2017 (11) TMI 78 - SC - Income Tax

Mobilisation/demobilisation payments under mineral oil contracts are business income taxable under s.44BB, ss.5 & 9; tools compensation excluded

SC held that amounts paid as mobilisation/demobilisation under contracts for mineral oil operations constitute profits and gains of business and are ... Scope and interpretation of Section 44BB - Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils - inclusion of amounts received for mobilisation/demobilisation to the gross revenue to arrive at the “profits and gains” for the purpose of computing TAX u/s 44BB by AO - Held that:- Having corrected the position in law, by emphasising that Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases where assessment is done under Section 44BB of the Act, we are of the opinion that the argument of the assessee that Section 44BB is only a computation provision, is also not entirely justified. From the bare reading of the clauses, amount paid under the aforesaid contracts as mobilisation fee on account of provision of services and facilities in connection with the extraction etc. of mineral oil in India and against the supply of plant and machinery on hire used for such extraction, clause (a) stands attracted. Thus, this provision contained in Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the Act as well. In the instant case, the amount which is paid to the assessees is towards mobilisation fee. It does not mention that the same is for reimbursement of expenses. In fact, it is a fixed amount paid which may be less or more than the expenses incurred. Incurring of expenses, therefore, would be immaterial. It is also to be borne in mind that the contract in question was indivisible. Having regard to these facts in the present case as per which the case of the assessees get covered under the aforesaid provisions, we do not find any merit in any of the contentions raised by the assessees. Therefore, the ultimate conclusion drawn by the AO, which is upheld by all other Authorities is correct, though some of the observations of the High Court may not be entirely correct which have been straightened by us in the above discussion. For our aforesaid reasons, we uphold the conclusion. Resultantly, all the appeals of the assessees are dismissed. In this batch of appeals, Civil Appeal a the solitary appeal which is preferred by the Director of Income Tax, New Delhi (Revenue) against the judgment of the High Court of Uttarakhand. The computation of income of the assessee was done under Section 44BB of the Act. However, the amount which was sought to be taxed was reimbursement of cost of tools lost in hole by ONGC. It is, thus, clear that this was not the amount which was covered by sub-section (2) of Section 44BB of the Act as ONGC had lost certain tools belonging to the assessee, and had compensated for the said loss by paying the amount in question. On these facts, conclusion of the High Court is correct. Issues Involved:1. Scope and interpretation of Section 44BB of the Income Tax Act, 1961.2. Inclusion of mobilisation charges in the computation of deemed profits and gains under Section 44BB.3. Application of Sections 4, 5, and 9 of the Income Tax Act in conjunction with Section 44BB.4. Treatment of reimbursement of expenses as income under Section 44BB.Issue-Wise Detailed Analysis:1. Scope and Interpretation of Section 44BB of the Income Tax Act, 1961:Section 44BB provides a special mechanism for computing profits and gains for non-residents engaged in the business of providing services or facilities related to mineral oil exploration. It mandates that a sum equal to 10% of the aggregate amounts specified in sub-section (2) shall be deemed as the profits and gains of such business chargeable to tax. The section starts with a non-obstante clause, meaning it overrides the general provisions for computing business income under Sections 28 to 41 and Sections 43 and 43A of the Act.2. Inclusion of Mobilisation Charges in the Computation of Deemed Profits and Gains under Section 44BB:The primary issue was whether mobilisation charges received by the assessees for transporting rigs to India should be included in the computation of deemed profits and gains under Section 44BB. The court held that mobilisation charges are to be included as they are part of the aggregate amounts specified in sub-section (2). The mobilisation fee is considered as compensation for services provided in connection with the exploration of mineral oils, and thus falls within the ambit of Section 44BB.3. Application of Sections 4, 5, and 9 of the Income Tax Act in Conjunction with Section 44BB:The court clarified that Sections 4, 5, and 9, which deal with the charging section, total income, and income deemed to accrue or arise in India, respectively, cannot be ignored even when the assessment is done under Section 44BB. These sections are essential to determine whether a particular income is taxable in India. The court emphasized that Section 44BB, while providing a computation mechanism, does not override the charging provisions of Sections 4 and 5. The mobilisation fee, being a part of the aggregate amounts specified in Section 44BB(2), is deemed to be income under Sections 5 and 9.4. Treatment of Reimbursement of Expenses as Income under Section 44BB:The assessees argued that mobilisation charges were reimbursements for expenses incurred outside India and should not be considered as income. The court rejected this argument, stating that the mobilisation fee was a fixed amount agreed upon in the contracts and not merely a reimbursement of actual expenses. The court noted that the contracts described these payments as 'fees' and not reimbursements, and thus, they should be included in the aggregate amounts for computing deemed profits and gains under Section 44BB.Conclusion:The Supreme Court upheld the inclusion of mobilisation charges in the computation of deemed profits and gains under Section 44BB, emphasizing that these charges are part of the aggregate amounts specified in sub-section (2) and are deemed to be income under Sections 5 and 9 of the Act. The court clarified that Section 44BB provides a special computation mechanism but does not override the charging provisions of the Act. The appeals by the assessees were dismissed, and the court affirmed the decisions of the lower authorities.