Siem Offshore Inc. Vs Commissioner concerned Director of Income Tax, Advance Ruling Authority – The payment for hire of vessels provided by the Applicant to Trans ocean would be covered under the definition of ‘plant’ as defined under section 44BB of the Act. Accordingly, consideration received for supply of vessels on hire used for offshore drilling activities and marine operations would be covered within the purview of section 44BB of the Act.
The basic intention to exclude construction, assembly, mining or like project from the purview of fee for technical services was to distinguish between business activities undertaken by a taxpayer vis-à-vis mere rendering of services. The receipt on account of provision of supply vessel on hire basis cannot have the character of fee for technical services. The services required by Trans ocean are rendered by the Applicant by using the vessel under its control and command which cannot bear the character of fee for technical services. Reliance was placed on AAR’s own ruling in the case of Geofizyka Torun SP z o o (AAR No. 813 of 2009).
The AAR has held that sea logistic services are not technical in nature and consequently income therefrom is covered within the scope of section 44BB of the Act. While an advance ruling is binding on the applicant, it has a persuasive value in the case of other taxpayers and hence this ruling may provide welcome relief to service providers providing similar services to oil and gas exploration industry in respect of applicability of presumptive taxation.
BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI
25th Day of July, 2011
A.A.R. No. 875 of 2010
Justice Mr. P. K. Balasubramanyan (Chairman) Mr. V.K. Shridhar (Member)
|Name & address of the applicant||Siem Offshore Inc., Gravane, 12 PO Box 425, Krisriasand, Norway
|Commissioner concerned||Director of Income-tax,
(International Taxation)- II
|Present for the applicant||Mr. P.J. Pardiwalla, Sr. Advocate
Mr. Sushil Kumar Dubey, Advocate
Mr. Neeraj Agarwala, Advocate
|Present the Department||Mr. Y.D. Sharma, Addl.DIT,
(By Hon‟ble Chairman)
The applicant is a company incorporated in the Cayman Islands. The applicant wanted to get listed in the Oslo Stock Exchange. As per the laws of Norway it acquired the requisite qualification by shifting the managerial control of the company to Norway. This was done in January, 2010. According to the applicant, from that date, it became a tax resident of Norway. It relies upon the tax residency certificate issued by Norway in support. The applicant, therefore, submits that subsequent to January 2010 it is governed by the Double Taxation Avoidance Agreement entered into by India and Norway and it is liable to be taxed only under that Treaty.
The applicant is the owner and operator of model support vessels for the global oil and gas service industry. The applicant has currently a fleet of 25 vessels in operation and 18 vessels under construction. The vessels include large anchor handling tug supply vessels, platform supply vessels, and other support vessels. The applicant has an integrated operation with offices in Norway , Brazil and Cayman Islands. It provides a wide range of services from its vessels, equipment and experienced onshore and offshore personnel with high focus on Health, Safety, Environment and Quality.
In the year 2009 the Oil and Natural Gas Corporation Ltd., hereinafter „ONGC‟, floated a tender for hiring of bundled services for 10,000 feet Water Depth Deep water Rig. Four different companies, including the applicant, formed a consortium. An agreement in that behalf was entered into by them on 5.6.2009. The consortium submitted its bid on 10.6.2009 for the work. By letter dated 20.6.2005 ONGC awarded the work to the consortium. The letter of award provided that the period of the contract was 4 years from the date of commencement. A contract dated 16.11.2009 was entered into. The scope of the work was described thus:
“The contractor shall provide following services for the dynamically Positioned Drill ship/ Semi submersible Drilling Rig hired by Operator for working in water depth up to 10,000 feet for drilling exploratory/development wells and work-over/ completion operations including re entry anywhere in Indian offshore. The services shall be capable of operating in water depth of 10,000 feet with well depth of 35,000 feet or more.”
The consortium agreement dated 5.6.2009 provided the scope of the work of each one of the four. The applicant was required to provide “Sea Logistics Services”. It was specified that the “Contractor shall be solely responsible to provide marine logistics support for transportation of essential cargo including operator‟s, operator‟s subcontractors‟ and Rig Contractors‟ materials and personnel required at the rig. Contractor will also ensure marine logistics support in the event of any operational exigencies within the least response time. In event of failure, Operator at their discretion shall arrange requisite marine logistics support in emergency as an alternate at the sole risk and cost of the Contractor.”
The responsibilities of the applicant were then set out as follows:-
“1) To carry men and materials between base and offshore installations/rigs as well as between offshore installations/rigs, as instructed by the Operator due to operational exigencies.
2) To carry out standby and rescue operations in offshore, if required.
3) To assist in exigencies arising out of mud loss, blow out etc. occurred in offshore.
4) To carry out routine surveillance in offshore for safety and security reasons.
5) To carry out any other fieldwork as instructed by the operator.
6) The vessel shall be available for offshore work round the clock 24 hours a day during the term of the contract.
7) Ultimate responsibility of selection of the requisite type of vessel rests with the Contractor. However, minimum broad specifications of PSV‟s suitable for deepwater operation is attached for Guidance only.
8) The responsibility for obtaining all statutory clearances like DG Shipping Clearance for operating the vessels on the Indian coast, Naval clearance from Ministry of Defence, Custom clearance etc rests with the Contractor.”
Under the contract between the consortium and ONGC, ONGC was to make direct payments to each of the consortium members for performance of the work as provided in the contract undertaken by it. The consortium agreement between the applicant and the others was recognised by ONGC since the payments were to be made direct by ONGC to the applicant and the other three companies for the work done by each one of them. The applicant wanted to ascertain its tax liability as a result and made an application under section 197 of the Income-tax Act before the Deputy Director of Income-tax, International Taxation, Dehradun. According to the applicant it was liable to be taxed under section 44BB of the Income-tax Act and as such sought the determination of a withholding rate of 4.223% of the gross amount payable to the applicant by ONGC. By a terse order, the Deputy Director of Income-tax directed ONGC to deduct tax at the rate of 10% on all contractual payments. The applicant has produced a copy of that order. In the circumstances the applicant has sought a ruling as to whether it was not liable to be taxed only under section 44BB of the Act and whether ONGC was not liable to withhold tax only on that basis and on other related questions.
While admitting the application for a Ruling in terms of section 245R(2), this authority accepted the following questions for Ruling:-
1. Whether income derived by the Applicant in India is covered under the provisions of Section 44BB of the Income-tax Act, 1961?
2. Whether the income of the Applicant was not liable to be taxed as „royalty‟ in terms of Section 9(1)(vi)(iva) given the exclusion carved out in respect of such income falling within the purview of section 44BB of the Act.
3. Whether the income derived by the Applicant is taxable in terms of Article 23 of the Double Taxation Avoidance Agreement (DTAA) between India and Norway after January 2010 when the Applicant became a tax resident of Norway?
4. Whether given the provisions of Article 23 of the DTAA the income derived by the Applicant after January 2010 was liable to be taxed only in Norway?
5. In the alternative, if the income of the Applicant was taxable in India under clause (4) of Article 23 of the DTAA only 7.5% of such income could be deemed to be the profit of the Applicant?
6. Whether the Applicant was entitled to the beneficial rate of tax being 50% of the rate of tax applicable to foreign companies in India in terms of the Proviso to Clause (4) of Article 23 of the DTAA?
7. Whether in the event of the Applicant not being eligible for the benefits of Article 23 of the DTAA post January 2010 it would continue to be governed and taxed in terms of section 44BB of the Act?
8. If it is held that the present case falls within the scope of section 44BB of the Act, then whether service tax charged and collected from ONGC by the Applicant, if any, would form part of gross receipts for the purposes of taxation of the Applicant under section 44BB of the Act?
We find on a scrutiny and on hearing counsel, that questions 1,2 & 7 go together and questions 3 to 6 go together and question no. 8 stands independent. The discussion in this ruling, therefore, is on the basis of this understanding of the grouping of the questions.
Subsequent to the admission of the application for a Ruling, the Revenue has provided its comments. It has taken up the stand that the receipts of the applicant are covered under section 9(1)(vii) of the Income-tax Act, being fees for technical services and the applicant was not liable to be taxed under section 44BB of the Act especially in the context of the proviso thereto. The Revenue has taken up the position that the proviso as subsequently amended by way of clarification with effect from 1.4.2011 by adding section 44DA also within it and excluding income that falls within that provision from within the purview of section 44 BB of the Act has application. The amendment being clarificatory, it takes effect from the very inception of section 44BB of the Act. So viewed, income received by the applicant is outside the purview of section of 44 BB of the Act. The comments on the applicability of the Treaty after 1st January, 2010 claimed by the applicant, is not properly met except by repeating that the income derived by the applicant comes within sections 5 and 9 of the Income-tax Act under the charge ability laws in India. Same is the position with regard to the claim of the applicant that the service tax received by it and made over by it to the Government, cannot be treated as part of its income under section 44 BB of the Act especially in terms of the contract by which the liability to pay service tax was on ONGC. The comments merely repeat that the income does not fall under section 44 BB of the Act.
As summarised by Senior Counsel for the applicant the first question to be considered is whether the income earned by the applicant in terms of the contract can be computed under section 44BB of the Act for the purpose of assessment under the Act. A reference to the memorandum of understanding entered into by the four entities of the consortium shows that the work undertaken by the applicant is the providing of Sea Logistics Services. We have already noticed the content or scope of that service to be rendered by the applicant and its responsibilities in that behalf. From the role assigned to the applicant and the responsibilities undertaken by it in terms of the contract among the consortium members and accepted and recognised by ONGC, it is clear that the applicant was mainly engaged in transportation of cargo, material and personnel required at the rig in addition to ensuring marine logistics support in the event of any operational exigency. It is not possible to understand the responsibilities resting on the applicant in terms of the contract as involving the providing of any technical service. Obviously, the applicant is engaged in the business of providing service or facilities in connection with extraction or production of oil, a mining activity. It could also be said to be supplying plant and machinery for hire to be used in the prospecting of oil. Thus, the income derived by the applicant from the activities undertaken by it under the consortium agreement as recognised by ONGC the explorer, takes it out of section 9(1)(vii) of the Act and brings that income within section 44BB of the Act. On the terms of the transaction in question, it is clear that what is paid to the applicant is not fee for technical services and consequently the proviso to section 44BB of the Act is not attracted. It is not, therefore, necessary for us to go into the question as to what constitutes fee for technical services and whether section 44DA will be attracted to the case. On facts, we find that the services being provided by the applicant are not technical services. Hence we take the view that the applicant can claim to be assessed in terms of section 44 BB of the Act especially since there is no case that ONGC is not involved in prospecting, exploration and extraction of oil and the services being provided by the applicant are services in connection with that activity.
The second aspect to be considered is whether in view of the developments that took place after 1st January, 2010, the income of the applicant should be assessed only in the context of Article 25 of the India-Norwegian Treaty. It is not disputed that the applicant is rendering services in India and its income accrues in India but that income is liable to be assessed under section 44BB of the Act. The submission is that on the shares of the applicant being listed in the Oslo‟s stock exchange, in view of the managerial control of the applicant company being shifted to Norway, the India-Norwegian Treaty is attracted with effect from January 2010 and the provisions of the Treaty should be looked into for the purpose of assessment subsequent to January 2010. No dispute is raised by the Revenue regarding the claim of the applicant that though the company was registered in Cayman Islands the managerial control over it passed to Norway when the applicant got listed in the Oslo Stock Exchange. The Tax Residency certificate relied on by the applicant is also not questioned. Hence the DTAA relied on has to be considered.
Article 23 of the DTAA between India and Norway deals with Offshore activities. The present activity undertaken by the applicant being such an activity, it is claimed that it is liable to be taxed only in Norway in terms of Article 25 of the DTAA and not in India. A reading of Article 25 with particular reference to sub-article 4 thereof shows that an income covered by Article 23 can be taxed in this country, making it obligatory on Norway to give a deduction of the tax paid while assessing liability of the resident in that country. On reverting to Article 23 of DTAA we find that sub-article (4) also provides that the income like the one here can be taxed in India, but that it has to be at the rate and in the manner prescribed therein. It fixes the notional income for taxation at 7.5% of the sums receivable as against the 10% stipulated by section 44BB of the Act. Sub-article 4 of Article 23 also limits the tax to be imposed at 50%of the tax otherwise imposed by India. Thus tax liability of the applicant to be taxed in India is governed by Article 23(4) of DTAA read with its non-obstante clause fixing the limit. This would be the position from 1 st January 2010.
The third aspect to be considered is whether the element of Service Tax said to be included in the aggregate amount paid to the assessee should be deducted while ascertaining tax liability of the applicant to tax under section 44BB of the Act or Article 23(4) of the DTAA. Counsel submits that the applicant was only collecting the Service Tax from ONGC and paying it over to the State and hence the amount received in that behalf cannot be treated as an amount paid to the applicant on account of the provision of service to ONGC. It is also argued that in terms of the contract between the parties, the obligation to pay Service Tax on the service rendered is on ONGC and it is all the more reason why the sum paid in that behalf cannot be included while computing the income of the applicant at 10% or 7.5% liable to tax. The obligation of the applicant to remit Service Tax under the Finance Act 1994, arises only if and when the said tax is paid by the Service receiver to the applicant, the Service provider, in the context of Rule 6 of the Service Tax Rules, 1994 read with section 73A of the Finance Act. Hence, the amount collected as Service Tax by the applicant to be made over to the State, cannot be treated as consideration for the service rendered by the applicant to ONGC. That amount has to be deducted.
A reference to the letter of award of the contract shows that the rates specified therein are inclusive of Service Tax but that the applicant would be reimbursed by ONGC at actual against documentary evidence. This is a matter of contract between the parties. But a look at section 68 of the Finance Act, 1994 shows that the liability to pay the Service Tax is on the Service provider. No provision in that Act is brought to our notice which provides that the service provider need not pay the tax if the Service receiver does not pay it to the Service provider. Section 73A of the Act and Rule 6 relied on regarding the depositing of tax with the Government cannot be taken to water down the obligation of the Service provider or relieve him from being assessed to tax. The liability remains that of the Service provider.
Section 44BB of the Income-tax provides for ascertainment of a fictional income for the purpose of taxation. It is fixed at 10% of the amount paid or payable for the service rendered or facility provided in connection with the prospecting for or extraction or production of mineral oils. The consideration fixed under the contract between the parties as the sum to be paid has to be taken as the amount based on which the fictional income has to be ascertained. The section does not speak of any deduction in that behalf. It is open to those who want to claim exemptions and exclusions in assessment to opt to proceed under section 44BB(3) of the Income-tax Act. But once an assessee opts to come under section 44BB(1) of the Act, there appears to be no scope for any calculation or re-calculation of the amount shown as payable in the contract. The very object of introducing the fiction, namely, to avoid all complications in determining the liability of an assessee coming under that provision otherwise, would itself be defeated, if an exercise is to be undertaken in each case to ascertain the liability of an assessee as if in the course of a regular assessment. Such an exercise is not warranted or permissible on the scheme of section 44BB of the Act.
In view of the discussion above we rule that the income of the applicant is liable to be taxed under section 44BB of the Income-tax Act upto 1.1.2010, that it is liable to be taxed in India in terms of Article 23 of the DTAA between India and Norway thereafter, and that the service tax said to be included in the consideration received by the applicant from ONGC must also go into computation while calculating the consideration for the service or facility provided by the applicant under section 44BB of the Income-tax Act or Article 23(4) of the India-Norway DTAA.