Sections 9(1)(vi) and 44BB – As source of income is the place where income-generating activity takes place, hire charges paid under bare-boat charter agreement were deemed to accrue and arise in India and were liable to tax in India – On facts, fixed place PE of vessel providers was constituted in India – Since vessel was used in connection with prospecting of mineral oil, payment was covered u/s 44BB and hence could not be treated as royalty

11. [2021] 124 taxmann.com 56 (AAR-New Delhi) SeaBird Exploration FZ LLC, In re
A.A.R. Nos. 1284 and 1285 of 2012 Date of order: 14th January, 2021

Sections 9(1)(vi) and 44BB – As source of income is the place where income-generating activity takes place, hire charges paid under bare-boat charter agreement were deemed to accrue and arise in India and were liable to tax in India – On facts, fixed place PE of vessel providers was constituted in India – Since vessel was used in connection with prospecting of mineral oil, payment was covered u/s 44BB and hence could not be treated as royalty

FACTS

The applicant was a company incorporated in the UAE and was also a tax resident of UAE. It was engaged in the business of rendering geophysical services to the oil and gas exploration industry which involved seismic data acquisition and processing. The applicant was providing such offshore services to oil companies in India. For performing its services, the applicant required seismic survey vessels, or vessels fitted with a special kind of equipment. Accordingly, the applicant entered into a bare-boat charter agreement (BBC agreement) with two different vessel-providing companies (VPCs) for hire of two seismic survey vessels on global usage basis. The BBC agreements were neither location specific nor utilisation specific and the applicant was free to use them in any part of the world. It was required to pay hire charges irrespective of whether or not the vessels were in use. Under the BBC agreement, the vessel owner makes the ship available to the charterer and then it is for the latter to maintain and operate it in the manner it desires. The vessel owner has no role to play either in navigation or any other day-to-day operations of the ship which is at the complete disposal of the charterer. The Masters, officers and crew of the vessel are to be ‘servants’, with all operational expenses to be borne by the hirer.

The applicant contended before the AAR that the source of income can be in India only if income-generating activity was contingent upon use in India. However, in this case the source of income was connected to delivering and transferring control of the vessel to the applicant and not its subsequent utilisation in India. Since the vessels were given on hire outside India, there was no source of income in India and no income could be said to accrue or arise or deem to accrue or arise in India under the Act. Further, even if it was held that income arising from the global BBC agreement was taxable in India, income should be computed in accordance with the provisions of section 44BB. And, since section 44BB applies, income cannot be taxed as ‘royalty’ u/s 9(1)(vi).

HELD

VPCs derive income from hiring of the seismic vessels which are used for marine acquisition of seismic data and are in the nature of scientific equipment. Any consideration received for use or right to use such scientific equipment would be in the nature of royalty unless the consideration was covered under the provisions of section 44BB.

Section 44BB(2)(a) of the Act provides that: the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India. Plant includes ship and since the vessel was used in connection with prospecting of mineral oil, hire charges were covered u/s 44BB. Therefore, they could not be treated as royalty in view of specific exclusion under Explanation 2(iva), to section 9(1)(vi). Once payment was covered u/s 44BB, it could not be brought within the purview of section 9(1)(vi). Accordingly, the income of the VPCs was not in the nature of royalty. The issue considered in the present case is identical with that discussed in Wavefield Inseis ASA, In re [2010] 230 CTR 106 (AAR) and, therefore, ruling of that decision is squarely applicable.

Source of income is the place where income-generating activity takes place. In case of business income, it is the place where business is conducted. The business activity of seismic vessel can only be at the place where it is utilised for acquisition of seismic data and not at the place where the contract for hiring was signed or where the ship was delivered. Deciding accrual of business income on the basis of the place of delivery may result in an anomalous situation.

In the case of a seismic vessel, the business is not conducted by the Master, crew or manpower on board but by scientific equipment on the vessel which emits seismic waves and recaptures them. Hence, to decide the place of business of seismic vessels it is not relevant whether the agreement is for time charter or for BBC.

In GVK Industries vs. ITO (371 ITR 453) (SC), the Supreme Court held that the ‘source state taxation’ rule confers primacy to right to tax on a particular income or transaction to the state / nation where the source of the said income is located. Relying on this decision, the appellant submitted that to apply the source rule it was necessary to establish nexus with taxable territory. The source rule was in consonance with the nexus theory and did not fall foul on the ground of extra-territorial operation. Source was the country where income or wealth was physically or economically produced.

The payer (i.e., the applicant) was executing the contract in the Indian territory. The services of the seismic vessels were utilised within Indian territory. Thus, all the parameters of the ‘source rule’ as explained by the Supreme Court were fulfilled and, hence, the business activity of the VPCs had a clear nexus with the Indian territory. There was existence of a close, real, intimate relationship and commonality of interest between non-resident VPCs and the applicant, which satisfied the requirements for ‘business connection’ and ‘territorial nexus’. Since the business of the VPCs was carried out through the seismic vessels deployed in Indian territory, the fixed place PE of the VPCs was constituted in India.