2022 (7) TMI 1507 - AT - Income Tax

Accrual of income in India - Treating the amount received as Fees for Technical Services (FTS), hence, taxable u/s 44DA or 44BB - As per amount received is for providing services in connection with prospecting for or extraction or production of mineral oils, hence, has to be treated as business profit, thus, taxable under section 44BB - scope of India - France DTAA - whether amount received by the assesse qualifies as FTS under section 9(1)(vii)? - AO was of the view that the work/services performed/rendered by the assessee is by way of second line contractor - assesse is a non-resident corporate entity incorporated under the laws of France HELD THAT - The scope of work clearly envisages that the assessee has to render certain services in connection with the mining activity carried on in well A5 in KG Basin. Thus, once the activity carried on by the assessee falls within the expression mining or like projects , it goes out of the purview of FTS as defined under Explanation 2 to section 9(1)(vii) of the Act. That being the factual and legal position, the amount received by the assessee cannot be treated as FTS under section 9(1)(vii) of the Act. That being the case, the provision of the Act being more beneficial in such a scenario, as per section 90(2) of the Act, will be applicable. Therefore, there is no need for us to examine the applicability of the term FTS under India France Tax Treaty. Thus, once the amount received by the assessee does not fall within the definition of FTS under section 9(1)(vii) of the Act, by default, section 44DD would not apply to such payment. Whether the amount received by the assessee is business profit under section 44BB? - as per sub-section (1) of section 44BB, the profits from providing services or facilities in connection with prospecting for or extraction or production of mineral oil would fall within the ambit of section 44BB. Thus, it is required to determine, whether the services provided by the assessee under the contract with RIL are in connection with prospecting for or extraction or production of mineral oils. The expression in connection with being of widest amplitude cannot be given a restrictive meaning. The expression would also encompass services or facilities provided to a person who is engaged in exploration or production of mineral oils. Going by the plain meaning of the words as used in the aforesaid provision, it cannot be said that for claiming benefit under section 44BB, a non-resident entity providing services in connection with exploration or production of mineral oils must itself be engaged in such activities. In the case of Oil and Natural Gas Corporation Vs. CIT 2015 (7) TMI 91 - SUPREME COURT while taking note of the nature of work to be executed under the contract, has observed that the pith and substance of the contract is inextricably connected with prospecting for or extraction or production of mineral oil. Thus, the amount received falls under section 44BB(1) of the Act. The aforesaid observations of Hon ble Supreme Court would squarely apply to the facts of the present appeal, as, the work performed by the assessee under the contract is definitely in connection with prospecting for or extraction or production of mineral oils as it is inextricably linked to the exploration/extraction of oil from A5 well. Contention of the Revenue that section 44BB would not be applicable to a second line contractor - As we find, the aforesaid issue has been decided against the Revenue by a Coordinate Bench at Delhi in case of DCIT Vs. Technip UK Ltd. 2018 (12) TMI 1069 - ITAT DELHI , thus we have no hesitation in holding that the amount received by the assessee has to be charged to tax under section 44BB of the Act. Therefore, we do not find any valid reason to interfere with the decision of learned DRP

Summary

Issues Involved:
1. Whether the amount received by the assessee from M/s. Reliance India Ltd. (RIL) qualifies as Fees for Technical Services (FTS) under section 44DA of the Income-tax Act, 1961.
2. Whether the services rendered by the assessee are in connection with prospecting for or extraction or production of mineral oils, hence taxable under section 44BB of the Act.

Issue-wise Detailed Analysis:

1. Qualification of Amount as Fees for Technical Services (FTS) under Section 44DA:

The Revenue contended that the amount received by the assessee from RIL qualifies as FTS under section 9(1)(vii) of the Act and Article 13 of the India-France DTAA. The Assessing Officer argued that the services provided by the assessee, being a second line contractor, do not fall within the exception of "mining or like project" under Explanation 2 to section 9(1)(vii). Consequently, the amount received should be taxed under section 44DA of the Act.

The learned DRP, however, disagreed with the Assessing Officer's view. It held that the services rendered by the assessee are in connection with prospecting for mineral oil and thus fall within the exception provided under Explanation 2 to section 9(1)(vii). The DRP further held that the "make available" condition under Article 13 of the India-France DTAA was not satisfied. Therefore, the amount received cannot be regarded as FTS under both the Act and the DTAA.

The Tribunal upheld the DRP's decision, emphasizing that the services rendered by the assessee in connection with the remedial action on well A5 in the Krishna Godawari Basin are indeed related to prospecting for mineral oil. This qualifies the services under the exception for "mining or like project" as per Explanation 2 to section 9(1)(vii). Consequently, the amount received does not qualify as FTS and section 44DA does not apply.

2. Taxability under Section 44BB:

The assessee argued that the services rendered were in connection with prospecting for, extraction, and production of mineral oil, and thus should be taxed under section 44BB of the Act. The assessee computed its income on a presumptive basis at 10% of the gross receipts as per section 44BB.

The Tribunal noted that section 44BB is a special provision for computing profits and gains in connection with the business of exploration of mineral oils. The Tribunal referred to the Supreme Court's decision in ONGC Ltd. Vs. CIT, which clarified that activities connected with prospecting for or extraction or production of mineral oils fall under "mining or like projects." The Tribunal observed that the services rendered by the assessee were directly associated with the exploration and production of mineral oils, thus qualifying under section 44BB.

The Tribunal also addressed the Revenue's contention that section 44BB does not apply to second line contractors. It cited the decision in DCIT Vs. Technip UK Ltd., which held that section 44BB applies to both main and second line contractors providing services in connection with mineral oil exploration.

In conclusion, the Tribunal held that the amount received by the assessee should be taxed under section 44BB of the Act, as the services rendered were in connection with the prospecting for and extraction of mineral oils. The appeal by the Revenue was dismissed, affirming the DRP's decision.

Final Judgment:
The appeal by the Revenue was dismissed, and the Tribunal upheld the DRP's decision that the amount received by the assessee is not FTS under section 9(1)(vii) of the Act or Article 13 of the India-France DTAA, and should be taxed under section 44BB of the Act.