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TMI Blog2008 (2) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... arises through the PE nor effectively connected with the PE. 2. That the learned CIT(A) erred in law in upholding the order of AO by taking the interest on tax refunds as business receipts, when the interest on tax refunds does not depend on the existence or non-existence of PE in India and is statutorily dependent on the outcome of assessment proceedings, appeals conducted by tax consultants and lawyers. 3. The learned CIT(A) erred in law in upholding the levy of tax on interest of Rs. 1,16,996 on tax refunds @ 48 per cent on gross as per IT Act instead of 10 per cent as prescribed in art. 12(2) of DTAA of the IT Act (sic) by virtue of applying beneficial provisions as per s. 90(2) of the IT Act." 3. The assessee is a French company operating in India in oil drilling operations and related services under various contracts with ONGC. For the year under consideration assessee has contract with ONGC for charter hire of Drilling Rig Pride Pennsylvania. The assessee had returned the gross fee for drilling operation for computation and taxation of income as per s. 44BB of IT Act, 1961 ('Act'). While working out the receipts assessee did not take into computation a gross sum of Rs. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal 34,73,174 --------------------------------------------------- 4. After consolidating the above figures into three main heads the position as described in the order of CIT(A) will be as under: ----------------------------------------- Nature of reimbursement/supply Amounts ----------------------------------------- Dry fruits 87,834 ----------------------------------------- Equipments 30,08,181 ----------------------------------------- Communication charges 3,77,159 ----------------------------------------- Total 34,73,174 ------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per cl. 16.3 or the contract, ONGC had to reimburse 75 per cent cost of the equipment to assessee which amounted to Rs. 30,08,181 and the same being a capital expenditure for the assessee and also being reimbursement of supply of items was excluded from receipts in terms of s. 44BB(2) r/w s. 5(2) of the Act. 7. It was further submitted that the assessee has inmarsat connection on the rig which is used for communication purposes. The ONGC personnel on the rig had made calls which were to be borne by them and a debit note on the basis of actual inmarsat voice was raised on ONGC which amounted to Rs. 3,77,159 during asst. yr. 2002-03 and the same also is not in the nature of drilling operational services. therefore, could not be added in income as per provisions of s. 44BB of the Act. 8. It was further submitted that ONGC personnel on the rig as per their office order were to receive dry fruit packets on daily basis. Such obligation was of ONGC and on the request of ONGC assessee had purchased the dry fruits from ONGC designated supplier for and on behalf of ONGC and the dry fruit packets were given to the personnel of ONGC on the rig. The assessee had debited a sum of Rs. 87,834 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical services as well as income by way of royalty. He pleaded that s. 44BB needs to be interpreted with regard to the background of each and every word used by the legislature in that section. And while interpreting the provision two principles of interpretation should be necessarily to be kept in mind, firstly, that the legislature is not ignorant of the other provisions of law; secondly, that each and every word has been used with a specific purpose and none of them is redundant. He referred to sub-ss. (2)(a) and (2)(b) of s. 44BB which refer to amount paid or payable whether in or out of India and amount received or deemed to be received in India in respect of provision of services and facilities outside India. He pleaded that sub-s. (1) of s. 44BB is a computation section in respect of profits and gains in connection with the business of exploration etc. of mineral oil and it provides computation of income on the basis of receipts mentioned in the section and legislature has taken into account ss. 4, 5 and 9 while framing s. 448B and any view that s. 44BB is not in accordance with the provisions of ss. 4, 5 and 9 of the Act will amount to invalidating s. 448B in the case of non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der dt. 28th Sept., 2007 [reported at (2008) 214 CTR (Uttarakhand) 192-Ed.] copy of which was furnished of learned Departmental Representative. In the said case the provision of s. 44BB was considered and it was found that payment was made to the assessee company outside India and the said payment had no nexus with the actual amount incurred by the assessee company for transportation of drilling units of rigs to the specified drilling locations in India and thus, it was found that such mobilization fee was not the reimbursement of expenses. In that case ONGC was liable to pay a fixed sum as stipulated in the contact regardless of actual expenditure which may be incurred by the assessee company thus, it was held that the AO was right in adding the amount of such mobilization fees. 15. Thus, it was pleaded by learned Departmental Representative that CIT(A) has wrongly excluded the abovementioned amount of Rs. 34,73,174 from the computation of income under s. 44BB of the Act. 16. On the other hand it was pleaded by learned Authorised Representative that all the reimbursements were on actual basis and were without any element of profit. He referred to the p. 37 of the paper book wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision 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; and (b) the amount received or deemed to be received in India by 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-s. (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-s. (2) of s. 44AA and gets his accounts audited and furnishes a report of such audit as required under s. 44AB, and thereupon the AO shall proceed to make an assessment of the total income or loss of the assessee under sub-s. (3) of s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NGC. As it has been specifically found by learned CIT(A) that supply of material was obligation of ONGC and assessee company simply provided such services to ONGC. The details were submitted before the AO as well as CIT(A) to show that no element of profit was involved in the reimbursement. The reimbursement on account of equipment was in accordance with the contract according to cl. 16.3 of the contract and the said clause reads as under: "Loss or damage to contractor's down hole equipment Company shall reimburse contractor for loss or damage to contractor's down hole equipment, as under, provided that such loss or damage is not occasioned by normal wear and tear or negligence on the part of the contractor. (a) In the case of contractor's down hole equipment being damaged, company shall reimburse contractor such repair cost, provided however, that company shall not be required to reimburse contractor any amount greater than that which would have been due had such equipment been lost and, therefore, calculated under sub-s. (b) hereinbelow. (b) In the case of contractor's down hole equipment being lost, company will reimburse contractor 75 per cent of the replacement cost, FOB n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable only in respect of activities referred to in s. 44BB(2) of the Act. The reimbursement of expenses is also not taxable under other provisions of the Act as there is no material on record to show that any element of profit was embedded in the reimbursement received by the assessee. In absence of element of profit in the amount received by the assessee as reimbursement, no income can be assessed under other provisions of the Act. Therefore, we find no force in the arguments which have been submitted by learned Departmental Representative. Rather it will be useful to refer to the following observations from the decision of Hon'ble Uttaranchal High Court in the case of Sedco Forex International Inc. vs. CIT: "In the present case, a finding has been recorded by the Tribunal that it was not in dispute before the Tribunal that the payment was made to the appellant company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant company for transportation of drilling units of rigs to the specified drilling locations in India. Hence, the mobilization fee is not the reimbursemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that PE." "Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article." "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, tax so charged shall not exceed 10 per cent of the gross amount of the interest." "S. The provisions of paras 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a PE situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It may be mentioned here that art. 12(2) of DTAA which was considered in the aforementioned decision of AAR as per UK treaty is pari materia with art. 12.2 of DTAA of France. It was pointed out that art. 12.5 has wrongly been held applicable by learned CIT(A). It was pointed out that for asst. yr. 1997-98 Tribunal in assessee's own case while interpreting the nature of interest on tax refund and while holding that whether it should be taxable as business income or income from other sources has held that such income was taxable under the head "Income from other sources". Reference was made to the order of Tribunal, a copy of which is placed at pp. 17-28 of the paper book which is an order dt. 25th Aug., 2004 in ITA No. 1442/Del/2001. The relevant observations of Tribunal in this regard are contained in para 7 of the order which are reproduced below for the sake of convenience: "Having decided that the assessee was in business during the year under consideration, there is no question of not allowing the expenses of Rs. 5,55,152 as business expenses. When the assessee was contemplating to revive the business and since it was in constant touch with ONGC, it had to keep its establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material placed before us. Similar issue came for consideration on AAR reported as (1999) 151 CTR (AAR) 481 : (1999) 236 ITR 637 (AAR). The question arose for decision by the Authority was that whether interest received on tax refund constituted "income from debt and claims of every kind" and, therefore, qualify as interest as defined in cl. 5 of art. 12 of DTAA. The questions referred to AAR are reproduced below for the sake of convenience: "Whether, on the facts and circumstances of the case described in Annex. 3, the taxes paid in excess of tax due in respect of income returned by ABC, lying with the Revenue authorities would be covered within the terminology 'debt-claims of every kind,' as provided in cl. 5 of art. 12 of the DTAA between India and UK? Whether, on the facts and circumstances of the case described in Annex. 2, interest of Rs. 30,24,576 under s. 244/243 of the IT Act. 1961 ('Act') paid by the Revenue authorities along with tax refunds due to ABC during the asst. yr. 1998-99, would constitute 'income from debt-claims of every kind' and therefore, qualify as interest as defined in cl. 5 of art. 12 of the DTAA?" And Authority after considering the arts. 12.2 and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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