2021 (10) TMI 1333 - AT - Income Tax

Income accrued in India - services proved by the appellant as fees for technical services (FTS) u/s 9(1)(vii) - scope of work is in respect of Project Management Consultancy services to ONGC for completion of balance work of G1 and GS 15 development project - HELD THAT - During the relevant assessment year the appellant assessee has received consideration from ONGC and Leighton India for providing engineering consultancy services. During the course of assessment proceeding the AO had asked the Appellant to show cause why the receipts from ONGC (and Leighton) should not be treated as FTS. Appellant explained that the consideration received by it from ONGC and Leighton India were in relation to the exploration and production of oil and natural gas and did not fall within the definition of FTS under section 9(1)(vii) of the Act. Since the consideration received by the Appellant was covered by the exclusion provided in the definition of FTS for mining or like projects , the same should not be treated as FTS under section 9(1)(vii). Appellant relied on the decision in case of ONGC 2015 (7) TMI 91 - SUPREME COURT wherein the Hon ble Supreme Court has held that where the pith and substance of an agreement is providing services for prospecting, extraction or production of mineral oils, payments made to non-resident companies are assessable under the provisions of section 44BB of the Act and not u/s 44D. From the perusal of the services and the nature of scope of work, we find that duties carried out by the appellant on contract with ONGC in fact has mining activity which was excluded from the definition of FTS u/s 9(1)(vii) as they are essential to the development and exploration of the oil and gas fields of ONGC. These services ostensibly is to be regarded as exclusion to FTS under section 9(1)(vii) and such activities need not itself be of mining or like nature so long as they are related to mining or like project as has been clarified in the Circular No. 1862 dated 22.10.1990, that the expressions 'mining projects' or 'like projects' occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas. In parting of training is a part of mining activity only carried out by his appellant in his contract to the aforesaid parties. In so far as the reliance placed by the Ld. DR on the decision of Paradigm Geophysical Pty Limited, was on different facts as the assessee therein was involved in providing software services definition of which is covered u/s 9(1)(vi) of the Act whereas Appellant s case is that of FTS under section 9(1)(vii) read with section 44DA of the Act. AR further explained that section 44DA of the Act can be applied only if the income in the first-place falls within the definition of FTS under section 9(1)(vii). In the Appellant s case, since the services are covered by the exclusion in section 9(1)(vii), they do not qualify as FTS for invoking section 44DA of the Act. Accordingly we hold that not only receipt of accounts of services which has been accepted by the Ld. CIT (A) was also other scope of work relating to attending meetings but also the other activities are inextricably linked with the contract of design and engineering of submarine pipeline. Therefore the entire receipts for the ONGC as well as Leighton India are taxable u/s 44BB. Accordingly the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Whether the services provided by the appellant to ONGC qualify as 'mining or like project' services or should be treated as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961.
2. Whether the receipts from services provided to Leighton India should be treated as fees for technical services or taxed under section 44BB of the Act.
3. Whether the receipts referred to in Grounds 1 and 2 should be taxed under section 44BB or section 44DA of the Act.

Issue-Wise Detailed Analysis:

1. Services to ONGC:
The appellant provided Project Management Consultancy (PMC) services to ONGC for the completion of the G1 and GS 15 development project. The scope of work included progress reporting, preparation of project completion schedules, preparation of specifications, review and approval of detailed design documents, offshore construction supervision, flow assurance, and review of additional engineering requirements. The Assistant Commissioner of Income Tax (ACIT) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that these services are not related to 'mining or like projects' and treated the consideration received as fees for technical services (FTS) under section 9(1)(vii) of the Income Tax Act, 1961. The CIT(A) held that the services provided by the appellant did not qualify as 'mining or like project' services and thus were not excluded from the purview of section 9(1)(vii) of the Act.

2. Services to Leighton India:
The appellant provided design and engineering services for submarine pipelines to Leighton India. The scope of work included pre-engineering survey inputs, review of survey data, pipeline protection/stability design, pipeline free span analysis, offshore pipeline crossing design, pipeline cathodic protection design, pipe lay feasibility study, and pipeline purchase specifications. The CIT(A) found that the services related to the design and engineering of submarine pipelines were integral to the exploration of mineral oil and thus taxable under section 44BB of the Act. However, the services of attending meetings and providing office space were considered managerial services and were taxed under section 44DA of the Act.

3. Taxation under Section 44BB or 44DA:
The appellant argued that the receipts from ONGC and Leighton India should be taxed under section 44BB of the Act, which deems 10% of gross receipts as taxable income, rather than under section 44DA. The appellant relied on the Supreme Court decision in ONGC v CIT, which held that payments for services directly associated with prospecting, extraction, or production of mineral oils should be taxed under section 44BB. The CIT(A) held that the entire receipts from ONGC should be taxed under section 44DA, while the receipts from Leighton India should be partly taxed under section 44BB and partly under section 44DA.

Final Judgment:
The Income Tax Appellate Tribunal (ITAT) examined the nature of the services provided and found that the services to ONGC were essential to the development and exploration of oil and gas fields, thus qualifying as 'mining or like project' services excluded from the definition of FTS under section 9(1)(vii). Similarly, the services provided to Leighton India, except for attending meetings and providing office space, were also integral to the exploration of mineral oil and should be taxed under section 44BB. The ITAT concluded that the entire receipts from ONGC and Leighton India should be taxed under section 44BB of the Act. The appeal of the assessee was allowed, and the order was pronounced on 8th October 2021.