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2020 (3) TMI 969
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....of developing and providing customized software enabled solutions and annual maintenance services. The solutions provided by the Petitioner are used by the oil and gas industry in relation to excavation, extraction, production activities and seismic analysis. 3. Petitioner opted to be taxed on presumptive basis under section 44BB(1) of the Act, whereby 10% of the aggregate of receipts is deemed to be profits and gains of business and is subjected to tax. The assessee filed its return of for the assessment year 2012-2013, declaring a total income of Rs. 19,71,61,430/- arising inter alia, from the business of providing services or facilities in connection with extraction or production of mineral oils. The case was picked up for scrutiny and notice under Section 143(2)/142(1) was issued by the Assessing Officer (hereinafter, 'AO'). Eventually, the AO held that in accordance with terms of the contract, the nature of services provided by the Petitioner fell within the purview of Royalty/ Fees for Technical Services (hereinafter, referred to as 'FTS') and is liable to be taxed under section 44DA instead of section 44BB, and proposed to compute the total income of Petitioner at Rs. 4,9....
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....R 306 SC, wherein it was held by the Supreme Court that the income falling within the ambit of Section 44D of the Act would be liable to be taxed under Section 44BB(1) of the Act, if it was in connection with extraction or production of mineral oils, since Section 44BB is a special provision. Mr. Kaushik further elaborated his submissions by making a detailed analysis of the decision of the Supreme Court in the case of ONGC v. Commissioner of Income Tax & Anr (supra). He submitted that in the said case, the court considered an identical issue as to whether such services/facilities fall within the purview of Section 44BB, or Section 44D of the Act. The nature of services involved in the said case comprised of the following: "1. Carrying out seismic surveys and drilling for oil and gas. 2. Services starting/re-starting/enhancing production of oil and gas from wells 3. Services for prospecting for exploration of oil and or gas 4. Planning and supervision of repair of wells 5. Repair, Inspection or Equipment used in the exploration, extraction or production of oil and gas 6. Imparting Training 7. Consultancy in regard to ex....
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.... for the Revenue, contended that the Petitioner engages in supply of software services that develop 2D/3D images and graphs of the seismic marine data, as well as maintenance for such software. These activities are carried out at the backend and can be done from any place. There is no need for this software to be deployed on-site or drilling-site and, therefore, the Petitioner cannot derive benefit of Section 44BB of the Act. Further, Petitioner is not transferring the ownership in the software to the purchasers vis-a-vis Oil India ltd. (OIL), ONGC, RIL etc. It only grants a licence to use the said software as per Clause 1, Section II of Contract No. CONT/GL/GPHY/275/10-11 dated 14.7.2011 between the petitioner and OIL, a Govt of India enterprise. He also refers to Clause 4 of the Work order No. 048/31035461 dated 5.4.2011 from RIL, (Software License Agreement) to purchase Order No. 048/7272379 from RIL. Thus, the services provided by the Petitioner fall under the broad definition of Royalty which is defined under Explanation 2 to section 9(1) clause (vi) and, consequently, the same will be assessed under Section 44DA. It was further submitted that supply of software was held to be....
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....ent case is not weighed down by the ONGC case (supra). ANALYSIS & CONCLUSION: LEGAL POSITION VIZ. SECTION 44BB AND SECTION 44DA AFTER AMENDMENT INTRODUCED UNDER FINANCE ACT, 2010. 11. The pivotal controversy in the present case surrounds the interpretation of Section 44BB and 44DA of the Act. These provisions have undergone amendments over the years, the last one being introduced by the Finance Act, 2010. Since assessee has argued at length that this legal position remains unaltered, we feel that this aspect in law needs to be clarified as it would also be germane for the decision in the present case. It is, thus, imperative to first examine the effect and consequence of the said amendments, particularly to determine if the legal position has undergone any change with respect to the applicability of the provisions, after the effective date i.e. April 01, 2011 since the return of income filed by the Petitioner pertains to the assessment year 2012-13. For the sake of convenience, the relevant provisions are reproduced hereunder: Inserted by the Finance Act, 1987 w.r.e.f. 1-4-1983"Special provision for computing profits and gains in connection with the business of ex....
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....on.--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. "Special provision for computing income by way of royalties, etc., in case of non-residents. Inserted by Finance Act, 2003 w.e.f 1-04-2004 44DA. (1) The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31st day of March, 2003, where such non- resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, shall be computed under the head ―Profits and ga....
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....cumentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. ........................" Explanation 2 (to 6) to Section 9(1)(vi) are relevant and read as follows: "Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for....
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.... Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down- linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;" (Emphasis supplied) Section 9(1)(vii) deals with "income by way of fees for technical services" and reads as follows: "(vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to any income by wa....
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....d gains of a non-resident from 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, including petroleum and natural gas. Section 44DA is broader and more general in nature and provides for assessment of the income of the non-resident by way of royalty or fees for technical services, where such non-resident carries on business in India through a permanent establishment situated therein, or performs services from a fixed place of profession situated in India and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with the permanent establishment or fixed place of profession situated in India. One more distinction between sections 44 DA and 44 BB is that, in section 44 BB one does not find any reference to a permanent establishment in India and the services contemplated therein are more specific than what is contemplated in section 44 DA. Thus, Section 44BB is a special provision in so far as it relates to the applicability of the provision in the context of the specif....
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....d to the following effect: "Provided further that provisions of Section 44BB shall not apply in respect of the income referred to in this Section". 16. Keeping in mind the legislative history of amendments in the two provisions, the aforesaid amendments are significant and changed the position with respect to the applicability of the said provisions. A taxing statute is to be construed strictly. The position that existed prior to the amendments was different. There was no proviso which restricted the applicability of Section 44BB in respect of the income falling within the scope of Section 44DA (1) of the Act. However, now that the proviso has been inserted, it has fundamentally restricted the applicability of section 44BB. This proviso has to be given due consideration and a meaning, recognizing the legislative intent. A plain reading of section 44BB (1) shows that it applies to an assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire use, or to be used, in the prospecting for, or extraction or production of mineral oils. However, the proviso thereto carves out an exception that the sub-....
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.... In order to remove doubts and clarify the distinct scheme of taxation of income by way of fee for technical services, it is proposed to amend the proviso to section 44BB so as to exclude the applicability of section 44BB to the income which is covered under section 44DA. Similarly, section 44DA is also proposed to be amended to provide that provisions of section 44BB shall not apply to the income covered under section 44DA. These amendments are proposed to take effect from 1st April 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years." This proviso reinforces the legislative intent to carve out an exception to the character of the income referred to in this section i.e. royalty and fees for technical services. The principles relating to interpretation of statute, emphatically lay down that statute should be interpreted to preserve the legislative intent. A reading of the overall scheme of section 44BB and 44DA leaves no manner of doubt that section 44BB applies if the assessee is engaged in the business of providing services or facilities in the prospecting for, or extraction or production of minerals oils. However, if....
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....Explanation 2 to Clause (vii) of Section 9(1). The said explanation as quoted above defines "fees for technical services" to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. "fees for technical services" any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head "salaries". Fees for technical services, therefore, by virtue of the aforesaid explanation will not include payments made in connection with a mining project. xxxxxxxxxxx 13. The Income Tax Act does not define the expressions "mines" or "minerals". The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing 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....
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....e appellants and placed before the Court is correct. The said details are set out below. S.No. Civil Appeal No. Work covered under the contract 1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and techn....
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....e machines. 32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33. 2008 Expert advice on the device to clean insides of a pipeline. 34. 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations. 35. 925 Engineering analysis of rig. 36. 1519 Imparting training on cased hold production log evaluation and analysis. 37. 1533 Training on well control. 38. 1518 Training on implementation of Six Sigma concepts. 39. 1516 Training on implementation of Six Sigma concepts. 40. 6023 Training on Drilling project management. 41. 2796 Training in Safety Rating System and assistance in development and audit of Safety Management System. 42. 1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages. 43. 1527 Supply supervision and ins....
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....of Director of Income Tax. v. Jindal Drilling & Industries Ltd. [2010] 320 ITR 104 (Delhi) and also to another order of Authority for Advance Ruling in the case of Geofizyka Torun Sp.zo.o In Re (2010) 320 ITR 268 (AAR), and concluded that the view taken by the Authority was correct and held that Section 44DA is broader in scope as compared to Section 44BB. In that context, the Court considered the effect of second proviso to Sub Section (1) of Section 44DA inserted by Finance Act, 2010 and held as under: "11. We do not think that there is any error in the view taken by AAR. Basically the rule that the specific provision excludes the general provision has been applied. Section 44BB is a special provision for computing the profits and gains of a non-resident in connection with 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 including petroleum and natural gas. Section 44DA is also a provision which applies to non-residents only. It is, however, broader and more general in nature and provides for assessment of the income of the....
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....t a familiar approach in such cases is to find out which of the two apparently conflicting provisions is more general and which is more specific and to construe the more general one as to exclude the more specific. 12. The second proviso to sub-section (1) of Section 44DA inserted by the Finance Act, 2010 w. e. f. 01.04.2011 makes the position clear. Simultaneously a reference to Section 44DA was inserted in the proviso to sub-section (1) of section 44BB. It should be remembered that section 44DA also requires that the non- resident or the foreign company should carry on business in India through a permanent establishment situated therein and the right, property or contract in respect of which the royalty or fees for technical services is paid should be effectively connected with the permanent establishment. Such a requirement has not been spelt out in Section 44BB; moreover, a flat rate of 10% of the revenues received by the non-resident for the specific services rendered by it are deemed to be profits from the business chargeable to tax in India under Section 44BB, whereas under Section 44DA, deduction of expenditure or allowance wholly and exclusively incurred by the no....
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....h the provisions of section 44BB of the Act and not section 44DA. 13. In the result the writ petition fails and is dismissed with no order as to costs." [Emphasis Supplied] 19. Petitioner has strongly relied upon the aforesaid observations to argue that this Court had explicated that the second proviso does not efface the applicability of Section 44BB, and notwithstanding the second proviso to section 44DA, the legal position remains unaffected. Before commenting on this contention, it is also necessary to take note of a later decision of this court in PGS Exploration (Norway) AS v. Additional Director of Income Tax [2016] 383 ITR 178 (Delhi), where the court also had the occasion to consider the aforesaid case of Director of Income Tax v. OHM Ltd (Supra). In the said case, the Court upheld the contention advanced on behalf of the assessee that since it is engaged in business of providing services in connection with prospecting for mineral oils, its income, even if it falls within the ambit of Section 44DA (1) of the Act, would be taxable under Section 44BB (1). However, at the same time, the court considered the effect of the amendments introduced by the Finance Act....
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....115A(1)(b) of the Act which does not fall within the four corners of Section 44DA(1) of the Act would also not be taxable under Section 44BB(1) of the Act, for the reason that by virtue of proviso to Section 44BB(1) of the Act, it is expressly excluded. Accordingly, if the consideration received by the Assessee for services rendered is found to be "fees for technical services", the AO would specifically have to determine (a) whether the assessee had a PE in India during the relevant period; and (b) if so, whether the contracts entered into by the appellant with BG and RIL were effectively connected with the Assessee's PE in India. It is only, if the AO finds that the said two conditions are satisfied, that the income of the assessee would be computed under Section 44BB(1) of the Act. However, if such conditions are not satisfied then the income tax payable by the appellant would have to be computed in accordance with Section 115A(1)(b) of the Act." 20. The aforesaid observations, in our view, rightly interpret the position in law. For that matter, the Petitioner is misinterpreting the earlier judgment of this Court in Director of Income Tax v. OHM (supra), to contend that Sectio....
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....to clarify the position. So understood, the proviso to sub-section (1) of Section 44BB can only mean that the flat rate of 10% of the revenues cannot be deemed to be the profits of the non-resident where the services are of the type which do not fall under that section, but are more general in nature so as to fall under Section 44DA. Similarly, the second proviso to sub-section (1) of Section 44DA can only be interpreted to mean that where the services are general in nature and fall under the sub-section read with Explanation 2 to Section 9(1)(vii) of the Act, then an assessee rendering such services as provided in Section 44BB cannot claim the benefit of being assessed on the basis that 10% of the revenues will be deemed to be the profits as provided in Section 44BB. In other words, the amendment made by the Finance Act, 2010 w.e.f. 01.04.2011 in both the sections, cannot have the effect of altering or effacing the fundamental nature of both the provisions or their respective spheres of operation or to take away the separate identity of Section 44BB. We do not, therefore, see how these amendments can assist the Revenue's contention in the present case, put forward by the learn....
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....n for any construction, assembly, mining, or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries.' " 2. The question whether prospecting for, or extraction or production of, mineral oil can be termed as 'mining' operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions 'mining project' or 'like project' occurring in Explanation 2 to section 9(1)(vii) of the Income-tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. 3. In view of the above opinion, the consideration for such services will not be treated as fees for technical services for the purpose of Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961. Payments for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of section 44BB of the Income-tax Act, 1961 and not under the special provision for the taxation of fees for te....
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....and that has constricted us to conclusively decide the issue for the reasons explained hereinafter. We are disappointed to note that the CIT has not taken any definite stand. The draft assessment order proposed under Section 143 (3) read with Section 143 (1) of the Act, held that the income of the assessee has been considered in the nature of Royalty/FTS. The assessment was also finalized in the above terms. Petitioner challenged the assessment order by way of a revision under Section 264 of the Act where the following ground was urged: "Ground No. 1- Claim of section 44BB incorrectly denied. On the facts and circumstances of the case, the Ld. AO erred in law and on the facts of the case in holding that the income on account of receipts from provision of software enabled solutions to the oil and gas industry along with providing annual maintenance services of the software is in the nature of fees for technical services/ royalty payments under section 9(1)(vii)/9(1)(vi) of the Income Tax Act, 1961 (the 'Act')." 25. The CIT considered the contentions raised by the Petitioner and rejected the aforesaid ground inter alia holding as under: "On a comprehensi....
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....e project" are out of the purview of FTS, and consequently the same would not fall within the ambit of Section 44DA (1), however the scope of technical services cannot be broadened by giving a restrictive interpretation to the expression "mining or like project", appearing in Explanation 2 to clause (vii) of sub Section (1) of Section 9. The CIT, perhaps in an attempt to give meaning to the combined effect of the provisions of Section 44BB, Section 44DA and Section 115A has endeavoured to give such an interpretation. However, such a view is flawed, in as much as, the scope of expression "mining or like project" has been confined only to situations where services are performed onsite i.e. at the site of mining/drilling. We are unable to find any rationale in this reasoning. In the impugned order, it has been noted that the software supplied by Petitioner helps to ascertain the drilling spot where there is a maximum probability for finding oil. The impugned order also records that the assessee is regularly hired by Oil and Gas exploration companies such as ONGC; Reliance Industries Ltd. Gujarat State Petroleum Corporations; Oil India Ltd etc. for availing the aforesaid services. It h....
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....viso to sub-section (1) of Section 44DA and a reference to section 44DA in the proviso below sub-section (1) of Section 44BB. A careful perusal of both the provisos shows that they refer only to computation of the profits under the sections. If both the sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber then the only way in which the provisos can be given effect to is to understand them as referring only to the computation of profits, and to understand the amendments as having been inserted only to clarify the position. So understood, the proviso to sub-section (1) of Section 44BB can only mean that the flat rate of 10% of the revenues cannot be deemed to be the profits of the non-resident where the services are of the type which do not fall under that section, but are more general in nature so as to fall under Section 44DA. Similarly, the second proviso to sub-section (1) of Section 44DA can only be interpreted to mean that where the services are general in nature and fall under the sub-section read with Explanation 2 to Section 9(1)(vii) of the Act, then an assessee rendering such services as provided in Section 44BB cannot cl....
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.... Act, transfer of all or any rights in respect of any copyright is royalty. The term "in respect of' has been interpreted by SC/HC and given very wide meaning in the following cases: (i) SC in Shahdara (Delhi) Saharanpur Light Railway Company Limited Ltd v. Upper Doab Sugar Mills Limited and another reported in AIR 1960, page 695; (ii) Bombay HC in Anusua Vithal and Others v J.H Mehata Additional Authroity under Payment of wages Act, Bombay and another reported in AIR 1960 (Bombay) page 201; (iii) Patna High Court in CIT Bihar and Orissa Patna vs Chunilal Rameshwar Lal reported in AIR 1968 (Patna) page 64. Relying on these judgments, Karnataka HC in the case of Synopsis International Old Limited (212 Taxman 454) held that the expression 'in respect of used in Explanation 2 denotes the intention of the Parliament to give a broader meaning and wider connotation that covered all the income from transfer of all or any of the rights in respect of a copyright. The HC also observed that when the meaning of the words used are clear, unambiguous, merely because it is a fiscal legislation, the meaning cannot be narrowed down and it cannot be interp....
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....ons on the plea pertaining to the concept of income from royalty. The Petitioner has impugned the decision of the CIT, contending that the income from facilities/services of specialized software will not fall within the purview of royalty under Section 9 (1)(vi) of the Act. CIT has essentially relied upon the judgment of Karnataka High Court in the case of Commissioner of Income Tax and Anr. v. Synopsis International Old Ltd. (2012) 208 Taxmann.com 162 (Kar) to hold that the expression "in respect of" used in Explanation 2 denotes the intention of the parliament to give a broader meaning and wider connotation that covers all the income from transfer of all or any of the rights in respect of copyright. The Petitioner on the other hand has contended that this Court has specifically dissented from the views expressed by the Karnataka High Court. In this regard, reliance has been placed on the decision of this Court in CIT v. Alcatel Lucent Canada (2015 372 ITR 476 (Del); CIT v. ZTE Corporation (2017) 392 ITR 80 (Del); Income Tax v. Ericsson A.B. 343 ITR 470 (Del) and Director of Income Tax v. Intrasoft Ltd. (2014) 220 Taxman 273 (Del). We need not go into this vexed question at this s....
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....perpetual software license and supply of software to be installed at Reliance facilities alongwith AMC for maintenance and support services of software in India alongwith supply of all enhancement and additions to the Software. h. Service Order number 8300000785 with Gujarat State petroleum Corporation Ltd for provision of AMC of paradigm software. The assessee is also providing installation and training with respect to the software provided. i. Quotation no. US1O-D14Q1; Quotation no. US-10-014R2-JS- Q2; Quotation no. us..1()"014R2-JS-Q3 and Quotation no. US- 10-014R2-JS-Q4 & with Fugro Geoscience India Pvt Ltd for provision of software license access and support* service agreement. j. Contract number OIUCCO/GPHY/GLOBAU275110-11 With Oil India Limited for provision of AMC and support services of paradigm software. The assessee is also providing services of its engineers who are deputed to site of OIL in India for the contract and maintenance services" 31. From the above it manifests that the contracts executed by the assessee are composite contracts and there is no bifurcation with respect to the nature of consideration relating to the services rendere....
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.... by the assessee, however, it is required to be examined whether the assessee's case would be covered under the India-Australia DTAA. Article 12(3) of the said DTAA provides the definition of Royalty. The Petitioner is granted liberty to claim benefit under the said DTAA before the Ld. CIT if it wishes to do so. Besides, in the event the answer to the question is in the affirmative, the assessee shall also be at liberty to assail such findings on merit, as we have refrained ourselves from determining whether the income of royalty is excluded from the definition under the Act. 33. The writ petition is allowed in the above terms. FOOTNOTE 6 For the sake of reference, the same is reproduced as under: "44D. Special provisions for computing income by way of royalties, etc., in the case of foreign companies. -Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company, - (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from an India concern in pursuance of an agreement made by the foreign company....