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TMI Blog2008 (2) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the PE. 2. That the learned CIT(A) erred in law in upholding the order of AO by taking the interest on tax refunds as business receipts, when the interest on tax refunds does not depend on the existence or non-existence of PE in India and is statutorily dependent on the outcome of assessment proceedings, appeals conducted by tax consultants and lawyers. 3. The learned CIT(A) erred in law in upholding the levy of tax on interest of Rs. 1,16,996 on tax refunds @ 48 per cent on gross as per IT Act instead of 10 per cent as prescribed in art. 12(2) of DTAA of the IT Act (sic) by virtue of applying beneficial provisions as per s. 90(2) of the IT Act." 3. The assessee is a French company operating in India in oil drilling operations and related services under various contracts with ONGC. For the year under consideration assessee has contract with ONGC for charter hire of Drilling Rig Pride Pennsylvania. The assessee had returned the gross fee for drilling operation for computation and taxation of income as per s. 44BB of IT Act, 1961 ('Act'). While working out the receipts assessee did not take into computation a gross sum of Rs. 34,73,174 the details of which are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 : (2000) 72 ITD 415 (Del) wherein it has been held that the expression of reimbursement means to repay or pay an equivalent amount for the loss of expenses incurred. It was submitted that the supply of material in question was an obligation of ONGC and assessee simply provided such services to ONGC in conformity with the terms of agreement. Thus, it was submitted that reimbursement of actual cost of such supply along with expenses for freight, insurance etc., therefore, cannot be included in the amount of contract receipt for the purposes of s. 44BB of the Act. Considering the submission of the assessee and the nature of reimbursement expenses, the AO observed that the receipts of the assessee were part of contractual receipts and. therefore. these were allowable to be included in the payments received while computing the profit under s. 44BB of the Act. Regarding decision of Delhi Tribunal, the AO observed that Department has not accepted the said decision of Tribunal, therefore, the decision of Tribunal is not applicable. Accordingly, the AO treated reimbursement as part of gross receipts and computed the profits of the assessee. 6. Aggrieved, assessee filed an appeal befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ONGC. Reliance was also placed on the aforementioned decision of Delhi Tribunal in the case of Sedco Forex International Drilling Inc. Learned CIT(A) after considering the submissions and after considering the case record found that AO had examined the issue that whether there was any profit element in the reimbursement and evidence was submitted by the assessee to show that there was no element of profit. Learned CIT(A) also found that supply of material was of the obligation of ONGC and assessee company had simply provided such services to ONGC. Relying on the decision of Tribunal in the case of Sedco Forex International Inc., learned CIT(A) has held that reimbursement of expenses to be incurred by contractee is not taxable under s. 44BB and he directed the AO not to include amount of Rs. 34,73,174 in the gross revenue for working out profit under s. 44BB. The Department is aggrieved with such direction of CIT(A) and hence in appeal. 10. Learned Departmental Representative after narrating the facts pleaded that return has been filed by the assessee by computing its income under s. 44BB of the Act and thus, the return filed by the assessee is under the provisions of domestic la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CTR (Raj) 297 : (2002) 255 ITR 413 (Raj). 13. It was pleaded that any sum received as a result of any supply of goods, commodity or for rendering services of any nature falls within the inclusive definition of income as given in s. 2(24) of the Act and the net income determining as per provisions of the Act is required to be taxed until and unless it falls under any of the exemptions available under the Act. He pleaded that reimbursement is neither excluded from taxation under ss. 4, 5, 9 and 10. Thus, he pleaded that any receipt of business can be exempted from taxation only in a case when the expenses incurred in earning the receipt become equal to the receipt itself and it is a case of pure reimbursement of expenditure. Reference was made to s. 37 of the Act which provides that all expenditure incurred wholly and exclusively (for) earning income shall be allowed as a deduction in order to determine total income subject to taxation. It was submitted that s. 44BB starts with non obstante clause that computation shall be made according to section notwithstanding to the contrary mentioned in ss. 28 to 41 and 43 and 43A of the Act. Thus, he pleaded that s. 44BB is applicable irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g operational activity covered under s. 44BB of the Act and it was submitted that reimbursement of 75 per rent cost of the equipment damaged by ONGC employees is capital cost recovery and does not relate to drilling operational income. Thus, it was pleaded that reimbursement of expenses/supply of items is not oil drilling activity and in absence of element of gain or profit these could not be included in the receipts for computing income as per s. 44BB of the Act. 17. We have carefully considered the rival submissions in the light of material placed before us. The assessee has filed its return as per provisions of s. 44BB which is a special provision for computing profits and gains in connection with the business of exploration, etc. of mineral oils. The section reads as under: "44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.-(1) Notwithstanding anything to the contrary contained in ss. 28 to 41 and ss. 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-s. (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession", subject to exclusion of s. 42, 44D, 115A or 293A. The nature of sums which are to be taxed under s. 44BB(1) is described in sub-s. (2) and the amount is aggregate of sum paid or payable (whether in or out of India) to the non-resident or to any person on his behalf on account of provisions of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in specified activity of extraction of mineral oil in India and also the sum received or deemed to be received in India by or on behalf of the non-resident on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils outside India. In other words the income received refers to the activity of providing services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in India or outside India. Thus, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to supply of dry fruit and recovery of communication expenses lost which have been claimed as reimbursement on actual basis. These activities also do not relate to the activities specified in s. 44BB(2) of the Act. There is no material on record to suggest that in respect of these three reimbursements, assessee has received amount more than the cost it incurred for the same. In other words, there is no element of profit in the receipts by the assessee. In absence of such profit the reimbursement receipts also cannot be brought to tax under the normal provision of the Act. 20. No doubt that s. 44BB is a code in itself and it starts with non obstante clause which excludes application of ss. 28 to 41 and ss. 43 and 43A of the Act but at the same time, to assess any sum under that section, the activity must fall within the activity described in sub-s. (2) of s. 44BB of the Act. Supply of dry fruits and recovery of communication expenses specifically do not find mention in sub-s. (2) of s. 44BB as these activities have nothing to do with the activity of prospecting for or extraction or production of, mineral oils in India or outside India. So (far) as it relates to reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imposing income-tax and CIT(A) and Tribunal were also right in upholding the order of the AO." 22. From the above observations it is clear that mobilization fee was not considered reimbursement on the ground that this was not in the nature of reimbursement; therefore, the same could not (sic) be brought to tax under the provisions of s. 44BB of the Act. Their lordships in the said case have considered s. 44BB, s. 4, s. 5(2), s. 9 and s. 98 also and after analyzing these sections it has been concluded that mobilization fee was to be considered under s. 44BB on the ground that ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by assessee company for the purpose. It is, therefore, that the mobilization fee was considered liable for taxation under s. 44BB. In the present case, payments received by the assessee were not a fixed sum as stipulated in the contract. It was based on actual expenditure which has been incurred by the assessee for that very purpose. There was no element of profit. Therefore also provisions of s. 44BB could not be applied for present case. In the result Departmental appeal is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is not in respect of debt which is effectively connected with PE. The interest was received by the assessee from the IT Department on delayed refund of taxes. Department also deducted tax at the rate of 10 per cent as per rate applicable in the terms of art. 12.2 of DTAA (with) France. Therefore, it was the contention of the assessee that the rate of tax chargeable to such interest is 10 per cent. Learned CIT(A) did not accept such submission of the assessee and has upheld the order of AO on this issue on the ground that assessee is operating in India through its PE and the interest has rightly been taxed at the rate of 48 per cent. He dismissed the ground. The assessee is aggrieved, hence in appeal. Learned Authorised Representative refers to pp. 4-9 of the paper book wherein copies of refund vouchers are enclosed. He also referred to p. 13 of the paper book which is an order passed by AO giving the appeal effect to the order of CIT(A). It was pleaded that assessee was entitled to refund on the tax paid and the interest was paid by the Department on delayed refund of income-tax and on such interest Department has deducted tax at the rate of 10 per cent as described i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as business income. It is true that assessee was not out of business and had to pursue and participate in the income-tax proceedings, it does not follow that interest on income-tax refund becomes the business income of the assessee. The assessee is not in the business of obtaining income-tax refunds and earning interest thereon. It is neither derived from nor attributable to the business activity of the assessee. It is merely a fallout of the profits earned by the assessee and is an appropriation of profits. Thus, when excess amount than what is due under the Act is appropriated, assessee gets refund thereof, and when there is a delay in granting, such refund, assessee is granted interest thereon which is taxable under the head 'Income from other sources'. Thus, we hold that though the expenses claimed by the assessee are allowable expenses, they will not be set off against the interest income. Interest income will be taxed as income from other sources and the unabsorbed expenses will constitute business loss and be available for inter-head set off under s. 71 of the Act." 26. It was pleaded that no conscious effort was made through PE to earn interest on tax refund from IT Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid must also be shown to be connected with such PE or fixed base. None of the aforesaid provisions of para 6 are attracted in the applicant's case. Applicant does not have a PE in India. The interest amount in dispute has not arisen out of any business operation in India. It is statutory interest granted on delayed refund under the provisions of s. 244/243 of the IT Act. There cannot be any dispute that the interest has been paid on delayed refund. Refund due and payable to the assessee is debt owing and payable. For delayed payment of this debt, interest will have to be paid by virtue of the provisions of ss. 243 and 244 of the IT Act. The debt claim is not connected in anyway with any activity of a PE or base in India. The right to get interest arose because of the delay in making refund of excessive collection of the tax. This is clearly a case falling under para 2 of art. 12 of the DTAA." 29. Though the order of AAR has no binding force but it has persuasive value. No contrary decision has been brought to our notice to contend that the interest received by the assessee can be taxed under art. 12.5 of the DTAA. It may be mentioned here that art. 12 of DTAA of UK and France a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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