TMI Blog2021 (12) TMI 1360X X X X Extracts X X X X X X X X Extracts X X X X ..... deed or in the nature of FTS taxable u/s 9(1)(vii). Reimbursement of equipment lost in hole - revenue or capital receipt - HELD THAT:- As the name signifies lost in hole means destruction and loss of capital assets like drilling equipment which are provided by the assessee to oil exploration and. production companies. Therefore, the revenue received on account of loss of equipment does not form income in the hands of the assessee rather it is a mere reimbursement of the cost of equipment destroyed in the process of oil extraction. As reliance on the decision of the Hon ble Uttarakhand High Court in the own case of the assessee [ 2009 (7) TMI 51 - UTTARAKHAND HIGH COURT] wherein the Hon ble Court held that the receipts on account of equipment lost in hole being in the nature of capital receipts cannot, be included in the revenues chargeable to lax u/s 44BB - We find considerable cogency in assessee's submission as above. Hence, we hold that the Assessing Officer has erred in including the sum received by the assessee as reimbursements for determining the taxable income of the assessee. - Decided against revenue. - ITA No. 6172/Del/2017 - - - Dated:- 7-12-2021 - Sh. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction, assembly, mining or like project and had only provided ancillary services, and thus did not fall in the exclusion clause of section 9(1)(vii) of the Act, in distinction to the lead case of Foramer inter alia covered by the Hon ble Apex Court in ONGC case supra where the dominant purpose of the contract being prospecting, extraction or production of mineral oil, the ancillary works were held to be covered by the exclusion provided in Explanation to section 9(1)(vii) of the Act. (vi) Whether the CIT (A) has erred in overlooking that the receipts of the assessee were not only in the nature of FTS u/s 9(1)(vii) of the Act, but were also not eligible to be excluded under Explanation 2 to section 9(1)(vii) since the recipient of FTS, the assessee in this case had not undertaken any construction, assembly, mining or like project. (vii) Whether the CIT (A) has erred in overlooking that the dominant nature of the backend technical services rendered by the assessee was not prospecting, extraction or production of mineral oil so as to fall under purview of Section 44BB of the Act. (viii) Whether the CIT (A) has erred, on the facts and in the circumstances of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business forms part of its business receipts. Owing to the inherent similarity in the nature of sales tax and service tax, the ratio of the judgment in the said case is directly applicable to the instant case. 3. The facts have been taken from the order of the ld. CIT(A) who has diligently examined the issue of controversy between applicability of provisions of Section 44BB and Section 44DA of the Income Tax Act, 1961. We have heard the arguments of both the parties and refrain to interfere with the order of the ld. CIT(A). For the sake of ready reference, the discussion on the issue as brought out by the first appellate authority is pointed out as under: 4. Brief facts of the case on this issue are that the AO has held that the revenues in respect of provision of service relating to post-stack inversion study, core pressure and well-bore study, data processing and maintenance services are in the nature of fees for technical services u/s 9(1)(vii) of the Act wherein the appellant submits that the activities are inextricably linked with the oil and gas exploration and production activities and in view of the judgment of Supreme Court of India in the case of Oil and Natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices are covered under the definition of FTS as per the provision of section9 (1) (vii) of the Act. 7. The issue under dispute is the section under which the receipts from post-stack inversion study, core pressure and well-bore study, data processing and maintenance services ought to be brought to tax. The AO has treated receipts in the nature of fee for technical services and taxed the same u/s 44DA of the Act. On the other hand, the Appellant is of view that its receipts should have been brought to tax under section 44 BB of the Act. The Appellant has primarily relied upon the judgment of the Apex Court passed in the case of ONGC (Civil Appeal No.731 of 2007) to support its contention. 8. Combined effect of the provisions of sections 44BB, 44DA and 115A is that if 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 or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of Section 9(1). The said explanation as quoted above defines fees for technical services to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. fees for technical services any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head salaries . Fees for technical services, therefore, by virtue of the aforesaid explanation will not include payments made in connection with a mining project. 9. Before the High Court, a Circular No. 1862 dated 22.10.1990 having a bearing on the subject was placed for consideration by the assessee. The aforesaid instruction may be reproduced herein below. Subject: Definition of fees for technical services in Explanation to Section 9(1) (vii) of the Income Tax Act, 1961 whether prospecting for or extraction of production of mineral oil are mining operations-clarification regarding. The expression fees for technical services has been defined in Explanation 2, to Section 9(1) (vii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State List in the 7th Schedule to the Constitution of India. It is urged that the eventual test is one of pith and substance of the agreement, namely, whether the works contemplated or services to be rendered under the agreement is directly and inextricably linked with the prospecting, extraction or production of mineral oil. It is submitted on behalf of the appellants that the agreements in question satisfy the above test for-.which purpose the appellants have categorized the different contracts under 8 heads which may be conveniently set out at this stage herein below. 1. Carrying out seismic surveys and drilling for oil and gas 2. Services starting/re-starting/enhancing production of oil and gas from, wells 3. Services for prospecting for exploration of oil and or gas 4. Planning and supervision of repair of wells 5. Repair, Inspection or Equipment used in the exploration, extraction or production of oil and gas 6. Imparting Training 7. Consultancy in regard to exploration of oil and gas 8. Supply, Installation, etc. of software used for oil and gas exploration 11. It is also urged on behalf of the appellants that the instr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned Counsel for the revenue has even suggested that if it is held that the High Court ought to have examined each agreement or contract to find out its real purpose and intent the revenue would have no objection if the matters are remanded for a complete exercise to be made on the above basis. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2. 740 Drilling, furnishing personnel for manning, maintenance and operation, of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. 737 Repair, inspection and overhauling of turbines. 26. 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines. 27. 1522 Replacement of choke and kill consoles on drilling rigs. 28. 1521 Inspection of gas generators. 29. 1515 Inspection of rigs. 30. 2012 Inspection of generator. 31. 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines. 32- 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33. 2008 Expert advice on the device to clean insides of a pipeline. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal. 14. Consequently, all the appeals are allowed with no order as to the casts. 12. In the said order the Hon ble Court had examined the contracts involved in the group of cases and summarized the brief description of the works covered under each of the said contracts in a table between pg 19-21 of the said order. In view of the ratio of the above judgment, it is to be seen whether the receipts under the head post-stack inversion study, core pressure and well-bore study, data processing and maintenance services is covered within the scope of work under the contracts examined by the Hon ble Supreme court in the said order. It is the scope of work and nature of service that determines taxability under section 44 BB and 44DA of the Act. 13. On examination of several sources available on the public domain it was found that post-Stack inversion transforms a single seismic data volume into acoustic impedance through integration of the assessment data, well data and a basic stratigraphic interpretation. The data input to the post stack inversion project typically consists of a set of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o maintenance support has been considered as activities falling within the ambit of section 44BB of the Act. The relevant portion of the decision is reproduced below: 7. Further, we find, that in the case of ONGC vs CIT (supra) the Hon ble Supreme Court held that if the pith and substance of each contracts/agreement is inextricably connected with prospecting, extraction or production of mineral oil, then payment received by the non-resident assessee or foreign companies under the said contract is more appropriately assessable under the provisions of section 44BB and not u/s 44D of the Act. The list of contracts, in the said appeal before the Supreme Court included following contracts: 1. Contract of supply, installation and familiarization of software for processing seismic data. 2. Contract of supply, supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. .. 8. In the case in hand also the software is supplied and maintained were related to various activities of exploration including for reservoir navigator, up-gradation of the Geo log multimin etc. 9. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded in the revenues chargeable to lax u/s 44BB of the Act. Adjudication of the ld. CIT(A) 5.24 The averments of the appellant have been critically examined in light of the decision in the case of CIT vs. Schlumberger Asia Services Ltd (supra), wherein Hon ble Uttarakhand High Court has endorsed the view of Hon ble ITAT and held that no question of law arises to be answered in this appeal. It is further gathered from the decision of the Hon ble ITAT, Delhi in the case Schlumberger Asia Services Ltd(ITA NO. 6063/Del/2010) for the assessment year 20072008 that the issue of reimbursement received on account of equipment lost in hole is decided in favour of the assessee by considering the earlier decisions. Ld ITAT has observed as below: 7.7 It has further been noted that the A.O. has included a sum of Rs. 7,23,59,963/- received by the Assessee as reimbursements of certain expenses being customs duties paid, by the Assessee on behalf of its clients, equipments lost in hole etc. It has been submitted that the inclusion of this amount within the scope of receipts for purpose of determining income of the Assessee is contrary to the settled law on the issue and decisions in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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