MARITIME VANGUARD PTE LTD. ,MUMBAI vs. DCIT (INTERNATIONAL TAXATION) -3(2)(1), MUMBAI, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

ITA No.5999/M/2019 A.Y.2016-17

2. erred in holding that the receipts earned by the Appellant on account of provision of services through various vessels to the charterers (BGEPIL and Sapura) were for providing the 'use or 'right to use the industrial, commercial or scientific equipment, thereby treating the same as "Royalty" under section 9(1)(vi) of the Act; 3. erred in holding that the benefit of exclusion provided under explanation 2 to section 9(1)(vi) of the Act would be available only if the receipts earned by MVPL is offered to tax under section 44BB of the Act; 4. erred in treating the receipts earned by Appellant from provision of services through various vessels as royalty under section 9(1 )(vi) of the Act, whereas the same is in the nature of business receipts; 5, without prejudice to the above, the Appellant submits that if the above receipts are considered as chargeable to tax, the same should be chargeable to tax in the nature of business receipts, chargeable under section 44BB of the Act ie 10% of the gross receipts deemed as profit chargeable to tax; Taxability under the India-Singapore Double Taxation Avoidance Agreement ('DTAA') 6. erred in holding that receipts earned by the Appellant on provision of services through various vessels to the charterers shall be covered within the definition of the term "Royalty" under Article 12(3) of the India-Singapore DTAA; 7. should have appreciated that the above receipts are on account of provision of services, which is governed by Article 12(4) of the DTAA ie Fees for Technical Services ('FTS') and in absence of 'make available' of technical knowledge, experience, skill, know-how or processes, the same is not chargeable to tax; 8. should have appreciated that the above receipts are specifically excluded from the definition of FTS in accordance with Article 12(5)(g) of the DTAA and the same is not be chargeable to tax; A.Y.2016-17

9. without prejudice to the above, even lithe impugned receipts are treated as Royalty/ FTS as per the Article 12 of the DTAA, the said receipts, as per Article 12(6) of the DTAA, would be governed by Article 7 of the DTAA, and due to non-satisfaction of the threshold for Permanent Establishment ('PE') as per clause 5 of Article 5, the impugned receipts would not be chargeable to tax; Computation of total income tax payable 10. erred in computing the total income tax payable as Rs 2,12,38,549 as against total income tax payable of Rs 1,99,83,460 on the impugned income chargeable to tax Levy of interest under section 234B of the Act of Rs 57.09,560 11. erred in levying interest under section 234B of the Act amounting to Rs57,09,560 Initiation of penalty proceedings under section 271(1)(c) of the Act 12. erred in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds of appeal

are mutually exclusive and without prejudice to one another. The Appellant craves leave to add/ alter/ amend/ delete/ withdraw any or all of the grounds at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law.”

3. Brief facts of the case are that the assessee has filed the return of income on 06.10.2016 declaring total income to the tune of Rs. Nil claiming a refund of Rs.2,53,86,130/- for the A.Y.2016-17. The case was selected for scrutiny under CASS. Notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee company was incorporated in and tax resident of Singapore. The assessee earned the revenue from the following contract for provisions of vessels on time charter basis.

Charterers Vessels Amounts (Rs.) A.Y.2016-17 BG Exploration Production India Ltd PW Natuna and Posh 25,85,90,235/- Mulia Sapura Kencana Offshore Sdn Bhd POSH Bangka and 13,80,10,023/- Maritime Putra Total 39,66,00,258/- The said amount was not offered to tax. Thereafter, the notice was given and after the reply of the assessee, the said amount was held to be taxed @ 10% of the said amount. Feeling aggrieved, the assessee has filed the present appeal before us.

“6. We have heard the rival submissions and perused the relevant materials on record. The 1st ground of appeal is general in nature. The reasons for our decisions in respect of the 2nd to 8th ground of appeal, being interrelated, are given below. Section 44BB is a special provision for computing profits and gains in connection with the business of exploration of mineral oil. Parliament engrafted the aforesaid provision in the Income Tax Act as a measure of simplification providing for determination of income of such taxpayers at 10% of the aggregate of certain amount. By virtue of section 44BB and because of non-obstante clause, section 28 of the Act will have no application.

ITA No.5999/M/2019 A.Y.2016-17 Thus section 44BB contains special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. Under the said section, in the case of an assessee being non-resident engaged in the business of providing services or facilities in connection with or supplying plant and machines on hire for use or to be used in the prospecting of or extraction or production of mineral oils, a sum equal to 10% of the aggregate of the amounts specified shall be deemed to be the profits and gains of such business chargeable to tax under the head „profits and gains of business or profession‟. Deemed profits to the tune of 10% are taxed under the said section and it overrides the other charging sections in this regard. The amount mentioned in section 44BB(2) clearly shows that the amount paid to the assessee on account of provision of services and facilities in connection with the extraction or production of mineral oils, whether paid in or outside India, are to be included. The word „services‟ followed by expansive phrase „in connection with‟ are relatable to prospecting for and exploration of mineral oil. That means, all services associated with prospecting for and exploration activities are brought within the scope and reach of section 44BB. Another category of assessees governed by section 44BB are those supplying plant and machinery on hire. 6.1 As mentioned earlier, in the instant case the assessee is a tax resident in Singapore and consequently, a non-resident in India. It has entered into time charters contracts with BGEPIL, LTHE, Astro and Sapura during the year under consideration. To appreciate the issue, we mention below the scope of work between the assessee i.e Maritime Vanguard Pvt Ltd (in short ‟MVPL‟) and BG Exploration & Production India Ltd (in short „BGEPIL‟) as filed by the Ld. counsel: “Scope of work ONGC, Reliance Industries Ltd and BGEPIL are joint operators of Panna-Mukta offshore oil and gas production field situated in the Arabia sea on the west coast of India. The oil and gas is produced at these fields and treated, compressed and then exported through subsea pipeline. The contract has been entered into for offshore installation at the aforesaid oil fields for which MVPL is required to provide for accommodation, barge, AHT etc to BGEPIL. The A.Y.2016-17 scope of work for the said activities have been summarized as under : Clause 7: Employment  The entire operation, navigation and management of the vessel shall be in the exclusive control and command of MVPL; the vessel will be operated and the services hereunder will be rendered as requested by charterers, subject always to the exclusive right of MVPL. Clause 11: Duties of master, officers and crew The master, officers and crew will perform the following services:  Will connect and disconnect the water, fuel, liquid mud hoses etc and other hoses in port as well as offshore installations;  Will operate appropriate machinery on board the vessel (i.e. loading unloading cargoes, anchor handling etc)  Will hook on and unhook cargo when discharging/loading in port and offshore installation;  Will be in sufficient number to allow the vessel to operate for twenty-four hours per day;  Will obtain and maintain all available pilotage exemptions for port locations etc. Clause 18 - Bunkers at delivery and redelivery  MVPL is responsible for provision of lubricant oils, grease and other consumables throughout the charter period. Clause 26 - Insurance  MVPL shall be under an obligation to effect and maintain insurance policies. MVPL was also responsible for any damage of the vessel and crew therein and accordingly would bear all the costs in relation to the same. Clause 10: Scope of work for AHT  Apart from Anchor Handling activities the AHT would be required for intra-field transfer of personnel and material at required location (i.e. Mumbai);  AHT to have positioning equipment and personnel to monitor anchor positions while anchor handling activities;  Implementation of systems for anchor handling, personnel transfer, offshore installations etc. Clause 11: Scope of work for barge A.Y.2016-17  The barges will be provided as support for carrying out work at the areas where AHT will be stationed for providing services. Clause 12.4: Garbage Handling facility  There will be a specified garbage area on the deck and will be provided by MVPL based on the specifications mentioned in the contract; Clause 12.5: Compliant helideck  A helideck would be available on the barge/workboat and would be compliant as per the specifications provided in the contract; Clause 12.6: Laundry facilities  MVPL would be required to provide laundry facilities for the crew working on the vessel; Clause 12.7: Toilet facilities  MVPL would be required to provide toilet facilities for the crew working on the vessel which has high class hygiene and cleanliness and one which is regularly maintained. Alongwith the facilities, MVPL to provide adequate competent personnel for maintaining the toilet facility; Clause 12.8: Accommodation and conference room and client office facilities  MVPL to provide adequate and requisite cabins as preferred for the senior personnel. In addition to the same, MVPL to provide for conference rooms with adequate seating capacity and all other necessary electronic arrangements (viz telephone, LCD TV, cables etc); Clause 12.9: Entertainment, recreation facilities  MVPL to provide mess rooms, smoking rooms, recreation rooms with the requisite furniture and appliances as mentioned in the contract; Clause 12.13: Medical facilities A.Y.2016-17  MVPL to provide medical facilities i.e. certified doctor, advanced medical responder bag with medicines, oxygen cylinder etc, first aid bag and kits etc; Further, the following clauses of the agreements between MVPL and L&T, Sapura & Astro demonstrate that the agreement was on account of provision of services and not simpliciter hire of equipment/vessel:  Clause 14 - Insurance - MVPL shall be under an obligation to effect and maintain insurance policies. MVPL was also responsible for any damage of the vessel and crew therein and accordingly would bear all the costs in relation to the same.  Clause 6 - Master and Crew - the entire operation, navigation and management of the vessel shall be in the exclusive control and command of MVPL; the vessel. The vessel will be operated and the services hereunder will be rendered as requested by charterers, subject always to the exclusive right of MVPL; and  Clause 7 - Owners to provide - Remuneration of the master, officer and other crew is to be borne by MVPL.” 6.2 At this juncture, we refer to the judgment of the Hon‟ble Supreme Court in ONGC (supra). In that case, the assessee- company „ONGC‟ and a nonresident/foreign company had entered into an agreement by which the nonresident company had agreed to make available supervisory staff and personnel having experience and expertise for operations and management of drilling rigs. The assessee-company paid amounts to non-resident assessees/foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil. The Assessing Officer held that the assessment should be made u/s 44D. However, the Appellate Commissioner and the Tribunal treated said payments u/s 44BB. The High Court, taking a view that the contract did not mention that the personnel of the non- resident company was also carrying out the work of drilling of wells, held that as the company had received fees for rendering service, therefore, the payments made to the foreign companies were liable to be taxed under the provisions of section 44D. On appeal, the Hon‟ble Supreme Court held as under: “13. The Income Tax Act does not define the expressions "mines" or "minerals". The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development A.Y.2016-17 and Regulation) Act, 1948. While construing the somewhat pari material expressions appearing in the Mines and Minerals (Development and Regulation) Act, 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the A.Y.2016-17 appellants and placed before the Court is correct. The said details are set out below. S. NO. Civil Appeal No Work covered under the contract 1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells. 10. 2794 Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation.

ITA No.5999/M/2019 A.Y.2016-17

ITA No.5999/M/2019 A.Y.2016-17

ITA No.5999/M/2019 A.Y.2016-17

ITA No.5999/M/2019 A.Y.2016-17

7. The levy of interest u/s 234B is consequential in nature. The initiation of penalty u/s 271(1)(c) is premature.” 5. Since all the issues have been discussed and decided by the Hon’ble ITAT in the assesee’s own case and specifically remanded before the AO to decide afresh on certain guidelines mentioned in the order, therefore, in the said circumstances, we set aside the finding of the issues and restored the issues before the AO to decide the matter of controversy afresh in view of the decision of the Hon’ble ITAT in the assessee’s own case Bearing by giving an opportunity of being heard to the assessee in accordance with law. Accordingly, all the issues are decided in favour of the assessee against the revenue.

Reasons for delay in pronouncement of order 6.1 Before parting, we would like to enumerate the circumstances which have led to delay in pronouncement of this order. The hearing of the matter was concluded on 07/02/2020 and in terms of Rule 34(5) of Income Tax (Appellate Tribunal) Rules, 1963, the matter was required to be pronounced within a total period of 90 days. As per sub-clause (c) of Rule 34(5), every endeavor was to be made to pronounce the order within 60 days after conclusion of hearing. However, where it is not practicable to do so on the ground of exceptional and extraordinary circumstances, the bench could fix a future date of pronouncement of the order which shall not ordinarily be a day beyond a further period of 30 days. Thus, a period of 60 days has been provided under the extant rule for pronouncement of the order. This period could be extended by the bench on the ground of exceptional and extraordinary circumstances. However, the extended period shall not ordinarily exceed a period of 30 days. A.Y.2016-17 6.2 Although the order was well drafted as well as approved before the expiry of 90 days, however, unfortunately, on 24/03/2020, a nationwide lockdown was imposed by the Government of India in view of adverse circumstances created by pandemic covid-19 in the country. The lockdown was extended from time to time which crippled the functioning of most of the government departments including Income Tax Appellate Tribunal (ITAT). The situation led to unprecedented disruption of judicial work all over the country and the order could not be pronounced despite lapse of considerable period of time. The situation created by pandemic covid-19 could be termed as unprecedented and beyond the control of any human being. The situation, thus created by this pandemic, could never be termed as ordinary circumstances and would warrant exclusion of lockdown period for the purpose of aforesaid rule governing the pronouncement of the order. Accordingly, the order is being pronounced now after the re-opening of the offices.

6.3 Faced with similar facts and circumstances, the co-ordinate bench of this Tribunal comprising-off of Hon’ble President and Hon’ble Vice President, in its recent decision titled as DCIT V/s JSW Limited (ITA Nos. 6264 & 6103/Mum/2018) order dated 14/05/2020 held as under: -

ITA No.5999/M/2019 A.Y.2016-17