2018-TII-INSTANT-ALL-556
06 April 2018   

CASE LAW

2018-TII-11-ARA-IT

SEABIRD EXPLORATION FZ LLC: AAR (Dated: March 28, 2018)

Income tax - Sections 9(1)(vi), 44BB & 245Q - India UAE DTAA - Articles 5(1) & 5(2)

Keywords - fixed place PE - fees for technical service - oil exploration - period of operation - royalty - special clause

The Applicant Assessee, a tax resident of UAE, is engaged in the business of rendering geophysical services to the oil and gas exploration industry. Its core business activity involves 4C-3D seismic data acquisition and processing, which were aimed at increasing the exploration success of its oil and gas clients and maximizing their production. In India, it is providing these services to ONGC and other oil companies operating in India. It had entered into a contract with ONGC for 4C-3D seismic data acquisition, processing and interpretation in the Mumbai High Field. Accordingly, the Applicant had sought an Advance Ruling as to whenther the consideration for services provided by the Applicant to ONGC could be construed as "FTS" or "Royalty" u/s 9(1)(vii)/9(1)(vi) of the Act and/ or under Article 12 of the DTAA between India and UAE. In addition, the Applicant also sought a ruling as to whether it coud be considered as having a PE in India under Article 5 of the Tax Treaty in respect of its contract with ONGC.

In pursuence of the same, the counsel for Applicant submitted that for undertaking the operations for 4C-3D seismic data acquisition, processing and interpretation in Mumbai High Field, resources including vessels were mobilized to India. The said vessels entered the Indian Territory on 20 October 2011 and left the Indian territorial waters on 9 February 2012. Thus, its presence in India in respect of the ONGC’s contract was only for 113 days in the FY 2011-12 and in terms of the provision of Article 5(2)(i) of the Indo UAE DTAA, it did not have a PE in India, and hence it would not be taxable in India. Accordingly, it wasvsubmitted that the income derived by Applicant in respect of the contract with ONGC be computed in accordance with provisions of section 44BB.

On application, the AAR held that,

Whether consideration received by non resident entity in relation to rendering of seismic data services in connection with mineral oil exploration, cannot be brought to tax as either FTS or Royalty, since no "right to use vessels" are transferred - YES: AAR

Whether seismic surveys rendered by an UAE entity in the High Sea not by its personnel but primarily by the vessels & equipments mounted & deployed in the ocean, are not covered by Article 5(1)(i) of Indo UAE DTAA - YES: AAR

Whether such vessels engaged in seismic surveys on the High seas, in connection with exploration of mineral oil under agreement with Indian entity, forms fixed place PE of the overseas entity through which it carries on its business - YES: AAR

Whether the "duration of services rendered" would be of any help to the UAE resident entity claiming treaty benefits on geophysical services, when the term did not find any place in the DTAA itself - NO: AAR

+ the applicant had been carrying on these activities earlier also, using different but similarly capable and equipped vessels, under similar contracts. It was before this Authority in 2009, when it had entered into an agreement with ONGC for 2D seismic, gravity and magnetic data acquisition and on-board seismic data processing offshore India, during the field seasons 2007-08 and 2008-09 in different survey areas of Western and Eastern Indian Offshore. It took an admitted position that its services of seismic data acquisition and processing were in connection with oil and mineral exploration, and on account of which it was eligible for computing its business income u/s 44BB. The activities at that time were the same as at present, yet in that application, the Applicant had not taken the position that it did not have a PE in India, or that it was covered by any of the provisions of Article 5 of the DTAA. This Authority had agreed with the Applicant’s contention. Coming to the issues as far as the question relating to taxability of consideration received from ONGC is concerned, the Revenue accepts that considering the nature of activities and decision of Supreme Court in Oil & Natural Gas Corporation Ltd., the consideration cannot be considered to be Fees for Technical Services within the meaning of section 9(1)(vii). Further, since ONGC does not use or obtain the right to use the vessels/equipment of the Applicant, receipts from ONGC cannot be termed as Royalty either. Hence, the consideration received cannot be brought to tax under these heads of royalty or FTS;

+ coming to the main issue as to whether the Applicant could be said to have a PE in India, and if so, whether its income would be taxable in India. Irrespective of the facts of the case before this Authority in the FugroEngineers case or that of Poompuhar Shipping Corp. Ltd. before the High Court of Madras, as cited by the Revenue, the criterion laid down therein for judging whether there was a PE or not, are applicable and of assistance in the instant case as well. The same are reinforced by the recent detailed findings on the issue in the case of Formula One World Championships Limited decided by Supreme Court, which actually seals the issue as to the requirements for constituting a PE when considered in the backdrop of Article 5(1) of the DTAAs, depending of course on the facts of each case. When viewed in the light of these decisions, it is clear that the vessels used by the Applicant on the Mumbai High Seas pass all the 3 tests for constituting a PE, namely that there is permanence of duration to the extent that is required by the business, and not meaning forever; there is a fixed place which are the vessels in the High Seas in a definite and composite geographical area, and from which its business of survey in connection with exploration is carried out; and lastly this place is at the disposal of the Applicant. Thus, if Article 5(1) of the India UAE Treaty alone is considered, there is PE in this case. The Applicant, however contends that in spite of the same, it cannot be considered as having a PE since it is covered by the specific clause as contained in Article 5 of the India UAE DTAA requiring its period of operation to be more than 9 months to qualify it as a PE, and that a specific or special clause, as in Article 5(2)(i) will take precedence over a general provision as in Article 5(1);

+ from perusal of Article 5 of the India UAE DTAA, it is clear that the services envisaged such as are furnished through employees or personnel and may include services such as of supervision, managerial, consultancy, or general nature, which are employee or personnel oriented, and connected with some works contract or project whose term aggregates to more than nine months. In contrast to this, in the Applicant’s case, the services of seismic surveys are conducted on the High seas through the seismic vessels which are equipped with various equipments for collection and interpretation of data, while operating in the geographical area and in connection with exploration and extraction of mineral oils. They are not carried on mainly by employees/personnel but primarily by the vessels and equipments mounted thereon and deployed in the ocean. Such are not the services contemplated under para 5(2)(i) of the India UAE DTAA. If the States signing the Treaty intended to include in Article 5(2)(i) the activities in connection with exploration, exploitation or extraction of mineral oil etc., the sub para would have said so. DTAAs are not to be interpreted like laws passed by Parliament that encompass a wide range of situations, and require one to examine and debate the legislative intent, as against the literal interpretation. In the case of the India UAE DTAA, there is no mention with regard to activities in connection with exploration or connected activities. In these circumstances, there is no scope for getting into the debate of interplay between paras 1 and 2 of Article 5 of the India UAE DTAA, or to resolve any conflict therein, as made out by the Applicant, since the services rendered by the Applicant are not covered under it;

+ therefore, the AAR concludes that the Applicant has a fixed place PE in India, as per para 1 of Article 5, in the form of its vessels engaged in seismic surveys on the High seas, in connection with the exploration of mineral oil/ natural resources under agreement with the ONGC, through which it carries on its business. It is immaterial that the period of their operation was only 113 days, as conveyed by the Applicant, as a permanent establishment need not be permanent or for all times. Hence, the income arising from the PE shall be subject to tax in India as business income of the Applicant. Since it is found that the activities of the Applicant are in connection with exploration of mineral oils, the special provisions of section 44BB apply, and the income of the Applicant would be computed as laid out therein.

In favour of Applicant

 

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