KREUZ SUBSEA PTE LTD.,MUMBAI vs. THE DY CIT, INTERNATIONAL TAXATION-3(1)(2), MUMBAI

Per Amarjit Singh (AM): The present appeal filed by the assesse is directed against the order passed by the DRP-1(WZ) dated 24.01.2020 for A.Y. 2014-15. The assesse has raised the following grounds before us: “On the facts and circumstances of the case and in law, the Assessing Officer based on directions of Hon'ble Dispute Resolution Panel (DRP) has: 1. erred in assessing total income at Rs.11,10,05,440/- as against Nil returned income

P a g e | 2 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) 2. erred in double counting of overlapping days of vessels in India while computing duration of the Appellant in India and not computing the duration in India based on solar days. 3. erred in misinterpreting and holding that Appellant constituted a Permanent Establishment (PE) in India under Article 5(6) of India - Singapore Double Taxation Avoidance Agreement (DTAA). 4. erred in not applying the specific clause of Article 5(3) of India- Singapore DTAA on installation activities undertaken by the Appellant and not appreciating the fact that Appellant did not have a PE in India under Article 5(3) of India-Singapore DTAA as the duration of each of its project in India was less than 183 days during the fiscal year 5. erred in misinterpreting and holding that Appellant constituted a PE in India under Article 5(1) of India - Singapore DTAA 6. erred in violating the principal of judicial discipline in not following juri ictional Income Tax Appellate Tribunal (ITAT's) order in the Appellant's own case for AY 2010-11-M/s. Kreuz Subsea Pte. Ltd. vs Deputy Director of Income Tax (International Taxation) (ITA No.1876/Mum/2014) and AYS 2012-13 and 2013-14-M/s. Kreuz (International Taxation) (ITA No. 1781 & 6621/ Mum/2016) rendered under similar facts and circumstances. 7. erred in incorrectly computing the Appellant's income from business at Rs. 11,10,05,440 at an arbitrary rate of 10%, on the ground that no books of accounts are maintained as against resumed income of NIL instead of applying provisions of Section 44BB of the Act 8. erred in including Rs.1,63,76,640 in gross revenues for AY 2014-15, received from consortium of M/s Valentine Maritime Limited & M/s Valentine Maritime Mauritius Limited, even though the same have been offered to tax in previous years. 9. erred in not granting credit of Rs.68,94,564 pertaining to taxes deducted at source on revenues received from consortium of M/s Valentine Maritime Limited & M/s Valentine Maritime Mauritius Limited amounting to Rs.1,63,76,640 10. erred in initiating penalty proceedings under Section 271(1)(c) of the Act without appreciating that the Appellant has neither concealed nor furnished inaccurate particulars of income. All the above grounds are without prejudice to each other. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Honorable Members to decide this appeal according to law.”

P a g e | 4 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) The assessee had mobilised two vessels named Kreuz Supporter (Barge) and Kreuz Glorious (Barge) for the contract. The installation activity of the assesse for the contract was spread over the financial year 2013-14 and 2014-15 and details of the presense of the vessels in India was as follows:

Name of Date of Date of Date of Financial No of days No of the Arrival of completion departure of year ending during PY days Vessel vessel of work vessel 2013-14 (till during PY March 2014) 2014-15 KRUEZ 29.11.13 17.04.14 20.05.14 31.03.14 123 50 SUPPOR 29.11.201 31.03.2015 NA 31.03.2015 --- 123 TER 4 KRUEZ 13.03.14 17.05.14 20.05.14 31.03.14 19 50 GLORIO US Total 142 223 days

The A.O further stated that the assesse M/s Kreuz Subsea Pte Ltd. was a subcontractor and had received contract from M/s Valentine Marime Ltd. and Leighton Welspun Contractors Pvt. Ltd. for assistance in installation of stalk of Risers in the ONGC’s Mumbai High field area. The A.O further stated that assessee was supposed to do the following work under the subcontract:

“1. Mobilisation of marine spread and resources such as construction equipment, etc from Singapore to India

The A.O further stated that the contractor M/s Leighton Welspun Contractors Pvt. Ltd. was to provide the following:

P a g e | 5 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) “a. The detailed design engineering for Riser will be performed by the consultant appointed by contractor, b. Welding procedure and NDT Welder procedure qualification. c. Permanent material in accordance with installation schedule limited to pre- fabricated riser pipes in required sections complete with Monel and spalash zone coating, Valves, flanges, gaskets, nuts, bolts and blinds (if required), HSS will be free issued by Contractor alongside installation barge, at site, on mutually agreed schedule Sub-Contractor shall make available Cargo Barge and or work barge as applicable (with Free Board) to receive the material immediately from supply vessel/ cargo barge. Sub-Contractor shall be responsible to arrange the loading and unloading of such material from contactors cargo barge/supply vessel at site. d. Contractor is responsible to provide at no cost to Sub-Contractor, efficient and expeditious logistic and all agency support as required for the project at Mumbai and Delhi towards various statutory clearances of sub- contractor Vessel spread and personnel. e. Sub-Contractor's name shall be included in Contractor's existing CAR Insurance Policy Sub-Contractor's exposure to deductibles shall be limited to U 25.000,00 per occurrences f. Contractor to obtain necessary statutory approvals required for deploying Sub- Contractor's marine spread form but not limited to Ministry of Defense (MOD), Directorate General of India Shipping, Indian Register of Shipping (IRS). Indian Customs, Immigration and Ministry of Home Affairs (MOHA) for expatriate and IOCAL personnel in Indian offshore economic zone waters, however, Sub Contractor to submit the all requires documents at least 30 days prior to arrival in Mumbai. g. Marine Warranty Surveyors, Third Party Independent Inspectors and any other required under the main contact for certifying Sub-Contractor's work spread and installation works.”

After going through the subcontract between the assesse and M/s Leighton Welspun Contractors Pvt. Ltd. the A.O has gone through the following clauses of the subcontract: “General clause i.e. Para no. 2 of the sub contract

P a g e | 6 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2)

P a g e | 7 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) “We refer to the notice dated 17 January 2020 issued by your goodself in case of KSS for AY 2014 15. In this connection, and in continuation of our response filed on 10 December 2019 and 19December 2019, on behalf of and under the instruction of our client, we wish to submit as under: As mentioned in our earlier submissions KSS executed the contract with Ms Leighton Welspun Contractors Pvt Ltd (Leighton) vide subcontract number 11154/11303/11249- SC033 dated 22 October 2013 during AY 2014-15 (FY 2013-14 ie during period 1 April 2013 to 31 March 2014) in connection with assistance for installation of stalk on risers. The details in connection with the duration of the contract is as under: Contract party Name of Vessel Duration of Number of contract during days during FY 2013-14 FY 2013-14 Leighton Kreuz Supporter 29-Nov-13 to 123 (11154/11303/ 31-March-14 11249-SC033) Kreuz Glorious 13-Mar-14 to 19 31-Mar-14

Copy of the contract have already been submitted before your goodself vide our response filed on 10 December 2019 KSS scope of work under each of the above contracts pertains to installation activities (ie installation of nsers, spools, clamps etc) and to carry on operations in the Oil and Gas sector which are in connection with prospecting for, or extraction or production of mineral oil and natural gas

P a g e | 8 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2)

P a g e | 9 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2)

 It is an accepted fact that every installation or construction contract may also include an element constituting provision of services through employees/ personnel (e.g. services provided by construction workers in the construction of a building). Accordingly, the provision of services is just a part of the installation/ construction contract and may be ancillary or subsidiary to the installation/construction contract.  Where a tax payer is carrying on construction/installation activity, such activities would be covered under the specific article for installation/ construction which is Article 5(3) of the Tax Treaty and not as per the residuary clauses of Article 5.  Based on the above, the specific provisions of Article 5(3) would override/prevail over the other clauses of Article 5 having regard to the rule of construction contained in the maxim: “generalia speeialibus non derogant”. Courts have consistently applied the aforesaid rule of construction while deciding which provisions would prevail where there may appear apparent conflict in two applicable provisions. Some of the judicial precedents are as follows:  Tribunal);  Forbes Campbell & Co. Ltd vs. CIT (1994) (119 CTR 319) (Mumbai High Court);  CIT, Dehradun and Another vs. M/s BKI/HAM (ITA No 34 of 2007) (Uttarakhand High Court),  P No 11 (1995) (228 ITR 55) (AAR),  P. No. 24 (1996) (237 ITR 798) (AAR): Brown and Roof Inc. (1999) (103 Taxman 515) (AAR),  Cal Dive Marine Construction (Mauritius) Ltd (315 ITR 334) (AAR)  Tiong Woon Project and Contracting Pfe Ltd (338 CTR 386) (AAR)

 Thus, it is humbly submitted that the provisions of residuary clauses of Article 5 are of no relevance in the case of installation/construction contracts and specific provisions of Article 5(3) would apply.  As already discussed above, the nature of activities carried on by KSS under the above- mentioned contracts involves installation activities Since, the duration of each of the contracts entered into by KSS has not exceeded the prescribed threshold period of 183 days during FY 2013- 14, it is submitted that KSS does not have a PE in India under Article 5(3) of the Tax Treaty and hence the contractual revenues of KSS are not taxable in India under Article 5(3) read with Article 7 of the Tax Treaty. 

Conclusion  Accordingly, as the Article 5(3) Le Installation PE clause is more specific to KSS than residuary clauses of Article 5. Therefore, the provisions of residuary clauses other than Article 5(3) would not apply to KSS.  Further, as the threshold period of 183 days under the Tax Treaty has not been exceeded for any of the contracts entered into by KSS during

P a g e | 10 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) AY 2014-15, KSS does not constitute a PE in India under more specific Article 5(3) of the Tax Treaty.

P a g e | 11 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) “2. The question whether prospecting for, or extraction or production of mineral oil can be termed as 'mining' operations, was referred to the Attorney General of India for his opinion The Attorney General has opined that such operations are mining operations and the expressions 'mining project' or 'like project' occurring in Explanation 2 to section 9(1)(vii) of the Income-tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas.

Accordingly and as per the provisions of the Act, the activities undertaken by KSS cannot be considered as FTS. Revenue not taxable as FTS under the Tax Treaty  Without prejudice to the non taxability of consideration received by KSS as FTS under the Act, KSS submits that since the definition of FTS is narrower under the Tax treaty than under the Act provisions of the Tax Treaty are more beneficial than the provisions of the Act and hence, KSS resorts to the provisions of the Tax Treaty regarding the taxability of FTS as detailed in the ensuing paragraphs.  Given the above, we have analyzed the term 'FTS as defined under Article 12(4) of the Tax Treaty which is reproduced as under: “The term “fees for technical services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services.” 1. ………………………………………………………………………...

P a g e | 12 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) 2. make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein, or 3. consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.  To interpret the meaning of the term "make available", reliance is placed on the memorandum of Understanding (MOU) to the India-US Tax Treaty.  The MOU states that technology can be said to have been 'made available' when the person acquiring the service is enabled to apply the technology embedded in the services provided to him, independently. The mere fact that provision of the service may require technical input by the person providing the service would not per se mean that technology has been made available. Accordingly, the meaning of the term 'make available is that the recipient of the service should be able to apply on his own, the technical knowledge, experience, skill, know-how, or processes employed by the service provider in rendering the service i.e the term 'make available' is akin to the concept of 'transfer and technical knowledge, experience, skill, know-how, or processes are transferred to the recipient by the service provider so that the recipient can apply the same on his own.  In view of the above, rendering of included services (i.e making available of FTS) leads to transfer/ imparting of technical knowledge, experience, skill, know-how, or processes to the recipient which enables the recipient to apply the same on his own- the recipient acquires a means to an end le he acquires the technical knowledge experience, skills, know-how or processes from the provider which acts as a means and enables him to use the same for achieving a further end.  From the above definition it is clear that services will fall within the category of FTS, if all of the following conditions are satisfied.  Services are technical or consultancy services, and  Services "make available" technical knowledge, skill, experience, etc or consist of the development and transfer of a technical plan or design.

In view of the above it is submitted that under the terms of the agreement, there is no technology made available by KSS to its customers and that KSS is only providing services for subsea installation and there is no transfer of any technology, skill, experience or know-how Accordingly, revenues received by KSS for the subsea installation services rendered to its customers during AY 2014-15 cannot be considered as FTS under Article 12 of the Tax Treaty

P a g e | 13 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) Further, it is submitted that your goodself has held that the revenues of KSS are not taxable as FTS under the Act and Tax Treaty as per the final assessment order passed under Section 143(3) for AY 2016-17 dated 24 October 2019 which was in pursuant to DRP directions dated 13 September 2019. Conclusion: As installation activities fall within the exclusionary criteria i.e. construction, assembly, mining or like project, revenues earned by KSS for provision of installation services shall not be taxable as FTS under Section 9(1)(vii) of the Act Further, as KSS does not make available any technical knowledge to its contracting entities/customers i.e. due to restrictive definition of FTS under the Tax Treaty, revenues earned by KSS pursuant to its projects are not FTS under Article 12(4) of the Tax Treaty.” However, the A.O has not agreed with the submission of the assessee and he was of the view that the nature of services provided by the assessee were nothing but was the FTS (fees for technical services) taxable u/s 9(1)(vii) of the Act as well as under article 12(4) of the DTAA between India and Singapore. The A.O further stated that assessee has been given a subcontract by Leighton Welspun Contractors Pvt. Ltd. and other contractor for the installation of stalks on risers in the Mumbai High field area. The AO stated that the nature of services provided by the assesse was not in the nature of supervisory activity. The A.O also stated that nature of services were not connected with exploration, exploitation or extraction of mineral oil in India. The A.O further stated that the word used in the contract between assesse and the contractor was ‘installation’ but in real sense the assessee was providing the helping hand to the main contractor by doing repair work, obtaining in field permits, performing fitting/attachment of stalk on risers which cannot be termed as installation activity. Therefore, A.O was of the view that the nature of work/project being executive by the assesse did not fall under the para ¾ or para 5 of the Article 5 of DTAA between India & Singapore. Therefore, the services provided by the P a g e | 14 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) assesse were in the nature of services referred to in Article 5(6) of the DTAA. The A.O further stated that the threshold period for triggering the presence of PE in India as per Article 5(6) was 90 days in any fiscal year. However, the activities of the assessee continued in India for a period of 142 days in F.Y. 2013-14 and its income arising from projects executed in India will be taxable in India as business income as per I.T. Act as well as Article 7 of the India-Singapore DTAA. Therefore, the A.O held that the assessee had a PE in India and consequently the revenue from the projects executed in India will be taxable. The A.O further stated that since assesse had not maintained its books of account in India, therefore, the taxable profit is estimated at 10% of gross revenue of Rs.1,11,00,54,395/-.

P a g e | 16 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) D.R submitted that make available only when the other party applied it independently there is a close connection between the service providers and the assesse therefore there is a make available of the technical knowledge in the case of the assessee. During the course of appellate proceedings before us the ld. D.R also submitted that for the A.Y. 2016- 17 the assessee has opted for VSV Scheme wherein the similar issue was involved. In rejoinder the ld. Counsel submitted copy of the direct tax Vivad se Vishwas Act 2020 and referred explanation 5 of the section wherein it is clarified that making a declaration under this Act shall not amount to conceding the tax position and it shall not be lawful for the income tax authority or the declarant being a party in appeal or writ petition or special leave position to contend that the declarant or the income-tax authority as the case may be has acquiesced in the decision on the disputed issue by settling the dispute.

P a g e | 18 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2)

WORK BARGE-1 (Kreuz Supporter) STALK-ON Riser Installation (Base Scope) Sr. P/L segment Sequence of Face Field Dia, (Inch) PL Wall Thk Riser Wal Thk. Thk. (mm) Splash No. Installation (mm) (mm) Zone Wall Tnk (mm) 1. 6” (BCPA 2 VSEA) BCPA-2 South Bassein 6 12.7 14.3 18.3 2. 12” (MNP-RS 5) RS-5 East North 12 15.9 17.5 20.6 3. 12” (NS- MNP) NS West North 12 15.9 17.5 20.6 4. 12” (IF-SC-1) IF East South 12 15.9 17.5 20.6 5. 12” (SU-SHD) SU West South 12 15.9 17.5 20.6 6. 12” (SU-SHD) SHD West South 12 15.9 17.5 20.6 7. 12” (SQ-BHS) SQ West South 12 15.9 17.5 20.6 8. 12” (SQ-BHS) BHS South South 12 15.9 17.5 20.6 9. 12” (SJ-SA) SJ East South 12 15.9 17.5 20.6 10. 12” (SJ-SA) SA West South 12 15.9 175 20.6 11. 8” (S14-S15) S1-4 East South 8 10.3 11.1 15.9 12. 8” (S14-S15) S1-4 West South 8 10.3 11.1 15.9 13. 6” (NLM10-NLM8) NLM-10 East Neelam 6 7.9 9.5 14.3 14. 6”(NLM10-NLM8) NLM-8 East Nellam 6 7.9 9.5 14.3 15. 20” (ICP-MSP) ICP South North 20 20.6 22.2 25.4 16. 20” (ICP-MSP) MSP South North 20 20.6 22.2 25.4 17. 16” (II-SHG) II East South 16 17.5 22.2 23.8 18. 16” (II-SHG) SHG East South 16 17.5 22.2 23.8 19. 18” (WIS-WI7) WIS West South 18 17.5 25.4 28.6 20. 18” (WIS-SJ) WIS North South 18 17.5 25.4 28.6 21. 18” (WIS-WI7) WI7 East South 18 17.5 25.4 28.6 22. 16” (WIS-SC 1) WIS North South 16 15.9 23.8 26.2 23. 16” (WIS-SC 1) SC1 West South 16 15.9 23.8 26.2 24. 18” (WIS –SJ) SJ East South 18 17.5 25.4 28.6 25. 18” (B173AB- B 193 AP North Bassein 18 19.1 23.8

WORK-BARGE 1 (STALK-ON Riser Installation (Optional Scope) 1. 10.75” (HB-HE) HB West Heera 10 14.3 15.9 18.3 2. 10” HB-HA HB West Heera 10 14.3 15.9 18.3 3. 12” (HK-HRC) HRC West Heera 12 14.3 15.9 21.9 4. 12” (HP-HRC) HRC West Heera 12 14.3 15.9 21.9 5. 6” (HB-HK) HB East Heera 6 7.9 9.5

Even in the third schedule of the sub-contract the rate of payment are specified for installation of Risers under different segment and installation of HRD stalk-on risers with clamps etc. We have also perused the copies of invoices issued by the assesse i.e Requisition No. 11227 dated 06.01.2014 Requisition No. 12218 dated 14.04.2014, Requisition No. 11506 at 04.02.2014, Requisition No. 11779 at 05.03.2014, Requisition No. 12173 dated 14.04.2014 placed in the paper book showing installation charges of Risers. Considering the above material relied upon by the lower authorities does not corroborate the adverse inference drawn as regards treating the assessee as a service PE in India under Article 5(6) of the Tax Treaty. Therefore, we consider that contracts entered by the assessee were for P a g e | 19 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2) installation purpose and would be covered under Article 5(3) of tax treaty. Further the similar view were adopted by ITAT in assesse’s own case for A.Y. 2012-13 and 2013-14 as well vide ITA No. 1781 & 6621/Mum/2016. As per Article 5(3) of the tax treaty provides that a tax resident of Singapore constituted a PE in India only if each installation or construction project/activity is carried on in India for a period exceeding 183 days during a financial year. Further as per Article 5(3) threshold of 183 days applies to each individual installation project and as well as every contract is to be considered as a separate project. The A.O has not controverted the submission of the assessee based on different clauses of agreement and relevant supporting material stating that it has engaged in the installation work as per the contract and as a part of the installation/construction contract also include providing provisions of services which were ancillary to the installation contract.

Therefore the grounds of 1 to 7 are allowed. Ground No. 8 & 9:

P a g e | 20 Kreuz Subsea Pte. Ltd. Vs. The DCIT, IT,-3(1)(2)

आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file.

सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,

उि/सहायक िंजीकार (Dy./Asstt.