2009 (9) TMI 565 - HC - Income Tax

Non-Resident - principle of res judicata - provision of services at cost to cost basis - The assessee-company was required, vide notice under section 142(1) of the Act, to show cause as to why the receipts be not assessed under section 44BB of the Act. The assessee-company, in its reply, contended that the company has rendered, the service on cost-to-cost basis to EOGIL in terms of the production sharing contract entered into by EOGIL with Indian concerns duly approved by the Government of India and payments received through debit notes are only reimbursement of actual expenses. It was also claimed that the income of the assessee-company is not taxable in India in view of article 7(3) of the Double Taxation Avoidance Agreement (DTAA) with the USA. - Held that - The assessees have clearly substantiated the fact that there is no element of profit, therefore, in terms of article 7 of the Double Taxation Avoidance Agreement between India and the USA, the assessees cannot be taxed. - questions raised in these appeals are answered in favour of the assessees and against the Revenue

Issues Involved:
1. Applicability of the Production Sharing Contract (PSC) terms to Enron Expat Services Inc. (EESI).
2. Application of the principle of res judicata in income-tax proceedings.
3. Taxability of income under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
4. Applicability of Section 44BB of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of the Production Sharing Contract (PSC) terms to Enron Expat Services Inc. (EESI)

The primary contention was whether the terms of the PSC, which were applicable to the consortium/joint venture members, extended to EESI, an affiliate of Enron Oil and Gas India Ltd. (EOGIL). The Tribunal upheld the decision that the PSC terms were not applicable to EESI because it was merely an affiliate and not a direct member of the consortium. The court noted that the PSC was approved by the Government of India under Section 42 of the Income-tax Act and laid before both Houses of Parliament. The court reiterated that Section 42 is a separate code that overrides other provisions of the Act, and the taxability of each member of the PSC must be determined in terms of the PSC read with Section 42.

Issue 2: Application of the principle of res judicata in income-tax proceedings

The Tribunal held that the principle of res judicata does not apply to income-tax proceedings. The court supported this view by referencing the judgment in CIT v. Bharat General Reinsurance Co. Ltd., which stated that there is no estoppel in the Income-tax Act. This means that even if the assessee included a particular income in the return in previous years, it does not prevent them from claiming that such income is not taxable in subsequent years. The court found no error in the Tribunal's decision that the principle of res judicata does not operate in this context.

Issue 3: Taxability of income under the Double Taxation Avoidance Agreement (DTAA) between India and the USA

The assessees argued that their income was not taxable in India under Article 7 of the DTAA with the USA, which states that business profits of a US enterprise are taxable in India only if the enterprise has a permanent establishment (PE) in India. The court agreed with this argument, noting that the income in question was merely reimbursement of actual expenses incurred by the assessees in providing services to EOGIL, and there was no element of profit. The court emphasized that, under Article 7(3) of the DTAA, expenses incurred for the purpose of the business of the PE are deductible, and no profit element was involved in the reimbursements received by the assessees.

Issue 4: Applicability of Section 44BB of the Income-tax Act, 1961

The Revenue contended that the income should be assessed under Section 44BB, which deals with the taxation of income from the provision of services or facilities in connection with the extraction or production of mineral oils. The court, however, found that Section 44BB had no application once the assessees were to be assessed under the provisions of the DTAA. The court noted that Section 90(2) of the Act allows the provisions of the DTAA to override the Act if they are more beneficial to the assessee. Since the DTAA provided a more favorable tax treatment, the court ruled that the assessees could not be taxed under Section 44BB.

Conclusion:

The court dismissed the appeals filed by the Revenue and allowed the appeals filed by the assessees. It upheld the Tribunal's findings that the assessees' income was not taxable in India under the DTAA, as there was no element of profit in the reimbursements received. The court also confirmed that the principle of res judicata does not apply to income-tax proceedings and that Section 44BB of the Income-tax Act does not apply when the DTAA provides a more beneficial tax treatment.

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