2024 (3) TMI 1380 - HC - Income Tax

Revenue earned from Indian payer on account of drilling rights on hire (equipment rental) under contracts - taxation u/s 9(1)(vi) read with section 115A of the Act and Article 12 of the India-Malayasia DTAA or deemed profit rate of 10% u/s 44BB - HELD THAT - As would be manifest from clause (iv-a) of the Act, although the right to use any industrial, commercial or scientific equipment is otherwise covered under the expression royalty , it makes a clear exclusion in respect of amounts which would be referable to Section 44BB of the Act. No justification to interfere with the view as taken by the ITAT.

Summary

Issues:
1. Interpretation of provisions under the Income Tax Act, 1961 regarding the taxation of income earned from drilling rights on hire.
2. Determination of whether income from leasing of rigs should be taxed as business profits under section 44BB or as royalty under section 9(1)(vi) of the Act.
3. Assessment of whether the assessee is engaged in prospecting or exploration of oil within the scope of section 44BB.
4. Analysis of whether income from non-PSC partner qualifies as business receipts for taxation under section 44BB.

Detailed Analysis:
The High Court judgment dealt with an appeal where the Commissioner contested the order passed by the Income Tax Appellate Tribunal (ITAT) regarding the taxation of income earned from drilling rights on hire. The Commissioner raised questions challenging the ITAT's decision to tax the income at a deemed profit rate of 10% under section 44BB of the Income Tax Act, 1961, instead of as royalty under section 9(1)(vi) and Article 12 of the India-Malaysia DTAA. The ITAT's order highlighted that the dispute centered on whether the receipts from hiring/leasing of rigs should be treated as business profits or royalty. It was established that the assessee had leased rigs to an Indian entity for drilling and exploration of mineral oils, leading to a disagreement on the nature of the income received.

The judgment focused on the interpretation of relevant provisions, including Explanation 2 to Section 9(1)(vi) of the Act, which defines "royalty" and excludes amounts referable to Section 44BB. The court noted that the right to use industrial, commercial, or scientific equipment falls under the definition of royalty but is exempted if related to Section 44BB. The court upheld the ITAT's decision, emphasizing that the income from leasing rigs for drilling and exploration of mineral oils should be taxed under section 44BB as business profits, rather than as royalty under section 9(1)(vi) of the Act.

Furthermore, the judgment addressed the contention that the assessee was not engaged in prospecting or exploration of oil within the scope of section 44BB. It was argued that the receipts from non-PSC partners did not qualify as business receipts for taxation under section 44BB. The court analyzed these arguments and concluded that the ITAT's decision was justified, dismissing the appeal and affirming that the income earned from leasing rigs for drilling purposes should be taxed as business profits under section 44BB, in line with the ITAT's findings.