TMI Blog2016 (5) TMI 1341X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. Therefore, it is the entire consideration received which will be considered for taxability and not the profits derived by the installation of permanent establishment of the applicant. During the course of hearing this fact was pointed out to Shri S.D. Kapila, learned counsel for the applicant and he had agreed to this proposition. We conclude that the entire consideration received by the applicant in respect of contract with IOCL for executing work of installation of SPM System, offshore and onshore pipelines and associated facilities for integrated offshore crude oil unloading facilities located at Paradip would be chargeable to tax under the provisions of section 44BB of the Income-tax Act. - A. A. R. No. 1122 of 2011 - - - Dated:- 11-5-2016 - V. S. Sirpurkar J. (Chairman), A. K. Tewary (Member Revenue) And R. S. Shukla (Member Law) For the Applicant : S. D. Kapila, R. R. Maurya and Sanjay Kumar, Jeetan Nagpal, Pallavi, Chartered Accountants, and Sudesh Poojari, Senior Manager, Hyunday Heavy Indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The scheduled date of completion of the contract was June 13, 2012. The actual date of completion is May 13, 2013. 3. The applicant filed withholding tax application dated January 27, 2011 before the Income-tax Department under section 197 of the Income-tax Act, 1961 ( Act ) requesting for withholding tax at the rate of 4.223 per cent. (or a lesser rate as per the projected profit and loss account) because according to them the consideration for work done by the applicant under IOCL contract fell within the scope of section 44BB of the Act. The Assessing Officer passed the order directing IOCL to deduct tax at source at the rounded rate of 5 per cent. on gross basis and remarked that deemed profit out of total contract receipt to be taken at 10 per cent. in accordance with the provision of section 44BB of the Income-tax Act 1961 . . . for convenience the withholding tax rate is taken at 5 per cent. . 4. The applicant has sought ruling on the following question : Whether on the stated facts and in law the profits derived by the installation permanent establishment of the applicant, for executing contract awarded by Indian Oil Corporation Limited (IOCL) for installation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it 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. 6. The applicant has admitted that it has an installation permanent establishment in India under article 5(3) of Indo-Korea Double Taxation Avoidance Agreement. The applicant has further mentioned that since the applicant has installation cum construction permanent establishment in India, the consideration received from IOCL is chargeable to tax as business income under section 44BB read with articles 5, 12(5) and 7(3) of Indo- Korea Double Taxation Avoidance Agreement. The relevant articles of the double taxation avoidance agreement are as under (see [1987] 165 ITR (St.) 191 ) : 5(1) for the purposes of this convention, the term 'permanent estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mineral oil. Circular No. 57 of 1971 is reproduced as under (see [1971] 80 ITR (St.) 66 ) : 1. A question has been raised whether a company carrying on the business of refining crude oil into motor spirit, aviation spirit, kerosene and allied articles can be said to be engaged in the manufacture or production of 'mineral oil' for purposes of calculating the super tax rebate under the Finance Act, 1964 and the Finance Act, 1965. The Board have been advised that the term 'mineral oil' covers both crude oil (crude petroleum) and the liquid products derived from crude petroleum which are in the nature of mixtures of hydrocarbons, namely, motor spirit, aviation spirit, kerosene and other allied articles. It, therefore, follows that the profits and gains attributable to the business of refining of crude oil would qualify for higher rebate in respect of super tax available in relation to the profits and gains attributable to the business of manufacture and production of mineral oil under the Finance Act, 1964 and the Finance Act, 1965, provided the other conditions specified in this behalf are fulfilled. 2. On a parity of reasoning, the business of refining of cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a fixed place of business through which the business of the applicant is partly or wholly carried on. In view of this the applicant is liable to be taxed as such from all income accruing or arising in India irrespective of the fact whether it has an installation permanent establishment or not. Article 5(3) of the Double Taxation Avoidance Agreement stands on equal footing with article 5(1) and article 5(2) as the wordings include 'likewise' (the term permanent establishment likewise encompasses), in this respect the Department has cited order of the Delhi Income-tax Appellate Tribunal in the case of Samsung Heavy Industries Co. Ltd. v. Addl. DIT (Intnl. Txn.) (I.T.A. No. 5237/Del/2010 - [2011] 11 ITR (Trib) 513 (Delhi)). (b) The Department is of the view that the activity undertaken by the applicant is not covered under the provisions of section 44BB of the Income-tax Act because the provisions of this section reveal the following facts :- (i) Income in the nature of upstream activities of the oil sector like prospecting, exploration, extraction or production of mineral oil, i.e., all activities up to the level of oil head are covered under section 44BB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch show that production operations cover the production from the development area, i.e., from the oil well but the activities undertaken by the applicant, i.e., midstream activities for transportation of the oil are covered under Development Operations . (f) The Department has further relied on the definition of petroleum and natural gas in the Petroleum Tax Guide which shows that mineral oil means petroleum and natural gas existing in their natural condition and the products obtained after post mining activities do not constitute mineral oil. The Department has also contacted Indian Institute of Petroleum for clarification and they have sent a response saying that refining of crude oil is different from production of crude oil. The Department has further pointed out that as per definition of minerals in section 2(jj) of the Mines Act, 1952 : Minerals means all substances which can be obtained from the earth by mining, drilling, digging, dredging, hydaulicing, quarrying or by any other operations and includes mineral oils (which in turn include natural gas and petroleum). From the above definition, it is concluded by the Department that minerals, which include m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with IOCL for carrying out offshore construction work in India which involved installation of SPM and another contract with L T which included pipeline constructions, etc. The Authority bifurcated considerations received from IOCL in two parts, to be taxed as royalty and fee for technical service, but no part of consideration was found to be taxable under section 44BB. According to the Department the nature of contract with IOCL was similar and, therefore, same treatment should be given in the present case also. 13. In its rejoinder the applicant has mentioned that the Circular No. 495 issued by the Central Board of Direct Taxes does not refer to upstream or downstream activities and it talks only of exploration and exploitation of mineral oils, the definition of mineral oil for the purpose of section 44BB, unlike the Petroleum Guide, is an inclusive definition and the Petroleum Guide cannot be used for construing the meaning of expression mineral oil in section 44BB. As regards the meaning of mineral oil as given in the Mines Act, the applicant has stated that the terms mineral or mineral oil are elastic terms and the meaning to be given to them will depend on the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'extraction' and 'production' employed in section 44BB for the reason that the word 'production' has a well understood meaning independent of the word 'extraction' and it is used in contrast to 'extraction' and user of the disjunctive article 'or' placed between the words 'extraction' and 'production' in section 44BB contra distinguishes the meaning of these two words. II. The applicant has further argued that inclusive definition of 'mineral oil' controls the whole of section 44BB. The scope of the section cannot be restricted. This will reduce the word 'production' to redundancy, which is impermissible. III. The applicant has pointed out that as per Concise Oxford Dictionary the meanings of relevant words are as under : Prospect : search for mineral deposits, especially by means of drillings and excavation. Extract : v 1. remove, especially by effort or force-obtain (money, information, etc.,) from someone unwilling to give it 2. obtain (a sub stance) from something by a special method. Extraction : 1 the action of extracting 2. ethnic origin : of polish extraction. Prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1987, with retrospective effect from April 1, 1983. Memorandum explaining the provisions (165 ITR 161-62) stated that 'The computation of the taxable income of a taxpayer engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire, used or to be used in the exploration for, and exploitation of, mineral oils involves a number of complications. As a measure of simplification, the bill seeks to insert a new section 44BB in the Income-tax Act providing for determination of income of such tax payers at ten per cent. of the aggregate of certain amounts. The amounts in respect of which the provisions will apply would be the amounts paid or payable to the tax payer or to any person on his behalf whether in or out of India, on account of the provision of such services or facilities or supplying plant and machinery for the aforesaid purposes . . . The aforesaid amendment will not, however, apply to any income to which the provisions of section 42, 44D, 115A or 293A of the Income-tax Act apply. An exception was carved out vide Explanation 2 to section 9(1)(vii) out of the provision in respect of fees for technical services by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier by the Central Board of Direct Taxes in Circular No. 57 of 1971, reproduced earlier, wherein it was categorically mentioned that the term mineral oils cover both crude oil (crude petroleum) and liquid products derived from crude petroleum which are in the nature of mixtures of hydrocarbons, namely, motor spirit, kerosene and other allied articles. We also notice that the Explanation (ii) of section 44BB reads that mineral oil includes petroleum and natural gas. The word includes used in this Explanation clearly show that mineral oils is to be given a wider meaning and cannot be restricted to Petroleum and Natural Gas only. In this respect also Circular No. 57 of 1971 issued by the Central Board of Direct Taxes becomes very relevant irrespective of the fact that this circular was issued on the question as to whether the business of refinery crude oil could be regarded as business of manufacture/production of mineral oil for the purpose of levy of surtax. The meaning of 'mineral oils' would remain same whether it is for the purpose of levy of surtax or for other provisions of the Act. 18. As regards the contention of the Department that the meaning of min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mineral oil . We are convinced that the meaning of mineral oils given by the courts and by the Central Board of Direct Taxes in Circular No. 57 of 1971 is appropriate and will include liquid products derived from crude petroleum which are being produced by IOCL. 20. The Department has strongly relied upon the rulings given by this Authority in the case of Global Industries Asia Pacific Pte Ltd. (supra) saying that the Authority held that the consideration received for similar nature of contract with IOCL was held to be fee for technical service under article 12(4) of the India-Singapore Double Taxation Avoidance Agreement. We find that in this case the applicant had entered into two separate contracts with IOCL and L T respectively. As regards contract with IOCL it was noted that the contract was loaded in favour of mobilisation expenses though it was a divisible one segregating the mobilising segments and other segments. It was further noted by the Authority that considering the entire payments, the payment made for the use of equipments, i.e., the barges and stated as mobilisation and demobilisation expenses determined the predominant character and nature of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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