TMI Blog1994 (2) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing up of the tax to the receipts should be done once only, the probable Surtax liability could not have been treated as perquisite and that, the assessee could not have been burdened with tax on such assumed figures. The last of the common issue is that, the cash system of accounting adopted by it for accounting its income should not have been disturbed. 2. The brief facts of the case are brought out below. In the previous year relevant to the assessment year under appeal, it had receipts for contract works which are stated to be tax-protected, which have been taxed on cash receipt basis through ONGC as agent of the assessee, and therefore were not included for direct assessment on the assessee. In addition to the above, the assessee had receipts from six other contracts, of which only the contract with Nippon Steel Corpn.,Japanis stated to be not tax-protected. The engineering contracts were for Mazagon Dock Ltd. Nos. D2827, D2318 D2332. Sumitomo HeavyInd.No. D2206,NipponSteel Corpn. No. D2329, andNipponKokan KK Japan No. D2301. The contracts are turnkey projects that included fabrication, installation, hook-up, commissioning, modification and transportation of various plat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts into account. During the course of the proceedings before him the Assessing Officer should also consider Shri Hingwala's request that there should not be any grouping of tax in the tax protected contracts in view of the overriding provisions of section 44BB; if there is any grossing, it should be done on a single stage basis; the single stage grouping should be by applying a rate of 10% and wherever possible the tax may be recovered from the customers because of lapse of long period after the original receipts. 4. The filing of proceedings vide order dated3-7-1987is cancelled. 4. The Assessing Officer (AO) in the proceedings consequent to the direction of the CIT, noting that, the system of accounting adopted by the assessee as "cash system" had in regard to the six contracts for which the assessee had shown receipts in the previous year, observed that, some part of the works though done out of India, it should be treated as part of the composite contract because, the project was a turnkey one on lump basis, in the nature of sale of goods/machinery in India and on that basis calculated 10% as income from profits under section 44BB of the Act. He concluded that, 10% of rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with prospecting, extraction or production of oils in the Continental Shelf and the Exclusive Economic Zone of India, was liable for taxation. 6. Shri Dinesh Vyas, the learned Senior Advocate, during the hearing did not insist on the common ground, which read - "the learned CIT CIT(A) have erred in law and on facts in not holding that if at all the tax perquisite is to be added the same should have been considered only in the year of actual payment by customer by applying a rate of 10%" and accordingly this ground is dismissed. 7. Shri Vyas filed a paper book containing extracts from various sub-contract Nos. D2206, D2229, D2801, D2355, D2238, D2266, D2808, D2806, D2301, D2318 D2807 and the copy of the Notification [No. 304(E) No. 5147/F. No. 133(7)/82-TPL dated 31-3-1993]. He contended that, the present claim of the appellant non-resident company is closely linked to the interpretation of the notification, pleaded that he be heard on the legal plea. He contended that, the reading of the notification indicated that, this has been so issued to cover only those cases of contracts that are related to provision of any service or facility such as provision of supply of ship, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the machine, which manufacturing process cannot be related to the machinery supplier. He contended that, he had cited the example of setting up of the business only with the sole purpose of highlighting the fact that, the work that is carried out by the appellant is that stage, after which only either of the three main activities as stated in the notification starts. He pleaded that, since, the notification clearly states that, provision of any service or facility in connection with any three activities, would also be covered, it is only those services that aid and assist in the prospecting or extraction or production, while the services or facilities provided by the assessee are not for any prospection or extraction or production, but are ultimately used for the achievement of either of the three activities. He accordingly contended that, the notification does not apply to any of the activities carried on by the assessee. He contended that, if the main contractor, who is to carry out works of engineering construction are not themselves connected with any of three activities, then, the sub-contractor who assists such main contractor in its engineering construction cannot be h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 27 ITR 1 had held that, though the company may derive income from agriculture, but, the dividend received by its shareholder is not agricultural income. He pleaded that, the three authorities support the view advanced by him, that, the term 'provision of any services or facilities in connection with any activities referred to in clause (A)' has to be limited to those services or facilities for prospection, extraction and production and not to those that are carried out before the commencement of any of those three activities. He submitted that, the alternative plea is concerning section 44BB and section 28(1)(iv) of the Act. He contended that, section 44BB starts with the words 'notwithstanding anything to the contrary contained in sections 28 to 41, and sections 43 43A', which clearly indicates that, in so far as section 44BB is concerned, whatever is contained in that section, that alone is relevant. He contended that, section 44BB has excluded the provisions that are applied for determination of the income from profits gains of business or profession, and thereby has taken the place of a total code governing the computation of the profits gains in connection with the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that, the legal plea as raised by the appellant is not justified because, it makes a distinction between works before the commencement and after the commencement of the three main activities, which is not so intended. 9. The rival submissions have been very carefully considered and the relevant material placed on our record have been perused and the case laws relied upon have also been perused. The controversy being related to the notification dated31-3-1993, which extended the applicability of the Income-tax Act, 1961, to the Continental Shelf and the Exclusive Economic Zone of India, we reproduce the same. Notification No. 5147/F.No. 133(7)/82-TPL dated 31st March, 1983 . GSR 304(E): In exercise of the powers conferred by clause (A) of sub-section (6) of section 6 and clause (A) of sub-section (7) of section 7 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) the Central Government hereby extends the Income-tax Act, 1961 (43 of 1961) to the Continental Shelf of India and the Exclusive Economic Zone and other Maritime Zone Act, 1976 (80 of 1976). The Central Government hereby extends the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that is received or deemed to be received by him in India. 11. The notification states that, it is restricted to the income derived by every person from all or any of the activities carried on within the Continental Shelf and Economic Zone of India. The stated activities are, prospecting for or extraction or production of mineral oils; the provision of any services or facilities or supply of any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any activities namely, prospecting for or extraction or production of mineral oils. The prospecting of or extraction of or production of mineral oil or natural gas in high seas requires digging of deep sea wells and their construction, followed by laying of pipe lines for drawing of mineral oil or natural gas, and other engineering construction like platform, and many other ancillaries related thereto. These structures are the basic infrastructure required without which carrying out of any of three activities described by the notification is impossible. These construction works form the foundation for enabling the carrying out the three activities and are directly connected with those activities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x payer. The sixth is that, literal meaning must be adhered to even if it results in any injustice. Last but not the least, it is not the duty of any court to supply for any omissions to the enactment. According to the above principles of interpretation, the first is to appreciate the intention of the Legislature. The other principle that goes with the above is, due consideration must be given to the situation that existed before the enactment of the law, its purpose, the removal of defect, if any. The Government of India with a view to augment its oil resources, had decided to proceed with the prospection, extraction and production of oil from the Bombay High. In this connection, it required the services, equipments etc., of persons who are familiar with these activities and had invited them. The Government realised that, section 5(2) of the Income-tax Act which had defined the scope of the total income of non-residents, but, did not include in its fold the various activities in the Bombay High and the income derived therefrom. This it could do so by bringing out the notification, and by extending the Income-tax Act to the activities in the Bombay High. Since the Government of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context in which they have been used. As observed earlier, the services or facilities are in connection with any of the three facilities, indicating that, it would include all those services and facilities with the help of which, those three activities are possible and are carried out. The words in connection with have been used to link or relate the services or facilities to the three main activities. Therefore, the services or facilities that provide the link or relate to the main activity are included. We had earlier observed that, the notification has extended the operation of the Income-tax Act to the Continental Shelf and the Exclusive Economic Zone of India and now the limited extension of the Act is, on income derived from all or any of the defined activities therein. The notification as it stood at the relevant point of time, makes it abundantly clear that, it is not intended to cover the income derived by any person from all or any activity carried on within the Continental Shelf and the Exclusive Economic Zone, which does not involve prospection or extraction or production of mineral oil and natural gas or rendering of service or provision of any facility in connection w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in our view, the services or facilities provided in connection with the three activities would also cover those that are so rendered or provided before actual prospection etc. 12. The claim of the appellant that, section 44BB overrides the provisions of section 28 of the Act, is fully justified because, the said section begins with the words notwithstanding anything contained in sections 28 to 41. Whatever is provided in section 28 cannot therefore be imported into section 44BB of the Act. To this extent, the assessee succeeds. 13. Section 44BB was inserted into the Income-tax Act by Finance Act, 1987, with retrospective effect from1-4-1983for purposes of computing the profits gains in connection with the business of exploration, etc., of mineral oils. We shall reproduce this section because, it being a complete code in itself, to appreciate whether, the taxes paid by the main contractor on behalf of the assessee could be termed as the amount payable to the assessee or not, to which the said section also makes reference of. (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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount paid or payable (whether in or out ofIndia) to the assessee or to any person on his behalf on account of the provision of services and facilities in computing the profits under this section. The income-tax paid by the main contractor is on behalf of the assessee, which has been so undertaken for the various services provided by the assessee in its capacity as a sub-contractor to the main contractor, who had in turn rendered the services or provided the facilities, in connection with the prospecting for, extraction of or for production of mineral oils. Therefore, on a plain reading of sub-clause (a) of sub-section (2) of section 44BB of the Act, the taxes paid on its behalf has to be considered in the computation of the profits and gains under this section. Since, the amount of tax so paid, is to be initially added to the receipts of the assessee, the aggregate amount of which would be treated as the total receipts and the factor of income have to be limited to ten per cent of this aggregate. The addition of tax is to be done once at the beginning only. We derive support in this regard from the order of the Tribunal in ONGC's case, where the action of the Assessing Officer fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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