fiogf49gjkf0d
New Page 1Part C : Tribunal & AAR International Tax Decisions
20 Seabird Exploration FZ LLC
AAR No. 829 of 2009
S. 9(1)(vi) & S. 44BB, Income-tax Act
Dated : 25-6-2010
Income from hiring of equipments under global usage Bareboat
Charter Agreements (BCA) arises at the place where the equipment is delivered.
Subsequent use by lessee as per his discretion is not relevant for determination
of place of accrual.
Facts :
The taxpayer, UAE Company (UAECO) provides geophysical
services to the oil and gas industry in India. For this purpose, the taxpayer
entered into agreements for hiring the vessels (equipment) pursuant to BCA on
global-usage basis. Under the agreements, the lessor (owner) provided the
vessels to the taxpayer on hire without providing any crew or other services.
The terms of the agreement had the following features :
-
Agreements for hiring
of vessels were entered into outside India;
-
In terms of the
agreement, hire charges were payable outside India;
-
Delivery and
redelivery of vessels was to take place outside India;
-
The taxpayer was
obliged to pay period-linked hire charges irrespective of usage of vessel
i.e., even during idle period fixed hire charges were payable;
-
Vessels were under
complete control and dominion of the hirer;
-
It was the discretion
of the hirers to use equipment in or outside India;
-
The owner had limited
responsibility of maintenance of equipments and consequential right of
inspecting the vessels during the term of the agreement.
The charges paid pursuant to the agreement were not covered
by royalty definition u/s.9(1)(vi) of the Act in view of provisions of S. 44BB
of the Act. The taxpayer contended that the hire charges were not taxable in
India as it represented income earned by non-resident owners outside India.
The Tax Department sought to assess the amount on gross basis
u/s.44BB of the Act by contending that the income accrued/arose in India due to
use of vessels in India.
Held :
The AAR accepted contentions of the taxpayer and held :
-
The income can be
taxed in the hands of the non-resident owner only if income accrues or arises
in India or is deemed to be accruing or arising in India, given the fact that
the hire charges were payable outside India.
-
The income can be
deemed to accrue or arise in India if it was income earned through or from any
asset or source of income in India. The source of income for owner of the
equipment lies in delivering and transferring control of the vessel to the
hirer outside India and not its subsequent utilisation which may or may not be
in India.
-
The expression
‘source of income’ is not a legal concept, but needs to be understood the way
a practical man would regard it to be a real source of income. It is required
to be understood in a broad and practical sense and not in a technical manner.
-
Reliance was placed
on the following extract of Privy Council decision in the case of Commissioner
of Inland Revenue v. Hang Seng Bank Ltd. [1991 (1) AC 306]
“. . . . . , if the profit was earned by the exploitation of property assets
as by letting property, lending money or dealing in commodities or securities
by buying and reselling at a profit, the profit will have arisen in or derived
from the place where the property was let, the money was lent or the contracts
of purchase and sale were effected.”
-
Having regard to the
above, it was concluded that in case of hire of moveable property, the source
of income is the place where property is let out and delivered and subsequent
utilisation of such equipment as per the discretion of the hirer does not
impact the determination of source.
-
Consequentially,
income from hire charges does not accrue or arise in India if the asset is
delivered outside India. It can be charged to tax only if the delivery of the
asset is in India either at the time of entering into original agreement or at
the time of renewal of the agreement.
