TMI Blog2022 (7) TMI 1507X X X X Extracts X X X X X X X X Extracts X X X X ..... under Explanation 2 to section 9(1)(vii) of the Act. That being the factual and legal position, the amount received by the assessee cannot be treated as FTS under section 9(1)(vii) of the Act. That being the case, the provision of the Act being more beneficial in such a scenario, as per section 90(2) of the Act, will be applicable. Therefore, there is no need for us to examine the applicability of the term FTS under India France Tax Treaty. Thus, once the amount received by the assessee does not fall within the definition of FTS under section 9(1)(vii) of the Act, by default, section 44DD would not apply to such payment. Whether the amount received by the assessee is business profit under section 44BB? - as per sub-section (1) of section 44BB, the profits from providing services or facilities in connection with prospecting for or extraction or production of mineral oil would fall within the ambit of section 44BB. Thus, it is required to determine, whether the services provided by the assessee under the contract with RIL are in connection with prospecting for or extraction or production of mineral oils. The expression in connection with being of widest amplitude cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by assessee from M/s. Reliance India Ltd. (RIL) as Fees for Technical Services (FTS), hence, taxable under section 44DA of the Act. 3. Briefly the facts are, the assesse is a non-resident corporate entity incorporated under the laws of France and a tax resident of the said country. As stated by the Assessing Officer, assessee is primarily engaged in engineering, procurement and construction business for oil production- off-shore and on-shore, refining petrochemicals, fertilizers, chemical fertilizers, non-conventional energy and submarine pipelines etc. The assessee had entered into contracts with two Indian entities viz. Oil and Natural Gas Corporation (ONGC) and RIL. During the year under consideration, the assessee has earned income from both the contracts. However, insofar as receipt from ONGC contract is concerned, there is no dispute between the assessee and the Revenue. The dispute is only with regard to the receipts from contract entered with RIL. 4. As could be seen from the facts on record, as per the scope of work under the contract with RIL, the assessee was entrusted with the work in connection with remedial action on well A5 in the Krishna Godawari (KG block), w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received cannot be regarded as FTS, even, under Article 13 of the India France DTAA as the make available condition is not satisfied. Having held so, learned DRP concluded that since the services rendered by the assessee are in connection with prospecting for mineral oil, such income of the assessee has to be taxed by applying the presumptive rate as per section 44BB of the Act. 7. Sh. Sanjay Kumar, learned Departmental Representative, strongly relying upon the observations of the Assessing Officer, submitted that the assessee itself is not engaged in the business of prospecting for or extraction or production of mineral oils. He submitted, the activity of prospecting for, or extraction or production of mineral oil was actually performed by RIL. He submitted, RIL engaged the assessee as a second line contractor for providing certain services in relation to repair/replacement of certain parts of plants/machineries used in prospecting for or extraction of mineral oils. Therefore, the provisions of section 44BB of the Act would not be applicable to the assessee. In this context, he drew our attention to the scope of work as envisaged in the contract between the assessee and RI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms with section 44DA read with section 115A of the Act. Without prejudice, he submitted, Article 13(4) of the India-France Tax Treaty, which defines the term FTS is more or less similar to the definition provided under section 9(1)(vii) of the Act. He submitted, FTS as defined in the Treaty does not impose any make available condition. Thus, he submitted, even under the treaty provision, the services rendered by the assessee would qualify as FTS. In support of his submission, he relied upon the following decisions: 1. Paradigm Geophysical Pty. Ltd. Vs. CIT, WP(C) No. 1370 of 2019, dated 13.03.2020 2. University of Calgary Vs. ADIT, (2017) (ITA No. 4877/Del/2013 1327/Del/2016) 10. Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted, the services rendered by the assessee cannot be regarded as FTS, either under section 9(1)(vii) of the Act or under Article 13 of Indian France Treaty. Drawing our attention to the agreement between the assessee and RIL, learned counsel submitted, while RIL has been entrusted with the work of drilling and exploration of oil at KG Basin, a part of the work was subcontracted to the assessee by RIL. He submitted, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and production of mineral oils will be taxable under section 44BB as opposed to section 44DA of the Act. He submitted, amendment to the aforesaid section by Finance Act, 2010 would not have the effect of altering or effacing fundamental nature of both the provision and their respective spheres of operation or to take away the separate identity of section 44BB of the Act. Thus, relying upon the ratio laid down in these decisions, learned counsel submitted, mining/oil exploration projects are not restricted to carrying out mining simpliciter. The said projects comprise of amalgam of activities where each of such activities are indispensable to the completion of the project. Therefore, considered in that context, the activities performed by the assessee are services in connection with prospecting for, extraction or production of mineral oils, hence would be covered under section 44BB. 12. He submitted, section 44DA of the Act provides that income by way of royalty or FTS earned by a non-resident assessee in pursuance to an agreement with the Government or an Indian concern shall be computed under the head profit and gains from business or profession , in case, the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 1116/Del/2014) 3. Technip UK Ltd. Vs. DIT (ITA No. 4284/Del/2013) 4. Geofizyka Torun Sp zoo [2010] 320 ITR 268 (AAR) 5. ACIT Vs. Paradigm Geophysical Pvt. Ltd. [2008] 117 TTJ 812 (Delhi) 6. Lloyd Helicopters International Pty Ltd. [2001] 249 ITR 162 7. Seabird Exploration FZ LLC [2010] 320 ITR 286 8. Wavefield Inseis Asa [2009] 320 ITR 290 9. McDermott International Inc. Vs. DCIT [1994] 49 ITD 590 (Delhi) 10. Oil and Natural Gas Corporation Ltd. VS. CIT, 376 ITR 306 (SC) 11. Louis Dreyfus Armateures SAS Vs. ADIT, 54 taxmann.com 366 (Delhi) 12. Pride Offshore International LLC Vs. ADIT, 59 taxmann.com 23 (Delhi) 13. ADIT Vs. International Technical Services LLC, 71 taxmann.com 351 (Delhi) 14. Iranian Offshore Engineering Construction Company Vs. ADIT, 76 taxmann.com 95 (Delhi) 15. Micoperi S.P.A. Milano Vs. DCIT [2002] 82 ITD 369 (Mumbai) 16. Bourbon Offshore Asia Pte Ltd. [2011] 337 ITR 122 (AAR) 17. Spectrum Geo Ltd. [2012] 346 ITR 422 (AAR) 18. ADIT Vs. International Technical Services LLC, 159 ITD 958 (Delhi) 19. ADIT vs. M.B. Petroleum Services LLC.: 63 SOT 63 (Del.) 20. ADIT vs. TDI Brooks Intl. Inc: 64 taxmann.co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 16. At the outset, we propose to deal with the contention of the Revenue that the amount received by the assessee falls within the definition of FTS under section 9(1)(vii) of the Act. Section 9(1)(vii) of the Act provides for taxation of FTS. Explanation 2 to section 9(1)(vii) defines FTS 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 the head Salaries ; 17. A reading of Explanation 2 to section 9(1)(vii) would make it clear that it carves out an exception by excluding consideration received for any construction, assembly, mining or like projects and, off course, any income which is chargeable under the head salary from the term FTS . The meaning of expression mining or like projects as used in Explanation 2 to section 9(1)(vii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Regulation) Act, 1957 as well as Entries 53 and 54 of List 1 and Entry 22 of List 2 of the 7th Schedule to the Constitution of India, the Hon ble Supreme Court held that drilling operation for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. For ascertaining whether a particular activity carried out is in the nature of mining activity or a mining operation, the Hon ble Supreme Court propounded that it is the proximity of work contemplated under an agreement executed with a non-resident assessee with mining activity or mining operation, that would be crucial for determining, whether the payment made under such an agreement to the non-resident is to be assessed under section 44BB or section 44D of the Act. Thus, Hon ble Apex Court observed that test of pith and substance of the agreement would be the factor to decide, whether the amount received would be in the nature of profit earned for rendering services or facilities in connection with prospecting for mineral oils etc. While so observing, the Hon ble Supreme Court also referred to CBDT Instruction No. 1862, dated 22.10.1990. Thus, what follows from the observations of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 22. On a careful reading of the aforesaid provision makes it clear that profits earned by 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 would be taxable at the rate of 10% of the aggregate amount as specified in sub-section (2). Off course, the proviso to sub-section (1) of section 44BB carves out an exception by providing that the provision would not apply in a case where provision of section 42 or section 44D or section 44DA or section 115A or section 293A would apply for computing profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also a provision which applies to non-residents only. It is, however, broader and more several in nature and provides for assessment of the income of the non-resident by way of royalty or fees for technical services, where such nonresident 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 Ad, 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 such permanent establishment or fixed place of profession or in respect of amounts, if any, paid by the permanent establishment to its head office or to any of its other offices. Under section 44BB one does not find any reference to a permanent establishment in India. The type of services contemplated by the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fir 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 nonresident. 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 under the sections. If both the sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber then the only way in which the provisos can be given effect to is to understand them as referring only to the computation of profits, and to understand the amendments as having been inserted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct . 26. From the details of works covered under the contract enumerated in the aforesaid observations of the Hon ble Supreme Court, it can be well appreciated that wide spectrum of services in the nature of analysis of data of we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted. Hence, where the provision does not create any discrimination between the person who actually does the activity of prospecting for or extraction or production, and the person who renders services in connection therewith, the section cannot be narrowly construed. 19. It would not be out of place to refer to the decision of the co- ordinate bench in assessee's own case in ITA No. 4284/DEL/2013. Though the said decision of the co-ordinate bench was in respect of the order framed u/s 263 of the Act, but the findings are very much relevant to the case in hand. The relevant extract of the said decision of the co-ordinate bench reads as under: In the instant case, ground for which the DIT assumed jurisdiction u/s 263 of the Act are that provisions of section 44BB of the Act does not cover second leg contract and the said section is not application to sub-contracts engaged in providing technical services to contractors for those undertaking projects in oil exploration, that income received by the assessee was clearly covered u/s 44DA of the Act and hence not taxable u/s 44BB of the Act and that the A.O has not taxed out country receipts and that contract was a composite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for or extraction or fiction of mineral oils. Having regard to the above we are of the considered opinion that the fetter assumed by authorities below while interpreting the provisions of Section 44BB of the Act are manifestly it and there is nothing in the said provision so as to disentitle a sub- contractor from invoking the said provision. Accordingly we do not find any fault in the claim of the assessee that revenues received under the charter agreements with CGG for providing two seismic survey vessels are in consideration with prospecting extractions or production of mineral oils and therefore taxable u/s 44BB of the Act. 58. The various other decisions relied on by the ld. counsel for the assessee also support the proposition that the provision of section 44BB of the Act are held to be applicable to the tax payer being a second leg contractor/sub-contractor. Further, it has been held in various decisions including the decision of the Hon'ble Delhi High Court in the case of DIT Vs. OHM Ltd. reported in 352 ITR 406 that the services rendered in relation to extraction and production of mineral oil are taxable u/s 44BB of the Act. 59. So far as the receipts of out- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure as revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between lack of inquiry and inadequate inquiry . If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open. In Gabriel India Ltd. (supra), law on this aspect was discussed in the following manner: ........From a reading of sub-s. (1) of section, it is clear that the power of suomotu revision can be exercised by the CIT only if, on examination of the records of any proceedings under this Act, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income himself at a higher figure. It is because the ITO has exercised the quasi judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. ............... There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. ............... We may now examine the facts of the present case in the light of the powers of the CIT set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard.......... 13. When we ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, is not clear as to whether the expenditure can be treated as capital expenditure or it is revenue in nature. No doubt, in certain cases, it may not be possible to come to a definite finding and therefore, it is not necessary that in all cases the CIT is bound to express final view, as held by this Court in Gee Vee Enterprises (supra). But, the least that was expected was to record a finding that order sought to be revised was erroneous and prejudicial to the interest of the Revenue. [See Seshasayee Paper (supra)]. No basis for this is disclosed. In sum and substance, accounting practice of the assessee is questioned. However, that basis of the order vanishes in thin air when we find that this very accounting practice, followed for number of years, had the approval of the IT authorities. Interestingly, even for future assessment years, the same very accounting practice is accepted. 62. We find the Hon'ble Delhi High Court in the case of CIT Vs. Anil Kumar reported in 335 ITR 83 has held that where it was discernible from record that the A.O has applied his mind to the issue in question, the ld. CIT cannot invoke section 263 of the Act merely because he has differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponsibility of examining and investigating the case. More so, in view of the fact that the assessee explained that the capital investment made by the partners, which had been called into question by the CIT was duly reflected in the respective assessments of the partners who were I.T. assessees and the unsecured loan taken from M/s Stutee Chit Finance (P) Ltd. was duly reflected in the assessment order of the said chit fund which was also an assessee. 64. Since in the instant case the A.O after considering the various submissions made by the assessee from time to time and has taken a possible view, therefore, merely because the DIT does not agree with the opinion of the A.O, he cannot invoke the provisions of section 263 to substitute his own opinion. It has further been held in several decisions that when the A.O has made enquiry to his satisfaction and it is not a case of no enquiry and the DIT/CIT wants that the case could have been investigated/ probed in a particular manner, he cannot assume jurisdiction u/s 263 of the Act. In view of the above discussion, we hold that the assumption of jurisdiction by the DIT u/s 263 of the Act is not in accordance with law. We, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
