- An agreement to amend the scope of services provided under the original contract is not a separate contract
- Services under an amendment agreement or change order are of the same nature as services under the original contract and are to be taxed in the same manner
- Section 44BB of the ITA does not make a distinction between whether consideration is paid or payable in or out of India
Recently, the Authority for Advance Rulings ("AAR") in the matter of Aker Contracting FP ASA1 held that the services under an amendment agreement are of the same nature as services under the original agreement and must be taxed accordingly.
Aker Contracting FP ASA ("Aker") is a Norway based company engaged in providing 'Floating Production Storage and Offloading' ("FPSO") facilities which are used in offshore oil and gas mining. On May 9, 2007 Aker entered into an agreement ("Original Agreement") with M/s Reliance Industries Limited ("RIL") for providing FPSO to an offshore location in India. Under the Original Agreement, Aker was to provide the following services:
- Preparing and chartering/leasing out the FPSO, a vessel converted to a floating, production, processing, storage and offloading facility
- Supplying, materials, equipment, personnel and technical support necessary for the performance of its obligations under the Original Agreement
- Providing functional requirements including general facilities for living quarters and related operations.
From Assessment Year 2009-2010 onwards, Aker offered the entire fee towards such services for tax in India as per section 44BB of the Income Tax Act, 1961 ("ITA").
On July 27 2008, Aker signed an agreement with RIL to change the scope of services ("Change Order") for a fee of USD 85 million. Pursuant to the Change Order Aker was contracted to:
- Fabricate and install new living quarters onboard the FPSO facility and procure and install housing related amenities.
- Mobilize personnel and major vendor representatives four months prior to the FPSO sailing to India instead of six weeks prior to the FPSO sailing to India as envisaged in the Original Agreement
- Extend the dry-docking as envisaged in the Original Agreement to 15 years
- Expedite deliveries and increase productivity at the shipyard, install buoy / moorings in India.
Aker approached the AAR to determine the taxability of services rendered under the Change Order.
Aker put forth the following arguments:
- Aker argued that the Change Order was a separate and independent agreement from the Original Agreement.
- Aker had not rendered any managerial, technical or consultancy services to RIL under the Change Order, and the income earned for work performed by them was purely in the nature of business profits not taxable in India in the absence of a permanent establishment ("PE") (or business connection).
- Further, the scope of work under the Change Order was for making the FPSO ready (prior to sail away) and was performed outside India. Therefore consideration in respect of such services did not accrue or arise in India.
- With respect to the mobilization of the FPSO from Singapore to India, the income earned in relation to the FPSO for distance travelled outside India is not taxable under the ITA.
- The consideration received pursuant to the Change Order would not be taxable under the India-Norway DTAA as Aker did not perform any activities in India in relation to services under the Change Order which could constitute a PE in India.
On the other hand, the tax department made the following contentions:
- The Change Order is not independent from the Original Agreement as it was executed as per the procedure specifically provided for under clause 25 of the Original Agreement.
- The services under the Change Order are merely an extension/modification of services originally under the Original Agreement and cannot be treated in a different manner.
- The services under the Change Order, like those under the Original Agreement, are inextricably linked with the mining and production of mineral oil, therefore related income should be taxed in accordance with section 44BB of the ITA.
- The consideration received for services provided under the Change Order is in the nature of a revenue receipt under the DTAA. It is subject to tax in India as Aker carries on the activity of leasing business in India amounting to a PE.
Original Agreement and Change Order are inextricably linked: The AAR first tackled the very foundation of Aker's argument by analyzing whether the Original Agreement and Change Order could, in fact, be considered two independent contracts. Relying on the fact that clause 25 of the Original Agreement clearly outlined the procedure to be followed in case changes were required to the scope of services, and the fact that the Change Order was entered into as per such procedure the AAR found that the two were inextricably linked.
Scope of services under the Change Order: Further, the AAR analyzed the scope of the services under the Change Order and concluded that the services were merely amendments to the services already envisioned under the Original Agreement. The amended services were wholly dependent on the services under the Original Agreement. Thus, the AAR found that the two contracts were not independent, rather the Change Order merely amended the scope of services under the Original Agreement pursuant to clause 25 of the Original Agreement.
The AAR ruled that as the services under the Change Order were merely an amendment to the services already captured under the Original Agreement, Aker could not treat the income arising from the Change Order differently than it had been treating income arising from the Original Agreement.
Reliance on prior conduct of Aker: The AAR also noted that in all previous relevant assessment years, Aker had offered the entire income arising from services under the Original Agreement to tax in accordance with section 44BB of the ITA, and had not made a distinction based on the FPSO's distance travelled outside Indian waters.
Services performed outside India: Based on Aker's prior conduct, and relying on previous AAR rulings in the cases of Geofizyka Torun Sp.zo2 and Bergen Oilfield Services AS,3 the AAR concluded that section 44BB does not provide for splitting of income attributable to activities in India and outside India. What is important is that the services under the Change Order were in connection with preparing the FPSO for chartering to provide the same on lease rental basis to obtain crude oil/ natural gas etc. from India.
In light of the above, the AAR ruled that the entire consideration (baring insurance receipts) received for services provided under the Change Order was to be treated as business profits and taxed as per section 44BB of the ITA.
Insurance payments: As far as insurance payments was concerned, the AAR, Aker and the tax department were of the common view that consideration received from an insurance policy outside India, is not taxable in India, considering that the policy was obtained and signed outside India.
Taxability under India- Norway tax treaty: The AAR ruled that as the services under the Change Order were of the same nature as those of the Original Agreement, it was also clear that Aker carried on the activity of providing the FPSO on lease rental basis to obtain crude oil/ natural gas from the development area in India under both contracts. As such it was evident that income received for such services under the Change Order would also be taxable under the India-Norway DTAA as work is performed in India.
Although this ruling is based significantly on the facts of this case as opposed to a specific interpretation of law, it is important to note the findings of the AAR on the nature of amended agreements. To the extent that the amended agreement or change order is inextricably linked to and dependent on the original agreement, and the services are related and incapable of being bifurcated, both should be construed to be the same. Consequently, consideration received under the change order should be taxed in the same manner as the original agreement.
Although the consideration receivable for the services under the Change Order in this case was clearly distinguishable from that of the services under the Original Agreement, the AAR made it a point to examine the real relationship between the original and amended services. Even though the consideration was apportioned in both agreements, the AAR's decision was based on the fact that the nature of services provided were inextricably linked, rather than the formalistic bifurcation of the documentation and consideration.
1 Aker Contracting FP ASA. (AAR No. 867 of 2010)
2 Geofizyka Torun Sp.zo (AAR 813 of 2009)
3 Bergen Oilfield Services AS (AAR 857 of 2009)
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