TaxTMI 
TaxTMI 
TaxTMI 
2008 (6) TMI 238
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....on facts in holding that the revenues in respect of contract No. 2001/GENL/E-1-GG-L-033-MAC with ONGC Ltd. are for the services in connection with the exploration and extraction of mineral oils and hence are taxable under section 44BB whereas the receipts are taxable as fees for technical services, which the assessee NRC itself offered in its original return of income and also in view of Article 13 of DTAA between India & Australia, the same were taxable as fees for technical services." 2. The assessee is a non-resident company incorporated in Australia. It entered into a contract with Reliance Industries Limited (hereinafter referred to as RIL) under contract No. 2001-GENL-El-GG-L-033-MAC. Under this contract, the assessee was to undertake the 2D and 3D seismic data processing based on the data collected by the RIL. The volume of data to be processed for 2D was 7,000 LKM and the volume of data to be processed for 3D was 3,050 sq. km. According to the contract, a copy of which is placed at pages 18 to 27 of the paperbook, the entire processing was to be carried out by the assessee at their processing centre located in the city of Perth, Australia. We shall examine the terms of the....
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....eing utilised by RIL in India, the provisions of section 44BB of the Act were attracted and revenues were taxable accordingly as business profits. He also noted that the assessee had rightly offered the revenues to tax under section 44BB in the return. In this view of the matter, he brought the revenues under the contract to tax by determining 10 per cent thereof as the profits of the assessee's business. 4. The assessee appealed to the CIT (Appeals) and took up the contention that the construction placed by the Assessing Officer on section 44BB, holding the same to override the charging provisions of sections 5 & 9 of the Act, was erroneous and was contrary to the judgment of the Supreme Court in the case of Carborandum Co. In the written submissions filed before the CIT (Appeals), reliance was placed on the judgment of the Hon'ble Allahabad High Court in the case of Pt. Sheo Nath Prasad Sharma v. CIT [1967] 66 ITR 647 in which it was held that the mere circumstance that the assessee has shown a receipt as income in his return does not make him liable to tax thereon and that whether the receipt can be taxable as income is a matter which requires consideration and examination of t....
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....Also, the fact that the appellant himself offered the revenues to tax in terms of section 44BB is of no help to the Assessing Officer as there is no estoppel in the Income-tax Act. On a through consideration of the matter, I hold that for contract No. 2001-GENL-E1-GG-L-033-MAC the appellant did not have a Permanent Establishment in India. Correspondingly, revenue from this contract are not be taxable in India and will be taxable only in Australia. The appellant gets relief to this extent." 6. The revenue is in appeal. Mr. Devender Shanker, the learned CIT(DR) put forth the following contentions in support of the appeal of the department. He submitted that the receipt fell to be taxed as "fees for technical services" within the meaning of the term under Explanation 2 to section 9(1)(vii)(b) of the Income-tax Act which embodied the "source rule" introduced from 1-4-1976 and that the amount received by the assessee did not fall within the excluded area, viz., "consideration for any construction, assembly, mining or like project undertaken by the recipient" carved out by the aforesaid Explanation. He drew our attention to the contract and pointed out that the assessee, in addition to ....
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....der of the Delhi Bench of the Tribunal in ITA No. 2145/Delhi/2004 (copy filed). Controverting the contention of the learned CIT(DR) that Article XII(3) of the treaty was applicable and the receipt was taxable under the treaty as "royalty", he pointed out that clause (g) of Article XII(3) required that the services rendered by the assessee should "make available" to RIL technical knowledge, skill, process or know-how or consist of the development and transfer of a technical plan or a design. He relied on the interpretation placed on the words "make available" appearing in Article 12(4)(b) of the Indo-US double tax treaty dated 20-12-1990 which came into force from 1-4-1991 by the Bombay Bench of the Tribunal in Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791, 826, 835 and submitted that the processed data handed over by the assessee-company in the present case to RIL is not of any use to RIL once the work undertaken by RIL gets over and it does not make available to RIL any technical knowledge, skill, know-how, etc., or a technical plan or design which it can use in future without reference to the assessee-company, for its own benefit in other projects undertaken by it. Mr. Vohra further ....
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....ervices rendered by the non-resident company in future for its own benefit and without reference to the non-resident company. It was pointed out that in the case on hand, RIL was enabled to make use of the processed data in future for any of its projects without reference to the assessee-company. 9. We have carefully considered the rival contentions. It needs hardly to be stated that the basic principle to be applied in such cases is that one has to first look at the domestic law to find out if the non-resident assessee is taxable thereunder. If it is taxable, only then one needs to look into the treaty, if any, between India and the country in which the non-resident is incorporated to find out if there is any beneficial provision in the treaty to exempt the assessee from taxation or reduce the rigours of the domestic law. If there is such a provision in the treaty, the assessee is entitled to claim that it should be given the benefit of the treaty provisions. On the other hand, if the assessee is not taxable under the domestic law itself, there is no need to look into the provisions of the treaty for avoidance of double taxation, even if one exists. One cannot, in such a situatio....
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....ove that the entire job of processing the data collected by RIL was to be carried out by the assessee in its Perth office. The necessary manpower, software and hardware were to be deployed by the assessee towards the timely execution and delivery of data. But this is also to be done in the Perth office. Along with the processed data the assessee was required to supply the licence for operating the software to RIL at Mumbai; but this was at no additional cost to RIL. From these terms of the letter of award, it seems to us that there can be no dispute that no part of the processing work which was entrusted to the assessee was carried out in India. The entire income thus accrued to the assessee outside India, if one were to apply the principles laid down by the Supreme Court in Carborandum Co.'s case. The Assessing Officer does not dispute the factual position that no part of the processing work was carried out in India, but says that since the processed data is utilised in India, the income accrues in India. There is no statutory basis for this conclusion. Under section 5(2)(b) of the Income-tax Act, the total income of a non-resident includes all income from whatever source derived ....
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....would be far-fetched to describe the assessee has having undertaken a project for mining merely because it has undertaken to process the data collected by RIL which is actually engaged in the mining project, namely, the prospecting for oil. The reliance placed by the learned counsel for the assessee on the order of the Tribunal dated 23-2-2007 in ITA No. 2145 (Delhi) of 2004 in the case of ONGC as representative assessee of Alberta Research Company, Canada v. Dy. CIT does not appear to have examined this position specifically. Therefore, it does not support the contention of the learned counsel for the assessee. It is also to be noted that it is not necessary for the application of section 9(1)(vii) that the recipient of the fees for technical services should have any business connection in India. All that is required is that the source of the payment should be in India, from a resident of India. In this view of the matter, we agree with the learned CIT (DR) that the amount received by the assessee-company from RIL under the letter of award (the contract) is taxable under section 9(1)(vii)(b) read with Explanation 2 of the Income-tax Act, 1961. 12. We now turn to the question whet....
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....nection with the prospecting or extraction of mineral oil in India will fall within section 44BB. The services rendered by the assessee-company - the processing of data collected by RIL - under the terms of the contract thus fall within section 44BB. There is no dispute that those services are in connection with the prospecting for or the extraction of mineral oil in India. 14. Since section 44BB falls within the heading "D.-Profits and gains of business or profession" in Chapter IV of the Income-tax Act, the profits of the assessee-company derived from the rendering of the services are taxable under the head "Business" and in fact the last part of sub-section (1) expressly says so. If the profits are so taxable, then it is open to the assessee-company to rely on Article VII(1) of the double tax treaty with Australia to contend that since it has no PE in India such profits are not taxable in India as "business profits". The basic principle that the treaty overrides the provisions of the Act is attracted and the contention deserves to be accepted. The result is that the profits cannot be assessed in India as "business profits" as rightly pointed out by the assessee in the course of....
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....other services. The consideration for such services is included in the definition of royalties. We have to therefore examine whether there is any such rendering of services by the assessee which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design. We have already seen that under the letter of award, the assessee was required to process the seismic data collected by RIL of an estimated volume of 7,000 1km for 2D and 3,050 sq. km. of 3D. The assessee was also to provide committed equipment and personnel for the above processing but at their Perth office. It shall also carry out the processing job at its single processing centre at Perth. The assessee shall deploy all the needed resources like manpower, software and hardware during the entire period of the contract to ensure timely completion and delivery of the processed data and these resources cannot be diverted to any other job without the written approval of RIL. The assessee shall also provide RIL with the licence for the software for a period of four months in the case of "Focus 2D/3D" and for a period of two months for "VoxGeo". A....
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....ntinues to manufacture cement, suitings, etc., as in the past." The contention of the learned CIT (DR) however was that the technical and consultancy services "make available" to RIL technology as has been explained in the memorandum of understanding entered into between India and US regarding the double tax treaty. After giving careful consi-deration to the rival submissions on this aspect, we are inclined to hold that the services rendered by the assessee-company are limited to the project undertaken by RIL and do not "make available" to RIL any technical knowledge, experience, etc., nor do they consist of the development and transfer of technical plan or design. Under the contract, it is RIL which collects the data in the area in which it proposes to prospect for mineral oil. The data is thus area-specific. The data so collected by RIL is recorded in the tapes and it is the duty of the assessee to collect the tapes from RIL in Mumbai, carry out the processing of the data at their Perth office and after completion of the processing the original tapes along with the processed tapes shall be returned by the assessee to RIL, Mumbai. Once the processed tapes are received by the RIL,....
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....tic law. 16. We may now refer to the contention of the learned CIT (DR) that if Article XII(3)(g) of the treaty is not applicable than we have to go back to the domestic law, namely, the Income-tax Act and tax the receipt as fees for technical services within the meaning of section 9(1)(vii)(b) read with Explanation 2 thereunder. The argument of the learned counsel for the assessee however is that if the aforesaid article of the treaty is not applicable, we have to go back to Article VII of the treaty and not to the Income-tax Act. On a careful consideration of the debate, we are inclined to take the view canvassed on behalf of the assessee since that seems to be more logical. What Article VII(7) seems to convey is that where the business profits of the non-resident include items of income for which specific or separate provisions have been made in other articles of the treaty, then those provisions would apply to those items. Per contra, if it is found that those provisions are not applicable to those items of income, then the logical result would be that those items of income will remain in Article VII and will not go out of the same. Such items of income which do not fall under....
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....delivery and documentation as are necessary to ensure the supply of services as detailed in Annexure 1. Annexure 1, which is at pages 43 to 45 of the paperbook, is titled "Special conditions of contract". Clause 1 deals with "Scope of services". It is as under :- "Scope of work.-Contractor shall carry out the work specified below in accordance with RIL's specifications, test procedures, parameters, evaluation criteria and the highest applicable professional standards. The work includes but is not limited to accomplishing the following : Training on Geolog software with inclusion of- (a) Introduction to Geolog (Basic use); (b) Geolog System administration; (c) Section (Cross section construction); (d) Determine (Basic Petrophysical analysis). Deliverables - Training manuals in 10 copies" Clause 2 which speaks of compensation and payment includes a term that the assessee shall be paid at the rate of US$ 1,750 per day per person commencing from the day after the assessee's personnel arrived at the job site until the last working day prior to their departure from the job site. Under clause 3, the assessee was to perform the services at the office of RIL located in I....
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....ed 22-10-1990 issued by the CBDT, based on the opinion of the Attorney General that prospecting for or extraction or production of mineral oil can be termed as "mining" operations for the purpose of Explanation 2 below section 9(1)(vii)(b) of the Income-tax Act. It was contended that the words "mining project" appearing in that provision would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas in terms of the aforesaid Instruction. It was, therefore, contended that the receipt cannot be taxed as "fees for technical services" within section 9(1)(vii)(b), but was chargeable under section 44BB of the Act. It was also submitted to the Assessing Officer that section 44D read with section 115A was inapplicable. 20. The Assessing Officer rejected the aforesaid contentions of the assessee and assessed the receipt under Article XIII of the double tax treaty between India and Australia. 21. On appeal, the assessee explained the functions of the software "Geolog" by producing the brochure, and relying on the instruction issued by the CBDT contended that the revenues under the contract were taxabl....
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.... 24. In reply, the learned CIT (DR) pointed out that Instruction No. 1862 was not issued under section 44BB but was issued to clarify Explanation 2 below section 9(1)(vii)(b) and in any case the opinion of the Attorney General was applicable only where the recipient of the consideration renders services and also carries out drilling operations and it was not applicable where the assessee was only imparting training on the use of software as in the present case. In the course of the arguments, the learned CIT (DR) also contended that section 44BB will apply only if the assessee had a PE in India and since this condition was not satisfied in the present case the section was not applicable. 25. We have carefully considered the rival contentions. It is seen from the terms of the contract and the scope of work that the assessee has to impart training to the employees of RIL for operating the Geolog software including the basic use, system administration, cross-section construction and basic petro-physical analysis. The personnel of the assessee will impart the training to the personnel of RIL at the job sites designated by RIL. They shall provide technical guidance and direction to RIL....
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....he order of the Delhi Bench of the Tribunal in Hotel Scopevista Ltd.'s case has to be noticed. The difference between the two sections has been noticed in this order in paragraph 4.5 which is reproduced below :- "4.5 The Ld. AR for the assessee has referred to certain decisions of the Tribunal as mentioned in para 3.1 of this order earlier which relate to provisions of section 44BB but we find that the provisions contained in section 44BB which relate to computation of profit and gain in connection with business of exploration, etc., of mineral oil have been differently worded. As per these provisions, services and facilities provided in connection with prospecting for or extraction or production of mineral oils are covered for separate computation of income under section 44BB. It was because of the words used "services or facilities provided in connection with" that in the decisions of the Tribunal cited, various services provided in connection with exploration of mineral oil such as comprehensive geological and geophysical studies, supply of supervisory staff and personnel having expertise in operation and management of drilling rigs, imparting training, etc., were held to be c....
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....of the Income-tax Act, 1961 and not under the special provision for the taxation of fees for technical services contained in section 115A, read with section 44D of the Income-tax Act, 1961". In view of the clear instruction of the Board that consideration for services rendered by a non-resident in connection with the prospecting for mineral oil in India will be taxed under section 44BB, the assessee is right in offering the revenues under the contract for tax under this section. The applicability of this section does not depend upon the existence of any PE of the non-resident in India. Therefore, even though the assessee has no PE in India, the receipt under this contract is assessable under section 44BB. 26. We now proceed to examine the contention of the learned CIT (DR) based on the proviso to section 44BB. It says that the section shall not apply if the provisions of section 44D are applicable. Section 44D makes special provisions for computing the income by way of royalties, etc., in the case of foreign companies. It has overriding effect and is applicable notwithstanding anything to the contrary contained in sections 28 to 44C. It thus overrides even section 44BB. Though the....