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2016 (4) TMI 317 - DELHI HIGH COURT

2016 (4) TMI 317 - DELHI HIGH COURT - [2016] 383 ITR 178 - Fees for technical services - establishment of permanent establishment ("PE") in India - Assessee's contention that services in question fell within the scope of "construction, assembly, mining or like project" - Held that:- Prospecting for or extraction or production of mineral oil could be termed as 'mining operations' and consequently provided that expression "mining projects” or like projects" as occurring in Explanation 2 to Section .....

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ancillary works contemplated under the contracts in question but since the dominant purpose of each of such contract is for prospecting, extraction or production of mineral oils, the income from such services were to be computed under Section 44BB of the Act.

Question as whether the Tribunal erred in law in holding that the activity of 2D/3D seismic survey carried on by the appellant in connection with exploration of oil, was in the nature of "fees for technical services" in terms of .....

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ration received by the Assessee from BG and RIL was fees for technical services, in our view, the Tribunal’s decision to remit the matter to the AO for determining whether the Assessee had a PE in India and whether the consideration received by it was connected with that PE, would have to be sustained.

Accordingly the second question - Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that income of the appellant, in the nature of "fees for techn .....

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bhu Bakhru, J 1. PGS Exploration (Norway) AS (now known as 'PGS Geophysical AS'), a company incorporated under the laws of Norway (hereafter the Assessee ), has filed the present appeal under Section 260A of the Income Tax Act, 1961 (hereinafter the Act ) impugning the order dated 20.04.2012 passed by the Income Tax Appellate Tribunal (hereafter the Tribunal ) in ITA No. 4056/Del/2011. The said appeal was directed against the assessment order dated 29.07.2011 passed under Section 144C re .....

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t. 3. The present appeal was admitted on 08.01.2013 and the following questions of law were framed: 1. Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that the activity of 2D/3D seismic survey carried on by the appellant in connection with exploration of oil, was in the nature of "fees for technical services" in terms of Explanation 2 to section 9(1)(vii) of the Act? 2. Whether on the facts and circumstances of the case, the Tribunal erred in la .....

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rvices worldwide. These services include the services of acquiring and processing two dimensional and three dimensional seismic data (both on land and offshore). The acquisition of seismic data is the primary method of exploring for hydrocarbon deposits. 4.2 M/s B.G. Exploration and Production India Limited (in short 'BG') and Reliance Industries Limited (in short 'RIL'), who had been granted exploration licenses, engaged the services of the Assessee for acquiring and processing .....

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me of the Assessee from the contracts in question was to be computed under Section 44BB of the Act. These applications were accepted and the concerned officers issued orders under Section 197/195 of the Act, authorizing deduction of TDS at the rate of 4.223% of the gross amounts payable by the contracting oil companies (BG and RIL) to the Assessee for the financial year 2007-2008. 4.4 The Assessee also filed its return of income for the Previous Year 2007-2008 (AY 2008-09) on 30.09.2008 declarin .....

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ices within the scope of Section 9(1)(vii) of the Act. Accordingly, the AO held that the tax on such income was to be computed under the provisions of Section 115A of the Act and not under Section 44BB(1) of the Act. A draft assessment order to the aforesaid effect was made by the Assessing Officer on 24.12.2010. 6. The Assessee filed its objections to the said draft assessment order before the DRP, which were rejected by an order dated 18.07.2011; the DRP directed the AO to complete the assessm .....

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be computed under Section 44BB(1) of the Act. The Tribunal disposed of the aforesaid appeal by an order dated 20.04.2012, which is impugned herein ( the impugned order ). 8. By the impugned order, the Tribunal concurred with the AO/DRP that the consideration received by the Assessee was fees for technical services falling within the scope of Explanation 2 to Section (9)(1)(vii) of the Act. The Assessee's contention that services in question fell within the scope of "construction, assemb .....

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said issue would be dependent on whether the Assessee had a permanent establishment (hereafter 'PE') in India. The Tribunal quoting from its earlier decision in CGG Veritas Services SA (supra) held as under:- (i) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil having business PE or fixed place of profession - (section 44DA); (ii) Fee for technical services rendered in connection with prospecting for or extraction or produc .....

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first determine whether the Assessee had a PE in India and, thereafter determine the tax payable in accordance with its ruling in CGG Veritas Services SA (supra). Submissions 10. It was contended by Mr Vohra, learned senior counsel appearing for the assessee that income falling within the ambit of Section 44DA(1) of the Act would be liable to be taxed under Section 44BB(1) of the Act if it was in connection with prospecting for, or extraction or production of mineral oils because Section 44BB wa .....

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inextricably linked with prospecting and extraction of mineral oil and thus, would fall within the exclusion as provided under Explanation 2 to Section 9(1)(vii) of the Act. He further submitted that the said issue was squarely covered in favour of the Assessee by a recent decision of the Supreme Court in Oil and Natural Gas Corporation Limited v. Commissioner of Income Tax & Anr. Civil Appeal 731/2007, decided on 01.07.2008. 12. Mr Raghvendra Singh, the learned counsel appearing for the Re .....

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ct from its scope. He submitted that even though the period in question was prior to the said amendment, nonetheless, the amendment would be applicable as it was only clarificatory. He urged that the said amendment would be instructive in determining whether the income from fees for technical services was liable to be taxed under Section 44DA(1) of the Act even if the same was in connection with prospecting for, or extraction or production of, mineral oils. Insofar as the decision of this Court .....

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the services were in connection with a "like project". He argued that in the present case, the Assessee itself had not claimed that its services were in connection with a mining project and, therefore, the said decision would have no application to the facts of the present case. Reasoning and Conclusion 14. Before proceeding further, it would be necessary to refer to Section 44BB of the Act. The said Section as in force during AY 2008-09 is reproduced below:- Special provision for com .....

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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 42 or section 44D or section section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. (2) The amounts referred to in sub-section (1) shall be .....

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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 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 .....

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gas. 15. A plain reading of proviso to Section 44BB(1) of the Act indicates that it would not apply in a case where provisions of Section 115A of the Act are applicable for computing profits and gains or other income referred to in that Section. It is, thus, necessary to refer to Section 115A of the Act for ascertaining the nature of income that is taxable therein and consequently, expressly excluded from the ambit of Section 44BB(1) of the Act by virtue of the proviso thereto. The relevant ext .....

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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,- (A) the amount of income-tax calculat .....

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if such royalty is received in pursuance of an agreement made on or after the 1st day of June, 2005; (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 thirty per cent if such fees for technical services are received in pursuance of an agreement made on or before the 31st day of May, 1997 and twenty per cent where such fees for technical services are received in pursuance of an agreement made after th .....

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d fees for technical services. 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 subsection (1) of section 9; (b) foreign currency shall have the same meaning as in the Explanation below item (g) of sub-clause (iv) of clause (15) of section 10; (c) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (d) Unit Trust of India means the Unit Trust of In .....

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from its scope, incomes referred to under Section 44DA of the Act. The question whether any income falling within the scope of Section 44DA of the Act would necessarily have to be excluded from the scope of Section 44BB(1) of the Act in respect of the period prior to 01.04.2011 will be adressed a little later. However, at this stage, it is necessary to observe that it is indisputable that any income referred to under Section 115A would, indisputably, fall outside the scope of Section 44BB(1) of .....

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2 - For the purposes of this clause, 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 under the head Salaries . 18. Thus, the income of an ass .....

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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 company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs profes .....

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nce 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. 19. A plain reading of Section 44DA(1) of the Act indicates that said provision would be applicable, inter alia, in respect of income by way of fees for technical services by a fo .....

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erforms professional services from a fixed place of profession in India; and (c) The contract in respect of which income by way of fees for technical services is received is effectively connected with the PE in India. 20. If the aforesaid conditions are met, the income of the appellant would fall within the scope of Section 44DA(1) of the Act and, consequently, would be excluded from the scope of Section 115A(1)(b) of the Act. Thus, whilst the existence of PE is not a condition specified in sect .....

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f the Act and none of the two provisions could be applied for computing the tax payable on such income. 21. In this view, the primary issue to be addressed is whether the consideration received by the Assessee for providing Geophysical services would fall within the exclusion provided in Explanation 2 to Section 9(1)(vii) of the Act. In our view, the aforesaid question is no longer res integra and is squarely covered by the decision of the Supreme Court in Oil and Natural Gas Corporation Limited .....

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nd 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 repaid of wells. 5. Repair, Inspection or Equipment used in the exploration, extraction or production of oil and gas. 6. Imparting Training. 7. Consultancy in regard to exploration of oil and gas. 8. Supply, Installation, etc. of software used for oil and gas exploration. 22. In its judgement, the Supreme Court refer .....

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tion of oil and natural gas". And, after examining various contracts involved in the appeals before it, the Supreme Court held that the contracts were inextricably connected with prospecting, extraction or production of mineral oil and, accordingly, proceeded on the basis that consideration for such services was not fees for technical services. The Supreme Court held that even though there may be certain ancillary works contemplated under the contracts in question but since the dominant pur .....

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on 2 to section 9(1)(vii) of the Act - must be answered the affirmative, that is, in favour of the Assessee and against the Revenue. 24. In view of our decision that the consideration for services rendered by the Assessee cannot be construed as fees for technical services , the second question does not arise. However, since the counsel have advanced their respective contentions on the said question, we consider it appropriate to address the same on the assumption that the consideration received .....

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ness carried on in connection with prospecting for, or extraction or production of mineral oils and which also fell within the ambit of Section 44DA(1) of the Act. The relevant extract of the said judgment reads as under:- 11. We do not think that there is any error in the view taken by AAR. Basically the rule that the specific provision excludes the general provision has been applied. Section 44BB is a special provision for computing the profits and gains of a nonresident in connection with the .....

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business in India through a permanent establishment situated therein or performs services from a fixed place of profession situated in India and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with the permanent establishment or fixed place of profession. Such income would be computed and assessed under the head business in accordance with the provisions of the Act, subject to the condition that no deduction woul .....

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Section 44BB refers specifically to 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 production of mineral oils . Revenues earned by the non-resident from rendering such specific services are covered by Section 44BB. It is a well settled rule of interpretation that if a special provision is made respecting a certain matter, that matter is excluded from the general provision under the rule which is exp .....

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ed by the nonresident, that would reduce section 44BB to a useless lumber or dead letter and such a result would be opposed to the very essence of the rule of harmonious construction. In South India Corporation (P) Ltd. v. Secretary, Board of Revenue Trivandrum, AIR 1964 SC 207 it was held that a familiar approach in such cases is to find out which of the two apparently conflicting provisions is more general and which is more specific and to construe the more general one as to exclude the more s .....

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with the PE of such foreign company in India would be taxable under Section 44DA(1) of the Act, irrespective of whether the same is connected with extraction/production of mineral oils, cannot be accepted. By virtue of Finance Act, 2003, such income was excluded from the ambit of Section 115A(1)(b) of the Act w.e.f. 01.04.2004. Although, with effect from said date such income was taxable under Section 44DA(1) of the Act but in certain cases where such income was earned by the assessee by carryin .....

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g a reference to Section 44DA in the proviso to Section 44BB(1) of the Act with effect from 01.04.2011 and simultaneously introducing a second proviso to Section 44DA(1) which reads as under: Provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this section. 28. Thus, after 01.04.2011, income falling within the scope of Section 44DA(1) of the Act would be excluded from the scope of Section 44BB of the Act. However during the period from 01. .....

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tion 115A(1)(b) of the Act, would be computed in accordance with section 44BB(1) of the Act. 29. Having stated the above, we must clarify that the income falling within Section 115A(1)(b) of the Act which does not fall within the four corners of Section 44DA(1) of the Act would also not be taxable under Section 44BB(1) of the Act, for the reason that by virtue of proviso to Section 44BB(1) of the Act, it is expressly excluded. Accordingly, if the consideration received by the Assessee for servic .....

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