Worley Parsons Services Pty. Ltd. 312 ITR 317 (AAR)

10. Worley Parsons Services Pty. Ltd. 312 ITR 317 (AAR)

Article 5 (3) and Article 12 of
India-Australia DTAA

Dtd. : 23rd April, 2009

 

Issue

•  In the facts of the applicant’s case, for the
  purpose of determining threshold under the service PE, presence in respect of
  all the contracts is to be taken into account.

•   The services involving preparation of technical plan amounts to royalties
  within the meaning of Article XII of India-Australia treaty.

•   The services involving review of the designs prepared by the third party,
  assisting in the bid process, making suggestion on optimisation of resources,
  etc., do not meet the test of ‘make available’, etc., and is therefore not
  royalty within the meaning of Article XII of India Australia treaty.

Facts

Worley Parson, a company registered in Australia,
(AUSCO) is engaged in the business of providing professional services
including engineering, procurement and project management services to various
players engaged in the business of energy and resource industry.

AUSCO entered into six separate service contracts
with ONGC. The contracts were entered into in respect of two offshore projects
of ONGC. One of the six contracts (contract no.5) involved the work of
preparing design, provide lay out and cost optimisation scheme along with the
process designs for the new process platform of ONGC. The consideration paid
pursuant to contract no.5 was admitted to be the payment in the nature of
royalty as it involved consideration for development and transfer of technical
plan.

In respect of the balance 5 contracts, the
applicant provided the following services :

1. Reviewing the design and engineering
documents prepared by the third party consultants engaged directly by ONGC.

2. Reviewing technical and commercial bid
document floated by ONGC for the purpose of inviting tender from the
interested parties.

3. Reviewing the proposals of optimisation and
cost savings presented by ONGC.

4. Reviewing the existing facilities and making
recommendations.

5. Assisting ONGC in procurement phase of one
of the offshore projects.

Services in respect of these contracts were
rendered partly in India and partly in Australia. The aggregate presence of
employees pursuant to various contracts (other than contract no. 5) exceeded
period of 90 days in 12-month period reckoned for two financial years.

Before the AAR, the applicant claimed that :

•   The services rendered under the various contracts except contract no. 5
  cannot be regarded as royalties as defined in the treaty.

• For the purpose of determining the service PE trigger threshold, each
  contract should be viewed separately;

•   There was no service PE trigger except under contract 6 since in each of the
  contracts seen individually the time spent by the employees of the applicant
  did not exceed the threshold of 90 days in 12-month period provided in the
  treaty.

•   Relying on SC decision in the case of Ishikawajima-Harima Heavy
  Industries Ltd. vs. DIT, (288 ITR 408), it was submitted that offshore
  services cannot be taxed in India even in respect of contract no. 5.

The Department contended that the entire amount was taxable as royalty and
hence no distinction is required for onshore & offshore services. Further all
the contracts should be seen together in order to ascertain whether service PE
has emerged or not.

Held :

The AAR held :

•   Consideration for contract no. 5 was taxable as royalty income. For the
  purpose of determining number of days of presence for service PE, the
  presence of employees pursuant to contract no.5 is to be excluded in view of
  specific provisions of Article V(3)(c) of the treaty.

•   Services rendered pursuant to other contracts were not royalty within the
  meaning of Article XII of the treaty. The services rendered pursuant to the
  contracts had a technical content and recommendation for use by ONGC.
  However, the services and the input did not result in the recipient of
  service getting equipped with the knowledge and expertise of the applicant.
  The services were project specific and ONGC could not make use of such
  services for unrelated project to the exclusion of the applicant. The
  services therefore did not make available technology to ONGC so as to be
  regarded as royalty within the meaning of Article XII(3)(g) of the treaty.

• The AAR also rejected the contention of the Department that the services of
  reviewing designs of third party and suggesting recommendations thereon
  resulted in development of technical plan or design for transfer by the
  applicant. The AAR observed that the payment was not royalty as the
  applicant did not evolve and transfer plan or design to ONGC.