TaxTMI 
TaxTMI 
TaxTMI 
2019 (2) TMI 1422
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....", for short) and Petroleum Geo-Services Asia Pacific Pte Ltd ("PGS Singapore", for short). PGS Norway and PGS Singapore were in contract with India entities like Oil & Natural Gas Corporation ("ONGC", for short) and Reliance Industries Limited ("RIL", for short) for the purpose of undertaking seismic data acquisition and on board processing. The assessee opted to offer income @ 10% of gross receipt as per Section 44BB of Income Tax Act, 1961 ("I.T. Act, for short). Vide Draft Assessment Order dated 25.03.2014, the Assessing Officer ("AO", for short) did not agree with assessee's claim of applicability of Section 44BB of I.T. Act. The AO proposed to invoke Rule 10 of Income Tax Rules, 1962 ("I.T. Rules", for short) and proposed to determine assessee's income @ 15% of the gross receipt by applying Rule 10 of I.T. Rules. The Assessee filed objections before Dispute Resolution Panel ("DRP", for short). Vide order dated 02.12.2014, DRP held that, the amount received by the assessee during the year under consideration on account of hire charges of the vessels should be brought to tax by applying the deemed profit ratio of 10%, U/s 44BB of the I.T. Act. Acting on the directions of the DR....
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.... by it, the provisions of section 44BB are not applicable where the scope of the services/facilities provided by an assessee is general in nature falling under section 115A/44DA of the Act. 2.3 The Hon'ble DRP has erred in mechanically following the decision in the case of M/s OHM Ltd without first adjudicating upon the issue as to whether and how the scope of the services/facilities rendered under the contracts is not general in nature and therefore, does not qualify as Royalty u/s 9(l)(vi) of the Act and taxable under section 44DA of the Act read with section 7 of the DTAA. 3. Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in holding that the provisions of section 44BB of the Act are more special provisions which shall prevail over the provisions of section 9(l)(vi) read with sections 115A/44DA of the Act, not appreciating the fact that both set of provisions are special in nature which operate in their own clearly defined spheres and therefore, once a particular receipt or income takes on the character of Royalty/FTS as defined in section 9(l)(vi)/9(l)(vii), it cannot be considered for treatment u/s 44BB and has to be taxed u/s 115A/4....
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....s Expro Gulf Limited & Others (ITA No 34 of 2015) (High Court) 6. Copy of the decision of the Delhi ITAT in the case of Louis Dreyfus Armateures SAS Vs ADIT (2015) (153 ITD 579) (Delhi-Trib) 7. Copy of decision of the Uttrakhand High Court in the case of BJ Services Co Middle East (Special appeal no. 316 and 317 of 2012) 8. Copy of decision of the Uttrakhand High Court in the case of M/s western Geco International Limited (ITA no 39 of 2012) 9. Copy of the decision of the Delhi ITAT in the case of Schlumberger Asia Services Ltd vs ADIT (ITA No 6063 of 2010) 10. Copy of the ruling of AAR in case of Bourbon Offshore Asia Pte Ltd vs DIT (2011) (337 ITR 122) (AAR) 11. Copy of the ruling of AAR in case of Wavefield Inseis ASA (2010) (230 CTR 106) (AAR) 12. Copy of the decision of Delhi ITAT in the case of Swiber Offshore Marine Pte Ltd vs ADIT (ITA NO 5652/Del/2011)\ 13. Copy of the decision of Delhi ITAT in the case of ADIT vs Baker Hughes Singapore Pte Ltd (2015) (41 ITR (T) 212) (Delhi-Trib) 14. Copy of the decision of the Delhi Bench of the ITAT in the case of Baker Hughes Asia Pacific Ltd vs ADIT -(2014) (34 ITR (T) 192) (Delhi -Trib.) 15. Copy of the ....
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....der section 144C(5) of the Act. 28. Certified true copy of the final assessment order dated January 12, 2015 passed by the AO under section 144C(13)/143(3) of the Act. 29. Text of section 44BB and section 9 of the Act. 30. Copy of the tax residency certified issued by the Norwegian Fiscal authorities for AY 2010-11." (2.1) During appellate proceedings in ITAT, Ld. Commissioner of Income Tax (Departmental Representative), ["CIT(DR)", for short], filed written submissions, relevant portion of which is reproduced as under: "SUBMISSIONS In the above case, it is humbly submitted that the following decisions may kindly be considered with regard to Applicability of Section 44BB 1. ONGC LTD vs. CIT (2015) f2015-TII-03-SC-INTLJ(SC| In that case, the facts as discussed by Hon'ble Supreme Court were that - "6. The appellant-ONGC and a non resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sag....
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....e fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the nonresident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends t....
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....esting under simulated reservoir conditions 13. 1514 Consultancy for optimal exploitation of hydrocarbon resources. 14. 2797 Consultancy for all aspects of Coal Bed Methane 15. 6174 Analysis of data of wells to prepare a job design 16. 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys. 17. 7226 Opinion on hydrocarbon resources and foreseeable potential 18. 7227 Opinion on hydrocarbon resources and foreseeable potential 19. 7230 Opinion on hydrocarbon resources and foreseeable potential 20. 6061 Opinion on hydrocarbon resources and foreseeable potential 21. 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program. 22. 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs. 23. 733 Repair of gas turbine, gas control system and inspection of gas turbine and generator. 24. 741 Repair and inspection of turbines. 25. 737 Repair, inspection and overhauling of turbines 26. 736 Inspection, engine performance evaluation, instrument calibration and in....
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....ntire observation is with respect of "Drilling" i.e. whether "drilling" would amount to a 'mining operation' and the proximity of works contemplated under the contract to "Drilling". The Hon'ble SC has been repeatedly emphasizing a few expressions and terms like - * Proximity of the works" * "Directly and inextricably linked" * "Direct associated" * "Inextricably connected" * "Dominant Purpose" * "Pith & Substance" to highlight the tests and degree of association that is needed to bring a transaction under the purview of section 44BB. In the words of Hon'ble SC, "there may be certain 'ancillary works" but what matters is whether the "dominant purpose" is prospecting, extraction or production of mineral oil The above intention of the Hon'ble Apex Court is clearly discernable from the sample of work covered under agreements which are directly and inextricably associated with drilling, rig operation & management of drilling rigs & drilled wells and other such activities related to prospecting, extraction or production of mineral oils. This intention of Hon'ble Supreme Court to distinguish activities which are directly associated and inextricably connec....
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.... covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business.'' Thus, the above terms i.e. "Proximity of the works", "Directly and inextricably linked", "Directly associated", "Inextricably connected", "Dominant Purpose", "Pith & Substance" as used by Hon'ble Supreme Court must be understood and given effect to in the context in which they have been used. This approach has also been followed by Hon'ble ITAT in the case of ONGC as representative assessee of University of Calgary vs. ADIT (2017) (ITANo.4877/Del/2013 & 1327/Del/2016) (copy enclosed) In view of the above, since the activities of the assesse are not directly associated or intrinsically linked with the prospecting, extraction or production of mineral oils it is not eligible for taxation u/s 44BB of the Act. Even assuming (without admitting) that the above decision of Hon'ble Supreme Court under the provisions of Companies (Profits) Surtax Act, 1964 should not be imported/used to interpret the provisions of Income Tax Act, it may be seen that the Hon'ble Supreme Court in their orde....
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....nnection' of the activities carried on by the assessee as the determining factor. It is not the claim of the assessee that it is providing services in the nature of Seismic Studies as described in S. Nos. 1,9-12 & 16 of the order of the Hon'ble Supreme Court. The AO and DRP confirmed that the income received by the assessee is from the hiring of the vessels only. Yet. the Hon'ble DRP erred in holding that the income is taxable u/s 44BB of the Act In view of the above, the order of the AO may be confirmed." (2.2) The Ld. Counsel for Assessee filed synopsis, the relevant portion of which is reproduced as under: * "The Assessee, a company incorporated under the laws of Norway, is engaged in providing equipments, services and facilities in connection with prospecting for or extraction or production of mineral oils. * During the relevant previous year, the Assessee entered into a contract with PGS Exploration (Norway) AS ("PGSEN") and Petroleum Geo-Services Pacific Pte Ltd ("PGSAP") for providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing in pursuance of their respective contracts with Oil and Natural Gas Corporation ("ONGC") and Re....
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....ions Royalty has been defined under Explanation to section 9(l)(vi) of the Act to inter-alia include consideration for the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB of the Act. It is, thus, clear that the definition of royalty specifically excludes the consideration paid for the use of industrial, commercial or scientific equipment where such consideration is taxable as per the provisions of section 44BB of the Act. In the instant case, for the reasons elaborated hereinafter, the Assessee is governed by the provisions of section 44BB of the Act and accordingly, the provisions of section 9(l)(vi) of the Act for taxation of royalty would not be applicable. Section 44BB of the Act provides for the deemed profit regime in case of income earned by non-residents engaged in the business of: * providing services or facilities in connection with prospecting for, or extraction, or production of mineral oils (first limb); or * supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction, or production of mineral oil (second limb). Applicability of sec....
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....ing of mineral oil and accordingly, hire charges received would be chargeable to tax as per the provisions of section 44BB of the Act. Applicability of first limb of section 44BB of the Act in the instant case * Without prejudice to the above, in the instant case, the provision of vessels on hire by the Assessee to for conducting of seismic activities, shall be regarded as provision of a 'facility' 'in connection with' prospecting for or extraction or production of mineral oil, thereby liable to tax as per the provisions of section 44BB of the Act. * In absence of a definition under the Act, the same would need to be understood by placing reliance on its ordinary and normal meaning as per various dictionaries. Advanced Law Lexicon (Book 2; page no 1749) "the quality of being easily performed; absence of difficulty; dexterity; ease in performance; that which promotes the ease of any action" Concise Oxford English Dictionary (Indian Edition; Page 509) "a building, service, or piece of equipment provided for a particular purpose; absence or difficulty or effort" * Since the term 'facility' has wide connotation and includes any activity t....
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....has been affirmed by the Uttarakhand High Court. * Therefore, from a plain reading of the above, it can be reasonably concluded that the Assessee is rendering services 'in connection with' (through provision of vessel on hire) prospecting etc of mineral oils. * Further, it is respectfully submitted that the decision of Uttarakhand High Court in case of CIT vs ONGC as an agent of M/s Foramer France (2005) (299 ITR 438) (Uttarakhand HC) relied on by the Revenue Authorities in ground of appeal no 2 has been overruled by the Hon'ble Supreme Court of India in case of ONGC vs CIT [2015] 376 ITR 306 (SC) (copy of the decision is enclosed on pages 1-23 of the paperbook). The Supreme Court held that where the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oils, the income from such contracts would be taxable under the provisions of section 44BB of the Act. * In its decision, the Supreme Court did not distinguish between first and second leg contractors while allowing the benefit of section 44BB of the Act. Additionally, the Supreme Court allowed the benefit of section 44BB to 44 diff....
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.... 579) (Delhi-Trib) (copy of the decision is enclosed on pages 53-80 of the paperbook), wherein it was held that section 44BB does not distinguish between the main contractor or a sub-contractor. The provision clearly envisages the nonresident Assessee to be engaged in the business of supplying plant and machinery on hire. The only condition imposed is that, such plant and machinery has to be used or should be used, for the purposes of prospecting for, or extraction or production of mineral oils. The basic condition to be satisfied in the said provisions is that the plant and machinery supplied or let on hire by the Assessee, non-resident should be used in prospecting for or extraction or production of mineral oils, or where the equipment has been supplied, such equipment should have been used for the purposes of prospecting for or extraction or production of mineral oils. * In this regard, reliance is also placed on the following judicial precedents: - Micoperi SPA Milano vs DCIT (2002) (82 ITD 369) (Mum); - McDermott International Inc vs DCIT (1994) (49 ITD 590) (Del) - Bourbon Offshore Asia Pte Ltd (2011) (337 ITR 122) (AAR); - Spectrum Geo Ltd (2012) (346 ITR 422)....
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....T (Supra) - B J Services Co Middle East (Special Appeal no 316 and 317 of 2012) copy of the decision is enclosed on pages 81-82 of the paper book) - Uttarakhand High Court in the case of DIT vs M/s Western Geco International Limited (ITA No 39 of 2012) (copy of the decision is enclosed on pages 83-84 of the paperbook) - CGG Veritas Services SA vs Addl DIT (2012) (50 SOT 335) (Delhi-Trib) (copy of the decision is enclosed on pages 48 of the paperbook) - Schlumberger Asia Services Ltd vs ADIT (International Tax) (ITA No 6063 (Delhi) of 2010) (copy of the decision is enclosed on pages 85-103 of the paperbook) * Further, section 44DA and section 115A of the Act are not applicable to transactions between two non-residents. Therefore, the Assessee cannot be taxed under the provisions of section 44DA and 115A of the Act and the same has also been accepted by the AO in the draft assessment order. Reliance in this regard is placed on the ruling of the AAR in the case of Spectrum Geo Limited vs DIT (2012) (346 ITR 422) (AAR) (copy of the ruling is enclosed on pages 193-198 of the paperbook). Rebuttal of the decisions quoted in the grounds of appeal * Reliance has been pl....
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....ses of assessment to income-tax may be calculated (i) at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or (iii) in such other manner as the Assessing Officer may deem suitable." * From a perusal of the above, it is evident that for invoking rule 10 of the Rules, a precondition is that income of the non-resident which is accruing or arising in India should be unascertainable. In the instant case, it is submitted that the receipts earned from operations in India have been properly documented and offered to tax by the Assessee. Copy of the invoices raised by the Assessee during the subject year were duly submitted to the AO vide submissions dated April 27, 2012. Further, all the other information / documents called for by the AO were duly submitted by the Assessee. * Therefore, it cannot be in any way said that the income accr....
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.... show that the income of the assessee consisted of income from processing and sale of seismic data & Geophysical Services. He drew our attention to the facts that both DRP and AO confirmed that income of the assessee was from hiring of vessels only. He also contended that there was nothing on record to show that shipping vessels given to PGS Norway and PGS Singapore on hire basis by the assessee, had necessary equipments, or technical capacity for processing of seismic data or for Geophysical Services. It is quite possible that PGS Norway and PGS Singapore might have installed such equipments and / or acquired technical capacity for the vessels, either by themselves, or through some other parties, to fulfill their contract with ONGC and RIL; the Ld. CIT(DR) contended. On the other side, the Ld. Counsel for Assessee drew our attention to the decision of the Delhi ITAT in the case of Louis Dreyfus Armateures SAS vs ADIT (2015) (153 ITD 579) (Delhi-Trib) and also the decision of Delhi ITAT in the case of ADIT vs Baker Hughes Singapore Pte Ltd (2015) (41 ITR(T) 212) (Delhi-Trib). The Ld. Counsel for assessee also referred to the decision of the Delhi High Court in assessee's own case r....
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.... Provisions of Section 44BB of I.T. Act are reproduced as under: "(1) Notwithstanding anything to the contrary contained in Section 28 to 41 and Section 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 of business or profession" : Provided that this sub-section shall not apply in a case where the provisions of Section 42 or section 44D or [section 44DA 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 be assessee or to any person on his behalf on account of the provision of services and facilities' in connection with, or supp....
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....arter hire basis; and not on income from processing and sale of seismic data & Geophysical Surveys on its own. The claim of the assessee U/s 44BB of I.T. Act is based on the contention that it has supplied plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The assessee has claimed that receipts from providing vessels on hire to PGS Norway and PGS Singapore is to be treated as receipts from supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils; and income therefrom is to be assessed U/s 44BB of I.T. Act. This claim of the assessee is disputed by Revenue. It is in dispute between the two sides whether income from operation of vessels hired to PGS Norway and PGS Singapore on charter hire basis can be said to be on account of supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. (4.2) We are of the view that in the case before us, it is only when the vessels given on hire by the Assessee are fitted with necessary equipments, and has the technical capacity for use in the p....
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....r of the DRP is found to be suffering from the defect of factlessness and lacking in factfulness, as mentioned earlier; yet we have attempted to find from the records available to us whether the aforesaid crucial facts in support of assessee's claim for applicability of Section 44BB of I.T. Act can be discovered from sources other than the order of the DRP. However, we find that these facts do not emerge either from the orders of the lower authority (namely the AO) or from the Paper Books filed by the Assessee. In this connection, we have carefully perused the assessee's contracts for hiring of shipping vessels, copy thereof was filed vide pages 159-174 of Paper Book dated 15th May, 2018. Firstly, the period of hire stated in the documents is 1st January, 2008 to 10th June, 2008 which is not in correspondence with the Financial Year (i.e. 2009-10) relevant for Assessment Year 2010-11 to which this appeal pertains. Even then, there is nothing in the document to conclusively establish that the shipping vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or prod....
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....ecessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. Moreover, we have also perused copies of invoices raised by the assessee (vide pages 182 to 197 of the Paper Book dated 15th May 2018). The description on these invoices is 'Charter hire' 'ship prof', and 'std. vessel cost'. From the description of the amounts charged by the assessee as per these invoices, we find nothing to firmly establish that the amounts charged by the assessee pertained to 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; or that the vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; or that the shipping vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity f....