The Applicant, a Polish company, was engaged in conducting seismic surveys and providing seismic data to oil companies in connection with their oil exploration and drilling activities. The AAR had to consider whether the income derived by the Applicant was assessable u/s 44BB or u/s 9 (1) (vii) r.w.s. 44DA. HELD, deciding in favour of the Applicant:
(i) S. 44BB applies to an assessee engaged in the business of providing services or facilities in connection with ….. the prospecting … of mineral oils. On the other hand, Explanation 2 to s. 9 (1) (vii) defines “fees for technical services” to mean consideration for the rendering of technical services but not including consideration for mining or like project undertaken by the recipient.
(ii) The Applicant’s case falls within s. 44BB because the words in connection with therein have an expansive meaning. The services provided by the Applicant have a real, intimate and proximate nexus with the prospecting for or extraction of mineral oils. The seismic survey and data acquisition is a prelude and 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.
(iii) The argument of the Revenue that that the term ‘services’ in s. 44BB are other than the services covered by Expl. 2 to s. 9(1)(vii) is not acceptable. There is no compelling reason to assign a narrow and restricted meaning to the expression ‘services’ and confine it to services other than technical, consultancy or managerial services.
(iv) The argument of the Revenue that that the exclusion with regard to mining projects in Expl. 2 to s. 9 (1)(vii) is applicable only to those who have taken up main project but not to those who rendered services to the enterprise promoting the main project is also not acceptable in view of binding Instruction No. 1862 issued by the CBDT on 22.10.1990 wherein it was held that the term ‘mining project’ in Expl 2 to s. 9(1)(vii) covers the rendering of services.
(v) Even on first principles, s. 44BB is a special provision dealing with the computation of profits of non-residents engaged in providing services in prospecting for etc of mineral oils and will prevail over s. 9 (1) (vii) which is a general provision for charging fees for technical services to tax.
ADVANCE RULINGS DETAILS
|BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI|
|Date of Ruling||7th Day of December, 2009|
|PRESENT||Mr. Justice. P.V. Reddi (Chairman) Mr. J. Khosla (Member)|
|AAR No.||813 of 2009|
|Name & address of the applicant||Geofizyka Torun Sp.zo.o.Chrobrego 50,
|Commissioner concerned||Director of Income-tax,(International Taxation), Range-II
|Present for the applicant||Mr. N. Venkatraman, Sr. AdvocateMr. Achin Goel, Advocate
Mr. Taranpreet Singh, CA
Mr. Hitesh Jain, CA
Mr. Lalit Mohan, CA
Mr.Sanjay Aggarwal, CA
|Present for the Department||Mr. Girish Dave, CCIT, MumbaiMr. Virendra Singh, DIT(Int.Taxation)-2,Delhi
Mr. S.M.J. Abidi, Addl.DIT(Int.Taxn),Dehradun
6.1. We are of the view that the case of the applicant neatly fits into Section 44BB and all the ingredients of that section are satisfied. 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. Both these ingredients are present in relation to the activities undertaken by the applicant in India. Firstly, it does not admit of any doubt that the applicant is engaged in the business of providing services (technical services) to the oil sector industries. It is not some sporadic or isolated activities that are being carried on by the applicant. The applicant claims to have many clients in 8.India and it has been engaged in the said activities since many years. In fact, it has come to light at the time of hearing that the applicant has been filing returns and is being assessed to tax from 2002-03 onwards and even for the year 2009-10 return has been filed. It is an undisputed and undeniable fact that the activities or operations of the applicant in India have the characteristics of ‘business’ and the applicant is engaged in the said business in India and other countries. The next question is whether the applicant provides services in connection with the prospecting for or extraction of mineral oils. Here again, there is hardly any room for doubt. The expression ‘in connection with’ is important and has to be construed to have expansive meaning. While explaining the meaning of similar and inter-changeable expressions viz. “pertaining to” and “in relation to”, the Supreme Court observed in the case of Doypack Systems Pvt .Ltd. 48. The expression “in relation to” (so also “pertaining to”), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context, see State Wakf Board vs. Abdul Aziz (AIR 1968 Madras 79, 81 paragraphs 8 and 10, following and approving Nitai Charan Bagchi vs. Suresh Chandra Paul (66 C.W.N. 767), Shyam Lal vs. M. Shayamlal (A.I.R. 1933 All. 649) and 76 Corpus Juris Secundum 621. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject matters, even then these would be brought within the purview of the vesting by reason of the above expressions. In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 * 1988 (36) ELT 201 (SC) 9.where it is stated that the term “relate” is also defined as meaning to bring into association or connection with. It has been clearly mentioned that “relating to” has been held to be equivalent to or synonymous with as to “concerning with” and “pertaining to”. The expression “pertaining to” is an expression of expansion and not of contraction.”
6.2. In the decision of British Columbia Appellate Court, Vancouer in Nanaimo Community Hotel Ltd. vs. Canada, ** which arose under the Excise Profits Tax Act, 1940, the following passage is instructive of the real import of the phrase “in connection with”: “Mr. Cunlifee argues that that section presupposes that an assessment has been made, and that as I understand him, the words “in connection with” mean “consequent upon.” I do not think that is the correct construction to be put upon these words. One of the very generally accepted meanings of “connection” is “relation” between things one of which is bound up with or involved in another”; or again “having to do with”. The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase “having to do with” perhaps gives as good a suggestion of the meaning as could be had? I think section 66 is sufficient to oust the jurisdiction of this Court to deal with a decision on which an assessment is subsequently made.”
In that case, the court was with interpreting section 66 of the Income War Tax Act which reads as under:
”66. Subject to the provisions of this Act, the Exchequer Court shall have exclusive jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act.” ** 1944 (4) DLR, 638
6.3. In V.A. Vasumathi v. CIT *** the Kerala High Court observed while interpreting Section 48(1) of the Income-tax Act that the words “in connection with such transfer” mean intrinsically related to the transfer and the expenditure has to be connected with the transfer.
7. Keeping the above exposition of the phrase “in connection with”, it is crystal clear that the services offered by the applicant is in connection with the prospecting for or extraction of mineral oils, which business is carried on by the applicant’s employers viz. those in the business of oil and gas production. The real, intimate and proximate nexus between the services performed by the applicant in India and the prospecting for or extraction of mineral oils (which expression includes petroleum and natural gas) is very much present in the instant case. 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 utilization 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.
7.1. However, the Revenue’s representative, in order to exclude the application of Section 44BB, harps on the argument that the expression ‘services’ occurring in that section are other than the technical/consultancy services covered by Explanation 2 to Section 9(1)(vii). Thus, a restricted interpretation is sought to be placed on the word ‘services’ employed in Section 44BB by pressing into service the Explanation. We find it difficult to accept the Revenue’s contention. There is no compelling reason to assign a narrow and restricted meaning to the expression ‘services’ and confine it to services other than technical, consultancy or managerial services. In the absence of any words of limitation or exclusion, the word ‘services’ shall be understood in its plain and ordinary sense. If the Legislature wanted to give a restricted meaning to the expression ‘services’ in order to take the technical services out of the purview of section 44BB, explicit words to that effect would have been deployed, especially in view of the fact that Section 44BB is a later provision. On the other hand, the contextual setting and the company in which the expression ‘services’ is found is suggestive of inference that far from excluding technical/consultancy services, they were also intended to be brought within the ambit of Section 44BB. The word ‘services’ followed by an expansive phrase ‘in connection with’ are relatable to Prospecting for and exploration of mineral oil. That means, all services associated with Prospecting for and exploration activities are brought within the scope and reach of Section 44BB. Another category of assessees governed by Section 44BB are those supplying plant and machinery on hire. Both these two categories of assesses covered by Section 44BB engage themselves in core activities pertaining to prospecting and exploration of oil and gas and the Parliament thought it fit to accord a special treatment to the income derived by these two categories of non-residents in India.
7.2. The Revenue submits that the exclusionary provision in Explanation 2 to Section 9(1)(vii) has no application here for the reason that the applicant has not undertaken any mining or like project and, therefore, the main part of the definition in FTS continues to govern the applicant’ services. It may be recalled that the second part of the Explanation excludes “consideration for any construction, assembly, mining or like project” undertaken by the recipient. In other words, it is contended on behalf of the Revenue that the exclusion would be applicable only to those who have taken up main project but not to those who rendered technical or consultancy services to the enterprise promoting the main project. It is pointed out that the reason for exclusion of the construction, assembly, mining or the like project from the ambit of Explanation 2 can be gathered from CBDT circular No. 202 dated 5.7.1976 [105 ITR st 25] explaining the changes brought out by the Finance Act, 1976. The CBDT stated that the consideration from such projects has been excluded from the definition (of f.t.s) on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly, it will not be fair to tax such consideration in the hands of a foreign company on gross basis or to restrict the expenditure incurred for earning the same to 20 per cent of the gross amount as provided in the new Section 44D. The same rationale should logically apply to the non-residents engaged in the business of providing services for the specified projects in India. Be that as it may, there was no occasion for the CBDT to consider in 1976 the implications of the exclusion clause vis-à-vis the specified service providers because Section 44BB was not there at that time.
7.3. After section 44BB was introduced, the Circular (Instruction No. 1862) issued by the CBDT on 22nd October, 1990 governs a case like the present one and it furnishes an answer to the Revenue’s contention that the technical services rendered for 14.exploration of mineral oil/ natural gas are outside the ambit of Explanation 2 to Section 9(1) (vii). These instructions were issued after obtaining the opinion of the learned Attorney-General of India. The following two paragraphs in the circular are relevant:
“The question whether prospecting for, or extraction, or production of, mineral oil can be termed as ‘mining’ operations was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions ‘mining project’ or ‘like project’, occurring in Explanation 2 section 9(1)(vii) of the Income-tax Act would cover rendering of services like imparting of training and carrying drilling operations for exploration or exploitation of natural gas. In view of the above opinion, the consideration for services will not be treated as fees for technical services for purposes of Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961. The payments for such services to a foreign company will, therefore, be income chargeable to tax under the provisions of Section 44BB of the Income-tax Act, 1961 and not under the special provisions for the taxation of fees for technical services contained in Section 115A read with Section 44D of the Income-tax Act, 1961.”
7.4. The Circular which can be traced to the power vested in the CBDT under section 119(7) of the Act is binding on the department. The executive understanding of the relevant statutory provisions is reflected in this circular which has held the field for nearly two decades. This circular has been relied upon by the Income-tax Appellate Tribunal in a number of cases in order to reach the conclusion that Section 44BB governs the cases in which the services (including technical services) are rendered in relation to the prospecting for or exploration of oil [vide AC(IT) vs. Paradigm Geophysical (P) Ltd.[(2008) 25 SOT 94]; ONGC vs. DC(IT) (ITA No. 15.2145/D/2004); DC(IT) vs. Schlumberger Seaco Inc. (50 ITD 346); DIT (Intrnl.Taxation) vs. Jindal Drilling Industries Ltd. (ITA No. 3416(Del) of 2003]. The order of the Tribunal in Jindal Drilling Industries Ltd. was affirmed by the High Court of Delhi in DIT vs. Jindal Drilling Industries Ltd * . The learned Judges held that the sums received by NDAL – a non-resident company from the Indian assessee were not includible in the definition of FTS and section 44BB is the appropriate provision to be applied. NDAL rendered the services of jacking up of rigs, review of design and issuance of suitability certificate.
7.5. The scope and implications of the Circular becomes more clear if it is read in the context of the question referred for the opinion of Attorney-General. It reads: “(ii) whether the expressions “mining project” or ”like project” occurring in Explanation 2 to Section 9(1)(vii) of the I.T.Act would cover rendering of services like imparting training and carrying out drilling operations for exploration or exploitation of oil and natural gas;
(iii) whether the provisions of Section 44BB will be applicable in respect of services of the type rendered by M/s. Scan Drilling Company Limited.”
The answers given to both the questions were in the affirmative. No doubt, there is no specific discussion on the distinction pointed out by Revenue i.e., the distinction between those who carry out the entire project and the independent service providers to the project. On that account, however, the Circular cannot be brushed aside.
8. Irrespective of the said circular and even assuming that the applicant is not strictly covered by the exclusion clause in Explanation 2 to Sec. 9(1)(vii), let us consider whether Revenue’s contention has any merit.
8.1. As already discussed, Section 44BB which was inserted into the Act w.e.f. 1st April, 2004 is a special, specific and exclusive provision dealing with the computation of profits of the non-resident assesses engaged in the business of providing services in connection with or supplying plant and machinery on hire to be used “in the prospecting for, or extraction or production of mineral oils”. It is in the company of three other sections (which we have referred to earlier as 44B series) specially providing for computation of profits of the non-residents/foreign companies engaged in the specified types of business. True, profits arising from the business specified in Section 44BB may also fall within the ambit of fees for technical services chargeable under Section 9(1)(vii). But, the question is which is the appropriate computation provision that is applicable? As between the competing provisions, namely 9(1)(vii) read with Section 44DA and 44BB, Section 44BB being a more 17.specific provision, that provision should prevail for the purposes of computation. Section 44DA, it may be recalled, provides for method of computation of income by way of f.t.s received by a non-resident or a foreign company carrying on business through a PE in India. If the non-resident is engaged in the business of providing services in connection with the prospecting etc. of mineral oils, the computation provisions relating to f.t.s will have to yield to Section 44BB. It may be noticed that in a case of business governed by Section 44BB, normally, the enterprise concerned would be having a PE in India. It is difficult to envisage a situation of a person being engaged in providing services or facilities in connection with prospecting and extraction of mineral oils not having a fixed place of business from where the operations are carried on. Thus, the existence of PE is a common feature both in 44DA as well as 44BB, though there is an explicit reference to PE under Section 44DA. Thus, rendering of technical services through PE may be a common feature of both the Sections, i.e., 44BB and 44DA, though in the case of S.44DA, it is explicitly mentioned. But, what is important is the nature of business and it is that factor which serves as an indicator to apply one of the two sections. If the business is of the specific nature envisaged by 44BB, the computation provision therein would prevail over the computation provision in Section 44DA. In other words, the income received by a non-18.resident businessman for the technical services provided in relation to prospecting and extraction of mineral oil, will be wholly governed by S.44BB 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 44DA, very little purpose will be served by incorporating a special provision in 44BB for computing the profits in relation to the services connected with exploration and extraction of mineral oils. The provision will then operate in a very limited field.
9. We may now refer to the decisions from which support was sought to be drawn by the Revenue. 9.1. The first one is the case of Hotel Scopevista Ltd. Vs. AC(IT) [ITA No.124/Del/2006 dated 20.9.2007] decided by ITAT, Delhi Bench. In Scopevista case, the question was whether the payments for the various services rendered by a foreign company in relation to the construction of hotel were chargeable under Section 9(1)(vii) of the Act and whether tax was liable to be deducted at source by the appellant – assessee. The Delhi Bench of the Tribunal held that the payee had provided managerial, technical and consultancy services in connection with the construction project in India and such services were chargeable to tax as f.t.s under Section 9(1)(vii) read with Explanation 2. It was then held that the exclusion clause in Explanation (2) has no 19.application because ‘consideration for construction project’ will mean consideration for actual construction activities undertaken in India and not consideration for any services in connection with the construction project. Whether the services rendered right from the designing stage upto the construction stage are covered by the exclusion clause in Explanation 2 is a moot point. But, we need not go into that aspect. Irrespective of that reasoning, Section 44BB cannot in any case be applied to construction services as they are not included within the fold of Section 44BB. That is why the Tribunal observed that the decisions dealing with the provisions of Section 44BB stood on a different footing. At the same time, the Tribunal while referring to the earlier orders of Tribunal, explained that various services in connection with exploration of mineral oil such as geological and geophysical studies and providing expert personnel were covered under the provisions of Section 44BB. Thus, the decision of Tribunal in Hotel Scopevista Ltd., far from supporting the Revenue, clearly negates the contention of Revenue on the scope of S.44BB.
9.2. The other decision of the Tribunal referred to by the learned Departmental Representative is the case of DC(IT) vs. ONGC as agent of Foramer France * . Even this decision is not contrary to the earlier decisions of the Tribunal in regard to the interpretation of Section 44BB. That was a case in which the non-resident company supplied supervisory staff and personnel having expertise in operation and management of drilling rigs. The Commissioner (Appeals) held that the consideration received from such services rendered for the project undertaken by ONGC is liable to be taxed under Section 44BB and not as fees for technical services under Section 44D. The Revenue came up in an appeal to the Tribunal. The Tribunal dismissed the appeal following the view taken in earlier cases and the circular of CBDT referred to earlier. The only observation that can perhaps be pressed into service by the Revenue is what is stated in paragraph 6.5 to the effect that Section 44BB will not be redundant if the technical/consultancy services in relation to the project are kept out of the reach of Section 44BB. In making this observation, the Tribunal was inspired by the ruling of this Authority in Advance Ruling P.No.6 of ‘95 regarding which there will be discussion in the next para.
9.3. We shall now refer to the ruling of this Authority in * P No.6 of 95 on which reliance was placed by the Revenue.
9.4. In that case, the applicant – a foreign company entered into three agreements with X, an oil company in India for rendering technical and consultancy services. Broadly, the services rendered under the three agreements were: (1) Indepth reservoir * 1998, 100 Taxman, 2006 21.management study of the offshore-oil field on behalf of X which involved simulation studies, barometric estimates, evaluation of reservoir performance and handing over the data generated during the study to X on computer media. (2) Review of hydrocarbon reserves and analysis and review of data, maps reserves etc. and (3) Assisting and advising X on the methodology of evaluating the tenders. This Authority rejected the contention of the applicant’s counsel that the payments made by X to the applicant in terms of the three agreements would be taxable under Section 44BB. The Authority accepted the Revenue’s contention that in view of the proviso to Section 44BB, the income derived by the applicant has to be computed as per the provisions of Section 44D read with Section 115A. As the rate of tax prescribed in the DTAA was 20% as against 30% prescribed under Section 115A, it was held that the applicant was entitled to the benefit of reduced rate of tax under DTAA.
9.5. The ratio of this ruling rests on a statutory provision, namely, Section 44D with which we are not concerned. Section 44D which is a special provision for computing income by way of royalties and fees for technical services in the case of foreign companies starts with a non-obstante clause “notwithstanding anything to the contrary contained in Sections 28 to 44C”. Section 44BB is thus 22.enveloped by the non-obstante clause. It is in this context that the AAR very rightly stated the legal position as follows:
“15.3 A perusal of these provisions would make it clear that these are special provisions which have to be read together, for computing and taxing income by way of royalties and fees for technical services in the case of foreign companies. Section 44D starts with an overriding expression ‘notwithstanding anything to the contrary contained in sections 28 to 44C….’. This means that section 44D has application in respect of royalties and technical fees in the course of a business and that its special provisions take precedence over sections 28 to 44C and override these provisions. That means section 44BB is also superseded in respect of computation of income by way of royalties or fees for technical services received from an Indian concern (‘X’ in this case). The proviso to section 44BB excluding the application of that section to cases covered by section 44D is consistent with and complementary to this. This double safeguard provided by statute shows that section 44D includes within its purview also royalties and technical service fees arising in the course of business.”
9.6. It was further observed that if special provisions like Section 44BB and 44D had not been included in the Act, such rendering of technical services would have been taxable only as business income under the provisions of Section 28 to 44C. Then, it was observed
“Section 44BB and section 44D have, thus, both to be given effect to and the only way of doing it is by restricting section 44BB to income that does not fall within the scope of section 44D; it is this that is made clear by the proviso to section 44BB(1) which specifically excludes any profits and gains of business or other income falling under section 44D from the purview of section 44BB.” Thus, in a case where the disputed income fell within the scope of Section 44D, resort to Section 44BB could not have been 23.taken because of the non-obstante provision in section 44D as well as the proviso to Section 44BB. Therefore, in the case decided by this Authority in P 6 of 1995, the competition was between Section 44BB and Section 44D read with Section 115A. Section 44DA was not on the statute book at that time. Admittedly, Section 44D does not come into play in the instant case as the agreement between the foreign company and the Indian concern was subsequent to 1.4.2003. In relation to the agreements after that date, Section 44DA would apply. But, there is nothing in Section 44DA which has the effect of superseding or overriding Section 44BB. Both these provisions should be harmoniously read. If so read, the profits derived from business of providing services in connection with the prospecting for or extraction or production of mineral oil are squarely and exclusively governed by Section 44BB, irrespective of the nature of services, provided the services are intimately connected to Prospecting and exploration of oil. Therefore the ruling in P6 of 1995 cannot be called in aid by the Revenue to sustain its plea.