2007 (9) TMI 196 - HC - Income Tax

Appeal dismissed; mobilization charges paid abroad treated as deemed profits under s.44BB, additions of Rs.99.04L and Rs.64.64L upheld

HC dismissed the assessee's appeal, upholding the AO, CIT(A) and ITAT findings that mobilization charges paid outside India were not reimbursements of ... Deemed profits under section 44BB - aggregate amount in sub-section (2) of section 44BB - inclusion of mobilization charges in taxable gross receipts - nature of mobilization charges - reimbursement versus fixed contractual payment - section 44BB as a complete code for non-resident contractors supplying plant and machinery or services in connection with mineral oilsAggregate amount in sub-section (2) of section 44BB - inclusion of mobilization charges in taxable gross receipts - nature of mobilization charges - reimbursement versus fixed contractual payment - section 44BB as a complete code for non-resident contractors supplying plant and machinery or services in connection with mineral oils - Inclusion of mobilization charges in the aggregate amounts specified in sub-section (2) of section 44BB for computing deemed profits at 10% was upheld. - HELD THAT: - The Court examined section 44BB and held that it is a special, self-contained code which prescribes that a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed profits. The amounts in sub-section (2) are mutually inclusive and apply whether payment is made in or out of India. The Tribunal had found on the contract terms that the mobilization fee was a fixed contractual payment forming part of the overall consideration for supply of the drilling unit and associated services, and that the mobilization fee had no nexus with actual expenditure incurred by the assessee (i.e., it was not a mere reimbursement). Given the fictional nature of taxation under section 44BB, such contractual mobilization charges fall within the aggregate amounts to be taken into account for calculating the deemed profits, even though the payment was made outside India. Consequently the Assessing Officer, the Commissioner (Appeals) and the Tribunal were correct in including the mobilization charges in the aggregate for the purpose of levy under section 44BB. [Paras 6, 10, 17]Tribunal's inclusion of mobilization charges in the aggregate under sub-section (2) of section 44BB is sustained and the additions were correctly upheld.Final Conclusion: Appeal dismissed; question answered in favour of the Revenue and against the assessee - mobilization charges, being fixed contractual payments with no nexus to actual reimbursement, are includible in the aggregate under sub-section (2) of section 44BB for computation of deemed profits. Issues Involved:1. Inclusion of mobilization charges in the aggregate amount under Section 44BB of the Income-tax Act, 1961.2. Nature of mobilization charges as reimbursement of expenses.3. Applicability of Section 44BB vis-a-vis Sections 5 and 9 of the Income-tax Act.Issue-wise Detailed Analysis:1. Inclusion of Mobilization Charges in the Aggregate Amount under Section 44BB:The appellant, a non-resident company, entered into an agreement with ONGC for drilling contracts. The Assessing Officer included the mobilization charges of Rs. 99,04,000 for the assessment year 1986-87 and Rs. 64,64,530 for the assessment year 1987-88 under Section 44BB of the Income-tax Act, 1961. The Income-tax Appellate Tribunal (ITAT) upheld this inclusion, stating that the agreements between the appellant and ONGC were indivisible contracts. The Tribunal noted that Section 44BB specifically provides that the aggregate of the amounts referred to in sub-section (2) will be adopted as the basis for calculating profits at 10%, which shall be deemed to be the profits and gains of such business chargeable to tax. It does not exclude separate considerations for transportation of drilling units from the aggregate amount of gross receipts.2. Nature of Mobilization Charges as Reimbursement of Expenses:The appellant contended that mobilization charges were not actual charges but were expenses reimbursed by ONGC for mobilizing machinery from Portugal to Bombay seashore. The Commissioner of Income-tax (Appeals) rejected this argument, holding that the assessment was made at 10% on the total amount received by the non-resident company under Section 44BB. The ITAT further supported this by stating that the mobilization fee paid by ONGC had no nexus with the actual amount incurred by the appellant for transportation. Even if the actual expenditure was less, ONGC was liable to pay the fixed mobilization fee stipulated in the agreements.3. Applicability of Section 44BB vis-a-vis Sections 5 and 9 of the Income-tax Act:The appellant argued that mobilization charges represent reimbursement of expenses and should not be included in the amount under sub-section (2) of Section 44BB. They relied on various judgments, including Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax, where the Supreme Court held that only such part of the income as is attributable to operations carried out in India is taxable in India. However, the court clarified that Sections 5 and 9, which deal with the scope of total income and income deemed to accrue or arise in India, are not applicable in this case. Section 44BB is a special provision relating to non-resident assessees providing services or facilities in connection with, or supplying plant and machinery on hire used in the prospecting for, or extraction or production of, mineral oils. The section is a complete code in itself, and the amounts referred to in sub-section (2) of Section 44BB include payments made inside or outside India.Conclusion:The court concluded that the mobilization fee is not a reimbursement of expenditure but a fixed sum stipulated in the contract, regardless of the actual expenditure incurred. The Assessing Officer was correct in adding the mobilization charges to the aggregate amount for tax purposes under Section 44BB. The appeal was dismissed, and the question of law was answered in favor of the Revenue and against the assessee. There was no order as to costs.