Income from Seismic Vessels Taxed Under Article 21(4) of India-Norway DTAA as Assessee Not Engaged in Seabed Exploration: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) held that income from seismic vessels provided on bareboat charter by a Norwegian company falls under Article 21(4) of the India-Norway Double Taxation Avoidance Agreement (DTAA), as the assessee was not engaged in seabed exploration or exploitation.

Sanco Holding, appellant-assessee, was a Norwegian company and tax resident of Norway that provided seismic vessels on bareboat charter to Magseis FF LLC and Shearwater Geo Services Limited. It operated a fleet of 25 vessels and filed its income tax return on 25.11.2022, declaring income of Rs. 3,87,58,010/- with tax paid under Article 21(4) of the India-Norway DTAA.

The case was selected for scrutiny and transferred to the International Taxation Circle, and later to the Assessing Officer (AO) with jurisdiction over the assessee. During assessment, it was found that the company had received Rs. 36,72,70,375/- from Magseis FF LLC and Rs. 5,41,59,371/- from Shearwater Geo Services Limited. The assessee computed net income as 7.5% of 50% of the receipts under para 4 of Article 21 of the DTAA.

The AO, however, held that paras 2 and 3 of Article 21 applied, and gross receipts were taxable under section 44BB, with 10% taken as total income. The assessee’s objections to the DRP were rejected on 19.12.2024, and the final assessment order was passed on 27.12.2024 confirming the income as per the draft assessment. The assessee appealed against this order before the Tribunal.

The assessee counsel submitted that the assessee was entitled to compute income under para 4 of Article 21 of the India-Norway treaty. He argued that the assessee was not engaged in exploration or exploitation of seabed or minerals but only provided vessels for transportation to Magseis FF LLC and Shearwater Geo Services Limited. Therefore, paras 2 and 3 of Article 21 were not applicable.

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He further noted that para 4 applied to transportation services and operation of vessels auxiliary to such services, which covered the assessee’s activities. He also relied on previous Tribunal rulings where similar vessel-providing activities were held to fall under Article 21(4), and gross receipts could not be taxed under section 44BB.

The Departmental counsel however, supported the lower authorities, stating that the AO correctly applied section 44BB because the assessee’s activities fell under paras 2 and 3 of Article 21. He argued that the assessee did not provide sufficient details to show that Article 21(4) applied and requested confirmation of the orders of the lower authorities.

The two member bench comprising Yogesh Kumar U.S (Judicial Member) and Manish Agarwal (Accountant Member) heard both parties and perused the record. It noted that Article 21 of the India-Norway DTAA provided that paras 2 and 3 applied to enterprises engaged in offshore exploration or exploitation of seabed, subsoil, or natural resources.

Paras 2 and 3 did not apply where activities did not exceed 30 days in a fiscal year. Para 4 applied to profits derived from transportation services or operation of vessels auxiliary to such activities, which were taxable only in the resident state, subject to certain limits.

The tribunal observed that the assessee was not engaged in exploration or exploitation activities but only provided vessels for transportation to entities involved in such activities, as admitted by the AO. Therefore, paras 2 and 3 were not applicable. The assessee’s activities fell squarely under para 4, and income was to be computed accordingly. This view was supported by coordinate Bench judgments and an Advance Ruling in Siem Offshore (AAAR No. 875 of 2010).

In view of this, the appellate tribunal held that the lower authorities erred in computing income under section 44BB. The orders of the lower authorities were set aside, and the AO was directed to compute the assessee’s income in accordance with para 4 of Article 21 of the India-Norway DTAA. The assessee’s grounds of appeal were allowed.

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