2016 (5) TMI 1341 - AAR - Income Tax

Applicability of section 44BB - Profits derived by the installation permanent establishment for executing contract awarded by Indian Oil Corporation Limited (IOCL) for installation of SPM systems - whether assessable to tax in India as per the provisions of section 44BB of the Income-tax Act, 1961 ? - Held that - We find that in this case the applicant had entered into two separate contracts with IOCL and L&T respectively. As regards contract with IOCL it was noted that the contract was loaded in favour of mobilisation expenses though it was a divisible one segregating the mobilising segments and other segments. Section 44BB is a special provision and has a self contained code relating to the taxability of non-resident for providing services in connection with prospecting for, extraction of and production of mineral oils and this section prevails over other general provisions including that of section 44DA. The provisions of section 44BB take into consideration the aggregate of amounts paid or payable to the assessee on account of the provisions of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India. Therefore, it is the entire consideration received which will be considered for taxability and not the profits derived by the installation of permanent establishment of the applicant. During the course of hearing this fact was pointed out to Shri S.D. Kapila, learned counsel for the applicant and he had agreed to this proposition. We conclude that the entire consideration received by the applicant in respect of contract with IOCL for executing work of installation of SPM System, offshore and onshore pipelines and associated facilities for integrated offshore crude oil unloading facilities located at Paradip would be chargeable to tax under the provisions of section 44BB of the Income-tax Act.

Issues Involved:

1. Whether the profits derived by the installation permanent establishment of the applicant for executing a contract awarded by IOCL for installation of SPM systems are assessable to tax in India as per the provisions of section 44BB of the Income-tax Act, 1961.
2. Interpretation of the term "mineral oils" under section 44BB.
3. Applicability of section 44BB to the payments received by the applicant.
4. Consideration of the entire contract amount for taxability under section 44BB.

Issue-wise Detailed Analysis:

1. Assessability of Profits under Section 44BB:

The applicant, Hyundai Heavy Industries Limited (HHI), a tax resident of South Korea, entered into a contract with IOCL for the installation of SPM systems and associated facilities. The applicant contended that the consideration received falls within the scope of section 44BB, which pertains to non-residents engaged in providing services or facilities in connection with the exploration, extraction, or production of mineral oils. The applicant argued that the profits derived should be assessed under section 44BB, which deems 10% of the aggregate amounts received as the profits and gains of such business chargeable to tax.

2. Interpretation of "Mineral Oils":

The applicant claimed that the term "mineral oils" includes both crude oil and the liquid products derived from crude petroleum, such as LPG, Naphtha, Motor Spirit, Jet Fuel, Kerosene, and Diesel. This interpretation was supported by Circular No. 57 of 1971, which stated that refining crude oil into various products qualifies as the production of mineral oil. The Department of Revenue, however, argued that "mineral oils" should be restricted to crude oil and not include downstream products.

3. Applicability of Section 44BB:

The Department contended that section 44BB applies only to upstream activities, such as prospecting, exploration, and extraction of mineral oil, and not to midstream or downstream activities like transportation or refining of crude oil. They relied on the principle of noscitur-a-sociss and ejusdem generis to argue for a restrictive interpretation of "production" to mean only activities analogous to prospecting and extraction.

4. Consideration of Entire Contract Amount for Taxability:

The Department argued that the contract involved not just installation but also significant elements of technical services, which should be taxed under sections 44DA or 115A as fees for technical services or royalties. They cited previous rulings where similar contracts were bifurcated, and only parts related to equipment use were taxed under section 44BB.

Ruling and Analysis:

The Authority for Advance Rulings (AAR) concluded that section 44BB is a special provision introduced to simplify the computation of taxable income for non-residents providing services in connection with the exploration and exploitation of mineral oils. The term "mineral oils" was interpreted broadly to include both crude oil and its derivatives, as supported by Circular No. 57 of 1971 and the Bombay High Court ruling in Burmah Shell Refineries Ltd. v. G. B. Chand, ITO.

The AAR rejected the Department's restrictive interpretation, noting that the Central Board of Direct Taxes (CBDT) had clarified that section 44BB covers both exploration and exploitation of mineral oils. The AAR emphasized that the entire consideration received for the contract, including installation and associated facilities, falls under section 44BB.

The AAR also distinguished the present case from previous rulings cited by the Department, noting that the nature of the contract and the scope of work were different. The AAR reiterated that section 44BB is a self-contained code for taxing non-residents providing services in connection with mineral oil production and prevails over general provisions like section 44DA.

Conclusion:

The entire consideration received by the applicant for the contract with IOCL for the installation of SPM systems and associated facilities is chargeable to tax under section 44BB of the Income-tax Act. The ruling was pronounced on May 11, 2016.

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