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TMI Blog2017 (11) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... APPEAL NO. 4923 OF 2010 CIVIL APPEAL NO. 8627 OF 2013 CIVIL APPEAL NO. 5155 OF 2011 CIVIL APPEAL NO. 6573 OF 2014 CIVIL APPEAL NO. 4909 OF 2010 CIVIL APPEAL NO. 5935 OF 2010 CIVIL APPEAL NO. 5934 OF 2010 CIVIL APPEAL NO. 6651 OF 2014 CIVIL APPEAL NO. 17390 OF 2017 (ARISING OUT OF SLP(C) NO. 20000 OF 2015) CIVIL APPEAL NO. 17391 OF 2017 (ARISING OUT OF SLP(C) NO. 22343 OF 2012) CIVIL APPEAL NO. 17392 OF 2017 (ARISING OUT OF SLP(C) NO. 22833 OF 2012) CIVIL APPEAL NO. 4914 OF 2010 CIVIL APPEAL NO. 4915 OF 2010 CIVIL APPEAL NO. 8595 OF 2010 CIVIL APPEAL NO. 9188 OF 2013 CIVIL APPEAL NO. 8665 OF 2013 CIVIL APPEAL NO. 10294 OF 2016 CIVIL APPEAL NO. 10295 OF 2016 CIVIL APPEAL NO. 10296 OF 2016 CIVIL APPEAL NO. 4926 OF 2010 CIVIL APPEAL NO. 267 OF 2013 CIVIL APPEAL NO. 268 OF 2013 CIVIL APPEAL NO.17393 OF 2017 (ARISING OUT OF SLP(C) NO. 39683 OF 2013) CIVIL APPEAL NO. 3695 OF 2012 CIVIL APPEAL NO. 435 OF 2017 CIVIL APPEAL NO. 10382 OF 2017 CIVIL APPEAL NO. 10385 OF 2017 CIVIL APPEAL NO. 10383 OF 2017 CIVIL APPEAL NO. 10384 OF 2017 CIVIL APPEAL NO. 10386 OF 2017 CIVIL APPEAL NO. 17394 OF 2017 (ARISING OUT OF SLP(C) NO. 21939 OF 2017) CIVIL APPEAL NO. 12365 OF 2017 CIVIL APPEAL NO. 12366 OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis by adopting the formula laid down in sub-section (2). Sub-section (2) mentions those amounts aggregate whereof is to be treated as deemed profits and gains of such a business. 4) At this juncture, we reproduce the provisions of Section 44BB of the Act, as reading of this provision is necessary before spelling out the nature of dispute which had arisen in these appeals. This section reads as under: "44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. (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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-resident; and (ii) assessee should be engaged in the business of exploration etc. in mineral oils of the nature specifically spelled out in the provision. (c) Choice is given to such an assessee under sub-section (3) of the Act to either claim lower profits and gains than the profits and gains specified in sub-section (2) and covered by normal provisions of computing profits and gains of business or profession, subject to fulfilling the conditions of audit etc. as mentioned therein or to be governed by Section 44BB of the Act. (d) In case the twin conditions mentioned above are satisfied, the assessee can take the benefit of paying the tax as per the provisions of Section 44BB on "deemed profits and gains" of its business and such profits and gains are to be calculated as per the formula provided in sub-section (2) thereof. Pertinently, it is a 'deemed' provision for calculating profits and gains of business or profession, which means that such profits and gains are to be arrived at fictionally, as per provisions contained in sub-section (2). (e) Sub-section (2) mentions the amounts which are to be added up, and the aggregate of those amounts is deemed to be profits an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts all over the world including India in connection with exploration and production of mineral oil. The assessees are companies incorporated outside India and, therefore, non-resident within the meaning of Section 6 of the Act. The assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid agreements provided for the scope of work along with separate consideration for the work undertaken. Since the dispute is about mobilisation charges, clauses in respect thereof are as under: "Operating Rate - Receipts for undertaking drilling operations computed by per day rates provided in the contract. The operating rates shall be payable from the time the drilling unit is jacked-up and ready at the location to spud the first well. Mobilisation - charges for the transport of the drilling unit from a location outside India to a location in India as may be designated by ONGC." In addition to the above, assessees also received amounts from the operator towards reimbursement of expenses like catering, boarding/lodging, fuel, customs duty, the supply of material etc., with which we are not concerned. 10) The assessees filed their return of income declaring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o included as amounts received for computation of aggregate of amounts specified in sub-section (2) as deemed to be the profits and gains of the businesses of the assessees, chargeable to tax under the said provision. 14) Mr. Porus F. Kaka, learned senior advocate appearing in some of these appeals submitted that the aforesaid amounts were, in fact, towards reimbursement of expenses actually incurred by the assessees. According to him, the work undertaken was, in fact, the obligation of the ONGC and it was for ONGC to provide such facilities/material under the contract. Still the assessees performed the said task at the request of the ONGC and ONGC simply reimbursed these expenses which did not have any profit element. It was emphasised by Mr. Kaka that insofar as the assessee-Sedco Forex International Inc. is concerned, the expenditure incurred on mobilisation was much higher than the actual payment received. Thus, this assessee had, in fact, suffered loss on this transaction. He also pointed out that the agreement separately provided for consideration/remuneration for mobilisation and demobilisation of drilling unit and reimbursement of cost incurred on behalf of the operator of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at insofar as payment for mobilisation which was received by the assessee is concerned, it is neither income receipt nor deemed to be received in India. It is in respect of services outside India and, therefore, does not accrue or arise or deemed to accrue or arise under Section 5 read with Section 9 of the Act. 16) Proceeding further on the aforesaid line of argument, he submitted that, in the first instance, it has to be determined that income accrues or arises or is deemed to accrue or arise in India. Only when that is established, the next step is to compute the total income based on other provisions of the Act and here Chapter IV of the Act which deals with computation of income from 'Profits and Gains of Business or Profession' gets triggered. It was submitted that, no doubt, Sections 44B, 44BB, 44BBB etc. provide for special mechanism for computing the income in the case of non-residents on presumptive basis. However, even when the income is to be computed under any of these provisions, first pre-requisite is to find out as to whether a particular income has accrued or arisen or deemed to accrue or arise in India. If that threshold is not met, the question of treating such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax v. F.Y. Khambaty (1986) 159 ITR 203. Mr. Kaka also relief upon the following judgments: (a) Anglo-French Textile Company, Ltd., by Agents M/s Best & Company, Ltd., Madras v. Commissioner of Income Tax, Madras (1954) 25 ITR 27 (SC) (b) Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (2007) 288 ITR 408 (SC) = (2007) 3 SCC 481) (c) Carborandum & Co. v. CIT, Madras (1977) 108 ITR 335 (SC) (d) Commissioner of Income Tax, Madras v. Best and Company (Private) Ltd., Madras (1966) 60 ITR 11 (SC) 19) He also cited judgments on the proposition that CBDT Circulars are binding on tax authorities; reimbursement of actual expenses does not represent income and, therefore, cannot be taxed; and normal concept of income cannot be taken away by presumption provisions. 20) In nutshell, as can be seen from the aforesaid arguments, the proposition advanced by learned senior counsel are as follows: (a) Principle of apportionment between India and outside India is a basic principle of income tax law. Where payments are made to a non-resident outside India, for services rendered outside India, namely mobilization charges for drilling rigs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utside India could not be taxed in India, more so, when these were in the nature of reimbursement of expenses on account of mobilization/movement of rig from Singapore to the offshore site at Mumbai. His primary contention was that before this payment could be included while making computation under Section 44BB of the Act, it had to be 'income' which is taxable in India in the first instance. His submissions on the scheme of Sections 4, 5 and 9 of the Act were the same as that of Mr. Kaka, already noted above. Additionally, he submitted that insofar as Section 44BB of the Act is concerned, it only provides a simplified computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. Thereby, overriding the normal computation mechanism contained in Sections 28 to 41, 43 and 43A of the Act. His emphasis was that this provision does not override charging provisions as contained in Section 4 read with Sections 5 and 9 of the Act, thereby bringing to tax an amount which is not at all taxable under the provisions of the Act. In addition to Circular No. 495 dated September 22, 1987 (alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the appellant only received mobilization fee amounting to Rs. 2,76,89,533/- (equivalent to US$ 6,42,300), after deduction of liquidated damages, the AO erred in bringing to tax the gross amount of US$1 million under Section 44BB of the Act. 25) Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates appearing for some other assessees treaded the same path by adopting same line of arguments. 26) M/s. Chidananda and Arijit Prasad, learned advocates appearing for the Revenue put up an emphatic defence to the judgment of the High Court which has accepted the position taken by the Revenue. It was argued that assessee Sedco, which is a non-resident company, had entered into a composite/indivisible contract with ONGC to provide a drilling unit to carry out drilling operations. A finding of fact to this effect i.e. a composite/indivisible contract was entered into, was arrived at by the ITAT and, therefore, matter had to be proceeded on that basis. Submission was that, as per this contract, it was the obligation of the assessee to mobilise its resources for the purpose of drilling operations. According to them, since the payments were made by ONGC to the assessee in terms of indivisib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /used in India and the source of income is in India. Therefore, the ingredients of Section 9(1)(i) are fulfilled. Thus, assessee has territorial nexus in India. Further, in a given case, if the assessee fulfils these requirements and a DTAA applies, this will also constitute a Permanent Establishment (PE) through which an assessee operates its business in India. Further, the rigs/equipment are mobilised for its business operations in India and that source of income is in India, therefore, the question of apportionment. Thus, the mobilisation fee/charges paid by ONGC to assessee is an income chargeable to tax from a conjoint reading of Sections 4, 5 and 9. Therefore, the submission of the assessee that Section 44BB seeks to tax an event which the charging sections does not seek to tax is incorrect. 28) Adverting to the provisions of Section 44BB of the Act which finds place in Chapter IV dealing with 'computation of income' in respect of business or profession, it was submitted that the scope and effect of Section 44BB has been explained in Departmental Circular No. 495 dated September 22, 1987. It has been mentioned in the said circular that a number of complications were involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions made by counsel for the parties on both sides, it would be apposite to go into the raison d'etre behind the orders of the ITAT as well as the High Court. 30) The ITAT in its order has taken note of the relevant clauses of the agreements entered into between ONGC and assessee (Sedco) pertaining to mobilisation and mobilisation fee. Clause 3.2 of the Agreement dated September 3, 1985 relating to providing the Shallow Dash Water Jack Up Rig covering this aspect reads as under: "Mobilisation Operator shall pay to Contractor a mobilisation fee of eight hundred thousand United States Dollars (US $ 800,000) ("Mobilisation Fee") for the mobilisation of the Drilling Unit from its present location in Setubal, Portugal to the first well location designated by Operator, Offshore Bombay, India. Operator will notify Contractor no later than fifteen (15) days from the execution of this Agreement if it desires to mobilize the Drilling Unit to another location offshore India and no additional costs shall be charged to Operator for mobilisation to such other location. In the event that Operator desires to mobilize the Drilling Unit to another location offshore India and it fails t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 495 dated September 22, 1987. It further noted that agreements between ONGC and the assessee were indivisible in nature as per which entire payments had been agreed to be made by ONGC for supply of drilling unit including the rigs, for operating those rigs, and for providing experts and other personnel for operating those rigs. Therefore, all these payments were deemed to be the profits and gains of business for the purposes of Section 44BB of the Act and 10% thereof was to be treated as income chargeable to tax. Section 44BB of the Act does not provide that separate consideration mentioned in the Agreement for transportation of the drilling units/rigs from their present location to the designated location in India would be excluded from the correct amount of gross receipts on which 10% profit rate is required to be applied. The ITAT held that the mobilisation fee paid by ONGC to the assessee had no nexus with the actual amount incurred by the assessee for transportation of drilling units/rigs and, therefore, it could not be said that this payment was made for reimbursement of actual expenditure. 34) This is the summary of the rationale given by the ITAT in support of its conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned in the Agreement for transportation of the Drilling Unit/Rig from their present location to the designated location in India will be excluded from the aggregate amount of gross receipts on which 10% profit rate is required to be applied. ONGC has made the entire payment including the mobilisation fee, operating charges, daily hire on non operating days etc. for availing the services and facilities and the supply of Plant & Machinery on hire agreed to be provided by the appellant company to ONGC. The mobilisation fee paid by ONGC to the appellant company has no nexus with the actual amount incurred by the appellant company for transportation of the Drilling Unit/Rigs to the specified drilling location in India. Even if the actual expenditure incurred by the appellant company would have been substantially less, ONGC was liable to pay the fixed amount of mobilisation fee stipulated in the respective Agreements." 35) Before the High Court, argument of the assessee was that amount of mobilisation charges cannot be included in the amount referred to under sub-section (2) of Section 44BB of the Act as the mobilisation charges represent reimbursement of expenses incurred for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from a business connection of the assessee. Holding that income is not taxable in India, the Court premised the conclusion, inter alia, on the ground that as per clause (a) of Explanation 1 to Section 9(1)(i) of the Act, only such part of income as is attributable to the operations carried out in India, is taxable in India and further that sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable. As far as offshore supply and offshore services in US$ are concerned, it was done outside the territory of India and the payment was also made to the assessee (a foreign company) in US$ outside India, said payment was not taxable as it was not "income" arising from a business connection of the said assessee. 37) The High Court, after taking note of the aforesaid judgment, has held that it is not applicable in the instant case. Reason given is that in Ishikawajima-Harima Heavy Industries Ltd., the Court had dealt with the assessment of a non-resident company on its income as per the provisions of Sections 5 and 9 of the Act and these sections are not attracted in the instant case, as the same is governed by Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight in upholding the order of the Assessing Officer." 38) We feel that High Court may not be entirely correct in law in excluding the provisions of Sections 5 and 9 in those cases where the assessment is opted by the assessee under Section 44BB of the Act. Submissions of learned counsel for the assessees are justified to the extent that Section 44BB of the Act is a special provision providing computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the Act which deal with charging section, total income and income of non-resident which arises or deem to arise in India cannot be sidetracked. These are the provisions which bring a particular income within the net of income tax. Therefore, it is imperative that a particular income is covered by the charging provisions contained in Section 5 of the Act. Indian Income Tax Act, admittedly, follows a territorial system of taxation. As per this system only that income of a non-resident is taxable in India which is attributable to operations within the Indian Territory. Therefore, in the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India shall be only that part of the income as is reasonably attributable to the operations carried out in India. Thus, business income earned by non-resident is chargeable to tax in India only to the extent reasonably attributable to the operations carried out in India. 42) It is, however, pertinent to point out that Section 44BB(2) makes certain receipts as "deemed income" for the purposes of taxation in the said provision. Therefore, aid of this provision is to be necessarily taken to determine whether a particular amount will be "income" within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act provides for special provision for computing profits and gains. However, that would not mean that if the income is to be computed under this provision, we have to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High Court may not be correct. Law in this behalf is settled by the judgment of this Court in A. Sanyasi Rao case as can be discerned from the following discussion in the said judgment. "We are further of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he object sought to be achieved by the Legislature. (emphasis supplied)" 43) Having corrected the position in law, by emphasising that Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases where assessment is done under Section 44BB of the Act, we are of the opinion that the argument of the assessees that Section 44BB is only a computation provision, is also not entirely justified. 44) In the first blush, assessees may appear to be correct in their contentions that Section 44BB falls in Chapter IV of the Act. Insofar as computation of income from 'Profits or Gains of Business or Profession' is concerned, it has to be computed as per the provisions of Sections 28 to 43D(2). However, certain provisions are made for providing special mechanism for computing the income on presumptive basis in case of non-resident and it includes Section 44BB as well. 45) Having put the law in prospective, we need to examine as to whether mobilisation charges received by the assessees can be treated as 'income' under Section 5 of the Act and would fall within the four corners of Section 9, namely, whether it can be attributed as having arisen or deemed to arise in India. Argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the business or profession'. Sub-section (2) mentions two kinds of amounts which shall be deemed as profits and gains of the business chargeable to tax in India. Sub-clause (a) thereof relates to amount paid or payable to the assessee or any person on his behalf on account of 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. Thus, all amounts pertaining to the aforesaid activity which are received on account of provisions of services and facilities in connection with the said facility are treated as profits and gains of the business. This clause clarifies that the amount so paid shall be taxable whether these are received in India or outside India. Clause (b) deals with amount received or deemed to be received in India in connection with such services and facilities as stipulated therein. Thus, whereas clause (a) mentions the amount which is paid or payable, clause (b) deals with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to be received in India as mentioned in sub-section (2) of Section 44BB as the deemed profits and gains. Thereafter, on such deemed profits and gains (treating the same as income), a concessional flat rate of 10% is charged to tax. In these circumstances, the AO is supposed to apply the provisions of Section 44BB of the Act, in order to find out as to whether a particular amount is deemed income or not. When it is found that the amount paid or payable (whether in or out of India), or amount received or deemed to be received in India is covered by sub-section (2) of Section 44BB of the Act, by fiction created under Section 44BB of the Act, it becomes 'income' under Sections 5 and 9 of the Act as well. 50) It is stated at the cost of repetition that, in the instant case, the amount which is paid to the assessees is towards mobilisation fee. It does not mention that the same is for reimbursement of expenses. In fact, it is a fixed amount paid which may be less or more than the expenses incurred. Incurring of expenses, therefore, would be immaterial. It is also to be borne in mind that the contract in question was indivisible. Having regard to these facts in the present case as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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