TMI Blog2017 (12) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... n 44DA are not applicable in the instant case. The assessee company has therefore rightly offered its income under the subject contracts in terms of section 44BB of the Act. In the result, ground no. 2 of assessee’s appeal is allowed. - ITA No. 732/JP/2015 And I.T(I.T.) A. No. 02/JP/2017 - - - Dated:- 27-11-2017 - SH. KUL BHARAT, JM AND SH. VIKRAM SINGH YADAV, AM For The Assessee : Sh. Prashant Bansal (CA) And Sh. Mahesh Gehlot (Advocate) For The Revenue : Sh. Varindra Mehta ORDER PER: SH. VIKRAM SINGH YADAV, A.M. These are two appeals filed by the assessee against the order of Assessing Officer passed pursuant to the directions of the Dispute Resolution Panel u/s 144(C)(13) read with section 143(3) of the Act for A.Y 2012-13 and 2013-14 respectively. The respective grounds of appeal are as under: ITA No. 732/JP/2015: ( 1) Under the facts and circumstances of the case and in Law, the Assessment Order passed u/s 143(3) r.w.s. 144C of the Income Tax Act 1961 dated 30/01/2015 by the ld. DCIT, International Taxation, Jaipur is bad in Law and bad in facts. ( 2) Under the facts and circumstances of the case and in law, the ld. AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( 3) Under the facts and circumstances of the case and in law, the learned AO has on the basis of assumptions and presumptions without appreciating the facts and merits of the case, disallowed u/s 44DA(1) and 40(a) (ia) the payment made against ERP Cost and Training Expenses of ₹ 7,22,163.47/-, whereas these expenses were incurred wholly for the purpose of cementing services provided, construction of mineral oil and gas wells in India which is an integral part, main activity and important element in providing services or facilities in prospecting for, or extraction or production of mineral oil and natural gas. These expenses are also not covered u/s 195 of the I.T.Act 1961. ( 4) Under the facts and circumstances of the case and in Law, the Learned AO has on the basis of assumptions and presumptions without appreciating the facts and merits of the case, charged interest u/s 234B, 234C and 234D and withdrawing the interest u/s 244A(3) of the Act. ( 5) Under the facts and circumstances of the case and in Law, the learned AO on the basis of assumptions and presumptions without appreciating the facts and merits of the case has initiated penalty u/s 271(1)(c) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In order to appreciate the rival contentions advanced by both the parties, firstly, it would be relevant to refer to the nature of the services and scope of work under the two contracts entered into by the assessee company with Oil India Ltd. and Gail (India) Limited revenues from which have been offered to tax in the return of income for AY 2012-13. 7. The contract with Oil India Ltd. Dated 27.11.2009 is titled as Hiring of cementing services which is available at APB pages 96 to 250 and the scope of work is contained in Section II of the contract and the relevant provisions reads as under:- 2.0 Preamble 2.1 Rajasthan Project of Oil India (OIL), a Govt of India Enterprise, is engaged in the exploration and production of natural gas from its Jaisalmer Basin and heavy oil from Bikaner-Nagaur basins of Western Rajasthan, India. 2.2 Presently, OIL plans to extend its exploration activities in the Jaisalmer and Bikaner, Nagaur Basins of Western Rajasthan by drilling about 18 to 19 wells (1200 + 1950m) in its various NELP Blocks in Western Rajasthan. 2.3 The down-hole drilling conditions and geology in the proposed drilling locations are expected to be norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enting jobs 4) Cement/Barytes/Bentonite-diesel-gunk etc. plug, jobs through drill pipe/tubing 5) BOP Stack testing/LOT 6) Casing Test 7) To provide services on cementing programme, slurry design etc. for exploratory/developmental drilling of oil/gas wells. 8) To maintain and service all equipment belonging to Contractor and thus avoid downtime. 9) Any other job normally required to be done by cementing unit. 10) To carry out relevant API and other tests on cement and additives in the nearest laboratory. 11) To perform squeeze job (optional) if required by retrievable packer/cement retainer on mutually agreed terms conditions. 12) Pre-stressing for thermal wells where experts for this will be called separately by OIL. 13) Any other jobs generally connected with such services for bringingin a well to health should be provided by the Contractor when called upon to do so including supply of extra items/equipment/cement additives (on reimbursement basis on mutually agreed terms conditions). 8. It would be equally relevant to note the schedule of rates for the above scope of work which is provided in section IV of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinating all requirements in consultation with the GAIL s representatives and Contractor shall mobilize inter-location movements in accordance with the instructions given, and the Contractor will be held responsible for any failure to provide such personnel, materials, equipment and supplies as agreed to be provided under this tender. 1.2 Services/Contract Co-ordinator An experienced Services/ Contract Co-ordinator who is familiar with the proposed services and the area in which the work will be performed, shall be available to GAIL for discussions with respect to technical, planning, operational and logistical matters, attendance at meetings and general liaison and shall monitor onshore progress on a continuous basis prior to and during the operations, thus facilitating daily reporting. 1.3 Specialist Provider of Services The Contractor as a specialist provider of services under this scope of work is responsible to bring to our attention any additional items or services not specifically identified, but nonetheless considered by you as required to carry out GAIL s drilling program. 2.0 CEMENTING SERVICES: Contractor shall provide a comprehensive Cementing servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory well drilling programme in the RJ-ONN-2004/1 Block in Western India. The consideration under both the contracts are thus for provision of comprehensive cementing services through equipment, material and personnel which have to be undertaken by the assessee, along with drilling services, as part of the exploratory and development well programme for oil and gas fields. 12. The question that arises for consideration is whether the consideration for provision of comprehensive cementing services through equipment, material and personnel as described above will qualify as fees for technical services or qualify for exclusion from technical services under Explanation 2 to section 9(1)(vii) which reads as under: Explanation 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 chargeable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as fees for technical services under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act or will such payments be taxable on a presumptive basis under Section 44BB of the Act'? The Hon ble Supreme Court was pleased to hold as under: 8. A careful reading of the aforesaid provisions of the Act goes to show that under Section 44BB(1) in case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10% of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in Sub-section (2). On the other hand, Section 44D contemplates that if the income of a foreign company with which the government or an Indian concern had an agreement executed before 1.4.1976 or on any date thereafter the computation of income would be made as contemplated under the aforesaid Section 44D. Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions mining projects or like projects occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6174 Analysis of data of wells to prepare a job design. 16. 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys. 17. 7226 Opinion on hydrocarbon resources and foreseeable potential. 18. 7227 Opinion on hydrocarbon resources and foreseeable potential. 19. 7230 Opinion on hydrocarbon resources and foreseeable potential. 20. 6016 Opinion on hydrocarbon resources and foreseeable potential. 21. 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program. 22. 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs. 23. 733 Repair of gas turbine, gas control s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43. 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. 44. 1523 Supply, installation and familiarization of software forprocessing seismic data. The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es is directly associated with drilling operations and inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of these contracts is for prospecting, extraction or production of mineral oils. The payments under the two contracts will thus fall in the exclusion from Fees for technical services , by virtue of the explanation 2 to section 9(1)(vii) which doesn t not include payments made in connection with a mining project for prospecting, extraction or production of mineral oils. 19. We are conscious of the fact that above decision of the Hon ble Supreme Court has been rendered in the context of Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act and in the instant case, the AO has invoked provisions of section 44DA of the Act. At the same time, we find that both under section 44D as well as under section 44DA, fees for technical services has been defined as per explanation 2 to section 9(1)(vii) of the Act. Though there have been amendments made to section 44BB and section 44DA by the Finance Act 2010, there has been no amendment that has been made by the legislature to the said definition of fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nn.com 120 and it was submitted that the said decision of the Hon ble Delhi High Court had considered the amendment which has been brought in by the Finance Act 2010 in section 44BB as well as section 44DA of the Act. 24. Per contra, the contention of the ld DR is that by the Finance Act, 2010, the amendments have been made in section 44BB as well as section 44DA of the Act and the rational for the said amendments was explained in memorandum explaining the provisions of the Finance Bill, 2010 which reads as under:- Combined effect of the provisions of sections 44BB, 44DA and 115A is that * In the income of a non-resident is in the nature of fee for technical services, it shall be taxable under the provisions of either section 44DA or section 115A irrespective of the business to which it relates. * Section 44BB applies only in a case where consideration is for services and other facilities relating to exploration activity which are not in the nature of technical services. * However, owing to judicial pronouncements, doubt were raised regarding the scope of section 44BB vis-a-vis section 44DA as to whether fee for technical services relating to the exploratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for computing the profits and gains of a non-resident in connection with 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 including petroleum and natural gas. Section 44DA is also a provision which applies to non-residents only. It is, however, broader and more general in nature and provides for assessment of the income of the non-resident by way of royalty or fees for technical services, where such non-resident carries on 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 would be allowed in respect of any expenditure or allowance which is not wholly or exclusively incurred for the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technical services is paid should be effectively connected with the permanent establishment. Such a requirement has not been spelt out in Section 44BB; moreover, a flat rate of 10% of the revenues received by the non-resident for the specific services rendered by it are deemed to be profits from the business chargeable to tax in India under Section 44BB, whereas under Section 44DA, deduction of expenditure or allowance wholly and exclusively incurred by the non-resident for the business of the permanent establishment in India and for expenditure towards reimbursement of actual expense by the permanent establishment to its head office or to any of its other offices is allowed from the revenues received by the non-resident. Because of the different modes or methods prescribed in the two sections for computing the profits, it apparently became necessary to clarify the position by making necessary amendments. That perhaps is the reason for inserting the second proviso to sub-section (1) of Section 44DA and a reference to section 44DA in the proviso below subsection (1) of Section 44BB. A careful perusal of both the provisos shows that they refer only to computation of the profits u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and doesn t qualify as fees for technical services as per explanation to section 9(1)(vii) and in any case, the provisions of section 44BB being more specific, shall be applicable and provisions of section 44DA are not applicable in the instant case. The assessee company has therefore rightly offered its income under the subject contracts in terms of section 44BB of the Act. In the result, ground no. 2 of assessee s appeal is allowed. 29. In view of the above, grounds no. 3, 4 5 which are in the context of section 44DA become academic and are treated as infructuous. Ground no. 6 which is pertaining to levy of interest u/s 234A, 234B and 234C is consequential in nature and it doesn t require separate adjudication. Ground no. 7 is pertaining to levy of penalty u/s 271(1)(c) doesn t arise out of order under appeal and is hereby dismissed. I.T.(I.T) A. No. 02/JP/17 30. In I.T.(I.T) A. No. 02/JP/17 for AY 2013-14, both parties agree and submit that ground no. 2 relates to applicability of section 44BB vis- -vis 44DA and facts and circumstances of the case are pari-materia. It was submitted that during the year under consideration, revenues have accrued from earlier con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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