Thursday, 23 August 2012

Income taxable under both FTS and PE would be taxable as FTS – AAR

The services rendered by the applicant are technical in nature and do not fall within the exception provided in the definition of FTS since the applicant has not actually carried out any mining or like project.  It can at best be said that the services were rendered “in connection with” the mining activity undertaken by the Indian Companies.  The applicant cannot be taxed under section 44BB since it had merely contracted to render some prospecting services through a sub-contractor in India.
AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI
C.A.T. Geondata GmbH, In re
JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN
AAR NO. 1119 OF 2011
JULY 31, 2012
RULING
Essar Oil Limited and Essar Engineering Holdings Limited were awarded a contract by the Government of India for exploration of block AA-ONN-2004/3 under the New exploration licensing policy VII. The award of the block to the Consortium is governed by the production sharing contract between the Government of India and the Consortium members.
2. The applicant is a company incorporated under the laws of Austria and claims to be a tax resident of Austria. It is engaged in the business of acquisition and processing of 2D/3D Seismic Data for companies engaged in the exploration and production of mineral oil in various countries. Seismic data acquisition, according to the applicant, means the generation and recording of seismic data relating to the formation of sub-surface wherein the required data is collected on large storage tapes and then processed by specialist professionals with the help of specialized equipment to present the sub-surface data in the manner that can help the geologist to draw a conclusion about the existence of hydro-carbon in the concerned area. The applicant was awarded the work of acquisition and processing of 3D land seismic data over 50 sq. kms in a block in Assam by Essar Oil Limited which had entered into a contract in that behalf with the Government of India. The applicant entered into an agreement dated 3.5.2011 with Essar Oil Limited for the purpose of carrying out detailed design, plan and execute acquisition of 3D seismic data in the concerned area and provide related services in accordance with the terms of the contract. In pursuance of the above work being awarded to the applicant, the applicant entered into a Memorandum of Understanding dated 16.3.2011 with Hardson Oil Fields Services Private Limited. Thereunder, the applicant has assigned the work to that sub contractor by work order dated 21.3.2011 followed by a detailed agreement dated 21.3.2011. The work thus commenced and is continuing under the arrangement. The applicant submitted three running bills to Essar Oil Limited. Essar Oil Limited, while releasing the payments withheld taxes in terms of section 195 of the Income-tax Act. Since according to the applicant, withholding of tax as done by Essar Oil Limited was not warranted under the Act, the applicant approached this Authority for an advance ruling on the questions posed by it in the application.
3. After hearing the applicant and the Revenue, this Authority allowed the application under section 245R(2) of the Act for rendering the rulings under section 245R(4) of the Act on the following four questions:
 i.  Whether the applicant is not entitled to absolute exemption from levying of tax in India by virtue of provisions of DTAA between India and Austria, since the sub-contractor being an independent agency and not an agent which is devoted wholly on behalf of the applicant, cannot be treated to be a Permanent Establishment within the meaning of Article 5 of the DTAA?
 ii.  Even assuming that the sub-contractor is a Permanent Establishment within the meaning of Article 5 of DTAA, whether the profits of the applicant taxable in India can exceed the extent of profit attributable to the Permanent Establishment as provided under Article 7(1) of DTAA?
iii.  Whether revenues earned by the applicant under the seismic data acquisition and processing contracts with Essar Oil Limited in India are taxable in accordance with Section 44BB of the Income-tax Act, 1961?
iv.  How much TDS percentage should be applied for deducting the TAS by the Essar Oil Limited while crediting/releasing the payment to the applicant?
4. According to the applicant, the activity undertaken by it is a mining activity and though the services rendered by it are technical services, the fees received by it for rendering such technical services under the contract, was exempt from the definition of fees for technical services by virtue of Explanation 2 to section 9(1)(vii) of the Act to the effect that fees for technical services does not include consideration for any construction, assembly, mining or like project undertaken by the recipient. Since the consideration received was not fees for technical services, section 44BB of the Act applied to the applicant and the income of the applicant has to be assessed in terms of section 44BB(1) of the Act. Though the services otherwise might come under section 44DA or Section 115A of the Act, the consideration received stood exempted by virtue of Explanation 2 to section 9(1)(vii) of the Act from the definition of fees for technical services and consequently, the proviso to section 44BB(1) of the Act was not attracted. In other words, the contention is that the consideration received by the applicant could be assessed only in terms of section 44BB(1) of the Act if the applicant opts for the same. On behalf of the Revenue, it is contended that the consideration received by the applicant was not exempt by Explanation 2 to section 9(1)(vii) of the Act and consequently, the proviso to section 44BB(1) of the Act was attracted since the services rendered are admittedly technical in nature. It is pointed out that the proviso to section 44BB(1) of the Act was amended with effect from 1.4.2011 by including section 44DA in the proviso and since the present contract was entered into only on 3.5.2011, the amended proviso had application. The amended proviso clearly kept out fees for technical services received by a person hit by section 44DA and section 115A of the Act from out of the purview of section 44BB(1) of the Act. The exemption contained in section 9(1)(vii) of the Act applied only to a person who had undertaken the work of construction, assembly, mining or like project. The applicant has not undertaken any mining or like project. That had been undertaken by the Essar Consortium and the applicant had only undertaken to provide technical services to Essar Oil Limited. Even if the applicant can be said to be rendering technical services in connection with mining activities within the meaning of section 44BB(1) of the Act, the applicant cannot be said to have undertaken a mining or like project. After the amendment to the proviso to section 44BB(1) of the Act, the applicant cannot sustain the claim for being assessed under section 44BB(1) of the Act and had to be assessed in terms of section 44DA of the Act in this case.
5. Question No. 1, raised is whether the agent of the applicant could be treated to be a permanent establishment of the applicant within the meaning of Article 5 of the DTAC between India and Austria. On behalf of the applicant, at the hearing, it was fairly pointed out that under paragraph 3 of Article 5 of the DTAC, the applicant shall be deemed to have a PE in India and to carry on business through that PE if it provided services and facilities in connection with prospecting or extraction or exploration of mineral oil in India. One has, therefore, only to rule on this question by stating that the applicant has a PE in India or will be deemed to have a PE in India.
6. Similarly, though the applicant had raised question No. 2 as to whether the profits of the applicant taxable in India can exceed the extent of the profits attributable to the PE as provided under paragraph 1 of Article 7 of the DTAC, the applicant conceded at the hearing that the activities of the applicant are by its PE or deemed PE and consequently, the whole of the income arising out of the contract will be attributable to that PE. In view of this, this question really does not call for a ruling.
7. The controversy centered around the applicability of section 44BB(1) of the Act to the applicant. It was submitted on behalf of the applicant by relying on the ruling of this Authority in Geofizyka Torun Sp.zo.o [AAR No. 813 of 2009], that the activity undertaken by the applicant was an activity in connection with the prospecting for, or extraction or production of mineral oils and hence the sums received by the applicant would be assessable to tax only under section 44BB of the Act. It was submitted that though the applicant could be said to be rendering technical services, the compensation therefor received by the applicant, cannot be deemed to be fees for technical services since the consideration is for a mining activity and would come within the exception enacted by Explanation 2 to section 9(1 )(vii) of the Act. The ruling in Geofizyka supported this position. In addition, the definition of mining in the Mines Act and the description of exploration operation contained in the Petroleum guide, the opinion of the Attorney General earlier rendered to the Income-tax Department on whether exploration for natural gas and oil would also form part of mining, were also relied on. It was contended that since the payment received could not qualify as fees for technical services within the meaning of section 9(1)(vii) of the Act, the proviso to section 44BB(1) of the Act was not attracted and consequently, section 44DA or section 115A had no application. In that context, it was submitted that the inclusion of section 44DA in the proviso by the Finance Act, 2010 with effect from 1.4.2011, was of no consequence.
8. On behalf of the Revenue, it was pointed out that whereas section 44BB(1) of the Act took within its sweep, even activities carried on in connection with mining, the exception contained in section 9(1)(vii), was confined to consideration received for mining or like project undertaken by the recipient. This indicated that the consideration would be kept out from the definition of fees for technical services only in the case of a person who has undertaken a mining project and not by a person, who merely as a sub-contractor, is engaged in an activity in connection with that mining operation. He referred to a ruling of this Authority in P. No. 6 of 1995 [234 ITR 371] to point out that in a case where the applicant had only surveyed the area earmarked by the contractor who had undertaken the mining project and rendered technical services to enable that person to perform the mining job itself, the exemption contained in Explanation 2 to section 9(1)(vii) of the Act was held to have no application. He also cited a decision of the Delhi High Court in DIT v. Reotonto Chemical Services in support of his contention. He also referred to certain decisions of Tribunals in support of his contention.
9. In answer, it was submitted on behalf of the applicant that the applicant had to bore wholes, place explosives, explode them, and keep the data recorded and it cannot be said that the applicant had not undertaken a mining project. There was, therefore, no merit in the contention that the exception contained in Explanation 2 to section 9(1)(vii) of the Act would not apply to the applicant.
10. A reading of the proviso to section 44BB(1) of the Act would show that the Parliament wanted to exclude certain income from within the purview of section 44BB(1) of the Act, which was enacted as a special provision for dealing with consideration received in connection with mining activities generally. Fees for technical services in respect of a non-resident has been specifically dealt with in section 44DA and section 115A of the Act. The proviso to section 44BB(1) originally had excluded only section 44D and section 115A from within the purview of the section 44BB(1) of the Act. By an amendment with effect from 1.4.2011, section 44DA has also been included in that exclusion. It is true that in Geofizyka and other cases, the expression ‘in connection with’ has been widely understood and the benefits of section 44BB(1) extended to activities in connection with mining. But, after the amendment by the Finance Act, 2010, in respect of fees for technical services, the applicability of section 44BB(1) has to be considered in the context of that amendment. The Ruling in Geofizyka, rendered by this Authority was before the amendment to the proviso. That Ruling also did not deal with section 115A of the Act on the basis of that no argument was advanced on behalf of the Revenue based on section 115A of the Act. The question, therefore, is open for consideration in the context of the amendment to the proviso to section 44BB(1) of the Act.
11. But for the exception contained in Explanation 2 to section 9(1)(vii) of the Act, there cannot be any dispute that what the applicant receives is fees for technical services. The services rendered by the applicant are clearly technical in nature based on specific scientific knowledge and experience. The question then would be whether the consideration received by the applicant under the sub-contract in question, would come under the exception contained in Explanation 2 to section 9(1)(vii) of the Act. The said Explanation, in the latter part uses the specific words “but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head “salaries”. A person who has merely gathered seismic data for a contractor who has undertaken a mining or like project, cannot be said to have undertaken a mining project. That person can at best be said to render technical services or services ‘in connection with’ the mining activity undertaken by the original contractor. The difference in wording in section 44BB(1) and Explanation 2 to section 9(1)(vii) of the Act, cannot be ignored. Whereas section 44BB(1) speaks of an activity ‘in connection with’ the exploration of oil or mining, Explanation 2 to section 9(1)(vii) speaks of a mining or like project undertaken by the recipient of the consideration. The two recipients are different, the recipient under the exception under the Explanation 2 is one who has undertaken a mining or like project. The recipient in section 44BB(1) is a person who is engaged in the business of providing services or facilities in connection with prospecting, extracting or production of mineral oils. In other words, whereas the exception contained in Explanation 2 to section 9(1)(vii) is confined to the person who has undertaken a mining or like project, Section 44BB(1) takes within its sweep even those who are engaged in activities in connection with mining activities. The expansive nature of section 44BB(1) has been recognized in the ruling in Geofizyka by this Authority. But, there was no occasion in Geofizyka to consider the scope of the exception contained in section 9(1)(vii), Explanation 2. When the claim of a person like the applicant who is engaged by the person who has undertaken a mining project, to render certain technical services in connection with that mining project, is considered, on the wording of the exception in Explanation 2 to section 9(1)(vii) of the Act, it cannot be said that the consideration received by such a person would not be ‘fees for technical services’ within the meaning of the body of the definition in section 9(1 )(vii) of the Act.
12. On a construction of section 9(1)(vii) of the Act, in the context of section 44BB(1) of the Act, I am satisfied that the applicant who has merely contracted for rendering certain prospecting activities for Essar Oil Limited, cannot claim to be assessed under section 44BB(1) of the Act. I, therefore, rule on the questions raised, in the following manner.
13. On question No. 1, I rule that the applicant has a Permanent Establishment in India within the meaning of Article 5 of the Double Taxation Avoidance Convention between India and Austria.
On question No. 2, I rule that the income derived by the applicant from the contract dated 3.5.2011 entered into by it with Essar Oil Limited, is attributable to its Permanent Establishment in India.
On question No. 3, I rule that the revenues earned by the applicant under the Seismic Data Acquisition and Processing contracts with Essar Oil Limited are not taxable in accordance with section 44BB of the Act and are taxable only as fees for technical services.
On question No. 4, I rule that taxes on payments made by Essar Oil Limited under the sub-contract in question to be withheld under section 195 of the Act would be at 10.56% of the amount to be paid.
14. Accordingly, the ruling is pronounced on this, the 31st day of July, 2012.

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