Installation services integral to contract not FTS under DTAA. This was held by Delhi High Court in a recent judgment as under:
Case Law:
W.P (C) No. 7416/2012
Technip Singapore PTE Ltd…. Petitioner vs. Director of Income Tax & ANR …. Respondent
Date of Judgment: 02/06/2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru
Brief Facts of the Case:
The Petitioner company was a leading solutions provider of offshore construction, engineering, project management and support services to the oil and gas industry worldwide and was assessed by the Income Tax Officer (International Taxation) Dehradun.
The petitioner company eneterd into a contract with Indian Oil Corporation Ltd (IOCL) for the “Residual Offshore Construction work” at Paradip. The work involved installation of IOCL supplied Single Point Mooring (SPM) including anchor chains, floating and subsea hoses. The total contract value was US$ 18,598,140. with the following break up (in US Dollars):
(i) Mobilization and demobilization of Marine Spread 12,980.959
(ii) Pre and post erection work 877,288
(iii) Actual installation work 4,652,381
(iv) Documentation, Misc 87,512
the Petitioner filed an application in the AAR under Chapter XIX B of the Income Tax Act, 1961 for determination of few questions regarding its tax liability. According to the petitioner it did not have any project office or any other premises in India for executing of the work under the above contract. The Petitioner‟s obligations under the contract were fulfilled by deputing men and materials at the offshore site where the activity was performed.
AAR held that the income of the Petitioner was taxable in India as fees for technical services (FTS) both under the Income Tax Act and the DTAA on the following grounds:
(i) The contract could not be said to be for installation alone. If during the activity of installation, the income in the nature of royalty or fees or FTS or interest or of any other nature arises then such income has to be assessed under that head.
(ii) IOCL paid for each of the items of work separately although the work was a composite one. In the present contract, the payment made for use of equipment, i.e., the barges, and stated as mobilization and demobilization expenses comprised a substantial part of the payment and therefore fell within the definition of royalty under Article 12.3(b) of the DTAA.
(iii) The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408 held that the consideration for each portion of the contract, if separately specified, can be separated from the whole. In the present case, the contract was divisible one. The expenses were loaded in favour of mobilization. As observed in State of Madras v. Richardson (1968) 21 STC 245, even in the works contract, a contract of sale of material utilized in the works can be inferred.
(iv) Installation was to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, adding to the length of the anchor chain where it is falling short of the desired length, towing and setting up the Buoy from the port to the location and fixing the chain to the SPM Buoy, testing the leakages of the floating hose strings, affixing the umbilical to the valves outlets and installing all end connection, installing navigational aids, pressure gauge.
(v) As installation was ancillary and subsidiary to the use of equipment or enjoyment of the right for such use, the payment for the installation would fall under the definition of FTS in terms of Article 12.4(a) of the DTAA.
The High Court’s Observations
On the various points, the High Court held as under:
Contract cannot be re-characterised–In terms of the specific clauses of the contact to the contray, AAR could not conclude that the de facto control of the equipment was with IOCL.
Permanent Establishment (PE) in India-Revenue could not 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.
Are mobilisation/demobilisation charges ‘royalty’? – There was 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. The Court did not concur with the finding of the AAR that in the consideration received for mobilisation/demobilisation should be considered as royalty paid by IOCL to the Petitioner.
Are installation charges FTS? – On two counts the finding of the AAR on FTS could not be sustained. The first being that the installation services were 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 had proceeded on a factual misconception that the dominion and control of the equipment was with IOCL
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