2016 (4) TMI 317 - HC - Income Tax

Fees for technical services - establishment of permanent establishment ( PE ) in India - Assessee s contention that services in question fell within the scope of construction, assembly, mining or like project - Held that - Prospecting for or extraction or production of mineral oil could be termed as mining operations and consequently provided that expression mining projects or like projects as occurring in Explanation 2 to Section 9(1)(vii) of the Act would also cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas . And, after examining various contracts involved in the appeals before the contracts were inextricably connected with prospecting, extraction or production of mineral oil and, accordingly, proceeded on the basis that consideration for such services was not fees for technical services. Even though there may be certain ancillary works contemplated under the contracts in question but since the dominant purpose of each of such contract is for prospecting, extraction or production of mineral oils, the income from such services were to be computed under Section 44BB of the Act. Question as whether the Tribunal erred in law in holding that the activity of 2D/3D seismic survey carried on by the appellant in connection with exploration of oil, was in the nature of fees for technical services in terms of Explanation 2 to section 9(1)(vii) of the Act must be answered the affirmative, that is, in favour of the Assessee and against the Revenue. We accept the contention advanced on behalf of the Assessee that since it is clearly engaged in business of providing services in connection with prospecting for mineral oils, its income - if it falls within the ambit of Section 44DA(1) of the Act - would be taxable under Section 44BB(1). Tribunal was right in finding that the consderation received by the Assessee from BG and RIL was fees for technical services, in our view, the Tribunal s decision to remit the matter to the AO for determining whether the Assessee had a PE in India and whether the consideration received by it was connected with that PE, would have to be sustained. Accordingly the second question - Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that income of the appellant, in the nature of fees for technical service was liable to tax in India under section 44BB of the Act only if the appellant had Permanent Establishment ( PE ) in India in the relevant assessment year is answered in the negative, that is, in favour of the Revenue and against the Assessee.

Issues Involved:
1. Whether the activity of 2D/3D seismic survey carried on by the appellant in connection with exploration of oil was in the nature of "fees for technical services" under Explanation 2 to Section 9(1)(vii) of the Income Tax Act.
2. Whether the income of the appellant, in the nature of "fees for technical service," was liable to tax in India under Section 44BB of the Act only if the appellant had a Permanent Establishment (PE) in India in the relevant assessment year.

Issue-wise Detailed Analysis:

1. Nature of 2D/3D Seismic Survey as "Fees for Technical Services":
The principal controversy was whether the consideration received by the Assessee for services rendered to entities resident in India constituted "fees for technical services" under Explanation 2 to Section 9(1)(vii) of the Income Tax Act and whether it was taxable under Section 115A or Section 44BB of the Act. The Tribunal had held that the activity of 2D/3D seismic survey carried out by the appellant was in the nature of "fees for technical services."

The Assessee argued that the services were inextricably linked with prospecting and extraction of mineral oil, thus falling within the exclusion provided under Explanation 2 to Section 9(1)(vii) of the Act. This contention was supported by the Supreme Court's decision in Oil and Natural Gas Corporation Limited v. Commissioner of Income Tax & Anr., which held that services related to prospecting, extraction, or production of mineral oil were not considered "fees for technical services."

The Court concluded that the consideration for services rendered by the Assessee could not be construed as "fees for technical services," thus answering the first question in the affirmative, in favor of the Assessee and against the Revenue.

2. Taxability under Section 44BB and the Requirement of Permanent Establishment (PE):
The second issue revolved around whether the income of the appellant, if considered as "fees for technical services," was liable to tax under Section 44BB of the Act only if the appellant had a PE in India during the relevant assessment year. The Tribunal had remitted the matter to the AO to determine whether the Assessee had a PE in India and whether the contracts were effectively connected with that PE.

The Assessee contended that Section 44BB, being industry-specific, should override Section 44DA for income arising from services in connection with prospecting for, or extraction or production of, mineral oils. This view was supported by the Delhi High Court's decision in Director of Income Tax-II v. OHM Ltd., which held that Section 44BB would prevail over Section 44DA for such services.

The Court agreed with the Assessee's contention, stating that if the income fell within the ambit of Section 44DA(1) of the Act, it would be taxable under Section 44BB(1). However, if the income was considered "fees for technical services," the AO would need to determine if the Assessee had a PE in India and whether the contracts were connected with that PE.

The Court concluded that the Tribunal's decision to remit the matter to the AO for determining the existence of a PE and the connection of the contracts with the PE was correct, thus answering the second question in the negative, in favor of the Revenue and against the Assessee.

Conclusion:
The impugned order and the assessment order were set aside, and the matter was remanded to the AO to assess the Assessee's income and tax payable by applying the provisions of Section 44BB of the Act.

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