2021 (2) TMI 946 - AT - Income Tax

Taxability of Amounts paid to the non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil - Fee for technical services covered u/s 115A or it is inextricably connected with processing, extraction or production of mineral oil u/s 44BB - Payment for rendering services for microseismic acquisition, processing and interpretation of micro-seismic data in two observation wells during hydro-fracturing operations carried out in the wells at Bakrol oil field - Short deduction of tax deducted u/s 44BB - short deduction has been determined by the CPC-TDS in respect of deductees by treating that the tax was deductible at 10% u/s 115A - HELD THAT - Following the decision rendered in Oil Natural Gas Corporation Ltd. 2015 (7) TMI 91 - SUPREME COURT we are of the considered view that ld. CIT (A) has erred in treating the services rendered by M/s. ESG Solutions to the assessee in the nature of technical services to be covered u/s 115A of the Act rather these services are inextricably connected with prospecting, extraction or production of mineral oil petroleum products and these services are to achieve dominant purpose by rendering services for micro seismic acquisition, processing and interpretation of micro-seismic data in two observation wells during hydro-fracturing operations carried out in wells at Bakrol oil fields. Consequently, services rendered by the non-resident company fall within the purview of presumptive provision of section 44BB of the Act and the addition made by the AO and confirmed by the ld. CIT (A) is not sustainable, hence ordered to be deleted. Consequently, the appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Taxability of the sum of ?3,52,633/- under Section 115A versus Section 44BB of the Income-tax Act, 1961.
2. Determination of whether the services rendered by M/s. ESG Solutions are in the nature of technical services or are inextricably connected with the extraction and production of mineral oil.

Detailed Analysis:

Issue 1: Taxability under Section 115A vs. Section 44BB
The primary issue is whether the payment of ?3,52,633/- made by the assessee to M/s. ESG Solutions should be taxed under Section 115A or Section 44BB of the Income-tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT (A)] held that this sum is taxable under Section 115A, which pertains to fees for technical services, and accordingly, tax is deductible at a higher rate. The assessee contended that the sum should be taxed under Section 44BB, which deals with the taxation of income from services and facilities provided in connection with the extraction or production of mineral oils.

Issue 2: Nature of Services Rendered by M/s. ESG Solutions
The second issue revolves around the nature of the services rendered by M/s. ESG Solutions. The services in question involve micro-seismic acquisition, processing, and interpretation of micro-seismic data during hydro-fracturing operations at Bakrol oil field. The CIT (A) classified these services as technical services under Section 115A, arguing that they are back-end services involving analysis and interpretation of data. However, the assessee argued, relying on the Supreme Court's decision in Oil & Natural Gas Corporation Ltd. vs. CIT, that these services are inextricably connected with the exploration and extraction of crude petroleum and should be covered under Section 44BB.

Tribunal's Findings:

Nature of Services and Relevant Sections:
The Tribunal examined the facts and the nature of services rendered by M/s. ESG Solutions. It was undisputed that the services involved micro-seismic acquisition, processing, and interpretation of data during hydro-fracturing operations. The CIT (A) had held that these services are not directly covered under the services mentioned in Section 44BB(2)(a) and are instead technical services under Section 115A. However, the Tribunal referenced the Supreme Court's ruling in the ONGC case, which clarified that services directly associated with the extraction or production of mineral oil should fall under Section 44BB.

Supreme Court Precedent:
The Supreme Court's decision in Oil & Natural Gas Corporation Ltd. vs. CIT was pivotal. The Court had held that the proximity of the services to mining operations determines whether they fall under Section 44BB. It emphasized that services inextricably connected with the prospecting, extraction, or production of mineral oil should be taxed under Section 44BB, not Section 115A. The Tribunal noted that the services provided by M/s. ESG Solutions were directly associated with the extraction and production processes, thus aligning with the Supreme Court's interpretation.

Conclusion:
Following the Supreme Court's precedent, the Tribunal concluded that the CIT (A) erred in categorizing the services as technical services under Section 115A. The services rendered by M/s. ESG Solutions were inextricably connected with the extraction and production of mineral oil, falling under Section 44BB. Therefore, the addition made by the Assessing Officer (AO) and confirmed by the CIT (A) was not sustainable. The Tribunal ordered the deletion of the addition, allowing the appeal filed by the assessee.

Order Pronouncement:
The order was pronounced in open court on the 17th of February, 2021, allowing the appeal in favor of the assessee.