2011 (3) TMI 479 - AT - Income Tax

Rate of profit - transaction of sale of spares/supplies taken place outside India - computation of profit u/s 44BB - Under section 143(3) read with section 144C - Held that - Supply of components is indivisible part of entire contract. - ONGC is certainly engaged in the activity of prospecting for, or extraction or production of mineral oils and any amount received by the assessee being a non-resident engaged in the business of providing services or facility in connection with, or supplying plant and machinery on hire, used or to be used in such activity shall be governed by the provisions of section 44BB. - even supply of spare parts have been treated to be assessable under the provisions of section 44BB(1) of the Act. - the assessee has accepted the application of 10 per cent net profit rate on the segment relating to supply of spares. It means that on entire payments received by the assessee from ONGC, the assessee has accepted the application of section 44B i.e., net profit rate of 10 per cent on presumptive basis. - Appeal allowed partly in favor of assessee.

Summary

Issues Involved:
1. Application of an arbitrary rate of 25% profit on the sale of spares/supplies.
2. Taxability of sales conducted entirely outside India.
3. Estimation of profit at 25% versus 10% for transactions attributable to India.

Detailed Analysis:

1. Application of an Arbitrary Rate of 25% Profit on Sale of Spares/Supplies:
The assessee challenged the application of a 25% profit rate on the sale of spares/supplies by the Deputy Director. The assessee argued that the entire receipts should be subject to the provisions of section 44BB(1) of the Income-tax Act, 1961, which prescribes a net profit rate of 10% for non-residents engaged in 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 in India. The assessee cited the case of CIT v. B.J. Services Co. Middle East [2008] 300 ITR 392/170 Taxman 286, where the supply of spare parts in a turnkey contract was also covered under section 44BB.

2. Taxability of Sales Conducted Entirely Outside India:
The assessee contended that the sale of spares/supplies, which took place entirely outside India in the United Kingdom, should not be taxed in India. However, this ground was not pressed during the appeal, and the focus was shifted to the applicability of section 44BB on the entire receipts.

3. Estimation of Profit at 25% Versus 10% for Transactions Attributable to India:
The Assessing Officer had accepted the claim of the assessee under section 44BB(2) for receipts amounting to Rs. 1,59,12,886 related to repair/revamp services of cranes but rejected the claim of 1% on gross receipts related to spare parts, instead applying a 25% profit rate. The assessee's representative argued that the entire receipts should be taxed under section 44BB at a 10% net profit rate, including the supply of spares. The Tribunal referred to the contract clauses and noted that the supply of components was an indivisible part of the entire contract with ONGC, which is engaged in the extraction and production of mineral oils. Therefore, the Tribunal concluded that the entire receipts, including the supply of spares, should be assessed under section 44BB at a 10% net profit rate on a presumptive basis.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal ruled that the entire receipts from ONGC, including the supply of spares, should be assessed under section 44BB at a 10% net profit rate. The assessee's claim regarding the application of a 1% rate was forgone, and the focus was on the applicability of section 44BB to the entire contract receipts. The Tribunal's decision was based on the interpretation that the supply of spares in a turnkey contract is covered under section 44BB, as supported by the case of CIT v. B.J. Services Co. Middle East.