Section 44BB , the Act – rental income earned by non-resident sub-contractor supplying plant and machinery on hire to the main contractor qualifies for taxation in accordance with Section 44BB of the Act since the provision does not distinguish between main contractor and sub-contractor.
Facts:
The taxpayer was a French company having seismic survey vessels. A Foreign Company (“FCo”) had entered into three contracts with ONGC for providing personnel and equipment, plan and execute acquisition of 3D seismic data and basic 3D seismic data processing. The taxpayer provided two seismic survey vessels on hire to FCo for carrying out the seismic operations offshore India. The taxpayer offered the rental income to tax u/s. 44BB of the Act.
As per the AO, the equipment rental received by the taxpayer was in the nature of ‘royalty’ taxable u/s. 9(1)(vi) of the Act and chargeable @ 25% of gross rental receipts.
The DRP, while giving its directions, concluded as follows.
(i) The term ‘used or to be used’ in section 44BB means that the hirer should use plant and machinery for ‘prospecting for, or extraction or production of, mineral oil’. Section 44BB was not applicable to the taxpayer since it was not engaged in the business of prospecting, extraction or production of mineral oils.
(ii) The exception in clause (iva) of Explanation 2 to section 9(1)(vi) of the Act applies only if income is covered u/s. 44BB.
(iii) R entals for leasing of vessels would constitute income by way of royalty u/s. 9(1)(vi) under the Act as well as under Article 13(3) of DTAA between India and France.
(iv) FCO is deemed to have a PE in India. Since the profits of FCO are charged on deemed income basis, and the plant and machinery is to be utilised by the PE, payments also would be deemed to have been deducted from profits of PE. In terms of Article 13(7) of India-France DTAA , royalty received by the taxpayer is taxable in India if FCo has PE in India and the royalty was borne by PE.
(v) Hence, rental receipts of sub-lessor were taxable in India as ‘royalty’ at the rate provided under India- France DTAA (i.e., 10%).
Held:
(i) T he provision clearly envisages that the non-resident should be in the business of hiring of plant and machinery. The only condition is that such plant and machinery should have been used or to be used in the prospecting for, extraction or production of mineral oils.
(ii) Perusal of various terms of the agreements and the purpose of chartering of the vessel clearly indicate that the vessel was hired for the specific purpose of carrying out geophysical prospection. Since the real intention of the parties as per the contract was to provide the vessel for carrying out geophysical prospection and not for any other purpose, agreements cannot be classified as time charter simplicitor.
(iii) Perusal of several judicial precedents1 shows that the conclusion of the AO and DRP is erroneous since section 44BB clearly envisages that the non-resident should be engaged in business of supplying plant and machinery on hire. The section does not distinguish between main contractor and sub-contractor. The fetter assumed by lower authorities is absent in section 44BB and there is nothing in the said provision to disentitle a sub-contractor. A judicial authority cannot read what is not said in the provision and add words to bring in a restricted interpretation since such interpretation will defeat the special provision.
(iv) If the legislative intent was to restrict the benefit only to the main contractor, the words after ‘the assessee engaged in the business of ‘supplying plant and machinery on hire’ or ‘providing services or facilities’ ought to have been omitted.
(v) The taxpayer satisfies the requirements in section 44BB and its income qualifies to be treated and tax accordingly
