Treaty business profits and pure reimbursement controlled taxability of expatriate personnel receipts under an approved contract.

Receipts for supplying expatriate technical personnel under an approved production sharing contract were treated as reimbursement on a pure cost basis, with no profit element. The Court stated that, in such circumstances, the treaty framework under article 7 of the Indo-US DTAA prevails over section 44BB where it is more beneficial, and business profits of a US enterprise are taxable in India only to the extent attributable to a permanent establishment. It also noted that reimbursement of actual expenses is not taxable income for that purpose. Separate earlier-year treatment did not create res judicata or estoppel in income-tax proceedings, so the assessee could contest taxability.

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Issues: (i) Whether receipts of the non-resident assessees for providing expatriate technical personnel to an affiliate of the operator under the production sharing contract were taxable in India under section 44BB of the Income-tax Act, 1961 or were to be governed by the Indo-US Double Taxation Avoidance Agreement. (ii) Whether the assessee was bound by its treatment of similar receipts in earlier years by reason of res judicata or estoppel.

Issue (i): Whether receipts of the non-resident assessees for providing expatriate technical personnel to an affiliate of the operator under the production sharing contract were taxable in India under section 44BB of the Income-tax Act, 1961 or were to be governed by the Indo-US Double Taxation Avoidance Agreement.

Analysis: The assessees were affiliates of the operator and, under the production sharing contract, services rendered for the direct benefit of petroleum operations had to be charged only on a cost basis without any element of profit. The agreement had been approved under section 42 of the Income-tax Act, 1961, which operates as a special code for the computation of profits in such mineral oil arrangements. The Court further held that section 44BB was invoked only where the foreign enterprise is assessable under the Act, whereas the treaty under section 90(2) applies where it is more beneficial. Under article 7 of the Indo-US treaty, business profits of a US enterprise are taxable in India only to the extent attributable to a permanent establishment, and in determining such profits, reimbursement of actual expenses does not constitute taxable income.

Conclusion: The receipts were not taxable in India under section 44BB, and the assessees were entitled to the benefit of article 7 of the Indo-US Double Taxation Avoidance Agreement.

Issue (ii): Whether the assessee was bound by its treatment of similar receipts in earlier years by reason of res judicata or estoppel.

Analysis: The Court held that res judicata does not apply to income-tax proceedings on legal issues. Mere inclusion of income in earlier returns does not create an estoppel against the assessee, and the revenue cannot be permitted to tax an amount that is not legally taxable merely because the assessee had previously accepted a different treatment.

Conclusion: The assessee was not barred by res judicata or estoppel from contending that the receipts were not taxable.

Final Conclusion: The Revenue's appeals failed and the assessees' appeals succeeded because the receipts were held to be mere reimbursement without profit element and therefore not chargeable to tax in India under the treaty framework.

Ratio Decidendi: Where a non-resident enterprise renders services on a pure cost-to-cost basis under an approved production sharing contract and the receipts contain no profit element, treaty provisions governing business profits prevail over domestic deeming provisions, and prior year treatment does not operate as estoppel in income-tax proceedings.

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