2016 (3) TMI 421 - AT - Income Tax

Addition to gross receipts - offer to tax revenues only on a pro-rata basis - Held that - As far as the issue of inclusion of ₹ 3,04,18,274/- in gross receipt for the purposes of computing is concerned, we are of the considered opinion that the contention of the assessee is incorrect. Gross payments are intricately linked to the services/works rendered by the assessee and arise due to the execution of contract in India, under the terms and conditions of the contract between the assessee and Siem Offshore Inc. The vessel was hired by the contract and it was only for this purpose that the vessel and the crew were involved in the said contract. Thus, it is improper on the part of the assessee to offer to tax its revenues only on a pro-rata basis based upon the number of days the vessel was stationed within 200 nautical miles from the Indian shore line. As the contract for the provision of crew was a continuing contract, it cannot be said that revenues were not earned for the period the vessel was out of the territorial waters of India. Hence, the entire contract amount is to be considered for the purpose of calculating the gross receipts and all receipts received against the execution of the contract would come under the purview of gross receipts. Thus, gross amounts for the months of November 2007, December 2007 and January 2008 are to be included in the gross receipts. We accordingly uphold the action of the Assessing Officer and the Ld. CIT (A) on this issue and decline to interfere. - Decided against assessee Revenues earned - taxed as Fees for Technical Services (FTS) or under the provisions of section 44BB - Siem Offshore Inc had leased a vessel under a time charter agreement to Electromagnetic Geo Services AS ( EMGS ) to assist EMGS in its exploration of seabed and subsoil (EMGS has entered into a contract with Oil and Natural Gas Corporation Ltd) - Held that - Specific services are contemplated only under section 44BB and, therefore that being special provision, the same will prevail over all other provisions dealing with royalty/FTS. In no other section dealing with royalty/FTS, specific services are provided. In this regard, one may also refer to section 293A of the Act which empowers the Central Government to grant exemptions in relation to participation in the business of prospecting for or extraction etc. of mineral oil. In fact separate notifications have been issued by the Government in exercise of its power conferred u/s 293A to give relief to the assessees in connection with the business of exploration and extraction of mineral oil. Considering the pressing requirement of the oil industry, sections 42 and 293 A were inserted in the Act in view of the high expenditure involved in the business of oil exploration. When viewed in the back drop of this objective, we find that section 44BB has been couched in such a manner so as to encompass within its ambit all services connected with oil exploration. Thus, in our opinion, if a non-resident is engaged in the business of providing services or facilities in connection with the prospecting for extraction or production of mineral oil, then 10% of the aggregate of the amounts received/accrued will be deemed to be the profits and gains of such business chargeable to tax in terms of provisions of section 44BB of the Act. Thus on the facts of the case and respectfully following the ratio of the judgment of the Hon ble Apex Court in ONGC vs. CIT & Anr. 2015 (7) TMI 91 - SUPREME COURT it is our considered opinion that the revenues of the assessee should be taxed under the provision of section 44BB of the Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Taxability of revenues earned outside Indian territorial waters.
2. Transfer pricing adjustment.
3. Classification of revenues as Fees for Technical Services (FTS) or under section 44BB of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Revenues Earned Outside Indian Territorial Waters:
The primary contention was whether revenues earned by the assessee, a non-resident company, for providing crew services on a vessel operating beyond 200 nautical miles from Indian shorelines are taxable in India. The assessee argued that such revenues should not be taxable as the services were rendered outside India. The Assessing Officer (AO) and the CIT (A) disagreed, asserting that the contract for providing crew was a continuing contract and the income could not be segregated based on the vessel's location. The Tribunal upheld the AO's and CIT(A)'s view, stating that gross payments are intricately linked to services rendered under the contract executed in India. Therefore, the entire contractual amount, including revenues for periods the vessel was outside Indian territorial waters, should be included in gross receipts for tax purposes.

2. Transfer Pricing Adjustment:
The second issue involved a transfer pricing adjustment of Rs. 55,37,033/- suggested by the Transfer Pricing Officer (TPO). The assessee did not press this ground during the hearing, and it was dismissed as withdrawn.

3. Classification of Revenues as Fees for Technical Services (FTS) or Under Section 44BB:
The third issue was whether the revenues earned should be taxed as FTS under section 9(1)(vii) or under section 44BB of the Income Tax Act, 1961. The assessee provided crew and management services for a vessel used in oil exploration, arguing that such revenues should be taxed under section 44BB, which deals with services connected to the prospecting, extraction, or production of mineral oils. The Tribunal analyzed various provisions and judicial precedents, including the CBDT Instruction No. 1862 and the Supreme Court's decision in ONGC vs. CIT. It concluded that services directly associated with oil exploration fall under section 44BB. Therefore, the Tribunal held that the assessee's revenues should be taxed under section 44BB and not as FTS under section 9(1)(vii).

Conclusion:
The Tribunal upheld the inclusion of revenues earned outside Indian territorial waters in gross receipts for tax purposes, dismissed the transfer pricing adjustment as withdrawn, and ruled that the assessee's revenues should be taxed under section 44BB of the Income Tax Act, 1961. The appeal was partly allowed.