2022 (3) TMI 84 - HC - Income Tax

Court rules tug and barge payments not 'Royalty' under Income Tax Act.

Larsen & Toubro Limited, Versus Girish Dave, Director of Income-tax (International Taxation), Bombay, Vinay Sinha, Deputy Income-tax (International Taxation) 4 (1) Mumbai and Union of India

The court concluded that payments made by the petitioner for hiring tugs and barges were assessable under Section 44BB of the Income Tax Act, 1961. The ... Income deemed to accrue or arise in India - payments made by the petitioner to the non-resident assessee as assessable under Section 44BB or not? - payment made by the petitioner towards charter hire of the tugs and barges for executing the contract entered into with ONGC - whether the hire of the tugs and barges by the petitioner had any connection with the exploration, extraction or production of mineral oils? - whether the payment of charter hire for the tugs and barges by the petitioner falls within the ambit of ‘royalty’ under Section 9(1)(iv) or is covered by the special provision contained in Section 44BB ? - HELD THAT:- It is imperative to note that the service provider in this case being a non-resident assessee, under Section 195 of the Act, the petitioner – assessee was enjoined to deduct income tax thereon at source at the applicable rates. Moreover, there is material to indicate that in the case at hand, the petitioner had grossed up the profits by 10% and thereafter paid the taxes. There does not appear much controversy as regards the nature of the contract between ONGC and the petitioner - the use of the expression ‘in connection with’ in Section 44BB is of significance. The said expression, expands the horizon of the services or facilities, provided by a non-resident assessee, which fall within the ambit of the said provision, provided they have connection with the exploration, extraction or production of mineral oils. The emphasis is not as much on the service, facility as plant as on the purpose to which it is put to. It is the proximity or connection of the service, facility, plant or machinery with the process of exploration, extraction and production of mineral oils, that is of determinative significance. Supreme Court in the case of Oil and Natural Gas Corporation Limited [2015 (7) TMI 91 - SUPREME COURT] concluded that the pith and substance of each of the contract and agreement in the said case was inextricably connected with prospecting, extraction and production of mineral oil. The dominant purpose of each of such agreements was for prospecting, extraction or production of mineral oils though there might be certain ancillary works contemplated thereunder, and, therefore, the Supreme Court held that the payments made by the ONGC and received by the non-resident assessees or foreign companies under the said contracts were more properly assessable under the provisions of Section 44BB and not under Section 44D of the Act. Applying the aforesaid ratio to the facts of the case at hand, where there is no qualm over the fact that the petitioner had entered into a contract with ONGC on turn-key basis for enhancing the exploration/production capacity of the platform at Bassein field offshore site and, for the said purpose, the petitioner had hired the tugs and barges from non-resident assessees, we are of the view that the authorities were not justified in arriving at the conclusion that the use of the tugs and barges was in the nature of a mere transportation facility. On facts, respondent no.1, in terms, recorded that tugs were hired by the petitioner to transport the Compressor module from the yard to the offshore platform. The said compressor module, as it emerges from the record, was an integral part of the execution of the contract by the petitioner. If we consider the object of special dispensation and the proximate use, to which the facility / service or plant and machinery was put to, an inference becomes irresistible that the hire of the tugs and barges, to transport an integral part of the equipment to enhance the exploration / production capacity, was inextricably connected with the extraction and production of mineral oil. The payments made by the petitioner to the non-resident assessess in the execution of the contract with ONGC is properly assessable under the provisions on Section 44BB of the Act, 1961. Thus, the impugned order deserves to be quashed and set aside. Issues Involved:1. Applicability of Section 44BB of the Income Tax Act, 1961.2. Classification of payments as 'Royalty' under Section 9(1)(iv) of the Income Tax Act, 1961.3. Correctness of the orders passed by the Assessing Officer and the Director of Income Tax (International Taxation).Analysis:1. Applicability of Section 44BB of the Income Tax Act, 1961The core issue was whether the payments made by the petitioner for hiring tugs and barges fall under the special provisions of Section 44BB, which deals with computing profits and gains in connection with the business of exploration, extraction, or production of mineral oils. The petitioner argued that the services provided were inextricably linked with the exploration and production of mineral oils, thus qualifying for the special dispensation under Section 44BB. The court noted that the petitioner had entered into a comprehensive contract with ONGC for the installation and commissioning of a platform to enhance production capacity, and the hired tugs and barges were integral to transporting essential equipment for this purpose. The court emphasized that the phrase 'in connection with' in Section 44BB broadens the scope to include services and facilities that are closely linked to exploration activities.2. Classification of Payments as 'Royalty' under Section 9(1)(iv) of the Income Tax Act, 1961The Assessing Officer initially classified the payments as 'Royalty' under Section 9(1)(iv) read with Clause (iva) of Explanation 2, arguing that the payments were for the use of commercial equipment and thus taxable at a higher rate. The petitioner contended that the authorities erred in this classification, as the payments fell within the exclusion provided in Clause (iva) of Explanation 2, which excludes amounts referred to in Section 44BB. The court agreed with the petitioner, noting that the payments were for services and facilities directly connected with the exploration and production of mineral oils, and thus should not be classified as 'Royalty.'3. Correctness of the Orders Passed by the Assessing Officer and the Director of Income Tax (International Taxation)The court found that the authorities had misinterpreted the provisions of the Income Tax Act, particularly the scope and applicability of Section 44BB. The court held that the Assessing Officer and the Director of Income Tax (International Taxation) erred in their conclusion that the payments were in the nature of 'Royalty' and not covered under Section 44BB. The court emphasized that the services provided by the petitioner were inextricably linked to the exploration and production of mineral oils, thus qualifying for the special provisions under Section 44BB.Conclusion:The court concluded that the payments made by the petitioner to the non-resident assessees for hiring tugs and barges were assessable under Section 44BB of the Income Tax Act, 1961. The orders passed by the Assessing Officer and the Director of Income Tax (International Taxation) were quashed and set aside. The petitioner was declared entitled to all consequential benefits in accordance with the law.Order:1. The order dated 18th July 2008, passed by the Director of Income-tax (International Taxation), and the order dated 15th February 2008, passed by the Deputy Director of Income-tax (International Taxation), were quashed and set aside.2. It was declared that the payments made by the petitioner to the non-resident assessees are assessable under Section 44BB of the Income Tax Act, 1961.3. The petitioner shall be entitled to all consequential benefits in accordance with the law.4. Rule made absolute with no costs.