2023 (2) TMI 120 - AT - Income Tax

Income deemed to accrue or arise in India - Receipts from leasing/hiring of RIGs - Permanent Establishment (PE) in India - Whether taxable as business profits u/s 44BB of the Act on gross basis or they are in the nature of royalty hence taxable under section 9(1)(vi) read with section 115A - assessee is a non-resident corporate entity incorporated under the laws of Malaysia and is a tax resident of Malaysia - HELD THAT - The amounts received in connection with activities enumerated under sub-section (1) to section 44BB even if in the nature of royalty has to be treated as business profits in case of a non-resident entity not having any Permanent Establishment (PE) in India. This is so because section 44BB does not require existence of PE. Interestingly similar receipts falling within the definition of royalty as defined in explanation 2 to section 9(1)(vi) which also includes equipment royalty would be taxable under section 44DA of the Act in a case where the non-resident entity has a PE in India. Thus sections 9(1)(vi) 44BB and 44DA apply in different situations. While existence of PE is a pre-condition for applicability of section 44DA it is not so in case of 44BB of the Act. DRP has made a fundamental error in ignoring the exceptions provided under clause (iva) to explanation 2 to section 9(1)(vi) of the Act while concluding that the amount received is in the nature of royalty under section 9(1)(vi) read with section 115A of the Act. One more fundament error committed by learned DRP is in holding that section 44BB will be applicable only in a case where non-resident has a PE in India. The aforesaid conclusion of learned DRP is based on complete misinterpretation of the provision and goes against the very essence of the provision which does not put the condition of existence of PE for applicability of the provision. Thus in our view the conclusion drawn by learned DRP that the amounts received are in the nature of royalty under section 9(1)(vi) read with section 115A of the Act is unacceptable. On the contrary we accept the position taken by the assessee in offering the income to tax under section 44BB of the Act as it is in accordance with the statutory provision. Accordingly we direct the AO to compute the income in both the assessment years under dispute under the provisions of section 44BB - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of receipts from leasing/hiring of RIGs.
2. Classification of income as business profits under section 44BB or as royalty under section 9(1)(vi) read with section 115A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Receipts from Leasing/Hiring of RIGs:
The primary issue in these appeals is whether the receipts from leasing/hiring of RIGs are taxable as business profits under section 44BB of the Income-tax Act, 1961, or as royalty under section 9(1)(vi) read with section 115A of the Act. The assessee, a non-resident corporate entity incorporated in Malaysia, engaged in leasing machines and equipment for exploration and extraction of mineral oils, received amounts from an Indian entity, Jaybee Energy (P.) Ltd. (JEPL), for leasing RIGs. The assessee offered the income from leasing RIGs as business profits to be taxed on a gross/presumptive basis under section 44BB at 10%. However, the Assessing Officer treated these receipts as Fees for Technical Services (FTS) under section 9(1)(vii) read with sections 44D and 115A. The Dispute Resolution Panel (DRP) later held that the amounts received were in the nature of royalty under section 9(1)(vi) read with section 115A and Article 12 of the India-Malaysia DTAA.

2. Classification of Income:
The Tribunal examined whether the receipts should be treated as business profits under section 44BB or as royalty under section 9(1)(vi) read with section 115A. Section 44BB is a special provision for computing profits and gains in connection with the business of exploration, extraction, etc., of mineral oils, applicable to non-residents engaged in providing services, facilities, or supplying plant and machinery on hire used in the prospecting for, or extraction or production of, mineral oils. The provision allows taxation on a presumptive basis at 10% of the gross receipts. However, the proviso to section 44BB(1) excludes its application where sections 42, 44D, 44DA, 115A, or 293A apply.

The Tribunal noted that the activity carried on by the assessee falls within the scope of section 44BB, specifically under the category of supplying plant and machinery on hire used in the prospecting for, or extraction or production of, mineral oils. Section 9(1)(vi) defines royalty, including the use or right to use any industrial, commercial, or scientific equipment. However, clause (iva) to Explanation 2 of section 9(1)(vi) excludes amounts referred to in section 44BB from the definition of royalty.

The Tribunal concluded that the amounts received by the assessee are covered under section 44BB and taxable on a gross basis at 10%. The DRP's conclusion that the amounts received are in the nature of royalty under section 9(1)(vi) read with section 115A was deemed a fundamental error, as it ignored the exceptions provided under clause (iva) to Explanation 2 of section 9(1)(vi). Furthermore, the DRP's view that section 44BB applies only if the non-resident has a Permanent Establishment (PE) in India was found to be a misinterpretation, as section 44BB does not require the existence of a PE.

Conclusion:
The Tribunal accepted the assessee's position that the income from leasing RIGs should be taxed under section 44BB, as it aligns with the statutory provision. The Tribunal directed the Assessing Officer to compute the income for the disputed assessment years under section 44BB. The appeals were allowed, and the order was pronounced in the open court on February 1, 2023.