Law on whether “installation or construction activity” constitutes a PE under Article 5 and whether “mobilisation/ demobilisation charges” can be treated as “royalty” u/s 9 (1) (vi) & Article 12 (3) (b) of the DTAA and whether “installation charges” could be treated as “Fees for Technical Services” under Explanation 2 below s. 9 (1) (vii) read with Article 12 (4) (a) of the India-Singapore DTAA explained .( June 4, 2016)
The High Court had to consider 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.
HELD by the Court:
Contract cannot be re-characterised
(i) 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 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
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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?
Are mobilisation/ demobilisation charges ‘royalty’?
(vii) 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.
(viii) 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. 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.
(ix) 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. 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.
(x) 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.