Case Law Details
Repairs and mobilization of rigs not to be included for the purpose of calculating 120 days to constitute an installation PE- rules Delhi Tax Tribunal
Source: R & B Falcon Offshore Ltd Vs. ACIT Dehradun, ITAT Delhi (2011-TII-02-ITA T-DEL-INTL)
Facts
• R B Falcon Drilling Co USA (“RBF”), a non-resident foreign company, was engaged in business as an offshore drilling contractor.
In terms of an agreement with Petrom S.A., it had to execute a contract relating to drilling including mobilizing of rig in India. In the contract, RBF had given an address in India as the office address.
• In executing the contract the rig had to undergo repairs and for which RBF was remunerated by Petrom SA. The bone of contention between RBF and the revenue authorities was the period when the rig was under repairs on whether it is to be considered as being used for the purposes of the contract or not.
• RBF contented that since the rig had to be repaired, the period taken to bring the rig in working condition could not be considered as that the rig had not been used for the purpose of exploration and exploitation of natural resources. Hence the said period had to be excluded for calculating the period of 120 days required to constitute an installation Permanent establishment (PE) in accordance with Article 5(2)(j) of the Indo US Double Tax avoidance agreement (DTAA).
• The Assessing Officer (AO) held that the time that the rig underwent repairs since its arrival in India, for which RBF had received consideration was to be included and since the duration was longer than 120 days, RBF could be said to have a PE in India in accordance with the provisions of the relevant DTAA.
• In computing the income attributable to the PE, the AO invoked the provisions of section 44 BB of the Income- tax Act, 1961 („the Act?) and included the entire amount of mobilization revenue in respect of mobilization activities carried on outside India as income of RBF instead of such part attributable to the transportation of the rig in India.
• The Commissioner of Income-tax (Appeals) [CIT(A)]dismissed RBF?s appeal.
• Aggrieved by the above orders, RBF preferred an appeal before the Tribunal.
Issues before the Tribunal
• Whether period of repairs and mobilization of the rig has to be considered for the purpose of calculating 120 days to constitute an installation PE under the DTAA?
• Whether merely office address is sufficient to conclude that the assessee had a fixed PE in India?
• Consequently, whether mobilization charges paid to the assessee outside India are also includible in gross receipt u/s 44BB of the Act?
Observation and Ruling of the Tribunal
• An installation or a structure could become a PE only if it was actually used for exploration or exploitation of natural resources for a period of more than 120 days. The activity of repairs and mobilization of the rig were not for exploration or exploration of natural resources. That activity was a preparatory activity so as to make the rig fit for exploitation of natural resources.
• The rig could be said to be used for exploitation of mineral oil only when it was positioned at the appointed place for the exploitation of mineral oil. It was the admitted position that if the time was reckoned from its positioning at the appropriate place, the period was less than 120 days. Therefore, the assessee did not have any PE in terms of Article 5(2)(j) of the DTAA.
• Hence, the period of repairs and mobilization of the rig could not considered for the purpose of calculating 120 days required for constituting an installation PE.
• The Tribunal drawing from the OECD commentary, stated that the mere office address could not be said to considered as a PE, unless it has been established that activities (other than preparatory and auxiliary activities) need to be carried out from such place for it to be considered as a PE. Since there was no evidence to show that any business was carried on except that the address had been mentioned in the agreement, it could not lead to an inference that RBF had a fixed place PE by mentioning the office address in the agreement.
• Since the income was not taxable in India in absence of a PE, computing the income on a presumptive basis u/s. 44BB of the Act was not permissible.
Conclusion
The above decision lays down the position that an installation or a structure could become a PE only if it was actually used for exploration or exploitation of natural resources for a period of more than 120 days. The time from its positioning at the appropriate place for exploitation of mineral oil only was to be considered and not when it was under repairs or being moved to the appointed place.
