TMI Blog2012 (6) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of its clients, equipments lost in hole etc cannot be included within the scope of receipts for purpose of determining income of the Assessee. Interest u/s 234B and 234C - Held that:- Since income of the assessee (a non resident) is subject to TDS u/s 195, hence the interest liability u/s 234B and 234C does not arise. - IT Appeal No. 6063 (Delhi) of 2010 - - - Dated:- 18-5-2012 - Shamim Yahya And C. M. Garg , JJ. B. L Narasimhan, Tarun Jain and Sumeet Khurana for the Appellant Dev Jyoti Das for the Respondent ORDER Shamim Yahya, Accountant Member This appeal by the Assessee is directed against the order of the Assessing Officer passed u/s. 143(3) read with section 144C of the IT Act. 2. The concise grounds of appeal read as under:- 1. The Ld. Assessing Officer has erred on facts and in law in dismissing the claim of the Appellant that income from the activities of Wireline Logging, Logging/ Measurement while Drilling, Perforation/ Cementing, Well Testing and like rendered in connection with prospecting for, or extraction or production of, mineral oils to its customers is to be computed under Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's contentions placed before it. In the impugned assessment order passed in pursuance of DRP directions, it has been held that the activity undertaken by the assessee are royalty or fee for technical services and thus assessable under section 115A of the Act and not section 44BB. Only the activities of rental income from equipment leased to companies engaged in production/exploration of oil by themselves has been held as amenable to benefit of Section 44BB by authorities below. In coming to this conclusion, both the Assessing Officer as well as DRP has held that the agreements are not composite and have to be bifurcated. The DRP with respect to the issue as to whether benefit of provisions of section 44BB is available to the assessee for such services inter-alia referred to the provision of section 44BB which are reproduced below:- (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 engaged in the business of providing services, or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the activities undertaken by the Appellant is as under: 1.1 Wireline-Logging The word 'logging' means recording of any information with respect to depth or time. The term 'well-logging' had a wider meaning and application in borehole geophysics, viz. wire-hole study of different formations encountered in an exploratory well. Well logging is an activity by which the geophysical information, such as porosity and permeability of formation, their thickness and extent, and geometry of the reservoir are acquired, by measuring various physical, chemical and lithological properties of the formations. The recording is done by deploying automated equipments (containing software) which inter alia consists of electric logging tools that are lowered into the hole on a wire-line , a thick, flexible sheathed cable that conducts electricity down to the tools , and transmits the tool readings back up. These automated equipments provide real time on-line measure of geophysical properties, such as resistivity and conductivity (at various frequencies), sonic properties, active and passive nuclear measurements, dimensional measurements of the well-bore, formation pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cementing, casing and coil tubing, a special perforating tool is inserted into the casing and lowered to the desired position on the end of a cable. Then the shaped charges are fired remotely from the control truck at the surface and jets of high-temperature and velocity gas perforate the casing, the cement, and the surrounding rock for some distance away from the well bore. This allows oil and or gas from a producing zone to flow into the well. Drill Stem Testing A drill-stem test is conducted by the Assessee to obtain a sample of the fluids and gases contained in the formation or interval being tested as well as pressure information, which is determined by special gauges within the test tool. The test tool contains a valve, which may be opened and closed to allow formation fluids to enter the test tool and drill string. By analyzing the rate of flow or the amount of formation fluid recovered in the drill string and the formation pressures recorded, an indication of reservoir characteristics such as porosity, permeability, and the nature of the fluids or gas contained therein are obtained. Fracturing Fracturing activities are performed to stimulate production o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of foreign companies. 115A. (1) Where the total income of- ( b ) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,- (AA) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of ten per cent if such royalty is received in pursuance of an agreement made on or after the 1st day of June, 2005; (BB) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of providing services or facilities in connection with the extraction or production of mineral oil. Its profits and gains from such business shall be equal to 10 per cent of the amounts received by it. Under the Explanation below the section, mineral oil excludes petroleum and natural gas. There is a proviso to Section 44BB (1) which says that this computation of the business income is not available if the income consists of fees for technical services, in which case Section 115A will apply. Under Section 115A, special rates of income-tax are prescribed in the case of foreign companies. If the income of the foreign company the present assessee is undisputedly a foreign company consists of fees for technical services in terms of an agreement made after 31-3-1976. such fees will be subjected to tax 40% for the assessment year prior to 1987-88 and 30% on and from the assessment year 1987-88. Under Section 44D(b) if the income of the foreign company is computed in accordance with Section 115A, there will be no deduction in respect of any expenditure or allowance and the gross income by way of fees for technical services will be taxed at the special rates. The Explanation in Section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equipment. The ITO has taken the view that the assessee is to render detailed and sophisticated services to ONGC and OIL. The assessee also provides technical personnel who operate the equipment. Therefore, the ITO has taken the view that the work involves not men and materials but it involves the rendering of technical services, the receipt in respect of which byway of fees has to be charged at the special rates under Section 115A read with Section 44D(h) read with Explanation 2 to Section 9(1)(vii). But this view of the ITO, in our opinion, has been rightly rejected by the CIT(A). The view of the CIT(A) requires to be upheld. The mere fact that the assessee is to supply the equipment as also the personnel to operate the equipment does not automatically mean that the assessee is rendering only technical services to ONGC and OIL. Section 44B(1) speaks of a business of providing services or facilities in connection with extraction or production of mineral oil and natural gas. It also speaks of the business of supplying plant and machinery for hire to be used for such purposes. No materials or evidence have been brought on record by the ITO to indicate that the assessee is not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to Section 44BB(1). The function of a proviso is to carve out an exception from the earlier part of a section which but for the proviso would have fallen within the scope of the earlier part of the section. A proviso cannot be construed as enlarging the scope of the main section. The proviso have to be read in the present case with the exclusionary part of Explanation 2 to Sec 9(1)(vii). In that Explanation it is clearly provided that any consideration receive for any mining or like project will not be treated as fees for technical services. Reading Sub-section (1) of Section 44BB together with the proviso thereto along with Explanation 2 to Section 9(1)(vii), it is clear that they operate on different fact situations. While the main enactment, namely, Sub-section (1) of Section 44BB speaks of a business in the provision of the services or facilities in connection with the extraction or production of mineral oil, there is no reference to any business in Explanation 2 to Section 9(1)(vii). Section 9(1)(vii), as is by now well known embodies the source rule in respect of fees for technical services. The emphasis that provision introduced by the Finance Act, 1976 with effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HI and MDL is without any logical basis. The language used in the Notification is quite plain and clear and it only speaks about the services or facilities rendered for prospecting for or extraction or production of mineral oil. The Notification does not make a distinction between the contractor and the sub-contractor. The main contractors had not rendered any services for prospecting for or extraction or production of mineral oil from the High sea. They had only engaged the assessee to perform such services on High sea. But for the services of the assessee, it would not have been possible to prospect for or extract or produce any mineral oil from the High sea. Therefore, the services rendered by the assessee are intrinsically connected with the extraction of oil. Therefore, to say that the assessee had not rendered services to ONGC for the extraction of oil from the High sea is without any logical basis. - Mc Dormott Intemationallnc . v. Deputy Commissioner of Income-tax , [1994]49 ITD 590 (Tri. Delhi) - Assistant Commissioner of Income-tax v. Paradigm Geophysical Pty. Ltd. , [2008] 117 ITJ 812 (Tri. Del.) 26. We now proceed to examine the contention of the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. We confirm his decision on this point and dismiss the ground. - Scan Drilling Case (ITA No. 6147/Del/1987 dated June 24, 1989) (Tri. Delhi) - In re , Lloyd Helicopters Pty. Ltd ., [2001] 2491TR 162 AAR - ONGC v. Assistant Commissioner of Income-tax , [2007] 107 TTJ 551 (Tri. Del.) 3.5 The Appellant further submits that the activities of the Appellant are not affected by the proviso to section 44BB. This is on account of the following reasons; 3.5.a Section 42 is applicable to those assesses who are themselves engaged in prospecting/production of mineral oil and hence not applicable to Appellant being a service provider. 3.5.b Section 44D is not applicable since the contracts entered into by Appellant are after 1st April 2003 [Please refer Page 6A to 6D] 3.5.c Section 293A is not applicable since no notification has been issued in this regard. 3.5.d Section 115A is not applicable since the Appellant is carrying on its activities through a Permanent Establishment in India. 3.5.e Even section 44DA is not applicable for the year under Appeal as the same is applicable only from AY 2011-12. Appeal is covered in the favor of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business PE or fixed place of profession - (section 44DA); ( ii ) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil without having business PE or fixed place of profession - (section 115A); ( iii ) Other fee for technical services having business PE or fixed place of profession - (section 44DA); ( iv ) Other fee for technical services without business PE or fixed place of profession - (section 115A); Thus it is abundantly clear that with effect from assessment year 2011-12 fee for technical services whether rendered in connection with prospecting for or extraction or production of mineral oil or otherwise will be assessable either u/s 44DA or section 115A of the Act depending on fact whether such receipts are effectively connected with PE or fixed place of profession, or not. However, for assessment year 2004-05 to 2010-11 the consideration received for fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil though effectively connected with PE or fixed place of profession will fall outside the scope of section 44DA and will be assessable und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich had been raised regarding the scope of Section 44BB vis-a-vis Section 44DA has only been made prospectively and cannot be used or applied for reopening the case under Section 147 and 148 of the Act. In any case, the explanatory note does not mean that there was failure on the part of the assessee as envisaged by the provisions of Section 147 or in any manner he assessee suppressed the material facts or failed to disclose fully and truly all material facts necessary for the assessment. 3.9 Thus in as much as in the present appeal the Assessment Year 2007-08 is involved and admittedly the income earned by the Appellant is effectively connected with the permanent establishment, even if (without prejudice to the forgoing submissions) the income is indeed in the nature of 'fee for technical services', still assessment cannot be made under Section 115A of the Act. Further, the Assessment Year being 2007-08, Section 44DA is also not applicable. For this reason alone, the impugned Assessment Order which has assessed the income under Section 115A of the Act is liable to be set aside. 4. The Ld. A.O. has included a sum of ₹ 7,23,59,963/-received by the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther amounts received towards reimbursement. Therefore, we do not find any sufficient reason to interfere with the impugned orders, passed by the ITAT, which has affirmed the view taken by the CIT(A). Question of law stands answered accordingly. 4.3 Thus when the issue has already been decided in favour of the Appellant in Appellant's own case by the Hon'ble jurisdictional High Court, the impugned order in as so far as it is contrary to this declaration is liable to be set aside. 5. The Appellant submits that the income of the Appellant (a non resident) is subject to TDS under Section 195. Hence the interest liability under Section 234B and 234C does not arise as held by jurisdictional Hon'ble High Court of Uttarakhand in the case of the Appellant itself [ Commissioner of Income-tax v. Schlumberger Asia Services Ltd. (ITA No. 58 of 2006)]. 5.1 The following decisions also squarely cover the case of the Appellant; ( a ) CIT v. Oil Ltd , (ITA No. 56 of 2007) Uttaranchal High Court 8. Having gone through both the above mentioned case laws, we are of the view that now it is settled principle of law that where it is the duty of the non resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (LWD)/ Measurement While Drilling (MWD), Cementing, Perforation, Drill Stem Testing and Fracturing are technical services, and hence outside the ambit of S.44BB. 6. The claim of the assessee, that the work done by it is in the nature of composite and indivisible contracts, is not supported by any evidence. Hence the consideration received by it under different heads has been rightly split by the assessee into Fees for Technical Services (FTS) and Royalty (being rental receipts of Plant Machinery). 7. The services rendered by the assessee falls within the scope of Technical Services as defined in Sec 9(1)(vii) Expln. 2 and are not excluded as consideration of construction, assembly, mining or like project . 8. The income received from services provided by the assessee is in the nature of managerial, technical or consultancy services; the fact that services have been rendered using machines, is not relevant. 9. FTS received from other non-resident companies, towards services rendered, cannot be taxed u/s 44DA or u/s 115A; however, they are to be taxed as business income under the regular provisions under the head Income from business . 10. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quipment leased to companies engaged in production/exploration of oil by themselves has been held as amenable to benefit of Section 44BB by authorities below. In coming to this conclusion, both the Ld. A.O. as well as the Ld. DRP has held that the agreements are not composite and have to be bifurcated. 7.1 In this regard, we note that assessee has submitted it is an undisputed position that the income of the assessee is governed by Section 44BB(1). The only contention of the revenue is that by virtue of the proviso to the said section the case of the assessee is out of the purview of section 44BB of the Act and is instead governed by Section 115A. It has further been submitted that it is an admitted fact that the assessee operates in India through a Permanent Establishment (PE) which has earned the income under consideration. The Assessee contends that the exclusion under the proviso to section 44BB does not apply to the Assessee for the year under consideration in as much as Section 115A is not applicable for the assessee who earns income through a PE. It has further been submitted that section 44DA is effective in the proviso only from AY 2011-12. 7.2 We find co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing business PE or fixed place of profession - (section 44DA); ( ii ) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil without having business PE or fixed place of profession - (section 115A); ( iii ) Other fee for technical services having business PE or fixed place of profession - (section 44DA); ( iv ) Other fee for technical services without business PE or fixed place of profession - (section 115A); 7.4 The tribunal has further held that it is abundantly clear that with effect from assessment year 2011-12 fee for technical services whether rendered in connection with prospecting for or extraction or production of mineral oil or otherwise will be assessable either u/s 44DA or section 115A of the Act depending on fact whether such receipts are effectively connected with PE or fixed place of profession, or not. However, for assessment year 2004-05 to 2010-11 the consideration received for fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil though effectively connected with PE or fixed place of profession will fall outside the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses . There is no element of profit and gains in the reimbursements received by the Assessee, which has incurred expenses for and on behalf of other companies. Contractually the liability to incur these expenses was with those companies. Therefore the amounts towards reimbursement cannot be considered as income of the Assessee. Furthermore, we note that assessee's contention is that that Ld. Assessing Officer has also erred on facts and in law in not following the decision of the jurisdictional High Court of Uttarakhand in Assessee's own cases DIT, International Taxation v. Schlumberger Asia Services Limited [2009] 317 ITR 156/[2010] 186 Taxman 436 and CIT v. Schlumberger Asia Services Ltd. [IT Appeal No. 58 of 2006, Order dated 26-10-2007], in which it was held that such reimbursement does not constitute income. These decisions have also been followed by the Hon'ble Tribunal in Assessee's own case ACIT v. Schlumberger Asia Services Ltd. [IT Appeal No. 4180(Del)/2006 Order dated 13-04-2007]. We find considerable cogency in assessee's submission as above. Hence, we hold that the Assessing Officer has erred in including ₹ 723,59,963/- received ..... X X X X Extracts X X X X X X X X Extracts X X X X
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