International Taxation

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August 2011

CA. Hinesh Doshi, CA. Vishal Gada

Bourbon Offshore Asia PTE Ltd. (2011-TII-15-ARA-INTL) AAR No. 937 of 2010

Date: 12th July, 2011
Facts

The assessee is a tax resident of Singapore. It offers a comprehensive range of highly productive and new generation innovative offshore service vessels to global oil and gas industries. The vessels assist and support offshore drilling and marine operations.
It entered into a time charter vessel hiring agreement for providing its offshore service vessels to Transocean Offshore International Ventures Ltd. (TOIVL) in India. TOIVL provided various offshore drilling and support services to Oil and Natural Gas Corporation Ltd. (ONGC).
However, being a time charter agreement, the entire operation, navigation and management of the vessel, although operated by TOIVL, was under the exclusive command and control of the assessee.
The assessee filed an application with the AAR asking for a ruling as to whether its income from the hiring of the vessels would be covered under the special provision of section 44BB of the Act.
It was argued that the offshore drilling activities were an integral part of exploration and prospecting activities for mineral oil. Section 44BB of the Income-tax Act is applicable to non-residents who are engaged in the business of providing services or facilities which are in connection with or supplying plant and machinery on hire used, or to be used in the prospecting for or extraction or production of mineral oil. Here “in connection with any activity” would mean that everything which was connected with any of the three activities, namely, prospecting for, extraction of or production of mineral oil would fall within its scope.
On the other hand, the Revenue argued that the services rendered by the assessee was technical in nature and income from providing such services in India was liable to be taxed as fee for technical services.
It was argued that the services contemplated in section 44BB were services other than those coming within the purview of Explanation 2 to section 9(1)(vii) of the Act. Moreover, the exclusion clause in Explanation 2 to section 9 (1) (vii) does not apply in the case of the applicant because it was not undertaking a mining or like project. Therefore, the income of the assessee would be chargeable under section 9(1) (vii) read with section 44DA.

Issues
Whether income from hiring of vessels by assessee used in exploration and prospecting of mineral oil by another company is entitled to be taxed at the special rate prescribed u/s 44BB?
Whether such vessels can be considered as ‘plant’?
Whether nature of receipts on account of provision of supply of vessels on hire basis can have the character of fees for technical service taxable u/s 44DA?

Held
There is no dispute that the applicant is engaged in the business of providing offshore oil and gas marine subsea services. It also offers range of offshore oil service vessels to global oil and gas industry.
Under the contract with TOIVL, who in turn is providing various offshore drilling and support services to ONGC, the applicant has provided 4 vessels to TOIVL to be used on east and west coast of India.
For the purposes of section 44BB of the Act, the vessels provided are covered under the definition of “plant”. The consideration received for supply of “plant” i.e. the vessels on hire when used in the prospecting for or extraction or production of oil and gas is covered under the special provision for computing profits and gains under section 44BB of the Act.
The nature of receipts on account of provision of supply of vessels on hire basis cannot have the character of fees for technical services within the meaning of explanation 2 to section 9(1)(vii). The services required by TOIVL are rendered by the applicant by using the vessels under its control and command which cannot bear the character of fees for technical services.
The rate at which tax is to be withheld from payments made by Transocean to BOA towards time charter of service vessels will be 4.22%.
AAR pronounced in favour of the Assessee.

Deputy Commissioner of Income Tax Vs Tech Mahindra Ltd (Formerly Mahindra British Telecom Ltd) (2011-TII-71-ITAT-MUM-TP)

Dated June 30th, 2011
Facts
The assessee is a joint venture between an Indian company, Mahindra & Mahindra Ltd and a UK based company, British Telecommunications, engaged in the business of software services relating to telecommunication, internet technology and engineering etc. The assessee had allowed credit to its US based associated enterprises, beyond the stipulated credit period. The case was referred by Assessing officer to the Transfer Pricing Officer for determination of arm’s length price. The assesse was required to show cause as to why interest @ 10% not be treated as arm’s length interest for such delayed receipts on account of notional interest relating to excess credit period granted by the assessee to its AEs. The assessee contended that excess credit period was allowed to the US AE in view of the liquidity problems faced by the AE, and that, in any event, no such interest is charged from even independent enterprises.
It was also noted that the assessee had charged 10 % interest from its German AE on the Euro denominated loan granted by the assessee. The AO charged the same interest rate as an arm’s length interest for the excess credit period, resulting in an ALP adjustment. CIT(A) confirmed the ALP adjustment in principle but restricted the same to USD LIBOR rate plus a markup of 80 basis points, which amounted to 2%.

Issue
Whether a transaction admittedly with an associated enterprise can be taken as an internal comparable for the purpose of ascertaining the ALP.
Whether when there is a choice between the interest rate of a currency other than the one in which transaction has taken place and the interest rate in respect of the currency in which transaction has taken place, the latter should be adopted.

Held
It was held that the very selection of comparable by the TPO was contrary to the scheme of the applicable transfer pricing regulations. The TPO had proceeded to adopt the interest rate at which the assessee had given a Euro denominated loan to its AE, as an internal comparable under the Comparable Uncontrolled Price (CUP) method. TPO apparently overlooked the fact that to be an internal comparable under the CUP method, the transaction has to be with an independent enterprise. Rule 10B(1)(a) specifically provides that, as a first step for determining the Comparable Uncontrolled Price “the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified (emphasis by underlining supplied by us)”. Rule 10(a), in turn, defines the expression ‘uncontrolled transaction’ as ‘a transaction between enterprises other than associated enterprises, whether resident or non-resident’. Thus a transaction between the associated enterprises cannot be taken as a comparable for the purpose of application of CUP method. Accordingly, a transaction admittedly with an associated enterprise of the assessee company cannot be taken as an internal comparable for the purpose of ascertaining the ALP.
It was also held that since the AE was based in United States, the right parame