2019 (2) TMI 1422 - AT - Income Tax

Revenues earned by assessee for providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing - application of deemed profit rate of 10% u/s 44BB - action of the AO to bring the revenue to tax as royalty u/s 9(1 )(vi) at an estimated net income @15% of gross receipts r.w.s 44DA - whether Section 44BB has application in the case of the Assessee? - claim of the assessee U/s 44BB of I.T. Act is based on the contention that it has supplied plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils - proper marshalling of facts - HELD THAT - It is necessary for the claim of the assessee for applicability of Section 44BB of I.T. Act to succeed, that the vessels given on hire by the Assessee are shown to be fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils. In addition, it is also necessary for assessee s claim U/s 44BB of I.T. Act to succeed, that the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. On perusal of the aforesaid order dated 02.12.2014 of DRP, we find that there is no mention in the order of the DRP that these requirements are fulfilled in the case of the assessee. The order of DRP is silent on the crucial facts as to whether the vessels hired by the Assessee to these companies i.e PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and whether the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee.

Issues Involved:
1. Applicability of Section 44BB of the Income Tax Act, 1961.
2. Taxation of revenues as royalty under Section 9(1)(vi) read with Section 44DA of the Income Tax Act, 1961.
3. Interpretation of legislative intent behind Sections 9(1)(vi), 115A, 44DA, and 44BB.
4. Distinction between first leg and second leg contractors.
5. Attribution of profits under Rule 10 of the Income Tax Rules, 1962.

Detailed Analysis:

1. Applicability of Section 44BB of the Income Tax Act, 1961:
The primary issue is whether the income earned by the Assessee from providing vessels on hire to PGS Norway and PGS Singapore for undertaking seismic data acquisition and onboard processing qualifies for taxation under Section 44BB, which deals with the taxation of non-residents engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used in the prospecting for, or extraction or production of mineral oils.

The Assessee claimed that the vessels provided were equipped for seismic data acquisition, which is integral to the prospecting of mineral oils, and thus, the income should be taxed under Section 44BB. The Revenue disputed this, arguing that the income should be taxed as royalty under Section 9(1)(vi) read with Section 44DA, as the services provided were general in nature and not directly connected to the prospecting, extraction, or production of mineral oils.

2. Taxation of Revenues as Royalty under Section 9(1)(vi) read with Section 44DA:
The Revenue contended that the income earned by the Assessee should be taxed as royalty under Section 9(1)(vi) of the Act, which deals with the taxation of income by way of royalty or fees for technical services. The Revenue argued that the payments received by the Assessee for providing vessels on hire should be classified as royalty, which falls outside the purview of Section 44BB and should be taxed under Sections 115A/44DA.

The Assessee countered this by stating that the definition of royalty under Section 9(1)(vi) specifically excludes amounts referred to in Section 44BB. Therefore, the income from providing vessels on hire should be taxed under Section 44BB and not as royalty.

3. Interpretation of Legislative Intent Behind Sections 9(1)(vi), 115A, 44DA, and 44BB:
The Revenue argued that the legislative intent behind Sections 9(1)(vi)/9(1)(vii) read with Sections 115A/44DA and 44BB should be considered. They contended that the provisions of Section 44BB are special provisions that should prevail over the general provisions of Section 9(1)(vi) read with Sections 115A/44DA. The Revenue cited various judicial precedents to support their interpretation.

The Assessee, on the other hand, argued that the Supreme Court in the case of ONGC vs. CIT [2015] 376 ITR 306 (SC) had clarified that the provisions of Section 44BB should be given a wide interpretation and should cover all services or facilities in connection with the prospecting, extraction, or production of mineral oils.

4. Distinction Between First Leg and Second Leg Contractors:
The Revenue contended that the provisions of Section 44BB apply only to first leg contractors directly engaged in the business of prospecting, extraction, or production of mineral oils and not to second leg contractors like the Assessee, who provide services or facilities to the first leg contractors.

The Assessee argued that the provisions of Section 44BB do not distinguish between first leg and second leg contractors. They cited various judicial precedents, including the Delhi ITAT's decision in the case of Louis Dreyfus Armateures SAS vs. ADIT (2015) 153 ITD 579 (Delhi-Trib), which held that Section 44BB applies to both first leg and second leg contractors as long as the plant and machinery supplied on hire are used in the prospecting, extraction, or production of mineral oils.

5. Attribution of Profits Under Rule 10 of the Income Tax Rules, 1962:
The AO proposed to attribute 15% of the gross revenues as profits of the Assessee by applying Rule 10 of the Income Tax Rules, 1962, which deals with the determination of income in the case of non-residents. The Assessee contended that the application of Rule 10 was arbitrary and based on conjectures and surmises. They argued that their income had been properly documented and offered to tax under Section 44BB, and the AO's action of deeming a profit rate of 15% was incorrect.

The ITAT found that the DRP's order lacked adequate discussion of the crucial facts necessary for deciding the question of fact and suffered from factlessness. The ITAT set aside the DRP's order and restored the issue to the DRP for fresh consideration, directing the DRP to pass a denovo order containing proper discussion of relevant facts in accordance with law and principles of natural justice. The AO was directed to pass a fresh assessment order in accordance with the DRP's directions.

Conclusion:
The ITAT concluded that the DRP's order lacked adequate discussion of crucial facts and directed the DRP to pass a denovo order with proper discussion of relevant facts. The appeal of the Revenue was partly allowed for statistical purposes.

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