2021 (11) TMI 1077 - AT - Income Tax

Taxation u/s 44BB - receipts out of the contracts executed to various drilling offshore contractees along with ONGC - nature of the activities and scope of work of the contract - AO held that the contracts receipts are to be treated as Fee for Technical Services (FTS) in respect of equipment rental hire and claim of Section 44BB was denied and taxed the amount u/s 44DA - distinction between PSC and non-PSC partners for deciding whether a receipt would be assessed u/s 44BB or as FTS or Royalty - HELD THAT - Such a distinction has to be rejected as an artificial construct devoid of merit. Secondly, it also cannot be accepted that similar kinds of services can be taxed u/s 44BB of the Act if rendered to a PSC and thereafter, sought to be taxed as FTS or royalty if rendered to a non-PSC partner. The plethora of case laws cited by the ld. ARs and especially the case of CGG Veritas 2012 (4) TMI 280 - ITAT DELHI makes it clear that once a PE is known or admitted to exist then the income as in this case, has to be assessed u/s 44BB of the Act more so because the equipment supplied and services rendered are for the purposes of extraction or production of mineral oils. Thirdly, treating of supply of skilled personnel to operate equipment supplied by the assessee cannot be viewed in isolation since the activity of supplying such manpower is part and parcel of the supply of equipment to be used for extraction or production of mineral oils. For this reason also, the income has to be assessed u/s 44BB of the Act only. We also find that preferring appeal by the Revenue against the decision of the Hon ble High Court in the case of M/s BJ Services Co. (ME) Ltd. 2007 (10) TMI 219 - UTTARAKHAND HIGH COURT cannot be a ground for confirming the appeal. Till the decision is reversed, the order of the Hon ble High Court stands legally binding. Profits Attributable on revenues 5.08% or 2% - While arriving at 5.08%, the ld. CIT(A) has rejected KOA Tools Limited as a comparable company on account that it incurred losses - HELD THAT - The assessee relied on the ruling of the Special Bench of Chandigarh ITAT in the case of DCIT vs. M/s Quark Systems Private Limited 2009 (10) TMI 591 - ITAT, CHANDIGARH wherein it was held that merely because a comparable is making loss, it cannot be excluded from the list of comparables, Imercius is a case in which not only functional area is different. The above principle has also been upheld by other benches of ITAT in the case of UCB India (P) Limited 2009 (2) TMI 237 - ITAT BOMBAY-L , Wockhardt Limited 2010 (7) TMI 643 - ITAT, MUMBAI , Brigade Global Services Private Limited 2014 (12) TMI 337 - ITAT HYDERABAD . Thus we hold that Koa Tools India Limited which clears the FAR test should not be rejected as a comparable for the AY 2009-10. Service Tax Reimbursement - AO treated service tax collected by the assessee as a part of its gross receipts - HELD THAT - The issue under consideration has been recently adjudicated by the Uttarakhand High Court (Full Bench) in assessee s own case and Others 2019 (4) TMI 1177 - UTTARAKHAND HIGH COURT wherein the Uttarakhand High Court on similar facts has held that amount reimbursed to the assessee by ONGC representing service tax paid earlier by assessee to the Government of India and not on account of provision of services in connection with exploration and production of mineral oil , would not form part of aggregate taxable amount as referred under section 44BB. Given the above reasons, the Division Bench held that reimbursement of service tax collected by the assessee should not be included while computing taxable gross receipts under section 44BB of the Act. Also see MITCHELL DRILLING INTERNATIONAL PVT. LTD. 2015 (10) TMI 259 - DELHI HIGH COURT Hence, keeping in view, the pronouncements of the Hon ble Court, we hold that the service tax cannot be made a part of the Gross turnover. Revenue appeal dismissed.

Summary

Issues Involved:
1. Taxability of contract receipts under Section 44BB vs. Section 44DA.
2. Determination of profits attributable to India operations.
3. Inclusion of service tax in gross receipts for the purpose of Section 44BB.

Detailed Analysis:

1. Taxability of Contract Receipts under Section 44BB vs. Section 44DA:
The primary issue was whether the receipts from contracts executed by the assessee should be taxed under Section 44BB or Section 44DA of the Income Tax Act. The assessee argued that the receipts, including reimbursements and service tax, should be taxed under Section 44BB, which applies to non-residents engaged in providing services or facilities in connection with the prospecting, extraction, or production of mineral oils. The AO, however, treated these receipts as "Fee for Technical Services" (FTS) and taxed them under Section 44DA.

The Tribunal examined the nature of the contracts and the relevant provisions of Sections 44BB and 44DA. It concluded that the distinction between PSC (Production Sharing Contract) and non-PSC partners for deciding the applicability of Section 44BB or FTS/Royalty does not have legal support. The Tribunal emphasized that similar services cannot be taxed differently based on the recipient being a PSC or non-PSC partner. The Tribunal upheld the CIT(A)'s decision that the income should be assessed under Section 44BB, as the services and equipment supplied were for the extraction or production of mineral oils.

2. Determination of Profits Attributable to India Operations:
The CIT(A) determined the profits attributable to India operations at 5.08% of the revenues received from ONGC, rejecting the assessee's claim of 2%. The CIT(A) did not consider KOA Tools Limited as a comparable company due to its losses. The assessee argued that KOA Tools Limited should be considered comparable despite its losses, as losses are a regular business phenomenon and do not disqualify a company from being a comparable if it meets other comparability criteria.

The Tribunal agreed with the assessee, citing precedents where companies with losses were considered comparable if they met the functional comparability criteria. The Tribunal held that KOA Tools India Limited should not be rejected as a comparable for the AY 2009-10.

3. Inclusion of Service Tax in Gross Receipts for Section 44BB:
The AO included the service tax collected by the assessee as part of its gross receipts. The assessee contended that service tax should not be included as it does not contain any element of profit. The CIT(A) upheld the AO's decision, reasoning that under Section 44BB, profit is determined with reference to the gross value of transactions, and service tax should be treated as part of the turnover.

The Tribunal examined the issue and referred to the Uttarakhand High Court's ruling in the assessee's own case and others, which held that service tax reimbursed to the assessee does not form part of the aggregate taxable amount under Section 44BB. The Tribunal noted that service tax is a tax levied on the value of taxable services and not on account of the provision of services. Therefore, service tax should not be included in the gross receipts for the purpose of Section 44BB.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on the applicability of Section 44BB for taxing the receipts and the determination of profits attributable to India operations. However, it reversed the CIT(A)'s decision on the inclusion of service tax in gross receipts, holding that service tax should not be included while computing taxable gross receipts under Section 44BB. The appeals of the assessee were allowed, and the appeals of the Revenue were dismissed.