Citation : Geo Fizyka Torun Sp. ZO. O. – A.A.R. No. 813 of 2009
Court : Advance Ruling Authority of India
Income from services in connection with seismic surveys, data acquisition, processing and interpretation of such data is covered under Section 44BB of the IT Act, 1961 and cannot be regarded as ‘fees for technical services’.
The applicant (Geofizyka Torun Sp.zo.o.) is a company incorporated in Poland and a tax resident of Poland. It provides geophysical services to the international oil and gas industry. The applicant conducts seismic surveys and provides on-shore seismic data acquisition and other associated services such as processing and interpretation of such data to global oil and gas companies. The essential purpose of seismic data acquisition is to identify the existence of hydrocarbons underneath the earth’s surface.
The applicant has been providing seismic data acquisition, processing and interpretation services to various oil and gas exploration and production companies in India including ONGC since many years and has been filing income tax returns and is being assessed to tax in India from 2002-03 onwards.
Question before the Authority for Advance Ruling (AAR)
The applicant has sought a Ruling on whether the income derived from its services is covered under the provisions of Section 44BB of the Income-tax Act, 1961 (ITA).
Contention of the Applicant
· The main objective of the seismic data acquisition is to gather good quality seismic data in the block area so as to obtain meaningful geological sub-surface information and to indicate any direct (bright spot) or indirect evidence for the occurrence of hydrocarbons. Such services are aimed at increasing the exploration success of its customers and to assist them in maximizing the production from their existing reservoirs
· Seismic surveys can paint the picture of the sub-surface in order to target oil and gas reserves. Seismic surveys are conducted to gather data to understand the size and location of oil fields so that the risks involved in exploratory drilling could be reduced
· According to the Petroleum Tax Guide, published by Government of India, topographical and seismic surveys, analysis, studies and their interpretation and investigations relating to the sub-surface geology including test drilling and drilling of exploration/appraisal wells are part of „exploration operations?
· For any oil and gas exploration activity, seismic survey is the first and important step
· Thus, the income from the activities/services related to seismic data acquisition clearly fall within the provisions of Section 44BB of the ITA and therefore, computation of income should be done in terms of that Section
Contention of the Revenue
· The services contemplated in Section 44BB are services other than those within the purview of „Fees for Technical Services (FTS) as per Explanation 2 to Section 9(1)(vii) of ITA. The services rendered by the applicant fall within the meaning of FTS
· The income by way of FTS chargeable under Section 9(1)(vii) of the ITA has to be computed under Section 44DA of the ITA where the service provider has a Permanent Establishment (PE) in India like in the present case of the applicant
· The applicant is not undertaking mining or a like project. Hence, the services rendered by it are not covered by the exclusion clause in Explanation 2 to Section 9(1)(vii). The exclusion would be applicable only to those who have taken up main project and not to those who rendered technical or consultancy services to the enterprise promoting the main project
· Section 44BB would come into play only if the applicant is not covered within the purview of Section 9(1 )(vii)
Ruling of the AAR
The AAR held that the case of the applicant neatly fits into Section 44BB and all the ingredients of that section are satisfied. This conclusion was based on the following observations:
· To attract the first part of section 44BB, the non-resident must be (a) engaged in the business of providing services or facilities (b) such provision of services/facilities must be „in connection with? the prospecting for or extraction or production of mineral oils. According to the AAR, both these ingredients are present in relation to the activities undertaken by the applicant in India
· The applicant is engaged in the business of providing services to the oil and gas industry. It is not a sporadic or isolated activity carried on by the applicant as the applicant has many clients in India and other countries and has been engaged in these activities since many years. Further, the services/ facilities rendered are in connection with prospecting for or extraction or production of mineral oils. Thus, the case of the applicant fits within the scheme of Section 44BB of the ITA. The word „services? followed by an expansive phrase „in connection with? is relatable to prospecting for and exploration of mineral oil,
· There is a real, intimate and proximate nexus between the services performed by the applicant and the prospecting and exploration activities of oil and gas industry. The services rendered by the applicant have a direct and definite bearing on the prospecting/ exploration activities and they are integral to the activities undertaken by the petroleum and gas enterprises
· The expression „services? cannot be assigned a narrow and restricted meaning so as to include only services other than technical, consultancy or managerial services as defined by section 9(1 )(vii) and has to be understood in its plain and ordinary sense. If such a restricted meaning was to be given, the Legislature would have explicitly brought out in Section 44BB of the ITA since this Section is a later provision
· Instruction No. 1862 dated October 22, 1990 issued by the Central Board of Direct Taxes and the opinion of the Attorney General contained therein states that operations for prospecting for or extraction or production of mineral oils can be termed as „mining operations? for the purposes of Explanation 2 to Section 9(1)(vii) of the ITA. Accordingly, the consideration for such services will not be treated as FTS for the purpose of Explanation 2 to Section 9(1)(vii) of the ITA. Payment for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of Section 44BB of the ITA,
· Irrespective of the above instruction, the AAR observed that profits arising from the business specified in Section 44BB may also fall within the ambit of FTS and taxable under Section 44DA of the ITA. However, if the business is of a specific nature as envisaged in Section 44BB, the specific provisions of Section 44BB would prevail over general provision of Section 44DA of the ITA
· If the income from all the services that are in the nature of FTS is to be computed in accordance with the provisions of Section 44DA, the special provisions of Section 44BB would serve a very little purpose for computing the profits in relation to services connected with exploration and extraction of mineral oils
· The AAR also discussed an earlier ruling1 pronounced by it in the context of Section 44D and Section 44BB of the ITA when Section 44DA of the ITA was not in existence. Section 44D of the ITA has a non obstante clause and therefore, overrides Section 44BB of the ITA. However, in the present case Section 44D referred in the proviso to Section 44BB(1) of the ITA is not applicable as the agreement between the applicant and the Indian concern was subsequent to April 1 2003.
The AAR held that provision of Section 44BB is a special provision and would prevail over the provision of Section 44DA. The profits derived from business of providing services in connection with the prospecting for or extraction or production of mineral oils are covered by Section 44BB if the services are intimately connected with prospecting and exploration of mineral oil.