BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME...
Transcript of BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME...
BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI
23rd Day of July, 2010
PRESENT
Mr Justice. P.V. Reddi (Chairman) Mr. J. Khosla (Member)
Mr. V.K. Shridhar (Member)
A.A.R. No. 829 of 2009
Name & address of the applicant : Seabird Exploration FZ, LLC,UAE
35th floor, Al Shatha Tower, P.O. Box 500549, Dubai Media City
United Arab Emirates
Commissioner Concerned : Director of Income-tax (International Taxation),
New Delhi Present for the applicant : Mr. N. Venkataraman, Sr. Advocate Mr. Achin Goel, Advocate Mr. Taranpreet Singh, C.A. Mr. Hitesh Jain, C.A. Mr. Sanjay Aggarwal, C.A. Present for the Department : On 23rd Feb. 2010 Mr. S.M.J.Abidi, Addl.DIT, appeared. (appearance on 1st date of hearing) R U L I N G
[By Hon’ble Chairman]
1. The following facts are stated by the applicant in this
application for Advance Ruling under section 245Q of the Income
Tax Act 1961, hereafter referred to as the ‘Act’.
1.1. Seabird Exploration FZLLC (‘the Applicant’) is a company
incorporated under the laws of United Arab Emirates and is a tax
resident of UAE. Seabird is engaged in the business of rendering
geophysical services to oil and gas exploration industry. Its core
business activity involves: 1) 2D Seismic data acquisition and
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processing. 2) 2D/3D Shallow water data acquisition and processing.
In India, the applicant has been providing offshore 2D and 3D
seismic data acquisition and processing services to Oil & Natural Gas
Corporation Limited (‘ONGC’) and other oil companies in India. For
the purpose of executing the scope of work under such contracts, the
applicant requires seismic survey vessels. Seismic survey vessels
are special kind of vessels which are fitted with seismic recording
systems and receiver units which are used for undertaking seismic
data acquisition and on-board data processing.
1.2. In this regard, the applicant has entered into “Bareboat
charter” agreements” (‘BBC agreement’) with various vessel
providing companies (‘VPC’) for provision of requisite seismic survey
vessels on global usage basis. BBC agreement is one where the
lessor provides only the vessel (without provision of services
associated with the vessel) on hire to the lessee. It is also referred to
as ‘dry lease arrangement’. Further, a global usage BBC agreement
is one where the charterer is free to use the vessel anywhere around
the world.
1.3. The details of seismic vessels hired by the applicant for
executing contracts in India and elsewhere are given in the form of a
chart:
S.No. Name of the vessel Name of vessel
providing company. Country of incorporation of VPC
1. M/V Northern Explorer
M/s Sana Navigation Company Limited
Cyprus
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2. M/V Munin Explorer M/s. Munin Navigation Company Limited
Cyprus
3. M/V Osprey Explorer
M/s. Osprey Navigation Company Inc.
Republic of Panama
4. M/V Geo Mariner M/s Silver Queen Maritime Ltd.
Malta
1.4. The BBC agreements between the applicant and VPCs were
executed outside India. Under the terms of the agreement, the
vessels would be delivered to and redelivered by the applicant
outside India. In addition, all payments due by the applicant to VPC
under the agreement would be received/paid outside India. The
factual details relating to the hiring of vessels are given hereinafter.
1.5. The applicant filed a withholding tax application under
section 195 of the Income-tax Act, 1961 (‘Act’) for payments due to
VPC requesting for a NIL withholding tax order since VPC do not
have any income chargeable to tax in India. However, the assessing
officer passed an order directing the Applicant to deduct tax at source
at the rate of 4.224% of gross payments being income computable
under section 44BB of the Act.
2. On the basis of the above facts, the applicant has
approached this Authority seeking advance ruling on the following
questions:
1. Whether sum paid by the applicant to the vessel providing
companies (‘VPC’) under global usage bare boat charter
agreements (‘BBC agreements’) could be said to accrue or arise
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or deemed to accrue or arise in India under the provisions of the
Income Tax Act, 1961 (‘Act’) and therefore subject to withholding
tax in India?
2. If the answer to question 1 is in affirmative, whether sum paid by
the applicant to the VPCs under global usage BBC agreements
are taxable in India under the provisions of section 44BB of the
Act?
3. Whether on the stated facts and in law, can the sum paid or to be
paid by the applicant to VPCs under global usage BBC
agreements be construed to be in the nature of ‘Royalty’ under
section 9(1)(vi) of the Act?
4. Whether on the stated facts and in the circumstances of the case,
if the sum paid by the applicant to VPC under global usage BBC
agreements are construed to be in the nature of ‘Royalty’ or
‘Royalty and fees for included services’ under Article 12 of the
Double Taxation Avoidance Agreement between India and Cyprus
and India and Malta respectively (‘tax treaty’), the income
chargeable to tax in India ought to be computed as per the
computational mechanism under section 44BB of the Act?
2.1. Inspite of giving sufficient opportunities, the Department has
not chosen to file comments or written submissions. On 23rd
February, 2010, the case was adjourned on the request of the
Addl. DIT (Intl.Taxation), Dehradun, though the request for
adjournment was made at the last minute. Thereafter, by a
communication received on 9.3.2010 (wrong date is given in the
letter), the Addl. DIT, Dehradun, has raised some queries about
the ownership of the vessels which was replied to by the applicant,
as stated in the following para. Thereafter, though the Department
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received the written submissions filed by the applicant, no
comments were offered on behalf of the Revenue nor any one
appeared for the department. An indifferent attitude seems to have
been adopted.
3. Before we proceed further to deal with the question, we
would like to advert to the fact that the Department, in its
comments dated 23rd February, 2010, has pointed out certain
discrepancies in regard to the ownership of the vessels, namely,
Northern Explorer, Munin Explorer and Osprey Explorer. As
regards Northern Explorer, the applicant in its reply filed on
13.1.2010, reiterated that Sana Navigation Co. Ltd. is the owner (
as stated in the application). The applicant has filed a certificate
issued by the Directorate General of Merchant Marine of Panama
certifying that the vessel is owned and registered in the name of
Sana Navigation Co. The applicant has stated that as the vessel
was at the disposal of the applicant, the same was shown in public
domain as owned by the applicant. As regards Osprey Explorer
and Munin Explorer, it has been pointed out by the Revenue that
the names of the owners of the vessels are shown differently in
different documents. To meet this point, the certificate of
ownership issued by DG of Merchant Marine, Panama regarding
Osprey Explorer has been filed by the applicant in confirmation of
what it stated in the application. As regards Munin Explorer, two
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comments are made by the Revenue (vide written note dt.
4.2.2010): (i) as per the letter of ONGC, the said vessel is owned
by Ordinate Shipping AS whereas the assessee has shown the
owner of the vessel as Munin Navigation Co. Ltd. and (ii) the BBC
agreement submitted to ONGC was between Ordinate Shipping
(AS) and Seabird Exploration Ltd. and not with Seabird Explorer F-
2 LCC – the applicant. No specific clarification has been furnished
by the applicant on this aspect.
3.1. In the affidavit signed by the Executive Vice-President of the
applicant on 1st March, 2010, it is asserted that there was no MOU
between the owner of the vessel and the applicant which cast an
obligation on the owner to assure uninterrupted supply of the vessel
to ONGC. The deponent further clarified that the BBC Agreement
is neither location-specific nor utilization-specific and that the
applicant is free to use the vessel in any part of the world. Further,
it is stated that the payments have to be made by the applicant
even if the vessels are not in use. The BBC agreement, it is
pointed out, does not involve provision of crew of the vessel by the
owner. However, it is to be noted that Clause 10(b) of the
Agreement recognizes the possibility of the vessel owner providing
the crew.
4. According to section 115V of the Income-Tax Act, Bareboat
Charter means hiring of a ship for a stipulated period on terms
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which gives the charterer the possession and control of the ship
including the right to appoint a master and crew. In Black’s Law
Dictionary, the meaning of Bareboat Charter is given as :
“bareboat charter – A charter under which the shipowner provides the ship, and the charterer provides the personnel, insurance, and other materials necessary to operate it.”
‘Time Charter’, on the other hand, is defined as:
‘time charter – A charter for a specified period, rather than for a specific task or voyage; a charter under which the shipowner continues to manage and control the vessel, but the charterer designates the ports of call and the cargo carried.’
“
5. The Agreement entered into by the applicant is in the format
of Standard Bareboat Charter (BARECON 2001). Clause 2 of the
Agreement read with Box 21 states that in consideration of the
charter hire of US dollars 25,000 per day, the owners have agreed
to let and the charterer has agreed to hire the vessel for a period of
12 months with charterer’s option to extend it to another 12 months
subject to increase of charter hire by 10%. Charterer may
terminate the hire on giving 3 months’ notice. Clause 3 relates to
delivery. The vessel shall be delivered by the owners in a sea-
worthy condition and taken over by the charterer at the port or
place indicated in Box 13 in ready safe berth position. However,
Box 13 does not specifically mention the place of delivery. Clause
3(c ) of the Charter says that the delivery of the vessel by the
owners and the take over of the vessel by the charterer shall
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constitute a full performance by the owners of all the owner’s
obligations under clause 3. Clause 6 permits the vessel to be
employed in lawful trade for the carriage of suitable and lawful
merchandise within the trading limits indicated in Box 20. Box 20
indicates the trading limits as “worldwide within institute warranty
limits”. The owners shall have the right at any time after giving
reasonable notice to the charterer to inspect or survey the vessel to
satisfy themselves that the vessel is being properly repaired and
maintained (vide clause 8). Further, the charterer shall also permit
the owner to inspect the vessel’s log book whenever requested.
Clause 10 stipulates that during the charter period, the vessel shall
be in full possession and at the complete control of the charterer.
Sub-clause (b) of clause 10 which bears the heading “operation of
the vessel” says that the charterer shall at its own expense and on
its own procurement, man, navigate, operate fuel and whenever
required, repair the vessel during the charter period and shall pay
all charges and expenses incidental to the use and operation of the
vessel including all taxes and fees payable to the State and other
authorities. It is then stated in sub-clause (b) of clause 10 that the
master, officers and crew of the vessel shall be the servants of the
charterer for all purposes, “even if for any reason appointed by the
owners”. Sub-clause (c) of clause 10 obliges the charterer to
keep the owner and the mortgagee, if any, advised of the intended
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employment, planned dry-docking and major repairs to the vessel.
Clause 11 requires the charterer to pay hire dues to the owner
punctually in accordance with the terms of the charter. The hire is
payable in US dollars by means of bank transfer. During the
charter period, the vessel shall be kept insured by the owners at
their expense against the hull and machinery and war risks (vide
clause 14). Re-delivery is provided for in clause 15. The vessel
shall be re-delivered by the charterer at a safe and ice-free port
worldwide after giving due notice to the owner.
These are the relevant clauses in the agreement and there is
no need to refer to the other terms and conditions.
6. Section 5 of the Income-Tax Act, 1961 defines the scope of
total income. As far as non-resident is concerned, section 5(2) is
relevant. It says:
“5 (2) subject to 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.”
6.1. This provision shall be read along with section 9 which
defines the income deemed to accrue or arise in India. Section
9(1)(i) lays down:
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“9(1) The following incomes shall be deemed to accrue or
arise in India:-
(i) all income accruing or arising, whether directly or indirectly,
through or from any business connection in India, or through
or from any property in India, or through or from any asset or
source of income in India, or through the transfer of a capital
asset situate in India.”
7. Leaving apart section 5(2) for the time being, we shall
proceed to examine whether the first sub-clause of section 9(1)
(quoted above) is attracted in the instant case. It is difficult to infer
that the income has accrued or arisen to the non-resident owner of
the vessel by reason of any business connection in India. The
mere physical presence of the non-resident’s vessel in the territorial
waters of India pursuant to the hiring of the vessel on Bareboat
Charter terms by the applicant does not, without anything more,
constitute a permanent establishment’. The non-resident owner of
the vessel, according to the pleadings and Agreement on record did
not indulge in any business operations in India. Thus, the first
criterion of business connection is ruled out. In fact, no such case
has been set up by the Revenue in its comments. It would,
therefore, be appropriate to consider whether the third limb of sub-
clause (1) i.e. “through or from any asset or source of income in
India” is attracted. The learned senior counsel for the applicant
has concentrated on this point and submitted that the income was
not derived by the non-resident ship owner from a source of income
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in India. It is the contention of the applicant’s counsel that the
source is traceable to India only if the income generating activity is
contingent upon the use in India. According to the applicant, the
source of income for the owner of the vessel lies in delivering and
transferring the control of the vessel to the applicant and not its
subsequent utilization in India and elsewhere. On behalf of the
applicant, stress was laid on the fact that the hire charges were
payable irrespective of the usage of the vessel and, even if the
vessel was kept idle. Further, the vessel can be utilized all over the
world. It is pointed out that ‘source’ has reference to the origin of
income and therefore the source of income to the vessel owner is
outside India.
7.1. It is the case of the applicant itself that the place where the
vessel is delivered is the place where the source of income can be
said to be situated vide the last portion of para 1.2 of Annexure IV
to the application. It does not admit of any doubt that the delivery
of property/asset is an essential component of a contract of hire
unless the parties otherwise stipulate. The mere execution of
document, i.e. the agreement for letting out the movable property
does not conclude the hire transaction. It must be followed by the
delivery of the thing hired. The stipulations in the agreement in the
instant case specifically contemplate the delivery of the vessel.
The delivery, it is stated, could be in any port in the world. If the
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vessel was physically located in India at the time the Bareboat
Charter agreement was entered into or renewed, obviously, the
transaction could materialize only with the delivery of the vessel in
India. Of course, the delivery could be actual or constructive.
8. In the case of Commissioner of Inland Revenue vs. HK-TVB
International Limited1, the Privy Council explained that the words
“place where the property was let”2 as having reference “to the
place where the property let was situated and not to the place or
places where the lease happened to have been signed”. This
statement of law in fact accords with the understanding of the
applicant itself as seen from para 1.2 of Annexure IV. If the
transaction of hire had become effective only on the delivery of the
vessel as noted above, there is no difficulty in holding that the
income of the non-resident derived by it on a day-to-day basis
throughout the period the vessel was in India can be said to have
accrued or arisen in India within the meaning of sub-clause (b) of
Section 5(2) of the Act. In any case, it qualifies to be treated as
‘deemed income’ within the meaning of section 9(1)(i) quoted
supra. Proceeding on this premise, if we examine the facts as
presented by the applicant, the delivery of some of the vessels –
either actual or constructive – had taken place in India pursuant to
1 1992 Simons Tax cases p.723 : 1992 WLR 439 (CA) 2 These are the words falling from Lord Bridge in Hangseng Wang’s case [1991 (1) AC 306]
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the renewed agreement. In this context, let us notice the relevant
facts having a bearing on the aspect of delivery.
8.1. As per the details given by the applicant, the vessel Northern
Explorer was brought to India on two days i.e. 6.3.2008 and
23.10.2008. It remained in India during March / April, 2008. It was
deployed in the contract work with ONGC (contract No. 2038). In
the second spell, it remained in India from Nov., 2008 to May 2009
in connection with the execution of another contract (No.2139) with
ONGC. Thus, when the Agreement was renewed on 1.11.2008,
the vessel was very much in the territorial waters of India. The said
vessel stayed in India in connection with ONGC Contract No.2139
for 7 months.
8.2. The vessel HV Munin Explorer was in India from October,
2007 upto May, 2008 in connection with contract No. 2137 with
ONGC (vide Annexure A of the Paper Book). The Bareboat
contract was entered into on 1st November, 2007 and it was
renewed on 1st November, 2008. That means, the vessel was in
territorial waters of India on the date of renewal of Charter. There
is no mention in Annexure-A of any other period during which the
vessel was put to use in India.
8.3. The vessel Osprey Explorer was in India from March, 2008
to June, 2009, it having been deployed in ONGC contract Nos.
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2138 and 2139. The original Agreement which was in November,
2007 was renewed on 1.11.2008. On that date, the vessel was in
India. In the Chart filed by the applicant (Annexure ‘A’), the vessel
was shown to be ‘idle’ from June to Nov., 2009. There was yet
another renewal on 1.11.2009. It is not known whether the vessel
was stationed in India on that crucial date i.e. 1.11.09, though it
transpires from the Chart filed that it is being used in India in
connection with the contract with Reliance.
8.4. The vessel Geo-Mariner was in India from 17th March, 2008
to 22nd June 2008 in connection with the contracts with Cairn
Energy. Earlier it was in Tanzania. At page 16-A of Agreement to
the Paper Book, it has been shown to be in India in May/June, 2008
in connection with the contract with MOZ petroleum. But, it is not
stated so at page 2 of the same volume. The date of BBCA
between the applicant and the owner of Geo-Mariner was 26th Feb.
2008. Thus, as far as this vessel is concerned, there is nothing to
show that the vessel was located in India on the date of entering
into the Agreement and the delivery took place here.
8.5. In the Bareboat Charter Agreement, the port or place of
delivery is not specifically mentioned. However, the port or place of
re-delivery is mentioned as “Safe Port world-wide”. It is obvious that
the delivery of the vessel could also be in any port in the world. In
the absence of specific stipulation, it stands to reason and
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commonsense that the delivery pursuant to the agreement would
take place at the place where the vessel is situated on the date of
entering the Agreement. The delivery could be constructive in
nature having regard to the fact that the vessels, were located
outside the country where the agreements were executed and at
the point of time when the agreements were executed. The
delivery pursuant to the renewed agreements must therefore be
deemed to have taken place in India. It is axiomatic that the
agreement and delivery are integral parts of the hire transaction.
Thus, the transaction of hire was completed within India as far as
the three vessels are concerned, atleast in relation to renewed
agreements of November. It may be recalled that it is the case of
the applicant itself that the place of delivery is relevant to fix the
source of income arising from the hire of the vessel under the
Bareboat Charter. The reason obviously is that in the case of
moveable property, the income arises at the place where the
property is delivered to the hirer, unless there are any special
stipulations.
9. Now we shall address the crucial question whether the
income accrues or arises in any manner to the non-resident owner
of the vessel (VPC) through or from the source of income in India.
If so, the deemed income provision contained in section 9(1)(i) is
attracted. How the expression ‘source of income’ has to be
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understood? The ordinary and literal meaning of the word ‘source’
is that from which any act, movement or effect precedes; an
originator, creator, origin” (vide Webster’s Comprehensive
Dictionary). Black’s Law Dictionary defines ‘source’ as the
originator or primary agent of an act, circumstance, or result. In
short, the expression ‘source’ means the origin vide the dicta in
Raja Bahadur Kamakshya Narain Singh of Ramgarh Vs. CIT3. In the
case of Seth Shiv Prasad vs. CIT4, the Allahabad High Court
described the source of income as a spring or fount from which a
clearly defined channels of income. Rhodesia Metals Ltd. vs.
Commissioner of Taxes (11 ITR, Suppl. P. 45), the Privy Council
stressed on a practical approach in interpreting the expression
‘source’. The following observations Ingram’s work on Income Tax
was quoted with approval. “Source means not a legal concept
but which a practical man would regard as a real source of income;
“the ascertaining of the actual source is a practical hard matter of
fact. This observation was quoted with approval by the Supreme
Court in CIT vs. Lady Kanchan Bai (71 ITR 23). Thus, the
expression ‘source of income’ defies of a precise meaning and has
to be understood in a broad and practical sense, keeping at the
back of the mind the literal meaning of the expression.
3 11 ITR 513 4 84 ITR 15
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9.1. We may refer to certain other decisions which throw light on
the situs wherefrom the income can be said to have been derived.
9.2. The following passage in the decision of Privy Council in the
case of Commissioner of Inland Revenue vs. Hang Seng Bank Ltd. [1991
(1) AC 306] is very relevant to the issue in the present case. Lord
Bridge stated the principle thus:
“the question whether the gross profit resulting from a
particular transaction arose in or derived from one place or
another is always in the last analysis a question of fact
depending on the nature of the transaction. It is impossible
to lay down precise rules of law by which the answer to that
question is to be determined. The broad guiding principle,
attested by many authorities, is that one looks to see what
the taxpayer has done to earn the profit in question. If he
has rendered a service or engaged in an activity such as the
manufacture of goods, the profit will have arisen or derived
from the place where the service was rendered or the profit
making activity carried on. But if the profit was earned by
the exploitation of property assets as by letting property,
lending money or dealing in commodities or securities by
buying and reselling at a profit, the profit will have arisen in
or derived from the place where the property was let, the
money was lent or the contracts of purchase and sale were
effected. There may, of course, be cases where the gross
profits deriving from an individual transaction will have arisen
in or derived from different places. Thus, for example, goods
sold outside Hong Kong may have been subject to
manufacturing and finishing processes which took place
partly in Hong Kong and partly overseas”.
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9.3. The question in the appeal before Privy Council was whether
the respondent-bank was liable to profits tax on profits accruing
from the purchase and resale outside Hong Kong of certificates of
deposit, bonds and guilt-edged securities. The Revenue’s
argument that the gross profit from the trading in certificates of
deposit arose in or derived from Hong Kong because it was in Hong
Kong that the investment decisions were taken on a day-to-day
basis in the exercise of the skill and judgment of officers of the
banks’ foreign exchange department was refuted and the appeal
was dismissed. It was in that context that the above-quoted
observations were made. The said decision was referred to in a
case decided by the Privy Council two years later, i.e. in (1992
Simons Tax Cases 723) Commissioner of Inland Revenue vs. HK-TVB
International Ltd. Explaining Lord Bridges’ dicta in Hang Sang
Bank case, Lord Jauncey made the following crucial observations:
“Thus, Lord Bridge’s guiding principle could properly be
expanded to read one looks to see what the tax payer has done
to earn the profit in question and where he has done”.
Another important clarification given by Lord Jauncey was that
when Lord Bridge used the words ‘place where the property was
let’ he must have been referring to the place where the property let
was situated and not to the place or places where the lease
happened to have been signed.
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9.4. The case of Commissioner of Inland Revenue vs. Hong Kong
and Whampoa Doc Co. Ltd. [1960 (1) HKTC 85] referred to in TVB
case may be noticed. In that case, the appellants in response to a
request from the owners sent a tug to salvage the vessel stranded
on a foreign island. The tug refloated the vessel, towed her to a
shelter anchorage where she was made fit for the tow to Hong
Kong and thereafter, towed her for four days to the dock in Hong
Kong. The Supreme Court (Appellate Jurisdiction) held that the
profits from the salvage operation were not “profits arising in or
derived from the Colony”. The view taken by the appellate court is
discernible from the following passage:
“Here the contract of salvage was entered into in the Paracels and
all the work of refloating and putting the vessel into a condition to
be towed to Hong Kong and nearly all the tow, except for the
last three miles, were completely beyond the territorial limits of
Hong Kong and consequently I take the view that the profits must
be said to arise outside of Hong Kong rather than inside”.
It was then held in HK-TVB International case “In their Lordship’s view,
the court of appeal failed to give proper consideration to the fundamental
question of what were the operations of the tax payer company which
produced the relevant profit”. It was pointed out that the profit-
making activity of the sub-licences was carried on outside Hong
Kong but the grant of the sub-licences took place in Hong Kong
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where the tax payer company operated. It was held that the court
of Appeal erred in holding that the profits arose outside Hong Kong.
9.5. In the case of Federal Commissioner of Taxation vs. United
Aircraft Corporation [1943,68 CLR p.525], the High Court of Australia
affirmed the decision of appellate Judge, who held thus:
“In the present case the agreement was made in America; the
appellant carried on no business operations in, and had no
industrial or other property in Australia. All the information and
material was supplied in or from America. All the technicians were
sent by the Australian company for instruction except an engineer
who was loaned to the Australian company and became, for the
time being, its officer: All payments under the agreement were
made in America in dollars. In fact, and I so find, the income in
respect of which the appellant was assessed was not derived
directly or indirectly from any source in Australia, or, in other
words, directly or indirectly from any business operations carried
on by the appellant in Australia”.
While affirming this decision, Latham CJ made the following
pertinent observations:
“a person who neither owns anything in a country nor has done
anything in that country cannot in my opinion derive income
from that country”.
It was further observed thus:
“Thus, in my opinion it is impossible to point to any source in
Australia which can be described as the source of the 5,092
pounds paid to the American company. The American
company did nothing in Australia and owned no property in
Australia. That which produced the income of the American
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company was the agreement made in New York, together with
the performance of that agreement, which took place in
America”.
10. In the instant case, it cannot be said that the income has
been derived from an Indian source except in respect of vessels
delivered or deemed to have been delivered in India, as per the
details furnished in the following para. In a case where the
Bareboat Charter Agreement was concluded outside India and
delivery took place outside India, neither the origin of the income,
that is to say, the property or asset nor the activity giving rise to
income can be said to be located in India. The vessel owner has
not carried out any operations in India either directly or through the
crew. Even if the vessel owner carried out inspection of the vessel
in India to ensure its proper maintenance by the applicant and its
safety, that cannot be considered to be an income-triggering
business operation in India. The income accruing on day-to-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
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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.
10.1. To be more specific, the hire charges realized by VPC during
the following periods are liable to be taxed under the Income-tax,
1961 and the rest of them ought to be excluded.
(1) Osprey Explorer - from 1st November, 2008 to June,
2009. In regard to the period covered by the next
renewal i.e. 1.11.2009, no view is expressed.
(2) Munin Explorer - 1st November, 2007 to May, 2008.
(3) Northern Explorer – 1st November, 2008 to May, 2009.
(4) Geo-Mariner – not liable to be taxed, in so far as it was
deployed in contract with Crain Energy during
March/April, 2008. In regard to its alleged deployment
between May and June, 2008 in connection with the
contract with MOZ Petroleum, it is a matter of verification.
As regards the actual number of days in respect of which hire
charges received by VPC are liable to be taxed in India in the light
of the principle laid down in this ruling, the assessing authority is
at liberty to recheck the details, notwithstanding what is broadly
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indicated above. In this context it may be mentioned that the bills
of entry filed by the applicant do not relate to the entry of vessels
into India, but they are bills for home consumption (presumably
relating to fuel).
11. One more aspect which we would like to mention
before closing the discussion on the main question is whether the
master and/or other crew was deputed by VPC in order to assist
the applicant in carrying out the operations. Adverting to the
comment of the Revenue that it is not clear whether the crew
including the Party Chief/Shore Manager were employed by the
applicant itself or whether the services of the crew employed by
the vessel owner have been utilized by the applicant, the
applicant replied that there was neither supply of crew nor
payment of consideration for that (vide written submissions filed
on 3.3.2010). Without prejudice to the said statement, the
applicant has further stated that “any Crew serving in India at the
behest of the applicant, should they stay in India beyond 90 days,
would be assessed to tax in India and the applicant would
discharge this liability by withholding the tax thereon” (on salary
income). Further it is stated that the particulars of the crew
members would not be pertinent to decide the issue arising from
BBC Agreement. In the comments of the Revenue filed on
14.12.2009, a doubt was expressed whether the services of
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Shore Manager and crew deputed by VPC were utilized by the
applicant in providing the services to ONGC. The applicant,
while making a bare denial of the said suggestion pointed out that
such details are irrelevant for the determination of the issue and,
therefore, the particulars sought by the Revenue were not
furnished. At present and for the purpose of this application, we
go by the statement of the applicant that VPC did not provide any
personnel for the operation/maintenance of the vessel as
contemplated by the last portion of sub-clause (b) of clause (10)
of the Agreement. If contrary to the assertion of the applicant, it
is found that the services of VPC personnel were actually utilized
in operating the vessel, what bearing will it have on the stand
taken by the applicant need not be decided in this case. We are
leaving that question open if at all the Revenue would like to
probe into that aspect for good reasons.
12. The next question is whether the income chargeable to tax
in India ought to be computed as per the provisions of sub-section
(1) of section 44BB which reads as under:
(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 production of, mineral
oils, a sum equal to ten per cent of the aggregate of the
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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
……………………….. Explanation – For the purpose of this section, -
(i) “plant” includes ships, aircraft, vehicles, drilling
units, scientific apparatus and equipment, used
for the purpose of the said business;
(ii) “mineral oil” includes petroleum and natural gas”
As stated by the applicant, for any oil and gas exploration
activity seismic survey is the first important step and in order to
undertake seismic operations offshore, the applicant needs support
of seismic vessel which has specialized equipments for use in
seismic data acquisition and process. It cannot be disputed that
the seismic activities are inseparable part of prospecting of mineral
oil and the seismic survey vessel plays a crucial role in such
operations undertaken by the applicant. In the case of a non-
resident such as the applicant engaged in the business of providing
services or facilities in connection with prospecting for or extraction
of mineral oil or supplying of plant (including ships) on hire used or
to be used in the prospecting or extraction of mineral oil, Section
44BB is squarely attracted. The controversy has been settled by
the ruling of this Authority in more than one case. The ruling was
given in the case of the applicant itself vide order dated 22.12.2009
in AAR No. 815 of 2009. In the earlier ruling in Geofizyka Torun,
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Poland (AAC No. 813/2009) also, this Authority held that Section
44BB is the appropriate provision to be applied.
12.1. Accordingly, the 2nd question is answered in the affirmative
and in favour of the applicant.
13. The next question is about ‘royalty’. If at all sub-clause
(iv)(a) of Expalnation 2 to Section 9(1)(vi) of the Act could be
pressed into service to bring the transaction within the definition of
‘royalty’. Under sub-clause (vi) to clause (1), consideration for the
“use’ or right to use any industrial, commercial or scientific
equipment” is covered but the exclusion clause in the same
provision is important. It says: “but not including the amounts
referred to in Section 44BB”. Having regard to the fact that
Section 44BB comes into play as held earlier, the receipts cannot
be brought within the section 9(1)(vi) of the Act (which deals with
‘royalty’). It is unnecessary to go into the provisions of DTAA to
arrive at the conclusion in this regard. Nor it is necessary to go
into the question whether ‘use or right to use’ is in respect of an
equipment intended by both parties to be used in India.
14. The answers to the questions are, therefore, as follows:
Question 1: The answer is partly in affirmative and partly in
negative. The receipts representing hire charges are
liable to be taxed in India under the Income-tax Act,
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1961 for the period specified in para 10.1(supra) and
in respect of the three vessels mentioned therein.
As regards the remaining period and the vessel – Geo
Mariner, no income accrues or arises in India either
on actual or deemed basis.
Question 2: Question no. 2 is answered in the affirmative by
holding that the portion of income liable to be taxed in
India has to be assessed under Section 44BB of the
Act.
Question 3: The answer is in the negative as the consideration
received by VPC cannot be held to be ‘royalty’ income
within the meaning of Sectio 9(1)(vi) of the Act.
Question 4: It is unnecessary to answer this question except
reiterating that the computational mechanism under
section 44BB would apply.
Accordingly, the ruling is given and pronounced on this 23rd day of
July, 2010.
sd/- sd/- sd/- (J. Khosla) (P.V. Reddi) (V.K. Shridhar) Member Chairman Member
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F.NO. AAR/829/2009 Dated: 23.07.2010
(A) This copy is certified to be a true copy of the advance ruling and is sent to: 1. The applicant 2. The DIT (International Taxation) – II, New Delhi 3. The Joint Secretary (FT&TR-I), M/Finance, Bhikaj Cama Place, N.D 4. The Joint Secretary (FT&TR-II), M/Finance, Bhikaj Cama Place, N.D
(B) In view of the provisions contained in Section 245S of the Act, this ruling should not be given for publication without obtaining prior permission of the Authority
(Nidhi Srivastava) Additional Commissioner of Income tax
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