TMI Blog2021 (3) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract of ONGC. The commercial need of the deployment of vessel was generated by the contract of the applicant with ONGC and the services of the seismic vessels were utilized within the Indian Territory. Thus, all the parameters of the source rule as explained by the apex court in the case of GVK Industries is found fulfilled in this case and the business activity of the VPCs is found to have a clear nexus with the Indian Territory. There was existence of close, real, intimate relationship and commonness of interest between the non-resident VPCs and the applicant both of whom were operating in Indian Territory and which satisfies the essence of business connection and territorial nexus . The applicant has emphasized that sections 4, 5 and 9 of the Act are to be kept in consideration even in those cases where assessment is done under section 44BB of the Act, as held by the hon'ble Supreme Court in the case of Sedco Forex International Inc. [ 2017 (11) TMI 78 - SUPREME COURT] In this case the issue was whether mobilization fee on account of mobilization/movement of rig from foreign soil/country to offshore site at Mumbai (India) received by the non-resident assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been filed. The details of seismic vessels hired by the applicant for executing contracts with ONGC in India is as under : Sl. No. Name of the vessel Name of vessel providing company (VPC) Country of incorporation of VPC Application No. 1 M/V Munin Explorer M/s. Munin Navigation Company Limited Cyprus A.A.R./1284/2012 2 M/V Hugin Explorer M/s. Seabed Navigation Company Limited Cyprus A.A.R./1285/2012 2. It is stated that the BBC agreement between the applicant and the VPCs were executed outside India, the vessel were delivered outside India and the payments were also made outside India. The applicant has filed two applications in respect of two separate contracts for the vessel under section 245Q(1) of the Income-tax Act, 1961 with a request for ruling on the following common questions in both the applications in respect of the BBC agreement. 1. Whether the sum paid by the applicant to the vessel providing company ( VPC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the income cannot be held to be royalty income under section 9(1)(vi) of the Act. The applicant submitted that the clauses of the present global usage BBC agreement with M/s. Munin Navigation Company Limited and M/s. Seabed Navigation Company Limited were identical with the four projects with various VPC, for which the aforesaid ruling was obtained. All the agreements were entered into by the applicant in the format of BIMCO Standard Bareboat Charter BARECON, 2001. Accordingly, the ratio of the ruling of this authority in the four projects was squarely applicable to the facts of the present case. 4. The learned authorised representative explained that as per the provisions of section 5(2) of the Act, any income of the non-resident is taxable in India, only when it is received by such non-resident in India or it accrues or arises or is deemed to accrue or arise in India. Our attention was drawn to clause 2 of the agreement read with Box 21 and Box 22 which stipulated that in consideration of USD 10,000 per day for M/V Munin Explorer and USD 31,600 per day for M/V Hugin Explorer, the owners had agreed to let and the applicant had agreed to hire the vessel for 165 days. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sires. The vessel owner has no role to play either in navigation or any other day-to-day operations of the ship and the ship is at complete disposal of the charterer. It is the charterer who employs the captain and crew and not the vessel owner. Thus, this was a mere act of letting the ship on rent to operate in Indian territorial waters and nothing more than that was done by the vessel owner. Clause 10 of the agreement stipulated that the vessel will be in full possession and at the absolute disposal of the applicant. Further, the applicant shall at its own expense and on its own procurement, navigate, operate, supply, fuel and repair the vessel during the charter period. The applicant shall pay all the charges and expenses incidental to the use and operation of the vessel including all taxes and fees payable to the State and other authorities. The Masters, officers and crew of the vessel shall be servants of the applicant. In view of these facts, the learned authorised representative emphasized that the vessel owner had carried out no operations in India and no part of bareboat rental income can be attributed to VPC, even where a business connection is said to be established. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the applicant needs support of seismic vessels which have specialised seismic equipment installed in it for use in seismic data acquisition and processing functions. The applicant had entered into global BBC agreement with VPCs for the provision of seismic vessel which would enable the applicant to undertake its scope of work of seismic data acquisition and processing under its contracts with ONGC. It was submitted that provision of such vessels on hire to be used in the prospecting or extraction of mineral oil would be covered under section 44BB of the Act. The reliance in this regard was placed on the decisions in the case of Wavefield Inseis ASA, In re [2010] 320 ITR 290 (AAR) and Wavefield Inseis ASA, In re [2010] 322 ITR 645 (AAR) (AAR No. 823 of 2009 and 844 of 2009) and in the case of Siem Offshore Inc., In re [2011] 337 ITR 207 (AAR) (AAR No. 875 of 2010). 11. On the question of royalty, it was submitted that the definition of royalty specifically excludes income from use or right to use equipment referred to in section 44BB. It was submitted that the sum paid/payable by the applicant to VPCs was covered under the ambit of section 44BB of the Act and. therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing the actual agreements between itself and the Vessel Providing Companies (VPCs). The Revenue has contended that the change of stand by the appellant was motivated to avoid payment of taxes in India. In the case of a Time Charter agreement, the permanent establishment of the vessel was established as the control and management of the vessel which was earning its income from Indian waters, existed with the vessel owner company. 13. On the merits of the application, the learned Departmental representative submitted at the outset that in the instant cases the transaction was between one non-resident with other non-residents. Therefore, the applicant was not eligible to derive benefit of the DTAA between India and Cyprus as claimed in the application ; as the payment to VPCs was not being made by an entity located in India. It was submitted that in such an eventuality only the provisions of the Income-tax Act has to be considered to examine the taxability of the payments being made by the applicant to VPCs. It was stated that section 5 read with section 9 of the Income-tax Act provides the necessary domestic legislation with regard to taxability of income of the non-resident. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 9(1)(vi)(c) of the Act read with sub-clause (iva) of Explanation 2 of that section, which defines royalty. It was explained that section 9 of the Act deals with source rule explicitly and in this regard the Explanation to section 9(2) inserted vide the Finance Act, 2010 with retrospective effect from June 1, 1976 was referred to. It was submitted that considering this Explanation, the income of the non-resident VPCs being royalty income shall be deemed to accrue or arise in India, whether or not, such non-resident VPCs had residence or place of business or business connection in India. Therefore, the contention of the appellant that the lease income of the VPCs was not sourced in India as they had no business connection in India, was devoid of merit. 16. The Revenue also submitted that in the Ruling No. 829 of 2009 dated July 23, 2010 (Seabird Exploration FZ, LLC, the U. A. E., In re [2010] 326 ITR 558 (AAR)), the authority had held since the income was assessable under section 44BB of the Act, it would not partake the nature of royalty under sub clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. It was, however, submitted that apparently this ruli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that there was no nexus between the source of royalty and the taxable territory. It was contended that the source of royalty, if at all, was in UAE or at the place where the vessels were handed over to the applicant. The applicant has strongly relied on the earlier ruling of the authority in Seabird Exploration FZ, LLC, the U. A. E., In re [2010] 326 ITR 558 (AAR) AAR No. 829 of 2009 in support of the contention that the taxable event had happened outside India and there was no nexus with the taxable territories of India and, therefore, the transactions were not exigible to tax in India. The applicant has also relied on the decision of the hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) in this regard. It was further submitted that neither the Income-tax Act nor India-Cyprus DTAA set out how the place of accrual of income is to be determined. Hence, the situs has to be determined according to the general principles of law. It was submitted that the income from letting of property would accrue or arise at the place where the property was given to the payer by the payee or where the payee could enforce the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial bid stating that the particular offered vessel(s) (not owned by the contractor) will be available against this particular tender/work on award of the contract. (c) The number of suitable short listed seismic/source vessels out of the offered vessels will be communicated to the successful contractors before the price bid is opened. The contractors will have to ensure deployment of vessel(s) out of short-listed vessels only. The short-listed Seismic survey vessels as mentioned in the Notification of Award (NOA) dated August 19, 2011 by ONGC is found to be as under : Short-listed Seismic Survey Vessels for the subject tender as confirmed by the contractor, i. e., M/s. Seabird Exploration FZ, LLC, Dubai : 1. Munin Explorer (IMO No. 8915782) 2. Hugin Explorer (IMO No. 9366005) 22. It is found from the contract document that contractor was required to submit hire/lease agreement of the vessels along with techno-commercial bid and accordingly the agreements dated November 1, 2010 were filed by the applicant. These agreements were in respect of Munin Explorer and Hugin Explorer which are mentioned as short-listed seismic survey vessels in the NOA dated August 19, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 9(1)(vi) of the Act ? (ii) Whether the income of the VPCs can be said to accrue or arise, or deemed to accrue or arise in India ? In the present case the status of both the payer and the payees is nonresident. The scope of total income is provided under section 5 of the Act and the relevant provisions of section 5(2) applicable to non-resident is as under : 5. (2) Subject lo the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. The income of the non-resident VPCs was not received in India in this case. Therefore, we have to examine whether their income accrues or arises or is deemed to accrue or arise in India. In order to find out what income is deemed to accrue or arise in India we have to refer to section 9 of the Act, which has two broad categories of taxable income, i. e., (a) Business Income, and (b) Income from interest or royalty or fee for technical ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of royalty. However, as per clause (iva) of Explanation 2, it will be excluded from the ambit of royalty if it is found that such scientific equipment is covered under the provisions of section 44BB of the Act. 25. In order to find out whether the vessels, which are scientific equipment, is covered under the provisions of section 44BB of the Act or not, it will be relevant here to reproduce that section : 44BB. (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, 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 extraction or pro duction of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession' : Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or section 115A or section 293A appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44BB clarifies that plant includes ship or any scientific apparatus or equipment used for the purpose of the said business. Thus, the research vessel employed by the applicant is found to be covered within the scope of plant as defined in this section. Therefore, the payment made by VPCs is found to be for supply of plant and machinery on hire used in the prospecting for mineral oil in India and is squarely covered under the provisions of section 44BB(2)(a) of the Act. Since the receipt is found to be covered under the provisions of section 44BB of the Act, it cannot partake the character of royalty in view of specific exclusion under clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. 27. The Revenue has relied upon the Explanation to section 9(2) of the Act inserted vide the Finance Act, 2010 with retrospective effect from June 1, 1976 which stipulates that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of subsection (1); whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India. It was contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 44BB is clearly attracted in the instant case. There is no doubt that PF Thor is engaged, inter alia, in the business of letting out the ships/vessels on hire. There is also no doubt that the vessel has been taken on hire by the applicant for the purpose of enabling the applicant to carry on the seismic survey and data acquisition operations which are essential for prospecting of mineral oil. The requirement of sub-section (1) of section 44BB is that the vessel/ship must be used in the prospecting for or extraction of mineral oils. The function and utility of chase vessel in the operations relating to seismic survey and data acquisition which are integral to prospecting has been explained earlier. A chase vessel, provided by PF Thor is thus inextricably linked to the prospecting operations. Once the deployment of the vessel in the prospecting operations is considered to be integral part of such operations, the second part of section 44BB(1) is triggered. It is immaterial whether the vessel is deployed in the prospecting activities pursuant to a direct contract with the oil producing company or pursuant to a contract with the seismic survey services provider. The person at w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -day basis is not attributable to a source in India but it arises by reason of a hire transaction entered into and given effect to outside India. The VPC was not concerned with the place of user by the applicant. In fact, the VPC is not bothered whether the vessel is actually being put to use because even for the 'idle period', the hire charges are payable. Having regard to the legal principles that could be culled out from the decisions adverted to above, this authority is of the view that where the agreement was executed outside India and the delivery of the vessel also took place outside India, by reason of the mere presence of the vessel in India without the volition of VPC, the source of income cannot be said to be located in India. To this extent, the hire charges paid by the applicant are liable to be excluded from the taxable profits of the VPC. It has to be kept into consideration that this ruling was given on the basis of the submissions made by the applicant only and without the bene fits of any comment from the Department. It was clearly mentioned in para-2.1 of that order that In spite of giving sufficient opportunities, the Department has not chosen to fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mic vessels, we are of the opinion that the place where the vessels are deployed for operation would be deemed to be the source of such business income. 32. It is found that the contract of the applicant with ONGC was for Hiring of services for 4C-3D Seismic API Pilot Project in Mumbai High . The scope of work as awarded by the ONGC to the applicant was explained in the contract document as under : 4C-3D seismic data shall be acquired using Ocean Bottom Nodes technology during the filed season 2011-12 (between October 15, 2011 to May 15, 2012) over an area of about 60 kms. (full fold excluding migration aperture) of Mumbai High Field, which is located about 165 kms. west-northwest of the city of Mumbai in the Western Off shore, India at about 70 - 80m. water depth. The details of the area are given in Plate-I annexed to the scope of work. The co-ordinates of the area showing full fold coverage excluding the migration aperture are given below in Table-1. The acquired 4C-3D data is to be processed and interpreted in India by the experts of the contractor to meet the desired objectives stated below and to submit outputs as per the given list of deliverables. It is also fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant pertains to this deployment. Further, the nature of agreement, whether time charter or BBC agreement, will not be relevant to decide the place of the business of seismic vessels. In the case of seismic vessel, the business is not conducted by the Masters, crew or manpower on board but by the scientific equipment on the vessel which emits seismic waves and recaptures it. It is immaterial under whose control the Masters and crew of the seismic vessel are. Seismic vessels are in fact research vessel and are used to study the geology of the ocean/sea and help in research of their beds. A seismic vessel is fitted with technological gadgets like GPS, computers, nautical charts and other scientific equipment that facilitate the process of seismic survey. The main component of the seismic survey is analysis of seismic waves. The process involves a seismic detector that shoots seismic waves to a selected underwater point and the time taken for the waves to refract back to their origin point determines whether that particular subsea area is feasible for the oil drilling purpose. It is imperative that in such a scientific process ; the Masters, crew or manpower on board have no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 9(1)(vii)(b) of the Act and the apex court has held that the income of the recipient will be charged or chargeable in the country where the source of payment is located or the payer is located. When we examine the facts of the present case in the perspective of the principle of source rule propounded by the apex court, it is seen that the payer, i. e., the applicant was located in the Indian Territory, i. e., in Bombay High where it was carrying the contract of ONGC. The commercial need of the deployment of vessel was generated by the contract of the applicant with ONGC and the services of the seismic vessels were utilized within the Indian Territory. Thus, all the parameters of the source rule as explained by the apex court in the case of GVK Industries is found fulfilled in this case and the business activity of the VPCs is found to have a clear nexus with the Indian Territory. There was existence of close, real, intimate relationship and commonness of interest between the non-resident VPCs and the applicant both of whom were operating in Indian Territory and which satisfies the essence of business connection and territorial nexus . 36. The applicant has emphasized th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 328 (AAR - New Delhi) that the vessel engaged in seismic survey at high sea constitutes a fixed place permanent establishment. To reproduce from the order (page 96 of 403 ITR) : We conclude therefore that the applicant has a fixed place permanent establishment in India, as per para I of article 5, in the form of its vessels engaged in seismic surveys on the High seas, in connection with the exploration of mineral oil/natural resources under agreement with the ONGC, through which it carries on its business. It is immaterial that the period of their operation was only 113 days, as conveyed by the applicant, as a permanent establishment need not be permanent or for all times, as explained in the cases cited by the Revenue and also held in the case of Formula One World Championship (supra). Hence, the income arising from the permanent establishment shall be subject to tax in India as business income of the applicant. This ruling was given in the context of India-UAE DTAA. The definition of permanent establishment in India-Cyprus DTAA is identical with the definition in India-UAE DTAA. As per article 5.1 of India Cyprus DTAA a fixed place of business through which the business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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