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Wavefield Inseis ASA
Sec. 44BB of the Income-tax Act, 1961
Once Section 44BB is attracted, it is common ground that the computation has to be made in accordance with that provision and no other special provision, viz., Section 44DA or Section 115A would come into play in view of the fact that the payment is being made by a non-resident to another non-resident
[2009] 2010 TPI 83 (AAR - New Delhi)
Wavefield Inseis ASA
P.V. Reddi (Chairman) and J. Khosla
A.A.R. No.823 of 2009
21 December 2009
Gist
The applicant is a company incorporated under the laws of Norway and is a tax resident of Norway. The applicant is a marine geophysical company that conducts seismic surveys and provides offshore seismic data acquisition and other associated services to global oil companies. Such services are aimed at increasing the exploration success of its oil and gas clients and to assist them in maximizing production from their existing reservoirs. The applicant was awarded a 3 year contract by ONGC for 3D Seismic data acquisition and onboard processing offshore India during the field season 2008-09, 2009-10 and 2010-11, in different survey areas of Western and Eastern Indian Offshore.
(1) Whether on the stated facts and in law the income derived by PF Thor ought to be computed in accordance with provisions of section 44BB of the Act?
(2) If the answer to question 1 is in affirmative, what would be the rate at which tax is to be withheld from payments made by the Applicant to PF Thor?
(3) Whether on the stated facts and in the circumstances of the case, even if the consideration for the services provided by PF Thor is construed to be in the nature of ‘Royalty’ or ‘Fees for technical services’ under Article 13 of the Double Taxation Avoidance Agreement between India and Denmark (‘tax treaty’), nevertheless, the income chargeable to tax ought to be computed having regard to the computational mechanism under section 44BB of the Act?
(4) Whether on the stated facts and in law, can the consideration for services provided by PF Thor be construed to be in the nature of ‘Royalty’ under section 9(1)(vi) of the Act?
(5) Whether on stated facts and in law, even if the consideration for services provided by PF Thor be construed to be in the nature of ‘Fees for technical services’ under section 9(1)(vii) of the Act, nevertheless, the income chargeable to tax ought to be computed having regard to the computational mechanism under section 44BB of the Act?
(1) The first question is answered in the affirmative.
(2) It is not in dispute that as per Section 44BB read with Part II of the First Schedule to the Income Tax Act, the effective rate at which the tax has to be withheld from the payments made by the applicant to P.F. Thor would be 4.223%.
(3) No answer is called for as the contentions were confined to the provisions of the Income-tax Act, 1961 but not DTAA.
(4) As the amounts falling under Section 44BB of I.T.Act have been excluded from the purview of the royalty definition, this question has to be answered in the negative. Once Section 44BB is attracted, it is common ground that the computation has to be made in accordance with that provision and no other special provision, viz., Section 44DA or Section 115-A would come into play in view of the fact that the payment is being made by a non-resident to another non-resident.
5) It is unnecessary to answer this question.
Judgment
Present for the applicant | Mr. Perry Pardiwala – Sr.Advocate |
Present for the Department | Mr. SMJ Abidi, Addl. DIT(Intl. Tax) |
1. The applicant has filed
this application under section 245Q(1) of the Income-tax Act, 1961. The
following facts are stated in the application.
1.1 The applicant is a
company incorporated under the laws of
1.2 The
applicant submits that seismic survey is a method of investigating subterranean
structure. To reduce the risks involved in exploratory drilling, seismic
surveys are conducted to gather data to understand the size and location of oil
fields. Seismic survey involves acquisition/collection of the data related to
formation of sub-surface. This data is collected on large storage tapes and
then interpreted/processed by specialist professionals with the help of
specialized equipments (computers and software) to present the subsurface data
in a manner that it can help geologists draw conclusions about the existence of
potential hydrocarbons in the area. Seismic surveys can paint a picture of the
subsurface in order to better target oil and gas reserves. This results in
fewer dry holes and even avoids drilling if seismic data suggests a low
potential for oil and gas. Seismic data acquisition is done by a seismic vessel
to which long seismic cables (streamers) are attached behind. Seismic cables
float at a specified depth in water and are fitted with airguns which are used
to send shots underneath the water for generating waves. The generated waves
are captured/recorded by devices placed underneath water and are transferred to
the main seismic vessel for processing. The end of the seismic cable is fitted
with a floating device (tail buoy) to allow the crew to monitor the location
and direction of the steamer. The entire process and the activities, according
to the applicant, are monitored and assisted by a ‘chase vessel’.
1.3 For the
purpose of executing the contract with ONGC, the applicant has entered into a
contract with PF Thor, a company incorporated in
1.4 The
applicant filed an application under section 195 of the Income-tax Act, 1961
requesting for a withholding tax order @ 4.223% on the basis that the services
rendered by PF Thor fall within the scope of section 44BB of the Act and
accordingly the income chargeable to tax has to be computed as per that
section. The Assessing Officer, without setting out any reasons, passed a
withholding tax order according to which the applicant has to deduct tax at
source at the rate of 10.56% on gross basis. Hence, this application.
2. The
following questions are framed by the applicant for seeking advance ruling from
this Authority:
Questions:
(1)
Whether on the stated facts and in law the income derived by PF Thor ought to
be computed in accordance with provisions of section 44BB of the Act?
(2) If
the answer to question 1 is in affirmative, what would be the rate at which tax
is to be withheld from payments made by the Applicant to PF Thor?
(3)
Whether on the stated facts and in the circumstances of the case, even if the
consideration for the services provided by PF Thor is construed to be in the
nature of ‘Royalty’ or ‘Fees for technical services’ under Article 13 of the
Double Taxation Avoidance Agreement between India and Denmark (‘tax treaty’),
nevertheless, the income chargeable to tax ought to be computed having regard
to the computational mechanism under section 44BB of the Act?
(4)
Whether on the stated facts and in law, can the consideration for services
provided by PF Thor be construed to be in the nature of ‘Royalty’ under section
9(1)(vi) of the Act?
(5)
Whether on stated facts and in law, even if the consideration for services
provided by PF Thor be construed to be in the nature of ‘Fees for technical
services’ under section 9(1)(vii) of the Act, nevertheless, the income
chargeable to tax ought to be computed having regard to the computational
mechanism under section 44BB of the Act?
3. The
definition of plant as given in Explanation 2 to Section 44BB is quite
comprehensive. It includes ship, aircraft, vehicles, drilling units, scientific
apparatus and equipment used for the purposes of the business of providing
services in connection with prospecting etc. of mineral oil. Mineral oil
includes petroleum and natural gas.
4. The
relevance and importance of chase ship in carrying out the seismic survey is
brought out by the applicant in paragraph 1.3.2 of the application:
Seismic data acquisition is an activity involving
number of equipments in addition to the main seismic vessel, which move in
tandem with the seismic vessel. The area used for seismic data acquisition is
very large as seismic vessel, 6 to 8 seismic streamers of upto 8 kilometer
length, depth controllers and tail buoys are involved. The process of seismic
data acquisition cannot take place without deploying those equipments, which
would then need to work seamlessly and simultaneously for a long period of
time.
To co-ordinate and run an orchestra of a variety of
large sized equipments which are spread over an area spanning into kilometers,
is a complex and sophisticated exercise. This is where the crucial role of a
chase vessel provided by PF Thor comes in.
The chase vessel constantly monitors the activities
of the all the equipments used for seismic data acquisition whenever
acquisition is occurring in a large area relatively near shore. In particular,
due to large distance between seismic vessel at one end and seismic streamer
and tail buoys on the other end, chase vessel helps in avoiding potential
snagging of the seismic streamer. The chase vessel is also used for performing
functions like reducing the impact of marine activities in the survey area,
towing of main vessel in case of an emergency, transfer of personnel to and
from the seismic vessel and supply of fuel to the seismic vessel etc.
Accordingly, functions performed by chase vessel
i.e. services provided by PF Thor are extremely important without which it may
not be possible to undertake a successful seismic survey, hence a chase vessel
forms an integral part of the entire process.
5. The
applicant has stated that it entered into a world-wide ‘time charter agreement’
with PF Thor. Under the time charter arrangement, the entire operations,
navigation and management of the vessel provided on hire will be in the
exclusive command and control of the vessel owner and the vessel will be
operated and services rendered as and when required by the applicant. A copy of
the agreement titled “Bimco Supply Time 89 – Uniform Time Charter party for
offshore services vessels” has been filed. “Bimco supply time 89” is the code
name of standard time-charter party agreement. The agreement was entered into
in November, 2006 between the owner of the vessel and the Charterer, viz. the
applicant. The period of hire is 2 years and there is a provision for extension
of period of hire at a time for one year subject to a maximum of 3 years. The
opening clause states that the owners select and the charterers hire the vessel
named ‘Thor Assister’ for the period as stated above from the time the vessel
is delivered to the charterers. The charter hire is stated to be 5,900 US
dollars for a day pro-rata inclusive of fuel, lubs, harbour dues, etc. and the
money has to be transferred to the bank in Fero Islands. The payment of hire
has to be made within a period of 30 days after the date of invoice. It is
stated that the vessel shall be delivered by the owner free of cargo at
6. The
learned Sr. Counsel for the applicant has contended that the income received by
the owner of the vessel, namely, PF Thor in the form of “hire charges paid by
the applicant has to be computed in accordance with the special provision
contained in Section 44BB of the Act which provides for presumptive taxation.
As per section 44BB, a sum equal to 10 per cent of the aggregate amounts
specified in sub-section (2) shall be deemed to be the profits and gains of the
specified business and the effective rate works out to 4.23 per cent. The
learned counsel submits that both the limbs of sub-section (1) of Section 44BB
come into play in relation to the income derived by ‘PF Thor’. It is further
contended that it cannot be treated as ‘royalty’ income under Explanation 2 to
Section 9(1)(vi) of the Act, firstly, for the reason that there is no lease of
‘equipment’ and secondly for the reason that the amounts referred to in Section
44BB are specifically excluded from the purview of sub-clause (iv a) of
Explanation 2.
7. The
Revenue contends that the income received by PF Thor, if at all, falls within
the second limb i.e. supplying of plant and machinery on hire and if the
business concern which lets the plant and machinery is a third party like PF
Thor who has no privity of contract with ONGC, Section 44BB does not come into
play.
8. Section
44BB reads:
“(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”:
Provided that this sub-section shall not
apply in a case where the provisions of section 42 or section 44D or section
115A or section 293A apply for the purposes of computing profits or gains or
any other income referred to in those sections.
(2) The
amounts referred to in sub-section (1) shall be the following, namely :
(a) the
amount paid or payable (whether in or out of India) to the assessee or to any
person on his behalf on account of the provision of 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 India ;
and
(b) the
amount received or deemed to be received in
(3)
Notwithstanding anything contained in sub-section (1), an assessee may claim
lower profits and gains than the profits and gains specified in that
sub-section, if he keeps and maintains such books of account and other
documents as required under sub-section (2) of section 44AA and gets his
accounts audited and furnishes a report of such audit as required under section
44AB, and thereupon the Assessing Officer shall proceed to make an assessment
of the total income or loss of the assessee under sub-section (3) of section
143 and determine the sum payable by, or refundable to, the assessee.
Explanation : For the purposes of this
section, -
(i)
“plant” includes ships, aircraft, vehicles, drilling units, scientific
apparatus and equipment, used for the purposes of the said business;
(ii)
“mineral oil” includes petroleum and natural gas.
9. In a very recent ruling given by
this Authority in the case of Geofizyka
Torun Sp.zo.o. (AAR No.813/2009), the scheme and nuances of the said
special provision have been analysed in detail. The question in that case was
whether computation had to be done in respect of the income derived by the
assessee who carried out seismic survey and data processing services for the
oil companies under section 44BB as contended by the applicant or section 44DA
as contended by the Revenue. This Authority has taken the view that section
44BB being a specific and special provision providing for computation of income
arising from such services rendered in connection with the prospecting for or
exploration of mineral oil has to be computed under that section and Section
44DA cannot be applied in preference to Section 44BB even if the income partook
the characteristics of “fees for technical services” within the meaning of
Explanation 2 to Section 9(1)(vii). The expression “services in connection
with” has also been explained. Further, it was held that the income of such
nature stood excluded from the purview of Explanation 2, as made clear by the
CBDT in its circular. In the present case, we are not concerned with the
controversy whether the character of payment is in the nature of ‘royalty’ as
per section 9(1)(vi) because clause (iv a) of Explanation 2 to Section 9(1)(vi)
excludes the amounts referred to in Section 44BB. That clause reads thus:
“the use
or right to use any industrial, commercial or scientific equipment but not
including the amounts referred to in Section 44 BB”
9.1 Apart
from this specific exclusion, the learned counsel for the applicant sought to
contend that even the substantive part of clause (iv a) has no application
here. We need not go into that question. The only question to be considered is
whether the income received by PF Thor under the Time Charter Party contract is
liable to be computed and assessed to tax by applying Section 44BB. If Section
44BB has no application, it is common ground that the income received by PF
Thor shall be treated as business profit and the normal provisions governing
the computation of business profits will then apply. In such a case, the rule
of presumptive taxation under section 44BB will not apply.
10. The
contentious issue is, therefore, whether the ingredients of section 44BB are
satisfied in this case. The applicant’s counsel, as pointed out earlier, wants
to bring the instant case within both the limbs of section 44BB. His contention
is that the essence of transaction is rendering the services in connection with
prospecting for and exploration of mineral oils. Alternatively, it is submitted
that if it is construed that the substance of transaction is not rendering
services of the nature envisaged by the first part, the second part of
sub-section (1) of section 44BB is clearly attracted for the reason that the
‘plant and machinery’ has been supplied on hire for being used in the
prospecting operations. In this regard, the contention of the Revenue is that
it is not a case of rendering services, but, it is a case of supplying the
vessel on hire falling within the second limb of sub-section (1) of Section 44BB;
however, according to the departmental representative, the second limb is not
attracted here for the reason that the vessel is supplied not by an enterprise
having contract with ONGC but by a third party sub-contractor, i.e, PF Thor who
has not entered into any contract with ONGC.
10.1 We are of the view that the
second limb of section 44BB is clearly attracted in the instant case. There is
no doubt that PF Thor is engaged, inter
alia, in the business of letting out the ships/vessels on hire. There is
also no doubt that the vessel has been taken on hire by the applicant for the
purpose of enabling the applicant to carry on the seismic survey and data
acquisition operations which are essential for prospecting of mineral oil. The
requirement of sub-section (1) of section 44BB is that the vessel/ship must be
used in the prospecting for or extraction of mineral oils. The function and
utility of chase vessel in the operations relating to seismic survey and data
acquisition which are integral to prospecting has been explained earlier. A
chase vessel, provided by PF Thor is thus inextricably linked to the
prospecting operations. Once the deployment of the vessel in the prospecting
operations is considered to be integral part of such operations, the second part
of section 44BB(1) is triggered. It is immaterial whether the vessel is
deployed in the prospecting activities pursuant to a direct contract with the
oil producing company or pursuant to a contract with the seismic survey
services provider. The person at whose instance the chase vessel participates
in the seismic survey is not relevant to decide whether the requirements of the
section are satisfied.
10.2 The next question is whether the
vessel has been taken on hire. We have already referred to the broad terms and
features of the agreement which is in a standard proforma, bearing the description “Time Charter party for
offshore vessels”.
The House
of Lords in the case of “Whistler
International Ltd. Vs. Kawasaki KK Ltd 2001, 1AC, 638 explained:
“A time charterparty such as the present represents
a complex commercial bargain between owner and charterer. The owner undertakes
for the period of the charter to make his vessel available to serve the
commercial purposes of the charterer. To this end the hull, machinery and
equipment of the vessel are to be in thoroughly efficient state, the capacity
and fuel consumption of the vessel are specified and the vessel is to be ready
to receive the charterer’s intended cargo. The owner undertakes these
obligations in consideration of the charterer’s undertaking to pay for the hire
of the vessel at an agreed rate.
The charterer agrees to pay hire for the vessel
because he wants to make use of it. Crucial to the bargain, for him, are the
terms which require the Master to prosecute his voyages with the utmost
dispatch, which provide that the master (although appointed by the owner) shall
be under the orders and directions of the charterer as regards employment and
which require the charterer to furnish the master from time to time with all
requisite instructions and sailing directions.”
10.3 A Time
Charter Party agreement is distinguishable from Bare-boat Charter under which
the ship owner surrenders possession and control of the vessel to the
charterer, who then succeeds to many of the ship owner’s rights and obligations (vide Black’s Law
Dictionary at page 267).
10.4 In an
earlier case - Sea & Land
Securities Ltd. Vs. William Dickinson & Co.Ltd. 1942 2KB 65 Mckinnon
LJ expressed the view that the essence of such contract is that the ship
owners, without divesting themselves of the possession and control of the ship
merely undertakes to do services with their crew in carrying goods of the
charterers and there is no “letting or hiring of the steamer in real sense.” He
pointed out that certain phrases have survived in the printed form and only
“pertinent to the older form of the demise charterparty”. This decision of
1942, 2KB has been cited by the learned counsel for the applicant to
substantiate his first contention that the vessel of PF Thor has provided
services in connection with the prospecting/exploration of oil & gas and
therefore, the first part of section 44BB(1) would come into play. It is not
necessary for us to go into the larger question as regards the scope and
incidents of the contract for Time Charter Party and whether the statement of
law by Mckinnon LJ is preferable to the opinion expressed by House of Lords. On
a perusal of the relevant terms and clauses of the Time Charter Party agreement
filed in the present case, it seems to us fairly clear that it contemplates the
vessel being taken on hire by the applicant and the nomenclature ‘hire’ and
‘pay hire for the vessel’ in fact conveys the predominant nature of the
transaction and the intention of parties. The master and crew of the hired
vessel may in one sense, carry on the services by taking care of the vessel,
but, on that account, the second limb of S.44BB(1) does not cease to apply
unless it can be said with certainty that there is no hire at all. The term
‘hire’ in relation to a thing like machine, vehicle, ship etc. is generally
understood to be : “to procure the
temporary use of property at a set price” or “giving another temporary
possession and use of property other than money for reward”.
11. A conspectus of various terms
and stipulations referred to supra coupled
with the purpose for which the vessel is chartered would give an unmistakable
indication of hiring the vessel. The vessel, throughout the Charter period, is
kept at the Charterer’s disposal and would be available for operations whenever
the Charterer wants. The fact that the operation and management of the vessel
is stated to be under the control and command of the owners, their Master and
crew does not go against the concept of hiring. Such a stipulation in cl.6(d)
of the Agreement shall be read along with the sentence immediately following it
which says that “the vessel will be
operated and the services will be rendered as requested by the charterers,
subject always to the exclusive right of the owners or the Master of the vessel
to determine whether operation of the Vessel may be safely undertaken”.
This is only meant to ensure the safety of the vessel and does not rule out
hiring. Our attention has been invited to column no.18 of the Agreement whish
says that the employment of vessel is restricted to “support, re-supply and chase services for seismic operations as
instructed by charter, always within vessel’s safe capacities and capabilities”.
This stipulation again does not run counter to a hiring contract. The purposes
for which the hiring vessel can be utilized are only specified there. Though
the applicant has stated that the chase vessel “constantly monitors the activities of all the equipments used for
seismic data acquisition”, it is not stated by whom such monitoring is
done. Is it by the Crew of the vessel or by the technical personnel of the
applicant on board the vessel? The latter situation seems to be more probable.
The Crew may be engaged in the normal operations connected with navigation and
some support services. On the whole, it appears to us that the transaction
falls more appropriately under the second limb of sub-section (1) of Section
44BB rather than the first limb.
12. In the
light of above discussion, the questions are answered as follows :
(1) The
first question is answered in the affirmative.
(2) It is
not in dispute that as per Section 44BB read with Part II of the First Schedule
to the Income Tax Act, the effective rate at which the tax has to be withheld from
the payments made by the applicant to P.F. Thor would be 4.223%.
(3) No
answer is called for as the contentions were confined to the provisions of the
Income-tax Act, 1961 but not DTAA.
(4) As
the amounts falling under Section 44BB of I.T.Act have been excluded from the
purview of the royalty definition, this question has to be answered in the
negative. Once Section 44BB is attracted, it is common ground that the
computation has to be made in accordance with that provision and no other
special provision, viz., Section 44DA or Section 115-A would come into play in
view of the fact that the payment is being made by a non-resident to another
non-resident.
(5) It is
unnecessary to answer this question.
Accordingly,
the ruling is given and pronounced on this the 21st day of December,
2009.
