2015 (7) TMI 1314 - AT - Income Tax

Fees for Technical Service u/s 44D V/S u/s 44BB as services or facilities in the prospecting for or extracting or production of mineral oils - transfer of technical knowledge and skill - payment made by the assesses ONGC to foreign company M/s Gaffney Cline & Associates UK for audit of reserves for Mumbai High field - test of Make Available - HELD THAT - The scope of work of the contract included audit of ONGC s current Proved Proved Probable and Proved Probable Possible ultimate Reserves and Reserves of oil condensate associated gas and free gas. The above services were thus related to the activity of prospecting for or exploration of mineral oils which are covered under the provisions of section 44 BB of the Act. Moreover the test of Make Available is not satisfied as the assessee could not derive an enduring benefit and utilize the knowledge or know how on his own in future without the aid of the service provider for carrying out identical activities. There is no transfer of technical knowledge and skill enabling the assessee to perform similar activities in future at its own. Hence the payment cannot be taxed as fees for technical services even otherwise in the light of the proposition of law laid down in the case of De beers India Minerals Pvt. Ltd. 2012 (5) TMI 191 - KARNATAKA HIGH COURT . - decided against revenue

Summary

Issues:
Whether payment made by the assessee to a foreign company for audit of reserves for Mumbai High field is taxable as "Fees for Technical Service" under section 44D or as services for mineral oils under section 44BB of the Income Tax Act.

Analysis:

1. Issue of Taxability under Section 44D vs. Section 44BB:
The primary issue in this case revolved around determining the taxability of the payment made by the assessee to a foreign company for the audit of reserves for the Mumbai High field. The revenue contended that the payment should be considered as "Fees for Technical Service" under section 44D of the Act. However, the assessee argued that the payment falls under the purview of services related to the prospecting for or extraction of mineral oils under section 44BB of the Act.

2. Nature of Services Rendered:
The assessee, ONGC, made a payment to a UK-based company for the audit of its resources as per the agreement signed. The foreign company did not have a permanent establishment in India. The CIT(A) examined the nature of services provided and concluded that the payment for the audit of reserves could not be taxed as fees for technical services. It was highlighted that the benefits derived by the assessee were not enduring, and there was no transfer of technical knowledge enabling the assessee to perform similar activities in the future independently.

3. Legal Precedents and Interpretation:
The CIT(A) relied on various case laws, including the decision of the Hon'ble Karnataka High Court in a similar case, to support the argument that the services provided did not satisfy the "make available clause." Furthermore, the judgment of the Hon'ble Supreme Court in a related case emphasized that payments connected with prospecting, extraction, or production of mineral oil should be assessed under section 44BB rather than section 44D of the Act.

4. Conclusion and Dismissal of Appeal:
After considering the arguments presented by both parties, the Tribunal dismissed the appeal of the revenue. The Tribunal concurred with the CIT(A)'s findings that the payment made by the assessee for the audit of reserves was appropriately taxable under section 44BB of the Act. The Tribunal emphasized that the services provided were directly related to the exploration and extraction of mineral oil, thus falling within the scope of section 44BB. The absence of enduring benefits and the inability of the assessee to utilize the knowledge independently in the future without the service provider's aid further supported the decision to reject the revenue's appeal.

In conclusion, the Tribunal upheld the decision of the CIT(A) and dismissed the revenue's appeal, affirming that the payment made for the audit of reserves for the Mumbai High field was taxable under section 44BB of the Income Tax Act, and not as fees for technical services under section 44D.