observed that the assessee had raised separate invoices on ONGC in respect of the aforesaid activities. It was further observed by the CIT(A) that the employees working on the respective activities carried out in India were distinct and separate from the employees working for the activities carried outside India. We find that on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to its Indian PE as the installation PE came into existence only on conclusion of the transaction giving rise to the supply of the fabricated platform. On the basis of the aforesaid deliberations, it was observed by the Hon ble Court that the profit on such supplies of fabricated platform cannot be said to be attributable to the Indian PE of the assessee. Rather, it was observed that even if it was to be assumed that the supplies of platform were necessary for the purpose of installation (activity of the PE in India) and even if it was to be assumed that the supplies were an integral part, still no part of the profits on such supplies could be attributed to the independent PE, unless it was established by the department that the supplies were not at arm s length price. We further find that the aforesaid view arrived at by the CIT(A) is also fortified by the judgment of the Hon ble High Court of Delhi in the case of Linde AG, Linde Engineering Division Vs. DDIT (2014) 361 ITR 1(Del). We are of the considered view that as observed by us at length hereinabove, that the activities carried out by the assessee viz. (i) supply of offshore products/equipment; (ii) offshore repair work (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India also had no role to play in effectuating such transactions either pre or post such offshore supply. We find that the CIT(A) relying on the judgment of the Hon ble Supreme Court in Ishikawajima Harima Heavy Industries ltd. Vs. DIT (2007) 288 ITR 408 (SC) and CIT Vs. Hyundai Heavy Industries Company Ltd. (2007) 291 ITR 482 (SC), had observed that as in the case of the assessee no part of the activities of offshore supply of equipments by the assessee were undertaken in India, hence the revenue received by the assessee there from could not be taxed in India. We have deliberated at length on the aforesaid observations of the CIT(A) and find ourselves to be in agreement with the view arrived at by him that the revenue received by the assessee from offshore supply of goods to ONGC could not be taxed in India. We thus finding no infirmity in the order of the CIT(A) in context of the issue under consideration uphold the same to the said extent. The Ground of appeal No. 2 raised by the revenue is dismissed. 15. We shall now advert to the observations of the CIT(A) that the revenue received the assessee from repair work (and related activities) undertaken by the assessee under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any mining or like project undertaken by him, the same would be excluded from the sweep of FTS. We are of the considered view that as the consideration received by the assessee for providing the repair work (and related activities) to ONGC are in context of the business of providing services or facilities in connection with, or supplying plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of mineral oils, thus, the receipts in the hands of the assessee from providing such services would clearly fall within the sweep of the exclusion contemplated in Explanation 2 to Sec. 9(1)(vii) of the Act. We thus, in terms of our aforesaid observations are of the considered view that the revenue received by the assessee from providing repair services to ONGC would not fall within the sweep of FTS under Sec.9(1)(vii) of the Act. 17. We shall now deliberate as to whether the revenue received by the assessee from providing repair services to ONGC would fall within the scope and gamut of the definition of term royalty. We find that the term royalty as per the India-Australia DTAA is defined in Article XII(3) of the India- Australia DTAA. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the order of the CIT(A) holding that the revenue received by the assessee from rendering of the repair services to ONGC cannot be brought within the sweep of FTS or Royalty, uphold the same. Before parting, we may further observe that as the repair works are undertaken at the overseas work stations of the assessee, therefore, the question of taxability of such receipts from rendering of the repair work as attributable to PE of the assessee in India does not arise. We thus, in terms of our aforesaid observations conclude that the A.O had erred in holding that the revenue from repair activities rendered by the assessee to ONGC was taxable in India under Sec. 44DA of the Act. The Ground of appeal No. 3 raised by the revenue is dismissed. 19. The Grounds of appeal Nos. 4 and 5 being general in nature are dismissed as not pressed. 20. The appeal of the revenue is dismissed. C.O No. 315/Mum/2017 A.Y. 2011-12 21. We shall now take up the cross objection filed by the assessee. The assessee had raised the following grounds of cross objection before us: 1. On the facts and in the circumstances of the case and in law, if the question numbers 1, 2 and 3 rais ..... 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