TaxTMI 
TaxTMI 
2026 (6) TMI 373
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....ncome Tax Act. 2. The Assessing Officer, the Appellate Authority, as well as the Tribunal concurrently held that the payments made for services rendered by the parent company is not reimbursement of expenses but 'fees for technical services' or 'normal service charges'. Hence, Section 44 BB of the Income Tax Act is applicable to the payments made by the assessee to its Non-resident parent company and to the third parties, even though such payments are made in terms of the Production Sharing Contract (PSC). 3. The assessee, in alternate had claimed that, even if the payment made to reimburse the expenses is to be construed as 'payment for service', the same cannot be taxed in view of the DTAA (Double Taxation Avoidance Agreement) between India (where the assessee company is located) and Australia (where the parent company is located). According to the assessee, the recipient of payment has to pay tax, if any, only to the Australian Government. However, the Department rejected the alternate plea also by holding that the DTAA and Section 90 of the Income Tax Act has no role to play in the case of the assessee. Brief Facts: 4(i) On 28.10.1994, in order to exploit the petrol....
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....see relied on Clause 1.4.9, Article 1.65 (Site restoration) and Article 2.4 (Accounting procedures) to sustain its claim. However, the Assessing Officer held that, for the purpose of computation of Income Tax, Article 17 of the PSC allow expenses in relation to commercial production and expenses in respect of drilling and exploration activities alone incurred before or after production commences. The terms of the agreement/contract cannot be prejudice to the computation of income tax under the applicable provisions of the Income Tax, 1961. Hence, the Assessing Officer added back a sum of Rs. 1,01,63,385/-. 8. This part of the assessment order is subject matter of yet another set of appeals, pending for consideration before us. 9. That apart, in the course of assessment proceedings, it was found by the Assessing Officer that certain payments to the assessee non-resident parent company in respect of the expenditure incurred by the parent company in connection with the business activity carried on by the assessee in India, however the assessee has not deducted the tax at source (TAS) in terms of Section 195 of the Income Tax Act. Hence, the assessee held liable for payment of ta....
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.... framed:- T.C.(A).No.733 of 2010: 1. Whether the Tribunal was correct in confirming the order made under Section 201(1) and Section 201(1A) of the Act, in respect of reimbursement made by the assessee Company to Cairn Energy Asia Limited, Australia (CEAL) and unrelated third parties when there is no liability to deduct taxes at source under Section 195 for reimbursement of expenses, which are not chargeable to income tax? 2. Whether the Tribunal was correct in holding that Section 44BB of the Act, would be applicable to reimbursement of expenses made to the parent company outside India and payment to third parties for services? 3. Whether the Tribunal was correct in holding that the payments made under the Production Sharing Contract (PSC) were not reimbursements of expenses, but "fees for technical services" or "normal service charges" covered under Section 44BB of the Act? 4. Whether the Tribunal is correct in upholding the interpretation of Clause of 3.14 of Section 3 of Production Sharing Contract made by the Commissioner (Appeal) in its order? 5. Whether the Tribunal is correct in holding that the provisions of DTAA was ina....
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....ens Aktiongesellschaft: (2009) 177 Taxmann 81(Bombay). 3) Director of Income Tax (International Taxation) vs. Krupp Udhe GMBH: (2013) 40 Taxmann.com 38 (Bombay). 4) Commissioner of Income Tax vs. Enron Expat Services Inc: (2009 SCC OnLine UTT 1416. 5) GE India Technology Centre (P) Ltd vs. Commissioner of Income-Tax: (2010) 327 ITR 456 (SC). 6) Commissioner of Income Tax, Dehradun vs. Enron Oil and Gas India Ltd: (2008) 173 Taxman 348 (SC). 18. On behalf of the respondent/Income Tax Department, the Senior Standing Counsel submitted that the scheme of the Income Tax Act, in the case of business for prospecting, etc., for mineral oil provides special provisions for deductions (Section 42) and for computing profits and gains (Section 44BB). Where a person responsible for paying any such sum chargeable under the Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable [Section 195(2)]. The provisions of Section 195 of the Act is applicable for all ki....
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....ntation drafting, IT & Communication, Taxation Consultants and International Travel Expenses, as reimbursements made to the parent company without any element of profit and those payment is not chargeable to tax. As a consequence Tax at source (TAS) is not payable. 23. Contrarily, the Learned Counsel for the Department vehemently argued that, on reading of the charging sections and the special provisions dealing with computation of tax on Companies such as the assessee involved in prospecting mineral oil, the remittance to the non-resident claimed as reimbursement of actual expenditure were, in fact, "fees for technical service" or "normal service charges." Hence, the assessee, who desired to get deduction, ought to have satisfied the mandatory requirement under Section 195 of the Act. In Transmission Corporation of AP Ltd vs. CIT (1999) 239 ITR 587 (SC), the Hon'ble Supreme Court has categorically held that any remittance to a non-resident includes an element of income is eligible to tax in India. The accounting procedure annexed to the Production Sharing Contract in it. Article 3.1.4 mandates the parties to the contact to charge only the actual costs for the service rendered. ....
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.... assets used in that connection, except assets on which allowance for depreciation is admissible under section 32: [Provided that in relation to any agreement entered into after the 31st day of March, 1981, this clause shall have effect subject to the modification that the words and figures "except assets on which allowance for depreciation is admissible under section 32" had been omitted; and] (c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement; and such allowances shall be computed and made in the manner specified in the agreement, the other provisions of this Act being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement. (2) Where the business of the assessee consisting of the prospecting for or extraction or production of petroleum and natural gas is transferred wholly or partly or any interest in such business is transferred in accordance with the agreement referred to in sub-section (1), subject to t....
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....l" includes petroleum and natural gas. Section 44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.- (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, [being a non-resident,] engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains 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 5 [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....
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....ance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (2A) Notwithstanding anything contained in subsection (2), the provisions of Chapter X A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred t....
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.... and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the [Assessing Officer] to determine, [by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the [Assessing Officer] for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that subsection, and where a....
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....ay incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident- (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed: Provided [further] that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax. (1A) Without prejudice to the provisions of subsection (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct th....
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.... rise to revenues, costs or expenditures which will be credited or charged to the accounts prepared, maintained or submitted hereunder shall be conducted at arms length or on such a basis as will assure that all such revenues, costs or expenditures will not be lower or higher, as the case may be, than would result from a transaction conducted at arms length on a competitive basis with third parties. Article 3.1.4: Charges for services: (i) Third Party The actual costs of contract services, services of professional consultants, utilities and other services necessary for the conduct of Petroleum Operations under the Contract performed by third parties other than an Affiliate of the Contractor, provided that the transactions resulting in such costs are undertaken pursuant to Section 1.8 of this Accounting Procedure. (ii) Affiliates of Contractor (a) Professional and Administrative Services and Expenses: Cost Of professional and administrative services provided by any Affiliate of the Contractor for the direct benefit of Petroleum Operations, including, but not limited to, services provided by the production, exploration, legal, fin....
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....tax on income to non-resident arises. 26. The High Court of Bombay, in Director of Income-Tax (International Taxation) vs. Krupp Udhe GMBHE case, had an occasion to deal with similar plea of the assessee in respect of reimbursement of air tickets to the technicians. Following the decision of Calcutta High Court, the Division Bench of Bombay High Court held as below:- 6. The question as to whether a reimbursement for expenses would form part of the taxable income is not res integra in so far as this court is concerned. In CIT v. Siemens Aktiongesellschaft(2009) 310 ITR 320 (Bom), a Division Bench of this court held that it was in agreement with the view taken by the Calcutta High Court in CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal) and by the Delhi High Court in CIT v. Industrial Engineering Projects (P.) Ltd. (1993) 202 ITR 1014 (Delhi). The observations of this court in Siemens (2009) 310 ITR 320 (Bom) are as follows (page 340): "That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in CIT v.....
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....this Act, other than interest on securities and salary to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the assessing officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable: (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income tax has to be deducted under sub-section (1) may make an application in the prescribed form to the assessing officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that subsection, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1)." ...... 7.... While deciding the scope of Section ....
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....profits unlike the other amounts received towards reimbursement. Therefore, we do not find any sufficient reason to interfere with the impugned orders, passed by the Income-tax Appellate Tribunal, which has affirmed the view taken by the Commissioner of Income-tax (Appeals). The question of law stands answered accordingly. 9. For the reasons, as discussed above, the appeal is dismissed. 29. In Commissioner of Income-Tax vs. Enron Expat Services Inc. (cited supra), the issue regarding the taxability of amounts paid for the services provided on a cost-to-cost basis under a Production Sharing Contract came up for consideration before the High Court of Uttarakhand, wherein the Hon'ble Judges held in favour of the assessee, observing that: "....in terms of Article 3.1.4 of Appendix C of the Production Sharing Contract the assessee cannot charge a profit from the joint venture as it is an affiliate of EOGIL. The production sharing contract has been passed by both the Houses of Parliament as required under section 42(1) of the Act. The assessee's have clearly substantiated the fact that there is no element of profit, therefore, in terms of article 7 of the Double Taxa....
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....ng the profits or gains of any business consisting of prospecting, extraction or production of mineral oil, an assessee would be entitled to claim deduction in respect of the abovementioned three items of expenditure in lieu of or in addition to the allowances admissible under the 1961 Act. Further, such allowances shall be computed and made in the manner specified in the agreement. In short, an assessee is entitled to allowances which are mentioned in PSC. According to the Department, translation losses claimed by EOGIL are not specified in PSC, hence they cannot be claimed as deduction under Section 42(1). 31. From the provisions of law and the above judgments which has interpreted the relevant provisions of law in respect of reimbursements to non-resident company, it is amply clear that if the terms of Production Sharing Contract (PSC) restricts reimbursement of expenditure on cost-to-cost basis, the application of Section 44 BB of Income Tax Act is not called for. Contrarily, if the assessee makes a consolidated claim of expenses under the head 'reimbursement' without break- up details, the assessee is not entitled for relief, without determination by the Commissioner under ....