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TMI Blog2019 (2) TMI 1422X X X X Extracts X X X X X X X X Extracts X X X X ..... eed, that the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. On perusal of the aforesaid order dated 02.12.2014 of DRP, we find that there is no mention in the order of the DRP that these requirements are fulfilled in the case of the assessee. The order of DRP is silent on the crucial facts as to whether the vessels hired by the Assessee to these companies i.e PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and whether the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. - ITA No:- 1401/Del/2015 - - - Dated:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue has filed this appeal in Income Tax Appellate Tribunal ( ITAT , for short), with the following grounds of appeal are as under: i. Whether on the facts and circumstances of the case, the Hon ble Dispute Resolution Panel ( DRP ) has erred in directing the Assessing Officer to apply the deemed profit rate of 10% u/s 44BB of the Income Tax, 1961 ( the Act ) on the Revenues earned by assessee on account of providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing, as against the proposed action of the AO to bring the revenue to tax as royalty u/s 9(1 )(vi) of the Act at an estimated net income @15% of gross receipts r.w.s 44DA of the Act. 1.1 Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in not appreciating that the terms services or facilities used therein are not defined and the two terms used are general in nature and therefore, once the payments take the-character of Royalty as defined u/s 9(l)(vi), they go outside the purview of section 44BB and have to be taxed at rates applicable to Royalty u/s 115A/44DA of the Act. 2. Whether on the facts and circumstances of the case the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Royalty or FTS is earned by a nonresident by way of royalty or FTS from Government or an Indian Concern and where an income is received by a non-resident from another nonresidents, the provisions of section 115A/44DA do not apply. 4.1 Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that sections 44DA/115A enshrine the source rule of taxation and is intended to cover all the payments in the form of Royalties/FTS etc. where the source of such payments lies in India. 4.2 Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that the payments in the present case have been made by a non resident entity in respect of contracts being executed by it in India and therefore the source of the payments as well as the situs of the activity to which these payments pertain lies in India. 4.3 Whether the Hon'ble DRP has erred in not appreciating the fact that the phrase Indian Concern' in sections 115A/44DA having not been defined, it has to be given a purposive construction and, therefore, a Non- Resident entity executing contracts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of DIT vs Morgan Stanley Inc and Co (2007) (292 ITR 416) (SC) 17. Form 35A 18. Annexure to Form 35A 19. Certified true copy of the transfer pricing order dated December 3, 2013 passed by the transfer pricing officer under section 92CA(3) of the Income-tax Act, 1961 ( Act ) 20. Certified true copy of the draft assessment order dated March 25, 2014 passed by the assessing Officer ( AO ) under section 144C (1)/143(3) of the Act 21. Copy of the return of income for the subject year along with computation 22. Copy of the relevant pages of the contracts entered into by PGS Exploration (Norway) AS ( PGSEN ) and Petroleum Geo-Services Asia Pacific Pte Ltd ( PGSAP ) with Oil Natural Gas Corporation and Reliance Industries Lifmited ( RIL ) respectively evidencing that the activities of seismic data acquisition and processing were carried on by PGSAP and PGSEN 23. Copy of the submission dated April 27, 2012 filed before the AO during the course of assessment proceedings 24. Copy of the submissions dated February 24, 2014 filed before the AO during the course of assessment proceedings 25. Copy of submissions dated March 7,2014 fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86-87. Faced with the different views taken by the authorities under the Act, as mentioned above, the High Court proceeded to analyse the different clauses of the contract between the parties. A consideration of such analysis made by the High Court would go to show that it had come to light before the High Court that the contract between the parties visualized operation of the oil rigs including drilling operations by the personnel made available under the contracts/agreements, which fact was further stated on affidavit before the High Court by an authorized official of the ONGC in the following terms. That under the said agreement, Foramer was required, through its personnel listed in Exhibit-A to the said agreement, to carry out inter-alia the drilling operations specified in clause 4.3 to 4.10 of the said agreement. Despite the above, the High Court took the view that under the agreement payment to M/s. Foramer France was required to be made at the rate of 3450 USD per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company. Specifically, taking the view that the contract did not mention that the personnel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 work covered under each of the said contracts as culled out by the appellant and placed before the Court is correct. The said details are set out below: S. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c 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. 6061 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. 25. 737 Repair, inspection and overhauling o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstallation 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 there under. 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. (emphasis Supplied) As evident from the above, the entire observation is with respect of Drilling i.e. whether drilling would amount to a 'mining operation' and the proximity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement for the association or participation of that Govt. or any person authorized by th at Govt. providing any services or facilities or supplying any ship, aircraft, machinery or plant (whether by way of sale on hire) in connection with any business consisting of in any business consisting of the prospecting or extraction or production of mineral oil carried on by that Govt. or any person specified by that Govt . The Hon ble Supreme Court did not accede to the contentions of the appellant that- ... applicability should be understood with reference to the existence of agreement with foreign companies rather than the immediate purpose of such agreement (beneficiaries should also) include foreign companies with whom the ONGC has no direct agreement though such foreign companies may nevertheless be providing similar services, may be, on the strength of separate agreements with the foreign companies with whom the ONGC has executed an agreement.... ( emphasis and clarifications added) The Hon ble SC held that ...the power to grant exemption is twofold and covers agreements directly associated with the prospecting or extraction or production of mineral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The activities of the assessee are not covered under any of the above activities. The assessee provided vessels on hire on time charter basis to non-resident companies [DRP, Para-2] The business of such hirers or whether and to what extent such hirers deployed the hired vessels in their business has no effect on the taxability of the income received by the assessee. In the annexure to its objections before DRP, the assessee described its business as under The assessee .operates vessels which are provided on time charter basis ..As part of charter hire, the assessee provides operational and vessels management services which include maritime management services, health, security and environment and accounting services. It is also engaged in conducting geophysical surveys offshore whith special emphasis on 3D collection of seismic data, processing and sale of such data and other activities of similar nature . [p.3 Appeal Set] In other words, the assessee is engaged in two types of activities i.e. * Income from the operation of vessels on charter hire basis and * Income from processing and sale of seismic data Geophysical Surveys. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined by the Assessee and did not make any adverse inference in the case of the Assessee. Copy of the order passed by TPO is attached at pages 35-36 of the paperbook. In the draft assessment order (dated March 25, 2014), the AO proposed to deny the applicability of section 44BB to the income received by the Assessee by holding that the plant and machinery supplied to PGSEN and PGSAP were in turn supplied to third party contractors like ONGC and RIL. Therefore, the first leg contractors, ie PGSEN and PGSAP may be justified in availing the benefit of section 44BB of the Act, but not the Assessee. Consequently, the AO held that such income would qualify as 'royalty' and proposed to tax the aforesaid income as per the provisions of section 28 of the Act read with rule 10 of the Income tax Rules ( Rules ), 1962. The AO arbitrarily proposed to attribute 15 per cent of the gross revenues as profits of the Assessee by applying rule 10 of the Rules and the total income was proposed to be assessed at INR 118,033,105 (effective rate of tax being 6.335 percent). Copy of the draft assessment order is attached at pages 37-54 of the paperbook. Aggrieved with the draf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. It is beyond doubt that the vessels used for prospecting for, extraction and production of mineral oil would be considered as ships. Reliance in this regard is placed on the following decisions: - Sedco Forex International Drilling Inc vs ACIT (1996) (58 ITD 177) (Del) - ACIT vs Interocean Shipping India Private Limited (1994) (51 ITD 582) (Del) - Wavefield Inseis ASA vs DIT (2009) (320 ITR 290) (AAR) - Seabird Exploration FZ LLC UAE (2010) (326 ITR 558) (AAR) Without prejudice to the above, the Delhi Bench of ITAT in the case of ACIT vs Interocean Shipping India Private Limited (1994) (51 ITD 582) (Del) has also held that the ships should be considered as machinery thereby, eligible to be categorized / covered under section 44BB of the Act In the instant case, the ship / vessel provided by the Assessee is used for the purpose of prospecting for mineral oil pursuant to the Production Sharing Contract ( PSC ) entered into by ONGC, RIL etc with the Government of India. It is also to be noted that for any oil and gas exploration activity, seismic survey is the first important step and in order to undertake seismic operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been defined in the Act and thus, reliance is placed on the decision of the Apex Court in the case of Doypack Systems (P) Ltd vs UOI and Ors, National Textile Corpn and Anr, Swadeshi Mining and Mfg Co Ltd (1988) (36 ELT 201) (SC). The interpretation of the term 'in connection with' as emerging from above decision suggests that the expression includes matter occurring prior to as well as subsequent to so long as these are related to the principal thing. Judicial precedents, in the context of section 44BB of the Act have given a wide interpretation of the expression so as to include within its ambit services or facilities which are closely connected to the activities of prospecting for, or extraction or production of mineral oil such as helicopter services for transporting men to the area where exploration activities are undertaken and seismic data processing activities [Lloyd Helicopters International Pty Ltd (2001) (249 ITR 162) (AAR)]. Attention is also invited to the decision of the Delhi Bench of the ITAT in the case of ACIT vs Paradigm Geophysical Private Limited (2008) (117 TTJ 812) (Del), wherein, the assessee had entered into a contract with RIL for un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs M/s Expro Gulf Limited Others (ITA No 34 of 2015) (Uttarakhand High Court) (copy of the decision is enclosed on pages 49-52 of the paperbook) have allowed the benefits of section 44BB of the Act to nonresident taxpayers. Further, this Bench has also followed the Supreme Court decision in the following cases: - DDIT vs RPS Energy Pty Ltd (2018) (92 taxmann.com 77) (Delhi-Trib) - BJ Services Company Middle East Ltd vs ADIT (2017) (77 taxmann.com 218) (Delhi-Trib) - ACIT vs Landmarks Graphics Corp (2017) (87 taxmann.com 311) (Delhi Trib) - Viking Maritime Inc vs DCIT (2016) (69 taxmann.com 303) (Delhi - Trib) - Western Geco International Ltd vs ACIT (2016) (71 taxmann.com 166) (Delhi -Trib) The following recent case laws have followed the Supreme Court decision: - Seabird Exploration FZ LLC (2018) (92 taxmann.com 328) (AAR) - National Oil Well Maintenance Company vs DCIT (2018) (89 taxmann.com24) (Jaipur - Trib) - Production Testing Services Inc vs DCIT (2018) (89 taxmann.com 416) (Mumbai -Trib) First leg versus second leg contract In the draft assessment order, the AO held that the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to PGSEN and PGSAP were in turn let out to ONGC and RIL which is not a true fact. The vessels were used by PGSEN and PGSAP for conducting seismic data acquisition and processing in pursuance of the contract entered into with ONGC / RIL. As mentioned above, the vessels, in the instant case, are being used by PGSEN and PGSAP for rendering seismic data acquisition and processing services which is the first step of prospecting of mineral oil. Thus, even for sake of argument, if the contention of the AO be accepted that the provisions of section 44BB of the Act is applicable only to first leg contractors, the provisions of the aforesaid section would be applicable to the Assessee as it is providing facilities / plant and machinery for prospecting of mineral oil only. The words ....used or to be used for the business of prospecting for, or extraction or production of, mineral oils... clearly signifies that the plant or machinery supplied on hire for the aforesaid activities would fall within the ambit of section 44BB. Section 44DA of the Act not applicable Section 44DA read with section 9(l)(vi) of the Act provides that 'income from royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the activities undertaken by the assessee in the present case. The services rendered in that case and those rendered by the assessee herein are tabulated and contrasted as under Particulars ONGC (as representative assessee of Rolls Royce, Singapore) Assessee Nature of activities Inspection of the existing control system and utilizing services of engineers for Y2K roll over time at offshore installation Providing vessels on hire to be used by another company for the purpose of undertaking seismic data, acquisition and on board processing in pursuance of contract for exploration, prosecuting and production of mineral oil entered into by ONGC Counter Party to the Contract ONGC (Indian resident) PGS GAS (non-resident) Adhoc attribution of the profits The AO has applied deemed profit of 15 percent on the gross receipts received by the Assessee from supplying plant and machinery to PGSEN and PGSAP. The application of deemed profit rate of 15 percent is based on conjectures and surmises. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been offered to tax by the Assessee under section 44BB of the Act. Without prejudice to the above, it is submitted that the Assessee has earned its entire income during the subject year from its Associated Enterprises and the same has been subjected to transfer pricing provisions. In this regard, it is submitted that the Assessee has been duly remunerated at arm's length price which has been approved by the transfer pricing officer (please refer pages 35-36 of the paperbook). Accordingly, no further profits can be attributed to Assessee's Permanent Establishment ( PE ) in India as per the decision of the Supreme Court in the case of DIT vs Morgan Stanley Inc and Co (2007) (292 ITR 416) (SC) (copy of the decision is enclosed on pages 199-214 of the paperbook). (3) At the time of hearing before us, the Ld. CIT(DR) relied on his written submissions as well as on the aforesaid Draft Assessment Order dated 25.03.2014. In his oral submissions, the Ld. CIT(DR) contended that the assessee has two types of activities: firstly, it has income from the operation of vessels on charter hire basis and secondly, it has income from processing and sale of seismic data Geop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. The Ld. Counsel also took us through the Paper Books to support the case of the Assessee. The Ld. Counsel for assessee placed reliance on the Paper Books filed by the assessee and the synopsis filed by the Ld. Counsel. In rebuttal, the Ld. CIT(DR) contended that the reliance placed by the Ld. Counsel of the Assessee, on Louis Dreyfus Armateures SAS (supra) and Baker Hughes Singapore Pte Ltd (supra) is wrong because the facts are distinguishable. In the case of Louis Dreyfus Armateures SAS (supra) it was not in dispute that the shipping vessels provided on hire by the assessee were seismic survey vessels whereas in the case before us this fact is disputed, the Ld. CIT(DR) submitted. He further submitted that in the case of Baker Hughes Singapore Pte Ltd (supra) also it was not in dispute that the equipments given on hire were for rendering services to entities engaged in Oil Exploration Work whereas in the case before us, this fact is in dispute. The Ld. CIT(DR) also submitted that the order of Hon ble Delhi High Court does not advance the case of the assessee, because admittedly, the order of Hon ble Delhi High Court was admittedly in relation to services of different nature. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on behalf of the assessee 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. [( 3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that subsection, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.] Explanation .- For the purposes of this section,- ( i) plant includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business; (ii) mineral oil includes petroleum and natural gas. (4.1) On careful perusal of Section 44BB of I.T. Act it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and technical capacity can be in the area of seismic data Geophysical Services or in any other area useful in the prospecting for, or extraction or production of, mineral oils. However, it is necessary for the claim of the assessee for applicability of Section 44BB of I.T. Act to succeed, that the vessels given on hire by the Assessee are shown to be fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils. In addition, it is also necessary for assessee s claim U/s 44BB of I.T. Act to succeed, that the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. On perusal of the aforesaid order dated 02.12.2014 of DRP, we find that there is no mention in the order of the DRP that these requirements are fulfilled in the case of the assessee. The order of DRP is silent on the crucial facts as to whether the vessels hired by the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. In fact, vessels specification (pages 161-162 of the Paper Book dated 15th May, 2018) is blank in the sense that information regarding vessels specification is not filled up at all. Perusal of Page 164 of Paper Book dated 15th May, 2018 shows that the shipping vessels were to be delivered by the owners free of cargo and with clean tanks suggesting that the shipping vessels might have been oil tankers and /or cargo vessels instead of being vessels fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils. We have also perused what has been termed by the assessee to be the Copies of the invoices (vide pages 198-217 of Paper Book dated 15th May, 2018) filed by the assessee. From the discernible description on some of these invoices, it is found that expenses are account of over-time of cabin crew, baggage clearance for crew, food allowance, mobile recharge, lashing charges, Sony LCD TV, Coke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of any categorical findings by DRP on these crucial issues of facts; and in the absence of anything on record to conclusively establish relevant facts as aforesaid; it is not possible for us to uphold the order of DRP. (6) Although both sides have relied on judicial precedents to support their respective positions on assessee s claim for applicability of Section 44BB of I.T. Act; we find that the crucial facts whether the shipping vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and whether the shipping vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee; are not available on our record. Further, in the absence of crucial facts, the order of DRP is defective as it suffers from factlessness, as held by us earlier, and is liable to be set aside. We have alr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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