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2015 (7) TMI 91 - SUPREME COURT

2015 (7) TMI 91 - SUPREME COURT - [2015] 376 ITR 306 (SC) - Taxability of Amounts paid by the ONGC to the non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil - Fees for technical services under Section 44D read with Explanation 2 to Section 9(1)(vii) OR payments be taxable on a presumptive basis under Section 44BB - Held that:- Pith and substance of each of the contracts/agreements is inextricably connec .....

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4D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal. - Decided in favour of assessee. - CIVIL APPEAL NO. 731 OF 2007 - Dated:- 1-7-2015 - RANJAN GOGOI and PINAKI CHANDRA GHOSE, JJ. WITH CIVIL APPEAL NOs.729 OF 2007, 733 OF 2007, 736 OF 2007, 737 OF 2007, 738 .....

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7 OF 2009, 1722 OF 2010 AND CIVIL APPEAL NO. 6174 OF 2010 JUDGMENT RANJAN GOGOI, J. 1. The issue that arise for consideration in this group of appeals is common and may be summarized as follows. Whether the amounts paid by the ONGC to the non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as fees for technical services under Section 44D read with Explanation 2 to Section 9(1)(vii) o .....

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of the Act and not Section 44BB of the Income Tax Act (hereinafter referred to as the Act ). The Appellate Commissioner and the Income Tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of separate appeals before the High Court of Uttrakhand in respect of each of the assessments made for the years in question. The High Court considered the facts of Civil Appeal No. 731 of 2007 (Income Tax Appeal No. 239 of 2001 before the High Court) as the le .....

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cts of Civil Appeal No. 731 of 2007 corresponding to I.T.A. No. 239 of 2001 has been considered in detail by the High Court and the view expressed in the said proceeding have been followed in all the other appeals before the High Court, it may be necessary to notice in detail the said facts arising in the appeal in question. 6. The appellant-ONGC and a non resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available .....

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at it had come to light before the High Court that the contract between the parties visualized operation of the oil rigs including drilling operations by the personnel made available under the contracts/agreements, which fact was further stated on affidavit before the High Court by an authorized official of the ONGC in the following terms. That under the said agreement, Foramer was required, through its personnel listed in Exhibit-A to the said agreement, to carry out inter-alia the drilling ope .....

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ls and as the company had received fees for rendering service the payments made were liable to be taxed under the provisions of Section 44D of the Act. As already noticed, in the rest of the appeals before the High Court the aforesaid decision dated 15.12.2005 passed in I.T.A. No. 239 of 2001 was followed on the basis that the facts in all the appeals were similar to those involved in I.T.A. No. 239 of 2001. 7. It will be convenient and in fact necessary for the purposes of present adjudication .....

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ices or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" : Provided that this sub-section shall not apply in a case where the provisions of section .....

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he 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-section (1), an assessee may claim lower profits and gains than t .....

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.-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.] 44D. Special provision for computing income by way of royalties, etc., in the case of foreign companies.- Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,- (a) the de .....

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ansfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received [from Government or an Indian concern in pursuance of an agreem .....

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xplanation 2 to clause (vi) of sub-section (1) of section 9; (d) royalty received [from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern] after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1 .....

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on by such person in India or for the purposes of making or earning any income from any source in India : [Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made b .....

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roject undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".] (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a .....

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r or not, - (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.] 8. A careful reading of the aforesaid provisions of the Act goes to show that under Section 44BB(1) in case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable t .....

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fees for technical services as mentioned in Section 44D would have the same meaning as in Explanation 2 to Clause (vii) of Section 9(1). The said explanation as quoted above defines fees for technical services to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. fees for technical services any payment received for construction, assembly, mining or l .....

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fees for technical services in Explanation to Section 9(1) (vii) of the Income Tax Act, 1961 whether prospecting for or extraction of production of mineral oil are mining operations-clarification regarding. The expression fees for technical services has been defined in Explanation 2 to Section 9(1) (vii) of the Income Tax Act, 1961 as under: Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for .....

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Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions mining project or like projects occurring in Explanation 2 to Section 9(1) (ii) of the Income Tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. 3. In view of the above opinion, the consideration for such services will not be treated as fees for techn .....

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py of the Attorney General s opinion dated 13.5.90 are enclosed. 5. These instructions may brought to the notice of all the officers in your region. [F.No.500/6/89-FTD dt.22.10.90 from CBDT] 10. Before us the opinion of the learned Attorney General has been placed by the learned counsel for the appellants at great length to contend that the views expressed by the learned Attorney which had been accepted by the CBDT were based on an exhaustive consideration of the provisions of the Mines Act, 195 .....

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agreements in question satisfy the above test for which purpose the appellants have categorized the different contracts under 8 heads which may be conveniently set out at this stage hereinbelow. 1. Carrying out seismic surveys and drilling for oil and gas 2. Services starting/re-starting/enhancing production of oil and gas from wells 3. Services for prospecting for exploration of oil and or gas 4. Planning and supervision of repair of wells 5. Repair, Inspection or Equipment used in the explora .....

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on behalf of the appellants that even under the provisions of Section 3D of the Oil Fields (Regulation and Development) Act 1948 a mining lease means a lease granted for the purposes of searching for, winning, working, getting, making merchandisable, carrying away or disposing of mineral oils or for the purpose connected therewith and such a lease includes an exploring or prospecting lease. Reference has also been made to the Petroleum and Natural Gas Rules, 1959 framed under Section 5 of the a .....

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lines etc. as may be necessary for full enjoyment of the PML. On the said basis it is argued that rendering any service in connection with prospecting and extraction is an integral part of mining and that the expression mining in the Explanation 2 to Section 9(1) of the Income Tax Act, in the absence of any definition under the Income Tax Act, has to be understood as per the provisions of the Oil Fields (Regulation and Development) Act, 1948 read with the Petroleum and Natural Gas Rules, 1959. 1 .....

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g, extraction or production of mineral oil, the primary service rendered by the non-resident companies on the basis of the agreements is not for prospecting, extraction or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned counsel for the revenue has even suggested that if it is held that the High Court ought to have examined each .....

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gulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th S .....

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y or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as re .....

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o a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description .....

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nd operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and .....

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of Coal Bed Methane. 15. 6174 Analysis of data of wells to prepare a job design. 16. 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys. 17. 7226 Opinion on hydrocarbon resources and foreseeable potential. 18. 7227 Opinion on hydrocarbon resources and foreseeable potential. 19. 7230 Opinion on hydrocarbon resources and foreseeable potential. 20. 6016 Opinion on hydrocarbon resources and foreseeable potential. 21. 6008 Evaluation .....

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ation and inspection of far turbines. 27. 1522 Replacement of choke and kill consoles on drilling rigs. 28. 1521 Inspection of gas generators. 29. 1515 Inspection of rigs. 30. 2012 Inspection of generator. 31. 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines. 32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33. 2008 Expert advice on the device to clean insides of a pipeline .....

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