TaxTMI 
TaxTMI 
2017 (11) TMI 78
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....IVIL APPEAL NO. 5089 OF 2015 CIVIL APPEAL NO. 5090 OF 2015 CIVIL APPEAL NO. 4923 OF 2010 CIVIL APPEAL NO. 8627 OF 2013 CIVIL APPEAL NO. 5155 OF 2011 CIVIL APPEAL NO. 6573 OF 2014 CIVIL APPEAL NO. 4909 OF 2010 CIVIL APPEAL NO. 5935 OF 2010 CIVIL APPEAL NO. 5934 OF 2010 CIVIL APPEAL NO. 6651 OF 2014 CIVIL APPEAL NO. 17390 OF 2017 (ARISING OUT OF SLP(C) NO. 20000 OF 2015) CIVIL APPEAL NO. 17391 OF 2017 (ARISING OUT OF SLP(C) NO. 22343 OF 2012) CIVIL APPEAL NO. 17392 OF 2017 (ARISING OUT OF SLP(C) NO. 22833 OF 2012) CIVIL APPEAL NO. 4914 OF 2010 CIVIL APPEAL NO. 4915 OF 2010 CIVIL APPEAL NO. 8595 OF 2010 CIVIL APPEAL NO. 9188 OF 2013 CIVIL APPEAL NO. 8665 OF 2013 CIVIL APPEAL NO. 10294 OF 2016 CIVIL APPEAL NO. 10295 OF 2016 CIVIL APPEAL NO. 10296 OF 2016 CIVIL APPEAL NO. 4926 OF 2010 CIVIL APPEAL NO. 267 OF 2013 CIVIL APPEAL NO. 268 OF 2013 CIVIL APPEAL NO.17393 OF 2017 (ARISING OUT OF SLP(C) NO. 39683 OF 2013) CIVIL APPEAL NO. 3695 OF 2012 CIVIL APPEAL NO. 435 OF 2017 CIVIL APPEAL NO. 10382 OF 2017 CIVIL APPEAL NO. 10385 OF 2017 CIVIL APPEAL NO. 10383 OF 2017 CIVIL APPEAL NO. 10384 OF 2017 CIVIL APPEAL NO. 10386 OF 2017 CIVIL APPEAL NO. 17394 OF 2017 (ARISING OUT OF SLP(C) NO. 21939 O....
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.... Act is concerned, on which 10% tax is payable, it is worked out on fictional basis by adopting the formula laid down in sub-section (2). Sub-section (2) mentions those amounts aggregate whereof is to be treated as deemed profits and gains of such a business. 4) At this juncture, we reproduce the provisions of Section 44BB of the Act, as reading of this provision is necessary before spelling out the nature of dispute which had arisen in these appeals. This section reads as under: "44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains o....
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....stand excluded. (b) In order to attract the provisions of Section 44BB of the Act, two conditions are to be specified, namely, (i) assessee has to be a non-resident; and (ii) assessee should be engaged in the business of exploration etc. in mineral oils of the nature specifically spelled out in the provision. (c) Choice is given to such an assessee under sub-section (3) of the Act to either claim lower profits and gains than the profits and gains specified in sub-section (2) and covered by normal provisions of computing profits and gains of business or profession, subject to fulfilling the conditions of audit etc. as mentioned therein or to be governed by Section 44BB of the Act. (d) In case the twin conditions mentioned above are satisfied, the assessee can take the benefit of paying the tax as per the provisions of Section 44BB on "deemed profits and gains" of its business and such profits and gains are to be calculated as per the formula provided in sub-section (2) thereof. Pertinently, it is a 'deemed' provision for calculating profits and gains of business or profession, which means that such profits and gains are to be arrived at fictionally, as per....
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....the factual matrix from the said appeals, as it would suffice for answering the question involved. 9) During the years under consideration, the assessees are engaged in executing the contracts all over the world including India in connection with exploration and production of mineral oil. The assessees are companies incorporated outside India and, therefore, non-resident within the meaning of Section 6 of the Act. The assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid agreements provided for the scope of work along with separate consideration for the work undertaken. Since the dispute is about mobilisation charges, clauses in respect thereof are as under: "Operating Rate - Receipts for undertaking drilling operations computed by per day rates provided in the contract. The operating rates shall be payable from the time the drilling unit is jacked-up and ready at the location to spud the first well. Mobilisation - charges for the transport of the drilling unit from a location outside India to a location in India as may be designated by ONGC." In addition to the above, assessees also received amounts from the operator toward....
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....n by the ONGC to the assessees: (i) Mobilisation/demobilisation advance. (ii) Custom duty reimbursement. (iii) Operational charges reimbursement. 13) The High Court has held that these payments be also included as amounts received for computation of aggregate of amounts specified in sub-section (2) as deemed to be the profits and gains of the businesses of the assessees, chargeable to tax under the said provision. 14) Mr. Porus F. Kaka, learned senior advocate appearing in some of these appeals submitted that the aforesaid amounts were, in fact, towards reimbursement of expenses actually incurred by the assessees. According to him, the work undertaken was, in fact, the obligation of the ONGC and it was for ONGC to provide such facilities/material under the contract. Still the assessees performed the said task at the request of the ONGC and ONGC simply reimbursed these expenses which did not have any profit element. It was emphasised by Mr. Kaka that insofar as the assessee-Sedco Forex International Inc. is concerned, the expenditure incurred on mobilisation was much higher than the actual payment received. Thus, this assessee had, in fact, suffered ....
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....egory, namely, income in the nature of interest, royalty or fees for technical services is concerned, such income would be deemed to accrue or arise in India, irrespective of situs of the services. The learned senior counsel argued that insofar as payment for mobilisation which was received by the assessee is concerned, it is neither income receipt nor deemed to be received in India. It is in respect of services outside India and, therefore, does not accrue or arise or deemed to accrue or arise under Section 5 read with Section 9 of the Act. 16) Proceeding further on the aforesaid line of argument, he submitted that, in the first instance, it has to be determined that income accrues or arises or is deemed to accrue or arise in India. Only when that is established, the next step is to compute the total income based on other provisions of the Act and here Chapter IV of the Act which deals with computation of income from 'Profits and Gains of Business or Profession' gets triggered. It was submitted that, no doubt, Sections 44B, 44BB, 44BBB etc. provide for special mechanism for computing the income in the case of non-residents on presumptive basis. However, even when the income is ....
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....said line of argument, another submission of Mr. Kaka was that since Section 44BB is a computation provision under the head 'income', it cannot override the charging section. For this purpose, he relied upon the judgment of Bombay High Court in Commissioner of Income Tax v. F.Y. Khambaty (1986) 159 ITR 203. Mr. Kaka also relief upon the following judgments: (a) Anglo-French Textile Company, Ltd., by Agents M/s Best & Company, Ltd., Madras v. Commissioner of Income Tax, Madras (1954) 25 ITR 27 (SC) (b) Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (2007) 288 ITR 408 (SC) = (2007) 3 SCC 481) (c) Carborandum & Co. v. CIT, Madras (1977) 108 ITR 335 (SC) (d) Commissioner of Income Tax, Madras v. Best and Company (Private) Ltd., Madras (1966) 60 ITR 11 (SC) 19) He also cited judgments on the proposition that CBDT Circulars are binding on tax authorities; reimbursement of actual expenses does not represent income and, therefore, cannot be taxed; and normal concept of income cannot be taken away by presumption provisions. 20) In nutshell, as can be seen from the aforesaid arguments, the proposition advanced by learned s....
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...., the appellant received outside India, net mobilization charges of US$ 6,42,300 (equivalent to Rs. 2,76,89,533/-) after deduction of liquidated damages for delay, for mobilization from Singapore to the offshore site (in India). 22) On the aforesaid facts, he submitted that net mobilization charges received outside India could not be taxed in India, more so, when these were in the nature of reimbursement of expenses on account of mobilization/movement of rig from Singapore to the offshore site at Mumbai. His primary contention was that before this payment could be included while making computation under Section 44BB of the Act, it had to be 'income' which is taxable in India in the first instance. His submissions on the scheme of Sections 4, 5 and 9 of the Act were the same as that of Mr. Kaka, already noted above. Additionally, he submitted that insofar as Section 44BB of the Act is concerned, it only provides a simplified computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. Thereby, overriding the normal computation mechanism contained in Sections 28 to 41, 43 and 43....
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....nt is held liable to tax in India, then the same has to be computed in terms of Sections 4, 5 and 9 read with Section 44BB of the Act. In that situation, only the mobilization fee pertaining to voyage within the territorial waters of India can be subjected to tax. (iii) Without prejudice to the aforesaid, it is alternatively submitted that since the appellant only received mobilization fee amounting to Rs. 2,76,89,533/- (equivalent to US$ 6,42,300), after deduction of liquidated damages, the AO erred in bringing to tax the gross amount of US$1 million under Section 44BB of the Act. 25) Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates appearing for some other assessees treaded the same path by adopting same line of arguments. 26) M/s. Chidananda and Arijit Prasad, learned advocates appearing for the Revenue put up an emphatic defence to the judgment of the High Court which has accepted the position taken by the Revenue. It was argued that assessee Sedco, which is a non-resident company, had entered into a composite/indivisible contract with ONGC to provide a drilling unit to carry out drilling operations. A finding of fact to this effect i.e. a composite/indivisible ....
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....e source derived. It was submitted that, in this hue, Section 9 which deals with income deemed to accrue or arise in India, had to be looked into. According to the learned counsel, the assessee had business connection in India through the equipment owned by it, operating in India and its employees, experts etc. working in India. Its assets are employed/used in India and the source of income is in India. Therefore, the ingredients of Section 9(1)(i) are fulfilled. Thus, assessee has territorial nexus in India. Further, in a given case, if the assessee fulfils these requirements and a DTAA applies, this will also constitute a Permanent Establishment (PE) through which an assessee operates its business in India. Further, the rigs/equipment are mobilised for its business operations in India and that source of income is in India, therefore, the question of apportionment. Thus, the mobilisation fee/charges paid by ONGC to assessee is an income chargeable to tax from a conjoint reading of Sections 4, 5 and 9. Therefore, the submission of the assessee that Section 44BB seeks to tax an event which the charging sections does not seek to tax is incorrect. 28) Adverting to the provisions of....
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....on consideration of relevant material, this Court may not disturb those findings. Reliance was placed on Avasarala Technologies Limited v. Joint Commissioner of Income Tax, Special Range 1, Bangalore (2015) 14 SCC 732 and Commissioner of Income Tax Bihar and Orissa, Patna v. Ashoka Marketing Co. (1972) 4 SCC 426. 29) Before we appreciate the rival submissions made by counsel for the parties on both sides, it would be apposite to go into the raison d'etre behind the orders of the ITAT as well as the High Court. 30) The ITAT in its order has taken note of the relevant clauses of the agreements entered into between ONGC and assessee (Sedco) pertaining to mobilisation and mobilisation fee. Clause 3.2 of the Agreement dated September 3, 1985 relating to providing the Shallow Dash Water Jack Up Rig covering this aspect reads as under: "Mobilisation Operator shall pay to Contractor a mobilisation fee of eight hundred thousand United States Dollars (US $ 800,000) ("Mobilisation Fee") for the mobilisation of the Drilling Unit from its present location in Setubal, Portugal to the first well location designated by Operator, Offshore Bombay, India. Operator will n....
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....e, these payments were not in the nature of fee (income) but reimbursement of expenses only. This argument is dealt with by the ITAT, taking note of the provisions of Section 44BB of the Act. The ITAT concluded that it was a special provision for computing profits and gains in connection with the business of exploration of mineral oils, effect whereof was explained in Departmental Circular No. 495 dated September 22, 1987. It further noted that agreements between ONGC and the assessee were indivisible in nature as per which entire payments had been agreed to be made by ONGC for supply of drilling unit including the rigs, for operating those rigs, and for providing experts and other personnel for operating those rigs. Therefore, all these payments were deemed to be the profits and gains of business for the purposes of Section 44BB of the Act and 10% thereof was to be treated as income chargeable to tax. Section 44BB of the Act does not provide that separate consideration mentioned in the Agreement for transportation of the drilling units/rigs from their present location to the designated location in India would be excluded from the correct amount of gross receipts on which 10% profi....
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....her personnel for operating those rigs etc. Section 44BB specifically provides that the aggregate of the amounts referred to in sub-section (2) of Section 44BB will be adopted as the basis for calculating profits @10%, which shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits & Gains of Business or Profession". It does not provide that separate consideration mentioned in the Agreement for transportation of the Drilling Unit/Rig from their present location to the designated location in India will be excluded from the aggregate amount of gross receipts on which 10% profit rate is required to be applied. ONGC has made the entire payment including the mobilisation fee, operating charges, daily hire on non operating days etc. for availing the services and facilities and the supply of Plant & Machinery on hire agreed to be provided by the appellant company to ONGC. The mobilisation fee paid by ONGC to the appellant company has no nexus with the actual amount incurred by the appellant company for transportation of the Drilling Unit/Rigs to the specified drilling location in India. Even if the actual expenditure incurred by the appellant c....
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....S dollars, whereas that of onshore supply as also onshore services and construction and erection partly in US dollars and partly in Indian rupees. 36) The High Court noted that while determining the tax liability of the said foreign company, this Court had taken into consideration Section 5(2), Section 9(1)(i) and Section 9(1)(vii) of the Act and considered the question of imposition of tax on income arising from a business connection of the assessee. Holding that income is not taxable in India, the Court premised the conclusion, inter alia, on the ground that as per clause (a) of Explanation 1 to Section 9(1)(i) of the Act, only such part of income as is attributable to the operations carried out in India, is taxable in India and further that sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable. As far as offshore supply and offshore services in US$ are concerned, it was done outside the territory of India and the payment was also made to the assessee (a foreign company) in US$ outside India, said payment was not taxable as it was not "income" arising from a business connection of the said assesse....
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....may be incurred by the assessee company for the purpose. In view of the fictional taxing provision contained under Section 44BB, the Assessing Officer was right in adding the amount of Rs. 99,04,000/- for the Assessment Year 1986-87 and amount worth Rs. 64,64,530/- for the Assessment Year 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income tax and CIT (Appeals) and ITAT were also right in upholding the order of the Assessing Officer." 38) We feel that High Court may not be entirely correct in law in excluding the provisions of Sections 5 and 9 in those cases where the assessment is opted by the assessee under Section 44BB of the Act. Submissions of learned counsel for the assessees are justified to the extent that Section 44BB of the Act is a special provision providing computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the Act which deal with charging section, total income and income of non-resident which arises or deem to arise in India cannot be sidetracked. These are the provision....
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.... directly or indirectly through any business connection in India or from any property in India or from any asset or source of income in India or any capital asset situated in India (referred as business income). Explanation 1(a) to Section 9(1)(i) of the Act provides an exclusion in the case of operations which are not carried out in India. The explanation provides that the income of the business deemed under this clause to accrue or arise in India shall be only that part of the income as is reasonably attributable to the operations carried out in India. Thus, business income earned by non-resident is chargeable to tax in India only to the extent reasonably attributable to the operations carried out in India. 42) It is, however, pertinent to point out that Section 44BB(2) makes certain receipts as "deemed income" for the purposes of taxation in the said provision. Therefore, aid of this provision is to be necessarily taken to determine whether a particular amount will be "income" within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act pr....
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....cular trade or business, it should be shown to have some basis and fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in section 44AC are denied the reliefs available to others. No plea is put forward by the revenue that these trades are distinct and different even for the grant of reliefs under Sections 28 to 43C. The denial of such reliefs to trades specified in section 44AC, available to other assessees, has no nexus to the object sought to be achieved by the Legislature. (emphasis supplied)" 43) Having corrected the position in law, by emphasising that Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases where assessment is done under Section 44BB of the Act, we are of the opinion that the argument of the assessees that Section 44BB is only a computation provision, is also not entirely justified. 44) In the first blush, assessees may appear to be correct in their contentions that Section 44BB falls in Chapter IV of the Act. Insofar as computation of income from 'Profits or Gains of Business or Profession' is concerned, it has to be computed as per the provisions of Sections 28 to 43D(2....
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.... in India as per Section 9 of the Act. For this purpose, Section 44BB(2) has to be invoked. 47) Section 44BB starts with non-obstante clause, and the formula contained therein for computation of income is to be applied irrespective of the provisions of Sections 28 to 41 and Sections 43 and 43A of the Act. It is not in dispute that assessees were assessed under the said provision which is applicable in the instant case. For assessment under this provision, a sum equal to 10% of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'profits and gains of the business or profession'. Sub-section (2) mentions two kinds of amounts which shall be deemed as profits and gains of the business chargeable to tax in India. Sub-clause (a) thereof relates to amount paid or payable to the assessee or any person on his behalf on account of 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. Thus, all amounts pertaining to the aforesaid activity which are re....
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.... tax shall be paid @10% of the 'aggregate of the amounts specified in sub-section (2)' and those amounts are 'deemed to be the profits and gains of such business chargeable to tax...'. It is a matter of record that when income is computed under the head 'profits and gains of business or profession', rate of tax payable on the said income is much higher. However, the Legislature provided a simple formula, namely, treating the amounts paid or payable (whether in or out of India) and amount received or deemed to be received in India as mentioned in sub-section (2) of Section 44BB as the deemed profits and gains. Thereafter, on such deemed profits and gains (treating the same as income), a concessional flat rate of 10% is charged to tax. In these circumstances, the AO is supposed to apply the provisions of Section 44BB of the Act, in order to find out as to whether a particular amount is deemed income or not. When it is found that the amount paid or payable (whether in or out of India), or amount received or deemed to be received in India is covered by sub-section (2) of Section 44BB of the Act, by fiction created under Section 44BB of the Act, it becomes 'income' under Sections 5 and ....