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2016 (3) TMI 421 - ITAT DELHI

2016 (3) TMI 421 - ITAT DELHI - TMI - Addition to gross receipts - offer to tax revenues only on a pro-rata basis - Held that:- As far as the issue of inclusion of ₹ 3,04,18,274/- in gross receipt for the purposes of computing is concerned, we are of the considered opinion that the contention of the assessee is incorrect. Gross payments are intricately linked to the services/works rendered by the assessee and arise due to the execution of contract in India, under the terms and conditions o .....

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venues were not earned for the period the vessel was out of the territorial waters of India. Hence, the entire contract amount is to be considered for the purpose of calculating the gross receipts and all receipts received against the execution of the contract would come under the purview of gross receipts. Thus, gross amounts for the months of November 2007, December 2007 and January 2008 are to be included in the gross receipts. We accordingly uphold the action of the Assessing Officer and the .....

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ection 44BB and, therefore that being special provision, the same will prevail over all other provisions dealing with royalty/FTS. In no other section dealing with royalty/FTS, specific services are provided. In this regard, one may also refer to section 293A of the Act which empowers the Central Government to grant exemptions in relation to participation in the business of prospecting for or extraction etc. of mineral oil. In fact separate notifications have been issued by the Government in exe .....

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h oil exploration. Thus, in our opinion, if a non-resident is engaged in the business of providing services or facilities in connection with the prospecting for extraction or production of mineral oil, then 10% of the aggregate of the amounts received/accrued will be deemed to be the profits and gains of such business chargeable to tax in terms of provisions of section 44BB of the Act.

Thus on the facts of the case and respectfully following the ratio of the judgment of the Hon’ble Ap .....

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r Sudhanshu Srivastava, JM This appeal has been preferred by the assessee against order dated 21.05.2013 passed by the learned CIT (A)-II, Dehradun for Assessment Year 2008-09. 2. The brief facts of the case, as borne out from the records, are that the assessee is a non-resident company incorporated in Norway and derives revenue from Time Charter Agreement by providing crew on vessel. It filed its return of income under the provisions of section 44BB of the Income Tax Act, 1961 on 30.09.2008 at .....

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hence the revenue earned for the period during which the vessel was not in India was not taxable. The Assessing Officer was of the opinion that as the contract for providing of crew was a continuing contract, the income could not be segregated and claimed as nontaxable for the period the vessel was not in India. The Assessing Officer was also of the opinion that under the scheme of section 44BB, the receipts are to be taxed on the basis of gross receipts. Secondly, the Assessing Officer was of t .....

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owever, the assessee did not respond to the query and also did not raise any objections to the draft assessment order. Subsequently, the assessment was finalized at ₹ 11,59,84,960/- after making an addition of ₹ 3,04,18,274/- towards amount excluded by the assessee from its gross receipts, addition of ₹ 55,37,033/- towards adjustment as suggested by the TPO and addition of ₹ 1,62,381/- towards reimbursement of employees tax cost. 3. Aggrieved, the assessee approached the .....

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ssel was operating outside India and therefore, the said amounts are not chargeable to tax in India. 2. On the facts and circumstances of the case, the Ld. CIT (A) erred in making a transfer pricing adjustment of ₹ 55,37,033/- deriving the margin (PLI) at 10.12% as per search of comparables made by him without considering the comparable margin submitted by the assessee. 3. On the facts and circumstances of the case, the Ld. CIT (A) has erred on the facts and law in treating the total gross .....

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eemed to accrue or arise in India only where the operations are carried out in India or the services utilized in a business/profession carried on by such person in India or for the purpose of earning any income from any source in India. He further submitted that in the present case the assessee has provided crew to operate the vessel and for management of the vessel owned by Siem Offshore Inc. He elaborated that Siem Offshore Inc. has given vessels on time charter basis to EMGS. The Ld. AR averr .....

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lling Leasing and submitted that it has been held that mobilization charges received by the foreign company would be taxable in India only to the extent the same relates to the distance travelled by the equipment within the Indian territorial waters (i.e. 200 nautical miles from the appropriate base line) and consequently mobilization charges received towards travel of equipments beyond such territorial waters will not be taxable in India. 6. Ground no. 2 was not pressed by the Ld. AR and hence .....

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ion with Siem Offshore Inc s contract with EMGS, Siem Offshore Inc has entered into a management contract with Siem for management of vessel and provision of crew to operate the vessel. Siem received revenues under the contract with Siem Offshore Inc for providing services and facilities in connection with prospecting for, or extraction or production of mineral oils. The Ld. AR submitted that in light of these facts, the revenues of Siem Offshore AS should be taxed under the provision of section .....

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Act, any consideration for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) is taxable as FTS. The Ld. AR submitted that as per the definition of FTS as provided in the Income Tax Act, consideration for services undertaken for any construction, assembly, mining or like project are specifically excluded from the purview of FTS. The Ld. AR further submitted that the words construction, assembly, mining or like pro .....

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ral oil can be termed as mining operations, was referred to the 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 project occurring in Explanation 2 to Section 9(l)(vii) 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. In view of the above opinion, the considera .....

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ents, the Ld. AR pleaded that Ground Nos. 1& 3 of the appeal may be allowed. 9. In response, the Ld. DR for the Revenue submitted that as far as Ground No. 1 is concerned, assessee s contention is not legally tenable. He submitted that gross payments were intricately linked to the services/works rendered by the assessee and arise due to the execution of contract in India, under the terms and condition of the contract between the assessee and Siem Offshore Inc. He submitted that the vessel wa .....

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f absence of the vessel from the Indian territorial waters cannot be considered as not liable to tax. He submitted that the entire contractual amount should be treated as part of taxable gross receipts. He also submitted that in any case, the receipts under section 44BB (as offered by assessee) are to be taxed on gross basis i.e. all the amounts which are received against the execution of the contract would come under the purview of gross receipts. 10. Regarding ground no. 3 of the appeal, the L .....

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sed therein are not defined and the two terms used are too general in nature. He submitted that the proviso thus restricts the applicability of the substantive provision of section 44BB in relation to those persons who are either engaged in the business for prospecting, etc., for mineral oil (Section 42) or foreign companies who received fee for technical services from an Indian concern etc., (44D) or in the cases of non-residents and foreign companies receiving fee for technical services (Secti .....

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the section to cover services which are not of technical nature and enacts a special provision for determination of tax liability of persons engaged in providing such services which would be outside the scope of technical services. The Ld. DR also submitted that Instruction No. 1862 dated 22-10-1990 dealing with the interpretation of the term Mining or like project , has been issued in an entirely different context as can be seen from the statement of the case referred for the opinion of learne .....

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due to the execution of contract in India, under the terms and conditions of the contract between the assessee and Siem Offshore Inc. The vessel was hired by the contract and it was only for this purpose that the vessel and the crew were involved in the said contract. Thus, it is improper on the part of the assessee to offer to tax its revenues only on a pro-rata basis based upon the number of days the vessel was stationed within 200 nautical miles from the Indian shore line. As the contract fo .....

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receipts. We accordingly uphold the action of the Assessing Officer and the Ld. CIT (A) on this issue and decline to interfere. 12. As far as ground no. 3 of the appeal is concerned, in order to properly appreciate the controversy, it is necessary first to consider various sections dealing with Royalty, FTS and their fields of operation. The Finance Act, 1976 effected three basic changes as regards assessment of nonresidents. (a) It inserted clauses (v), (vi) and (vii) in Section 9(1) deeming i .....

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al fees in case of foreign company. 13. By Finance Act, 2001 w.e.f. 1-4-2002, in Explanation 2, dealing with definition of 'royalty, clause (iv-a) was inserted in Section 9(l)(vi), which reads "(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB." "(iv-a) The use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B" .....

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;fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries". 15. As per CBDT Instruction no. 1862 da .....

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ble u/s 9(l)(vi) and 9(l)(vii) till the date of insertion of exclusionary clauses. Thus, royalty and FTS which was for the nature of services contemplated u/s 44BB were excluded from sections 9(l)(vi) and 9(l)(vii) and brought under section 44BB which is a special provision for computing profits and gains in connection with the business of exploration etc. of mineral oils. Section 44BB was inserted by the Finance Act 1987 with retrospective effect from 1-4-1983. 17. We also proceed to analyse va .....

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ible under the said sections in computing the income by way of royalty or fees for technical services received [from Government or a Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside I .....

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foreign company with Government or with the Indian concern] after the 31st day of March, 1976 [but before the 1st day of April, 2003]; (c)[***] (d)[***] Explanation.-For the purposes of this section,- (a) "fees for technical services" shall have the same meaning as in [Explanation 2] to clause (vii) of sub-section (1) of section 9; (b) "foreign company" shall have the same meaning as in section 80B; (c) "royalty" shall have the same meaning as in [Explanation 2] to .....

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1976.] 18. Noticeable features of this section are that it is special provision for computation of income by way of royalty or fees for technical services. Thus it is a computation provision. This section is applicable to only that portion of royalty which consists of lump sum consideration for the transfer outside India, or for imparting of information outside India in respect of any data, documentation, drawing or specification relating to patent, invention, model, design, secret formula or pr .....

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B. 19. Section 44DA, inserted by the Finance Act, 2003, w.e.f. 1-4-2004, reads as under: Special provision for computing income by way of royalties, etc., in case of non-residents 44DA(1) The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31st day of March, 2003, where such non-resident (not being a c .....

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t; in accordance with the provisions of this Act: Provided that no deduction shall be allowed- (i) in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or (ii) in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices. (2) Every non-resident (not being a compa .....

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the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (b) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (C) "permanent establishment" shall have the same meaning as in clause (iiia) of section 92 F. ] 20. Therefore, it follows that if royalty/ FTS is received by a non-resident who is engaged in the business of providing services or facilities in connection with, or supplying P&M on .....

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le u/s 44BB. 21. Section 115A, substituted by Finance Act, 1994 w.e.f. 1-4-1995, reads as under: Tax on dividends, royalty and technical service fees in the case 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 .....

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ount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of thirty per cent if such royalty is received in pursuance of an agreement made on or before the 31st day of May, 1997 and twenty per cent where such royalty is received in pursuance of an agreement made after the 31st day of May, 1997; (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thi .....

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on,- (a) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ; (c) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9 ; (3) No deduction in respect of any expenditure or allowance shall be allowed to the assessee under sections 28 to 44C and section 57 in computing his or its income referred to in sub-section (1). 22. Noticeable features of section 1 .....

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87 with retrospective effect from 1-4-1983 reads as under: Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils 44BB. (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 .....

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d to in those sections. (2) The amounts referred to in sub-section (1) shall be the following, namely:- (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf 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 in India; and (b) the amount received or deemed to be received in India by or on be .....

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on (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 subsection (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, us .....

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tion of mineral oils. The amount being 10% of gross receipts would be assessable as "business income. However, a proviso was also inserted which, inter alia, excluded the royalty or FTS contemplated u/s 44D or section 115A. Section 44DA was inserted by Finance Act 2010 w.e.f. 1-4- 2011. From the combined reading of these sections it is evident that all the sections relating to royalty/FTS operate in different fields and that is the reason for insertion of proviso to sections 44BB/44DA/115A. .....

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ection dealing with royalty/FTS, specific services are provided. In this regard, one may also refer to section 293A of the Act which empowers the Central Government to grant exemptions in relation to participation in the business of prospecting for or extraction etc. of mineral oil. In fact separate notifications have been issued by the Government in exercise of its power conferred u/s 293A to give relief to the assessees in connection with the business of exploration and extraction of mineral o .....

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prospecting for extraction or production of mineral oil, then 10% of the aggregate of the amounts received/accrued will be deemed to be the profits and gains of such business chargeable to tax in terms of provisions of section 44BB of the Act. 25. A reference can also be made to the decision of the Hon ble Apex Court in ONGC vs. CIT & Anr. in Civil Appeal No 731 of 2007 wherein the Hon ble Apex Court in its Order dated 01/07/2015 has allowed the appeal of ONGC on the substantial question of .....

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