Case Law Details
IN THE ITAT DELHI
Schlumberger Asia Services Ltd.
V/s.
Additional Director of Income-tax, (International Tax)
IT Appeal No. 6063 (Delhi) of 2010 – Assessment Year 2007-08
Date of pronouncement – 18.05.2012
ORDER
Shamim Yahya, Accountant Member
This appeal by the Assessee is directed against the order of the Assessing Officer passed u/s. 143(3) read with section 144C of the IT Act.
2. The concise grounds of appeal read as under:-
“1. The Ld. Assessing Officer has erred on facts and in law in dismissing the claim of the Appellant that income from the activities of Wireline Logging, Logging/ Measurement while Drilling, Perforation/ Cementing, Well Testing and like rendered in connection with prospecting for, or extraction or production of, mineral oils to its customers is to be computed under Section 44BB of the Act.
2. Without prejudice to Ground 1, the amount of Rs. 28,15,07,457/- received by the Appellant by rendering services to other Non-resident companies could not have been taxed either under Section 115A or 44DA of the Act.
3. Without prejudice to Ground 1, the amount of Rs. 133,69,28,675/- received by the Appellant from rental of equipments is in any case taxable under Section 44BB of the Act.
4. The Ld. Assessing Officer has erred on facts and in law in including Rs. 7,23,59,963/- received by the Appellant as reimbursements (towards customs duty, insurance etc.) for determining the taxable income of the Appellant.
5. The Ld Assessing Officer has erred on facts and in law in levying interest under Section 234B and 234D of the Act upon the Appellant.
6. The Ld. Assessing Officer has erred on facts and in law in initiating penalty proceedings under Section 271B of the Act.
The Appellant craves leave to add or amend the above grounds of appeal.”
3. The assessee is a foreign company incorporated in the Hongkong, filed its return of income on 31.10.2007 reporting revenues chargeable to tax u/s. 44BB at Rs. 1,08,17,38,034/-. Assessee during the previous year received revenue from 59 contracts which were offered for taxation u/s. 44BB. Assessee company is engaged in the business of wire line logging, perforation and other related activities. During the financial year 2006-07, the assessee has worked out on a number of contracts for various Oil and Gas Companies. The various activities carried out by the assessee under these contracts can be broadly classified as follows:
(a) Wireline logging services.
(b) Directional Drilling Services.
(c) Perforation Services.
(d) Cementing Services.
(e) Testing Services.
3.1 Assessee claimed that its activities are in connection with prospecting for, or extraction or production of mineral oil, which are taxable income as per the provisions of section 44BB of Income Tax Act. However, the Assessing Officer did not agree with the views of the assessee. According to the Assessing Officer, such receipts are FTS and do not fall in purview of Sec. 44BB.
4. Against the draft assessment order of the Assessing Officer, assessee preferred objection before the Disputes Resolution Panel (DRP). The DRP rejected the assessee’s contentions placed before it. In the impugned assessment order passed in pursuance of DRP directions, it has been held that the activity undertaken by the assessee are royalty or fee for technical services and thus assessable under section 115A of the Act and not section 44BB. Only the activities of rental income from equipment leased to companies engaged in production/exploration of oil by themselves has been held as amenable to benefit of Section 44BB by authorities below. In coming to this conclusion, both the Assessing Officer as well as DRP has held that the agreements are not composite and have to be bifurcated. The DRP with respect to the issue as to whether benefit of provisions of section 44BB is available to the assessee for such services inter-alia referred to the provision of section 44BB which are reproduced below:-
“(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 41 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.”
4.1 Referring to the above proviso to section 44BB(1) it was held that it clearly stipulates that this section does not apply in cases where section 115A or section 44D is applicable. For taxation of income which was taxable by virtue of special provisions for computing income by way of royalties etc. in the case of foreign companies u/s. 44D, Section 44DA was brought on the statute. DRP noted that provisions of section 44BB and 44DA have been amended w.e.f. 1st April, 2011. However, it held that these amendments are clarificatory in nature as is evident from the relevant para of Finance Bill 2010.
5. Against the above order the assessee is in appeal before us.
6. The submissions of the assessee are summarized as under:-
“1. The Appellant is part of the Schlumberger Group engaged in business of oilfield since more than seventy years. The Appellant company is incorporated under the laws of Hong Kong and has been operating through its project office in India since 1987. The Assessee is rendering services in connection with prospecting for, or extraction or production of mineral oils in India for its customers, being Exploration and Production companies (‘E&P companies’) like ONGC, Reliance etc. The Assessee has operations based in Delhi, Mumbai, Chennai, Rajahmundry and Kakinada (Andhra Pradesh), Baroda, (Gujarat), Barmer (Rajasthan) and Nazira (Assam) in India. The Assessee undertakes oil field services where it deploys its own resources, its own proprietary equipment and trained personnel to execute the work as specified under the scope of work of various contracts. For each contract, which could extend for a period of six months to five years, the Assessee mobilizes its equipments and personnel at site, executes its works under the contract and demobilizes the same after completion of the contract. A technical note of the activities undertaken by the Appellant is as under:
1.1 Wireline-Logging
The word ‘logging’ means recording of any information with respect to depth or time. The term ‘well-logging’ had a wider meaning and application in borehole geophysics, viz. wire-hole study of different formations encountered in an exploratory well. Well logging is an activity by which the geophysical information, such as porosity and permeability of formation, their thickness and extent, and geometry of the reservoir are acquired, by measuring various physical, chemical and lithological properties of the formations.
The recording is done by deploying automated equipments (containing software) which inter alia consists of electric logging tools that are lowered into the hole on a “wire-line”, a thick, flexible sheathed cable that conducts electricity down to the “tools”, and transmits the tool readings back up. These automated equipments provide real time on-line measure of geophysical properties, such as resistivity and conductivity (at various frequencies), sonic properties, active and passive nuclear measurements, dimensional measurements of the well-bore, formation pressure, etc.
The Assessee’s activity of wire line logging, which is largely a mechanical activity with the use of automated equipments, culminates in a ‘log’, which refers to the display of one or more log measurements on a strip of paper or film (a hard copy) with depth in one axis. This is delivered to the E&P Companies. Analysis of these logs for various exploratory wells, geologists and engineers of the E&P Company can determine the geo-physical characteristics of formations in and around the exploratory well, which aids their decisions in their exploratory or extraction process.
Logging while drilling (LWD)I Measurement while Drilling (MWD)
In this activity, automated equipments (that include acoustic, density and neutron porosity tools) are deployed to ‘log’ or ‘measure’ the geophysical properties ‘while drilling’ (LWDI MWD). This enhances efficiency by measuring properties of a formation before drilling fluids invade deeply and ensures little or no wellbore alteration or formation invasion. LWD data are transmitted . t6 the surface by mud pulse telemetry and stored in memory for later retrieval on the surface.
Cementing
This activity constitutes specialized construction work unique to exploratory and extracting oil field activities. After drilling successive stages of an oil well, the drill pipe is removed from the hole and a steel casing or liner is run into the bottom hole. During casing, a large-diameter pipe is lowered into an open hole and cemented in place to stabilize the wellbore. Sufficient cement is pumped down the surface casing to fill the space between the outside of the casing and the well bore all the way to the surface. Before cementing operations commence, the drilling mud that initially occupies both inside and outside of the steel tube is displaced by pumping a sequence of fluids down the inside of the tube from surface and returning up towards the surface in the annulus. Sufficient cement is pumped down the surface casing to fill the space between the outside of the casing and the well bore all the way to the surface. This leaves the liquid cement in the desired position, where it sets and forms a good hydraulic seal with the rock’ formation. Thus, the finished well consists of a telescopic sequence of cemented steel tubes.
Perforation
After the activities of cementing, casing and coil tubing, a special perforating tool is inserted into the casing and lowered to the desired position on the end of a cable. Then the shaped charges are fired remotely from the control truck at the surface and jets of high-temperature and velocity gas perforate the casing, the cement, and the surrounding rock for some distance away from the well bore. This allows oil and or gas from a producing zone to flow into the well.
Drill Stem Testing
A drill-stem test is conducted by the Assessee to obtain a sample of the fluids and gases contained in the formation or interval being tested as well as pressure information, which is determined by special gauges within the test tool. The test tool contains a valve, which may be opened and closed to allow formation fluids to enter the test tool and drill string. By analyzing the rate of flow or the amount of formation fluid recovered in the drill string and the formation pressures recorded, an indication of reservoir characteristics such as porosity, permeability, and the nature of the fluids or gas contained therein are obtained.
Fracturing
Fracturing activities are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. The fracturing process consists of pumping a fluid gel into a cased well at sufficient pressure to fracture the formation at desired depths.
2. Section 44BB was introduced in the Income Tax Act, 1961 vide Finance Act, 1987 w.e.f. 01.04.1983 and the Appellant has been assessed under Section 44BB since A.Y. 1983 consistently till A Y 2006-07. For the Assessment Year 2007-08 the Appellant had also sought its assessment under Section 44BB. However by the impugned Assessment Order passed in pursuance of directions of the Dispute Resolution Panel (‘DRP’) it has been held that the activities undertaken by the Appellant are royalty or fee for technical services and thus assessable under Section 115A of the Act and not Section 44BB. Only the activities rental income from equipment leased to companies engaged in production / exploration of oil by themselves has been held as amenable to benefit of Section 44BB by authorities below. In coming to this conclusion, both the Ld. A.O. as well as the Ld. DRP has held that the agreements are not composite and have to be bifurcated. The Appellant is presently in appeal against the said order of Ld. AO. The relevant provisions are reproduced as under;
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.
* Inserted by Finance Act, 2010 w.e.f. 01.04.2011
Tax on dividends, royalty and technical service fees in the case of foreign companies. 115A. (1) Where the total income of-
(b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,-
(AA) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of ten per cent if such royalty is received in pursuance of an agreement made on or after the 1st day of June, 2005;
(BB) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of ten per cent if such fees for technical services are received in pursuance of an agreement made on or after the 1st day of June, 2005; and
Explanation.-For the purposes of this section,-
(a) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
(c) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9.
Submissions on Grounds of Appeal
Ground of Appeal No. 1 (income of the Appellant is taxable under Section 44BB).
3.1 The Appellant submits that it is undisputed position that the income of the Appellant is governed by Section 44BB(1). The only contention of the revenue is that by virtue of the proviso to the said section the case of the Appellant is out of the purview of section 44BB of the Act and is instead governed by Section 115A.
3.2 Further, it is an admitted fact that the Appellant operates in India through a Permanent Establishment (PE) which has earned the income under consideration. The Appellant contends that the exclusion under the proviso to section 44BB does not apply to the Appellant for the year under consideration in as much as Section 115A is not application for the Appellant earns income through a PE and section 44DA is effective in the proviso only from AY 2011-12.
3.3 Further, in the case of a group company of the Assessee, the Hon’ble ITAT has concluded the availability of Section 44BB to the activities undertaken therein (which are similar to those of the Assessee) and that decision in DCIT v. Schlumberger Seaco Inc. [1994] 50 ITD 348 ITAT-Cal) has been upheld by High Court in 264 ITR 331 (Cal HC). In Schlumberger Seaco (supra). it was inter alia held by the Hon’ble ITAT as under;
6. In passing, it may be stated that the ITO did not object to the applications under Section 154 on the ground that there was no mistake apparent from the record. He has rejected the applications on the merits following his decision in the assessment for the assessment year 1987-88. We will therefore, proceed to an examination of the merits of the assessee’s claim that its income should be computed in accordance with Section 44BB. Section 44BB provides that in the case of an assessee being a non-resident which is engaged in the business of providing services or facilities in connection with the extraction or production of mineral oil. Its profits and gains from such business shall be equal to 10 per cent of the amounts received by it. Under the Explanation below the section, mineral oil excludes petroleum and natural gas. There is a proviso to Section 44BB (1) which says that this computation of the business income is not available if the income consists of fees for technical services, in which case Section 115A will apply. Under Section 115A, special rates of income-tax are prescribed in the case of foreign companies. If the income of the foreign company the present assessee is undisputedly a foreign company consists of fees for technical services in terms of an agreement made after 31-3-1976. such fees will be subjected to tax 40% for the assessment year prior to 1987-88 and 30% on and from the assessment year 1987-88. Under Section 44D(b) if the income of the foreign company is computed in accordance with Section 115A, there will be no deduction in respect of any expenditure or allowance and the gross income by way of fees for technical services will be taxed at the special rates. The Explanation in Section 115A defines fees for technical services as it has been defined in Section 9(1)(vii). Explanation 2. Under Explanation 2 to Section 9(1)(vii), fees for technical services means any consideration including lump sum consideration for rendering managerial, technical or consultancy service, including the rendering of services of technical or other personnel. It is expressly stated in the latter part of the Explanation that the fees for technical services will not include consideration “for any construction, assembly. mining or like project” undertaken by the assessee. If the case of the assessee falls within the main provision of Sub-section (1) of Section 44BB it is entitled to have its assessment made thereunder and 10% of the receipts win be subjected to income tax at the normal rates. If the case is covered by the proviso. thereto, the assessee will be taxed at the special rates under Section 115A. We have to necessarily find out whether the assessee is engaged in the business of providing services or facilities or supplying plant and machinery in the extraction or production of mineral oil. A perusal of the contracts in the present case indicates that all the incidents that are generally attached to the carrying on of a business are present. The contracts are for conducting wire line services for the explanatory wells of ONGC and OIL. The assessee has the requisite expertise. experience and technical know how in respect of conducting such services. It is useful to refer to the assessee’s letter written to the ITO in the course of the assessment for the assessment year 1987-88 explaining the nature of the work. The scope of the work required by the assessee is to provide the wire logging services to ONGC and OIL. The work is executed by the assessee with the help of wire logging equipment and tools and personnel to operate the same. The function of wire logging unit is to measure, record and log geological and geographical characteristic of the oil well by lowering an electric equipment at the end of electric cable into the well. The equipment measures the porosity, density, responsibility, conductivity, etc. of the oil and helps in determining the possibility of finding mineral oil or natural gas from the well. The assessee’s income consists of a monthly rental charged for the equipment and the tools and monthly charges for the crew provided to operate the equipment. The ITO has taken the view that the assessee is to render detailed and sophisticated services to ONGC and OIL. The assessee also provides technical personnel who operate the equipment. Therefore, the ITO has taken the view that the work involves not men and materials but it involves the rendering of technical services, the receipt in respect of which byway of fees has to be charged at the special rates under Section 115A read with Section 44D(h) read with Explanation 2 to Section 9(1)(vii). But this view of the ITO, in our opinion, has been rightly rejected by the CIT(A). The view of the CIT(A) requires to be upheld. The mere fact that the assessee is to supply the equipment as also the personnel to operate the equipment does not automatically mean that the assessee is rendering only technical services to ONGC and OIL. Section 44B(1) speaks of a business of providing services or facilities in connection with extraction or production of mineral oil and natural gas. It also speaks of the business of supplying plant and machinery for hire to be used for such purposes. No materials or evidence have been brought on record by the ITO to indicate that the assessee is not engaged for such business or that the activities in which the assessee engages itself do not bear the incidents of business. The preamble of the agreement recites that the assessee possesses the requisite expertise, experience and technical know-how in conducting wire line services. Apparently, such expertise or experience is the result of a continuous course of activity in rendering such services to various persons engaged in the extraction of oil all over the world. The assessee having engaged itself continuously in the above activity, it must be stated to have engaged itself in such business. Its business is the provision of the facility or service of rendering wire line services and also the provision of personnel to operate wire logging equipment. There is nothing in the agreements to show that such rendering of the services has not been undertaken by the assessee as part of its business activity. The ITO has relied upon the fact that the assessee is rendering technical services and, therefore, the income represents fees for technical services. There is difficulty in accepting this view. The income can be earned by rendering the services continuously and such services may also include technical services of the type rendered by the assessee. That does not mean that the assessee’s case is taken out from the main provision of Sub-section (1) of Section 44BB. The enquiry in cases of the present type, in our opinion, has to be whether the services or facilities are rendered or provided in such a manner as to constitute a business. The very fact that Section 44BB(1) also speaks of rendering of services shows that it cannot be stated that merely because the assessee has rendered some technical services the income arising therefrom must be treated only as fees for technical services taxable under Section 115A at the special rates. As held by the Supreme Court in Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449, the activities which constitute carrying on business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of a profession or vocation. Such activities may even consist of rendering services to others which services may be of a variegated character.
7. This necessarily takes us to the question as to what are the types of which would fall within the proviso to Section 44BB(1). The function of a proviso is to carve out an exception from the earlier part of a section which but for the proviso would have fallen within the scope of the earlier part of the section. A proviso cannot be construed as enlarging the scope of the main section. The proviso have to be read in the present case with the exclusionary part of Explanation 2 to Sec 9(1)(vii). In that Explanation it is clearly provided that any consideration receive for any mining or like project will not be treated as fees for technical services. Reading Sub-section (1) of Section 44BB together with the proviso thereto along with Explanation 2 to Section 9(1)(vii), it is clear that they operate on different fact situations. While the main enactment, namely, Sub-section (1) of Section 44BB speaks of a business in the provision of the services or facilities in connection with the extraction or production of mineral oil, there is no reference to any business in Explanation 2 to Section 9(1)(vii). Section 9(1)(vii), as is by now well known embodies the “source rule” in respect of fees for technical services. The emphasis that provision introduced by the Finance Act, 1976 with effect from 1-6-1976 is on the source of the income by way of fees for technical services. The income is considered as accruing or arising in India if the source from which it is derived is located in India. The person who is in receipt of the income may not be carrying on any business India. It is to rope in the income received by such persons who had successful avoided tax under the provisions which existed before 1-6-1976 which was considered to be insufficient or ineffective, that the source rule was brought in the form of Clause (vi) and Clause (vii) of Sub-section (1) of Section 9. This will be clear if reference is made to the Circular (c) T the Board explaining the source rule. In the Circular No. 202, dated 5-7-1976 [105 ITR (Statutes) 25].
3.4 Further, the Appellant is 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 and therefore entitled to benefit of Section 44BB as held in the following cases;
– Dy. CIT v. Schlumberger Seaco Inc. [1994] 50 ITD 348 (ITAT-Cal).
– Micoperi SPA Milano v. Deputy Commissioner of Income-tax, [2002] 82 ITD 369 (Tri. Mum)
11. In the present case, the assessee entered into two agreements with HHI and MDL for transportation, installation and hook-up of certain platforms at Bombay High offshore, The various other services rendered by the assessee are mentioned in detail in the respective agreements with HHI and MDL. The services rendered by the assessee are absolutely necessary for the prospecting for, extraction or production of mineral oils in the Continental Shelf of India or the Exclusive Economic Zone of India. The language used in Clause (B) is without any ambiguity and it is mentioned therein that “The provision of any services or facilities or supply of any ship, aircraft, machinery or plant.” The assessee had made provisions of various services and facilities for prospecting for or extraction or production of mineral oil in the Continental Shelf of India or Exclusive Economic Zone of India. The contention of the learned counsel that the Notification issued by the Central Government is not applicable to the assessee’s case because the assessee is a sub-contractor and the services to the ONGC had been rendered by the main contractors HHI and MDL is without any logical basis. The language used in the Notification is quite plain and clear and it only speaks about the services or facilities rendered for prospecting for or extraction or production of mineral oil. The Notification does not make a distinction between the contractor and the sub-contractor. The main contractors had not rendered any services for prospecting for or extraction or production of mineral oil from the High sea. They had only engaged the assessee to perform such services on High sea. But for the services of the assessee, it would not have been possible to prospect for or extract or produce any mineral oil from the High sea. Therefore, the services rendered by the assessee are intrinsically connected with the extraction of oil. Therefore, to say that the assessee had not rendered services to ONGC for the extraction of oil from the High sea is without any logical basis.
– Mc Dormott Intemationallnc. v. Deputy Commissioner of Income-tax, [1994]49 ITD 590 (Tri. Delhi)
– Assistant Commissioner of Income-tax v. Paradigm Geophysical Pty. Ltd., [2008] 117 ITJ 812 (Tri. Del.)
26. We now proceed to examine the contention of the learned CIT-Departmental Representative based on the proviso to s. 44BB(1). It says that the section shall not apply if the provisions of s.44D are applicable. Sec. 44D makes special provisions for computing the income by way of royalties etc. in the case of foreign companies. It has overriding effect and is applicable notwithstanding anything to the contrary contained in ss. 28 to 44C. It thus overrides even s. 44BB. Though the learned CIT-Departmental Representative contended that s. 44BB is not applicable to the assessee’s case if the assessee’s case falls under s. 44D, but he did not however elaborate the contention and explain how the assessee’s case fell under s. 44D. He however relied on art. XII(3)(a) and (d) of the treaty to contend that the amount received by the assessee under the contract represented consideration for the use of the Geolog software which was a copyright and also represented consideration for the rendering of technical or consultancy services (provision of personnel) which are ancillary and subsidiary to the application of the software. The contention, with respect, seems to overlook the basic principle that there can be no taxation under the double tax treaty. The treaty can come to the aid of the assessee if it is more beneficial or advantageous compared to the domestic law. However, the Revenue has to first demonstrate that the case of the non-resident assessee falls under the domestic law and it is for the assessee to take advantage of any beneficial or advantageous provision in the DTAA. In the present case, no arguments were advanced by the learned CIT-Departmental Representative to show how the assessee is covered by s. 44D and how the revenues under the contract can be treated as royalty within the meaning of the above section r/w Expln. 2 to s. 9(1)(vi) of the IT Act. The Instruction No. 1862 issued by the 80ard also rules out the applicability of s. 44D r/ws. 115A of the Act. Therefore, there is no need or legal justification to examine the applicability of art. XII(3)(a) or (d) of the treaty between India and Australia. We have already held that the provisions of s. 44BB are more appropriate to the present case. Accordingly, we hold that the assessee was right in contending and the CIT(A) was right in accepting the contention that the revenues under the contract are assessable in India under s. 44BB of the IT Act. We confirm his decision on this point and dismiss the ground.
– Scan Drilling Case (ITA No. 6147/Del/1987 dated June 24, 1989) (Tri. Delhi)
– In re, Lloyd Helicopters Pty. Ltd., [2001] 2491TR 162 AAR
– ONGC v. Assistant Commissioner of Income-tax, [2007] 107 TTJ 551 (Tri. Del.)
3.5 The Appellant further submits that the activities of the Appellant are not affected by the proviso to section 44BB. This is on account of the following reasons;
3.5.a Section 42 is applicable to those assesses who are themselves engaged in prospecting/production of mineral oil and hence not applicable to Appellant being a service provider.
3.5.b Section 44D is not applicable since the contracts entered into by Appellant are after 1st April 2003 [Please refer Page 6A to 6D]
3.5.c Section 293A is not applicable since no notification has been issued in this regard.
3.5.d Section 115A is not applicable since the Appellant is carrying on its activities through a Permanent Establishment in India.
3.5.e Even section 44DA is not applicable for the year under Appeal as the same is applicable only from AY 2011-12.
Appeal is covered in the favor of the Appellant by the decision of CGG Veritas.
3.6. The interplay of section 44BB with section 115A and 44DA has been explained by this Hon’ble Tribunal in the case of CGG Veritas [ITA No. 4653/0EU2010 dated 25.01.2012] wherein the legal position has been summed up (in paragraph 46) regarding the applicability of Section 115A and 44DA in the context of Section 4488 in the following terms;
46. On combined reading of Section 44DA(1) and 115A(1)(b) it is clear that the provisions of Section 44DA(1) are applicable in the case of a non-resident assessee who carries on business in India through a permanent establishment, or performs professional services from a fixed place of profession, and fees for technical services. paid under: the contract is effectively connected with such permanent establishment or fixed place of profession in India. In section 115A(1)
(b) the Finance Act, 2003 with effect from 1.4.2004 substituted words “a non-resident (not being a company) or a foreign company includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA” for words “a foreign company, includes any income by way of royalty or fees for technical services”. Therefore, w.e.f. 1.4.2004 fee for technical services which is not connected with permanent establishment of business or fixed place of profession in India, will be taxable u/s 115A(1)(b) of the Act. As observed earlier section 44DA was inserted in proviso to section 44BB(1) by the Finance Act, 2010 with effect from 1.4.2011 and simultaneously inserted second proviso to section 44DA applicable from assessment year 2011-12 according to which provisions of section 44BB (1) will not be applicable in respect of income referred to this section. On combined reading of proviso to section 44BB (1) and second proviso to section 44DA it is clear that the fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil though effectively connected with PE or fixed place of profession will fall not under section 44BB(1) and will be assessable under section 44DA of the Act. To make it more clear the fee for technical services can be divided in following categories:
(i) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil having business PE or fixed place of profession – (section 44DA);
(ii) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil without having business PE or fixed place of profession – (section 115A);
(iii) Other fee for technical services having business PE or fixed place of profession – (section 44DA);
(iv) Other fee for technical services without business PE or fixed place of profession – (section 115A);
Thus it is abundantly clear that with effect from assessment year 2011-12 fee for technical services whether rendered in connection with prospecting for or extraction or production of mineral oil or otherwise will be assessable either u/s 44DA or section 115A of the Act depending on fact whether such receipts are effectively connected with PE or fixed place of profession, or not. However, for assessment year 2004-05 to 2010-11 the consideration received for fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil though effectively connected with PE or fixed place of profession will fall outside the scope of section 44DA and will be assessable under section 44BB (1) of the Act for the simple reason that proviso to section 44BB(1) does not contain section 44DA for these years.
3.7 From the above it is evident that CGG Veritas it has been held that even if the assessee is engaged in earning income in the nature of ‘fee for technical services’ or ‘royalty’ and if the income is in connection with the business of exploration, etc. of mineral oils for the Assessment Year prior to 01.04.2011 then the income will be assessed under Section 44BB if the income is effectively connected with the permanent establishment. Further, Section 115A applies only to case of income in the nature of ‘fee for technical services’ if no Permanent Establishment is involved.
3.8 This is also supported by the decision of jurisdictional High Court in the case of Appellant itself in Schlumberger Asia Services Ltd. v ACIT Writ Petition No 2510 of 2010 wherein it has been held that the amendment by Finance Act, 2010, excluding the application of Section 44BB in cases where Section 44DA applies, is prospective and applies from assessment year 2011-12. In Schlumberger Asia Services (supra) the Hon’ble High Court has inter alia held as under;
As stated earlier, the combined effect of the provisions of Section 44BB, 44DA and 115A of the Act will not have a bearing to the cases in hand in as much as the Explanatory Note to the Finance Bill, 2010 clearly indicates that the amendments proposed in Section 44BB and 44DA of the Act would take effect from 1st April, 2011 and would apply in relation to the assessment year 2011-2012 and subsequent years. The amendment is prospective in nature and would not apply to the cases in hand which is of the earlier assessment years. Under the existing provisions contained in Section 44BB, 44D, Section 115A and Explanation II of Section 9(1)(vii) of the Act, it was open to the Assessing Officer to tax the petitioner either under Section 44BB or 44D or under Section 9 (1) (vii) of the Act on the basis of the material produced before him. The primary facts were placed by the assessee before the Assessing Officer, who after due enquiry and verification, applied its mind to the facts of each case and came to the conclusion that the assessee was liable to be taxed under Section 44 BB of the Act. The Explanatory Note to the Finance Bill has removed the doubts, which had been raised regarding the scope of Section 44BB vis-a-vis Section 44DA has only been made prospectively and cannot be used or applied for reopening the case under Section 147 and 148 of the Act. In any case, the explanatory note does not mean that there was failure on the part of the assessee as envisaged by the provisions of Section 147 or in any manner he assessee suppressed the material facts or failed to disclose fully and truly all material facts necessary for the assessment.
3.9 Thus in as much as in the present appeal the Assessment Year 2007-08 is involved and admittedly the income earned by the Appellant is effectively connected with the permanent establishment, even if (without prejudice to the forgoing submissions) the income is indeed in the nature of ‘fee for technical services’, still assessment cannot be made under Section 115A of the Act. Further, the Assessment Year being 2007-08, Section 44DA is also not applicable. For this reason alone, the impugned Assessment Order which has assessed the income under Section 115A of the Act is liable to be set aside.”
4. The Ld. A.O. has included a sum of Rs. 7,23,59,963/-received by the Appellant as reimbursements of certain expenses being customs duties paid by the Appellant on behalf of its clients, equipments lost in hole etc. It is submitting 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 the case of the Assessee itself. Income tax is leviable only on those receipts, which constitute ‘income’. “Income” as contemplated under the Act does not include “reimbursement of expenses”. There is no element of profit and gains in the reimbursements received by the Assessee, which has incurred expenses for and on behalf of other companies. Contractually the liability to incur these expenses was with those companies. Therefore the amounts towards reimbursement cannot be considered as income of the Assessee.
4.1 The Ld. Assessing Officer has also erred on facts and in law in not following the decision of the jurisdictional High Court of Uttarakhand in Assessee’s own cases DIT v. Schlumberger Asia Services Limited [2009] 317 ITR 156 and CIT v. Schlumberger Asia Services Limited [ITA No. 58 of 2006, Order dated 26-10-2007], which have held that such reimbursement does not constitute income. These decisions have also been followed by the Hon’ble Tribunal in Assessee’s own case ACIT v. Schlumberger Asia Services Limited, ITA No. 4180(Del)/2006 Order dated 13-04-2007.
4.2 In Schlumberger Asia Services Limited [2009] 317 ITR 156 it has been inter alia held as under;
7. Learned Counsel for the respondent submitted that for import of the machinery or equipment; liability to pay the custom duty was on the Oil and Natural Gas Corporation (for short ONGC), who has hired the services of the assessee in contract. It is further submitted that there cannot be element of profit in reimbursement of the custom duty, paid by the assessee. As such, it is contended on behalf of the respondent /assessee that CIT(A) and ITAT, has rightly held that said amount, received by the assessee is to be excluded in computing profits under Section 44BB of the Act.
8. Having considered submissions of learned Counsel for the parties, we are of the view that reimbursement towards the custom duty, paid by the assessee, being statutory in nature, cannot form part of amount for the purposes of deemed profits unlike the other amounts received towards reimbursement. Therefore, we do not find any sufficient reason to interfere with the impugned orders, passed by the ITAT, which has affirmed the view taken by the CIT(A). Question of law stands answered accordingly.
4.3 Thus when the issue has already been decided in favour of the Appellant in Appellant’s own case by the Hon’ble jurisdictional High Court, the impugned order in as so far as it is contrary to this declaration is liable to be set aside.
5. The Appellant submits that the income of the Appellant (a non resident) is subject to TDS under Section 195. Hence the interest liability under Section 234B and 234C does not arise as held by jurisdictional Hon’ble High Court of Uttarakhand in the case of the Appellant itself [Commissioner of Income-tax v. Schlumberger Asia Services Ltd. (ITA No. 58 of 2006)].
5.1 The following decisions also squarely cover the case of the Appellant;
(a) CIT v. Oil Ltd, (ITA No. 56 of 2007) Uttaranchal High Court
8. Having gone through both the above mentioned case laws, we are of the view that now it is settled principle of law that where it is the duty of the non resident foreign company, who engaged the individual assessee, who is non resident foreign company, to deduct the tax at source, the individual assessee cannot be made liable to pay the interest under Section 234B for default on the part of the company who engaged or employed such individual.
(b) CIT v. Halliburton Offshore Services Inc., [2004] 271 ITR 395 Utf.
(c) Sedco Forex International Drilling Inc. v. DCIT, [2000] 72 ITD 415 (ITAT-Del)
(d) Motorola Inc. v. DCIT [2005] 95 ITD 269 (ITAT-Del)
(e) CIT v. Madras Fertilizers Ltd, [1984] 149 ITR 703 (Mad)
(f) M.M. Ratnam v. Income-tax Officer, [1997] 62 ITD 21 (ITAT-MUM).”
6. The contention of the Revenue are summarized as under
“1. The decisions rendered in CGG Veritas Services SA v Addl Director of Income Tax (Int Tax)(ITAT, Delhi), ITA 4653 of 2010 (Del ITAT) dt.25.01.2012, has a binding precedent on various matters relating to taxability of FTS in general. However, it is not a binding precedent as regards the taxability of an assessee having a PE, since it was rendered specifically for an assessee which does not have a PE. Any reference to taxability of an assessee having PE is only obiter.
2. BJ Services Company Middle East ltd. & Others v. DDIT(Int Tax) (Utt He) & DClT v. Chlumberger Seaco Inc. (ITAT, Kolkata) dt 14 .02.1994 cited by the assessee, are not binding precedents for the present case.
3. The legislative history of the Sections 9, 115A, 44D, 44BB and 44DA shows that FTS, whether or not PE is present, and regardless of the fact the assessee is rendering services in connection with prospecting/exploration/extraction of mineral oil, are not taxable in u/s 44BB. This is specifically supported by the binding decisions of jurisdictional Uttaranchal High Court in CIT v. ONGC as Representative Assessee of Rolls Royce (P.) ltd.[200S] 170 TAXMAN 563/214 CTR 135 and CIT v. O.N.G.C. [200S] 299 ITR 43S. Under the scheme of the Act, FTS can be taxed only u/ss. 115A, 44D or 44DA.
4. The amendments vide Finance Act 2010, inserting mutually exclusionary clauses in s. 44BB and s.44DA are c1arificatory, and hence are retrospective in operation, w.e.f. AY 2004-05.
5. The services being offered by the assessee it to its clients, viz., Wirelogging, Logging while drilling (LWD)/ Measurement While Drilling (MWD), Cementing, Perforation, Drill Stem Testing and Fracturing are technical services, and hence outside the ambit of S.44BB.
6. The claim of the assessee, that the work done by it is in the nature of composite and indivisible contracts, is not supported by any evidence. Hence the consideration received by it under different heads has been rightly split by the assessee into Fees for Technical Services (FTS) and Royalty (being rental receipts of Plant &Machinery).
7. The services rendered by the assessee falls within the scope of Technical Services as defined in Sec 9(1)(vii) Expln. 2 and are not excluded as consideration of “construction, assembly, mining or like project”.
8. The income received from services provided by the assessee is in the nature of managerial, technical or consultancy services; the fact that services have been rendered using machines, is not relevant.
9. FTS received from other non-resident companies, towards services rendered, cannot be taxed u/s 44DA or u/s 115A; however, they are to be taxed as business income under the regular provisions under the head “Income from business”.
10. The amount received from E&P (Exploration & Prospecting) companies, towards rental of equipment is taxable u/s 44BB. However, rental income from non-E&P companies is taxable as “royalties”, and lies outside the ambit of S.44BB.
11. Amounts received towards reimbursement of certain non-statutory expenses such equipment lost etc are to be included in receipts for taxation u/s 44BB, in case of rental receipts from E&P companies.
12. The rule of res judicata does not apply to assessment proceedings under the Income Tax Act. Although the A.O, in the earlier assessment years had allowed taxability u/s 44BB, he was justified in applying the correct law in the current assessment year, instead of perpetuating a mistake. The principle of consistency does not operate against law.
13. The assessee’s claim that its activities, being similar to that of another assessee in the decision rendered by ITAT Kolkata in DClT v Schlumberger Seaco 50 ITD 348(1994), A.O. should have followed that decision is without basis, since the reasoning in that decision has not found favour with in subsequent decisions of the Delhi High court and ITAT, Delhi.
14. The CBDT instruction no 1862 dt 22.10.1990 is of no help to the assessee. The Instruction cannot be applied to take a case out of the ambit of S. 115A and place it in S.44BB.
15. Sec 44BB is not a specific provision. On the contrary, Sec 44DA, which is a specific provision, and is not overruled by S.44BB.
16. Interest u/s 234D is mandatorily leviable.
17. Appeal does not lie against mere initiation of penalty proceedings u/s 271B “
7. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that section 44BB was introduced in the Income Tax Act, 1961 vide Finance Act, 1987 w.e.f. 01.04.1983 and the assessee has been assessed under Section 44BB since A.Y. 1983 consistently till A Y 2006-07. For the Assessment Year 2007-08 the assessee had also sought its assessment under Section 44BB. However by the impugned Assessment Order passed in pursuance of directions of the Dispute Resolution Panel (‘DRP’) it has been held that the activities undertaken by the assessee are royalty or fee for technical services and thus assessable under Section 115A of the Act and not Section 44BB. Only the activities rental income from equipment leased to companies engaged in production/exploration of oil by themselves has been held as amenable to benefit of Section 44BB by authorities below. In coming to this conclusion, both the Ld. A.O. as well as the Ld. DRP has held that the agreements are not composite and have to be bifurcated.
7.1 In this regard, we note that assessee has submitted it is an undisputed position that the income of the assessee is governed by Section 44BB(1). The only contention of the revenue is that by virtue of the proviso to the said section the case of the assessee is out of the purview of section 44BB of the Act and is instead governed by Section 115A. It has further been submitted that it is an admitted fact that the assessee operates in India through a Permanent Establishment (PE) which has earned the income under consideration. The Assessee contends that the exclusion under the proviso to section 44BB does not apply to the Assessee for the year under consideration in as much as Section 115A is not applicable for the assessee who earns income through a PE. It has further been submitted that section 44DA is effective in the proviso only from AY 2011-12.
7.2 We find considerable cogency in these submissions. We note that it is the contention of the assessee that in the case of a group company of the Assessee, the ITAT has concluded the availability of Section 44BB to the activities undertaken therein (which are similar to those of the Assessee) and that decision in Dy. CIT v. Schlumberger Seaco Inc. [1994] 50 ITD 348 (Cal) has been upheld by High Court in CIT v. Schlumberger Sea Co. Inc. [2003] 264 ITR 331/[2002] 124 Taxman 358 (Cal.). Further, it is the contention of the assessee that assessee is 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 and therefore entitled to benefit of Section 44BB as held in several cases laws. It has further been the contention of the assessee that the activities of the assessee are not affected by the proviso to section 44BB. This is on account of the following reasons;
(a) Section 42 is applicable to those assesses who are themselves engaged in prospecting/production of mineral oil and hence not applicable to Appellant being a service provider.
(b) Section 44D is not applicable since the contracts entered into by Appellant are after 1st April 2003 [Please refer Page 6A to 6D]
(c) Section 293A is not applicable since no notification has been issued in this regard.
(d) Section 115A is not applicable since the Appellant is carrying on its activities through a Permanent Establishment in India.
(e) Even section 44DA is not applicable for the year under Appeal as the same is applicable only from AY 2011-12.
We find ourselves in agreement with the assessee’s contention as above.
7.3 It has further been the contention of the ld. counsel of the assessee that the appeal is covered in the favor of the assessee by the decision of CGG Veritas Services, SA v. Addl. DTI, International Taxation [2012] 18 taxmann.com 13 (Delhi). In this decision, the tribunal has elaborately discussed the interplay of section 44BB with section 115A and 44DA. The tribunal has expounded in this case that the fee for technical services can be divided in following categories:
(i) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil having business PE or fixed place of profession – (section 44DA);
(ii) Fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil without having business PE or fixed place of profession – (section 115A);
(iii) Other fee for technical services having business PE or fixed place of profession – (section 44DA);
(iv) Other fee for technical services without business PE or fixed place of profession – (section 115A);
7.4 The tribunal has further held that it is abundantly clear that with effect from assessment year 2011-12 fee for technical services whether rendered in connection with prospecting for or extraction or production of mineral oil or otherwise will be assessable either u/s 44DA or section 115A of the Act depending on fact whether such receipts are effectively connected with PE or fixed place of profession, or not. However, for assessment year 2004-05 to 2010-11 the consideration received for fee for technical services rendered in connection with prospecting for or extraction or production of mineral oil though effectively connected with PE or fixed place of profession will fall outside the scope of section 44DA and will be assessable under section 44BB (1) of the Act for the simple reason that proviso to section 44BB(1) does not contain section 44DA for these years.
7.5 Thus, it is evident that in the decision of CGG Veritas SA (supra), it has been held that even if the assessee is engaged in earning income in the nature of ‘fee for technical services’ or ‘royalty’ and if the income is in connection with the business of exploration, etc. of mineral oils for the Assessment Year prior to 01.04.2011 then the income will be assessed under Section 44BB if the income is effectively connected with the permanent establishment. Further, Section 115A applies only to case of income in the nature of ‘fee for technical services’ if no Permanent Establishment is involved.
7.6 Further, the Hon’ble Jurisdictional High Court in the case of the assessee itself in Schlumberger Asia Services Ltd. v ACIT [Writ Petition No 2510 of 2010] wherein it has been held that the amendment by Finance Act, 2010, excluding the application of Section 44BB in cases where Section 44DA applies, is prospective and applies from assessment year 2011-12. Thus, in as much as in the present appeal the assessment year is 2007-08 is involved and admittedly the income earned by the assessee is effectively connected with the permanent establishment, even if the income is indeed in the nature of ‘fee for technical services’, still assessment cannot be made under Section 115A of the Act. Further, the Assessment Year being 2007-08, Section 44DA is also not applicable. For this reason alone, the impugned Assessment Order which has assessed the income under Section 115A of the Act is liable to be set aside.
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 the case of the Assessee itself. Income tax is leviable only on those receipts, which constitute ‘income’. “Income” as contemplated under the Act does not include “reimbursement of expenses”. There is no element of profit and gains in the reimbursements received by the Assessee, which has incurred expenses for and on behalf of other companies. Contractually the liability to incur these expenses was with those companies. Therefore the amounts towards reimbursement cannot be considered as income of the Assessee. Furthermore, we note that assessee’s contention is that that Ld. Assessing Officer has also erred on facts and in law in not following the decision of the jurisdictional High Court of Uttarakhand in Assessee’s own cases DIT, International Taxation v. Schlumberger Asia Services Limited [2009] 317 ITR 156/[2010] 186 Taxman 436 and CIT v. Schlumberger Asia Services Ltd. [IT Appeal No. 58 of 2006, Order dated 26-10-2007], in which it was held that such reimbursement does not constitute income. These decisions have also been followed by the Hon’ble Tribunal in Assessee’s own case ACIT v. Schlumberger Asia Services Ltd. [IT Appeal No. 4180(Del)/2006 Order dated 13-04-2007]. We find considerable cogency in assessee’s submission as above. Hence, we hold that the Assessing Officer has erred in including Rs. 723,59,963/- received by the assessee as reimbursements for determining the taxable income of the assessee.
7.8 It has further been submitted by the assessee that the income of the assessee (a non resident) is subject to TDS under Section 195. Hence the interest liability under Section 234B and 234C does not arise as held by jurisdictional Hon’ble High Court of Uttarakhand in the case of the assessee itself Schlumberger Asia Services Ltd. (supra). We find that the submission cogent enough. Thus, we hold that assessee is not liable under section 234B and 234C.
7.9 The following decision also squarely cover the case of the Assessee:-
(a) CIT v. Oil Ltd, (ITA No. 56 of 2007) Uttaranchal High Court. In this case it was held that having gone through both the above mentioned case laws, we are of the view that now it is settled principle of law that where it is the duty of the non-resident foreign company, who engaged the individual assessee, who is non resident foreign company, to deduct the tax at source, the individual assessee cannot be made liable to pay the interest under Section 234B for default on the part of the company who engaged or employed such individual.
7.10 We find that it is the revenue’s contention that the decision rendered in CGG Veritas Services SA (supra) is not applicable. As it has been contended that the said decision is binding precedent on various matters relating to taxability of an assessee having a PE, since it was rendered specifically for an assessee which does not have a PE. Any reference to taxability of an assessee having PE is only obiter. We do not agree with these submission of the revenue. We find that the exposition of the tribunal in that case are very much applicable in the present case and it cannot be said to be obiter dicta.
7.11 It has further been the contention of the revenue that the amendments vide Finance Act 2010, inserting mutually exclusionary clauses in s. 44BB and s.44DA are clarificatory, and hence are retrospective in operation, w.e.f. AY 2004-05. We find that this contention is not at all correct as the said provision of the Act cannot be said to be clarificatory and hence retrospective in operation. In this regard in the case of CGG Veritas Services SA (supra) comes to the rescue of the assessee. Furthermore, the Jurisdictional High Court in the case of the assessee itself in Schlumberger Asia Services Ltd. (supra) wherein it has been held that the amendment by Finance Act, 2010, excluding the application of Section 44BB in cases where Section 44DA applies, is prospective and applies from assessment year 2011-12.
7.12 As regards levy of interest u/s. 234D is concerned, we agree with the revenue that the same is mandatorily leviable. The assessee has not been able to put forth any cogent reasoning as to why interest u/s. 234D is not applicable to the assessee.
7.13 We have carefully gone through the other contention raised by the revenue and find that there is lack of cogency in the same.
8. Since we have adjudicated and allowed ground no. 1 in favour of the assessee, adjudication on alternative ground no. 2 and ground no. 3 is not being done.
9. In the result, the appeal filed by the Assessee is partly allowed.
