TMI Blog2010 (7) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... xcludes consideration for construction project which means that exclusion is only in respect of consideration paid for actual carrying on construction activities - Payments for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of section 44BB of the Income Tax Act, 1961 and not under the special provision for the taxation of fees for technical services contained in section 115A, read with section 44D of the Income Tax Act, 1961 - Therefore, even though the assessee has no PE in India, the receipt under this contract is assessable under section 44BB - Decided in the favour of the assessee - ITA No.785 (Del) 2000 - - - Dated:- 23-7-2010 - K.G. Bansal Accountant Member J. A.D. Jain Judicial Member J. Appellant by: S/Shri Ajay Vohra Sachit Jolly Respondent by: Smt. Yagyasaini Kakkar, Sr. DR ORDER PER A.D. JAIN, J.M. 1. xxx xxx xxx xxx xxx 2. While dictating the Order, it was seen that the Tribunal, in its Order dated 23.2.07, in ITA No. 2145(Del)04 in ONGC s case for asstt. year 98-99(relied on by the assessee), has referred to its decision in ONGC s case for asstt. year 97-98, titl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld the assessment order and dismissed the assessee s appeal. This brings the assessee before us, in further appeal. 8. Challenging the impugned order, the learned counsel for the assessee has contended that the assessee is a non-resident company which had offered its receipts from carrying out a feasibility study for implementation of CSS, for taxation u/s 44BB of the Act; that this was so, since the service had been rendered in connection with exploration of mineral oil; that the AO, however, held that the aforesaid receipts were for rendering technical services as envisaged u/s 9(1)(vii) of the Act; that the ld. CIT(A) erred in upholding the order of the AO; that the feasibility study carried out by the assessee was in connection with exploration of mineral oil; that CSS helps in improving recovery of oil from oil fields by thinning of oil, so that the oil moves from the formation to the well bore; that without CSS, the implementation of which was the subject matter of the feasibility study carried out by the assessee, some part of the oil would remain below the surface of the earth and would remain unextracted; that therefore, the feasibility study was solely in connection wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly supported the impugned order. Further, she has placed reliance on CIT v. ONGC as representative of Rolls Royce , 214 CTR 135(Del) and CIT v. ONGC , 299 ITR 438 (Del) and the decision of the Delhi Bench of the Tribunal in ITA Nos. 124 to 126(Del)06, in Hotel Scopevista Ltd. v. ACIT . Written submissions have also been filed, wherein, as in the oral arguments, it has been urged that the Tribunal decisions in the assessee s own case for the above years (supra) be not followed. 10. In rejoinder, the learned counsel for the assessee has contradicted the applicability of any of the above three decisions cited by the ld. DR, to the present case, besides reiterating the aforementioned arguments. 11. We have heard both the parties and have perused the written submissions and other material on record. The issue before us is as to whether the receipts of the assessee are assessable to tax u/s 44BB of the Act, or if they comprise fees for technical services or FTS u/s 9(1)(vii) of the Act and are taxable as such. 12. The receipts have admittedly been earned by ARC for carrying out a feasibility study on implementation of Cyclic Steam Stimulation, or CSS. This study was carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following work programme. 2. Deliverables under the work programme: The following will be included in a comprehensive final report: Well completions: Review of relevant ONGC reports including drilling records describing the existing type of casing and connections and details on well completions; directional surveys for the wells; cementing reports; geologic summaries including resistivity and open-hole logs; geologic descriptions of overlying and underlying formations especially aquifers and up-hole gas zones; GOR; anticipated injection/production zones; sieve analysis if the heavy oil reservoir is an un consolidated sand; wellhead design; existing lift on the wells; and a list of North American vendors for materials and supplies relating to well completions and artificial days. Preparation of detailed recommendations including specifications of the down hole equipment regarding well completions and artificial lift for twelve wells and report preparation. Reservoir Engineering and Troubleshooting: Review of relevant ONGC reports including those reports described in well completions relating to the reservoir; interpreted logs; core data; primary production hist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the production equipment. In case of the reactive material in the reservoir and the formation and the injected water appears to be incompactable a limited amount of the geochemical model SOLNTENO will be run under standard practices used in the Canadian all fields to accommodate the predicted water chemistry at Lanwa shall be provided. 2.3 Surface facilities Engineering: i) Review of existing engineering documents and qualitative assessment of planning approach and methodology assessment of facilities and recommendations (if required) for detailed engineering. ii) Review of the detailed specifications of the surface injection facilities and the associated equipment. iii) Budgetary estimates of the Injection and allied equipments required for successful implementation of the project. 2.4 ECONOMIC EVALUATION WITH SENSITIVITY ANALYSIS: Based on ONGC s evaluation methods being followed All the activities are optional activities to be taken up only after due approval of the ONGC. 16. A perusal of the above contents of Annexure A to the Agreement shows that ONGC proposed to implement CSS in its 12 selected oil wells in Lanwa oil fields in Mehsana, India. A feasibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing contained in sub-section(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-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. 19. Section 44 BB(1) provides for taxation if the assessee is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire use or to be used, in the prospecting for or extraction or production of mineral oil. The proviso to section 44BB(1) states that the said section shall not apply where the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was under Explanation 2 to Section 9(1)(vii) as fees for technical services appears to be justified. The facts of this case are therefore, distinguishable from the facts of the decisions of Hon ble ITAT and decisions of CIT(A), Dehradun cited by the appellant in its written submissions. In the circumstances the contention of the appellant that the consultancy services rendered by the N.R.C. was assessable under section 44BB cannot be accepted. The claim of the appellant is, therefore, being rejected. 23. At first blush, the reasoning adopted by the Authorities below appears to be well justified. But is it so? One has to delve a bit deeper to ascertain the reality. First off, not all operations concerning extraction of mineral oil must necessarily be physical operations inside the crust of the earth. An accepted mode of such exploration is a procedure known as divining . One of the meanings of the word divine , given in the Chambers 20th Century Dictionary (1983 edition) is To search for (underground water, etc.), especially with a divining rod . Such procedure does not involve any physical operations under the surface of the earth. For our present purposes, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recipient. 27. In this connection, the learned counsel for the assessee has referred to CBDT Instruction No. 1862 dated 22.10.1990, wherein, mining or like project as employed in Explanation 2 to Section 9(1)(vii) has been taken to include services like imparting of training and carrying out drilling operations for exploration or extraction of oil and natural gas. 28. The assessee has sought to draw an analogy of the services rendered by ARC with such services as considered in the aforesaid CBDT Instruction No. 1862 of 22.10.1990, i.e., services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. 29. It is seen that the CBDT issued Instruction No. 1862 dated 22.10.1990, stating that mining or like project , as referred in Explanation 2 to section 9(1)(vii) of the Act would include rendering of services like imparting of training for carrying out drilling operations in connection with extraction of mineral oil. It would be apposite to reproduce hereunder, the said Instruction (relevant portion):- The expression fees for technical services has been defined in Explanation 2 to section 9(1)(vii) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CBDT has accepted the opinion of the Attorney General of India that the expression mining or like project occurring in Explanation 2 to Section 9(1)(vii) would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. Now, the nearest analogy which the assessee can seek to draw from the aforesaid Instruction is that therein, imparting of training has been taken to be mining or like project . The training being talked of in the Instruction is obviously training connected with exploration or exploitation of oil and natural gas. 32. Instruction No. 1862 (supra), as contended, has been dealt with in DCIT v. Schlumberger Seaco Inc. , 50 ITD 348(Cal). Therein, apropos the issue at hand, it has been held as follows:- The opinion of the Attorney General dated 13.5.90 on a reference made of the CBDT on the question whether petroleum and natural gas are mineral oils and whether the activity of prospecting for or extraction of the same can be considered mining activity was clearly in favour of the assessee. The Attorney General was of the opinion that petroleum and natural gas are mineral oils ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1997- 98 order dated 31.1.2006 wherein it was held that work order for services for preparation of bid documents for 3D Seismic API (acquisition, processing and interpretation)Project on Bombay High Field and technical evaluation of 3D Seismic API Tender on Bombay High Field was related to mining and hence outside the definition of the words fees for technical services contained in Explanation 2 to section 9(1)(vii), and consequently outside the provisions of section 115A and held that the consideration received for carrying out such operation was to be taxed under the provisions of section 44BB and not under section 44D read with section 115A of the Act. Facts being identical and in the absence of any distinguishing features pointed out by the ld. DR, respectfully following the precedent, we set aside the orders of the AO and the CIT(A) and hold that the receipts of the assessee non-resident company are to be taxed u/s 44BB and not u/s 44D read with section 115A of the Act. Consequently, the ground of appeal of the assessee is allowed. 35. Thus, in the assessee s case for assessment year 98-99, the Tribunal found the facts to be identical to those in the case of ONGC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing anything to the contrary contained in sections 28 to 44C. It thus overrides even section 44BB. Though the ld. CIT DR contended that section 44BB is not applicable to the assessee s case if the assessee s case falls under section 44D, but he did not however elaborate the contention and explain how the assessee s case fell u/s 44D. He, however, relied on Article XII(3)(a) and (d) of the Treaty to contend that the amount received by the assessee under the contract represented consideration for the use of the Geolog Software which was a copyright and also represented consideration for the rendering of technical or consultancy services (provision of personnel) which are ancillary and subsidiary to the application of the software. The contention, with respect, seems to overlook the basic principle that there can be no taxation under the double tax treaty. The treaty can come to the aid of the assessee if it 24 ITA 785(Del)2000 is more beneficial or advantageous compared to the domestic law. However, the revenue has to first demonstrate that the case of the non-resident assessee falls under the domestic law and it is for the assessee to take advantage of any beneficial or advanta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntractor, being in the nature of salary, were not taxable as FTS under Explanation 2 to section 9(1)(vii). It was , on the facts of that case, held that such revenues were not in the nature of salaries and were more appropriately to be taxed u/s 9(1)(vii). As stated, there was no issue in that case with regard to the services rendered being covered within section 44BB and excluded from FTS as envisaged by Explanation 2 to section 9(1)(vii). Therefore, evidently, ONGC (supra), is not applicable. 43. In CIT Another v. ONGC 214 CTR Uttarakhand 135 (copy placed on record), it has been held that technical services covered u/s 44D read with section 115A are specifically excluded from the purview of section 44BB by virtue of the proviso to section 44BB(1); and that therefore, such services are not taxable u/s 44BB of the Act. Pertinently, the services considered therein involved inspection of the control system of the gas generator and carrying out repairs of such generator. It was held: The non-resident company R , represented by ONGC in terms of the contract with ONGC , inspected the existing control system of three units RR Avon Gas Generator Driven Process Gas Compressor a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, obviously, there would be no applicability of section 44BB, as section 44D read with section 115A would come into play. 46. The Department has also placed reliance on the Hon ble Delhi Bench Tribunal decision dated 28.8.2007 in ITA Nos. 124 to 126(Del)06, for assessment year 2006-07, in the case of M/s. Hotel Scopevista Ltd. v. ACIT (copy placed on record). The issue therein, it is seen, is again entirely different. The question in that case was as to whether consultancy services rendered in connection with a construction project could be excluded from the ambit of FTS as provided in Explanation 2 to section 9(1)(vii). Deciding the issue against the assessee in that case, the Tribunal held the exclusionary clause to be not applicable to consultancy services rendered in connection with a construction project. The issue doing the rounds before us in the appeal at hand, on the contrary, is entirely different from that in Scopevista (supra). Herein, as discussed hereinabove, the consideration received by ARC was for mining or like project undertaken by ARC. 47. Further, Scopevista (supra), has been taken and duly considered in Paradigm Geophysical (supra), wherein, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on activities. The clarification given by the CBDT regarding the legislative intention behind inserting the Explanation 2 is also on the same lines. We are, therefore, of the view that the various managerial technical and consultancy services provided by the foreign contractor from the foreign country in connection with the construction project without actually taking up any such activities in India, will not be covered within the meaning of the words used in the Explanation 2 to section 9(1)(vii). In other words, we agree with the view taken by the authorities below that payments made for various services provided from abroad by the foreign contractor will be taxable as income in the hands of the recipient under the provisions of the Act and accordingly the payments made by the assessee to the foreign contractor are liable for the deduction of tax at source. Accordingly, we uphold the orders of the CIT(A) and dismissed the appeals filed by the assessee. In our opinion, section 44BB would be the more appropriate section applicable to the case since the assessee is rendering technical services to RIL and such services were rendered in connection with the prospecting for or extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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