Brief of the Case
Authority for Advance Rulings held In the case of Aker Contracting FP ASA, Norway, USA that it is beyond doubt that the consideration received as per amended order is similar to consideration received as per original contract. It is also established that both original contract and amendments therein by way of Change order are inextricably linked with extraction, processing, production, storing & offloading of crude oil and natural gas for which RIL had floated tender and granted the contract to the applicant. Hence, the applicant would be governed by provisions of Section 44BB. Further, as the work as per the contract was to prepare the Floating Production Storage and Offloading (FPSO) for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil & natural gas from development area in India, it is immaterial whether work relating to preparation of the FPSO was done in India or outside India. Section 44BB does not make any distinction between amount paid in India or outside India and, therefore, the entire amount has to be considered for the purpose of computation under this section.
Facts of the Case
The applicant is a company incorporated under the laws of Norway and is engaged in the business of providing ‘Floating Production Storage and Offloading’ (FPSO) facilities which is a type of floating production system used in the offshore oil and gas industry. The applicant is a tax resident of Norway. The applicant entered into a contract on 9th May 2007 (original contract) with M/s Reliance Industries Limited (RIL). Under this contract the applicant was required to provide FPSO at the assigned oil and gas field in connection with extracting, prospecting or production of mineral oil, the consideration for this was on day rate release rental basis. Further the original contract specified USD 18.79 million as the fee towards mobilization of the vessel from Singapore to India to the offshore location in India. The consideration for FPSO facility and the fees towards mobilization of the vessel as per the original contract have been offered to tax from Assessment Year 2009-10 onwards. The applicant, in the return of income filed from the Assessment Order 2009-10 onwards, accepted that the consideration for providing FPSO facility was for supplying plant and machinery on hire used or to be used in the prospecting, extraction or production of mineral oil and such income having accrued in India was computed in terms of Section 44BB of the Income-tax Act and offered to tax accordingly. Similarly, the mobilization Revenue was also offered to tax on the same basis.
On 27th July 2008, the applicant signed a ‘Change Order’ with RIL to facilitate the amendments in the scope of work of the original contract for a total sum of US Dollars 85 million. The consideration received as per the ‘Change Order’ has not been offered to tax by the applicant. In the application before this Authority the applicant mentions that the ‘Change Order’ provides for additional scope of work out of which a substantial portion of work was performed outside India. However, RIL has been withholding tax on payments made under the ‘Change Order’ also based on the withholding order obtained from the Income Tax Department for the original contract under which tax was to be deducted in accordance with provisions of section 44BB of the Act.
The applicant raised the following questions – whether the consideration received by the Applicant under the Change Order for undertaking the following is in the nature of business profits or in the nature of ‘fees for technical services’ as defined in the Explanation 2 of section 9(1)(vii) of the Income Tax Act, 1961 and whether the income ought to be computed having regard to the computational under section 44BB of the Act , If the scope of work is in nature of business profits, would the consideration be taxable in India even though it pertains to work performed wholly outside India, Whether consideration received by the Applicant for installation of the buoy and moorings in India is in the nature of business profits on fees for technical services under section 9 and whether computational mechanism under section 44BB will be applicable , Whether the consideration received by the Applicant that is attributable to mobilization of the FPSO to the extent of the distance travelled by the FPSO outside India is taxable in India and Whether the consideration received by the Applicant on account of insurance receipts for loss of hire are chargeable to tax in India.
Submission of Applicant
Consideration received under the ‘Change Order’ is in the nature of business profits
According to the applicant it has not rendered any managerial, technical or consultancy services to RIL. The consideration received is neither for rendering services of managerial, technical or consultancy in nature nor in the nature of royalty. The work performed by the applicant is in the nature of business profits because such receipts are arising from execution of a contract. Even in respect of work relating to mobilization it was stated that the applicant is simply undertaking the mobilization of the commissioning team along with members of Aker Borgestad (entity which will operate and maintain the FPSO) and major vendor representatives four months prior to the FPSO sailing to India instead of six weeks prior to the FPSO sailing to India, as stipulated under the Change Order executed with RIL. The same essentially amounted to execution of the contract and not rendering any service to RIL. The mobilization of the commissioning team is integral to the provision of the FPSO (as envisaged by the original contract. The work performed by the applicant is in the nature of business profits.
Work performed outside India
The applicant has stated that as the entire scope of work was performed outside India, the consideration received cannot be said to accrue or arise in India.
Income should be computed under section 44BB
The applicant further states that in the event consideration received under the Change Order for revenue streams mentioned in question No.1 are deemed to be taxable in India, the income chargeable to tax should be computed as per computational mechanism under section 44BB of the Act. The activities performed are integral part of provisions of the FPSO and are thus in connection with extraction and production of mineral oil and gas at the assigned gas fields and should accordingly be liable to tax in accordance with the provisions of section 44BB. However, consideration received by the applicant that is attributable to mobilization of FPSO to the extent of distance travelled outside India is not taxable. The mobilization revenue taxable in hands of the applicant should be restricted only to the revenues attributable to the distance travelled in Indian territorial waters as compared to the total distance travelled from Singapore yard to India.
Work as per ‘change order’ cannot be attributed to PE
According to the applicant the STP buoy and moorings were installed in Indian waters in January 2008 and FPSO arrived at the production site only in August 2008. The consideration received was for the work done as per the ‘change order’ and cannot be attributed to PE in India on the ground that the work has been carried out outside India.
Income out of consideration to STP Buoys & Moorings should be computed under Section 44BB
As regards the consideration received for the installation of buoy and moorings in India, it was stated by the applicant that the activities performed on this account would fall within the exclusion to Section 9(1)(vii) of the Act and they would be classified as ‘Mining or like project’ and accordingly would not be in the nature of FTS. Such activities should be liable to tax in accordance with the provisions of Section 44BB of the Act. Such installation services are the services or facilities in connection with the production of ‘mineral oil’ and clearly fall under the ambit of Section 44BB of the Act. Accordingly, the additional compensation for timely installation of STP buoy and moorings should be computed having regard to the computational mechanism under section 44BB.
Insurance receipts not taxable in India
As regards insurance receipt, the applicant has stated that the insurance received cannot be deemed to accrue or arise in India since they are received outside India pursuant to an insurance policy which has been signed outside India. Accordingly, such receipts are not taxable in India. The same is not taxable even under the provisions of section 44BB because such receipts neither are the ‘services or facilities’ in connection with prospecting, extraction or production of mineral oil nor are for the supply of plant or machinery on hire for prospecting, extraction or production of mineral oil.
The applicant also submitted that he consideration received towards the scope of work performed is entirely outside India and, therefore, it falls outside the purview of section 5 of the Act. The reliance was placed on the decision of Mumbai ITAT in the case of MC Dermott ETPM Inc. vs. DCIT 2008 303 ITR 445. D. The applicant has no business connection in India and section 9(1) (i) has no application because even the work was carried out not in India. It was pointed out to the Applicant’s counsel that in the application a clear stand was taken that all activities pursuant to the change order were integral to the provisioning of FPSO as envisaged in the original contract and consideration received was revenue in nature. It was categorically categorized as business profits.
Submission of Department
Change Order is not a contract independent of the original contract
The change order is subsidiary to the original contract and the payments on account of it are integral transactions to the principal transactions that arise out of the original contract. In the cases of Hindalco Ind 94 ITD 242(Del), Mitsui Engg & Ship Building 259 ITR 248(Del), Ansaldo Energia SPA 210 ITR 237 (Mad), Motorola Inc 95ITD 269 (Del)(SB), 107 ITD 120 (Del), HMS Real Estate 325 ITR 71 (AAR) and Alstom Transport 349 ITR 292 (AAR) it has been held that subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation.
According to the Department the applicant is in the business of providing such services as mentioned in the contracts that it had entered into with RIL. Therefore the entire consideration that it has received from RIL has to be taken together, the applicant cannot bifurcate them as lease rentals (which has been offered to tax u/s 44BB of the Act and lump sum consideration for carrying out the works as specified in the change order (not offered to tax in India).
The Department has argued that the applicant has installed buoy and moorings in India in order to fulfill its obligations (i.e. to provide its FPSO on lease rental basis to RIL to extract, receive, process, produce, store and offload crude oil and natural gas from the fields in India) as contained in the original contract that it had entered into with RIL. For this, the applicant was paid USD 15 million and the same was offered to tax in India u/s 44BB of the Act. The other considerations received under the Change Order are also on account of the applicant fulfilling the same obligations towards RIL as contained in the original contract. Therefore such considerations received by the applicant cannot be considered differently just because the required modifications in the FPSO were carried outside India. Such modifications were required for the operations of RIL in India and the modification were carried out as per the request and requirements of RIL and hence they are all attributable to the business operations carried in India and thus have business connection in India.
According to the Department the amount received by the applicant pursuant to the Change Order is revenue receipt falling under the provisions of Section 5 and 9 of the Act as well as Article 7 of the DTAA between India and Norway. The Change Order does not represent a separate scope of work from that of the original contract and hence the same is taxable u/s 44BB of the Act. The Department also asserts that the applicant has a PE in India in terms of provisions of Article 23 of DTAA because the applicant is carrying on the activity of leasing business in India.
The Department has further pointed out that the applicant has already offered the entire mobilization fee as per the original contract to tax u/s 44BB of the Act and the claim that the distance travelled outside is not taxable in India is an afterthought. The entire consideration arising out of the original contract as well as the Change Order is to be taxed similarly u/s 44BB of the Act.
Held by AAR’s
The AAR held that from the facts, it is clearly seen that the Change Order has its genesis in Clause 25 of the original contract. It was only after following procedure mentioned in the clause 25 in detail that the change proposal was authorized by RIL and such authorization was called the Change Order. In view of this basic fact it is impossible to accept that the Change Order is independent of the original contract and the payment pursuant to Change Order was recoupment of capital costs. The analysis of original contract and of the Change Order further shows that the Change Order is nothing but amendments in their original contract. It is mentioned upfront in clear terms in the change order. In the circumstances to separate the consideration for mobilization pursuant to the Change Order from mobilization consideration as per original contract is not at all possible. The fact remains that the Change Order does not alter the character of consideration received which is identical with that of consideration received as per original contract.
The efforts made by the applicant’s counsel to make an artificial distinction between these two are not of any use. The case laws cited by him (CIT vs. Poona Electricity Company 14 ITR 622 and of Hoshiarpur Electricity Company vs. CIT 41 ITR 608) are in respect of definition of the term ‘actual cost’ in Section 43(1) of the Act and are in entirely different and unrelated context which has not even remote application in the present case. Here the facts are strong enough to suggest and speaking loudly that Change Order originates from the original contract. Any other interpretation will be nothing but alteration of facts.
Further, the Hon’ble High Court of Uttrakhand considered the question whether the entire mobilization revenue was chargeable to tax in India despite the fact that major part of the said activity was carried outside India and whether provisions of section 44BB would override Section 5. It was held by the Hon’ble High Court of Uttrakhand that Section 5 contains the scope of total income, which provides that subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income as described under this Section and Section 9 provides the incomes deemed to accrue or arise in India in the contingencies described under this Section. Therefore, Section 5 and Section 9 both are aimed at the income for the taxability under Section 4 of the act, while Section 44 BB does not take into account the income for calculating the aggregate amount to calculate 10 per cent profit and gains. Profit and gains is a type of income to be taxed under a legal fiction i.e. @ 10 per cent of the amount specified in sub-section (2) of Section 44 BB. Section 44BB is a special provision relating to non-resident assessee who is providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in or outside India. The Section is a complete code in itself.
This Authority has also taken a view in the case of Geofizyka Torun Sp.zo and Bergen Oilfield Services AS that ‘there is no scope under the provision of Section 44BB to split revenue attributable to activities in India and outside India, where the income is offered to tax on deemed profit basis. Accordingly the mobilization and de-mobilization revenue relating to the vessel travelled outside the Indian territorial waters would be included in the gross revenue for determining the deemed profit.’ It must be noted that section 44BB was introduced by the Finance Act, 1987, with retrospective effect from 1.4.1983, as it was felt that the computation of income on net basis in such a business was complicated. So, a lower tax @ 10% (as againsthigher tax on FTS and on net basis) on deemed profits and gains of the aggregate amount as specified in sub section (2) was prescribed, without splitting up the amount on the basis of place of payment. Therefore, there is no scope of splitting up the amount paid in or outside India.
It is established beyond doubt in earlier paragraphs that the consideration received as per Change Order is similar to consideration received as per original contract. It is also established that both original contract and amendments therein by way of Change order are inextricably linked with extraction, processing, production, storing & offloading of crude oil and natural gas for which RIL had floated tender and granted the contract to the applicant. Hence, the applicant would be governed by provisions of Section 44BB of the Act. As the ‘work’ as per the contract was to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil & natural gas from development area in India, it is immaterial whether work relating to preparation of the FPSO was done in India or outside India. Further Section 44BB does not make any distinction between amount paid in India or outside India and, therefore, the entire amount has to be considered for the purpose of computation under this Section.
The applicant has also argued that the consideration received as per Change Order is not taxable under the DTAA between India and Norway. It is relevant to point out that the scope of work as per Change Order has not changed as compared to that in the original contract. The applicant’s arguments is based on the stand that it, being a resident of Norway, does not carry on any activity offshore in India while performing its obligations under the Change Order and, therefore, provisions of Article 23 are not applicable. Again, this stand is based on the distinction between original contract and change order and is different from the stand taken in respect of original contract in the returns filed by the applicant form Assessment Year 2009- 2010 onwards. As said earlier, the consideration received from both original contract and Change Order is of the same nature and, therefore, it is not at all possible to give different treatments to them. Having said this, it is not acceptable that the applicant is not carrying on any activity in India.
As regards consideration received on account of loss of lease rentals on account of insurance policy signed outside India, the Department has also not disputed the stand of the applicant that such receipts are not taxable in India. In view of the fact that such receipts were received outside India, as a result of insurance policy obtained and signed outside India, we are inclined to accept the stand of the applicant.
Accordingly, the consideration received by the applicant under the Change Order for undertaking the scope of work including installation of STP buoy and moorings in India is in the nature of business profits and taxable in India under the provisions of section 44BB without splitting the same on the basis of travel of the FPSO outside or in India.