TMI Blog2022 (3) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner had grossed up the profits by 10% and thereafter paid the taxes. There does not appear much controversy as regards the nature of the contract between ONGC and the petitioner - the use of the expression in connection with in Section 44BB is of significance. The said expression, expands the horizon of the services or facilities, provided by a non-resident assessee, which fall within the ambit of the said provision, provided they have connection with the exploration, extraction or production of mineral oils. The emphasis is not as much on the service, facility as plant as on the purpose to which it is put to. It is the proximity or connection of the service, facility, plant or machinery with the process of exploration, extraction and production of mineral oils, that is of determinative significance. Supreme Court in the case of Oil and Natural Gas Corporation Limited [ 2015 (7) TMI 91 - SUPREME COURT] concluded that the pith and substance of each of the contract and agreement in the said case was inextricably connected with prospecting, extraction and production of mineral oil. The dominant purpose of each of such agreements was for prospecting, extraction or produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia takes exception to an order dated 18th July, 2008, passed by Director of Income-tax (International Taxation), Mumbai, under Section 264 of the Income Tax Act, 1961 ( the Act, 1961 ), whereby the application preferred by the petitioner against the order dated 15th February, 2008, passed by Deputy Director of Income-tax (International Taxation) 4(1), Mumbai ( the Assessing Officer ) under Section 195 of the Act, 1961, came to be rejected. 3. The background facts leading to this petition can be summarized as under: (a) The petitioner is a public limited company and an engineering conglomerate and carries out varied business activities through independent divisions. On 6th February, 2006, the petitioner had entered into a contract with the Oil and Natural Gas Corporation Ltd. ( ONGC ), whereunder the petitioner was awarded the contract for survey (pre-engineering, pre-construction/pre-installation and post-installation), design engineering, procurement, fabrication, load out, tie-down/seas fastening tow out/sail out, transportation, installation, hook-up modifications of existing facilities, testing, pre-commissioning, commissioning of the BCP Booster Compressor Platform Proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer again sought clarification as to how the income of the recipient would be governed by the provisions of Section 44BB of the Act, 1961, and also directed the petitioner to explain as to why the transaction be not treated in the nature of Royalty as defined in Section 9(1)(iv) read with Clause (iva) of Explanation 2 and why the taxability of the same be not governed by Section 115A. 6. The petitioner, through its representative, appeared before the Assessing Officer and furnished the necessary clarification and documents. However, by an order dated 15th February, 2008, under Section 195 of the Act, 1961, the Assessing Officer held that the petitioner was required to withhold taxes at the rate of 11.729% of the invoice amount paid to the non-resident assessee. In the process, the Assessing Officer recorded that the payments to be made by the petitioner for hire of tugs and barges was for commercial equipments and, therefore, it would fall within the meaning of royalty in terms of Clause (iva) of Explanation 2 to Section 9(1)(vi) and would be exigible to tax at the rate of 10% in view of Section 115A of the Act, 1961 as well as Article 12 of the Singapore Treaty. It was furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 44BB of the Act, 1961 did not govern the facts of the case as, according to the authorities, it was a case of mere transportation of equipment from the yard to offshore location. The authorities misdirected themselves in concluding that the payment was in the nature of Royalty within the meaning of Clause (iva) of Explanation 2 to Section 9(1)(iv) of the Act, 1961 as the payment was in connection with the use or right to use commercial equipment. Mr. Pardiwalla strenuously submitted that the authorities fell in the aforesaid error as they lost sight of the exception carved out by the latter part of Clause (iva) to the effect that such consideration does not include the amounts referred to in Section 44BB of the Act . Had the authorities considered the wide amplitude of the special provision for computing profits and gains in connection with the business of exploration etc. of mineral oils, incorporated in Section 44BB, by employing the expression, in connection with , the authorities would not have taken such a narrow view that the use of the barges and tugs to carry the BCP-B2 Booster Compressor from the yard to offshore platform was a case of mere transportation of equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant part of Section 44BB reads as under: Section 44BB Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. 44BB. (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. . The relevant part of Section 195 reads as under: Section 195: 195. [(1) Any person responsible for paying to a nonresident, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A, 115A or 293A, the deeming provision of assuming 10% profits and gains of the aggregate amounts from out of such business, shall not come into play. 16. The phraseology of Section 44BB(1), extracted above, indicates that for its applicability the following conditions must be satisfied: (i) The assessee ought to be a non-resident, and (ii) Such non-resident assessee should be engaged in the business of providing services or facilities or supplying plant and machinery on hire, and (iii) The services or facilities so provided shall have connection with prospecting for, or extraction or production of, mineral oil, or; (iv) the plant and machinery so supplied on hire should be used in the prospecting for, or extraction or production of, mineral oils. (v) If the aforesaid conditions are satisfied, then a sum equal to 10% of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains chargeable to tax . 17. It would be contextually relevant to note that under Explanation 2 to Section 9(1)(iv), which defines royalty for the purpose of the said clause to mean consideration, inter alia, for the use or right to use an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to offshore platform by TPL. 21. From the aforesaid observations an inference becomes inescapable that the scope of work under the contract was comprehensive from survey to the commissioning of entire facilities on turn key basis at Bassein field offshore site. The said platform was to be used in maintaining and enhancing the production/extraction capacity of mineral oil. The tugs hired by the petitioner were used for towing the compression module of platform, from petitioner s yard to offshore platform. At this juncture, it would be contextually relevant to note that in connection with the execution of the said contract, the Director General of Hydro Carbons had issued Essentiality Certificate to import the cargo (barge) for the petroleum operations. 22. Can the transportation of the Compression Module be said to be a mere transportation of equipment/material? In our view, answer to this question is required to be explored in the context of the utility of the equipment to the exploration, extraction and production of the mineral oils. Whether the said equipment used was indispensable for, or is inextricably connected with, exploration, extraction and production of mineral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is the proximity of the work, contemplated under an agreement executed with a non-resident of assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question 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 following observations of the Supreme Court in paragraphs 13 and 14 are instructive and hence extracted below: 13. The Income Tax Act does not define the expressions mines or minerals . The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction or production of mineral oils though there might be certain ancillary works contemplated thereunder, and, therefore, the Supreme Court held that the payments made by the ONGC and received by the non-resident assessees or foreign companies under the said contracts were more properly assessable under the provisions of Section 44BB and not under Section 44D of the Act. 28. Applying the aforesaid ratio to the facts of the case at hand, where there is no qualm over the fact that the petitioner had entered into a contract with ONGC on turn-key basis for enhancing the exploration/production capacity of the platform at Bassein field offshore site and, for the said purpose, the petitioner had hired the tugs and barges from non-resident assessees, we are of the view that the authorities were not justified in arriving at the conclusion that the use of the tugs and barges was in the nature of a mere transportation facility. On facts, respondent no.1, in terms, recorded that tugs were hired by the petitioner to transport the Compressor module from the yard to the offshore platform. The said compressor module, as it emerges from the record, was an integral part of the execution of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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