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TMI Blog2010 (7) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... gth. Hence, the copies of the aforesaid Tribunal Order were taken on record in the absence of the ld. DR, who was on leave. 3. The following sole ground has been raised in this appeal: "The ld. Commissioner of Income Tax(Appeals), Dehradun has erred in law and on the facts and circumstances of the case in rejecting the appellant's contention that the receipts of Alberta Research Council, Canada were taxable u/s 44BB of the Income Tax Act, 1961 and not as "fees for technical services" u/s 44D read with section 115A of the Income Tax Act, 1961." 4. As per the Statement of Facts filed before the ld.CIT(A), ONGC had engaged the services of M/s. Alberta Research Council, Canada, ('ARC' for short), vide Work Order dated 1.9.95, for carrying out a feasibility study on implementation of Cyclic Steam Stimulation ( 'CSS', for short) in Lanwa fields, Mehsana, India. As an agent of the said non-resident, the assessee ONGC filed a return of income claiming the receipts of the non-resident for ARC having rendered the aforesaid service of carrying out of feasibility study on implementation of CSS, as taxable u/s 44 BB of the I.T. Act. A total income of Rs.2,90,810/- was declared. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not fall within the proviso to section 44BB(1), which provides that section 44BB(1) shall not apply where the provisions of, inter alia, either section 44D, or section 115 A of the Act apply for the purposes of computing profits or gains or any other income referred to in those sections; that FTS, on the other hand, is envisaged by Explanation 2 to section 9(1)(vii) of the Act, which defines FTS to mean any consideration for rendering of any managerial, technical or consultancy services, but not to include consideration for any construction, assembly, mining or like project undertaken by the recipient, or consideration which would be chargeable as salary; that the receipts of the assessee do not fall under any of the components mentioned as meaning FTS under Explanation 2 to section 9(1)(vii) of the Act, since extraction of mineral oil and activities in connection therewith would be covered within 'mining or like project', as referred to in the said Explanation; that as per Instruction No. 1862 dated 28.2.98 issued by the CBDT, 'mining project or like project' would include rendering of services like imparting training for carrying out drilling operation in connection with ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible. CSS thins the oil below the surface of the earth. Application of CSS stimulates the sub terranean oil to move to the surface of the earth. Without CSS, thus, some part of the mineral oil would necessarily remain viscous and by virtue thereof - unstimulated to move to the earth's surface. As such, this part of the oil would remain unable to be extracted 14. As per Contract Agreement No. GGM/WR/CONSUL-ARC/95-96 dated 1.9.95 (copy at pages 1-20 of the Assessee's Paper Book, 'APB', for short), ONGC desired 'to engage an internationally reputed agency for carrying out the feasibility studies for implementation of the cyclic steam stimulation (CSS) in 12 wells in heavy oil deposits of Lanwa, Mehsana, India'. Such studies are referred to in the Agreement as 'Project Services'. ARC represented to have the willingness and necessary ability and expertise to perform such Project Services with the standard efficiency, professional skill and accepted international practices of the industry. It was, therefore, that the Agreement was entered into. 15. As per the Agreement: "In this Contract the following defined terms have the meanings indicated therein. 1.3. 'Project Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recipitation: i) Evaluation of Asphalting Precipitation potential initial characterization of a typical ONGC Oil including gravity, viscosity asphalting content and component type analysis by column chromatography. Comparison will be made to a Canadian heavy oil, e.g. Lyolydminsteer crude. ii) Determination of potential for asphalting precipitation by a series of onset measurements on the ONGC oil utilizing the near unframed (NTR)fiber optics light scattering apparatus under ambient conditions, by titration with a solvent such as pentane. Comparison will be made to the same Canadian heavy oil as above using the same titration solvent. iii) Quantification of Reservoir damage: Onset measurements will be carried out with the NIR apparatus on the ONGC oil by increasing in turn the pressure and temperature from ambient upto CSS conditions until asphalting onset is observed. This will determine if asphalting precipitation will be a potential problem in the reservoir. If it is determined that aspartames are precipitated under he above conditions, a core flood experiment will be carried out under CSS conditions to determine the extent of asphalting damage. A synthetic core would be pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 'FTS' within Explanation 2 to section 9(1)(vii), or they amount to services rendered in connection with exploration of mineral oil taxable under section 44BB. 18. The first point argued by the learned counsel for the assessee is that the service rendered by ARC is "in connection with exploration of mineral oil" within the meaning of section 44 BB(1) of the Act. Section 44BB reads as follows:- "44 BB (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 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 used, in the prospecting for or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (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". Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 44BB of the Act. 21. In this regard, the AO has held as follows:- "3. During the course of assessment proceedings assessee representatives have argued that the activities carried out by the N.R. Company will not be considered as technical services by virtue of exception provided in Explanation 2 to sec. 9(1)(vii). According to the assessee's claim, consideration for any construction, assembly, mining or like project will not be included in the definition of fees for technical services. They argued that nature of services performed by the N.R.C. is a mining activity and therefore deserve to be excluded from the definition of technical services. It has been claimed that since extraction of oil is an activity of mining, the revenues received by the assessee even for the above referred activities, will not be assessed as fee for technical services although these activities may be technical in nature. Assessee's contention as above, is not found convincing. Services performed by the NRC cannot be termed as mining activities. Mining requires certain operations inside the crust of earth. In the mining process top surface of the earth is removed and some operation is carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raction of mineral oil" simplicitor. It prefixes the phrase "in connection with" to the expression "extraction of mineral oil". This shows that the section, by virtue of the phrase "in connection with", is talking of something other than physical operations below the surface of the earth. It is, through this phrase, considering the services or facilities in connection with extraction of mineral oil. The Legislature, it cannot be gainsaid, chooses its words with utmost care. 24. Incidentally, "connected with" has been held by the Hon'ble Allahabad High Court in "Basudev v. Rex", AIR 1949 Allahabad 513 (FB), to imply a substantial or direct connection and not a fanciful or highly problematic connection. In the present case, the study carried out by ARC, as seen, was a study substantially and directly connected with the extraction of mineral oil, sub-serving the purposes of the phrase "in connection with the extraction of mineral oil" as used in section 44BB(1). 25. The study carried out by ARC was a feasibility study for implementation of CSS. Undeniably, CSS helps in improving recovery of oil from oil fields by thinning of oil, reducing its viscosity or density or specific gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bly, mining, or like project undertaken by the recipient of consideration which would be income of the recipient chargeable under the head 'salaries'". 2. The question whether prospecting for, or extraction or production of, mineral oil can be termed as 'mining' operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions 'mining project' or 'like project' occurring in Explanation 2 to section 9(1)(vii) of the Income Tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. 3. In view of the above opinion, the consideration for such services will not be treated as fees for technical services for the purpose of Explanation 2 to section 9(1)(vii) of the Income Tax Act, 1961. Payments for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of section 44BB of the Income Tax Act, 1961 and not under the special provision for the taxation of fees for technical services contained in section 115A read with section 44D of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the meaning of Explanation 2 to section 9(1)(vii). Therefore, any consideration received for carrying out such operation which was either a mining project or a like project must be considered to fall outside the definition of the words 'fees for technical services' as contained in that Explanation and, consequently, outside the provisions of section 115A." 33. The case before us is still better. The service rendered by ARC is a service directly and substantially connected with the extraction of mineral oil. It, therefore, is definitely related to a project like a mining project. 34. Vide order dated 23.2.2007, in the assessee's own case in ITA No. 2145(Del)04 for assessment year 98-99 (copy placed on record), the Delhi Bench of the Tribunal again considered CBDT Instruction No. 1862(supra). It was held as follows:- "We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. The nonresident company was engaged by the ONGC for rendering consultancy services for evaluation of seismic data to determine Gas Hydrate Potential and for implementation of Cyclic Steam Stimulation. The CBDT Instruction No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining and hence, outside the definition of FTS within Explanation 2 to section 9(1)(vii). 36. Herein, again, the situation is similar, if not identical. There, the services were of preparation of bid documents for 3D Seismic API Project and Technical Evaluation of 3D Seismic API Tender on Bombay High Field. The service, thus, in that case also, was not a physical operation below the surface of the earth. It was held to be related to mining. In the present case, as considered above, the study carried out by ARC is directly related to the extraction of mineral oil. In that year, the service of ARC had been engaged by ONGC for rendering consultancy service for evaluation of, inter alia, implementation of CSS. 37. Again, in the assessee's case for assessment year 2002-03, in ITA No. 5103(Del)04, vide order dated 4.2.2007 (copy placed on record), the Delhi Bench of the Tribunal considered CBDT Instruction No. 1862 (supra) and directed the AO to compute the income under the provisions of section 44 BB. 38. "DCIT v. Schlumberger Seaco Inc." (supra), was followed by the Tribunal in ITA No. 5103(Del)04(supra). Therein also, the Authorities had held that the services of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n No. 1862 issued by the Board also rules out the applicability of section 44D read with section 115A of the Act. Therefore, there is no need or legal justification to examine the applicability of Article XII (3)(a) or (d) of the Treaty between India and Australia. We have already held that the provisions of section 44BB are more appropriate to the present case. Accordingly, we hold that the assessee was right in contending and the CIT (Appeals) was right in accepting the contention that the revenues under the contract are assessable in India under section 44BB of the Income Tax Act. We confirm his decision on this point and dismiss the ground." 40. It was thus held that Instruction No. 1862 rules out the applicability of section 44D read with section 115A to the service of imparting training to employees for operation of software used in the business of extraction of mineral oil. It was held that inspite of the proviso to section 44BB, services in relation to exploration of and prospecting for mineral oil were taxable u/s 44BB, rather than u/s 9(1)(vii). Once again, the situation is squarely applicable to the facts of the present case. Receipts for imparting training to empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of Explanation 2 appended to clause (vii) to sub-sec.(1) of S.9 which has been adopted by reference under s. 44D and S. 115A and proviso appended to s. 44BB(1) clearly excludes the application of s. 44BB where s.42 or s.44D or S. 115Aor S. 293A applies. In view of the admitted fact that the company has received fee as consideration for the services rendered which were technical in nature and which could not be rendered by anyone else who does not have the technical expertise of that RR Avon Gas Generator Driven Process Gas Compressor or Y2K roll over time at offshore installation as he could not be able to inspect and give advice. Therefore, the advice given was purely technical in nature and accordingly the service rendered was a technical service squarely covered under Explanation 2 appended to cl.(vii) to sub-sec.(1) of s.9 which has been adopted by reference under s. 44D and s.115A. The AO rightly taxed Rs. 10,53,310 @ 15 per cent as per the DTAA between India and Singapore under s. 44D r/w s.115A treating that service rendered by the non-resident company was technical service. The Tribunal was not justified in upsetting the order of the AO and holding that it was a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o contend that the consideration has been received by it for any mining or like project for the simple reason, which we have already noticed while disposing of ground No.1, that such project has not been undertaken by it. It follows from this that the controversy precisely is whether the assessee's case is covered by section 9(1)(vii)(b) or by section 44BB. It is in this connection that the order of the Delhi Bench of the Tribunal in "Hotel Scopevista Ltd." (supra) has to be noticed. The difference between the two sections has been noticed in this order in paragraph 4.5 which is reproduced below: "4.5. The ld. AR for the assessee has referred to certain decisions of the Tribunal as mentioned in para 3.1 of this order earlier which relate to provisions of section 44BB but we find that the provisions contained in section 44BB which relate to computation of profit and gain in connection with business of exploration etc. of mineral oil have been differently worded. As per these provisions, services and facilities provided in connection with prospecting for or extraction or production of 29 ITA 785(Del)2000 mineral oils are covered for separate computation of income u/s 44BB. It was be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 2 below sec. 9(1)(vii)(b), in paragraph 3 the Instruction goes on to say that "in view of the above opinion, the consideration for such services will not be treated as fees for technical services for the purpose of Explanation 2 to section 9(1)(vii) of the Income Tax Act, 1961. Payments for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of section 44BB of the Income Tax Act, 1961 and not under the special provision for the taxation of fees for technical services contained in section 115A, read with section 44D of the Income Tax Act, 1961." In view of the clear Instruction of the Board that consideration for services rendered by a non-resident in connection with the prospecting for mineral oil in India will be taxed under section 44BB, the assessee is right in offering the revenues under the contract for tax under this section. The applicability of this section does not depend upon the existence of any PE of the non-resident in India. Therefore, even though the assessee has no PE in India, the receipt under this contract is assessable under section 44BB." 48. In view of the above, "Hotel Scopevista" is of no aid to the Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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