TMI Blog2017 (11) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... attracted. Thus, this provision contained in Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the Act as well. 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 per which the case of the assessees get covered under the aforesaid provisions, we do not find any merit in any of the contentions raised by the assessees. Therefore, the ultimate conclusion drawn by the AO, which is upheld by all other Authorities is correct, though some of the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2017IN THE SUPREME COURT OF INDIA A. K. Sikri And Ashok Bhushan, JJ. For the Appellant : Mr. Porus Kaka, Sr. Adv. Ms. Kavita Jha, AOR Shivani Khgandekar, Adv. Mr. Rustom B. Hathikhanawala, AOR Ms. Geetanjali Mohan, AOR Mr. Rohit Jain, Adv. Mr. Vaibhav Kulkarni, Adv. Ms. Anil Katiyar, AOR For the Respondent : Ms. Anil Katiyar, AOR Mr. B. V. Balaram Das, AOR Ms. Kavita Jha, AOR JUDGMENT A. K. Sikri, J. Leave granted in SLP(C) No. 2955 of 2012, SLP(C) No. 11560 of 2014, SLP(C) No. 20000 of 2015, SLP(C) No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, 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 the provisions of section 42 or section 44D or section 44DA or 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 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 machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 and gains on which 10% tax is charged as component of income tax. 6) Coming to the lis that is involved in these appeals, it may be seen that sub-section (2) mentions two kinds of amounts which are to be treated as profits and gains of the business. In clause (a) of sub-section (2), the amount referred to are those which are paid or payable to the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 income from charter higher of the rig. The same was offered to tax under Section 44BB of the Act. In the case of Sedco Forex International Inc., the assessee did not include the amount received as mobilisation charges to the gross revenue for the purpose of computation under Section 44BB of the Act. In the case of Transocean Offshore Inc., the assessee included 1% of the mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ONGC. It was submitted that as this was the nature of the amount received, namely, reimbursement of expenses without there being any profit element, it could not be treated as amount within the meaning of sub-section (2) of Section 44BB of the Act. 15) Explaining the taxation of income scheme enumerated under Sections 4, 5 and 9 of the Act, Mr. Kaka submitted that globally the tax systems can be classified broadly into two models; W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payments as income , merely because the income is to be computed under special provision, is of no consequence. Mr. Kaka also referred to Circular No. 495 dated September 22, 1987 issued by the Central Board of Direct Taxes (CBDT) which, according to him, explains the Legislature intent behind inserting Section 44BB in the Act. According to the circular, the computation of taxable income of a non-resident assessee engaged in the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from a foreign location to a location in India, the same is not chargeable to tax in India under Sections 5 and 9 of the Act and the same cannot be made chargeable to tax under Section 44BB of the Act. (b) A computation provision like Section 44BB cannot override the charging provisions of Sections 4 and 5. It is so stated in the instruction No. 1767 dated July 1, 1987 issued by the CBDT. The unders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance. 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 (already noted above), he also relied upon Instruction No. 1767 dated July 1, 1987 issued by CBDT explaining the computation of business income in case of a contractor engaged in business of exploration of oil where part of the activities are carried out in India and part of the activities are carried on outside India. It has been stated as under: 3. On these facts, it is clear that income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 indivisible contract for the purposes of drilling operations, it was not open to the assessee to claim that mobilisation fee/charges and it should not be included in the aggregate receipts for the purposes of Section 44BB of the Act and their plea that they are not actual charges but expenses in the nature of reimbursement by ONGC was not permissible. It was submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. Section 44BB was introduced with a view to simplifying the relevant provisions which provide for determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to notify Contractor by such date, any additional costs incurred by Contractor for such mobilisation in excess of the Mobilisation Fee shall be borne by the Operator. Contractor shall invoice Operator for payment of the Mobilization Fee after the Drilling Unit is jacked-up on the first well location and ready to spud the well. Operator shall make paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, 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 conclusion, as can be seen from the following detailed discussion: 2.14 The aforesaid Sec. 44BB making a special provision for computing profits and gains in connection with the business of exploration of mineral oils has been inserted by the Finance Act, 1987 with retrospective effect from 1st April, 1983. The scope and effect of new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 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 transportation of drilling units of rigs from outside India to designated drilling places in India and the payment has also not been made in India. In support of his submission, apart from other judgments, heavy reliance was placed on the decision of this Court in Ishikawajima-Harima Heavy Industries Ltd. case. The High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 Section 44BB of the Act. This is the material distinction, in the opinion of the High Court, the manner in which the same is discussed needs to be reproduced. Thus, we hereby quote the relevant portion of the said discussion: ..Therefore, section 5 and section 9 both are aimed a the income for the taxability under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 instance it is to be seen whether a particular income arises or accrues or deem to arise or accrue within India. In order to seek this answer, the principles contained in Section 9 have to be applied only when it becomes an income taxable in India as per Section 9, in case of non-resident, the question of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the basis of a charge relating to income tax is laid down in Sections 4 to 9 of the Act. Section 4 is the charging section. Income-tax is levied in respect of the total income of the previous year of every person. Section 5 deals with the scope of total income. Section 6 deals with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the learned counsel appearing for the assessees is that the amount was received by way of reimbursement of expenses for the operation carried outside India and the payment was also received outside India. It is on this premise, entire edifice is built to argue that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 amounts which are received or deemed to be received in India. In respect of amount paid or payable under clause (a) of sub-section (2), it is immaterial whether these are paid in India or outside India. On the other hand, amount received or deemed to be received hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 per which the case of the assessees get covered under the aforesaid provisions, we do not find any merit in any of the contentions raised by the assessees. Therefore, the ultimate conclusion drawn by the AO, which is upheld by all other Authorities is correct, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
