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TMI Blog2017 (1) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... gross amount for the purpose of deeming profit @ 10% u/s 44BB - Held that:- The service tax and VAT are statutory dues which are paid to the Government as liability of the assessee. A perusal of the record as well as the assessment order nowhere reveals that the Service Tax and VAT have been separately charged by the appellant company on the bills. The record further does not reveal whether the assessee has separately accounted for the amounts of Service Tax and VAT so charged, in the books of account. The assessment order also does not whisper anything as to whether the Service tax and VAT have been charged by the appellant company in terms and conditions of the agreements. These aspects, in our opinion, need proper examination and verification at the stage of Assessing Officer before deciding the question whether the Service Tax and VAT charged by the assessee would form part of the receipts or not. We, therefore, direct the AO to examine – (i) the procedure for collecting the Service Tax and VAT; (ii) whether the assessee has issued bills for charging Service Tax & VAT and if yes, whether the Service Tax and VAT have been separately charged in the bills or not and (iii) whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g profit @ 10% u/s 44BB. 2. That the ld AO has erred in treating equipment rental received from Triton Holding Ltd. Sedco Forex International Drilling Inc. and Pride Foramer as royalty and thus taxing it at 25% deemed income as against 10% deemed income u/s 44BB. 3. That the ld.AO has erred in taxing interest on Income Tax Refund at 41.82% as against 15% as envisaged in Article 12 of DTAA between India and U.K. 4. That the ld.AO has erred in charging interest u/s 234B. Grounds of appeal No. 421/Del./2012 (2008-09) : Addition qua services in connection with exploration/prospecting/extraction of mineral 1. That the Ld. AO/DRP erred on facts and in law in completing assessment under section 144C/143(13) of the Income-tax Act, 1961 ('the Act') at an income of ₹ 4,891,233,532/- as against the income of ₹ 481,586,605/- returned by the appellant. 2. The Ld. AO/DRP has erred on the facts and in law in dismissing the claim of the appellant that revenue of ₹ 4,883,904,056 earned from rendering services in connection with prospecting for, extraction or production of mineral oils was covered by the provisions of Section 44BB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from the aforesaid reimbursement of VAT of ₹ 1,250,900 was in the nature of fees for technical services/ royalty as opposed to claimed not chargeable to tax. Initiating of penalty proceedings 10. That the Ld. AO/DRP has erred on facts and in law in levying penalty under section 271B especially when the entire receipts of the assessee was liable to be chargeable to tax u/s 44BB and the assessee was neither required to maintain books of accounts nor get the same audited. Levy of interest 11. That the Ld. AO/DRP erred on facts and in law in levying interest under section 234B of the Act especially when there was no liability on the assessee to pay advance tax under section 209(1 )(d) of the Income-tax Act, 1961. 12. That the Ld. AO/DRP erred on facts and in law in not following the decision of the Hon'ble Jurisdictional High Court of Uttarakhand in the case of DIT vs Maersk Co. Ltd. [240 CTR 218] wherein the Hon'ble High Court held that interest u/s 234B was not chargeable where the entire income is subject to tax deduction at source. 13. That the Ld. AO/DRP erred on facts and in law in levying interest under section 234C as intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO/DRP erred on facts and in law in adding a sum of ₹ 1,813,114/- received on account of VAT to the income of the assessee taxable under section 44BB and section 44DA respectively without appreciating that the said amount represented an actual government levy which does not result in any taxable income for the appellant. Levy of interest 8. That the Ld. AO/DRP erred on facts and in law in levying interest under section 234B of the Act especially when there was no liability on the assessee to pay advance tax under section 209(1 )(d) of the Income-tax Act, 1961. That the Ld. AO/DRP erred on facts and in law in not following the decision of the Hon'ble Jurisdictional High Court of Uttarakhand in the case of DIT vs Maersk Co. Ltd.-[240 CTR 218] wherein the Hon'ble High Court held that interest u/s 234B was not chargeable where the entire income is subject to tax deduction at source. 2. Since the issues involved in all these three appeals are identical, therefore, all these appeals are being disposed of by this consolidated order for the sake of convenience and brevity. 3. The brief facts of the cases are that the assessee company was engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax the assessee s income from contracts with the companies which are members of a Production Sharing Contract (PSC) u/s. 44BB and sustained the orders of AO with respect to taxability of income from the contracts with non-PSC companies. Regarding the inclusion of VAT and Service tax in the receipts, the ld. DRP supported the assessment orders for the purpose of determining profit u/s. 44BB of the Act. The conclusion of AO on the taxability of interest on refund was also affirmed by learned DRP. In pursuance to the directions of ld. DRP, the AO, accordingly made the impugned assessment orders, assessing the total incomes of the assessee u/s. 143(3) read with sec. 144C(13) at ₹ 21,59,89,644/-, ₹ 4,89,12,33,530/- and ₹ 62,31,35,555/- respectively for the assessment years 2007-08, 2008-09 and 2009-10. Being aggrieved, the appellant/assessee is in appeals before the Tribunal. 4. From the above narration of facts, and the grounds of appeals raised before us, we find that the major issues, involved in the present appeals are as under : (i) Whether the assessee company is entitled to benefit of section 44BB(1) on the income from contracts of non-PSC companies or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Supreme Court in ICDS Ltd v CIT [2013] 350 ITR 527 held that the assessee leasing the vehicles to others who use the said vehicles in their business of running them on hire is entitled for higher rate of depreciation on the vehicles given on lease. It was held by the Hon ble Supreme Court that the lessor need not himself use the vehicles in the business of running them on hire. The rationale of the aforesaid decision of the Supreme Court may be applied in the context of section 44BB in as much as section 44BB does not mandate that the assessee should directly enter into contract with the person engaged in the business of prospecting for or extraction or production of, mineral oils or the services or facilities or plant and machinery on hire should be directly provided to the said person alone. We have already given a finding of fact that the services and facilities provided by the assessee along with plant and machinery are used in offshore drilling operations i.e., the activity of prospecting for or extraction or production of mineral oils. Consequently, the requirements of section 44BB are satisfied in the present case. 24. In view of the above, there is no merit in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions mining projects or like projects occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he area and analysis of seismic information reports to design 2 dimensional seismic surveys. 17. 7226 Opinion on hydrocarbon resources and foreseeable potential. 18. 7227 Opinion on hydrocarbon resources and foreseeable potential. 19. 7230 Opinion on hydrocarbon resources and foreseeable potential. 20. 6016 Opinion on hydrocarbon resources and foreseeable potential. 21. 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program. 22. 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs. 23. 733 Repair of gas turbine, gas control system and inspection of gas turbine and generator. 24. 741 Repair and inspection of turbines. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eservoir conditions. 44. 1523 Supply, installation and familiarization of software for processing seismic data. The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal. The issue is also covered in favour of the assessee by another decision of ITAT, Delhi Bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough stated to be effective from assessment year 2011-12 must be treated as clarificatory in nature. A reference is made to the decision of Hon'ble Supreme Court, in the case of Union of India v. Gosalia Shipping (P.) Ltd [1978] 113 ITR 307 for the proposition that when payment is made to a shipping company for time charter, its payment for hire of shipment and not for the purpose of carrying goods, and by the same logic, when payment is made by the first leg contractor to the supplier of equipment or personnel, the payment is for such equipment or personnel and not for the purposes in which the equipment or personnel are put to use. It is then submitted that the decision of PGS Geophysical AS v. Addl. DIT [2014] 369 ITR 27/[2015] 55 taxmann.com 394 (Delhi) contradicts the findings in the earlier Hon'ble Delhi High Court decision in the case of DIT v. OHM Ltd. [2013] 352 ITR 406/212 Taxman 440/[2012] 28 taxmann.com 120, based on which the coordinate bench has decided this issue in favour of the assesse. It is submitted that the decision of the coordinate bench in the case of Baker Hughes Asia Pacific Ltd. (supra), by which this issue in appeal is stated to be covered in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o reason to take any other view of the matter than the view taken by the coordinate benches and respectfully following the views of the coordinate bench, we approve the conclusions arrived at by the learned CIT (A) and decline to interfere in the matter. 27. On the basis of the above, following the decision of the coordinate bench we held that the revenue of the second leg contracts are also eligible for benefit of preferential tax treatment provided in section 44BB of the Income Tax Act and therefore, ground No. 8 of the appeal is allowed. 6. The learned DR, though relied upon the orders of the authorities below, but could not adduce any contrary decisions or material before us to discard the stand of the assessee already decided by various courts, as stated above. The decisions relied by the AO of Hon ble Uttaranchal High Court in the case of ONGC as agent of Foramer France (ITA No. 231/2001) and ONGC as Agent of Rolls Royce (ITA No. 86 of 2007) for holding that the income of the assessee was in the nature of Fees for Technical Services/Royalty, have been overruled by the decision of Hon ble Supreme Court in Civil Appeal No. 731 of 2007 and 1240 of 2008. Therefore, resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade. 2. Section 44BB makes a special provision for computing profits and gains of the non-resident assessee engaged in the business of exploration, etc., of mineral oils. Sub-section (1) provides that in respect of such an assessee, notwithstanding anything contained in sections 28 to 41 and sections 43 to 43A, an assessee shall be deemed to have earned ten per cent profit on the amount mentioned in sub-section (2) received by him. 3. Section 44BB is a complete code in itself. It provides by a legal fiction to be the profits and gains of the non-resident assessee engaged in the business of oil exploration at the rate of 10 per cent of the aggregate amount specified in sub-section (2). Accordingly, the Hon ble jurisdictional Uttrakhand HC has consistently held the aggregate amount received, including the following, to be included in total income for taxation under section 44BB: Citation Receipt [2008] 169 TAXMAN 138 (UTTARAKHAND) Halliburton Offshore Services Inc. Reimbursement of freight and transportation charges [2009] 181 TAXMAN 46 (UTTARAKHAND) Ensco Maritime Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Local Sales Tax [2012] 28 TAXMANN.COM 94 (CAL) Poddar Projects Surcharge is part of Rent [2013] 35 taxmann.com 565 (Allahabad) UP Hotels Luxury Tax [1982] 9 Taxman 173 (Punj_Har) Kunjpura Kiln Royalty (payable to government) [2006] 154 Taxman 274 (Allahabad) Rampur Distillery Export Duty [2015] 58 taxmann.com 206 (Bombay) Ovira Logistics Service Tax 6 Accordingly, the receipt of VAT is definitely connected with the business of of exploration and / or extraction of oil and needs to be included in the aggregate amount to be brought to tax under section 44BB. (It is also notable that VAT succeeded / replaced the sales tax and terefore the principal enunciated in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) applies squarely.) 7. It is submitted that for the purpose of working of deduction u / s 80HHC, the Hon ble SC in Lakshmi Machine Works [2007] 160 TAXMAN 404 (SC) has held that sales tax and excise duty cannot form part of the Total Turnover si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08, grounds Nos. 8 9 for A.Y. 2008-09 and grounds Nos. 6 7 for A.Y. 2009-10 are allowed for statistical purposes. 10. The third issue is whether the interest received on Income-tax Refund should be taxed @ 15% under Article 12 of DTAA, treaty with UK or should be taxed @ 40% as per normal provision of the Act. In this regard, the ld. AR of the appellant submitted that this issue is covered under Article No. 12 of the DTAA, according to which the interest on refund is taxable @ 15%. Article No. 12 of DTAA reads as under : 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the contracting state in which it arises and according to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15% of the gross amount of the interest. Even if para 1 and 2 of Article 12 are read with para 6 thereof, even then interest income has to be taxed at 12% as envisaged by para 2 of Article 12 because of the following reasons: a). Interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of, mineral oils in India, and (B) payable to the assessee (whether in or out of India) on account of the 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 in India. Clause (b) of sub-s. (2) refers to the amounts, (A) received by assessee in India on account of the 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, and (B) deemed to be received by the assessee in India on account of the 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. 6. Thus, it is clear from the perusal of s. 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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