2016 (3) TMI 421 - AT - Income Tax

Inclusion of Foreign Revenues in Taxable Income Upheld; Transfer Pricing Adjustment Dismissed

The Tribunal upheld the inclusion of revenues earned outside Indian territorial waters in gross receipts for tax purposes, dismissed the transfer pricing ... Inclusion of entire contract receipts in gross receipts for computing presumptive income - special provision of section 44BB for services connected with prospecting for, extraction or production of mineral oils - exclusion of fees for technical services from section 44BB by virtue of provisos and Explanation - pith and substance test for characterisation of payments as section 44BB or FTS - CBDT Instruction No. 1862 on mining/like projects - provisos and priority of special charging/computation provisions over general provisionsInclusion of entire contract receipts in gross receipts for computing presumptive income - 200 nautical miles/Indian territorial waters - Whether amounts excluded by the assessee relating to periods when the vessel was beyond 200 nautical miles are to be included in gross receipts - HELD THAT: - The Tribunal upheld the Assessing Officer's conclusion that gross payments are intrinsically linked to the services rendered under a continuing contract and arise from execution of the contract in India. The assessee's pro rata approach-allocating receipts only to days within 200 nautical miles-is improper because the provision of crew was a continuing contractual service; intermittent absence of the vessel from Indian territorial waters does not sever the link between the contract and taxable gross receipts. Accordingly, receipts for November 2007, December 2007 and January 2008 are to be included in gross receipts for computation under the Act. [Paras 11]Assessee's claim to exclude amounts for periods outside 200 nautical miles is rejected; entire contract receipts are included in gross receipts.Special provision of section 44BB for services connected with prospecting for, extraction or production of mineral oils - Fees for Technical Services (FTS) v. section 44BB classification - pith and substance test for characterisation - CBDT Instruction No. 1862 on mining/like projects - priority of specific/computation provisions over general royalty/FTS provisions - Whether the assessee's receipts are taxable as Fees for Technical Services under section 9(1)(vii) (and section 115A/44D) or are to be taxed under the presumptive scheme of section 44BB - HELD THAT: - After analysing the statutory scheme and legislative history, the Tribunal held that sections dealing with royalty and FTS operate in distinct fields and that section 44BB is a special provision specifically enacted to cover services or facilities in connection with prospecting for, extraction or production of mineral oils. Where services are directly associated with oil exploration, the pith and substance of the agreement governs classification. The Tribunal followed the reasoning of the Supreme Court in ONGC v. CIT and accepted CBDT Instruction No.1862 as support that services inextricably connected with mining/exploration fall within section 44BB. Consequently, section 44BB, being the specific provision for such activities, prevails over general provisions taxing FTS/royalty, and the assessee's revenues were to be brought to tax under section 44BB. [Paras 24, 26, 27]Receipts held taxable under section 44BB; classification as FTS rejected.Final Conclusion: The appeal is partly allowed: the inclusion of the disputed amounts in gross receipts is upheld (assessee's exclusion disallowed), but the revenues are to be taxed under the presumptive computation of section 44BB rather than as Fees for Technical Services. Issues Involved:1. Taxability of revenues earned outside Indian territorial waters.2. Transfer pricing adjustment.3. Classification of revenues as Fees for Technical Services (FTS) or under section 44BB of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Revenues Earned Outside Indian Territorial Waters:The primary contention was whether revenues earned by the assessee, a non-resident company, for providing crew services on a vessel operating beyond 200 nautical miles from Indian shorelines are taxable in India. The assessee argued that such revenues should not be taxable as the services were rendered outside India. The Assessing Officer (AO) and the CIT (A) disagreed, asserting that the contract for providing crew was a continuing contract and the income could not be segregated based on the vessel's location. The Tribunal upheld the AO's and CIT(A)'s view, stating that gross payments are intricately linked to services rendered under the contract executed in India. Therefore, the entire contractual amount, including revenues for periods the vessel was outside Indian territorial waters, should be included in gross receipts for tax purposes.2. Transfer Pricing Adjustment:The second issue involved a transfer pricing adjustment of Rs. 55,37,033/- suggested by the Transfer Pricing Officer (TPO). The assessee did not press this ground during the hearing, and it was dismissed as withdrawn.3. Classification of Revenues as Fees for Technical Services (FTS) or Under Section 44BB:The third issue was whether the revenues earned should be taxed as FTS under section 9(1)(vii) or under section 44BB of the Income Tax Act, 1961. The assessee provided crew and management services for a vessel used in oil exploration, arguing that such revenues should be taxed under section 44BB, which deals with services connected to the prospecting, extraction, or production of mineral oils. The Tribunal analyzed various provisions and judicial precedents, including the CBDT Instruction No. 1862 and the Supreme Court's decision in ONGC vs. CIT. It concluded that services directly associated with oil exploration fall under section 44BB. Therefore, the Tribunal held that the assessee's revenues should be taxed under section 44BB and not as FTS under section 9(1)(vii).Conclusion:The Tribunal upheld the inclusion of revenues earned outside Indian territorial waters in gross receipts for tax purposes, dismissed the transfer pricing adjustment as withdrawn, and ruled that the assessee's revenues should be taxed under section 44BB of the Income Tax Act, 1961. The appeal was partly allowed.