TaxTMI 
TaxTMI 
2019 (2) TMI 1422
X X X X Extracts X X X X
X X X X Extracts X X X X
....o PGS Exploration (Norway) AS ("PGS Norway", 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....atio of the judgment in the said of OHM Ltd [[352, ITR 406 (Delhi)] cited 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of CGG Veritas Services SA vs CIT (ITA No 08 of 2012) 5. Copy of decision of the Uttrakhand High Court in the case of CIT vs M/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 IT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....N for rendering custom clearance services, supply o food items and other consumables for consumption of vessels in India, supply of spares for the purpose of operation in India etc. 27. Certified true copy of the directions dated December 2,2014 issued by the Hon'ble Dispute Resolution Panel -II ("DRP") under 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 app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the 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, e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells. 10. 2794 Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation. 11. 1524 Conducting reservoir stimulation studies in association with personnel of ONGC 12. 1535 Laboratory testing 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtain ancillary works contemplated there under. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal." (emphasis Supplied) As evident from the above, the entire 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 asso....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that Govt. or any person specified by that Govt................ The Hon'ble Supreme Court did not accede to the contentions of the appellant that- "...applicability should be understood with reference to the existence of agreement with foreign companies rather than the immediate purpose of such agreement...... (beneficiaries should also) include foreign companies with whom the ONGC has no direct agreement though such foreign companies may nevertheless be providing similar services, may be, on the strength of separate agreements with the foreign companies with whom the ONGC has executed an agreement...." (emphasis and clarifications added) The Hon'ble SC held that "...the power to grant exemption is twofold and 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s also engaged in conducting geophysical surveys offshore whith special emphasis on 3D collection of seismic data, processing and sale of such data and other activities of similar nature". [p.3 Appeal Set] In other words, the assessee is engaged in two types of activities i.e. * Income from the operation of vessels on charter hire basis and * Income from processing and sale of seismic data & Geophysical Surveys. As has been claimed before lower authorities, the "The assessee provided vessels on hire on time charter basis" to non-resident companies. [DRP. Para-2] ] The business of such hirers or whether and to what extent such hirers deployed the hired vessels in their business has no effect on the taxability of the income received by the assessee. The Hon'ble Supreme Court has held the 'Proximity' and Intrinsic connection' 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 h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provisions of section 28 of the Act read with rule 10 of the Income tax Rules ("Rules"), 1962. The AO arbitrarily proposed to attribute 15 per cent of the gross revenues as profits of the Assessee by applying rule 10 of the Rules and the total income was proposed to be assessed at INR 118,033,105 (effective rate of tax being 6.335 percent). Copy of the draft assessment order is attached at pages 37-54 of the paperbook. * Aggrieved with the draft assessment order, Assessee filed objections before the Dispute Resolution Panel - II, New Delhi ("DRP"). The DRP issued directions and held that the amount received by Assessee during the year under consideration on account of hire charges of vessels should be brought to tax by applying the deemed profit ratio of 10 per cent under section 44BB of the Act (copy of DRP directions enclosed at pages 218-231 of the paperbook). Our submissions 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, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red as machinery thereby, eligible to be categorized / covered under section 44BB of the Act * In the instant case, the ship / vessel provided by the Assessee is used for the purpose of prospecting for mineral oil pursuant to the Production Sharing Contract ("PSC") entered into by ONGC, RIL etc with the Government of India. It is also to be noted that for any oil and gas exploration activity, seismic survey is the first important step and in order to undertake seismic operations, the companies engaged in such activities would need support of seismic vessel which has specialized equipments for use in seismic data acquisition and process. Therefore, there is no dispute that the seismic activities are inseparable part of prospecting of mineral oil and the seismic survey vessel plays a crucial role in such operations. The seismic vessel provided by the Assessee is unique in nature and can be utilized only for the purpose of undertaking seismic activities, being integral to prospecting 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cting for, or extraction or production of mineral oil such as helicopter services for transporting men to the area where exploration activities are undertaken and seismic data processing activities [Lloyd Helicopters International Pty Ltd (2001) (249 ITR 162) (AAR)]. * Attention is also invited to the decision of the Delhi Bench of the ITAT in the case of ACIT vs Paradigm Geophysical Private Limited (2008) (117 TTJ 812) (Del), wherein, the assessee had entered into a contract with RIL for undertaking seismic data processing activities. On the issue of determining whether the activities would be covered by the provisions of section 44BB of the Act, the ITAT held that any consideration of whatever nature received in connection with prospecting for, or extraction or production of mineral oil would be taxed on a presumptive basis as per section 44BB of the Act. The scope of section 44BB of the Act is very wide and would cover all kinds of services including services in the nature of managerial, technical or consultancy. This decision of the ITAT has been affirmed by the Uttarakhand High Court. * Therefore, from a plain reading of the above, it can be reasonably conclu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Ltd vs ACIT (2016) (71 taxmann.com 166) (Delhi -Trib) * The following recent case laws have followed the Supreme Court decision: - Seabird Exploration FZ LLC (2018) (92 taxmann.com 328) (AAR) - National Oil Well Maintenance Company vs DCIT (2018) (89 taxmann.com24) (Jaipur - Trib) - Production Testing Services Inc vs DCIT (2018) (89 taxmann.com 416) (Mumbai -Trib) First leg versus second leg contract * In the draft assessment order, the AO held that the provisions of section 44BB of the Act is applicable only to first leg contractors and it does not cover the second leg contractors. In this regard, it is submitted that the provisions of this section does not make any difference between first leg and second leg contractors as long as the non-resident is engaged in providing services or facilities in connection with prospecting, extraction or production of mineral oils or providing plant and machinery used or to be used in prospecting etc of mineral oils. * Attention is invited to the decision of Delhi Bench of ITAT in the case of Louis Dreyfus Armateures SAS vs ADIT (2015) (153 ITD 579) (Delhi-Trib) (copy of the decis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n would be applicable to the Assessee as it is providing facilities / plant and machinery for prospecting of mineral oil only. * The words "....used or to be used for the business of prospecting for, or extraction or production of, mineral oils..." clearly signifies that the plant or machinery supplied on hire for the aforesaid activities would fall within the ambit of section 44BB. Section 44DA of the Act not applicable * Section 44DA read with section 9(l)(vi) of the Act provides that 'income from royalty receipts' would be taxable as 'business profits' in India if such receipts are received from Government or an Indian concern in pursuance of an agreement made by a non-resident with Government or the Indian concern after March 31, 2003, having a Permanent Establishment in India. However, the provisions of section 44DA have been included in the proviso to section 44BB with effect from April 1, 2011 i.e. applicable only from AY 2011-12 onwards. In this regard, reliance is placed upon the following: - Memorandum to the Finance Bill 2010, which provides that the application of section 44DA of the Act in the proviso to section 44BB ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l entered into by ONGC Counter Party to the Contract ONGC (Indian resident) PGS GAS (non-resident) Adhoc attribution of the profits * The AO has applied deemed profit of 15 percent on the gross receipts received by the Assessee from supplying plant and machinery to PGSEN and PGSAP. The application of deemed profit rate of 15 percent is based on conjectures and surmises. The Assessee, as per the provisions of section 44BB, is not required to maintain books of accounts and other documents. Therefore, the action of the AO in deeming a profit rate of 15 percent on the gross receipts from PGSEN and PGSAP, in the absence of books of accounts, is incorrect and deserves to be deleted. In this regard kind attention is drawn on Rule 10 of the Income-tax rules, 1962: "Determination of income in the case of non-residents. 10. In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or throu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....." (3) At the time of hearing before us, the Ld. CIT(DR) relied on his written submissions as well as on the aforesaid Draft Assessment Order dated 25.03.2014. In his oral submissions, the Ld. CIT(DR) contended that the assessee has two types of activities: firstly, it has income from the operation of vessels on charter hire basis and secondly, it has income from processing and sale of seismic data & Geophysical Surveys. The Ld. CIT(DR) contended that the income from the former activities i.e. from operation of vessels on charter hire basis does not fall within the scope of Section 44BB of I.T. Act, because it has no 'proximity' or 'intrinsic' connection' with activity of prospecting for, or extraction or production of mineral oils, within the meaning of Section 44BB of I.T. Act. The Ld. CIT(DR) contended that the business of PGS Norway and PGS Singapore, to whom vessels were hired by the assessee has no effect on the taxability of the income received by the assessee. He contended that, it is only the income of the assessee from the latter activities, namely from processing and sale of seismic data & Geophysical Services which can be considered for Section 44BB of I.T. Act, prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t in dispute that the equipments given on hire were for rendering services to entities engaged in Oil Exploration Work whereas in the case before us, this fact is in dispute. The Ld. CIT(DR) also submitted that the order of Hon'ble Delhi High Court does not advance the case of the assessee, because admittedly, the order of Hon'ble Delhi High Court was admittedly in relation to services of different nature. He further drew attention to the invoices of the assessee, copies whereof were filed by assessee in the Paper Book, to make the point that on its perusal it cannot be said with certainty that the vessel given on hire by the assessee to PGS Norway and PGS Singapore had the necessary equipments, or technical capacity for processing of seismic data or for Geophysical Services. (4) We have heard both sides patiently. We have perused materials on record carefully. We have considered the judicial precedents brought to our attention, at the time of hearing before us, or referred to in the written submissions / synopsis filed by the two sides or mentioned in the orders of the lower authorities namely the AO and DRP. Although several grounds of appeal have been taken by the Revenue in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 143 and determine the sum payable by, or refundable to, the assessee.] Explanation.-For the purposes 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." (4.1) On careful perusal of Section 44BB of I.T. Act it is found that the Section is applicable only for such amounts, which are either on account of provision of services and facilities in connection with prospecting for or extraction or production of mineral oils; or which are 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. It is not the case of the Assessee that the assessee itself has provided services and facilities in connection with prospecting for or extraction or production of mineral oils. To this extent, there is no dispute between the two sides. There is also no dispute between the two sides that the assessee has two types of business activities; firstly, it has income from the operation of vessels on charter hire basis and secondl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. On perusal of the aforesaid order dated 02.12.2014 of DRP, we find that there is no mention in the order of the DRP that these requirements are fulfilled in the case of the assessee. The order of DRP is silent on the crucial facts as to whether the vessels hired by the Assessee to these companies i.e 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; and whether the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and having 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. When a statutory order lacks in adequate discussion of the crucial facts necessary for deciding question of fact; it suffers from the defect of factlessness and is liable to be set aside. A statutory order should be endowed with factfulness in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of, mineral oils. We have also perused what has been termed by the assessee to be the Copies of the invoices (vide pages 198-217 of Paper Book dated 15th May, 2018) filed by the assessee. From the discernible description on some of these invoices, it is found that expenses are account of over-time of cabin crew, baggage clearance for crew, food allowance, mobile recharge, lashing charges, Sony LCD TV, Coke cans, Milk, Sugar, Eggs, Amul cream, Prawns, French Fries, White Vinegar, Fruit Juice, Toast Bread Sliced, Tomatoes, Cucumber, Cauliflower, Onions, Radish, Spring Onion, Green Bell Paper, Papaya, Mineral Water, Pineapple, Paper Cups, Mushroom in tin, Curry Leaves, Pepper Green, Pepper Read, Lettuce Inceberg, Celery, Chinese Cabbage, Adocada, Coconut Fresh, Grapes Red Imported, Kiwi Fruit Imported, Lemon Big, Honey dew Melon ,Chocolate Biscuit Britannia, Cashew Nuts, Peanuts Fresh Roasted Local, Potato Chips Assorted Pringles, Milk Chocolate with nut, etc. We find nothing in the description and information contained in these invoices to conclusively establish that the shipping vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and....