A.A.R. No 867 of 2010

Mr V.S. Sirpurkar (Chairman) and Mr. A.K. Tewary, Member (Revenue)

For The Applicant : Mr. Percy Pardiwala, Sr. Advocate, Ms. Urvi Thakkar, CA, Mr. Rahul Jain, CA, Mr. R.Satish Kumar, Advocate
For The Department : Mr. G.C.Srivastava, Advocate Spl. Counsel
Ms Sukhvinder Khanna,CIT-DR(AAR),ND, Mr. S.S Negi, JCIT-DR (AAR), ND, Mr. Sachin Dhania, DCIT DR(AAR), ND, Mr. Lalmalsawma Pachuao, DCIT(IT),1(1)(i), Mumbai, Mr. S.M.Nigam, Advocate

RULING

A.K. Tewary-The applicant, Aker contracting FP ASA, is a company incorporated under the laws of Norway and is engaged in the business of providing ‘Floating Production Storage and Offloading’ (FPSO) facilities which is a type of floating production system used in the offshore oil and gas industry. The applicant is a tax resident of Norway. The applicant entered into a contract on 9th May 2007 (being referred to as original contract) with M/s Reliance Industries Limited (RIL). Under this contract the applicant was required to provide FPSO at the assigned oil and gas field in connection with extracting, prospecting or production of mineral oil, the consideration for this was on day rate release rental basis. Further the original contract specified USD 18.79 million as the fee towards mobilization of the vessel from Singapore to India to the offshore location in India. The consideration for FPSO facility and the fees towards mobilization of the vessel as per the original contract have been offered to tax from Assessment Year 2009-10 onwards. The applicant, in the return of income filed from the Assessment Order 2009-10 onwards, accepted that the consideration for providing FPSO facility was for supplying plant and machinery on hire used or to be used in the prospecting, extraction or production of mineral oil and such income having accrued in India was computed in terms of Section 44BB of the Income-tax Act and offered to tax accordingly. Similarly, the mobilization Revenue was also offered to tax on the same basis.

2. On 27th July 2008, the applicant signed a ‘Change Order’ with RIL to facilitate the following amendments in the scope of work of the original contract dated 9th May 2007for a total sum of US Dollars 85 million.

3. The consideration received as per the ‘Change Order’ has not been offered to tax by the applicant. In the application before this Authority the applicant mentions that the ‘Change Order’ provides for additional scope of work out of which a substantial portion of work was performed outside India. However, RIL has been withholding tax on payments made under the ‘Change Order’ also based on the withholding order obtained from the Income Tax Department for the original contract under which tax was to be deducted in accordance with provisions of section 44BB of the Act.

4. The events are summarized in chronological order as under:-

5. The applicant has filed the application in respect of taxability of the consideration received from various streams under the ‘Change Order’ mentioned above. The application was admitted vide order dated 24th May, 2010. While admitting the application it was noted by the Authority that the number of questions (15) framed in the application could be reduced and they could be more precise and, accordingly, the applicant was directed to recast the questions. The applicant filed revised questions on 17th February, 2011, which are as under:-

1) Whether based on the stated facts of the case and in law, the consideration received by the Applicant under the Change Order for undertaking the following [before the floating production storage and offloading system, (‘FPSO’) arrived in India], is in the nature of business profits or in the nature of ‘fees for technical services’ as defined in the Explanation 2 of section 9(1)(vii) of the Income Tax Act, 1961 (‘Act’)?:

i Fabrication and installation of new living quarters onboard the FPSO facility and procurement and installation of Heating Ventilation Air Conditioning System (‘HVAC’’) system onboard the living quarters.

ii Expediting deliveries of topside modules and increasing productivity at the Singapore yard.
iii Performing scope of work to avoid the dry-docking period up to a period of 15 years.
iv Mobilizing the commissioning team of the Applicant along with the members of Aker Borgestad Operations AS (entity which operates and maintains the FPSO) and major vendor representatives four months prior to the FPSO sailing to India instead of the scheduled timeline of six weeks prior to the FPSO sailing to India.

2) If the scope of work is in nature of business profits, would the consideration for the scope of work, as mentioned in question 1 above, be taxable in India even though it pertains to work performed wholly outside India?

3) Whether on the stated facts and in the circumstances of the case, the consideration received by the Applicant for installation of the buoy and moorings in India is in the nature of business profits on fees for technical services under section 9 of the Act? Whether the income chargeable to tax ought to be computed having regard to the computational mechanism under section 44BB of the Act?

4) If for any reason the amount as received by the Applicant for performing the scope of work as mentioned in Question 1 is taxable in India, whether the income chargeable to tax ought to be computed having regard to the computational under section 44BB of the Act?

5) Whether based on the stated facts and in law, the consideration received by the Applicant that is attributable to mobilization of the FPSO to the extent of the distance travelled by the FPSO outside India is taxable in India?

6) Whether on the stated facts and in the circumstances of the case, the consideration received by the Applicant on account of insurance receipts for loss of hire are chargeable to tax in India?
Applicant’s Submissions in the Application

6. Applicant’s submission in the original application dated 17 January 2010 and in the letter dated 17 February 2011 while filing revised questions are same and main points are as under:-
A. Consideration received under the ‘Change Order’ is in the nature of business profits

According to the applicant it has not rendered any managerial, technical or consultancy services to RIL. The consideration received is neither for rendering services of managerial, technical or consultancy in nature nor in the nature of royalty. The work performed by the applicant is in the nature of business profits because such receipts are arising from execution of a contract. Even in respect of work relating to mobilization it was stated that the applicant is simply undertaking the mobilization of the commissioning team along with members of Aker Borgestad (entity which will operate and maintain the FPSO) and major vendor representatives four months prior to the FPSO sailing to India instead of six weeks prior to the FPSO sailing to India, as stipulated under the Change Order executed with RIL. The same essentially amounted to execution of the contract and not rendering any service to RIL. The mobilization of the commissioning team is integral to the provision of the FPSO (as envisaged by the original contract).

‘The work performed by the applicant is in the nature of business profits.’
B. Work performed outside India.

The applicant has stated that as the entire scope of work was performed outside India, the consideration received cannot be said to accrue or arise in India.
C. Income should be computed under section 44BB of the Act

The applicant further states that in the event consideration received under the Change Order for revenue streams mentioned in question No.1 is deemed to be taxable in India, the income chargeable to tax should be computed as per computational mechanism under section 44BB of the Act. The activities performed are integral part of provisions of the FPSO and are thus in connection with extraction and production of mineral oil and gas at the assigned gas fields and should accordingly be liable to tax in accordance with the provisions of section 44BB. However, consideration received by the applicant that is attributable to mobilization of FPSO to the extent of distance travelled outside India is not taxable. The mobilization revenue taxable in hands of the applicant should be restricted only to the revenues attributable to the distance travelled in Indian territorial waters as compared to the total distance travelled from Singapore yard to India.

D. Work as per ‘change order’ cannot be attributed to PE According to the applicant the STP buoy and moorings were installed in Indian waters in January 2008 and FPSO arrived at the production site only in August 2008. The consideration received was for the work done as per the ‘change order’ and cannot be attributed to PE in India on the ground that the work has been carried out outside India.

E. Income out of consideration to STP Buoys & Moorings should be computed under Section 44BB of the Act.

As regards the consideration received for the installation of buoy and moorings in India, it was stated by the applicant that the activities performed on this account would fall within the exclusion to Section 9(1)(vii) of the Act and they would be classified as ‘Mining or like project’ and accordingly would not be in the nature of FTS. Such activities should be liable to tax in accordance with the provisions of Section 44BB of the Act. Such installation services are the services or facilities in connection with the production of ‘mineral oil’ and clearly fall under the ambit of Section 44BB of the Act. Accordingly, the additional compensation for timely installation of STP buoy and moorings should be computed having regard to the computational mechanism under section 44BB of the Act.
F. Insurance receipts not taxable in India

As regards insurance receipt, the applicant has stated that the insurance received cannot be deemed to accrue or arise in India since they are received outside India pursuant to an insurance policy which has been signed outside India. Accordingly, such receipts are not taxable in India. The same is not taxable even under the provisions of section 44BB because such receipts neither are the ‘services or facilities’ in connection with prospecting, extraction or production of mineral oil nor are for the supply of plant or machinery on hire for prospecting, extraction or production of mineral oil.
Submissions during the course of arguments

7. During the course of arguments, the counsel of the applicant Mr. Pardiwala raised the following points also:-

A. Even though the application filed did not address the issue as to whether the compensation paid pursuant to the Change Order is a capital or revenue receipt, it needs to be decided.

B. Change Order is a contract independent of the original contract. The obligations to be performed by the applicant in terms of the Change Order were solely at the behest of the RIL based on specific requirements. According to clause 25 of the original contract a detailed procedure was prescribed to enter into a Change Order which was followed. Therefore, although the Change Order may have its genesis in the original contract it is a further contract enabled into with its own independent application and consideration thereof. The amount payable under the Change Order was not to be refunded or adjudicated in case of termination or pre-termination of the original contract.

C. The consideration received towards the scope of work performed is entirely outside India and, therefore, it falls outside the purview of section 5 of the Act. The reliance was placed on the decision of Mumbai ITAT in the case of MC Dermott ETPM Inc. vs. DCIT 2008 303 ITR 445.

D. The applicant has no business connection in India and section 9(1)(i) of the Act has no application because even the work was carried out not in India.

E. The consideration received cannot be classified as lease rental or advance lease rental because the scope of work is for making the FPSO ready to use (prior to sail away) and not for the use of FPSO. If the specified sail away date and date of production on the oil is breached, though the work as per Change Order would have been done, yet the applicant would not be entitled for any consideration.

F. The communication dated 6/8/2007 between RIL and the applicant show that the Applicant brought to the attention of the RIL that there will be a delay in delivery of topside module due to which the due date of first production of oil as agreed (under original contract) may not be achieved. Further, the applicant also provided a lump sum cost that would be incurred to accelerate the conversion of the FPSO and expediting the delivery of topside module at Jurong Shipyard. In response thereto, RIL stated that it was exploring the possibility of expediting the deliveries and acceleration of FPSO conversion and asked the Applicant to provide a more realistic estimate. Subsequently, the cost of acceleration of the FPSO conversion and the expediting delivery of topside module was negotiated between both the parties. The communication between RIL and the applicant show that the Change Order was entered into to make the vessel ready to sail/ready to use.

G. The provisions of section 44 BB of the Act provides for a method of computing income, if the same is chargeable to tax in India under section 4 read with section 5 of the Act. Thus, only once it is established that the consideration for the work executed under the change order is taxable in India, the computation provisions of section 44BB come into the picture. Accordingly, the scope of work mentioned being executed wholly outside India, the income earned by the applicant does not accrue or arise or is deemed to accrue or arise in India, and hence, the same is not chargeable to tax in India. Hence, the question of invoking the provisions of section 44BB (computation provisions) does not arise.

H. The consideration is not chargeable to tax under the DTAA between India and Norway. As per Article 7 of the Treaty the consideration can be taxable if the applicant carries on business in India through a permanent establishment. The applicant had no PE in India. Further as per Article 23 of the Treaty “a person who is a resident of a Contracting State (Norway, in the instant case) and carries on activities offshore in the other Contracting State (India), in connection with exploration or exploitation of the sea bed and sub-soil situated in that other state (India), shall subject to para 3 and 4 of this Article, be deemed in relation to those activities to be carrying on business in that other state (India) through a PE or fixed based situated therein.” However, in the instant case, the Applicant, a resident of Norway, does not carry on any activity offshore in India whilst performing its obligations under the change order. Thus, the provisions of Article 23 – Offshore Activities are not applicable in the case of the Applicant.

It was pointed out to the Applicant’s counsel that in the application a clear stand was taken that all activities pursuant to the change order were integral to the provisioning of FPSO as envisaged in the original contract and consideration received was revenue in nature. It was categorically categorized as business profits. The Revenue also objected to the new pleadings introduced during the course of arguments.

8. Department’s Submissions
A. Change Order is not a contract independent of the original contract. The Department has analyzed the terms of the original contract and various clauses and exhibits and has concluded as under:-

(i) Clause 25 of the Original Agreement contains in itself the provision for the changes to be made as per specifications of the lessee. This change is with respect to obligations already contemplated in Exhibit A and / or Exhibit B. It does not render the two Exhibits redundant so as to represent a separate scope of work. For instance, the number of beds in the FPSO (104 in number) as contained in Exhibit B remains unchanged; there is only refurbishment of rooms and changes in the HVAC system which is contemplated in the so called Change Order. Also, the dry docking period has been increased to 15 years in the Change Order in order to cover the design life of FPSO and moorings as prescribed in Exhibit B of the original order. In any case, the designed life was for a period of 15 years and it continues to remain so, the dry docking period only getting extended by a few years.

(ii) The changes in Exhibit A and /or Exhibit B as contained in the Change Order falls under the definition of works as defined in the Original Agreement. Hence, the amount received on account of this is covered by the definition of contract price as contained in the contract itself. The extra cost that the Licensor may have to bear on this account can only go to increase the amount of compensation payable for making available the equipment for the use of the Licensee. All changes, even if so made, remain only in respect of the asset owned by the Licensor. The interest of the Licensee is limited to the use of the vessel for the contracted period. The ‘use’ being the only benefit arising to the lessee, any compensation paid whether by way of lump sum consideration or in installments can only represent the lease rentals. RIL had nothing to do with the changes if the vessel was not available for its use. The consideration paid by RIL cannot represent any other character than the lease rentals.

(iii) As per the responsibility matrix in Exhibit A as well as Clause 30.1 of Annexure – I of the Contract, it is the responsibility of the contractor to bear the costs in relation to the delivery and landing of FPSO and materials at the designated location and thereafter and in connection with the commissioning of the FPSO. The payment made by RIL in pursuance of the Change Order can only be considered under Exhibit – C of the original contract. The original agreement does not stipulate payment of any other nature. Clause 25 also stipulates only enhancement in the value of compensation which is elucidated in Exhibit – C.

(iv) The change order is subsidiary to the original contract and the payments on account of it are integral transactions to the principal transactions that arise out of the original contract. In the cases of Hindalco Ind 94 ITD 242(Del), Mitsui Engg & Ship Building 259 ITR 248(Del), Ansaldo Energia SPA 210 ITR 237 (Mad), Motorola Inc 95 ITD 269 (Del)(SB), 107 ITD 120 (Del), HMS Real Estate 325 ITR 71 (AAR) and Alstom Transport 349 ITR 292 (AAR) it has been held that subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation.

(v) Further, as per clause 41.2 of the original contract which states that if RIL purchases the FPSO from the Contractor; the contract upon transfer of title in the FPSO to RIL automatically terminates. In view of this, as the original contract is not invalidated by the Change Order and the payment on account of the Change Order can only come within the purview of revenue receipt.

B. According to the Department the applicant is in the business of providing such services as mentioned in the contracts that it had entered into with RIL. Therefore the entire consideration that it has received from RIL has to be taken together, the applicant cannot bifurcate them as lease rentals (which has been offered to tax u/s 44BB of the Act) and lump sum consideration for carrying out the works as specified in the change order (not offered to tax in India).

C. The Department relies on the decision of Hon’ble Supreme Court in the case of Oil and Natural Gas Corporation Limited (‘ONGC’) [Civil Appeal No 731 of 2007 (unreported)] on the following question of law:

“Whether the amounts paid by the ONGC to the non-resident assesses / foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as “fees for technical services” under Section 44D read with Explanation 2 to section 9(1)(vii)of the Income tax Act or will such payments be taxable on a presumptive basis under Section44BB of the Act”?

The Department has further stated that the Hon’ble Supreme Court held that the services rendered by various non-resident companies with which ONGC had entered into separate agreements for availing of diverse services (such as proviso of personnel with expertise and experience in operation and management of an oil rig, engineering and technical support, processing of seismic data, consultancy and training service, analysis of data, geological and feasibility study, inspection and repairs service etc.) were inextricably linked with prospecting, extraction or production of mineral oil and, hence were mining and related/ancillary services, so as to get excluded from the definition of FTS as provided under the Act. Accordingly, the non-resident companies would be governed by the provisions of presumptive taxation u/s 44BB of the Act. The following conclusions can be drawn by the Department:

(i) The applicant is in the business of providing products, systems and services to the oil and gas industry. In this particular instance it is providing its FPSO on lease to RIL. The lease rental received from RIL has been offered to tax as per the provisions of 44BB of the Act.

(ii) The consideration received from RIL out of the change order, even if these be genuine orders for change in specifications, are on account of the modifications made in the FPSO to meet the requirements of RIL. It is not unusual for a customer to seek specific modifications. Had all the requirements in the FPSO been met without requiring the said modifications, the lease rental would have been fixed accordingly without any requirement of a separate lump sum payment. As these modifications were carried out just because the requirements of RIL were not met initially by the FPSO owned by the applicant or these came before the sail away, the considerations for carrying out the said modifications as contained in the Change Order cannot be treated separately from the main consideration. The lump sum payment received subsequent to the Change Order would receive the same treatment as the consideration flowing from the original agreement.

(iii) The facilities on the FPSO prior to the modification by the Change Order and modification carried on consequent to the Change Order are inextricably linked with prospecting, extraction or production of mineral oil and, hence, were for mining and related/ancillary services, and, therefore, the consequent income in the hands of the assessee would be governed by the provisions of presumptive taxation u/s 44BB of the Act.

D According to the Department the FPSO has by itself no utility unless it is tied to the subsea wells by the moorings. Therefore, the consideration arises out of business connection in India and entire amount is attributable to operations carried out in India which comes under the purview of Section 9(1)(i) of the Act. The location of expenditure incurred for creation of FPSO facility is not material. What is material is situs of income developing operations which is in India.

E. The Department has argued that the applicant has installed buoy and moorings in India in order to fulfill its obligations (i.e. to provide its FPSO on lease rental basis to RIL to extract, receive, process, produce, store and offload crude oil and natural gas from the fields in India) as contained in the original contract that it had entered into with RIL. For this, the applicant was paid USD 15 million and the same was offered to tax in India u/s 44BB of the Act. The other considerations received under the Change Order are also on account of the applicant fulfilling the same obligations towards RIL as contained in the original contract. Therefore such considerations received by the applicant cannot be considered differently just because the required modifications in the FPSO were carried outside India. Such modifications were required for the operations of RIL in India and the modification were carried out as per the request and requirements of RIL and hence they are all attributable to the business operations carried in India and thus have business connection in India.

F. It has been further argued by the Department that the considerations received by the applicant pursuant to the Change Order as mentioned by the applicant at point nos. 4(a) to 4(d) of their submission dt.7.10.2015 have not been offered to tax in India while the consideration out of the Change Order mentioned in point no.4(e) (i.e. installation of buoy and moorings in India) of the same change order have been offered to tax u/s 44BB of the Act. The applicant has not only treated the considerations it received out of the Change Order differently from that of the original contract for tax purposes but has even treated the considerations received out of the same Change Order differently.

G. The Department has pointed out that the applicant has already paid taxes over the years as follows:

* Includes payments on account of installation of buoy and moorings in India as per the Change Order
H. Reliance has been placed by the Department on the following language of Section 44BB(2)(a) of the Act:
The amounts referred in sub-section (1) shall be the following, namely –

(a) 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.
(Emphasis supplied)

It has been further pointed out by the Department that the use of words “in connection with” has been interpreted in the wider sense by various courts in the cases of G&T Resources 1389 ITJ 568 (Del), ONGC 133 TTJ 663 (Del) etc. The use of the phrase ‘in connection with’ would take care of the amount received by the applicant in connection with the Change Order. In the case of Sedco Forex International Inc. Vs CIT reported in 299 ITR 238, the Hon’ble High Court of Uttaranchal has held that section 44BB(1) is a code in itself.

I. According to the Department the amount received by the applicant pursuant to the Change Order is revenue receipt falling under the provisions of Section 5 and 9 of the Act as well as Article 7 of the DTAA between India and Norway. The Change Order does not represent a separate scope of work from that of the original contract and hence the same is taxable u/s 44BB of the Act.

J. The Department also asserts that the applicant has a PE in India in terms of provisions of Article 23 of DTAA because the applicant is carrying on the activity of leasing business in India.

The Department has further pointed out that the applicant has already offered the entire mobilization fee as per the original contract to tax u/s 44BB of the Act and the claim that the distance travelled outside is not taxable in India is an afterthought. The entire consideration arising out of the original contract as well as the Change Order is to be taxed similarly u/s 44BB of the Act.

Inferences
9. We have examined carefully the applicant’s interpretation of law filed along with the original as well as revised applications, the arguments put forward by both sides and written submissions furnished by them. The main thrust of the argument of the applicant is based on the premise that the ‘Change Order’ is a contract independent of the original contract between RIL and the applicant. Therefore, it is necessary to first set out the facts which are as under:-

I) RIL floated a tender on 20th September 2006 for chartering of FPSO, following the discovery of crude oil and natural gas at the development area on lease rental basis, to extract, receive, process, produce, store and offload crude oil and natural gas from the field.

II) The applicant (referred to as contractor in the agreement for chartering of FPSO in the agreement dated 9th May 2007) got the contract for carrying out the ‘work’ in accordance with the terms and conditions contained in this agreement. In the agreement it has been mentioned that the contractor had sufficient technical capability, resources, equipment, man power, infrastructure and financial capability (with capacity to augment these) to carry out the work.

III) As per the agreement “Work” shall mean the chartering out of the FPSO and all activities and works to be performed by the Contractor and all other obligations to be performed by Contractor under the contract, including preparation of the FPSO for chartering as described in the contract including Exhibits A and B, and includes supplying FPSO, materials, and, up to completion of FPSO Commissioning, Contractor’s Personnel and technical support necessary for the performance of its obligations on the Work Site.

IV) FPSO or Contractor’s Equipment shall mean the Vessel converted to a floating, production, processing, storage and offloading facility with STP buoy and moorings meeting the FPSO Classification and including all equipment, materials, spare parts and supplies to be provided and/or supplies on such facility in order to meet the requirements of Exhibit A and Exhibit B.

V) Exhibit A is scope of work according to which the contractor’s equipment shall be equipped with all necessary tools, equipment and manned with qualified and experienced contractor’s personnel during the commissioning and until handing over to O&M contractor. The contractor was to provide living quarters, office space with furnishing, sick bay, galleys, mess rooms and other requirements of contractor, RIL and RIL’s other contractors.

VI) Exhibit B contains functional requirements and includes general facilities/requirements for operations including 104 air-conditioned living quarters with configuration of one bed, 2 beds and four bed cabins.

VII) Clause 25 of the contract, under the headlines ‘changes’, contains provisions for changes in the original agreement. As per clause 25.1 RIL has the right at any time to require any reasonable change to Exhibit A and/or to Exhibit B by notice (Change Notice) provided that no such change shall impair or invalidate the Contract. Such changes may include reasonable additions, deletions, substitutions, alterations and/or changes in quantity, form, kind, position and/or dimension. Clause 25 provides detailed procedure for changes and after the change, proposal is authorized by RIL. Such authorization constitutes a ‘Change Order’. The present application is in respect of such change order dated 27th July, 2008.

VIII) The Change Order dated 27th July, 2008 starts with the sentence ‘facilitating amendments are hereby agreed in the above referred contract’, which is contract dated 9th May, 2007 for chartering of FPSO in connection with the extraction and production of oil and gas as mentioned above.

IX) The relationship of scope of work in the Change Order with that of the original contract is as under:

(a) Fabrication and installation of all of 104 living quarters (Exhibit B Part-I clause 6E of the original contract already provided that the FPSO will have 104 quarters).

(b) Installation of an independent HVSC system in the living quarters after dismantling and scrapping the existing HVSC system (exhibit Part I Clause 6E of the original contract already provided for air-conditioned living quarters.)

(c) Mobilizing the commissioning team four months prior to the FPSO sailing to India instead of six weeks. (It relates to the modification in the mobilization schedule in the original contract.)

(d) Expediting deliveries of topside modules and timely installation of buoy and moorings. (Installation of buoys and moorings is as per the original contract.)

(e) Extending the dry docking period from 10 to 15 years. Clause 10 of the Change Order also mentions that changes agreed would not entitle the contractor to an extension of time under the contract and/or achieving of date of first production of oil except as specifically extended by this Change Order.
X) Clause 30.1 of the original contract reads as under:-

“Contractor shall be responsible for all activities in connection with and make all arrangements for and bear all costs in relation to the delivery and landing of FPSO and materials at the Designated Location and thereafter and in connection with the commissioning of the FPSO in accordance with Clause 19; all in accordance with the terms of the Contract.”

XI) When the application was filed the applicant filed its detailed interpretation of law and took a clear stand in respect of all questions framed that all activities pursuant to the change order were integral to the provisioning of the FPSO and the consideration for the work performed as per the change order by the applicant is in the nature of ‘business profits’. Repeatedly in respect of all 15 questions framed in the application it was argued by the applicant that the receipts arising from execution of a contract under the Change Order were in the nature of business profits. The applicant cited a number of Court Judgments to support this stand. When the questions were revised vide letter dated 17 February, 2011, the applicant again enclosed its own detailed ‘interpretation of law’ in respect of revised questions and again repeatedly took the same stand that the considerations as per Change Order were in the nature of ‘business profits’. There was not even a whisper regarding considerations being capital receipts. The applicant had already taken similar stand regarding considerations as per original contract and had filed returns accordingly, as mentioned above.

XII) Similarly, in the original application and in the revised application the applicant’s interpretation of law regarding applicability of Section 44BB of the Act was that:

Installation of STP buoy and moorings form an essential and integral part of operations of FPSO and the said activities are covered by provisions of Section 44BB of the Act. The applicant also referred to CBDT instructions and judicial precedents and in view of the same stated that the income arising to the applicant fall under the purview of Section 44BB and would be taxed as per the computational mechanism of the said Section. As regards consideration for fabrication and installation of living quarters, HVAC system, expediting deliveries of topside modules, increasing dry dock period up to 15 years and mobilizing and commissioning the team four months prior to FPSO sailing to India instead of 6 weeks, the applicant took the stand that if for any reason the considerations received were taxable in India, then in view of CBDT’s instructions and judicial precedents, the same should be computed having regard to computational mechanism under Section 44BB of the Act and as regards mobilization revenue it was mentioned that the taxability of this should be restricted only to the revenue contributed to the distance travelled in the Indian territorial waters as compared to the distance covered from Singapore yard to India.

XIII) As regards considerations received as per original contract the applicant (including mobilization revenue) in its returns filed from Assessment year 2009-10 to 2014-15 has already paid taxes in accordance with provisions of Section 44BB of the Act. No distinction has been made based on distances travelled in Indian waters and entire considerations were offered to tax.

10. As against above-mentioned facts, the applicant is giving different treatment to considerations received as per the original contract and as per the change order. Not only that, it is giving different treatment to considerations received pursuant to change order also as he is offering consideration for installation of buoys and moorings for tax under section 44BB of the Act and for other amount it is taking the stand that the same is not taxable. Further, during the course of arguments the applicant’s counsel Mr. Pardiwala took some different stands. His first changed stand was that the consideration received pursuant to Change Order was a receipt on capital account contrary to the stand taken in the original as well as revised application that it was in the nature of business profits (revenue streams). In fact, the applicant’s question is whether the consideration received pursuant to the change order is business profits or FTS. It has never asked any question as to whether such consideration is in the nature of capital or revenue receipts. Therefore, to raise such an issue during the course of argument is completely out of place and has no bearing on the questions asked. We are not supposed to give a ruling on an issue which is not part of the questions in the application. Having said this, we are going to deal with this argument. This argument is also based on the premise that the Change Order is independent of the original contract and has a separate scope of work for which separate consideration was received. This argument is completely flawed because as mentioned in earlier paragraphs the Change Order emanates from the original contract only. As mentioned in the facts narrated above, it is clearly seen that the Change Order has its genesis in Clause 25 of the original contract. It was only after following procedure mentioned in the clause 25 in detail that the change proposal was authorized by RIL and such authorization was called the Change Order. In view of this basic fact it is impossible to accept that the Change Order is independent of the original contract and the payment pursuant to Change Order was recoupment of capital costs. The analysis of original contract and of the Change Order done above further shows that the Change Order is nothing but amendments in their original contract No.0GF/13627982 dated 9.5.2007. It is mentioned upfront in clear terms in the change order. We have also seen that the original contract already had Clauses pertaining to provisioning of 104 living quarters and for HVSC systems. As per the Change Order the applicant has made 104 living quarters livable and installed new HVAC system by dismantling the existing one. In paragraph 9(IX) we have seen that the entire scope of work in the change order is nothing but modifications/amendments in the original contract. As per Exhibits A & B to the original agreement the applicant was bound to provide 104 living quarters with airconditioning facilities. If these facilities were not found up to the mark, it was duty of the applicant to ensure that the same should be provided and it did so after dismantling old HVAC systems. Similarly, consideration received for mobilization and commissioning team is also inextricably linked with the original contract as per which the contractor was to make the equipment suitably equipped with all necessary tools, equipments and manned with qualified and experienced personnel during commissioning. In the circumstances to separate the consideration for mobilization pursuant to the Change Order from mobilization consideration as per original contract is not at all possible. The fact remains that the Change Order does not alter the character of consideration received which is identical with that of consideration received as per original contract. Clause 25 of the agreement already mentions about changes relating to additions, deletions, substitutions, alterations and/or changes in quantity, form, kind, position, and/or dimension. These are definitely part of obligations of the applicant to prepare the FPSO for chartering and covered under the definitions of work under the original agreement. There is no way in which the change order can be seen in isolation. It has no legs of its own. The efforts made by the applicant’s counsel to make an artificial distinction between these two are not of any use. The case laws cited by him (CIT vs. Poona Electricity Company 14 ITR 622 and of Hoshiarpur Electricity Company vs. CIT 41 ITR 608) are in respect of definition of the term ‘actual cost’ in Section 43(1) of the Act and are in entirely different and unrelated context which has not even remote application in the present case. Here the facts are strong enough to suggest and speaking loudly that Change Order originates from the original contract. Any other interpretation will be nothing but alteration of facts. Therefore the new argument brought in by Mr. Pardiwala regarding consideration being capital receipt has no merits at all.

11. The second argument of Shri Pardiwala is that consideration received pursuant to the Change Order was outside India and, therefore, no income accrued or arose in India or deemed to have accrued or arisen in India and, therefore, computational provisions of Section 44BB cannot be invoked. He has cited the decision of Mumbai ITAT in the case of J Ray McDermott Eastern Hemisphere Stern Ltd (supra). In this context it is important to reiterate that as regards the consideration pursuant to the original contract the applicant has filed return in accordance with provisions of Section 44BB of the Act. As established clearly in earlier paragraph, the consideration received from the Change Order also bears the same character. As regards the case of J Ray McDermott Stern Hemisphere Ltd, it must be said that the Hon’ble High Court of Bombay had not gone into the issue of application of provisions of Section 44BB (2) (a) of the Act on merits and had noted that ‘the department as also the assessee proceeded on the undisputed position that the assessee is non-resident based in Mauritius. It has a permanent establishment in India. The income from the permanent establishment is assessable as business income. It is in such circumstances that we do not find that any substantial question of law with regard to status of the assessee or having a permanent establishment or not will arise for consideration. The appeal is clearly devoid of any merits and, therefore, it is dismissed.” In this context the provisions of Section 44BB (2) (a) is reproduced below:

(a) 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.

The word ‘in connection with’ has been interpreted in a very wide sense by various Courts (G&T Resources and ONGC – supra). In the case of Sedco Forex International Inc. the Hon’ble High Court of Uttrakhand considered the question whether the entire mobilization revenue was chargeable to tax in India despite the fact that major part of the said activity was carried outside India and whether provisions of section 44BB would override Section 5. It was held by the Hon’ble High Court of Uttrakhand as under:-

Here in the present case, provisions of Section 5 and Section 9 are not attracted. Section 4 is a charging Section and Section 5 contains the scope of total income, which provides that subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income as described under this Section and Section 9 provides the incomes deemed to accrue or arise in India in the contingencies described under this Section. Therefore, Section 5 and Section 9 both are aimed at the income for the taxability under Section 4 of the act, while Section 44 BB does not take into account the income for calculating the aggregate amount to calculate 10 per cent profit and gains. Profit and gains is a type of income to be taxed under a legal fiction i.e. @ 10 per cent of the amount specified in sub-section (2) of Section 44 BB. Section 44BB is a special provision relating to non-resident assessee who is providing 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 or outside India. The Section is a complete code in itself.
This Authority has also taken a view in the case of Geofizyka Torun Sp.zo and Bergen Oilfield Services AS that ‘there is no scope under the provision of Section 44BB to split revenue attributable to activities in India and outside India, where the income is offered to tax on deemed profit basis. Accordingly the mobilization and de-mobilization revenue relating to the vessel travelled outside the Indian territorial waters would be included in the gross revenue for determining the deemed profit.’ It must be noted that section 44BB was introduced by the Finance Act, 1987, with retrospective effect from 1.4.1983, as it was felt that the computation of income on net basis in such a business was complicated. So, a lower tax @ 10% (as against higher tax on FTS and on net basis) on deemed profits and gains of the aggregate amount as specified in sub section (2) was prescribed, without splitting up the amount on the basis of place of payment. The Memorandum explaining the provisions (165 ITR st 161-62) stated that “The computation of the taxable income of a taxpayer engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire, used or to be used in the exploration for, and exploitation of, mineral oils involves a number of complications. As a measure of simplification, the Bill seeks to insert a new section 44BB in the Incometax Act providing for determination of income of such tax payers at ten per cent of the aggregate of certain amounts. The amounts in respect of which the provisions will apply would be the amounts paid or payable to the tax payer or to any person on his behalf whether in or out of India, on account of provision of such services or facilities or supplying plant and machinery for the aforesaid purposes……’ Therefore, there is no scope of splitting up the amount paid in or outside India.

12. It is established beyond doubt in earlier paragraphs that the consideration received as per Change Order is similar to consideration received as per original contract. It is also established that both original contract and amendments therein by way of Change order are inextricably linked with extraction, processing, production, storing & offloading of crude oil and natural gas for which RIL had floated tender and granted the contract to the applicant. Hence, the applicant would be governed by provisions of Section 44BB of the Act. As the ‘work’ as per the contract was to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil & natural gas from development area in India, it is immaterial whether work relating to preparation of the FPSO was done in India or outside India. Further Section 44BB does not make any distinction between amount paid in India or outside India and, therefore, the entire amount has to be considered for the purpose of computation under this Section. This is the reason that applicant has taken the same stand in the return filed from Assessment Year 2009-10 onwards and has offered the consideration received as per original contract as per the provisions of Section 44BB and paid taxes accordingly on the entire amount without making any distinction either on the location where work preparing the FPSO was done or on the basis of distance travelled outside India or in India. We do not find any reason to give a different treatment to the consideration received pursuant to the Change Order.

13. The applicant has also argued that the consideration received as per Change Order is not taxable under the DTAA between India and Norway. It is relevant to point out that the scope of work as per Change Order has not changed as compared to that in the original contract. The applicant’s arguments is based on the stand that it, being a resident of Norway, does not carry on any activity offshore in India while performing its obligations under the Change Order and, therefore, provisions of Article 23 are not applicable. Again, this stand is based on the distinction between original contract and change order and is different from the stand taken in respect of original contract in the returns filed by the applicant form Assessment Year 2009- 2010 onwards. As said earlier, the consideration received from both original contract and Change Order is of the same nature and, therefore, it is not at all possible to give different treatments to them. Having said this, it is not acceptable that the applicant is not carrying on any activity in India. Moreover, the scope of work is to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil and natural gas from development area in India and all activities and works connected with this including its preparation for chartering are inextricably linked with the main work. In fact the applicant is carrying on its primary business activity, i.e., providing the FPSO on lease rental basis to extract, receive, process, produce, store and offload crude oil and natural gas from the development area (contract area in India) as mentioned in exhibit G of the contract. Against this factual position, it cannot be said that the applicant is not carrying on any activity offshore in India pursuant to the work under the change order, and, therefore, it is not possible to accept the stand of the applicant.

14. As regards consideration received on account of loss of lease rentals on account of insurance policy signed outside India, the Department has also not disputed the stand of the applicant that such receipts are not taxable in India. In view of the fact that such receipts were received outside India, as a result of insurance policy obtained and signed outside India, we are inclined to accept the stand of the applicant.

Rulings
15. Accordingly, the ruling is given and pronounced as under:- Ques.1 The consideration received by the applicant under the Change Order for undertaking the scope of work mentioned in ques No.1 is in the nature of business profits.

Ques.2&4 The entire consideration received for the scope of work as mentioned in ques No.1 is taxable in India under the provisions of section 44BB of the Act.

Que.3 The consideration received for installation of STP buoy and moorings in India is in the nature of business profits and is chargeable to tax under the provisions of section 44BB of the Act.

Que.5 The entire consideration received for mobilization of the FPSO is taxable under the provisions of Section 44BB of the Act without splitting the same on the basis of travel of the FPSO outside or in India.

Que.6 The consideration received on account of insurance receipts for loss of hire is not taxable in India.

The Ruling is accordingly given and pronounced on this day of 02nd December, 2015.