TaxTMI 
TaxTMI 
2003 (12) TMI 280
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....ficer that the amount received was in the nature of reimbursement charges which were not taxable in view of section 5 read with section 9. This contention of the assessee was rejected by the Assessing Officer since in his view section 44BB covered all payments whether in the form of reimbursement or in the nature of other payments. Accordingly, this amount was brought to tax under section 44BB. 3. The matter was carried before the CIT(A) before whom the same contentions were raised on behalf of the assessee. On behalf of the Assessing Officer it was submitted that the issue was covered in favour of the revenue by the decision of the Tribunal Delhi Bench in ITA No. 3413/Delhi/88 dated20-6-1990wherein it was held that mobilisation and demobilisation charges were taxable under section 44BB. Following the said decision of the Tribunal, the CIT(A) confirmed the order of the Assessing Officer on this aspect. Aggrieved by the same, the assessees in appeal before the Tribunal. 4. The learned counsel for the assessee. Mr. Vohra has vehemently assailed the order of CIT(A) by contending that the mobilisation charges cannot be brought within the net of taxation in view of section 5(2) in as ....
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....hat only the mobilisation charges in respect of transportation of the rig in the course of Indian water were taxable under section 44BB. According to the Bench, the entire receipts could not be brought in the net of taxation. The relevant observations of the Bench are being reproduced for the benefit of this order: "On a close reading of sections 44BB, 4 and 5(2), it is evident that what is taxable in India in the case of a non-resident is the income which is accrued or has arisen whether actually or is deemed under the statute or which is received in India. This concept is, in fact, adopted for arriving at the total earning of a non-resident by sub-section (2) of section 44BB, which, as aforesaid, takes in its ambit only those receipts which are paid or payable either in India or elsewhere for services rendered in India and in case the services are rendered outside India, the receipt by the non-resident in India. The terms "paid" or "payable" are used with reference to payer's point of view, but if these are translated into the recipients point of view they are to be read as received or receivable for the services rendered in India. In other words, it is the hire charges whi....
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....principles of apportionment of income, profits or gains depending whether the income, profits or gains could be said to arise or accrue. Therefore, in these circumstances, in our opinion, even though the entire receipts by the assessee may be subject to the determination of 10 per cent profit under section 44BB of the Act, the taxable portion thereof would have to be the amount that relates to the proportionate operations carried out in India and that; as aforesaid, would be relating to the voyage of 140 nautical miles out of the 11990 nautical miles for which the hire charges were received by the assessee. In these circumstances, in our opinion, the CIT(A) was justified in directing that only the proportionate income i.e. 185/11990 would be taxable in India. The order of the CIT(A), therefore; does not call for any interference and is accordingly upheld." 7. In view of the above discussion, we hold that mobilisation charges in respect of the transportation of rig outside the territorial water of India are not taxable. The order of the CIT(A) is, therefore, set aside and the Assessing Officer is directed to include in the total income only that portion of the profit which is relat....
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....ncluded in the total income of the non-resident, He stated that the case of the assessee could, at the most, be considered to be falling under clause (b) of sub-section (2). The attention of the Bench was drawn towards section 9(1) which deals with the incomes which are deemed to accrue or arise in India. It was urged that Explanation (a) to section 9(1)(i) provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Placing reliance on this Explanation, the ld. counsel for the assessee urged that only that part of the profit which is relatable to the receipts attributable to the transportation of rig in the territorial water of India could be included in the total income, while computing the income under section 44BB. For this proposition, the ld. counsel placed reliance on the order of the Mumbai Bench 'E' in the case of Jindal Drilling Leasing, a copy of which was placed at pages 18 to 24 of the paper book. The ld. counsel contended that the order of....
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.... applicable to section 44BB or not. For that it is necessary to consider the provisions of section 5(2) which are as under:-- "(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year." 6. There is no dispute about the fact that ordinarily the income of a non-resident is to be computed according to the mandate of section 5 which provides that the income which is received or is deemed to be received in India and also the income which accrues or arises or is deemed to accrue or arise in India is liable to be included in the total income of the nonresident. But the question arises that would section 5(2) hold the field even if any special/deeming provision has been enacted such as section 44BB in the Act? The answer to this question can be found from the language of section 5(2) itself which starts with the expression "subject to the provisions of this Act". It ergo shows that sec....
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.... provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. (2) The amounts referred to in sub-section (1) shall be the following, namely:-- (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used in the prospecting for, or extraction or production of, mineral oils in India; and (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provisions of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. Explanation.--For the purpose of this section:-- (i) 'plant' includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business; (ii) 'mineral oil' includes petroleum and natural gas." 9. On dissection of this s....
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....xploratory drilling in India only. It, therefore, boils down that section 44BB contains special provisions by virtue of which 10% of the qualifying amounts are deemed to be profits of the business which are chargeable to tax. Deeming provisions create a fiction by assuming a particular state of affairs. The law is trite and no authority is needed to be cited for the proposition that the deeming provisions override the general provisions. Seen in this light, it is difficult to digest the contention of the ld. counsel for the assessee that even though the entire receipts by the assessee may be subject to the determination of 10% profits under section 44BB but the taxable portion would be only that amount which relates to the distance covered in India, for the simple reason that section 44BB contemplates that 10% of the aggregate receipts would be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". 11. As section 44BB is a special provision, I am of the considered opinion that it is not controlled by the provisions of section 5(2) which section itself is "subject to the provisions of this Act" and hence s....
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.... had undertaken to clear from the port/ airport authorities customs of equipment and spares etc. imported into India for ONGC's work and that cost incurred by the non-resident company for transportation of equipment in India from point of origin to ONGC's location and back to point of origin would be reimbursed by ONGC." From the above extracted finding of the Tribunal's order it is clear that the entire mobilisation charges from the point of origin outside India to the ONGC's location in India were held to be includible in the receipts for applying the profit rate as per the prescription of section 44BB. The facts of the instant case are on all fours with the order passed by the Delhi Bench, relied upon by the CIT(A), and I am unable to find out even a single distinguishing feature. Hence it is manifest that the submission of the ld. counsel that the afore cited order of the Tribunal is not applicable is sans merits and deserves the fate of rejection. 13. There are number of orders of the Delhi Benches available on this issue. The recent order in this sequence is that of "B" Bench of Delhi Tribunal in the case of Sedco Forex International Drilling Inc. v. Dy. CI....
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....ination of taxable income of the nonresident taxpayers engaged in such business. The presumptive income of 10% on the aggregate payments made under such agreements cannot be said to be beyond the scope of charging sections 4 and 5, The various judgments relied upon by the ld. counsel for the assessee does not in any manner, support such a contention, where only 10% of the aggregate payments an~ deemed to be income chargeable to tax under the head "Profits & gains of business" by virtue of such special provisions of section 44BB of the Act. We are also unable to accept the assessee's contention that only a reasonable portion of 10% income determined under section 44BB in relation to mobilisation fee should be taxed, as income attributable to services rendered in India in the process of mobilisation of drilling unit is very small. Reliance placed by the ld, counsel on the circular issued by the Board does not in any manner support his contention, The said circular does not relate to section 44BB but it relates to determination of taxable income of a foreign contractor engaged in the execution of turnkey project involving part of the work to be carried out in India as well as outs....
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....ection 5(2) of the Income-tax Act, 1961?" 2. The facts pertaining to the point at issue are well set out in the order passed by the ld. Judicial Member and in respect of which the ld. Accountant Member has not expressed any dissent but for purposes of making the present order a self-contained one, I summarize these as under. 3. The assessee in this case is a non-resident company having its Registered Office at Milano Corso Venezia. It carried on the business pertaining to the exploration of mineral oils etc. In the year 1984, the company entered into an agreement with ONGC for offering One Land Drilling Rig on charter basis for exploratory drilling in the Krishna-Godavari Basinarea. Under the agreement between the parties, the assessee was to receive a fixed sum of, US $ 9,50,000 towards mobilization and transportation of the drilling rig from Sharjah, UAE to the Vishakapatnam port. Before the Assessing Officer, the assessee claimed that the amount received was in the nature of reimbursement charges and not taxable in view of the provisions of section 5 read with section 9. This contention of the assessee was rejected by the Assessing Officer as in his opinion section 44AB covere....
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....irected the Assessing Officer to include the same under section 44BB. On the matter being carried before the Tribunal, it was held that such payments arose out of the contract and, therefore, directly connected with the assessee's business. The further view expressed by the Tribunal was that there was an element of profit since a fixed amount had been received by the assessee irrespective of the expenditure incurred. The Bench on the aforesaid facts took the view that the mobilization charges were taxable in the hands of the assessee under section 44BB read with section 28(iv). It was categorically observed by the ld. Judicial Member that the issue with which the present Bench was concerned was neither raised before the Delhi Bench in the decision cited and nor considered by them. He accordingly took the view that the ratio of this decision could not be applied to the present case. 7. The Ld. Judicial Member at this stage referred to the decision of the Mumbai Bench of the Tribunal relied upon by the assessee's counsel viz., the case of Jindal Drilling Leasing and which according to him squarely covered the point at issue. In referring to the facts of the Mumbai Bench deci....
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.... (2). 10. Thereafter the ld. Accountant Member referred to the provisions of section 9(1) and which were referred to by the assessee's counselor the proposition that Explanation (a) to section 9(1)(z) provided that in the case of a business of which all the operations are not carried out in India but the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Placing reliance on the said explanation, the ld. counsel for the assessee urged that only that part of the profit which was relatable to the receipts attributable to the transportation of the rig in the territorial waters of India could be included in the total income while computing the income under section 44BB. The plea of the assessee in other words as noted by the Ld. Accountant Member was that section 44AB was controlled by section 5(2) read with section 9 and even though the entire receipts were subject to the determination of 10% profit under section 44BB, the taxable amount was only that portion thereof which related to the proportionate operations carried out in India. The stand of the....
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....r out ofIndia. In conclusion, the ld. Accountant Member took the view that section 44BB contained special provisions and according to him deeming provisions over-rode the general provisions. IJ was reiterated by the ld. Accountant Member that the provisions of section 44BB were not controlled by the provisions of section 5(2), and the further view expressed by the Ld. Accountant Member was that when section 5 itself was held to be inapplicable then there could be no question of considering the applicability of section 9 separately. 13. In coming to the decision of the Delhi Bench of the Tribunal in the case of Nippon Kokan K.K. which was relied upon by the Revenue, the Ld. Accountant Member at pages. 16 and 17 of his separate order took the view that there were no distinguishing features vis-a-vis the facts of the assessee's case and the said order of the Tribunal was squarely applicable. The Ld. Accountant Member also referred to another unreported decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. where according to the Ld. Accountant Member the question of mobilization charges was considered and adjudicated upon in favour of t....
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....e case of CIT v. Ajax Products Ltd. 55 ITR 741 held that the subject is not to be taxed unless the charging provisions clearly impose an obligation. The provisions of section 5 of the Act start with the expression 'Subject to other provisions of the Act'. The legislative intent behind making the provisions of section 5 subject to other provisions of the Act is that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in section 5 of the Act, such section may prevail. For example, although an income may fall within the four corners of the charging sections, namely, sections 4 & 5, the provisions of section 10 of the Act may, however, operate to exclude all or any part of such income from the total income. Thus, the benefit conferred by way of deduction/allowance/exemption under any of the provisions shall operate to confer such benefit to the assessee although such income falls within the scope of total income as defined in section 5 of the Act. The aforesaid view finds support from the commentary of the learned authors Kanga & Palkhiwala in their book La....
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....of section 44BB(2) deals with incomes/amounts accruing in India (whether received in or out of India). Thus, making a departure from general mode of computation of income chargeable under the head 'Profit and gains of business or profession', as a matter of convenience, the provisions of section 44BB of the Act provides that tax shall be levied on a presumptive rate of 10% on the aggregate of the following amounts: (a) Amounts accruing in India (whether received in or out of India) on account of rendering of services/utilization of facilities in India; (b) Amounts received or deemed to be received in India on account of rendering of services/utilization of facilities outside India. In view of the aforesaid, the provisions of section 44BB are not, in our respectful submission, in conflict with the provisions of section 5 of the Act. To construe the provisions of clause (a) of sub-section (2) of section 44BB of the Act to include entire charges in connection with, or supply of plant and machinery if the ultimate destination of its use is in India, even though such charges/amount falls outside the scope of total income, would, in our respectful submission, be doing i....
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.... conditions, viz., maintenance of books of account, getting the accounts audited, etc. In that case, the presumptive rate of taxation as laid down in sub-section (1) of section 44BB shall not apply and the income of the non-resident assessee shall be computed in accordance with the normal provisions of the Act. A non-resident assessee may, thus, w.e.f. assessment year 2004-05, compute his income from the business of exploration, etc., of mineral oils in accordance with the general mode of computation of income chargeable under the head 'Profits and gains of business or profession'. The amendment made by the Finance Act, 2004 further reinforces the contention of the appellant that the provisions of section 44BB are namely machinery / computation provisions. It would not be out of context to state that the interpretation sought to be canvassed by the Revenue to include mobilisation charges for transportation of rigs outside the territorial waters of India within the ambit of section 44BB(2)(a) of the Act will result in discrimination between an assessee paying taxes on presumptive basis under sub-section (1) and the assessee computing income as per the general mode of com....
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....income can be brought to tax unless it falls within the scope of the charging section. It is trite law that the subject is not to be taxed unless the charging provision clearly imposes the obligations, as held in following: CIT v. Ajax Products Ltd. 55 ITR 741 (SC) CWT v. Ellis Bridge Gymkhana 229 ITR 1 (SC) The Learned Authors of Kanga & Palkhiwala in their book 'Law and Practice of Income-tax' have on page 208 observed as under: 'The definition of total income is "subject to the provisions of this Act". The result is that while income cannot be taxed, generally speaking, unless it falls within section 5, it is not necessarily to be taxed because it falls within the section; any other section may operate to save from taxation income which is within the purview of this section.' Their Lordships of the Bombay High Court in the case of CIT v. F.Y. Khambaty 159 ITR 203, 207 observed as under: 'It appears to us that the expression "subject to" used in the opening portion of both the sub-sections (1) and (2) of section 5 has to be read keeping in mind that section 5 is intended to explain the scope of total income. Therefore, what the use of the said expr....
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....nnection with the business of exploration of mineral oil. Parliament engrafted the aforesaid provision in the Income-tax Act as a measure of simplification providing for determination of income of such taxpayers at ten per cent of the aggregate of certain amount.' CIT v. ONGC 124 Taxman 292 (Raj.) Canara Bank v. Joint CIT 84 ITD 310 (Bang.) The Bombay High Court in the case of CIT v. Standard Motor Co. Ltd. 119 ITR 573, 582-583 held that section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax and the provisions of section 5(2)(b), though by merely looking at the wording of section 145(1), it may appear that in all cases the method of accounting must be followed. It was further held that section 145 is only a machinery provision and cannot qualify the charging section so as to make the latter otiose. The decision of the Bombay High Court in the case of Standard Motor Co. has been affirmed by theApex Courtin the case reported as Standard Triumph Motor Co. Ltd. v. CIT 201 ITR 391. The Special Bench of Hyderabad Tribunal in the case of Dy. CIT v. Nagarjuna Investment Trust Ltd. 65 ITD 17 also held ....
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....decision of the Mumbai Tribunal in the case of Jindal Drilling is directly on the issue and fully applicable to the facts of the case." 17. In the course of the submissions before us over and above the aforesaid written propositions, the ld. counsel contended that the decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. had not been confronted to the assessee. It was further emphasized that die Income-tax Act did not have any extra territorial operation and the same applied only to the income earned in India and not outside. Further, according to the ld. counsel, section 44BB could not be extended to bring to tax the income which had accrued in India since all that it provided was that the computation provisions of sections 28 to 41, 43 and 43A were to be excluded and in proceeding further the ld. counsel contended that section 44BB was not in conflict with section 5(2). It was emphasized that as per clause (a) it was only the income pertaining to the services provided in India, which could be taxed and any other interpretation would be in conflict with section 5, which was the charging section" The further submission was to the effect....
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....tailed to a place up to 200 nautical miles outside India. According to the ld. DR, the contract between the parties got completed in India and not outside and therefore the entire amount would become taxable under section 44BB which was a special provision overriding the general provision. Further, according to the ld. DR the provisions of the statute were to be interpreted in a harmonious manner and it could not involve the segregation of the amount in question, which was a lumpsum payment to the assessee by the ONGC. 21. In conclusion and in support of the order passed by the Ld, Accountant Member, the ld. DR placed reliance on numerous judgments viz. CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SO), Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC), CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP), CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 at 999 (Guj.) (FB), Fertilisers & Chemicals (Travancore) Ltd.'s case, Gosalia Shipping (P.) Ltd.'s case, CIT v. Shahzada Nand &- Sons [1966] 60 ITR 392 at 400 (SC), CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth Trust [1977] 108 ITR 555 (SC), M.L. Vasudeva Murthy & Sons [1992] 198 ITR 426 (Kar.)....
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....bject to the provisions of section 44BB but the position was the other way round. According to the Id. counsel the amount had first of all to be brought within the ambit of section 5(2) and it was only thereafter that provisions of section 44BB came into operation. The question of a PE i.e. Permanent Establishment according to the ld. counsel was not relevant for purposes of deciding the point at issue as was the view expressed by the ld. DR. 25. In coming to the case of Sedco Forex International Drilling Inc. relied upon by the Id. DR, the stand of the ld. counsel was that the question raised in the present appeal was not under consideration in that case as it was either the entire income being taxable in India or outside. Further, according to the ld. counsel. the consistency principle was to apply provided the facts were identical but which in the present case were not. In conclusion, it was urged that Rule 10 of the Income-tax Rules supported the view taken by the ld. Judicial Member to bifurcate the receipts between the distance up to the entry point into India and the journey thereafter up to Vishakapatnam port. The various decisions relied upon by the ld. DR were sought to ....
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....re, set aside the order of the CIT(A) and directed the Assessing Officer to include in the total income only that portion of the profit which was relatable to the receipts attributable to the transportation of the rig in the territorial waters of India while computing the income under section 44BB. The Ld. Judicial Member distinguished the decision of the Delhi Bench of the Tribunal which had been followed by the CIT(A) in deciding against the assessee and vide para 5 of his order, he observed that in that case, the Assessing Officer did not include the receipts towards mobilization charges in the total income of the assessee and the Commissioner in proceedings under section 263 directed the Assessing Officer to include the same under section 44BB. In further elaborating the facts of that case, the ld. Judicial Member took the view that the issue which was concerned in the present appeal was neither raised and nor considered by the Delhi Bench of the Tribunal. 29. As against the aforesaid, ld. Accountant Member has taken the view that provisions of section 44BB are special provisions and these would have to lean in favour of section 5. The further view expressed by the ld. Account....
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....otiose/redundant the provisions of section 5 inasmuch as all assessees engaged in the business of exploration of mineral oils would have their income computed for taxation purposes only with reference to section 44BB and the entire exercise of deciding the question of accrual of income Or the place of accrual would become inoperative. There would be no need to refer to the provisions of section 5 or for that matter section 9. 31. In considering the background leading to the introduction of section 44BB this was never the intention of the Legislature and provisions of sections 5 and 9 were always meant to operate and remain effective on the statute book. I would have no hesitation in observing that the view of the ld. Accountant Member has been substantially guided by the opinion formed by him that provisions of section 44BBare special provisions and these must override those of section 5, He has relied heavily on the decision of the Delhi Bench of the Tribunal in the case of Nippon Kokan K.K. which was followed by the CIT(A) and the further view expressed by the ld. Accountant Member was that judicial propriety required the CIT(A) to follow the view of the Delhi Bench of the Tribu....
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....okan K.K. and on the other side are two decisions of the Mumbai Bench of the Tribunal, the first being the case of Jindal Drilling Leasing and the other being the decision of the same Bench in the case of Sonal Offshore Drilling Inc. The former decision has in fact been followed in the latter decision of the Mumbai Bench of the Tribunal and CBDT instruction No. 1767 dated1-7-1987has also been taken into account at page 2 of the said decision. Those instructions pertain to the percentage of work which pertains to activities performed in India and which would be subject to tax in India. In going by the accepted legal proposition that when there are two views, then the view which is favourable to the assessee should be followed, I am inclined to agree with the two decisions of the Mumbai Bench of the Tribunal but along with my own reasoning. 33. A number of decisions have been cited by both sides in support of their respective view points and I would now like to deal with some of these more so the ones cited on behalf of the assessee and which aptly support the view point canvassed. Their Lordships of the Hon'ble Supreme Court in the case of CIT v. Ajax Products Ltd. [1965] 55 IT....
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...., generally speaking, unless it falls within section 5, it is not necessarily to be taxed because it falls within the section; any other section may operate to save from taxation income which is within the purview of this section." 35. With reference to the aforesaid, I accept the argument of the ld. counsel that section 5 is the charging provision and no income can be brought to tax unless it falls within the scope of the said section and the use of the expression "subject to other provisions of the Act" in section 5 would mean that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in section 5 of the Act such section would prevail. To emphasise, the provisions of section 44BB vis-a-vis the legislative intent only mean that these replace the system of computation of income earlier envisaged by application of the provisions of sections 28 to 41 and sections 43 and 43A of the Act but the provisions of section 5 of the Act, which is the charging section would remain intact and these by no maxim of interpretation would be superseded by the provisions of section 44B....