DECIDED BY: AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI, IN THE CASE OF: Seabird Exploration FZ, LLC, In re, APPEAL NO: AAR No. 829 of 2009, DECIDED ON JULY 23, 2010
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 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:
Name of the vessel
Name of vessel providing company.
Country of incorporation of VPC
M/V Northern Explorer
M/s Sana Navigation Company Limited
M/V Munin Explorer
M/s. Munin Navigation Company Limited
M/V Osprey Explorer
M/s. Osprey Navigation Company Inc.
Republic of Panama
M/V Geo Mariner
M/s Silver Queen Maritime Ltd.
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 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 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 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, Bare boat Charter means hiring of a ship for a stipulated period on terms 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 Bare boat Charter is given as :
“bare boat 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 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 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:
“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 Bare boat 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 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 vessel was physically located in India at the time the Bare boat 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 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.
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 Bare boat 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 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 Bare boat 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
In the case of Seth Shiv Prasad vs. CIT 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. CIT34, 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.
9.1. We may refer to certain other decisions which throw light on the situs where from 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”.
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.
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 re floated 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 re floating 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-licenses was carried on outside Hong Kong but the grant of the sub-licences took place in Hong Kong 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 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 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 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 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 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, 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 favor of the applicant.
13. The next question is about `royalty’. If at all sub-clause (iv)(a) of Explanation 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, 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.