Deep Drilling 1 Pte. Ltd v. The Deputy Commissioner Of Income-Tax(It)-2(1)(2), Mumbai

Digitallysigned byTRUSHATRUSHATUSHARTUSHARMOHITEMOHITEDate:2023.07.1118:52:06+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.315 OF 2018 Deep Drilling 1 Pte. Ltd. ….. Appellant Vs. The Deputy Commissioner of Income-Tax(IT)-2(1)(2), Mumbai ….. Respondent Mr.Madhur Agarwal a/w Mr.Upendra Lokegaonkar i/b M/s.Mint andConfreres for the Appellant Ms.Sushma Nagaraj a/w Ms.Kinjal Patel, Ms.Shreya Singhi andMs.Sakshi Kapadia for the Respondent CORAM:K.R. SHRIRAM, J &FIRDOSH P. POONIWALLA, J. DATED :5TH JULY 2023 P.C. 1.Appellant is impugning the order dated 19[th] April 2017 passedby the Income Tax Appellate Tribunal (ITAT) allowing the Appealfiled by the Revenue against the order passed by CIT (A) on 28[th]October 2014 pertaining to Assessment Year 2011-12. 2.Appellant is a Company incorporated in Singapore and is taxresident of Singapore. Appellant was engaged in the business ofproviding Jack up drilling unit and platform well operationsservices. During the year under consideration, Appellant hadentered into an agreement dated 18[th] June 2020 with Gujarat State Petroleum Corporation Ltd. (GSPC) for providing Jack up drillingUnit and platform Well operations at the Block KG-OSN-2001/3offshore India, pursuant to exploration contract awarded byGovernment of India to the GSPC. 3.During the year under consideration, Appellant earnedcontractual income of Rs.64,88,90,227/- from GSPC under thecontract. The Assessing Officer (AO) observed that the activitiescarried out by Appellant as per the contract are covered by theprovisions of section 44BB of the Act and till Assessment Year 2010-11 Appellant consistently offered its revenue for taxation undersection 44BB. No income however, has been offered for tax in Indiafor Assessment Year 2011-12. 4.Mr.Agarwal in fairness stated that the service or facility thatAppellant provided was in connection with the exploration,exploitation and extraction of mineral oil and would be covered bysection 44BB but the actual service was rendered only from 3[rd]December 2010 until 31[st] March 2011. Therefore, the drillingservices were continued only for a period of 119 days duringAssessment Year 2011-12. Hence, would not be covered underArticle 5(5) of the India Singapore DTAA which requires provisionof service or facility for a period of more than 183 days in the fiscalyear. Mr.Agarwal submitted that if Appellant provided services inexcess of 183 days then certainly, like it had done in the previousyears, Appellant would have offerred its income for taxation duringthe Assessment Year 2011-112 as well. 5.The point in short which is required to be considered was thetime of 183 days will begin when the actual services under thecontract begins or from the moment the rig enters Indian territoryfor the purpose in connection with exploration, exploitation orextraction of mineral oil. In other words, when should an enterprisebe considered to have rendered services or facilities. 6.It is Appellant’s case that though rig had entered theterritorial waters some time in April 2010, it was undergoingnecessary upgrades / repairs to meet the requirements of GSPC. Asper the contract with GSPC and after this upgrades and repairs werecompleted actual drilling began only on 3[rd] December 2010 andtherefore, the time would start from 3[rd] December 2010. This wouldmean only 119 days during Assessment Year 2011-12. 7. Ms.Nagraj, per contra, submitted that Article 5(5) is verywidely worded. It says if an enterprise provides services or facilitiesin the Contracting state for a period of more than 183 days in thefiscal year in connection with the exploration, exploitation orextraction of mineral oils then, the moment the rig enters the 6.It is Appellant’s case that though rig had entered theterritorial waters some time in April 2010, it was undergoingnecessary upgrades / repairs to meet the requirements of GSPC. Asper the contract with GSPC and after this upgrades and repairs werecompleted actual drilling began only on 3[rd] December 2010 andtherefore, the time would start from 3[rd] December 2010. This wouldmean only 119 days during Assessment Year 2011-12. 7. Ms.Nagraj, per contra, submitted that Article 5(5) is verywidely worded. It says if an enterprise provides services or facilitiesin the Contracting state for a period of more than 183 days in thefiscal year in connection with the exploration, exploitation orextraction of mineral oils then, the moment the rig enters the Contracting state the time will begin. Ms. Nagaraj submitted that asper the contract with GSPC, appellant was required to provide JackUp Drilling Rig services which is clearly connected with exploration,exploitation or extraction of mineral oils. The Drilling Rig wasbrought into India on 26th April 2010 for undertaking the saiddrilling services which is evident from the bill of entry submitted.The claim of appellant regarding commencement of operations on3rd December 2010 cannot be accepted as the rig was brought intoIndia in April 2010 and it was undergoing necessaryupgrades/repairs to meet the requirements of GSPC as proposed inthe bid. The fact that the rig was getting prepared for undertakingthe work of GSPC is also evident from the minutes of the meetingdated 27th April 2010. This indicates that the rig was brought toIndia in April 2010 to make it suitable for undertaking the drillingactivities for GSPC without which the rig could not have performedits obligations under the contract. Therefore, appellant is deemed tohave provided services or facilities from April 2010 which will bemore than 183 days. In this case, therefore, the time would have begun in April,2010 itself even though the contract with GSPC was entered intoonly on or about 18[th] June 2010. 8.It is settled law that the use of the expression ‘in connection with’ in Section 44BB expands the horizon of the services orfacilities, provided by a non-resident assessee provided they haveconnection with the exploration, extraction or production of mineraloils. Mr.Agarwal, as noted earlier, in all fairness stated that serviceor facility provided would be covered by section 44BB. 9.The AO in his Assessment Order dated 26[th] May 2014 has inparagraph 6 extracted the explanation offered by Appellant.Paragraph 6 reads as under: “6.In response to the above the assessee has offeredits explanation vide letters dated 06/03/2014 and27/03/2014. The main contentions of the assessee are asunder : i. The company is incorporated and registered inSingapore and is a tax resident of it. ii.It is engaged in the business of providing offshoredrilling services for the purpose of prospecting for,exploration, exploitation and extraction of minerals oilsand natural gas. iii.For this purpose it deploys its equipments(mainly drilling rig) and the personnel at offshorelocations. iv.The assessee entered into an agreementdt.18.6.2010 with GSPC for provision of offshore drillingservices and the drilling rig was brought into India in April,2010. v.The actual services under the contract with GSPCwere commenced from 03.12.2010 and continued till theend of the financial year. vi. The drilling services were continued for a periodof 119 days during the FY2010-11 vii.As per Indo-Singapore DTAA the business profitsof the Singapore Enterprise can be taxed in India only if ithas a PE in India. viii.An Enterprise of Singapore is deemed to have a PE in India and to carry on business through that PE only ifthe Singapore Enterprise provides services or facilities inIndia for a period of more than 183 days in any fiscal yearin connection with the Exploration, Exploitation orExtraction of mineral oils in India. v.The actual services under the contract with GSPCwere commenced from 03.12.2010 and continued till theend of the financial year. vi. The drilling services were continued for a periodof 119 days during the FY2010-11 vii.As per Indo-Singapore DTAA the business profitsof the Singapore Enterprise can be taxed in India only if ithas a PE in India. viii.An Enterprise of Singapore is deemed to have a PE in India and to carry on business through that PE only ifthe Singapore Enterprise provides services or facilities inIndia for a period of more than 183 days in any fiscal yearin connection with the Exploration, Exploitation orExtraction of mineral oils in India. ix.As the drilling operations in India were onlyunder taken for 119 days which is less than the threshholdperiod of 183 days, accordingly, the assessee cannot be saidto have a PE in India. x.In view of the above, provisions of section 44BBcannot be applied. xi.The revenues for A.Y.2009-10 were offered fortaxation u/s.44BB as the assessee had operations in Indiafor more than 183 days. xii.As regards A.Y.2010-11 though the operationswere undertaken only for 4 days the revenue was offered totax due to lack of appropriate tax advice and a mistake oflaw without considering the provisions of Indo-SingaporeDTAA. xiii.Further, the income offered for A.Y. 2009-10 &2010-11 was in connection with a single contract whereasthe contract for current A.Y. is a different one.” 10.In paragraph 7(iv) of the Assessment Order, the AO has also extracted the minutes of the meeting held on 27[th] April 2010between GSPC and Appellant and the same reads as under : “iv.The fact that the during the in between period ofactual start of operations and arrival of rig in India, the rigwas getting prepared for undertaking the work of GSPC isevident from the minutes of meeting held on 27/04/2010between GSPC and Deep Drilling 1 Pte. Ltd. (AbanOffshore) the main points of which are as under : a) Aban informed that the Rig DD1 is currently inanchorage in Kakinada and is undergoing necessaryupgrades/ repairs to meet GSPC requirements and asproposed in their bid b) Aban was informed that they will have to arrange forsuitable AHTS (two or three) to correctly position the Rigas per the requirement of GSPC and for this GSPC willprovide a rig positioning diagram to assist in determiningthe final positioning of the rig with the future platform, GSPC may not be able to provide AHTs during the Rigpositioning. c) GSPC will provide the latest platform elevations andplan reviews to Aban. d) Since GSPC is going to hire Casing Running servicesseparately as done earlier and the rig is not equipped witha pile hammer, it will be GSPC’s responsibility to providewith Pile Hammer as Aban has stated in its bid that it canbe provided at cost of US$1800 per day if required byGSPC. e) Aban current has 18 3/4th 15K BOP and it will be usedin the beginning. Aban will explore providing either a 20 ¾3K or a 21 ¼ 2K BOP in addition for short term. f) GSPC asked about the BOP hoisting system since it israted just above the weight of the BOP stack. Abanresponded that they would add extra compression to thesystem. g) GSPC inquired if Aban is equipped to carry out batchdrilling of three wells. Since the CTU is not needed, a texasDeck would have to be fabricated / modified to support treeconductors. GSPC will furnish the information that GSPChas on the previous design by Premium Drilling. h) GSPC will furnish the 4 slot template drawings alongwith the drawings of the existing 6 slot template to Aban.” e) Aban current has 18 3/4th 15K BOP and it will be usedin the beginning. Aban will explore providing either a 20 ¾3K or a 21 ¼ 2K BOP in addition for short term. f) GSPC asked about the BOP hoisting system since it israted just above the weight of the BOP stack. Abanresponded that they would add extra compression to thesystem. g) GSPC inquired if Aban is equipped to carry out batchdrilling of three wells. Since the CTU is not needed, a texasDeck would have to be fabricated / modified to support treeconductors. GSPC will furnish the information that GSPChas on the previous design by Premium Drilling. h) GSPC will furnish the 4 slot template drawings alongwith the drawings of the existing 6 slot template to Aban.” 11.If we have to accept Mr.Agarwal’s stand that the date on whichthe count of 183 days will begin is only when the rig actually beginsto perform under the contract, i.e. 3[rd] December 2010, then (a) therewas no need to bring rig into the country in April 2010, (b) therewas no need to hold meetings with GSPC in April 2010, (c) thefittings could have been made outside the country and the rig couldhave been brought into India later, and (d) it will not stop anassessee from saying that in the middle of the contract of drilling therig broke down, she was off – hire and, therefore, those days shouldnot be added in counting 183 days. Theoretically, it is possible thaton 30[th] March the rig may have a sudden break down and on 2[nd]April the rig may start working again to escape the requirement of 183 days. 12.Therefore, it is quite clear that even though the actual contractwas entered into with GSPC only on 18[th] June 2010, and acceptingwhat Appellant states that the drilling work actually commenced on03[rd] December 2010, still the fact that as on 27[th] April 2010 the rigwas undergoing necessary upgrades / repairs to meet the GSPCrequirements, in our view the rig was already in the contractingstate for providing the services or facilities in connection with theexploitation, exploration or extraction of mineral oil as early as on27[th] April 2010. 13.The ITAT has also come to the same conclusion in paragraph 8and 9 of the impugned order which read as under : “8.A reading of the above makes it clear thatimmediately after arrival of the drilling rig on 26.04.2010operations had started on the Rig to make it suitable toperform the activities contracted. It involved activeparticipation of GSPC as evident above. For providing theservice and facility in this case it was required to properlyposition the rig, fabricate and modify of the same as per theneeds of the GSPC. By no stretch of imagination it can besaid that the Rig was ready for use. It was only after theaforesaid fabrication, upgradation and enabling operationswere carried out that further drilling operations werecommenced from 3.11.2010 and continued till the end ofthe financial year. Thus, the assessee was having in PE inIndia to carry on business from the day when itcommenced in India operation to fabricate, to upgrade toprepare, to position and to enable the Rig to perform thedrilling activity. 9. Hence, when the rig had entered Indian waters and itwas undergoing fabrication, upgradation and positioningfor the drilling activity for GSPC it can be said that the PEwas there in connection with the exploration, exploitationor extraction of mineral oils. The operation on the Rig toupgrade it, to prepare, and to enable it to perform the 9. Hence, when the rig had entered Indian waters and itwas undergoing fabrication, upgradation and positioningfor the drilling activity for GSPC it can be said that the PEwas there in connection with the exploration, exploitationor extraction of mineral oils. The operation on the Rig toupgrade it, to prepare, and to enable it to perform the drilling activity and the actual drilling activity cannot beconsidered in isolation for considering whether theassessee is having a PE which could be said to be inconnection with the exploration, exploitation or extractionof mineral oil in India. Thus the day from which suchfabrication, positioning and upgradation, activity started(which in the present case can be safely considered to havecommenced from 26.04.2010 as evident from the minutesof the meeting between GSPC and the assessee), theassessee was having an establishment in connection withits services and activity for GSPC.(emphasis supplied) 14.In the circumstances, we find no substantial question of lawarises. Appeal dismissed. (FIRDOSH P.POONIWALLA, J.) (K.R. SHRIRAM, J.)