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2017 (12) TMI 183 - AT - Income TaxFees for technical services - consideration for the services under the contracts for provision of cementing services - applicability of provisions of section 44BB - Held that - Respectfully following the decision of the Hon ble Delhi High Court in DIT vs OHM Ltd (2012 (12) TMI 1091 - DELHI HIGH COURT) given the nature of cementing services which are inextricably linked with activities of prospecting for extraction or production of mineral oil the provisions of section 44BB are applicable in the instant case being more specific than the general provisions contained in section 44DA of the Act. In light of above discussions and in the entirety of facts and circumstances of the case we are of the considered view that consideration for the services under the contracts for provision of cementing services fall under the exclusion and doesn t qualify as fees for technical services as per explanation to section 9(1)(vii) and in any case the provisions of section 44BB being more specific shall be applicable and provisions of section 44DA are not applicable in the instant case. The assessee company has therefore rightly offered its income under the subject contracts in terms of section 44BB of the Act. In the result ground no. 2 of assessee s appeal is allowed.
Issues Involved:
1. Validity of the Assessment Order. 2. Applicability of Section 44BB vs. Section 44DA for cementing services. 3. Disallowance of transportation expenses under Section 40A(3A). 4. Disallowance of transportation expenses under Section 40(a)(ia) for non-deduction of TDS. 5. Disallowance of ERP and Training Expenses under Section 44DA(1) and Section 40(a)(ia). 6. Charging of interest under Sections 234A, 234B, and 234C. 7. Initiation of penalty proceedings under Section 271(1)(c). Issue-wise Detailed Analysis: 1. Validity of the Assessment Order: The assessee challenged the validity of the Assessment Order passed under Section 143(3) read with Section 144C, claiming it was "bad in law and bad in facts." However, the tribunal did not find merit in this argument, and the primary focus shifted to the substantive issues regarding the nature of the income and disallowances made by the Assessing Officer (AO). 2. Applicability of Section 44BB vs. Section 44DA for Cementing Services: The core issue was whether the income from cementing services should be taxed under Section 44BB or Section 44DA. The assessee argued that the services were part of the construction of mineral oil and gas wells and should be taxed under Section 44BB, which is specific to services related to the exploration or extraction of mineral oil. The AO, however, assessed the income under Section 44DA, treating it as fees for technical services. The tribunal referred to the Hon’ble Supreme Court's decision in ONGC vs. CIT, which clarified that services directly associated with prospecting, extraction, or production of mineral oil fall under Section 44BB and not under Section 44DA. The tribunal noted that the cementing services provided by the assessee were inextricably linked with drilling operations and thus qualified for exclusion from "fees for technical services" under Explanation 2 to Section 9(1)(vii). The tribunal also considered the amendments made by the Finance Act 2010 to Sections 44BB and 44DA. Despite these amendments, the tribunal held that Section 44BB, being more specific, prevailed over Section 44DA. This conclusion was supported by the decision of the Hon’ble Delhi High Court in DIT vs. OHM, which stated that Section 44BB should be applied to services directly related to the exploration or extraction of mineral oil. 3. Disallowance of Transportation Expenses under Section 40A(3A): The AO disallowed transportation expenses of ?1,51,900 paid directly to the transporter's bank account, citing Section 40A(3A). The assessee contended that these payments were covered under exceptions provided in Rule 6DD. The tribunal found merit in the assessee's argument and noted that the payments were indeed covered under the exceptions, thus allowing the claim. 4. Disallowance of Transportation Expenses under Section 40(a)(ia) for Non-deduction of TDS: The AO disallowed transportation expenses of ?13,09,476 paid to Shree Digvijay Cement for non-deduction of TDS under Section 194C. The assessee argued that the transaction was a 'contract for sale' and not subject to TDS. The tribunal agreed with the assessee, referencing Circular No. 681, which clarified that such transactions were not subject to TDS, thereby allowing the claim. 5. Disallowance of ERP and Training Expenses under Section 44DA(1) and Section 40(a)(ia): The AO disallowed ERP and training expenses, treating them as fees for technical services under Section 44DA. The tribunal, having already determined that the services were not technical services under Section 44DA but rather under Section 44BB, found these disallowances to be academic and treated them as infructuous. 6. Charging of Interest under Sections 234A, 234B, and 234C: The assessee contested the interest charged under Sections 234A, 234B, and 234C. The tribunal noted that these charges were consequential and did not require separate adjudication. 7. Initiation of Penalty Proceedings under Section 271(1)(c): The AO initiated penalty proceedings under Section 271(1)(c). The tribunal noted that this issue did not arise from the order under appeal and dismissed it. Conclusion: The tribunal allowed the appeals for both assessment years, holding that the income from cementing services should be taxed under Section 44BB and not under Section 44DA. The disallowances related to transportation expenses and ERP/training costs were either allowed or treated as infructuous. The interest charges were deemed consequential, and the initiation of penalty proceedings was dismissed.
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