2005 (1) TMI 326 - AT - Income Tax

Tribunal Confirms Section 44BB Inapplicability on GAIL's Gas Transport Contract; Profit Estimate Reduced to 20.

The Tribunal upheld the CIT(A)'s decision, confirming that section 44BB of the Income-tax Act, 1961, did not apply to the foreign company's contract with ... Scope of the provisions of section 44BB - Production of natural gas within the ambit of section 44BB? - Production of Mineral Oil - contractual receipts - non-resident company - The activities of prospecting for, or extraction or production, of mineral oil including petroleum or natural gas? - HELD THAT:- It is clear from record that LPG does not contain Methane while natural gas is formed mainly of methane around 80%. LPG is mixture mainly of propane and butane which is extracted from either petroleum or natural gas. So, LPG and natural gas are entirely different commercial items. LPG is a by product of natural gas. Therefore, GAIL can be said to be a manufacturer of LPG and consequently, cannot be said to be manufacturer/producer of natural gas. What is produced by GAIL is not the natural gas but a different item, i.e., LPG. Hence, facility/service provided by the assessee to GAIL cannot be said in connection with prospecting for, extraction or production of mineral oil as contemplated u/s 44BB. Thus, it is clear that when natural gas is compressed to a particular pressure for storing, it is considered as CNG. Admittedly, GAIL does not have any gas well. It simply purchases natural gas which, perhaps, can be said to be compressed by it. Considering the meaning of the words 'production' and 'CNG' as well as the facts of present case, we are of the opinion that natural gas purchased by GAIL continue to be natural gas as a result of process carried on by it, though, in a compressed form (CNG) and resultantly no new item emerges as a result of such process. Consequently, GAIL cannot be said to be engaged in the production of natural gas. This view is supported by the judgment of Hon'ble Supreme Court in the case of Union of India v. Delhi Cloth & General Mills Co. Ltd.[1962 (10) TMI 1 - SUPREME COURT]. In our humble opinion, post mining operations carried on by GAIL would not fall within the definition of the word 'production' used by the Legislature u/s 44BB. We have already held that process of extraction of Propone, Butane, etc., from the natural gas and producing of LPG by mixing these two items in a particular ratio at a particular pressure had resulted in the production of different item, i.e., LPG which is entirely different from natural gas. We have also held that CNG continues to be essentially the same item, i.e., natural gas, even after the process of compression. In view of these findings, it cannot be said that post mining operations, i.e., process to manufacture LPG, Propane of Butane, etc., or process of compress natural gas would fall within the plain meaning of the word 'production' in section 44BB. In our view, the words 'extraction or production' have been used as interchangeable words and are restricted of mining operations since natural gas cannot be produced by any process except the mining process. Therefore, it is held that even as per plain and natural meaning, the word 'production' used by the Legislature in section 44BB would include only production by mining process and would not include production of LPG, Propane, Butane, etc., as well as CNG by post mining process. Thus, we reject both the contentions raised by the ld. Sr. Counsel for assessee. Having held so, the other submissions, if any, does not require any comment. Hence, the findings of CIT(A) are, therefore, upheld. In the result, order of CIT(A) is upheld and consequently, the appeal of assessee is dismissed. Issues Involved:1. Applicability of provisions of section 44BB of the Income-tax Act, 1961.2. Invocation of provisions of section 144 and estimation of net profit.Summary:1. Applicability of provisions of section 44BB of the Income-tax Act, 1961:The primary issue in this appeal was whether the provisions of section 44BB of the Income-tax Act, 1961, applied to the assessee, a foreign company contracted by GAIL for laying pipelines. The assessee claimed that the pipelines were for transporting natural gas, which falls under 'mineral oil' as per section 44BB. The Assessing Officer (AO) disagreed, stating that GAIL was not engaged in the business of 'prospecting for, or extraction or production of, mineral oils' but primarily in the transportation of natural gas. The AO invoked the rule of noscitur a sociis to interpret the word 'production' in a restricted sense, aligning it with 'prospecting' and 'extraction'. The CIT(A) upheld the AO's view, noting that GAIL's activities did not involve the production of mineral oils but merely the transportation of natural gas.The Tribunal examined the definitions of 'natural gas' and 'LPG' and concluded that LPG, produced by GAIL, is distinct from natural gas and does not qualify as 'natural gas'. Consequently, the Tribunal held that GAIL was not engaged in the production of natural gas, and the services provided by the assessee did not fall within the ambit of section 44BB. The Tribunal also rejected the assessee's contention that the word 'production' should be interpreted in its widest sense, affirming that the term should be contextually understood in connection with 'mineral oils'.2. Invocation of provisions of section 144 and estimation of net profit:The AO invoked section 144 due to the non-production of proper books of account by the assessee and estimated the net profit at 30% of the gross receipts. The CIT(A) reduced this estimate to 20%. The Tribunal upheld the CIT(A)'s decision, noting that the grounds related to the applicability of section 144 and the estimation of net profit were not pressed by the assessee during the appeal.Conclusion:The Tribunal upheld the CIT(A)'s order, confirming that the provisions of section 44BB were not applicable to the assessee's case and dismissing the appeal.