2019 (12) TMI 1230 - AT - Income Tax

Income accrued in India - PE in India - applicability of section 44BB - non-resident assessee - Receipts earned from provision of services through various vessels - DTAA - computing profits and gains in connection with the business of exploration of mineral oil. - HELD THAT - The word services followed by expansive phrase in connection with are relatable to prospecting for and exploration of mineral oil. That means, all services associated with prospecting for and exploration activities are brought within the scope and reach of section 44BB. Another category of assessees governed by section 44BB are those supplying plant and machinery on hire. In the instant case, we find that neither the AO nor the DRP has examined the applicability of section 44BB by looking into whether the pith and substance of each of the contract/agreement entered by the assessee is inextricably connected with prospecting, extraction or production of mineral oil. This is evident from the order of the DRP dated 29.08.2018 passed u/s 144C(5) and the assessment order dated 19.09.2018 passed by the AO u/s 143(3) r.w.s. 144C(5) and 144C(13) of the Act. Therefore, we set aside the order of the AO and restore the matter to him to make an order afresh after examining each of the contract/agreement and by following the ratio laid down by the Hon ble Supreme Court in ONGC 2015 (7) TMI 91 - SUPREME COURT . - Thus the 2nd to 8th ground of appeal are allowed for statistical purposes.

Issues Involved:
1. Assessment of total income.
2. Classification of receipts as "Royalty" under section 9(1)(vi) of the Income Tax Act.
3. Applicability of section 44BB of the Income Tax Act.
4. Classification of receipts under the India-Singapore DTAA.
5. Taxability of receipts as business income.
6. Definition of "Royalty" under Article 12(3) of the India-Singapore DTAA.
7. Classification of receipts as Fees for Technical Services (FTS) under Article 12(4) of the DTAA.
8. Permanent Establishment (PE) under Article 5 of the DTAA.
9. Levy of interest under section 234B.
10. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Assessment of Total Income:
The AO assessed the total income at ?40,62,51,200 against the returned income of Nil. The assessee contended that the receipts from services provided through various vessels should not be taxed as they do not constitute a Permanent Establishment (PE) in India under the India-Singapore DTAA.

2. Classification of Receipts as "Royalty":
The AO classified the receipts earned by the assessee from providing services through various vessels as "Royalty" under section 9(1)(vi) of the Income Tax Act. The AO argued that the provision of vessels was in the nature of leasing/hiring, thus falling under the definition of "Royalty."

3. Applicability of Section 44BB:
The assessee argued that the receipts should be taxed under section 44BB, which deals with the computation of profits and gains from the business of exploration of mineral oils. The AO, however, denied this specific exclusion, stating that no amounts were offered to tax under section 44BB.

4. Classification of Receipts under the India-Singapore DTAA:
The assessee contended that the receipts should not be taxed in India as they do not constitute a PE under the India-Singapore DTAA, given that the operations in India were for only 106 days, below the 183-day threshold.

5. Taxability of Receipts as Business Income:
The assessee argued that if the receipts were to be taxed, they should be considered business receipts under section 44BB, which prescribes a 10% deemed profit rate for such receipts.

6. Definition of "Royalty" under Article 12(3) of the India-Singapore DTAA:
The AO held that the receipts fell within the definition of "Royalty" under Article 12(3) of the DTAA. The assessee, however, argued that the receipts were for the provision of services, not for the use of equipment, and thus should not be classified as "Royalty."

7. Classification of Receipts as Fees for Technical Services (FTS):
The assessee contended that the receipts should be classified as Fees for Technical Services (FTS) under Article 12(4) of the DTAA, which requires the "make available" of technical knowledge, experience, skill, know-how, or processes. As this condition was not met, the receipts should not be taxed as FTS.

8. Permanent Establishment (PE) under Article 5 of the DTAA:
The assessee argued that it did not have a PE in India as per Article 5 of the DTAA, as its operations were for only 106 days. Therefore, the receipts should not be taxable in India.

9. Levy of Interest under Section 234B:
The levy of interest under section 234B amounting to ?1,00,01,922 was contested by the assessee, arguing that the taxability of the receipts was not established.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The initiation of penalty proceedings under section 271(1)(c) was also contested, with the assessee arguing that the proceedings were premature.

Judgment Summary:
The Tribunal set aside the AO's order and restored the matter for a fresh examination. The AO was directed to scrutinize each contract/agreement to determine if they were inextricably connected with the prospecting, extraction, or production of mineral oil, following the Supreme Court's ruling in the ONGC case. The AO was also directed to consider whether the receipts should be excluded from the definition of "Royalty" under section 9(1)(vi) and if the assessee should be governed by the provisions of section 44BB or the DTAA, whichever is more beneficial.

The Tribunal emphasized that the AO should examine the contentions regarding the non-existence of a PE in India and the applicability of the Supreme Court's ruling. The levy of interest under section 234B was deemed consequential, and the initiation of penalty proceedings under section 271(1)(c) was considered premature.

The appeal was allowed for statistical purposes, and the AO was directed to conduct a de novo assessment based on the Tribunal's guidelines.

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