BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI 21 st Day of December, R U L I N G (By Hon ble Chairman)

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1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI 21 st Day of December, 2009 PRESENT Mr. Justice P.V. Reddi (Chairman) Mr. J. Khosla (Member) A.A.R. No.823 of 2009 Name & address of the applicant : M/s Wavefield Inseis ASA Strandv 15, 1366 Lysaker Norway. Commissioner concerned : Director of Income-tax, (International Taxation-II), New Delhi Present for the applicant : Mr. Perry Pardiwala Sr.Advocate Mr.Sanat Kapoor Advocate on record Mr. Rahul Patni CA Mr. Harpreet Singh - CA Mr. Taranpreet Singh CA Present for the Department : Mr. SMJ Abidi, Addl.DIT(Intl.Tax) R U L I N G (By Hon ble Chairman) 1. The applicant has filed this application under section 245Q(1) of the Income-tax Act, The following facts are stated in the application. 1.1 The applicant is a company incorporated under the laws of Norway and is a tax resident of Norway. In this connection, the applicant has attached the certificate of incorporation and a certificate from the tax authorities certifying the applicant s tax residency in 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. 1

2 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 , and , in different survey areas of Western and Eastern Indian Offshore. 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 2

3 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 Faroe Islands. As per the protocol to the India- Denmark Tax Treaty (hereinafter referred to as the Treaty ), the Treaty would also be applicable to Faroe Inslands. PF Thor has provided a chase vessel on a time charter basis which enables the applicant to undertake the scope of work under its contract with ONGC. 1.4 The applicant filed an application under section 195 of the Income-tax Act, 1961 requesting for a withholding tax 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. 3

4 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 4

5 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 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 5

6 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 6

7 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 Luba Port, West Africa where the vessel can safely lie afloat. The charterer pays the day rate by way of mobilization charge in consideration of the owners giving delivery at the Port. The vessel shall be employed in offshore activities. (vide cl.5(a)) It is further stipulated in clause 5(c) that the whole reach, burden and decks of the vessel shall throughout the charter period be at the charterer s disposal, reserving proper and sufficient space for the vessel s Master, Crew provisions and stores. Clause 6 says that the master shall carry out his duties promptly and the vessel shall render all reasonable services by day and by night and at such time the charterer may reasonably require. The charterer shall furnish the master with all instructions and sailing directions. It is stated in clause 6.d that the entire operation, navigation and management of the vessel shall be in the exclusive control and command of the owners, their Master, officers and crew. The vessel will be operated and the services will be rendered as per the request of the charterer subject to the sole discretion of the owner or the Master of the vessel to determine whether the 7

8 operation of the vessel may be safely undertaken. The owners shall pay for all provisions, wages and other expenses of the Master and crew and the maintenance and repairs of the vessel and for insurance of the vessel. While the vessel is on hire and during the mobilization and de-mobilisation period, the charterer shall provide and pay for all fuel, lubricants, water, port charges, dock, harbour, tonnage and other duties and charges (vide clause 8). The owners have to procure and maintain in effect for the duration of the charter party, the insurance specified in Annexure-8. Broadly, these are the provisions which deserve reference in the context of this application. 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 8

9 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 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) (b) 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 the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, 9

10 or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. (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 subsection (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 subsection (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). 10

11 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, 11

12 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 subcontractor, i.e, PF Thor who has not entered into any contract with ONGC 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 12

13 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 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. 13

14 The House of Lords in the case of Whistler International Ltd. Vs. Kawasaki KK Ltd 1 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 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# In an earlier case - Sea & Land Securities Ltd. Vs. William Dickinson & Co.Ltd. 3 Mckinnon LJ expressed the view that the essence of such contract is that the ship owners, without divesting , 1AC, #(vide Black s Law Dictionary at page 267) KB 65 14

15 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 15

16 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 16

17 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 subsection (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. 17

18 (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 nonresident. (5) It is unnecessary to answer this question. Accordingly, the ruling is given and pronounced on this the 21 st day of December, sd/- (J.Khosla) Member sd/- (P.V.Reddi) Chairman 18