IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on : 13th May 2016
Decision on : 2nd June 2016
+ W.P (C) No. 7416/2012
TECHNIP SINGAPORE PTE LTD. ..... Petitioner
Through: Mr. Percy Pardiwala, Senior Advocate
With Mr. Sanat Kapoor and Ms. Ananya Kapoor
versus
DIRECTOR OF INCOME TAX & ANR. ..... Respondent
Through: Mr. Rahul Chaudhary, Senior Standing
Counsel with Mr. Raghvendra Singh, Junior
Standing counsel.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
% 02.06.2016
Dr. S. Muralidhar, J.:
1. An order dated 15th February 2012 passed by the Authority for Advance
Rulings ('AAR') (Income Tax) in AA No. 936 of 2010 has been challenged
in this writ petition filed by Technip Singapore Pte Ltd. (formerly known as
Global Industries Asia Pacific Pte. Ltd.), a company incorporated in
Singapore. The Petitioner, a resident of Singapore, is admittedly entitled to
the benefit of India-Singapore Double Tax Avoidance Agreement
(hereinafter ,,DTAA).
W.P.(C) No. 7416/2012 Page 1 of 25
Background facts
2. The Petitioner states that it is a leading solutions provider of offshore
construction, engineering, project management and support services to the
oil and gas industry worldwide. The Income Tax Officer (International
Taxation) Dehradun is stated to be the Assessing Officer (,,AO) as far as the
Petitioner is concerned.
3. By a letter dated 12th June 2008 Indian Oil Corporation Ltd (,,IOCL)
invited tenders for the "Residual Offshore Construction work" at Paradip.
The letter explained that IOCL was "setting up offshore crude oil receiving
facility having Single Point Mooring (SPM) terminal about 20 Kms. off the
coast of Paradip port in the east coast of India." The said facility would
enable unloading the crude oil from the Very Large Crude Carriers (VLCCs)
"to meet the crude oil requirement of its Refineries located in the eastern
part of India." The work involved installation of IOCL supplied SPM
including anchor chains, floating and subsea hoses.
Relevant clauses of the contract
4. By a letter dated 17th July 2008, IOCL gave the Petitioner the details of
the work of "Residual Offshore construction' at Paradip. It mentioned that
the work was divided into three groups as under:
Group-1: Installation of Single Point Mooring (SPM) including anchor
chains, floating & subsea hoses.
Group-2: Work of Post Trenching of 48" & 14" pipeline.
W.P.(C) No. 7416/2012 Page 2 of 25
Group-3: All balance works required to complete the 14" effluent pipeline.
5. The clarifications in relation to the work were enclosed as Annexure I and
II to the said letter. The expression 'Contractor' connoted the Petitioner and
the expression 'Owner' means IOCL. Clause 19 of Annexure II to the letter
dated 17th July 2008 of IOCL provided for the various indemnities to be
provided by the Contractor to the Owner in the execution of the work.
Clauses 19.4.0, 19.5.0 and 19.6.0 read thus:
"19.4.0 Owner shall defend, indemnify, and hold harmless Contractor
Group for all loss or damage to Owner's property, equipment, and
vessels, either owned or rented and operated by Owner arising out· of
or relating to the performance of the Work and regardless of whether
caused or brought about by any member of Contractor Group's
negligence (including active, passive, sale, joint, and concurrent
negligence) or any other theory of legal liability, including strict
liability or the' non-seaworthiness of any vessel or' the non-
airworthiness of. any aircraft, and Owner shall release, defend,
protect, indemnify and hold harmless all members of Contractor
Group from and against any loss, cost, claim, obligation to indemnify
another, suit, judgment, award or damage (including reasonable
attorney's fees) on account of such loss or damage.
19.5.0 Contractor Group has to indemnify and hold harmless Owner
from and against any liability or damage which arises from or is
related to loss or damage to the 'Property which is the subject of the
Work" including costs associated with repair or replacement of such
loss or damage regardless of whether such loss or damage is due or
claimed to be due to the negligence or breach of duty, Contractor or
any other party or his equipment.
19.6.0 For the purposes of this Article, "Property which is the subject
of the Work" shall include any materials, equipment, structures or
components whether temporary or permanent, and specifically
W.P.(C) No. 7416/2012 Page 3 of 25
includes any existing pipeline and risers and shall also include any
items lifted or transported from one location to another."
6. On 5th September 2008, the Petitioner signed a contract with IOCL for the
above offshore construction work involving installation of IOCL supplied
SPM including anchor chains, floating and subsea hoses. The general
description of the SPM as give in the contract is that it is
a floating equipment/device that serves as a loading/offloading station
and a mooring point for oil tankers for loading/offloading crude and
other petroleum products to/from the onshore refinery/process
platform. SPMs are connected to an onshore refinery/process platform
through a submarine pipeline. SPM systems are also called as CALM
systems i.e. "Catenary Anchor Leg Mooring system". The SPM
system is stated to consist of floating buoy anchored to the seabed by
catenary chain legs, which are secured to anchors. One twin mooring
hawser arrangement holds the tanker captive to a rotating part. The
rotating part freely weathervanes so that the tanker can take up the
position of least resistance to the prevailing weather at all times. Fluid
product is transferred via the CALM from or to the tanker by floating
and subsea hose systems. When the tanker moves off station, due to
the effects of wind, wave and current, anchor chain legs are lifted
which generate a restoring force tending to return the system to the
equilibrium position, thus limiting the tankers excursion."
7. The definition of 'work' in the above contract is contained in its preamble
which reads as under:
"Whereas
The owner desires to have executed the work of Residual Offshore
Construction Work At Paradip. Group-1-Installation Of Spm Including
Anchor Chains, Floating & Subsea Hoses (Tender No.
PLCC/PHCPL/SPM/0825) more specifically mentioned and described
in the contract documents (hereinafter called the ,,work which
expression shall include all amendments therein and/or modifications
W.P.(C) No. 7416/2012 Page 4 of 25
hereof) and has accepted the tender of the Contractor for the said
work."
8. Clause 3.1.1 of the Contract defined the scope of the work to include the
following:
"3.1.1 Bidders scope of work shall include pre-installation survey,
review of owner supplied documents, handling of owner supplied
project materials, installation engineering, installation and erection,
testing, pre-commissioning and assistance during commissioning for
the complete system necessary for safe handling of crude oil tankers at
CALM Type Single Point Mooring (SPM) system. The system should
be capable of satisfactorily functioning as a complete terminal for
discharge of crude oil from vessels to the onshore tankfarm."
9. Under Clause 3.1.2, the Contractor was to provide "all marine spread,
specialized manpower and equipments, installation tools and tackles,
consumables, labour, logistic supplies, planning, engineering,
documentation, etc. to fulfil the project specifications upto the
commissioning stage." Under Clause 3.1.3, the Contractor shall be
responsible for taking over all the Owner supplied project materials from the
place designated by the Owner required for installation of complete CALM
SPM system including their sub systems." Under Clause 3.1.4, the SBM Inc.
is required to depute an installation engineer during the entire installation
period of SPM system for assisting and advising the Installation Contractor
in the installation of the SPM system."
10. The Annexures forming part of the contract documents gave the
description and specifications of the equipments. Clause 14.0 thereunder
describes 'Spread equipment' as under:
W.P.(C) No. 7416/2012 Page 5 of 25
"The complete information regarding the Marine spread, the bidder
intends to mobilize shall be included along with the bid. This shall
essentially consist of but not limited to installation spread including,
pipelines lay spread, trenching spread, diving spread etc.
Contractor shall deploy all the marine spread of the requisite
specifications as approved at the time of the award of work.
The Contractor shall obtain prior approval from Owner for any
replacement of any spread/equipment proposed and accepted. The
owner shall evaluate such proposal and acceptance for the same shall
be granted only if the contractor proves to the satisfaction of the
Owner that the proposed spread/equipment is equivalent/superior to
the one proposed in the bid. The decision of the Owner in this regard
shall be final and binding on the Contractor."
11. Clause 19 thereunder talked of 'Mobilization of marine spread' and
Clause 20 of 'De-Mobilization of marine spread.' Clauses 19.1 and 19.2 read
as under:
"19.1The marine spread shall comprise of barge/vessel equipped with
suitable equipments, diving spread, anchor handling, tug support
vessel, survey spread, operating and construction crew, specialized
expertise equipped with all required vessel certificates and statutory
clearances including Customs & Port permissions as applicable in
India.
19.2. The marine spread equipped with above (22.1) shall be
considered mobilized after reaching at site and its readiness to
commence the work."
12. IOCL sent to the Petitioner a 'Letter of Acceptance' dated 4th September
2008 in which it inter alia set out the 'contract value and price schedule'. It
was stated therein that the contract value would be US$ 18,598,140. The
letter also indicated the amount in US dollar agreed to be paid for each item
of work. Broadly the break up was as under (in US Dollars):
W.P.(C) No. 7416/2012 Page 6 of 25
(i) Mobilization and demobilization of Marine Spread 12,980.959
(ii) Pre and post erection work 877,288
(iii) Actual installation work 4,652,381
(iv) Documentation, Misc 87,512
13. The Petitioner states that it does not have any project office or any other
premises in India for executing of the work under the above contract. The
Petitioners obligations under the contract were fulfilled by deputing men
and materials at the offshore site where the activity was performed.
Application before the AAR
14. On 25th May 2010, the Petitioner filed an application in the AAR under
Chapter XIX B of the Income Tax Act, 1961 (,,Act) for determination of
certain questions regarding its tax liability in respect of the services rendered
by it under the above contract. The ITO (International Taxation)
(Respondent No. 2) in response to the above application filed a report dated
6th September 2011 before the AAR. According to Respondent No.2, the
income of the Petitioner under the contract was taxable in India as fees for
technical services (,,FTS) both under the Act and the DTAA.
15. According to the Petitioner, Respondent No.2 did not dispute the
Petitioners stand that the income earned could not be regarded royalty
either under Section 9 (1) (vi) of the Act or Article 12 (3) (b) of the DTAA.
The Petitioner contended that the mere fact that the equipments were used
for rendering services to IOCL cannot alter the nature of the contract with
IOCL from a contract for services to a contract for hiring of vessel and
equipment. It is pointed out that the IOCL did not use any commercial or
W.P.(C) No. 7416/2012 Page 7 of 25
scientific equipment of the Petitioner.
Decision of the AAR
16. By the impugned order dated 15th February 2012, the AAR held as
follows:
(i) The contract could not be said to be for installation alone. If during the
activity of installation, the income in the nature of royalty or fees or FTS or
interest or of any other nature arises then such income has to be assessed
under that head.
(ii) IOCL paid for each of the items of work separately although the work
was a composite one. In the present contract, the payment made for use of
equipment, i.e., the barges, and stated as mobilization and demobilization
expenses comprised a substantial part of the payment and therefore fell
within the definition of royalty under Article 12.3(b) of the DTAA.
(iii) The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v.
DIT (2007) 288 ITR 408 held that the consideration for each portion of the
contract, if separately specified, can be separated from the whole. In the
present case, the contract was divisible one. The expenses were loaded in
favour of mobilization. As observed in State of Madras v. Richardson
(1968) 21 STC 245, even in the works contract, a contract of sale of material
utilized in the works can be inferred.
(iv) Installation was to be carried out by locating the ends of anchor chains,
W.P.(C) No. 7416/2012 Page 8 of 25
cross tensioning of the anchor chains, adding to the length of the anchor
chain where it is falling short of the desired length, towing and setting up the
Buoy from the port to the location and fixing the chain to the SPM Buoy,
testing the leakages of the floating hose strings, affixing the umbilical to the
valves outlets and installing all end connection, installing navigational aids,
pressure gauge.
(v) As installation was ancillary and subsidiary to the use of equipment or
enjoyment of the right for such use, the payment for the installation would
fall under the definition of FTS in terms of Article 12.4(a) of the DTAA.
17. It may be noted here that the impugned order of the AAR was common
to two contracts entered into by the Petitioner, one with IOCL and the other
with M/s Larsen & Toubro (,,L&T). That portion of the impugned order
concerning the contract with L&T is outside the ambit of the present
petition. Pursuant to the notice issued in the present petition, a counter
affidavit has been filed by the Respondent reiterating the stand taken by it
before the AAR. A rejoinder thereto has been filed by the Petitioner.
Submissions of counsel
18. This Court has heard the submissions of Mr. Percy Pardiwala, learned
Senior counsel for the Petitioner and Mr. Rahul Chaudhary, learned Senior
Standing counsel for the Revenue.
19. The submissions of Mr. Pardiwala were as under:
W.P.(C) No. 7416/2012 Page 9 of 25
(i) Under the contract, IOCL had no right to use or control over the
movement or operation of any equipment, vessels etc. belonging to the
Petitioner. The equipment was being used only by the Petitioner for
rendering services for the offshore construction work. The work involved
installation of IOCL supplied SPM including anchor chains, floating and
subsea hoses. Thus IOCL had no control or dominion over the movement of
the vessel or the equipment brought to the site and used by the Petitioner for
the purposes of rendering services under the contract.
(ii) The contract made it clear that in case of any damage or loss to the
property, equipment etc., supplied to IOCL while being installed or during
the movement, the responsibility will be of the Petitioner alone.
(iii) The very purpose of the mobilisation of the equipment was to install the
IOCL supplied SPM. The primary purpose was the offshore construction
work which was the work of installation of the IOCL supplied SPM which
included anchor chains, floating and subsea hoses. Therefore, the AAR erred
in concluding that the installation activity was ancillary and subsidiary to the
use of the equipment. The Respondent has never disputed that the income
earned by the Petitioner could not be regarded as royalty either under
Section 9(1) (vi) or Article 12 of the DTAA. The conclusion arrived at by
the AAR was without giving the Petitioner any opportunity of addressing the
issue. The AAR proceeded to decide against the Petitioner on a point on
which there was no dispute between the parties. Reliance was placed on the
decision in Asia Satellite Telecommunications Co. Ltd. v. Director of
Income Tax (2011) 332 ITR 340 (Del).
W.P.(C) No. 7416/2012 Page 10 of 25
(iv) The income earned by the Petitioner from the contract in question did
not fall within the definition of the 'royalty' under Article 12.3 (b) of the
DTAA.
20. In reply to the above submissions, Mr. Rahul Chaudhary pointed out that
as regards the contract to the L&T, the AAR has held that the Petitioner has
a PE in India and that the consideration received under that contract by the
Petitioner, including for mobilisation and demobilisation, was liable to tax in
India in terms of Section 44BB of the Act. According to him, although the
AAR may not have given a finding as regards the Petitioner having PE in
respect of the contract with IOCL, the Petitioner could not take advantage of
that fact and claim that the AAR did not hold that the Petitioner has a PE in
India in relation to the contract with IOCL.
21. Referring to the certificates dated 30th January 2009 and 13th July 2009,
issued by the Revenue under Section 197 of the Act in respect of the
consideration received or receivable, it had been mentioned thereunder that
the consideration was in the nature of royalty. He pointed out that the
Petitioner did not accept the tax withholding certificates and raised a specific
question whether the consideration received by the Petitioner for services
provided by it could be ,,Royalty under Section 9(1) (vi) of the Act or under
Article 12 of the DTAA?
22. According to Mr. Chaudhary, the Revenue had not accepted the
contention of the Petitioner that the payments are not in the nature of royalty
W.P.(C) No. 7416/2012 Page 11 of 25
or that FTS and royalty were not mutually exclusive. According to the
Revenue, there is no single lump sum price for the whole contract. The
consideration for mobilisation and demobilisation constituted 68% of the
total consideration and the actual installation constituted 25%. Therefore a
large percentage of the consideration related to supply/use of the equipment.
It was not necessary that the equipment should be in the direct dominion and
control of the IOCL for the payment to constitute royalty. As long as the
equipment can be exploited by or by the order of IOCL, the requirement of
dominion/control would stand satisfied and the payment for the same qualify
as royalty.
23. Mr. Chaudhary has contended that it was an undisputed fact that during
the period in question, the equipment could not be used by any other entity
or person other than IOCL and that IOCL was, in fact, in control of the
equipment. He placed reliance on the decision in Ishikawajima-Harima
(supra) and supported the decision of the AAR that the payment of
mobilisation and de-mobilisation fell under the definition of royalty under
Article 12.3(b) of the Act and the payment for installation was FTS under
Article 12.4(a) of the DTAA.
Contract cannot be re-characterised
24. The Revenue's attempt at re-characterising the contract as one for hire of
equipment must fail. From the various clauses of the contract, as noted
hereinbefore, it is evident that IOCL did not have dominion or control over
the equipment. The clauses of the contract make it clear that at all times
during the execution of the contract the control over the equipment brought
W.P.(C) No. 7416/2012 Page 12 of 25
by the Petitioner was to remain with the Petitioner. While the SPM system
was supplied by IOCL, the task of installation, testing and pre-
commissioning was the work of Petitioner. The system was to be capable of
satisfactorily functioning as a complete terminal for discharge of crude oil
from vessels to the onshore tankfarm. Clause 3.1.2 made it clear that it was
the Petitioner which had to supply "all marine spread specialized manpower
and equipments, installation tools and tackles, consumables, labour, logistic
supplies, planning, engineering, documentation etc". Further under Clause
3.1.3 the Petitioner was made responsible for taking over all the IOCL
supplied project materials from the place designated by the IOCL which was
required for installation of complete CALM SPM system including their sub
systems. In the circumstances, the Court is unable to appreciate how the
AAR could conclude that the de facto control of the equipment was with
IOCL.
No PE in India
25. The AAR was not called upon to decide whether, in the context of the
contract with IOCL, the Petitioner had any PE in India. That was not even
the contention of the Revenue before the AAR. That question arose in the
context of the Petitioner's contract with L&T and not IOCL. The finding of
the AAR that the Petitioner had a PE in India was rendered in the context of
contract that the Petitioner had with the L&T. Therefore, it is not open for
the Revenue to now contend that the Petitioner cannot take advantage of the
absence of a finding by the AAR as regards the existence of a PE qua the
contract with IOCL.
W.P.(C) No. 7416/2012 Page 13 of 25
26. The Revenue has been unable to counter the factual position that in
terms of Article 5 (1) of the DTAA, the Petitioner has no fixed place of
business in India. Under Article 5 (3) the Petitioner can be said to have a PE
in India only if the installation or construction activity is carried on in India
for a period exceeding 183 days in any fiscal year. The Petitioner was
admittedly present in India only from 25th November 2008 till 4th January
2009. In other words it was present for 41 days during 2008-09 for rendering
the contract of service to IOCL. The Petitioner also did not have a project
office in India for executing the contract with IOCL.
27. In terms of Article 7 of the DTAA, the business profits earned by the
Petitioner shall be liable to tax in India only if it carries on business in India
through a PE in India and the profits earned by it in India are attributable to
the activities carried out through such PE. Since factually the Revenue was
not able to show that the Petitioner had a PE in India, the income earned by
the Petitioner from the contract with IOCL cannot be brought to tax in India
in terms of Article 7 of the DTAA.
28. Turning to the other main issues that arise from the impugned order of
the AAR, the question is whether the mobilisation/demobilisation charges
which constituted 68% of the total consideration could be treated as royalty
within the meaning of Section 9 (1) (vi) of the Act read with Article 12 (3)
(b) of the DTAA and whether the installation charges could be treated as
FTS within the meaning of Explanation 2 below Section 9 (1) (vii) of the
Act read with Article 12 (4) (a) of the DTAA?
W.P.(C) No. 7416/2012 Page 14 of 25
Are mobilisation/demobilisation charges 'royalty'?
29. The Petitioner is right in its contention that the Revenue did not contend
before the AAR that the income earned by the Petitioner from the contract
towards mobilisation/demobilisation charges should be treated as royalty
under Section 9(i) (vi) of the Act or Article 12.3(b) of the DTAA. The fact
that in the certificates issued under Section 197 of the Act the Revenue may
have earlier characterized the payment as royalty cannot change its stand
taken subsequently before the AAR. Therefore, there was no occasion for
the AAR to examine the question as to whether the payment received for
mobilisation/demobilisation could be treated as royalty under Section 9(i)
(vi) of the Act read with Article 12.3(b) of the DTAA.
30. The term 'royalty' is defined in Article 12.3 of the DTAA as under:
"The term ,,royalties as used in this Article means payments of any
kind received as a consideration for the use of, or the right to use:
(a) any copyright of a literary, artistic or scientific work, including
cinematograph film or films or tapes used for radio or television
broadcasting, any patent, trade mark, design or model, plan, secret
formula or process, or for information concerning industrial,
commercial or scientific experience, including gains derived from the
alienation of any such right, property or information;
(b) any industrial, commercial or scientific equipment, other than
payments derived by an enterprise from activities described in
paragraph 4(b) or 4(c) of Article 8."
31. As far as the Act is concerned, Section 9(1) (vi) states that the following
incomes shall be deemed to accrue or arise in India:
"(vi) income by way of royalty payable by--
(a) the Government ; or
W.P.(C) No. 7416/2012 Page 15 of 25
(b) a person who is a resident, except where the royalty is
payable in respect of any right, property or information used or
services utilised for the purposes of a business or profession
carried on by such person outside India or for the purposes of
making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the royalty is payable
in respect of any right, property or information used or services
utilised for the purposes of a business or profession carried on by
such person in India or for the purposes of making or earning any
income from any source in India :
Provided that nothing contained in this clause shall apply in relation
to so much of the income by way of royalty as consists of lump sum
consideration for the transfer outside India of, or the imparting of
information outside India in respect of, any data, documentation,
drawing or specification relating to any patent, invention, model,
design, secret formula or process or trade mark or similar property, if
such income is payable in pursuance of an agreement made before
the 1st day of April, 1976, and the agreement is approved by the
Central Government :
Provided further that nothing contained in this clause shall apply in
relation to so much of the income by way of royalty as consists of
lump sum payment made by a person, who is a resident, for the
transfer of all or any rights (including the granting of a licence) in
respect of computer software supplied by a non-resident
manufacturer along with a computer or computer-based equipment
under any scheme approved under the Policy on Computer Software
Export, Software Development and Training, 1986 of the
Government of India.
32. Explanation 2 thereunder defines royalty to mean as under:
"Explanation 2.--For the purposes of this clause, "royalty" means
consideration (including any lump sum consideration but excluding
any consideration which would be the income of the recipient
chargeable under the head "Capital gains") for--
W.P.(C) No. 7416/2012 Page 16 of 25
(i) the transfer of all or any rights (including the granting of a
licence) in respect of a patent, invention, model, design, secret
formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or
the use of, a patent, invention, model, design, secret formula or
process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula
or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical,
industrial, commercial or scientific knowledge, experience or
skill ;
(iva) the use or right to use any industrial, commercial or scientific
equipment but not including the amounts referred to in section
44BB;
(v) the transfer of all or any rights (including the granting of a
licence) in respect of any copyright, literary, artistic or scientific
work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting,
but not including consideration for the sale, distribution or
exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities
referred to in sub-clauses (i) to (iv), (iva) and (v).
33. Further, Explanation 5 below Section 9(vi) reads as under:
"Explanation 5.--For the removal of doubts, it is hereby clarified
that the royalty includes and has always included consideration in
respect of any right, property or information, whether or not--
(a) the possession or control of such right, property or information
is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India."
34. As far as DTAA in the present case is concerned, the income earned by
the Assessee would be treated as royalty only where it is received as
W.P.(C) No. 7416/2012 Page 17 of 25
consideration for the use of the equipment, i.e., industrial, commercial or
scientific. It can also be for use of or the right to use any copyright or for
information concerning industrial, commercial or scientific experience. It is
clear from the contract itself that the control of the equipment throughout
remained with the Petitioner and did not get transferred to IOCL.
35.1 In this context, it is necessary to refer to the decision of this Court in
Asia Satellite Telecommunications Co. Ltd (supra). The facts were that the
Assessee in that case, Asia Satellite Telecommunications Co. Ltd. (ASTC),
a company incorporated in Hong Kong, was carrying on the business of
private satellite communications and broadcasting facilities and was the
lessee of a satellite called AsiaSat 1 which was launched in April 1990 and
was the owner of a satellite called AsiaSat 2 which was launched in
November 1995. ASTC entered into agreements with television channels,
communication companies or other companies who desired to utilize the
transponder capacity available on the assessees satellite to relay their
signals. The customers had their own relaying facilities, which were not
situated in India. From these facilities, the signals were beamed in space
where they were received by a transponder located in the assessees satellite.
35.2 The process of transmission of TV programmes started with TV
channels (customers of ASTC) uplinking the signals containing the
television programmes ; thereafter the satellite received the signals and after
amplifying and changing their frequency relayed it down in India and other
countries where the cable operators caught the signals and distributed them
to the public. Any person who had a dish antenna could also catch the
W.P.(C) No. 7416/2012 Page 18 of 25
signals relayed from these satellites. The role of ASTC was that of receiving
the signals, amplifying them and after changing the frequency relaying them
on the earth. For this service, the TV channels paid ASTC.
35.3 The Court held that ASTC was the operator of the satellites and in
control of the satellite. It had not leased out the equipment to the customers.
ASTC had merely given access to a broadband width available in a
transponder which could be utilized for the purpose of transmitting signals
of the customer. It was held that the terms "lease of transponder capacity",
"lessor", "lessee" and "rental" used in the agreement would not be the
determinative factors. There was no use of "process" by the television
channels. Moreover, no such purported use had taken place in India. It was
held that the services provided were an "integral part of the satellite" and
remained "under the control of the satellite/transponder owner (like the
appellant in this case) and it does not vest with the telecast operator/
television channels." The Court rejected the plea that the payment made to
ASTC could be 'royalty' within the meaning of Section 9 (1) (vi) of the Act.
The Court reiterated that "the fact remains that there is no use of 'process' by
the television channels. Moreover, no such purported use has taken place in
India."
35.4 The Court has held that the concept of dominion or control is sine qua
non use. Further Explanation 5 below Section 9 (vi), to the extent it is not
beneficial to the Assessee, will have to in terms of Section 90 (2) of the Act,
make way for the provision of the DTAA which is more beneficial to the
W.P.(C) No. 7416/2012 Page 19 of 25
Assessee. This aspect too has been clarified by the Court in Asia Satellite
Telecommunications (supra). It was observed:
"The effect of an agreement made pursuant to Section 90 is that if no
tax liability is imposed under this Act, the question of resorting to
agreement would not arise. No provision of the agreement can fasten
a tax liability when the liability is not imposed by this Act. If a tax
liability is imposed by this Act, the agreement may be resorted to for
negativing or reducing it. In case of difference between the provisions
of the Act and of an agreement under section 90, the provisions of the
agreement shall prevail over the provisions of the Act and can be
enforced by an appellate authority or the court. However, as provided
by sub-section (2), the provisions of this Act will apply to the assessee
in the event they are more beneficial to him. Where there is no
specific provision in the agreement, it is the basic law, i.e., the
Income-tax Act which will govern the taxation of income."
36. For the payment to be characterised as one for the use of the equipment,
factually, the equipment must be used by IOCL. In the present case
factually, there is no finding that the equipment had actually been used by
IOCL. There is a difference between the use of the equipment by the
Petitioner 'for' IOCL and the use of the equipment 'by' IOCL. Since the
equipment was used for rendering services to IOCL, it could not be
converted to a contract of hiring of equipment by IOCL.
37. As observed in Visual Inc. v. Asst. CCT 124 STC 426 (Karn):
"9. Thus if the transaction is one of leasing/hiring/letting simpliciter
under which the possession of the goods, i.e., effective and general
control of the goods is to be given to the customer and the customer
has the freedom and choice of selecting the manner, time and nature
of use and enjoyment, though within the frame work of the
agreement, then it would be a transfer of the right to use the goods
and fall under the extended definition of 'sale'. On the other hand, if
W.P.(C) No. 7416/2012 Page 20 of 25
the customer entrusts to the assessee the work of achieving a certain
desired result and that involves the use of goods belonging to the
assessee and rendering of several other services and the goods used by
the assessee to achieve the desired result continue to be in the
effective and general control of the assessee, then, the transaction will
not be a transfer of the right to use goods falling within the extended
definition of 'sale'."
38. Consequently, this Court is unable to concur with the finding of the
AAR that in the instant case the consideration received for
mobilisation/demobilisation should be considered as royalty paid by IOCL
to the Petitioner.
Are installation charges FTS?
39. Turning to the other question of the nature of the consideration received
by the Petitioner for installation, the definition of FTS in Article 12(4) is
relevant. It reads as under:
"The term "fees for technical services" as used in this Article means
payments of any kid to any person in consideration for services or a
managerial, technical or consultancy nature (including the provision
of such services through technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment of the
right, property or information for which a payment described in
paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how
or processes, which enables the person acquiring the services to apply
the technology contained therein; or
(c) consist of the development and transfer of a technical plan or
technical design, but excludes any service that does not enable the
W.P.(C) No. 7416/2012 Page 21 of 25
person acquiring the service to apply the technology contained
therein.
For the purposes of (b) and (c) above, the person acquiring the service
shall be deemed to include an agent, nominee, or transferee of such
person.
5. Notwithstanding paragraph 4, "fees for technical services" does not
include payments:
(a) for services that are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of property other than a
sale described in paragraph 3(a);
(b) for services that are ancillary and subsidiary to the rental or ships,
aircraft, containers or other equipment used in connect with the
operation of ships or aircraft in international traffic;
(c) for teaching in or by educational institutions;
(d) for services for the personal use of the individual or idividuals
making the payment;
(e) to an employee of the person making the payments or to any
individual or firm of individuals (other than a company) for
professional services as defined in Article 14;
(f) for services rendered in connection with an installation or structure
used for the exploration or exploitation of natural resources referred to
in paragraph 2(j) of Article 5;
(g) for services referred to in paragraphs 4 and 5 of Article 5."
40. The AAR held the installation services to be ancillary and subsidiary to
the main work of the Petitioner. In that sense, the payment of FTS under
Article 12.4(a) of the DTAA is linked to the payment received as royalty
W.P.(C) No. 7416/2012 Page 22 of 25
under Article 12.3. In the light of the finding of this Court that payment of
mobilisation/demobilisation cannot be termed as royalty, the question of
treating the work of installation as ancillary to such work and the payment
for installation as FTS does not arise. Further, in terms of the contract with
IOCL, the Petitioner provides services of construction and installation of
SPM. This does not involve any transfer of any technology, skill, experience
or know-how, to enable IOCL to undertake such activities on its own.
41. The Revenue's contention that the work of mobilisation/de-mobilisation
and the work of installation are separable components of the work as a
whole is not borne out by the documents constituting the written contract.
Consequently, the decision in Ishikawajima-Harima Heavy Industries Ltd.
v. DIT (supra) is not of assistance to the Revenue. IOCL's letter dated 17th
July 2008 to the Petitioner clarified that the work of "Residual Offshore
construction' at Paradip was a composite one comprising three groups viz.,
installation of the SPM; post trenching of the 48" and 14" pipeline and all
balance works required to complete the 14" effluent pipeline. However, as
far as the Petitioner was concerned it had to perform all the three 'groups' of
work and the payment was for execution of the composite contract.
42. While the payment was a lumpsum of US$ 18,598,140, the said sum was
broken up for the individual components like mobilization and
demobilization of Marine Spread; Pre and post erection work; Actual
installation work and documentation and miscellaneous. This again did not
mean that mobilisation and de-mobilisation of marine spread was the main
work and installation was ancillary and subsidiary to the said work.
W.P.(C) No. 7416/2012 Page 23 of 25
43. In the above factual background, an examination is undertaken of
Section 9 (1)(viii) of the Act which deals with the income by way of FTS
and reads as under:
"(vii) income by way of fees for technical services payable by-
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect
of services utilised in a business or profession carried on by such person
outside India or for the purposes of making or earning any income from any
source outside India; or
(c) a person who is a non- resident, where the fees are payable in respect of
services utilised in a business or profession carried on by such person in
India or for the purposes of making or earning any income from any source
in India:
.........
Explanation 2.- For the purposes of this clause," fees for technical
services" means any consideration (including any lump sum consideration)
for the rendering of any managerial, technical or consultancy services
(including the provision of services of technical or other personnel) but
does not include consideration for any construction, assembly, mining or
like project undertaken by the recipient or consideration which would be
income of the recipient chargeable under the head" Salaries".
44. The Petitioner is right in contending that the services rendered by it to
IOCL under the contract fell under the exclusionary portion of Explanation
2 viz., "consideration for any construction, assembly, mining or like project
undertaken by the recipient" This has been unable to be denied by the
Revenue.
W.P.(C) No. 7416/2012 Page 24 of 25
45. Therefore, on two counts the finding of the AAR on FTS cannot be
sustained. The first being that the installation services are not incidental to
the mobilisation/demobilisation service. The contract was in fact for
installation, erection of equipment. Mobilisation/demobilisation
constituted an integral part of the contract. Secondly, the AAR has
proceeded on a factual misconception that the dominion and control of the
equipment was with IOCL. It was erroneously concluded that the payment
for such mobilisation/demobilisation constitutes royalty. In that view of the
matter, the consideration for installation cannot not be characterized as FTS
and brought within the ambit of Article 12.4(a) of the DTAA. The resultant
position is that no part of the income earned by the Petitioner from the
contract with IOCL can be taxed in India.
Conclusion
46. For the aforementioned reasons, the impugned order dated 15th
February 2012 of the AAR is hereby set aside. The petition is allowed in
the above terms with no order as to costs.
S.MURALIDHAR, J
VIBHU BAKHRU, J
JUNE 02, 2016
mg
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