2018 (2) TMI 1343 - AT - Income Tax

Assessment of income - Revenue earned from a non-resident company on account of provision of technical personnel for executing contracts with ONGC - application of deemed profit rate of 10% u/s 44BB or u/s 44DA/115A read with section 9(1)(vii) - Held that - The issue is re-covered in favour of the assessee by the order of the Hon ble Supreme Court in the case of ONGC vs. CIT 2015 (7) TMI 91 - SUPREME COURT wherein it has been held that the payments for providing various services in connection with prospecting extraction and production of oil would be assessed u/s 44BB and not u/s 44DA. Also decided in assessee s own case 2016 (7) TMI 826 - ITAT DELHI the facts indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the nonresident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of section 44BB and not section 44D. - Decided in favour of assessee

Issues Involved:

1. Applicability of Section 44BB versus Sections 44DA/115A read with Section 9(1)(vii) of the Income Tax Act, 1961.
2. Interpretation of 'services' or 'facilities' under Section 44BB.
3. Eligibility of revenues earned by the assessee for treatment under Section 44BB.
4. Distinction between receipts from Production Sharing Participants (PSC Partners) and Non-Production Sharing Participants (Non-PSC Partners).
5. Applicability of CBDT’s Instruction No. 1862.
6. Legislative intent behind the scheme of taxation under Sections 9(1)(vi)/9(1)(vii) read with Sections 115A/44DA and 44BB.
7. Application of the proviso to Section 44DA.
8. Applicability of Section 44BB versus general provisions under Section 115A/44DA.
9. Definition and interpretation of 'Indian Concern' under Sections 115A/44DA.
10. Source rule of taxation and situs of activity in India.

Issue-wise Detailed Analysis:

1. Applicability of Section 44BB versus Sections 44DA/115A read with Section 9(1)(vii):
The DRP directed the Assessing Officer (AO) to apply the deemed profit rate of 10% under Section 44BB on revenues earned by the assessee from a non-resident company for providing technical personnel for executing contracts with ONGC. The AO had proposed to tax the revenue under Sections 44DA/115A read with Section 9(1)(vii). The DRP held that the services provided were in connection with prospecting for mineral oil and thus eligible for treatment under Section 44BB.

2. Interpretation of 'services' or 'facilities' under Section 44BB:
The DRP noted that the terms 'services' or 'facilities' under Section 44BB are not specifically defined and are general in nature. However, once the payments take the character of Fees for Technical Services (FTS) as defined under Section 9(1)(vii), they go outside the purview of Section 44BB and have to be taxed under Sections 115A/44DA.

3. Eligibility of revenues earned by the assessee for treatment under Section 44BB:
The DRP held that the revenues earned by the assessee on account of provision of services were in connection with prospecting for mineral oil and hence eligible for treatment under Section 44BB. The DRP referred to the Delhi High Court decision in CIT v. Rio Tinto Technical Services and other relevant case laws to support this view.

4. Distinction between receipts from PSC Partners and Non-PSC Partners:
The DRP held that no distinction can be made between receipts from PSC Partners and Non-PSC Partners and between services rendered by first-leg and second-leg vendors. The DRP noted that the receipts from second-leg contracts, even if entered with companies not directly engaged in oil production and exploration, are still liable to be taxed under Section 44BB.

5. Applicability of CBDT’s Instruction No. 1862:
The DRP held that the case of the assessee is covered by CBDT’s Instruction No. 1862, which clarifies that the exclusion from the definition of FTS in respect of 'mining and like project' would cover services like drilling operations for exploration or exploitation of oil and natural gas. Therefore, these activities fall outside the ambit of FTS under Section 9(1)(vii).

6. Legislative intent behind the scheme of taxation under Sections 9(1)(vi)/9(1)(vii) read with Sections 115A/44DA and 44BB:
The DRP interpreted the legislative intent and held that the provisions of Section 44BB are more specific and prevail over the general provisions of Sections 115A/44DA. The DRP relied on case laws including Rolls Royce Pvt Ltd and ONGC As Agent of Foramer France to support this interpretation.

7. Application of the proviso to Section 44DA:
The DRP held that the proviso to Section 44DA brought about by the Finance Act 2011 was clarificatory in nature and its application has to be read into the main provisions from the time the main provision came into effect, as per the Supreme Court decision in Sedco Forex International Drilling v. CIT.

8. Applicability of Section 44BB versus general provisions under Section 115A/44DA:
The DRP held that Section 44BB, being a more specific provision, shall prevail over the general provisions of Sections 115A/44DA. This was supported by the Delhi High Court decision in DIT v. OHM Ltd, which held that services rendered by sub-contractors at off-shore rigs are part of activities for extraction of mineral oils and covered under Section 44BB.

9. Definition and interpretation of 'Indian Concern' under Sections 115A/44DA:
The DRP noted that the term 'Indian Concern' is not defined in Sections 115A/44DA. However, it should be given a purposive construction, and a non-resident entity executing contracts in India and making payments for services availed for such contracts should be treated as an Indian Concern for the purpose of these sections.

10. Source rule of taxation and situs of activity in India:
The DRP emphasized that Sections 44DA/115A enshrine the source rule of taxation, intended to cover all payments in the form of Royalties/FTS where the source of such payments lies in India. The DRP noted that payments made by a non-resident entity for contracts executed in India have their source and situs of activity in India, thereby falling under the purview of Indian taxation.

Conclusion:
The ITAT upheld the DRP's direction to apply the deemed profit rate of 10% under Section 44BB for the revenues earned by the assessee, dismissing the revenue's appeal. The ITAT relied on the Supreme Court decision in ONGC v. CIT and other relevant case laws, affirming that the services provided by the assessee were in connection with prospecting, extraction, or production of mineral oil and thus taxable under Section 44BB.

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