2014 (7) TMI 601 - AT - Income Tax

Royalty u/s 9(1)(vi) and 9(1)(vii) of the Act - Fees for technical services Application of section 44BB of the Act - Invocation of section 44DA of the Act 25% profit attributable to PE against 10% - Held that - There were different composite contracts entered into between assessee and Indian companies and the assessing officer had bifurcated the contract receipts between service fee, rental income and sale of equipment - all the sections relating to royalty/FTS operate in different fields and that is the reason for insertion of proviso to sections 44BB/44DA/115A - Where the assessee was imparting services which entitled it to royalty or FTS simpliciter then the same continues to be assessed u/s 9(1)(vi)/(vii) read with section 115A but where the assessee is imparting services in relation to oil exploration the Royalty/ FTS would be taxable u/s 44BB - it cannot be held that insertion of section 44DA to proviso to section 44BB is to be considered as only clarificatory in nature and in order to make all the provisions relating to royalty/FTS workable, harmonious construction was to be placed. Relying upon CIT v. Hindustan Bulk Carrier 2002 (12) TMI 10 - SUPREME Court revenue s contention is that section 44DA inserted by the Finance Act, 2010 w.e.f. 1-4-2011 in section 44BB is retrospective and, therefore, royalty and fees for technical service should be taxed u/s 44DA and not u/s 44BB - the amendment cannot be held to be retrospective particularly because it brings substantial change in the taxability of assessee - an amendment to the taxing statute if results in higher tax burden on assessee then it is prospective in nature and not retrospective - the contentions cannot be accepted - income arising from letting out equipment, used in connection with the exploration/ prospecting/ extraction of mineral oil taxed u/s 9(1)(vi) by cannot be accepted in view of explanation (iv-a), the income is to be assessed u/s 44BB Decided in favour of Assessee. Income from sale of goods AO taxed the revenue receipts by applying a presumptive profit rate of 25% in gross revenues - Held that - The assessee is a Cayman Island company with which there is no DTAA - the provisions of Income-tax Act are applicable and since the consumables were provided in connection with prospecting for extraction or production of mineral oil, it comes within the ambit of providing services, therefore, the receipts were taxable u/s 44BB - section 44BB is applicable only with respect to Royalty and FTS but since consumables were supplied along with P&M given on hire, therefore, the receipts were taxable u/s 44BB Decided in favour of Assessee. Income from offshore sales Held that - The assessee had not offered any revenue from the contracts entered with Hindustan Oil Exploration Company Ltd. (HOEC) and ONGC - assessee is a Cayman Island company with which India does not have a tax treaty - the taxability of its income is to be determined as per the provisions of the Income-tax Act - if in connection with the contract no operations were carried out in India and the sale concluded outside India then no profit accruing to the non-resident assessee could be taxed in India - the right to property in goods in case of CIF contract passes at a place where the documents are delivered including the bill of lading. The bill of lading as per section 2(4) is a document of title of goods entitling the possession of the documents to transfer or receive goods thereby representative. Under both the contracts with HOEC and ONGC the documents are delivered in India and therefore the right to property in goods has passed in India as the sale got concluded in India - goods were to be supplied in India and thereafter payment was to be made - ONGC had right to rejection of the goods if the goods supplied were not in accordance with the specification and other conditions stated in the order - applying the test of preponderance as laid down in Skoda Export Versus Additional Commissioner Of Income-Tax, AP 1982 (11) TMI 33 - ANDHRA PRADESH High Court - both the parties intended for transfer of title in goods in India - title to goods passed in India in respect of contracts with HOEC and ONGC and income from sale has accrued or arisen in India - section 44BB deals only with royalty and FTS and not sales - The profit arises out of sales activity of non-residents has to be taxed under normal provisions of income-tax. The next issue is whether entire profits arising out of sales are to be attributed or only to the extent it has nexus with the operations carried out in India in connection with the sale - Section 5(2) which deals with the scope of total income of a non-resident is relevant - the total income of a non-resident includes all income from what-ever source derived which is received or deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to him in India during such year - receipt of income refers to the first occasion when the recipient got the money under his own control thus, the matter is remitted back to the AO for attributing income out of the two contracts to the extent of operations relating to sales carried out in India Decided partly in favour of Assessee. Levy of interest u/s 234B of the Act Held that - The AO is directed not to charge interest u/s 234B in respect of all contracts entered into by the assessee with various organizations in India except with respect to the contracts entered into with HOEC and ONGC - as far as income taxable u/s 44BB in respect of various contracts are concerned, the assessee itself has accepted the liability from the very beginning - it cannot be inferred that assessee would have made any representation which would have influenced the deductor companies for not deducting the tax - as far as contract with HOEC and ONGC are concerned, income arose in India thus, Following DIT-I, International Taxation Versus Alcatel Lucent USA, Inc., Alcatel Lucent World Services Inc. 2013 (11) TMI 734 - DELHI HIGH COURT the interest u/s 234B is leviable Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Taxability under Section 44BB vs. Section 44DA/115A.
2. Revenue from supply, rental, and services.
3. Taxability of offshore sales.
4. Interest under Section 234B.
5. Penalty under Section 271B.

Detailed Analysis:

1. Taxability under Section 44BB vs. Section 44DA/115A:
The primary issue was whether the income arising from services related to oil exploration should be taxed under Section 44BB or Section 44DA/115A. The Tribunal noted that Section 44BB is a special provision for computing profits from the business of providing services or facilities in connection with oil exploration. It was held that Section 44DA is applicable from A.Y. 2011-12 and not retrospective. The Tribunal relied on the decision of the Uttarakhand High Court in B.J. Services Co. Middle East Ltd. v. DDIT, which held that Section 44DA is prospective. Therefore, for the assessment years prior to 2011-12, the income was to be taxed under Section 44BB.

2. Revenue from Supply, Rental, and Services:
The Assessing Officer had bifurcated the revenue into supply, rental, and services, taxing rental income as "royalty" and service income as "fees for technical services" under Sections 9(1)(vi) and 9(1)(vii) respectively. The Tribunal found that the income from rental of equipment and services in connection with oil exploration should be taxed under Section 44BB. The Tribunal emphasized that Section 44BB covers all services related to oil exploration, including rental of equipment.

3. Taxability of Offshore Sales:
The Tribunal examined the contracts with Hindustan Oil Exploration Co. Ltd. (HOEC) and ONGC to determine if the sales were concluded offshore or in India. It was found that the contracts specified CIF (Cost, Insurance, Freight) terms, and the delivery of goods and transfer of title occurred in India. Therefore, the income from these sales was taxable in India. The Tribunal directed the Assessing Officer to attribute income based on the operations carried out in India.

4. Interest under Section 234B:
The issue was whether interest under Section 234B was chargeable when the assessee claimed that tax was deductible at source. The Tribunal held that interest under Section 234B is compensatory and should be charged if the assessee denied tax liability in India initially. However, for contracts where the assessee accepted tax liability from the beginning, no interest under Section 234B was chargeable.

5. Penalty under Section 271B:
The Tribunal found the issue of penalty under Section 271B premature and did not adjudicate it at this stage.

Conclusion:
The Tribunal allowed the appeals partly, holding that income from services related to oil exploration should be taxed under Section 44BB for the assessment years prior to 2011-12. Revenue from offshore sales was taxable in India as the title passed in India. Interest under Section 234B was chargeable for contracts where the assessee initially denied tax liability. Penalty under Section 271B was not adjudicated.