OHM Limited Vs. DIT (AAR No. 935 of 2010) – Foreign firms operating in the country will have to pay tax at the existing rate of 4.223 per cent on revenue earned under seismic data acquisition and processing contracts, says a tribunal. In a ruling, the Authority of Advanced Rulings (AAR) held that foreign firms would not enjoy any leeway even if their income falls under the label of royalties or is considered as fees for technical services.=
“The entire mobilization or demobilization revenues received by the applicant with respect to seismic data acquisition and/or processing contracts would be taxable in India at the effective rate of 4.223 per cent,” the AAR said.
Mobilization and demobilization revenues are the fees levied by a contractor for transporting the seismic equipment or vessel and personnel to and from a project site, as well as costs linked to establishment of site offices and other facilities.
The AAR”s ruling came in response an application filed by UK-based firm OHM Ltd, which provides geophysical services to oil and gas exploration industry.
OHM had sought to know whether revenues earned by it under seismic data acquisition and processing contracts in India are taxable under the Income Tax Act.
“Even if part of the income falls under ”Royalties” or ”Fees for Technical Services”, there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged under section 44BB,” the AAR said.
Section 44BB of the Income Tax Act deals with computing profits and gains in connection with the business of exploration, including mineral oils.
BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)
16th Day of May, 2011
A.A.R. No.935 of 2010
Mr. Justice P. K.Balasubramanyan (Chairman) Mr. V.K. Shridhar (Member)
Name & address of the applicant
C/o Pinsent Masons LLP 30 Aylesbury Street
Director of Income-tax
(International Taxation)- I, Delhi
Present for the applicant
Dr. Anita Sumanth, Advocate
Mr. Taranpreet Singh, FCA
Mr. Satish Aggarwal, FCA
Mr. Hitesh Jain, ACA
Present the Department
Ms Priyanka Singh, ADIT, Circle 2(1)
International Taxation, New Delhi
(By Mr. V.K. Shridhar)
The applicant, OHM Limited, is a company incorporated under the laws of United Kingdom and is a tax resident of United Kingdom. It provides geophysical services to oil and gas exploration industry. It conducts electromagnetic surveys, processing and interpretation of data so acquired through such surveys for offshore oil industry. Petrogas E&P, LLC has awarded contract to the applicant for provision of Marine Magneto Telluric and Transient Electro Magnetic (MMT/TEM) data acquisition, processing and interpretation services in respect of an offshore exploration block MB-OSN-2004/2 in India. The applicant states that these MMT/TEM survey is electromagnetic geophysical method of imaging the earth‟s subsurface. Data acquired through such surveys is further processed using specialized software to get the information about existence of hydrocarbons underneath. The entire process starting from conducting the survey and then processing and interpretation of data acquired through survey is driven towards assisting the oil and gas clients in their exploration operations. The services are part of the exploration/prospecting activities for mineral oil and clearly fall under the ambit of section 44BB of the Act. The applicant further states that for the purposes of conducting seismic surveys, the vessel is mobilized from outside India to the site area in India where the work is to be carried out. Similarly, when the vessel is demobilized, after completion of the work, it involves moving out of equipment and personnel from the site area. The applicant is paid for mobilization as well as demobilization of its vessel from site area. In its view, the mobilization/demobilization revenues taxable in India should be restricted only to the revenues attributable to the distance travelled in the Indian territorial waters as compared to the total distance travelled to/from India.
2. Advance ruling is sought on the following questions framed by the applicant:-
1)Whether revenues earned or to be earned by the applicant under seismic data acquisition and processing contracts in India are taxable under section 44BB of the Income-tax Act (‘Act’) at of effective tax rate of 4.223%?
2)Whether entire mobilization/demobilization revenues received by the
applicant with respect to seismic data acquisition and/or processing contracts would be taxable in India or revenues attributable to distance travelled by the vessel in India would be taxable in India.
3. As regards the first Question, the revenue in its written submissions has contended that the services contemplated in section 44BB are services other than those coming within the purview of Explanation 2 to section 9(1)(vii) of the Act. The services extended by the applicant fall under Explanation 2. It is submitted that the income by way of fees for technical services chargeable under section 9(1)(vii) has to be computed under Sec. 44DA in a case like this where the service provider has a Permanent Establishment in India. It is contended that the exclusion clause in Explanation 2 does not apply in the case of the applicant because it is not undertaking a mining or like project. Such project is undertaken by someone else and certain technical services are rendered by the applicant to the business enterprise that takes up the project. In short the Revenue contends that section 44 BB would come into play only if the applicant goes out of the purview of section 9(1)(vii) of the Act, read with Explanation 2 thereof.
4.In response, applicant has stated that this Authority had the occasion to examine the issue in the case of Geofizyka Torun Sp.zo.o, in AAR/813 of 2009, 320 ITR 268 wherein this Authority, after a detailed discussion, held the view that:
“If the business is of the specific nature envisaged under 44 BB, the computation provision therein would prevail over the computation provision in section 44 DA. In other words the income received by a nonresident business man for the technical services provided in relation to prospecting and extraction of mineral oil, will be governed by S.44 BB for the purposes of computation. If all the services that are in the nature of technical services within the meaning of Explanation 2 to section 9(1)(vii) are to be computed in accordance with 44 DA, very little purpose will be served by incorporating special provision in 44 BB for computing the profits in relation to the services connected with the exploration and extraction of mineral oils. The provision will then operate in a very limited field.” (refer Para 8.1).
It was then observed that:
“it is not our view that section 44 BB will become otiose or altogether redundant, but it is our view that its scope and content will be unduly curtailed by adopting the interpretation sought to be placed by the revenue” (refer para 9.8)
We do not feel the necessity to reopen the discussion on this question as we hold the same view. Question No.1 is answered in the affirmative.
5.As regards the second Question, the learned Advocate on behalf of the applicant submits that section 4 of the Act provides that income tax shall be charged in respect of the total income of the previous year. Total income under section 2(45) of the Act means the total amount of income referred to in section 5 computed in the manner laid down in the Act. Unless the income is subjected to tax under section 5, it can not be computed in the manner provided in the Act. The income can be subjected to tax in India only if it accrues or arises in India or is deemed to accrue or arise in India. Thereafter, under Explanation to section 9(1)(i), income of the business in which all the operations are not carried out in India, only such part of income as is reasonably attributable to the operations carried out in India would be the income deemed to accrue or arise in India. Applying the above stated law the applicant is of the view that any receipt can be subjected to tax under section 44 BB only if it is chargeable to tax under the Act. The learned Advocate submitted that mobilization and demobilization revenues to the extent attributable to journey of the vessel outside India should be excluded from the computation of income under section 44BB. As no objection is raised by the Revenue, the applicant‟s proposal be accepted. It is then prayed that the above issues arising out of Question No: 2 in the application be subjected to a Ruling only in the event the Authority decides the first issue in the negative and against the applicant. In the event the Authority is pleased to hold the first issue in favour of the applicant, the second question may be kept open to be agitated by the applicant before the assessing authority.
6. Once an assessee opts to come under Section 44BB(1) of the Act, the provision itself deems its profits and gains as 10% of the aggregate of the amounts specified in sub-section (2). Sub-section 2 (a) specifies that that aggregate amount is the amount paid or payable whether in or out of India to the assessee on account of provision of services in India. In the scenario, there is no scope for splitting up the amount payable to the assessee. If the assessee wants to seek such a splitting up it has to go under section 44BB(3) of the Act.
7. Section 44BB does not close its doors to an applicant who desires to know which part of its income accrues or arises in India and how much. The applicant can exercise its rights provided it opts to get the income taxed under section 44BB(3) of the Act. The scheme of computation of income under this section does not provide any leeway to apply both the sub-sections (1) and (3) of section 44BB to the income arising from the business activities falling under the ambit of section 44BB(1) of the Act. Even if part of the income falls under „Royalties‟ or “Fees for technical Services‟, there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged under section 44BB. We are of the view that if the applicant desires to know the answers to the two issues, then it has to first exercise the option to get its income computed under section 44BB(3). In view thereof, we answer the Question No.2 by saying that the entire mobilization/demobilization revenues received by the applicant with respect to seismic data acquisition and/or processing contracts would be taxable in India at effective rate of 4.223%.
Accordingly, ruling is given and pronounced on 16th day of May, 2011.