2010 (7) TMI 672 - AT - Income Tax

Receipts for Feasibility Study Taxable under Section 44BB, Not as Technical Services

The Tribunal found that the receipts earned by ARC for the feasibility study on CSS were taxable under Section 44BB of the Income Tax Act, 1961, and not ... Taxable u/s 44BB or fees for technical services - The receipts have admittedly been earned by ARC for carrying out a feasibility study on implementation of Cyclic Steam Stimulation, or CSS - CSS helps in improving recovery of oil from oil fields by thinning of oil, reducing its viscosity or density or specific gravity, so that the oil moves from the oil formation to the bore of the oil well - The feasibility study carried out by ARC was undisputedly solely in connection with the implementation of CSS - Hence, this study was solely “in connection with extraction of mineral oil - Thus it is taxable u/s 44B whether prospecting for, or extraction or production of, mineral oil can be termed as ‘mining’ operations, was referred to the Attorney General of India for his opinion - The service rendered by ARC is a service directly and substantially connected with the extraction of mineral oil The Explanation 2 does not exclude the consideration for providing services in connection with the construction project. Instead, it excludes consideration for construction project which means that exclusion is only in respect of consideration paid for actual carrying on construction activities - Payments for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of section 44BB of the Income Tax Act, 1961 and not under the special provision for the taxation of fees for technical services contained in section 115A, read with section 44D of the Income Tax Act, 1961 - Therefore, even though the assessee has no PE in India, the receipt under this contract is assessable under section 44BB - Decided in the favour of the assessee Issues Involved:1. Taxability of receipts under Section 44BB vs. Section 44D read with Section 115A of the Income Tax Act, 1961.2. Definition and applicability of 'fees for technical services' (FTS) under Section 9(1)(vii) of the Act.3. Interpretation of 'mining or like project' in the context of Explanation 2 to Section 9(1)(vii).Issue-wise Detailed Analysis:1. Taxability of Receipts under Section 44BB vs. Section 44D read with Section 115A of the Income Tax Act, 1961:The primary issue was whether the receipts of Alberta Research Council (ARC) for carrying out a feasibility study on the implementation of Cyclic Steam Stimulation (CSS) were taxable under Section 44BB or as 'fees for technical services' (FTS) under Section 44D read with Section 115A of the Income Tax Act, 1961. The appellant contended that the receipts should be taxed under Section 44BB as they were in connection with the exploration of mineral oil. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the receipts were for rendering technical services and thus taxable under Section 44D read with Section 115A.2. Definition and Applicability of 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Act:The AO and CIT(A) treated the receipts as FTS based on Explanation 2 to Section 9(1)(vii), which defines FTS as any consideration for rendering managerial, technical, or consultancy services. However, the appellant argued that the services rendered were in connection with the exploration of mineral oil and thus fell outside the scope of FTS as per the exclusion in Explanation 2, which excludes consideration for any construction, assembly, mining, or like project.3. Interpretation of 'Mining or Like Project' in the Context of Explanation 2 to Section 9(1)(vii):The appellant relied on CBDT Instruction No. 1862 dated 22.10.1990, which clarified that 'mining or like project' includes services like imparting training for drilling operations in connection with the extraction of mineral oil. The Tribunal noted that the feasibility study for CSS was directly related to the extraction of mineral oil, as CSS helps in improving oil recovery by thinning the oil, making it easier to extract. The Tribunal held that the services rendered by ARC were indeed in connection with the extraction of mineral oil and thus fell under the purview of Section 44BB.Tribunal's Findings:- The Tribunal found that the services rendered by ARC were directly connected with the extraction of mineral oil and thus taxable under Section 44BB.- The Tribunal noted that Section 44BB(1) talks about services or facilities 'in connection with' the extraction of mineral oil, which includes the feasibility study carried out by ARC.- The Tribunal referred to previous decisions, including 'DCIT v. Schlumberger Seaco,' where similar services were held to be taxable under Section 44BB.- The Tribunal also considered the CBDT Instruction No. 1862, which supports the appellant's contention that services related to the exploration of mineral oil fall outside the scope of FTS and are taxable under Section 44BB.- The Tribunal distinguished the case from decisions cited by the Department, such as 'CIT v. ONGC' and 'Hotel Scopevista Ltd. v. ACIT,' noting that those cases involved different facts and issues.Conclusion:The Tribunal concluded that the receipts earned by ARC for the feasibility study on CSS were taxable under Section 44BB of the Income Tax Act, 1961, and not as 'fees for technical services' under Section 44D read with Section 115A. The appeal of the assessee was allowed, and the orders of the AO and CIT(A) were set aside.