Global Geophysical Services Limited (A.A.R. No. 873 of 2010)- Would the special provisions for computing profits under section 44BB be applicable to a non-resident carrying on business of seismic data acquisition and processing under contract with Indian concerns?
On an application made to the Authority of Advance Ruling by the non-resident on the above issue, the Authority observed that in an identical issue in Geofizyka Torun SP. Z.O.O. (2010) 320 ITR 0268 (AAR), it was observed that without seismic data acquisition and interpretation, it is impractical to carry out the activity of prospecting of mineral oil and gas which is a step in aid to its exploration. The seismic data (in processed form) is used to create highly accurate images of the earth’s sub-surface which in turn are used by the exploration and production companies for locating potential oil and gas reserves based upon the geology observed.
Accordingly, in this case, the AAR ruled that the said activities and services of the applicant clearly fell within the description of section 44BB and the income derived by the applicant under the contracts with Indian concerns, namely ONGC and Cairn Energy, for seismic data acquisition and processing were to be computed under the provisions of section 44BB.
Before the Authority for Advance Rulings
(Income-tax) New Delhi
Mr. Justice P.K. Balasubramanyan (Chairman) Mr. J. Khosla (Member) Mr. V.K. Shridhar (Member)
A.A.R. No.873 of 2010
|Name & address of the applicant||Global Geophysical Services Limited C/o Apple by Corporate Services (Cayman) Limited Clifton House 75, Fort Street, PO box 1350 GT George Town Grand Cayman|
|Commissioner concerned||Director of Income-tax (International Taxation-II), New Delhi|
|Present for the Applicant||Mr. Percy Pardiwala, Sr. Advocate Mr. Nitiesh Joshi, Advocate Mr. Jignesh Shah, CA Mr. Mohit Gandhi|
|Present for the Commissioner||—|
Date of Ruling: 15th Day of March, 2011
R U L I N G
(By Mr. J. Khosla)
Global Geophysical Services Limited is the applicant company incorporated under the laws of Cayman Islands and therefore it is a non-resident. The applicant is engaged in the business of seismic data acquisition and processing for exploration companies on a worldwide basis. The seismic data (in processed form) is used to create highly accurate images of the earth’s subsurface which in turn are used by the exploration and production companies for locating potential oil and gas reserves based upon the geology observed.
2 The applicant was awarded a contract by Oil and Natural Gas Corporation Limited (ONGC ) to undertake 3D ocean-bottom cable (OBC) seismic data acquisition and on board processing in western offshore region, India, 2007-08. It has established a project office at Mumbai after taking the necessary permission from the concerned authorities in order to undertake the work. The applicant again entered into a contract with ONGC for 3D OBC seismic data acquisition and processing in Navsari Low area in the West coast, India, for field season 2008-09. The scope of work is delineated in Annexure-I to the contract dated 19th December, 2008. The work volume is given in Annexure-II to the contract. Under the ONGC contract, the applicant is also required to provide suitable and fully equipped survey vessels for OBC with spares and consumables. During the acquisition phase, the applicant is to undertake the recording of:
(I) 3D OBC seismic data acquisition as per specifications provided in the ONGC contract;
(ii) recording of bathymetry data concurrently with seismic data acquisition;
(iii) navigation and positioning data unambiguously tied with seismic and bathymetric data; and
(iv) on board processing of seismic trace data for quality control purposes.
2.1 The primary objective of 3D processing of seismic data acquired in the areas in the western offshore is to obtain accurate high resolution imaging with geological objectives prescribed under the ONGC contract. The ONGC contract was initially entered with a validity period up to May 31, 2009. However, the ONGC contract was extended for data acquisition activity up to December 31 2009 and for data processing activity up to February 28, 2010 since the applicant could not complete the contract within the stipulated period.
2.2 The applicant has also entered into a contract with Cairn Energy in November, 2008 for acquisition of 4D OBC Marine seismic data off the east coast of India. The scope of work under this contract includes, without limitation, provision of all equipment, materials and supplies in accordance with the terms of this contract. The applicant is to provide and keep available its personnel at the designated survey area of Rava field, Krishna-Godavari basis in India. As the applicant could not commence the work, this contract was terminated vide letter dated March 9, 2009. Further this contract was amended and restarted vide letter dated March 23, 2009 with completion period by pre-monsoon 2010.
2.3 The applicant has offered to tax its total income received under the contracts for the financial years 2007-08 and 2008-09 having regard to the provisions of section 44BB of the Income-tax, Act, 1961 (hereinafter referred to as the “Act‟) In August, 2009, the applicant has received a notice for initiation of scrutiny proceedings for financial year 2007-08 under section 143(2) of the Act from the Assessing Officer (AO) based in New Delhi. In response to this the applicant filed an application under section 127 of the Act to transfer its case from New Delhi to Mumbai. Further, an application was filed with the Deputy Director of Income-tax (International Taxation), Dehradun (DDIT) in July, 2009 for determination of the rate of tax withholding applicable on payments made to the applicant under the ONGC contract. The DDIT issued an order under section 197 of the Act directing the ONGC to deduct tax after applying a deemed profit rate of 10% on gross contractual payments including payments arising on account of reimbursement of all type of expenditure to be made to the applicant. The DDIT has further directed the applicant to file its return with tax authorities in Dehradun as per Central Board of Direct Taxes notification no. 1680E dated August 28, 2007.
2.4 Against this background, the applicant submits the following question for a ruling of this Authority:
“Whether on the facts as set out in the Annexure II to this application, the income derived by Global Geophysical Services Limited (the “Applicant‟) under the contracts with Oil and Natural Gas Corporation Limited (“ONGC‟) and Cairn Energy India Pty Limited (“Cairn Energy‟) is to be computed by applying the provisions of section 44BB of the Income-tax Act 1961 (the “Act‟)?”
3. Although notice was issued to the Revenue, neither did it furnish its comments nor was it represented during the hearing of this case.
4. Shri Percy Pardiwala, learned Sr. Counsel, while arguing the case on behalf of the applicant, has reiterated the stand taken in the application and submitted that the services rendered by the applicant is for prospecting of mineral oil. He has supplied the meaning of the word “prospect‟ from the dictionary of Science and Technology wherein it means:
“Area which shows sufficient promise of mineral wealth to warrant exploration. Methods of search include aerial survey, magnetometry, geophysical and geo chemical tests, seismic probe, electroresistivity measurement, pitting, trenching and drilling”.
4.1 He has also cited the following cases in support of his contention:
(i)  298 ITR 194(SC) – Deputy Commissioner of Income-tax v. Core Health care Limited.
(ii)  320 ITR 290 (AAR) – Wavefield Inseis ASA. In re (AAR)
(iii)  322 ITR 645 (AAR) – Wavefield Inseis ASA. In re (AAR)
(iv)  320 ITR 268(AAR)- Geofizyka Torun SP. Z.O.O., in re(AAR)
(v)  320 UTR 286 (AAR)- Seabird Exploration FZ LLC, in re(AAR)
4.2 The learned Sr. Counsel further submits that the applicant is engaged in seismic data acquisition and provision of associated services such as processing and interpretation of seismic data for oil and gas exploration companies. Seismic data acquisition is acquisition of data/information relating to earth’s structure in order to identify the existence of hydrocarbons, underneath. Seismic surveys paint the picture of the sub-surface in order to better target oil and gas reserves. The results help in assessing the potential for tapping oil and gas at a particular spot. Seismic surveys are conducted to gather data to understand the size and location of oil fields so that the risk involved in exploratory drilling could be reduced. Hence, such services are aimed at increasing the exploration success of oil and gas exploration companies by assisting them in maximising the production from existing reservoirs.
5. Now let us examine how far the activities of the applicant do attract the computation specified in section 44BB of the Act. Before we delve on this point, we extract below the section 44BB of the Act for appreciation:
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.
(2) The amounts referred to in sub-section (1) shall be the following, namely :—
(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.
[(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.]
Explanation.—For the purposes of this section,—
(i) “plant” includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;
(ii) “mineral oil” includes petroleum and natural gas.]
5.1 This is a provision for computation in respect of non-resident assessee engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire uses, or to be used, in the prospecting for, or extraction or production of, mineral oils. In the instant case the applicant is a non-resident assessee. It has entered into a contract with ONGC as well as Cairn Energy to conduct seismic survey and the data acquisition activities. It has specialisation for identifying the surface of the ocean for tapping gas and oil reserves. Unless a seismic survey is taken, it is difficult to locate the ocean surface with oil and gas reserves. Drilling and other examinations are ancillary for this purpose. We have already mentioned the activities of the applicant in para 4.2(supra) and therefore it is unnecessary to repeat the same. The activities/services as specified in the preceding paragraphs amply demonstrate that these are meant for prospecting for mineral oils. Therefore, in our view the activities of the applicant fit into description of section 44BB demanding computation of its income in accordance with this provision.
5.2 This Authority had the occasion to deal with an identical issue in Geofizyka Torun’s case (supra) wherein a graphic picture of exploration is given in the middle passage of para 14 of the ruling which is extracted below:
The seismic survey and data acquisition, as stated by the applicant, is a prelude and a very critical component of the oil and gas exploration activity. Without seismic data acquisition and interpretation, it is impracticable to carry out the activity of prospecting which is a step in aid to exploration. It would be difficult to locate hydro-carbons without conducting seismic survey and the utilisation of data emerging from it. The services of the nature undertaken by the applicant have a direct and definite bearing on the prospecting/exploration activities and they are integral to the said activities undertaken by petroleum and gas enterprises. It can by no means be said that the geophysical services have nothing to do or only remotely connected with the exploration of mineral oils. In fact, there is no serious dispute on this aspect”.
Subsequently, in an another identical case i.e. Seabird Exploration FZ LLC (supra) the same view was taken as that of the Geofizyka Torun‟s case wherein the question raised was answered in the affirmative that the income has to be computed in terms of section 44BB of the Act. In both the cases of Wavefield Inseis (supra) the Authority ruled in this line.
6. The applicant has already offered its income derived from the contracts with ONGC and the Cairn Energy for tax but wants the application of section 44 BB for its computation.
7. In the light of the consistent view taken by this Authority, there appears to be no case to take a contrary view. While applying the ratio of the cases supra, we have no hesitation to answer the question in the affirmative. Accordingly, we answer that on the facts as set out in the Annexure-II to the application, the income derived by the applicant under the contracts with ONGC and Cairn Energy is to be computed by applying the provisions of section 44BB of the Act.
This Ruling is given and pronounced on this the 15th day of March, 2011.