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TMI Blog2017 (12) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9(1)(vii) and in any case, the provisions of section 44BB being more specific, shall be applicable and provisions of section 44DA are not applicable in the instant case. The assessee company has therefore rightly offered its income under the subject contracts in terms of section 44BB of the Act. In the result, ground no. 2 of assessee’s appeal is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and in law, the learned AO has on the basis of assumptions and presumptions without appreciating the facts and merits of the case, disallowed u/s 44DA(1) and 40(a) (ia) the payment made against ERP Cost and Training Expenses of ₹ 7,22,163.47/-, whereas these expenses were incurred wholly for the purpose of cementing services provided, construction of mineral oil and gas wells in India which is an integral part, main activity and important element in providing services or facilities in prospecting for, or extraction or production of mineral oil and natural gas. These expenses are also not covered u/s 195 of the I.T.Act 1961. (4) Under the facts and circumstances of the case and in Law, the Learned AO has on the basis of assumptions and presumptions without appreciating the facts and merits of the case, charged interest u/s 234B, 234C and 234D and withdrawing the interest u/s 244A(3) of the Act. (5) Under the facts and circumstances of the case and in Law, the learned AO on the basis of assumptions and presumptions without appreciating the facts and merits of the case has initiated penalty u/s 271(1)(c) of the Act." 2. In its appeal for AY 2012-13, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the parties, firstly, it would be relevant to refer to the nature of the services and scope of work under the two contracts entered into by the assessee company with Oil India Ltd. and Gail (India) Limited revenues from which have been offered to tax in the return of income for AY 2012-13. 7. The contract with Oil India Ltd. Dated 27.11.2009 is titled as "Hiring of cementing services" which is available at APB pages 96 to 250 and the scope of work is contained in Section II of the contract and the relevant provisions reads as under:- "2.0 Preamble 2.1 Rajasthan Project of Oil India (OIL), a Govt of India Enterprise, is engaged in the exploration and production of natural gas from its Jaisalmer Basin and heavy oil from Bikaner-Nagaur basins of Western Rajasthan, India. 2.2 Presently, OIL plans to extend its exploration activities in the Jaisalmer and Bikaner, Nagaur Basins of Western Rajasthan by drilling about 18 to 19 wells (1200 + 1950m) in its various NELP Blocks in Western Rajasthan. 2.3 The down-hole drilling conditions and geology in the proposed drilling locations are expected to be normal and similar to those of gas fields of Jaisalmar Basin where 40 wells in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting/LOT 6) Casing Test 7) To provide services on cementing programme, slurry design etc. for exploratory/developmental drilling of oil/gas wells. 8) To maintain and service all equipment belonging to Contractor and thus avoid downtime. 9) Any other job normally required to be done by cementing unit. 10) To carry out relevant API and other tests on cement and additives in the nearest laboratory. 11) To perform squeeze job (optional) if required by retrievable packer/cement retainer on mutually agreed terms & conditions. 12) Pre-stressing for thermal wells where experts for this will be called separately by OIL. 13) Any other jobs generally connected with such services for bringingin a well to health should be provided by the Contractor when called upon to do so including supply of extra items/equipment/cement additives (on reimbursement basis on mutually agreed terms & conditions)." 8. It would be equally relevant to note the schedule of rates for the above scope of work which is provided in section IV of the above contract with OIL, and the relevant provisions reads as under:- "1.0 MOBILISATION CHARGES: US$ 12,000.00 (US Dollars Twelve Thousand only) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held responsible for any failure to provide such personnel, materials, equipment and supplies as agreed to be provided under this tender. 1.2 Services/Contract Co-ordinator An experienced Services/ Contract Co-ordinator who is familiar with the proposed services and the area in which the work will be performed, shall be available to GAIL for discussions with respect to technical, planning, operational and logistical matters, attendance at meetings and general liaison and shall monitor onshore progress on a continuous basis prior to and during the operations, thus facilitating daily reporting. 1.3 Specialist Provider of Services The Contractor as a specialist provider of services under this scope of work is responsible to bring to our attention any additional items or services not specifically identified, but nonetheless considered by you as required to carry out GAIL's drilling program. 2.0 CEMENTING SERVICES: Contractor shall provide a comprehensive Cementing service in support of GAIL's drilling program in the Rajasthan area for the drilling of first three exploratory wells. The services need to be extended to remaining three wells if required." 10. It would be equally rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". 13. During the course of hearing, the ld. AR explained that cementing services are part of the drilling services for drilling of the oil and gas wells and submitted that well cementing is the process of introducing cement to the annular space between the well-bore and casing or to the annular space between two successive casing strings. Oil Well cementing is the oilfield operation which isolates the unwanted rock formation from the reservoir by providing barrier. Cementing operation also assists to support the casing pipe with the side walls and protects the well from any unwanted fluid influxes from the formation. The bottom part of the cement assists to guide the Drill bit through drilling of the well. 14. It was further explained that the well cementing consists of two principal operations - primary cementing and remedial cementing. Primary cementing is the process of placing a cement sheath in the annulus between the casing and the formation. Remedial cementing occurs after primary cement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted before 1.4.1976 or on any date thereafter the computation of income would be made as contemplated under the aforesaid Section 44D. Explanation (a) to Section 44D however specifies that "fees for technical services" as mentioned in Section 44D would have the same meaning as in Explanation 2 to Clause (vii) of Section 9(1). The said explanation as quoted above defines "fees for technical services" to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. "fees for technical services" any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head "salaries". Fees for technical services, therefore, by virtue of the aforesaid explanation will not include payments made in connection with a mining project." "13. The Income Tax Act does not define the expressions "mines" or "minerals". The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Court is correct. The said details are set out below. S. No. Civil Appeal No. Work covered under the contract 1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Six Sigma concepts. 39. 1516 Training on implementation of Six Sigma concepts. 40. 6023 Training on Drilling project management. 41. 2796 Training in Safety Rating System and assistance in development and audit of Safety Management System. 42. 1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages. 43. 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. 44. 1523 Supply, installation and familiarization of software forprocessing 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or inextricably connected with prospecting, extraction or production of mineral oil." 18. In the instant case, applying the above test of the pith and substance, both the contracts which provides for provision of comprehensive cementing services is directly associated with drilling operations and inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of these contracts is for prospecting, extraction or production of mineral oils. The payments under the two contracts will thus fall in the exclusion from "Fees for technical services", by virtue of the explanation 2 to section 9(1)(vii) which doesn't not include payments made in connection with a mining project for prospecting, extraction or production of mineral oils. 19. We are conscious of the fact that above decision of the Hon'ble Supreme Court has been rendered in the context of Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act and in the instant case, the AO has invoked provisions of section 44DA of the Act. At the same time, we find that both under section 44D as well as under section 44DA, fees for technical services has been defined as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. It is the contention of the ld AR that section 44BB being more specific provision shall prevail over section 44DA and in support, reliance was placed on the decision of Hon'ble Delhi High Court in case of DIT vs. OHM (2012) 28 taxmann.com 120 and it was submitted that the said decision of the Hon'ble Delhi High Court had considered the amendment which has been brought in by the Finance Act 2010 in section 44BB as well as section 44DA of the Act. 24. Per contra, the contention of the ld DR is that by the Finance Act, 2010, the amendments have been made in section 44BB as well as section 44DA of the Act and the rational for the said amendments was explained in memorandum explaining the provisions of the Finance Bill, 2010 which reads as under:- "Combined effect of the provisions of sections 44BB, 44DA and 115A is that * In the income of a non-resident is in the nature of fee for technical services, it shall be taxable under the provisions of either section 44DA or section 115A irrespective of the business to which it relates. * Section 44BB applies only in a case where consideration is for services and other facilities relating to exploration activity which are not in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as under: "11. We do not think that there is any error in the view taken by AAR. Basically the rule that the specific provision excludes the general provision has been applied. Section 44BB is a special provision for computing the profits and gains of a non-resident in connection with 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 including petroleum and natural gas. Section 44DA is also a provision which applies to non-residents only. It is, however, broader and more general in nature and provides for assessment of the income of the non-resident by way of royalty or fees for technical services, where such non-resident carries on business in India through a permanent establishment situated therein or performs services from a fixed place of profession situated in India and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with the permanent establishment or fixed place of profession. Such income would be computed and assessed under the head "business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires that the non-resident or the foreign company should carry on business in India through a permanent establishment situated therein and the right, property or contract in respect of which the royalty or fees for technical services is paid should be effectively connected with the permanent establishment. Such a requirement has not been spelt out in Section 44BB; moreover, a flat rate of 10% of the revenues received by the non-resident for the specific services rendered by it are deemed to be profits from the business chargeable to tax in India under Section 44BB, whereas under Section 44DA, deduction of expenditure or allowance wholly and exclusively incurred by the non-resident for the business of the permanent establishment in India and for expenditure towards reimbursement of actual expense by the permanent establishment to its head office or to any of its other offices is allowed from the revenues received by the non-resident. Because of the different modes or methods prescribed in the two sections for computing the profits, it apparently became necessary to clarify the position by making necessary amendments. That perhaps is the reason for inserting the second proviso to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the entirety of facts and circumstances of the case, we are of the considered view that consideration for the services under the contracts for provision of cementing services fall under the exclusion and doesn't qualify as fees for technical services as per explanation to section 9(1)(vii) and in any case, the provisions of section 44BB being more specific, shall be applicable and provisions of section 44DA are not applicable in the instant case. The assessee company has therefore rightly offered its income under the subject contracts in terms of section 44BB of the Act. In the result, ground no. 2 of assessee's appeal is allowed. 29. In view of the above, grounds no. 3, 4 & 5 which are in the context of section 44DA become academic and are treated as infructuous. Ground no. 6 which is pertaining to levy of interest u/s 234A, 234B and 234C is consequential in nature and it doesn't require separate adjudication. Ground no. 7 is pertaining to levy of penalty u/s 271(1)(c) doesn't arise out of order under appeal and is hereby dismissed. I.T.(I.T) A. No. 02/JP/17 30. In I.T.(I.T) A. No. 02/JP/17 for AY 2013-14, both parties agree and submit that ground no. 2 relates to app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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