M/S DOLPHIN DRILLING LTD.,,NOIDA vs. DCIT (INTL. TAXATION), DEHRADUN

These are two appeals filed by the same assessee for assessment year 2011 – 12 and 2013 – 14 against the order passed by learned Commissioner of income tax (appeals) – 2, Noida (the learned CIT – A wherein the assessment order passed by the learned Deputy Commissioner of income tax (International taxation), Circle – 1, Dehradun u/s 143 (3) read with Section 144C of the income tax act for respective years on 29 June 2016 and 18 July 2016 respectively, were partly allowed in favour of the assessee. Thus, assessee is aggrieved for both the years against those orders and therefore has filed these appeals. Both the parties argued the same together, therefore, both these appeals are disposed of by this common order.

Briefly, the facts for assessment year 2011 – 12 show that dolphin drilling Ltd is a Scotland- based company. It is engaged in operating and managing drilling vessels, drilling platforms and accommodation rigs worldwide. It filed its return of income on 30 November 2011 wherein it has received a revenue from the contract entered into with reliance industries Ltd for the provision of same is deepwater drilling rig, showing taxable income of ₹ 4,455,967/– the assessee offered to tax the business income Under the head of business profits computing it applying the presumptive tax scheme of Section 44 BB of the income tax act. Income so computed was also set-off by the assessee from the brought forward losses of the previous year. Assessee also received interest on income tax refund, which was shown as income from other sources.

The learned assessing officer selected the case for the scrutiny and determined the total income of assessee at ₹ 161,281,958/– against the return filed by the assessee of Rs. 44,55,967/–. There was an issue during the assessment proceedings wherein assessee contended that while calculating the business income taxable Under the provisions of Section 44 BB of the income tax act, erroneously the remission of income tax liability amounting to ₹ 33,528,130/– born on behalf of its employees was added u/s 41 (1) (a) of the act by the appellant. The claim of the assessee is that such addition could not have been made in view of the provisions of Section 44 BB of the act, which starts with a non-obstante clause by virtue of which Section 28 to Section 41 of the act are not applicable. The learned AO held that the remission of income tax liability would be taxed at the rate of maximum marginal rate as opposed to the claim of the assessee. With respect to the interest on income tax refund of ₹ 4,455,967/– the learned AO held it is chargeable to tax at maximum marginal rate of 40% as assessee is a permanent establishment in India. The claim of the assessee is that assessee being a non-resident company incorporated in United Kingdom is a tax resident of United Kingdom and as per article 12 (2) of the India United Kingdom Double Taxation Avoidance Agreement the interest income of the UK resident is taxable in India at the rate of 15% of the gross amount of the interest. Thus assessee order of the learned assessing officer preferred appeal before the learned CIT – A. The learned CIT – A passed order on 29th of June 2016 wherein he confirmed the action of the learned assessing officer with respect to the chargeability of tax on remission of income tax liability holding that Section of income tax liability incurred on behalf of employees need to be brought to tax separately over and above and distinct from the amounts taxable u/s 44 BB of the income tax act. He further held that assessee has not filed revised return restating the income. He therefore held that the learned assessing officer has not committed any error while accepting this position. He also rejected the argument of the assessee that the learned assessing officer has not mentioned of the above adjustment in draft assessment order. The learned CIT appeal held that on reading of the assessment order it would bring out that the amount was considered as part of the proposed taxable income. Thus, he confirmed the action of the AO on this ground. With respect to the taxability of interest on income tax refund, he confirmed the action of the learned AO for the decision of the honourable jurisdictional High Court in B is services company Middle East limited versus Asst Commissioner of income tax holding that since there was a permanent establishment of the assessee in India, the income earned out of interest on refund from the income tax department cannot be brought to tax on gross basis Under Double Taxation Avoidance Agreement. Thus, he confirmed the order of the learned AO on this count also.

Assessee is aggrieved has preferred this appeal before us on these two issues. The learned authorised representative reiterated the argument submitted before the lower authorities on both these issues. The learned departmental representative vehemently supported the orders of the lower authorities.

We have heard the rival contentions and perused the orders of the lower authorities. The facts of ground number 1 are required to be narrated. Assessee has entered into a contract with reliance industries Ltd on 29th of March 2006 for provision of semisubmersible deepwater drilling rig. The income from the contract was computed in terms of provisions of Section 44 BB of the act. Assessee has offered to tax the business income under the head profits and gains of business. The income so computed in terms of Section 44 BB of the act was also set-off by the assessee with the brought forward losses of the previous year. Further at the time of calculating the business income taxable u/s 44 BB of the act, assessee submitted that erroneously the remission of income tax liability of ₹ 3,35,28,130/– born by the assessee on behalf of its employees pertaining to earlier years was added u/s 41 (1) of the act by the appellant. During the course of assessment proceedings, the assessee informed the learned AO on account of the above liability remitted. Assessee claimed that when it filed its Page | 3 return of income on presumptive taxation u/s 44 BB of the act, the further addition u/s 41 (1) of the act cannot be made. The claim of the assessee is that provision of Section 44 BB of the act excludes applicability of any other Section from Section 28 to Section 44 of the act. The learned CIT – A after considering the provisions of Section 44 BB of the act held that the above sum does not fall into provisions of subsection 2 of Section 44 BB of the act. Therefore, the remission income is required to be brought to tax separately. Section 44 BB of the act presumed income of the assessee at a sum equal to 10% of the aggregate of the amount specified in subsection (2) of the act. The amount so specified Under that subsection are sums paid or payable whether in or out of India to assessee or any other person for provision of services and facilities in connection with or supply of plant and machinery on higher used or to be used in the prospecting for extraction of production of mineral oils in India or services and facilities in connection with or supply of plant and machinery for the above activity. Admittedly, remission of income tax liability of employees is not covered under the receipts/amounts mentioned in subsection (2) of Section 44 BB of the act. Admittedly, the remission of income tax liability of employees does not relate to the income tax liability of such employees for assessment year 2011 – 12 but obviously for earlier years. Therefore if for the earlier year, the assessee has offered its income u/s 44 BB of the act and the income tax liability bond by the assessee of its employees relates to that year, then only the above sum cannot be charged to tax u/s 41 (1) of the act for this year. The reason being that 10% of the presumptive income on the gross receipts as mentioned in subsection (2) of Section 44 BB of the act for that previous year would have included the above expenditure which is not separately claimed by the assessee. Therefore it is to be established by the assessee that this liability of income tax born by the assessee on behalf of its employees was pertaining to which year and Whether the assessee has offered its income for that year applying the provisions of Section 44 BB of the act or not. If the liability pertains to the year for which the assessee has offered its income by applying the provisions of Section 44 BB of the act than once again this remission of liability cannot be taxed u/s 41 (1) of the act for the impugned assessment year i.e. assessment year 2011 – 12. However, it is also to be seen that assessee is setting of losses for previous year as evident from the assessment orders. Therefore, it is also possible that earlier years the assessee has not opted for presumptive income scheme u/s 44 BB of the act but has offered income based on its accounts. In such circumstances, remission of income tax liability if it pertains to those year for which the assessee is claiming set-off of losses by offering its income based on its regular income and expenditure accounts, would definitely be chargeable to tax in this year u/s 41 (1) of the act. These facts are not available on record; it is also not available with the assessee readily at the Page | 4 time of hearing. As it is not available before hand that for which assessment year, this remission of income tax liability pertains to and whether in that year how the income of the assessee has been offered i.e. whether u/s 44 BB of the act or at the actual income. In view of this we set aside this ground of appeal

We have carefully considered the rival contention and perused the orders of the lower authorities. The fact shows that assessee filed its return of income on 27/9/2013 declaring a total income of Rs. 1, 98,44,274/–. During the year the assessee has received interest u/s 244A of the Act amounting to Rs 198,44,274/– and computed the tax thereon at the rate of 40% as applicable to foreign companies as business income. Subsequently in the computation itself assessee has claimed relief under article 12 of the Indo United Kingdom Double Taxation Avoidance Agreement of ₹ 5,362,717/– and computed the tax payable at ₹ 29 76,641/– resulting into claim of refund of ₹ 5,363,973/–. It appears that the assessee has claimed income to be taxable under the head income from other sources by computing income at the rate of 15% under article 12 of the Indo UK DTAA. Assessee submitted before the learned assessing officer, that assessee did not carry out any business activity in India during the year; it does not have any PE in India. Therefore, the interest income earned by it cannot be held to be effectively connected with permanent establishment in India. The learned assessing officer held that the assessee had a permanent establishment in India by way of article 5 (1) of the Double Taxation Avoidance Agreement in the form of a project office in India. The AO further held that the interest income u/s 244A of The Income Tax Act is not covered by article 12 (1) & (2) of the Double Taxation Avoidance Agreement. Hence, he rejected contention of the assessee that interest on income tax refund received u/s 244A of the income tax act is not chargeable to tax in India. He relied on the decision of the honourable jurisdictional High Court in case of BJ services company Middle East limited versus Asst Commissioner of income Tax and held that the decision applies to the assessee squarely. Thus, he charged the interest on income tax refund received of Rs 198,44,274/– to tax at the rate of 40%.

The learned CIT – A held that it is not denied that the assessee had a project office in India. That project office constituted a permanent establishment of the appellant in India. He further found that such project office established to execute contract relating to projects in India and activities relating to such projects. He further considered the provisions of article 5 (2) of The Double Taxation Avoidance Agreement and held that the ‘project office’ also constitute a permanent establishment. He further referred to the decision of the coordinate bench in Micoperi SPA Milano [82 ITD 369] wherein it has been held that the ‘project office’ constitutes a permanent establishment. He further held that the assessee had the project office in the previous years also therefore, it cannot be said that the preparatory or auxiliary services were being carried out from that office. He therefore after considering the all these facts followed the decision of the honourable jurisdictional High Court in BJ services company Middle East limited to uphold the action of the learned assessing officer. Page | 6

Therefore, now it is required to examine whether assessee has a permanent establishment in India or not. If assessee has a permanent establishment in India, the orders of the lower authorities are required to be upheld. However if the assessee does not have a permanent establishment then the stand taken by the assessee needs to be upheld.

Even at the cost of repetition, the facts need to be re-stated. Assessee had entered into a contract with reliance industries Ltd on 29th of March 2006. Assessee was required to provide and eventually moored semisubmersible deepwater drilling rig. The ring was intended to be used for exploratory and redevelopment using subsea completion. The scope of work includes drilling, sidetracking, testing, completing and abandoning wildcat/exploratory; /appraisal/development wells as well intentionally drilled deviated wells. At the time of entering the contract with reliance, the drilling rig was undergoing up gradation in Rotterdam. The upgraded the rig was to be ready for voyage from Rotterdam by 31 August 2007 for commencement of work under the contract. The contract work was scheduled to commence after November 2007 for 36 months post mobilization of the rig. However, the commencement of execution was delayed. In between reliance permitted the assessee to executed contracts with other companies for undertaking the drilling operations outside India. Thus assessee entered into a tripartite agreement on 23 July 2009 with reliance and others whereby reliance assigned its rights and obligations Under the drilling contract reliance exploration and production for drilling a well in Oman stop the assessee received a letter of intent from Maersk oil Brazil limited for a bareboat charter agreement and service agreement for the employment of the rig in Brazil. Reliance industries Ltd allowed the assessee to enter into a contract with that company and suspended its original agreement by a suspension agreement entered into on 11 June 2010. Consequent to it, the drilling rig started its movement to leave Indian waters on 2 June 2010. It received a port clearance, rivers, and certificate on 5 June 2010. On completion of the contract with Brazil Company, RILL indicated its interest to bring the contract to an early termination and agreed to pay compensation to the assessee for early termination of the contract, which was entered into on 28th of November 2011. Thus, the permanent establishment of the assessee seized to exist in India from the date on which the drilling rig moved out of India i.e. 5 June 2010. Therefore, there is no activity carried on by the assessee during the financial year 2012 – 2013 in India. Even the assessment order also does not have any income of the assessee chargeable to tax in India except interest on income tax refund received by the assessee. However, orders of lower authorities show that assessee has a project office in India. This was also not denied by the assessee as it is evident from paragraph number 5.5 of the order of the learned CIT – A. Now the question arises that whether the project office in itself can be said to be a Page | 7 permanent establishment of assessee in India through which the business of the assessee is being carried on. It is for the learned assessing officer to bring on record certain evidences to show that assessee has a permanent establishment in India. The AO has to show that assessee is carrying on any business through that place of business i.e. project office income of which is chargeable to tax in India. No evidences have been brought on record by AO. Against this, the assessee has shown that its rig moved out of India in earlier years, there is no income of the project office as there is no business being carried out in India through that project office. In fact, no activities are carried out from that project office. Thus the issue squarely covered in favour of the assessee by the decision of the honourable Supreme Court in DIT versus Samsung heavy industries Ltd [2020] 117 taxmann.com 870 (SC)/ [2020] 272 Taxman 377 (SC).This is also gathered from the assessment order itself where except the interest on income tax refund, there is no other income chargeable to tax in India of the assessee. Thus, merely having a project office in India cannot result into a permanent establishment of the assessee in India. Therefore, it is now apparent that assessee does not have a permanent establishment in India. In absence of permanent establishment, the decision of the honourable High Court in BJ Services Company Middle East limited versus Asst Commissioner of income tax (supra) does not apply. The honourable High Court in 268 CTR 467 in Director Of Income Tax versus Pride Foramer in paragraph number two after reading article 12 in case of India France Double Taxation Avoidance Agreement held that plain reading of the provisions of the Double Taxation Avoidance Agreement makes it absolutely clear that some articles (1) and (2) will apply interalia when the recipient of interest does not have a permanent establishment in the country where he has received the interest. Therefore, in the present case the assessee is entitled to take the benefit of article 12 of the Double Taxation Avoidance Agreement, as there is no permanent establishment in India. The article 12 of DTAA provides that 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, such interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

Therefore the interest received on income tax refund of the assessee is subject to taxation as per article 12 (2) of the Double Taxation Avoidance Agreement at the rate of 15% of the gross amount of interest as income. Accordingly reversing the orders of the lower authorities, we allow ground number 1 and 2 of the appeal of the assessee.

In the result, appeal of the assessee for assessment year 2013 – 14 in ITA number 5220/Del/2016 is allowed.

Accordingly, both the appeals of the assessee are disposed of as above. Order pronounced in the open court on 08.06.2021.