ITAT rules in favor of appellant on tax treatment for services to ONGC & Leighton India

The Income Tax Appellate Tribunal (ITAT) ruled in favor of the appellant, finding that the services provided to ONGC and Leighton India qualified as 'mining or like project' services under section 9(1)(vii) of the Income Tax Act, 1961. The ITAT held that the receipts should be taxed under section 44BB of the Act, deeming 10% of gross receipts as taxable income. The appeal was allowed, and the decision was issued on 8th October 2021.

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Issues Involved:
1. Whether the services provided by the appellant to ONGC qualify as 'mining or like project' services or should be treated as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961.
2. Whether the receipts from services provided to Leighton India should be treated as fees for technical services or taxed under section 44BB of the Act.
3. Whether the receipts referred to in Grounds 1 and 2 should be taxed under section 44BB or section 44DA of the Act.

Issue-Wise Detailed Analysis:

1. Services to ONGC:
The appellant provided Project Management Consultancy (PMC) services to ONGC for the completion of the G1 and GS 15 development project. The scope of work included progress reporting, preparation of project completion schedules, preparation of specifications, review and approval of detailed design documents, offshore construction supervision, flow assurance, and review of additional engineering requirements. The Assistant Commissioner of Income Tax (ACIT) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that these services are not related to 'mining or like projects' and treated the consideration received as fees for technical services (FTS) under section 9(1)(vii) of the Income Tax Act, 1961. The CIT(A) held that the services provided by the appellant did not qualify as 'mining or like project' services and thus were not excluded from the purview of section 9(1)(vii) of the Act.

2. Services to Leighton India:
The appellant provided design and engineering services for submarine pipelines to Leighton India. The scope of work included pre-engineering survey inputs, review of survey data, pipeline protection/stability design, pipeline free span analysis, offshore pipeline crossing design, pipeline cathodic protection design, pipe lay feasibility study, and pipeline purchase specifications. The CIT(A) found that the services related to the design and engineering of submarine pipelines were integral to the exploration of mineral oil and thus taxable under section 44BB of the Act. However, the services of attending meetings and providing office space were considered managerial services and were taxed under section 44DA of the Act.

3. Taxation under Section 44BB or 44DA:
The appellant argued that the receipts from ONGC and Leighton India should be taxed under section 44BB of the Act, which deems 10% of gross receipts as taxable income, rather than under section 44DA. The appellant relied on the Supreme Court decision in ONGC v CIT, which held that payments for services directly associated with prospecting, extraction, or production of mineral oils should be taxed under section 44BB. The CIT(A) held that the entire receipts from ONGC should be taxed under section 44DA, while the receipts from Leighton India should be partly taxed under section 44BB and partly under section 44DA.

Final Judgment:
The Income Tax Appellate Tribunal (ITAT) examined the nature of the services provided and found that the services to ONGC were essential to the development and exploration of oil and gas fields, thus qualifying as 'mining or like project' services excluded from the definition of FTS under section 9(1)(vii). Similarly, the services provided to Leighton India, except for attending meetings and providing office space, were also integral to the exploration of mineral oil and should be taxed under section 44BB. The ITAT concluded that the entire receipts from ONGC and Leighton India should be taxed under section 44BB of the Act. The appeal of the assessee was allowed, and the order was pronounced on 8th October 2021.

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