TaxTMI 
TaxTMI 
2009 (12) TMI 4
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....ing them in maximizing the production from their existing reservoirs. It is explained that seismic surveys can paint the picture of the sub-surface in order to better target oil and gas reserves. The results would help assessing the potential for tapping oil and gas at the particular spot. It is further stated that seismic surveys are conducted to gather data to understand the size and location of oil fields so that the risks involved in exploratory drilling could be reduced. The applicant states that the main objective of seismic data acquisition is "to gather good quality seismic data in the block area so as to obtain meaningful geological sub-surface information and to indicate any direct (bright spot) or indirect evidence for the occurrence of hydrocarbons". Further, according to the Petroleum Tax Guide, published by the Govt. of India, topographical and seismic surveys, analysis, studies and their interpretation and investigations relating to the sub-surface geology including test drilling and drilling of exploration/appraisal wells are part of "exploration operations". Accordingly, the applicant submits that for any oil and gas exploration activity, seismic survey is the firs....
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.... 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 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 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 the assessee or to any person on his behalf on account of the provision of services and faciliti....
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.... "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration 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". 5.2. Section 44DA which was inserted by the Finance Act, 2003 is another special provision for computing income by way of royalty or f.t.s received by a non-resident or foreign company which carries on business in India through a Permanent Establishment. It is the case of the Revenue that the applicant is liable to be taxed under section 9(1)(vii) of the Act read with section 44DA but not section 44BB. 5.3. There is one more section which deserves notice. That is section 115A which bears the heading "tax on dividends, royalty and technical service fees in the case of foreign companies". Inter alia, the applicable rates are specified therein. Apparently, section115A is attracted where the non-resident or foreign company receiving income b....
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....s; (b) such provision of services/facilities must be 'in connection with' the prospecting for or extraction or production of mineral oils. Both these ingredients are present in relation to the activities undertaken by the applicant in India. Firstly, it does not admit of any doubt that the applicant is engaged in the business of providing services (technical services) to the oil sector industries. It is not some sporadic or isolated activities that are being carried on by the applicant. The applicant claims to have many clients in India and it has been engaged in the said activities since many years. In fact, it has come to light at the time of hearing that the applicant has been filing returns and is being assessed to tax from 2002-03 onwards and even for the year 2009-10 return has been filed. It is an undisputed and undeniable fact that the activities or operations of the applicant in India have the characteristics of 'business' and the applicant is engaged in the said business in India and other countries. The next question is whether the applicant provides services in connection with the prospecting for or extraction of mineral oils. Here again, there is hardly any room for....
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....ld be had? I think section 66 is sufficient to oust the jurisdiction of this Court to deal with a decision on which an assessment is subsequently made." In that case, the court was with interpreting section 66 of the Income War Tax Act which reads as under: "66. Subject to the provisions of this Act, the Exchequer Court shall have exclusive jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act." 6.3. In V.A. Vasumathi v. CIT*** the Kerala High Court observed while interpreting Section 48(1) of the Income-tax Act that the words "in connection with such transfer" mean intrinsically related to the transfer and the expenditure has to be connected with the transfer. 7. Keeping the above exposition of the phrase "in connection with", it is crystal clear that the services offered by the applicant is in connection with the prospecting for or extraction of mineral oils, which business is carried on by the applicant's employers viz. those in the business of oil and gas production. The real, intimate and proximate nexus between the services performed by the applicant in India and the prospecting for or extraction of m....
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.... and exploration of mineral oil. That means, all services associated with Prospecting for and exploration activities are brought within the scope and reach of Section 44BB. Another category of assessees governed by Section 44BB are those supplying plant and machinery on hire. Both these two categories of assesses covered by Section 44BB engage themselves in core activities pertaining to prospecting and exploration of oil and gas and the Parliament thought it fit to accord a special treatment to the income derived by these two categories of non-residents in India. 7.2. The Revenue submits that the exclusionary provision in Explanation 2 to Section 9(1)(vii) has no application here for the reason that the applicant has not undertaken any mining or like project and, therefore, the main part of the definition in FTS continues to govern the applicant' services. It may be recalled that the second part of the Explanation excludes "consideration for any construction, assembly, mining or like project" undertaken by the recipient. In other words, it is contended on behalf of the Revenue that the exclusion would be applicable only to those who have taken up main project but not to those wh....
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....es of Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961. The payments for such services to a foreign company will, therefore, be income chargeable to tax under the provisions of Section 44BB of the Income-tax Act, 1961 and not under the special provisions for the taxation of fees for technical services contained in Section 115A read with Section 44D of the Income-tax Act, 1961." 7.4. The Circular which can be traced to the power vested in the CBDT under section 119(7) of the Act is binding on the department. The executive understanding of the relevant statutory provisions is reflected in this circular which has held the field for nearly two decades. This circular has been relied upon by the Income-tax Appellate Tribunal in a number of cases in order to reach the conclusion that Section 44BB governs the cases in which the services (including technical services) are rendered in relation to the prospecting for or exploration of oil [vide AC(IT) vs. Paradigm Geophysical (P) Ltd.[(2008) 25 SOT 94]; ONGC vs. DC(IT) (ITA No. 15 2145/D/2004); DC(IT) vs. Schlumberger Seaco Inc. (50 ITD 346); DIT (Intrnl.Taxation) vs. Jindal Drilling Industries Ltd. (ITA No. 3416(Del) of 2003....
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....er Section 9(1)(vii). But, the question is which is the appropriate computation provision that is applicable? As between the competing provisions, namely 9(1)(vii) read with Section 44DA and 44BB, Section 44BB being a more specific provision, that provision should prevail for the purposes of computation. Section 44DA, it may be recalled, provides for method of computation of income by way of f.t.s received by a non-resident or a foreign company carrying on business through a PE in India. If the non-resident is engaged in the business of providing services in connection with the prospecting etc. of mineral oils, the computation provisions relating to f.t.s will have to yield to Section 44BB. It may be noticed that in a case of business governed by Section 44BB, normally, the enterprise concerned would be having a PE in India. It is difficult to envisage a situation of a person being engaged in providing services or facilities in connection with prospecting and extraction of mineral oils not having a fixed place of business from where the operations are carried on. Thus, the existence of PE is a common feature both in 44DA as well as 44BB, though there is an explicit reference to PE ....
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....ct. Irrespective of that reasoning, Section 44BB cannot in any case be applied to construction services as they are not included within the fold of Section 44BB. That is why the Tribunal observed that the decisions dealing with the provisions of Section 44BB stood on a different footing. At the same time, the Tribunal while referring to the earlier orders of Tribunal, explained that various services in connection with exploration of mineral oil such as geological and geophysical studies and providing expert personnel were covered under the provisions of Section 44BB. Thus, the decision of Tribunal in Hotel Scopevista Ltd., far from supporting the Revenue, clearly negates the contention of Revenue on the scope of S.44BB. 9.2. The other decision of the Tribunal referred to by the learned Departmental Representative is the case of DC(IT) vs. ONGC as agent of Foramer France*. Even this decision is not contrary to the earlier decisions of the Tribunal in regard to the interpretation of Section 44BB. That was a case in which the non-resident company supplied supervisory staff and personnel having expertise in operation and management of drilling rigs. The Commissioner (Appeals) held t....
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....the case of foreign companies starts with a non-obstante clause "notwithstanding anything to the contrary contained in Sections 28 to 44C". Section 44BB is thus enveloped by the non-obstante clause. It is in this context that the AAR very rightly stated the legal position as follows: "15.3 A perusal of these provisions would make it clear that these are special provisions which have to be read together, for computing and taxing income by way of royalties and fees for technical services in the case of foreign companies. Section 44D starts with an overriding expression 'notwithstanding anything to the contrary contained in sections 28 to 44C....'. This means that section 44D has application in respect of royalties and technical fees in the course of a business and that its special provisions take precedence over sections 28 to 44C and override these provisions. That means section 44BB is also superseded in respect of computation of income by way of royalties or fees for technical services received from an Indian concern ('X' in this case). The proviso to section 44BB excluding the application of that section to cases covered by section 44D is consistent with and complementary to t....
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.... representative: "It was sought to be made out that the above interpretation will render section 44BB altogether redundant. This is not correct for section 44BB will continue to apply to several types of cases in relation to the prospecting for or extraction or production of mineral oils. It is possible to conceive of services or facilities provided in this connection the consideration for which may not amount to 'royalty' or 'fees for technical services' within the scope of the definition in section 9(1)(vi) and (vii). Consideration for the supply of plant and machinery on hire referred to in section 44BB will not be in the nature of 'royalty'. Consideration for any construction, assembly, mining or like project is excluded from the compass of the definition of 'fees for technical services' within the meaning of Explanation to section 9(1)(vii). There is, therefore, a wide range of income falling under section 44BB which will not fall within section 44D. The exclusion of royalty and fees for technical services from the scope of section 44BB will not, therefore, render section 44BB otiose or redundant, as suggested. On the other hand, the proviso in section 44BB will be meaningl....