Offshore oil-services taxation under section 44BB: connected receipts, permanent establishment, and grossing-up rules were applied.

Offshore construction, transportation, installation and pipe-laying services were treated as intrinsically connected with mineral oil exploration and extraction, so receipts from those activities fell within the notification extending the Income-tax Act to the Continental Shelf and Exclusive Economic Zone and were taxable under section 44BB. The assessee's office in India constituted a permanent establishment under the India-Italy treaty, but taxation was confined to profits attributable to that establishment. Where reliable original books and supporting records were not produced, the accounts could be rejected and income estimated under Rule 10 read with section 44BB. Tax borne by Indian contractees was additional taxable income and had to be grossed up once on a single-stage basis. Mobilisation, demobilisation and insurance receipts were also includible in gross receipts.

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Issues: (i) Whether the assessee's offshore subcontract activities fell within Notification No. 304(E) dated 31-3-1983 so as to render the receipts taxable in India under the extended scope of the Income-tax Act, 1961 and section 44BB; (ii) whether the assessee had a permanent establishment in India under the India-Italy Tax Treaty and, if so, whether only profits attributable to that permanent establishment were taxable; (iii) whether the Assessing Officer was justified in rejecting the assessee's books of account and resorting to Rule 10 and section 44BB for computation; (iv) whether tax paid by the Indian contractees constituted taxable income and was to be grossed up on a single-stage or multiple-stage basis; (v) whether the tax rate and surcharge applicable to non-residents could be applied notwithstanding the non-discrimination clause; and (vi) whether mobilisation, demobilisation and insurance receipts were includible in gross receipts for section 44BB purposes.

Analysis: The Notification extending the Income-tax Act to the Continental Shelf and Exclusive Economic Zone applied to income derived from prospecting for, extraction or production of mineral oils and also to services or facilities rendered in connection with those activities. The assessee's construction, transportation, installation, pipe-laying and related offshore services were held to be intrinsically linked with the oil-extraction activity, and the notification was held not to distinguish between contractors and subcontractors. On treaty issues, the assessee maintained an office in India and therefore had a permanent establishment within Article 5; however, Article 7 restricted taxation to profits attributable to that permanent establishment, with deductions for expenses incurred for its business. The assessee failed to produce verifiable original books for dollar payments and relevant supporting records despite repeated opportunities; the authorities were therefore justified in rejecting the accounts and estimating income under Rule 10 read with section 44BB. As to tax perquisite, tax borne by the Indian contractees was treated as additional taxable income; the Tribunal held that grossing up had to be done once at the outset on a single-stage basis, not by repeated multiplication. The non-discrimination clause was held inapplicable because the assessment was made under section 44BB after rejection of the treaty computation mechanism, and the applicable non-resident rate and surcharge were upheld. Mobilisation, demobilisation and insurance receipts were also held to be connected with the offshore oil-extraction services and therefore includible in gross receipts under section 44BB.

Conclusion: The offshore receipts were taxable in India under the notification and section 44BB, the assessee had a permanent establishment in India, the books were rightly rejected for computation purposes, tax perquisites were to be grossed up on a single-stage basis, and the mobilisation/demobilisation and insurance receipts formed part of the taxable gross receipts.

Final Conclusion: The assessee's challenge failed on the substantive taxability and computation issues, while the Revenue succeeded on the grossing-up and receipts-inclusion issues, resulting in the dismissal of the assessee's appeal and allowance of the Department's appeal.

Ratio Decidendi: Offshore services and facilities that are intrinsically connected with prospecting for or extraction or production of mineral oil fall within a notification extending the Income-tax Act to such activities, and where reliable books are not produced, income may be computed under the Act's default provisions with grossing up of tax borne by another party done once at the outset.

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