2023 (4) TMI 1160 - AT - Income Tax

Income deemed to accrue or arise in India - receipts from services relating to Progressive Cavity Pump system (PCP) and rental of tools/equipments to Cairn India and ONGC - nature of business profits to be taxed under section 44BB or Fee for Technical Services (FTS) - assessee is a non-resident corporate entity incorporated under the laws of Singapore and a tax resident of Singapore - HELD THAT - Once the services related to prospecting, exploration, extraction or production of mineral oils is treated as in the nature of mining or like projects, automatically it will fall out of the ambit of FTS as defined in Explanation 2 to section 9(1)(vii) of the Act, hence, cannot be treated as FTS - Language used in section 44BB makes its scope very wide and encompasses not only the services or facilities in connection with prospecting for, or extraction, or production of mineral oils but also supply of plant and machinery on hire to use or ought to be used for the said purpose. In the facts of the present case, undisputedly, the service provided by the assessee to Cairn India is in connection with activity of prospecting for, or extraction, or production of mineral oils. Even, the hiring/leasing of tools/equipments to both Cairn India and ONGC is in connection with the same activity. Merely because the services provided are of technical nature, that by itself, would not make the receipts FTS when there is special provision in the shape of section 44BB engrafted in the Statute to bring such kind of receipts for the purpose of taxation in India under the head profits and gains from business or profession . AO, while concluding that the receipts are in the nature of FTS, has heavily relied upon a decision of the Uttarakhand High Court in case of CIT Vs. ONGC 2005 (12) TMI 46 - UTTARANCHAL HIGH COURT However, we are surprised to note that, while doing so, he has completely ignored the decision of the Hon ble Supreme Court in case of ONGC Vs. CIT 2015 (7) TMI 91 - SUPREME COURT wherein the very same decision of the Hon ble Uttarakhand High Court was reversed. As per SC in above case if the work/services in terms of a particular agreement is directly associated or inextricably linked with prospecting, extraction or production of mineral oil, then the receipts have to be taxed as business profits under section 44BB of the Act. Thus, in our view, the scope and ambit of section 44BB of the Act is wide enough to include the receipts of the assessee from Cairn India and ONGC. At this stage, it is relevant to observe, in assessee s own case for assessment year 2019-20, the Assessing Officer, while considering similar nature of receipts from ONGC, has accepted assessee s claim under section 44BB of the Act. We cannot sustain the decision of the Assessing Officer to treat the receipt as FTS. Accordingly, we direct the Assessing Officer to compute assessee s income under section 44BB of the Act. This ground is allowed. Taxability of the receipts from repair services stated to have been rendered directly from head office to Cairn India and ONGC - HELD THAT - As observed that the receipts in dispute are from repair of tools and equipments used by Cairn India and ONGC for extraction or exploration of mineral oil. In case of ONGC Vs. CIT 2015 (7) TMI 91 - SUPREME COURT while interpreting the provisions contained under section 44BB of the Act in the context of scope of work covered under the contract, has considered the entire gamut of work executed under the contract, including repair, training of personnel etc. and held that the pith and substance of each of the contracts is inextricably connected with prospecting, extraction or production of mineral oil - we hold that the receipts from repair work is inextricably connected with prospecting, extraction or production of mineral oil, hence, such receipt has to be taxed under section 44BB of the Act. We order accordingly. This ground is partly allowed. Treating the receipts from Cameron India towards business support services as FTS - HELD THAT - The expression make available if read in conjunction with, which enables the person acquiring the services to apply the technology contained therein , would mean that the recipient of service will be in a position to acquire the technical knowledge, experience, skill etc so that it equips the recipient to apply such technical knowledge, experience, skill etc. by himself independently without the aid and assistance of the service provider. In the facts of the present appeal, the departmental authorities have failed to prove this fact through any cogent material brought on record. The nature of services enumerated earlier would make it clear that these are routine managerial and partly consultancy services to provide business support to the subsidiary. There is nothing on record to suggest that while rendering services, the assessee has made available any technical knowledge, know-how, skill etc. enabling the recipient of service to apply them independently. That being the case, in our considered opinion, the conditions of section 12(4)(b) are not satisfied. Therefore, we hold that the receipts are not in the nature of FTS. This ground is allowed. Addition treating the reimbursement of expenses as FTS - HELD THAT - An amount on which, the assessee has paid service tax on reverse charge mechanism is actually expenditure incurred by the assessee itself on its own behalf and not in the nature of reimbursement. As it appears, the Assessing Officer has treated this amount as income under factual misconception. Therefore, we are inclined to delete the addition made as FTS. For the balance amount it is the claim of the assessee that these are reimbursements from Cameron Indian on cost to cost basis without any markup. The assessee has explained before the Assessing Office that the assessee was expecting to enter into new contracts with Cairn India but Cairn India awarded the contract to Cameron India. The assessee submitted that since the assessee had incurred certain expenses in relation to ongoing work, they were cross charged to Cameron India without any markup on pure cost to cost basis. In principle, we accept assessee s contention that reimbursement of expenses on cost to cost basis without any markup does not have any profit element - as observed, before the Assessing Officer and learned DRP, the assessee did make submission to the effect that given sufficient time, he will be in a position to submit the agreement between Cairn India and Cameron India - we restore this issue to the Assessing Officer with a direction to examine assessee s claim afresh with reference to evidences already available on record or which the assessee may file in course of proceeding.

Summary

Issues Involved:

1. Taxability of receipts from services relating to Progressive Cavity Pump system (PCP) and rental of tools/equipments.
2. Taxability of receipts from repair services rendered directly from head office to Cairn India and ONGC.
3. Taxability of receipts from business support services provided to Cameron Manufacturing India (P.) Ltd.
4. Addition of Rs. 7,53,42,991/- to the income by treating the reimbursement of expenses as Fee for Technical Services (FTS).
5. Issue of double addition of an amount of Rs.6,58,19,210/-.

Summary:

1. Taxability of Receipts from Services Relating to PCP and Rental of Tools/Equipments:

The assessee challenged the decision of the departmental authorities in holding that receipts from services relating to PCP and rental of tools/equipments to Cairn India and ONGC are not business profits to be taxed under section 44BB of the Income-tax Act, 1961, but are Fee for Technical Services (FTS). The tribunal held that the services provided by the assessee are in connection with the prospecting, exploration, and extraction of mineral oils, and hence, the receipts should be taxed under section 44BB of the Act. The tribunal also noted that the Assessing Officer had wrongly relied on a decision of the Uttarakhand High Court, which was later reversed by the Supreme Court.

2. Taxability of Receipts from Repair Services:

The assessee argued that receipts from repair services rendered directly from the head office to Cairn India and ONGC should not be taxed in India as the services were rendered from Singapore. However, the tribunal held that since the receipts are connected with the exploration and extraction of mineral oil, they should be taxed under section 44BB of the Act.

3. Taxability of Receipts from Business Support Services:

The assessee contended that the receipts from business support services provided to Cameron Manufacturing India (P.) Ltd. should not be treated as FTS as they do not make available any technical knowledge, skill, or know-how. The tribunal agreed with the assessee, stating that the services provided were routine managerial and consultancy services and did not fulfill the conditions of Article 12(4)(b) of the India-Singapore DTAA. Thus, the receipts were not in the nature of FTS.

4. Addition of Rs. 7,53,42,991/- as FTS:

The assessee claimed that the amount of Rs.7,53,42,991/- was reimbursement of expenses on a cost-to-cost basis without any markup. The tribunal directed the Assessing Officer to examine the assessee's claim afresh with reference to the evidences available on record. If the assessee can establish that the amount represents reimbursement of expenses without any markup, no addition should be made.

5. Issue of Double Addition of Rs.6,58,19,210/-:

The tribunal directed the Assessing Officer to verify the assessee's claim of computational errors and decide the issue accordingly after providing an opportunity of being heard to the assessee.

Conclusion:

The tribunal allowed the appeals partly, directing the Assessing Officer to compute the income under section 44BB of the Act for the relevant issues and to verify the claims regarding reimbursement of expenses and computational errors.