Case Law Details
Court : Authority for Advance Ruling
Citation : Seabird Exploration FZ, LLC, UAE [2010-TII-27-ARA-INTL]
Brief : Payment of hire charges on bare boat charter basis is not taxable if the agreement for hire was executed outside India and vessel was delivered/ situated outside India at the time of entering into the agreement.
Recently the Authority for Advance Ruling (AAR) in the case of Seabird Exploration FZ, LLC, UAE [2010-TII-27-ARA-INTL] held that the hire charges paid by the applicant to Vessel Providing Companies (VPC) under global usage bareboat charter agreements shall be liable to tax in India only in the cases where vessel was in India at the time of entering into agreement.
The AAR held that the ‘source of income’ for hire charges of a vessel is to be determined having regard to the place where the agreement for hire was executed and the place where the vessel was delivered/situated at the time of entering into the agreement. In the present case, since at the time of renewal of the agreements the vessels were situated in India, the hire charges pertaining to that period are taxable in India.
The AAR further held that since the activity of hiring seismic survey vessels is squarely covered by the special provisions of section 44BB of the Income-tax Act, 1961 (the Act), the receipts cannot be brought to tax within section 9(1)(vi) of the Act (which deals with royalty).
Facts of the case
• The applicant, a company incorporated under the laws of the United Arab Emirates (UAE), was engaged in the business of rendering geophysical services to oil and gas industry. In India, the Applicant has been providing offshore 2D and 3D seismic data acquisition and processing services to the oil companies in India. For the purpose of executing the scope of work under such contracts, the Applicant requires seismic survey vessels.
• In this regard, the Applicant has entered into “Bareboat charter” agreements (BBC agreement) with various VPC for provision of requisite seismic survey vessels on global usage basis. The BBC agreements 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 applicant filed a withholding tax application under section 195 of the Act for the payment due to the VPC requesting for a NIL withholding tax order since the VPC did 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 percent of gross payments being income computable under section 44BB of the Act.
Issue before the AAR
• Whether sum paid by the applicant to VPCs under global usage BBC agreements could be said to accrue or arise in India or deemed to accrue or arise in India under the provisions of the Act?
• Whether the sums paid are taxable in India under the provisions of section 44BB of the Act?
• Whether the sum paid or to be paid under the BBC agreements can be construed to be in the nature of ‘Royalty’ under section 9(1)(vi) of the Act?
Applicant’s contentions
• The income was not derived by the non-resident ship owner from a source of income in India. The source is traceable to India only if the income generating activity is contingent upon the use in India.
• The source of income for the owner of the vessel lies in delivering and transferring the control of the vessels to the applicant and not its subsequent utilization in India and elsewhere. Further, the hire charges were payable irrespective of the usage of the vessel and even if the vessel was kept idle.
• Source has reference to the origin of income and therefore the source of income to the vessel owner is outside India. The place where the vessel is delivered is the place where the source of income can be said to be situated.
AAR’s ruling
Business Connection
• The mere physical presence of a non-resident’s vessel in the territorial waters of India pursuant to the hiring of vessel on Bareboat Charter terms by the Applicant, without anything more, does not constitute a Permanent Establishment (PE) of the non¬resident in India. According to the pleadings and agreement on record, the non-resident owner of the vessel did not indulge in any business operations in India.
• 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.
Asset or Source of income in India
• 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 agreement and delivery are integral parts of a hire transaction.
• Therefore, in case of movable property, income arises at the place where the property is delivered to the hirer, unless there are any special stipulations. Relying on various Indian and international judgments, the AAR concluded that 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.
• In a case where the BBC 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 or activity giving rise to income can be said to be located 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.
• In the absence of specific stipulation in the agreement, it stands to reason and commonsense that the delivery pursuant to an agreement would take place at the place where the vessel is situated on the date of entering the agreement. The delivery pursuant to the renewed agreements must therefore be deemed to have taken place in India.
• The AAR held that where the agreements were executed outside India and the delivery of the vessels also took place outside India, the source of income cannot be said to be located in India, by reason of the mere presence of the vessels in India without the volition of the VPC. To this extent the hire charges paid by the applicant are liable to be excluded from the taxable profits of the VPC.
• Further the AAR observed that in the present case, where some of the BBC agreements were renewed, the vessels were in the territorial waters of India on the date of such renewal.
• The delivery pursuant to such renewed agreements, having deemed to have been taken place in India, the hire charges paid or payable to the VPCs for the period of renewal were held taxable in India.
Tax ability under section 44BB of the Act
• 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. Relying on its rulings given in the case of the Seabird Exploration FZ LLC, In re [2010] 187 Taxman 37 (AAR) and in the case of Geofizyka Torun SP. Z.O.O., In re [2010] 186 Taxman 213 (AAR) the AAR held that supply of plant (including ships) on hire for prospecting for, or extraction of mineral oil was squarely covered by the special provisions of section 44BB of the Act.
Tax ability as Royalty
• The hire charges received under the BBC agreements can be brought to tax as Royalty, if at all, under sub-clause (via) of Explanation 2 to Section 9(1 )(vi) of the Act which covers consideration for “use or right to use any industrial, commercial or scientific equipment”. The sub-clause however excludes the amounts referred to in Section 44BB.
• Having regard to the fact that section 44BB of the Act is applicable to the hire charges, as held earlier, the receipts cannot be brought to tax as royalty under section 9(1 )(vi) of the Act.
Our Comments
It has been held by the AAR that hire charges payable under agreements executed outside India pursuant to which vessels are delivered outside India are not taxable in India. However, hire charges payable pursuant to renewal agreements at the time of execution of which the vessels were in India are taxable under the provisions of section 44BB of the Act.
The tax ability on hire of vessels on bare boat charter basis under a global usage agreement has been a contentious matter, considering that owner of the asset earning the hire charges from the charter may not have information of the country in which the asset is actually being used by the lessee unless specific stipulation is made in the agreement in this regard.
Although it has been held by the AAR that income arises at the place where asset is delivered to the hirer, the terms of the BBC agreement are critical to determine what part of the hire charges can be said to arise in India. Therefore, terms of the agreement are important to determine tax ability of the hire charges payable there under.
