2023 (9) TMI 1723 - AT - Income Tax

Non-resident oil services taxed under s.44BB, service tax excluded; s.244A interest to foreign company at MMR

ITAT Dehradun held that the receipts of the non-resident assessee, a Hong Kong tax resident with a project office constituting a PE in India, are ... Taxability of services includible in the revenue chargeable to tax u/s 44BB - assessee is incorporated in and under the laws of Hongkong and accordingly a tax resident of Hongkong - assessee had set up a Project office in India for execution of the contracts, which is the Permanent Establishment (PE) of the assessee in India - HELD THAT:- We hold that the receipts of the assessee would be liable to be taxed only u/s 44BB of the Act and not u/s 44DA of the Act. Service tax component in the gross receipts chargeable to tax u/s 44BB - Hon'ble Jurisdictional High Court [2019 (4) TMI 1177 - UTTARAKHAND HIGH COURT] wherein as held Service tax is levied, under the Finance Act, 1994, on services. Service tax is, therefore, a tax on 'service', and does not form part of the consideration paid for the services rendered, much less services rendered in connection with the prospecting, extraction or production of mineral oils. Reimbursement of service tax by the service recipient to the service provider, representing the amount of tax already paid by the service provider to the Government, would not constitute a part of the amount received for the services rendered by the service provider- assessee to the service recipient-ONGC, much less a part of the amount received for services rendered by the assessee in the prospecting for or the extraction or production of mineral oils. Taxability of interest on income tax refund at Maximum Marginal Rate or as per section 115A of the Act - We find that in the instant case, admittedly, the remittances came to the assessee from its customers in US Dollars. Hence this Circular would be relevant to drive home the point that what is crucial is how the remittance come to the assessee. The case of the ld AR is that the remittance in assessee's case came in US Dollars and the refund arose due to TDS on such remittances. Hence it would be debt in foreign currency. Assessee had admittedly offered the income under the domestic provisions and had not even disputed the same. Hence the decision of Special Bench of Delhi Tribunal relied upon by the ld. AR does not come to the rescue of the assessee in the instant case. We find that the decision of Delhi Tribunal relied by ld. DR in the case of B J Services Co. Middle East [2008 (9) TMI 410 - ITAT DELHI-B] has been approved by the Hon'ble Jurisdictional High Court [2015 (5) TMI 1036 - UTTARAKHAND HIGH COURT] wherein it was held that interest on refund u/s 244A of the Act arising to a foreign company would be taxed at Maximum Marginal Rate. Ground raised by the assessee dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1. Whether revenues from various oil and gas related services, including subsurface sample transfer and shipping services and supply of materials for controlling mud loss, are taxable under section 44BB or as 'fees for technical services' under section 9(1)(vii) read with section 44DA. 1.2. Whether service tax collected and reimbursed to the Government forms part of 'gross receipts' for computing income under section 44BB. 1.3. Whether reimbursements of expenses, including those linked to oilfield operations, constitute taxable income and are includible in gross receipts under section 44BB. 1.4. Whether interest received on income tax refund under section 244A by a foreign company is taxable at the concessional rate under section 115A(1)(a)(ii) or at the normal/maximal rate applicable to foreign companies. 1.5. Whether certain grounds raised by the Revenue, not emanating from the order of the first appellate authority, are maintainable in appeal before the Tribunal. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of oilfield service receipts: section 44BB vs section 44DA / FTS Legal framework (as discussed) 2.1. The Tribunal considered section 44BB(1), section 44DA and section 9(1)(vii), and the judicial test laid down by the Supreme Court that, where the pith and substance of the contract is directly and inextricably connected with prospecting, extraction or production of mineral oil, the receipts are taxable under section 44BB and not as 'fees for technical services'. 2.2. Reliance was placed on the Supreme Court ruling in the ONGC group of cases holding that services inextricably linked with mining or oil exploration/production fall under section 44BB and not under section 44D/44DA, and on CBDT Circular dated 22.10.1990 referred to in that judgment. Interpretation and reasoning 2.3. The assessee, a non-resident with a project office constituting a PE in India, rendered multiple services in connection with oil and gas exploration and production. The Assessing Officer split contracts: items 1-215 were taxed under section 44BB, but contracts 216-231 (including subsurface sample transfer and shipping and supply of materials for controlling mud loss) were treated as FTS taxable under section 44DA on net basis. 2.4. The Tribunal noted that it was undisputed that the assessee's business is in exploration of mineral oils and that all services were rendered through its PE in India. The key dispute was whether the specified services (subsurface sample transfer/shipping and mud loss control) were 'technical/consultancy' services divorced from mining activity or were inextricably linked to extraction/production operations. 2.5. For subsurface sample transfer and shipping services, the Tribunal examined detailed functional steps: collection of formation samples during drilling, transfer from MDT sample chambers to specially treated bottles using nitrogen/other chemicals, maintaining higher temperatures during transport due to waxy nature, and delivery of bottles to specialised laboratories for further reservoir analysis. It held that once samples are extracted from the formation for reservoir evaluation, the secure transfer and handling of such samples is part of the same exploration/extraction process and not a standalone transport service. 2.6. By applying the 'pith and substance' and 'inextricable connection' tests from the Supreme Court's ONGC judgment, the Tribunal held that these subsurface sample transfer/shipping services fall squarely within the category of services regarded by the Supreme Court as mining/exploration-related and taxable under section 44BB. 2.7. For supply of material for controlling mud loss, the Tribunal considered the described activities: pumping chemicals during drilling to prevent overflow, assist bit cooling, manage waste flow and capture mud, all as consumables used in drilling wells for oil extraction. The Tribunal observed that in the assessee's own later assessment year (AY 2016-17), the Assessing Officer himself accepted similar receipts under section 44BB following the Supreme Court in ONGC. 2.8. These consumables and associated activities were found to be critical to the drilling operation and therefore directly and inextricably linked with extraction of mineral oil, rather than being separable technical services. 2.9. The Tribunal also referred to its own decision in the assessee's earlier year (AY 2013-14), where receipts from post-stack inversion study, core pressure and wellbore study, data processing and maintenance services were held to be taxable under section 44BB on the same ONGC principle, reinforcing the characterisation of similar technical-analysis and support services as integral to exploration/production. 2.10. It was further held that, for invoking section 44DA, the Revenue must first establish that the receipts are FTS within section 9(1)(vii) and not covered by the mining exception; on the facts and nature of activities, this threshold was not met. Conclusions 2.11. Revenues from subsurface sample transfer and shipping services and from supply of materials for controlling mud loss are not assessable as 'fees for technical services' under section 9(1)(vii) read with section 44DA. 2.12. Such revenues are part of the income from services in connection with, and inextricably linked to, exploration and extraction of mineral oil and are taxable on presumptive basis under section 44BB. 2.13. The contrary treatment directed by the first appellate authority for these two service categories under section 44DA was reversed, and all such receipts were directed to be taxed under section 44BB. Issue 2 - Inclusion of service tax component in gross receipts under section 44BB Legal framework (as discussed) 2.14. The Tribunal considered the scope of 'amount paid or payable' under section 44BB, in light of the Full Bench decision of the jurisdictional High Court holding that service tax is a levy on services and not part of consideration for services, even when reimbursed by the service recipient. Interpretation and reasoning 2.15. The Assessing Officer had included the service tax component collected from clients and deposited with the Central Government in the assessee's gross receipts for section 44BB purposes. The first appellate authority held that the assessee acted merely as an agent for collection/remittance of service tax and, relying on High Court and Tribunal precedents, directed exclusion. 2.16. The Tribunal, following the Full Bench of the jurisdictional High Court, reiterated that service tax is a tax on services under the Finance Act, 1994, and not consideration for the services rendered in connection with prospecting, extraction or production of mineral oils. 2.17. Reimbursement of service tax by the service recipient to the service provider represents recovery of tax already paid to the Government and does not constitute 'amount received for services' for the purpose of section 44BB. Conclusions 2.18. Service tax collected and remitted to Government does not form part of gross contractual receipts for computing presumptive income under section 44BB. 2.19. The deletion of service tax from the gross receipts by the first appellate authority was upheld; Revenue's grounds challenging such deletion were dismissed. Issue 3 - Taxability and inclusion of reimbursements in gross receipts under section 44BB Legal framework (as discussed) 2.20. The Tribunal examined whether reimbursements constitute 'income' and whether they are includible in 'amount paid or payable' for section 44BB computation, with reference to the jurisdictional High Court decision (317 ITR 156) and earlier Tribunal orders in the assessee's own cases. 2.21. It also noted the separate judicial line regarding 'equipment lost in hole' receipts (capital receipts, not part of section 44BB turnover), including the Uttarakhand High Court decision in the assessee's case and Supreme Court decision in Sedco Forex (for context and consistency across years). Interpretation and reasoning 2.22. For the year in question, the Assessing Officer had already excluded 'lost in hole' receipts from taxable turnover by following Supreme Court precedent and had, however, included other reimbursements (Rs. 10.84 crore) in the gross receipts under section 44BB. The first appellate authority upheld inclusion of these reimbursements. 2.23. The assessee argued that reimbursements represent mere recovery of actual expenses incurred on behalf of clients, contractually their liability, with no element of profit; hence they do not constitute income and cannot be brought to tax or included in section 44BB gross receipts. 2.24. The Tribunal referred to the jurisdictional High Court decision in the assessee's own case holding that reimbursements, including amounts received for equipment lost in hole, are capital or non-income receipts, not liable to be included in revenue chargeable under section 44BB. The Tribunal also referred to its own prior orders consistently following that view. 2.25. It held that the principle laid down-that reimbursements, where there is no profit element, do not constitute 'income'-applies equally to the reimbursement amount in dispute in this year. Conclusions 2.26. Reimbursements of expenses (where there is no profit element and expenses are incurred on behalf of clients) do not constitute 'income' in the hands of the assessee. 2.27. Such reimbursements cannot be included in 'gross receipts' for computation of presumptive income under section 44BB. 2.28. The finding of the first appellate authority including the reimbursement amount in section 44BB receipts was reversed and the issue decided in favour of the assessee. Issue 4 - Rate of tax on interest on income tax refund under section 244A for a foreign company: section 115A(1)(a)(ii) vs normal/maximal rate Legal framework (as discussed) 2.29. The Tribunal examined section 115A(1)(a)(ii), which provides a concessional rate on certain interest income received by a non-resident/foreign company from Government or an Indian concern on moneys borrowed or debt incurred by them in foreign currency. 2.30. The meaning of 'debt owed by Revenue' and the nature of income tax refund and interest thereon were analysed with reference to the Supreme Court decision in Union of India v. Tata Chemicals Ltd and the Madras High Court decision in Ansaldo Energia SPA v. CIT. 2.31. The Tribunal also considered CBDT Circular No. 473 dated 29.10.1986 explaining the application of section 115A(1) to interest on certain investments made by foreign companies in foreign currency; and the jurisdictional High Court judgment in B.J. Services Co. Middle East Ltd. approving the Tribunal's decision that interest on refund under section 244A is taxable at normal rates. Interpretation and reasoning 2.32. The assessee, which had originally offered interest on income tax refund to tax at the maximum marginal rate, claimed before the Assessing Officer and in appeal that such interest qualifies for concessional rate under section 115A(1)(a)(ii) on the basis that: (i) refund/interest constitutes a 'debt' owed by Government, and (ii) the debt is in foreign currency because underlying contract receipts were in US dollars and tax was withheld from those foreign currency remittances. 2.33. The Assessing Officer rejected the claim on two grounds: (i) income tax refund is neither a debt nor incurred in foreign currency, and (ii) the claim was not made in the return of income, referring to the Goetze (India) Ltd ruling. The first appellate authority held that the fresh claim could be considered in appeal but, on merits, agreed with the Assessing Officer that section 115A(1)(a)(ii) conditions were not satisfied. 2.34. The Tribunal first accepted, following Tata Chemicals and Ansaldo Energia SPA, that a refund due under the Act together with interest thereon constitutes a 'debt owed' by the Revenue to the assessee. Thus the first condition-existence of a debt-was held to be satisfied. 2.35. However, on the second condition-that the money was borrowed or debt incurred 'in foreign currency'-the Tribunal distinguished between: (i) the foreign currency remittance relationship between the assessee and its customers, and (ii) the tax relationship between the assessee and the Income Tax Department. It held that the Department has not borrowed or incurred any debt in foreign currency; the fact that tax was withheld from contract payments made in US dollars does not render the Department's debt (i.e., the refund) a foreign currency debt. 2.36. CBDT Circular No. 473 was noted only to emphasise that, in the context of section 115A, the key test is whether the borrowing/debt of Government or Indian concern is in foreign currency, which was absent in the instant case. 2.37. The Tribunal also considered that the Special Bench decision in Clough Engineering Ltd related to treaty interpretation (effective connection of interest on refund with a PE) and had no direct bearing where the assessee is taxed purely under domestic law and not under a DTAA. Conversely, the jurisdictional High Court in B.J. Services Co. Middle East Ltd had expressly upheld taxation of interest on refund under section 244A at normal business rates for a non-resident. Conclusions 2.38. Interest on income tax refund under section 244A is a debt owed by the Revenue, but such debt is not incurred by the Government in foreign currency within the meaning of section 115A(1)(a)(ii). 2.39. The concessional rate under section 115A(1)(a)(ii) is not applicable to interest on income tax refund received by the assessee. 2.40. Such interest is taxable at the normal/maximal rate applicable to the foreign company, as upheld by the jurisdictional High Court; the assessee's ground seeking application of section 115A(1)(a)(ii) was dismissed. 2.41. The Tribunal also admitted an additional ground for an earlier year raising the same issue and, following its reasoning for the lead year, decided that additional ground against the assessee. Issue 5 - Maintainability of Revenue's grounds not arising from the first appellate order Interpretation and reasoning 2.42. Certain grounds (Grounds 8 and 9 for the relevant assessment year) were raised by the Revenue on issues which had already been decided in favour of the assessee by the Assessing Officer and were, therefore, never the subject of dispute before the first appellate authority. 2.43. The Tribunal observed that where no grievance has been adjudicated upon by the first appellate authority, no cause of action arises for the Revenue to agitate that point in further appeal before the Tribunal. Conclusions 2.44. Revenue's grounds which did not emanate from, or arise out of, the order of the first appellate authority were held to be not maintainable and were dismissed in limine. Overall disposition (as relevant to issues) 2.45. For both assessment years in appeal, all disputed service receipts were directed to be taxed under section 44BB; inclusion of service tax and reimbursements in gross receipts was rejected; and interest on income tax refund remained taxable at the normal/maximal rate, not under section 115A(1)(a)(ii). Appeals of the assessee were partly allowed; appeals of the Revenue were dismissed.