Income of foreign companies providing technical services and data to oil exploration and production companies in India will be taxed at a concessional rate, the Authority for Advance Rulings (AAR) on income tax has said in a recent decision. The ruling will be a big help to oil prospecting companies in India as they step up exploration activities, allowing them to avail of technical services and data more easily.
The last round of auction of hydrocarbon exploration blocks under the new exploration licensing policy (Nelp-VIII ) in October received 76 bids for 36 of the 70 blocks on offer. These blocks will be available for exploration early next year and the winning bidders will need both technical services and data to begin prospecting.
The AAR ruling relates to UAE-based Seabird Exploration FZ LLC, a geophysical company that conducts seismic surveys and provides offshore seismic data to global oil companies.
The company had sought a ruling from the authority with regard to the tax liability on its income from three contracts it had entered into with ONGC for carrying out seismic, gravity and magnetic data acquisition and onboard seismic data processing in different survey areas off the country’s western and eastern coasts.
The company had sought to know from the AAR if the lower effective rate available under the special provision of Section 44BB of the Income-Tax Act would apply to it.
Under this Section, 10% of total gross receipts is deemed to be the total income from the activity and taxed at the rate of 40% applicable for foreign companies. The effective rate thus comes down to 4%.
The AAR rejected tax authorities’ contention that the income from supply of technical knowhow, such as seismic data for exploration activity, was to be treated as fee for technical services and taxed at the rate of 10%. The lower tax rate will make it more attractive for foreign companies to offer such services to Indian exploration firms.
“The authority’s ruling is very much in line with the intent and coverage of the Section 44BB of the Income-Tax Act and, hopefully, should settle similar issues relating to oil exploration and production,” said Ernst & Young partner Amitabh Singh.
The AAR is a quasi-judicial body, set up to give opinion to guide companies on their potential tax liabilities. While rulings by the AAR are case-specific, they have a persuasive impact on tax assessment in case of other firms facing similar circumstances.