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TMI Blog2019 (12) TMI 1230X X X X Extracts X X X X X X X X Extracts X X X X ..... arterers (BGEPIL, LTHE, Sapura and Astro) were for providing the 'use' or 'right to use' the industrial, commercial or scientific equipment, thereby treating the same as "Royalty" u/s 9(1)(vi) of the Act; 3. erred in holding that the benefit of exclusion provided under explanation 2 to section 9(1)(vi) of the Act would be available only if the receipts earned by MVPL is offered to tax under section 44BB of the Act. 4. erred in treating the receipts earned by Appellant from provision of services through various vessels as royalty u/s 9(1)(vi) of the Act, whereas the same is in the nature of business receipts; 5. without prejudice to the above, the Appellant submits that if the above receipts are considered as chargeable to tax, the same should be chargeable to tax in the nature of business receipts, chargeable u/s 44BB of the Act i.e. 10% of the gross receipts deemed as profit chargeable to tax. 6. erred in holding that receipts earned by the Appellant on provision of services through various vessels to the charterers shall be covered within the definition of the term "Royalty" under Article 12(3) of the India-Singapore DTAA. 7. should have appreciated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was 106 days. It was stated before the AO that the assessee did not offer to tax the receipts earned from provision of services through various vessels, as the services are rendered in India for only 165 days in the concerned financial year and the threshold to trigger a PE in India as per the India-Singapore DTAA is 183 days in a fiscal year. Further, it was explained to the AO that while the receipts earned by the assessee from provision of services through various vessels are covered u/s 44BB of the Act, however, since the assessee was not having a PE in India as per clause 5 of Article 5 of DTAA, the revenues are not taxable in India as per Article 7 of the India-Singapore DTAA. However, the AO characterized the charter receipts earned by the assessee during the year as royalty by denying the specific exclusion granted for activities covered u/s 44BB of the Act from the definition of royalty in Explanation 2 to section 9(1)(vi) of the Act on the ground that no amounts were offered to tax u/s 44BB of the Act. Further, the AO held that the provision of vessels by the assessee to the charterers during the year is purely in the nature of leasing/hiring of vessel on rental and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the assessee do not qualify as 'royalty'/ 'FTS' under the Act, the same cannot be brought to tax as 'royalty'/ 'FTS' under DTAA, (v) since the assessee has provided services for only 106 solar days in the fiscal year, the assessee does not constitute a PE in India as per Article 5(5) of the DTAA; in absence of a PE in India, revenues earned by the assessee on provision of services is not taxable in India as per the DTAA. Thus it is stated that the assessee has rightly filed a 'Nil' return of income adopting a 'No PE, No Tax' position as per the DTAA being more beneficial as compared to the taxability u/s 44BB of the Act. The Ld. counsel further submits that the AO incorrectly observed that the assessee is not rendering services which are in the nature of prospecting, extraction or production of mineral oil. Relying on the judgment of the Supreme Court in ONGC (supra), the Ld. counsel explains that profits should be computed in accordance with the provisions of section 44BB of the Act which is a specific provision for computing income of non-resident from provision of services or facilities in connection with or supplying plant & machinery on hire used in prospecting and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of a wet lease/time charter arrangement i.e. it involves a service element and not a pure rental contract. Referring to the clauses of the agreement, it is explained by him that the said agreement between the assessee and the charterers was not in the nature of simpliciter hire/lease of vessels as held by the AO, rather, it was a time charter contract whereby the assessee agreed to provide services through various vessels. Further, it is argued by him that in case of time charter of ship, though the charterer may have the right to give direction to the master, officer or other crew, but the charterer does not have full control, possession or operating responsibility of the vessel and hence, in substance is availing a service only and the charterer does not have any involvement in the functioning of the vessel and hence in a time charter arrangement, the revenues will not be taxable as royalty. Clarifying further, it is stated by him that since the assessee has full control over the vessel and the crew, the revenue earned by it will not be taxable as 'royalty' under the Act; accordingly the revenue earned by the assessee are not for hire or use of or right to use of any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed rate per day basis and not a service contract, it is explained by them that even though it is a time charter agreement, the crew is entirely at the command and directions of charterer and not assessee. Relying on the judgment of the Hon'ble Madras High Court in Poompuhar Shipping Corporation Ltd. (supra), wherein it is held that 'Ship' is an equipment and therefore, receipts from hire of a ship are covered u/s 9(1)(vi) and taxable as 'equipment royalty', the Ld. DRs state that the revenues earned by the assessee on account of hire charges is taxable as royalty. Thus the Ld. DRs conclude that the order passed by the AO be affirmed. 6. We have heard the rival submissions and perused the relevant materials on record. The 1st ground of appeal is general in nature. The reasons for our decisions in respect of the 2nd to 8th ground of appeal, being interrelated, are given below. Section 44BB is a special provision for computing profits and gains in connection with the business of exploration of mineral oil. Parliament engrafted the aforesaid provision in the Income Tax Act as a measure of simplification providing for determination of income of such taxpayers at 10% of the aggrega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MVPL is required to provide for accommodation, barge, AHT etc to BGEPIL. The scope of work for the said activities have been summarized as under : Clause 7: Employment * The entire operation, navigation and management of the vessel shall be in the exclusive control and command of MVPL; the vessel will be operated and the services hereunder will be rendered as requested by charterers, subject always to the exclusive right of MVPL. Clause 11: Duties of master, officers and crew The master, officers and crew will perform the following services: * Will connect and disconnect the water, fuel, liquid mud hoses etc and other hoses in port as well as offshore installations; * Will operate appropriate machinery on board the vessel (i.e. loading unloading cargoes, anchor handling etc) * Will hook on and unhook cargo when discharging/loading in port and offshore installation; * Will be in sufficient number to allow the vessel to operate for twenty-four hours per day; * Will obtain and maintain all available pilotage exemptions for port locations etc. Clause 18 - Bunkers at delivery and redelivery * MVPL is responsible for provision of lubricant oils, grease and other co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the agreements between MVPL and L&T, Sapura & Astro demonstrate that the agreement was on account of provision of services and not simpliciter hire of equipment/vessel: * Clause 14 - Insurance - MVPL shall be under an obligation to effect and maintain insurance policies. MVPL was also responsible for any damage of the vessel and crew therein and accordingly would bear all the costs in relation to the same. * Clause 6 - Master and Crew - the entire operation, navigation and management of the vessel shall be in the exclusive control and command of MVPL; the vessel. The vessel will be operated and the services hereunder will be rendered as requested by charterers, subject always to the exclusive right of MVPL; and * Clause 7 - Owners to provide - Remuneration of the master, officer and other crew is to be borne by MVPL." 6.2 At this juncture, we refer to the judgment of the Hon'ble Supreme Court in ONGC (supra). In that case, the assessee-company 'ONGC' and a nonresident/ foreign company had entered into an agreement by which the nonresident company had agreed to make available supervisory staff and personnel having experience and expertise for operations and management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nspection of gas turbine and generator. 24. 741 Repair and inspection of turbines. 25. 737 Repair, inspection and overhauling of turbines. 26. 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines. 27. 1522 Replacement of choke and kill consoles on drilling rigs. 28. 1521 Inspection of gas generators. 29. 1515 Inspection of rigs. 30. 2012 Inspection of generator. 31. 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines. 32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33. 2008 Expert advice on the device to clean insides of a pipeline. 34. 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations. 35. 925 Engineering analysis of rig. 36. 1519 Imparting training on cased hold production log evaluation and analysis. 37. 1533 Training on well control. 38. 1518 Training on implementation of Six Sigma concepts. 39. 1516 Training on implementation of Six Sigma concepts. 40. 6023 Training on Dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44BB by looking into whether the pith and substance of each of the contract/agreement entered by the assessee is inextricably connected with prospecting, extraction or production of mineral oil. This is evident from the order of the DRP dated 29.08.2018 passed u/s 144C(5) and the assessment order dated 19.09.2018 passed by the AO u/s 143(3) r.w.s. 144C(5) and 144C(13) of the Act. Therefore, we set aside the order of the AO and restore the matter to him to make an order afresh after examining each of the contract/agreement and by following the ratio laid down by the Hon'ble Supreme Court in ONGC (supra) mentioned at para 6.2 hereinbefore. We direct the assessee to file the relevant documents/evidence before the AO. We make it abundantly clear that in the de novo proceedings, the AO would examine the contentions of the assessee that (i) since the receipts earned from provision of services through various vessels are covered u/s 44BB of the Act, the same should be excluded from the definition of royalty under the Act under clause (iva) of explanation 2 of section 9(1)(vi), (ii) as per section 90(2) of the Act, the assessee would be governed u/s 44BB of the Act or under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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