Case Law Details
G&T Resources (Europe) Ltd. v. DDIT (ITAT Delhi)- The receipts for supply of spare parts used in prospecting for, or extraction or production of mineral oils in the turnkey contract are eligible for presumptive taxation under section 44BB of the Income Tax Act, 1961. It may be noted on the facts of the present case, the supply of spare parts was indivisible part of the entire repair/ revamp contract.
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: C: NEW DELHI
ITA No.3909/Del/2010 Assessment Year: 2007-08
G&T Resources (Europe) Ltd Vs. DDIT
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
This is an appeal filed by the assessee under the provisions of Section 253 (1) (d) of the IT Act, 1961, against the order passed by the Assessing Officer u/s 143 (3) read with Section 144C of the Income-tax Act, 1961 (the Act). The grounds of appeal read as under:-
1. That, on the facts and in the circumstances of the case and in law, the learned Dy. Director has erred in applying an arbitrary rate of 25% profit on sale of spares/supplies.
2. As the sale of spares/supplies has taken place entirely outside the country in the United Kingdom, the same should not be taxed in India.
3. Without prejudice to Ground No.1, the learned Deputy Director has erred in both facts and law in estimating profit of 25% which is exceptionally high as only profits attributable to the transaction will be taxed in India.
4. The appellant craves leave to supplement, to cancel, to amend, to add/or otherwise to modify any or all the ground(s) of appeal stated hereinabove, at a later stage.
2. The assessee is a non-resident entity entering into turnkey basis contracts with ONGC which have been listed in the assessment order in para 2 as follows:-
| S.No. |
Contract Agreement No. |
| 1. | M R/B&S/M M/KKT/ASS-Cra nes/243/03-04/LT-06/PC-23 for “Revamping of 4 Nos. American Aero Make Cranes Installed at BPB (East), BC, BPB (West) & BLQ-2 Platforms of ONGC” on Turnkey basis. |
| 2. | MR/MH/CMC/OEM/DAMAGED-BOOM-SM/2005/05001 for replacement of damaged boom of SM Deck Crane on OEM and Turnkey basis installed at IC complex |
| 3. | MR/MH/MM/LSTK/RO/OEM/DAMAGE BOOM/110/2005/Y15OS05001/P-B4006 for replacement of damaged boom selection of SS Deck Crane on Turnkey Basis installed at SH Complex. |
| 4. | M R/M H/M M/LSTK/AB/OEM/PATRIOT/CRAN ES/2 004/Y1 5AL04003/PAPERBOOK-3007 for repair/revamping overhauling and servicing of pedestal/patriot make deck cranes on OEM and Turnkey Basis installed at BHS (North) and SLQ (South) Platform. |
| 5. | M R/M H/M M/LSTK/AB/OEM/PATRIOT/CRAN ES/GROUPII/2004/Y15AL04004/PAPER-BOOK-3008 dt. 11/11/2005 |
| 6. | MR/MH/MM/LSTK/RO/OEM/DAMAGED BOOM/110/2005/Y1505s05001/PAPER-BOOK-4006 dt.07/03/2006. |
| 7. | M R/M H/M M/LSTK/CG/OEM/SK-N Qd-SH D/CRAN ES/LT-3 3/PAPER-BOOK4004 for repair/revamping of 3 Nos. American Aero make Deck Cranes on OEM and Turnkey basis installed at Group-1 (SK & SHD Deck Cranes Nos.) and Group H (NQD Deck Crane-1 No.) |
3. In the computation of income, the total receipts of the contracts amounting to 6,76,73,525/- were bifurcated into two portions; one relating to supply of material of 5,17,60,664/- and the other sum of 1,59,12,861/- relating to services rendered by the assessee with regard to repair/revamp of cranes installed at rigs. On the component of spares, the assessee had returned income © 1% of the gross receipts by taking resort to Notification F.No.484/3/87-FTD, Government of India, MoF, Department of Revenue (Foreign Tax Division), New Delhi, July, 1987. On the other portion, the income was offered © 10% of the gross receipts by making reference to Section 44BB on presumptive basis and, in this manner, the income returned was calculated at21,08,893/-. The Assessing Officer though accepted the claim of the assessee u/s 44BB (2) in respect of total receipts of 1,59,12,886/- pertaining to receipts on account of repair/revamp of cranes installedat rigs, but has rejected the claim of the assessee regarding assessment of 1% of gross receipt relating to spare parts used in such spares. The Assessing Officer has referred to Section 9(1)(i) of the Act and has computed the income of the component © 25% and hasassessed income on that component at 1,29,40,166/-and, in this manner, the income of the assessee has been assessed at a total sum of 1,45,31,452/- in place of returned income of 2 1,08,893/-. The assessee has filed objections u/s 144C and vide order dated 4th June, 2010, DRP has upheld the action of the Assessing Officer by observing that the assessee has not been able to give any convincing basis as to why 10% should be applied and not 25% as applied by the Assessing Officer considering that the said income is not covered u/s 44BB (1).Learned Assessing Officer has passed the impugned order in pursuance of directions issued by the DRP u/s 144C of the Act. The assessee is aggrieved, hence, has raised the aforementioned grounds of appeal.
4. At the outset, it was submitted by learned AR that the assessee has forgone its claim of being assessed © 1% and now it is the case of the assessee that its entire receipts should be made subject to provisions of Section 44BB (1) and, thus, the application of rate of 25% on the component relating to user of spare parts is, thus, bad as none of the provisions of the Act support such computation of income © 25%. To support the contention that supply of spares in case of turnkey contract is also subject to provisions of Section 44AB, learned counsel has relied on various judgements inter alia including the decision of Hon’ble Uttaranchal High Court in the case of CIT vs. B.J. Services Co. Middle East 300 ITR 392 (Uttaranchal) the copy of which is placed at pages 37-38 of the paper book. Reading from para 2-8, it was submitted by him that supply of spare parts in a turnkey contract of repair will also be covered under the provisions of Section 44BB of the Act and, therefore, the applicable rate of net profit will be © 10%. For the sake of convenience para 2 and 8 from the said order are being reproduced below:-
“2. Facts, in brief, are that return of income was filed by a non-resident company M/s B.J. Services Co. Middle East, disclosing Rs.3,27,770/- for computing the amount referred under Sub-section (2) of Section 44BB of the Act, which was 5 per cent of the total receipts towards handling charges on the original cost. It was found from the return filed by the assessee that total amount received by the assessee for supply of spare parts to the Oil & Natural Gas Corporation (for short, ONGC) was Rs.69,45,264. The A.O., therefore, took into account the total amount received by the non-resident company for supply of spare parts to ONGC under Sub-section (2) of Section 44BB for determining the profits and gains and imposed the tax © 10 per cent under Sub-section (1) of Section 44BB of the Act.”
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8. Sub-section (1) of Section 44BB specifically provides that aggregate of amounts specified in Sub-section (2) shall be taken into account, 10 per cent of which shall be deemed to be profits and gains. Sub-section (2) provides that amounts referred shall be amount paid or payable to the assessee (whether in or out of India) and the amount received or deemed to be received in India 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. Explanation appended to Section 44BB provides that for the purpose of this section, plant includes ships, aircrafts, apparatus and equipments used for the purpose of said business and mineral oils include petroleum and natural gas. Thus, the amount received by the assessee on account of supply of spare parts is squarely covered under Section 44BB. Therefore, the A.O. was right in calculating the 10 per cent of total amount of Rs.69,45,264, which was received by the assessee nonresident company from the ONGC. The claim of the assessee that the amount of Rs.66,17,495 could not be included for the purpose of calculating the amount referred to in Sub-section (2) of Section 44BB as it was reimbursement while the assessee himself has claimed 5 per cent handling charges on the original cost of material i.e., spare parts. Therefore, Rs.69,45,264 was the cost of spare parts and was duly received by the assessee non-resident company and hence was an amount referred to under Sub-section (2) of Section 44BB of the Act as it was a receipt during the course of business.
6.On the other hand, it was submitted by learned DR that since the assessee is not pressing his claim regarding application of 1% rate, his submission is that the contracts obtained by the assessee from ONGC were having two components and, for this purpose, he referred to the computation of income submitted by the assessee in which such bifurcation was made. The one relating to supply of spare parts and the other relating to the services rendered in that regard. He submitted that supply of spares is not covered as such by the provisions of Section 44BB of the Act and, hence, it should have been treated separately from the services rendered by the assessee as envisaged in Section 44BB of the Act. He, therefore, supported the case of the Assessing Officer that only with regard to the services rendered by the assessee Section 44BB will be applicable and in respect of supply of spare parts this Section will not apply and the Assessing Officer will be free to assess the income of the assessee as per normal provisions of the Act. In this manner, learned DR supported the order of the Assessing Officer and CIT (A) vide which 25% net profit rate has been applied on the component relating to supply of spares as the same has rightly been assessed under the provisions of Section 9(1)(i) being income accruing or arising to the assessee through or from any business connection in India.
7. We have carefully considered the rival submissions in the light of the material placed before us. It is undisputed that the assessee has received composite payments with regard to turnkey contracts listed in the assessment order. These contracts are with ONGC and the name of the work contract of the assessee in one of the contracts is “Revamping of 4 Nos. American Aero Make Cranes Installed at BPB (E), BC, BPB (W) & BLQ-2 Platforms of ONGC.” In the other contracts also the nature of work is same. Clause 3 defines the scope of work which inter alia provides as under:-
“3.0 SCOPE OF WORK
3.1 Contractor’s scope of work shall be on turn key basis for repair/replacement/Servicing/overhauling of 4 Nos. Cranes Installed at BPB(E), BPB(W), BC & BLQ-2 platforms at Bassien & Satellite. The crane is to be get load tested after commissioning at site and duly certified by third party at rated capacity. The third party inspection agency shall be arranged by the Contractor. Testing loads shall be provided by ONGC. The number of manpower to be deputed at offshore for overhauling of crane shall be restricted to 6 to 9 person per crane.”
3.6 The Contractors scope of work shall also include the dismantling/cutting/removal of existing materials at BPB(E), BPB (W), BC & BLQ-2 platforms and loading on OSV (OSV will be arranged by ONGC). The cranes have to be revamped on turnkey basis including but not limited to replacing AND/OR servicing the listed spare parts. If during the revamping process replacement of additional optional items become necessary to complete all the four cranes, the same will be carried out by the Contractor.”
7.1 Clause 4 defines the scope of supply which defines contractor’s scope of supply as under:-
4.0 SCOPE FO SUPPLY
4.1 CONTRACTORS SCOPE OF SUPPLY
The procurement and supply in sequence and at appropriate time of all materials and consumables shall be entirely the Contractor’s responsibility and his quoted price for execution shall be inclusive of all these items which include, but not limited to the following.
a) All spares and assemblies/sub-assemblies along with optional items required to make the cranes fully operational at rated capacity and fit for certification are attached at Appendices I to IV under Annexure-III of the tender.
b) All structural and sea fastening materials, lifting and installation materials and equipments.
c) All industrial gases like oxygen, acetylene or inert gses and all types of welding machines, electrodes, torches, brazing rods, flux, etc. for welding purposes.
d) PTFE tape and other jointing compounds for sockets threads and gaskets for flanges.
e) Grease, cleaning oils, other solvents, chemicals required for cleaning and greasing of lines, adhesives, etc.
f) Paints, thinner and painting materials, painting equipment, including equipments enquire for surface preparation and other consumables.
g) Hardware and blinds wherever required.
h) Equipment/materials required for load testing, excluding the Test weigh loads.
i) Any other item not specified but required for the completion of works.
j) Structural Steel, M.S. Plates, Flats/Pipes, etc. required for fabrication of supports, trays, structures, etc. as required to complete the works. Installation, assembly mechanical completion, commissioning, third party inspection and certification agency to be approved by ONGC along with all the required accessories at platform.
k) If any material is falling short or require replacement, the same shall be air freighted to complete the job as per operational reason and the cost will be borne by the contractor.”
7.2 Clause 4.2 defines ONGC scope of supply which read as under:-
“4.2 ONGC’S SCOPE OF SUPPLY
a) Provide water, diesel, electricity, compressed air.
b) Portable fire extinguishers, fire water supply through FWP or OSV during hot work period if required.
c) Provide boarding and lodging at offshore platform for contractor’s personnel as specified in contract.
d) Provide transportation facility free of cost to & for man and material by OSV/Helicopter between Nhava/ONGC Helibase Mumbai to BPB/BLQ-2 platform and vice versa.
e) Compressed air shall not be available at BC.”
7.3 Clause 5 defines repairs and replacements as under:-
“5.0 REPAIRS AND REPLACEMENT
The contractor shall assume the entire responsibility for the protection of the structure and repair of all damages to the structure of its components resulting from contractor’s negligence, accidents, inferior workmanship, or any other reason of evident fault by the Contractor and in including, but not limited to weather.
Contractor shall be responsible for any work performed by the contractor on materials which do not meet the provision of the applicable specifications. Further, Contractor shall remove and replace all such materials which are incorporated in the structure (s) without prior written approval of the company.
8. Annexure – C defines contract price schedule copy of which is placed at page 75 of the paper book which is a sum of US $ 14,63,526.58 which read as under:-
ANNEXURE C
CONTRACT PRICE SCHEDULE
CONTRACT NO. M R/B&S/M M/KKT/AA-CRAN ES/243/03-04/LT-06/PC-2 3 FOR “REVAMPING OF 4 NOS AMERICAN AERO MAKE CRANES INSTLALED AT BPB (EAST), BC, BPB (WEST) & BLQ-2 PLATFORMS OF ONGC” ON TURNKEY.
| LUMPSUM PRICE | |
| Lump sum price for “Revamping of 4 nos. American Aero make cranes installed at BPB (East), BC BPB (West) & BLQ-2 platforms, as per enclosed scope of work on turnkey basis. The scope of work shall include but not limited to Dismantling & Replacement with new parts/sub-assemblies/assemblies, supply of parts/assemblies/subassemblies, servicing and greasing of items, installation & commissioning of cranes, providing manpower including OEM representative for complete execution of work along with mobilization & demobilization, tools & Tackles, overhauling/rebuilding of Engines and also including third party inspection charges.
The lump sum price shall also be inclusive of all taxes, duties (excluding customs duty), levies, insurance, service tax and corporate tax to complete the job on turnkey basis. |
US $ 1,463,526=58
(United States Dollar One million Four hundred and sixty three thousand Five hundred twenty six and cents fifty eight only) |
Note:
1. The above lumpsum price includes Corporate Tax and Service tax shown below:
| Corporate Tax @ 41% by applying a profit rate of 1% in respect of supply of spares. | US $ 3,788=75 | |
| Corporate Tax @ 41% by applying a profit rate of 11.5% in respect on installation cost | US $ 22,407.00 | |
|
3. |
Service Tax @ 8% on installation & commissioning | US $ 38,018=24 |
9. A cumulative reading of all these clauses will show that the supply of components is indivisible part of entire contract. ONGC is certainly engaged in the activity of prospecting for, or extraction or production of mineral oils and any amount received by the assessee being a non-resident engaged in the business of providing services or facility in connection with, or supplying plant and machinery on hire, used or to be used in such activity shall be governed by the provisions of Section 44BB. For one component of the contract, the Assessing Officer himself has agreed for application of Section 44BB and the assessee has been charged to tax by taking 10% net profit on that component. The assessee may have bifurcated the contract price into two segments; one relating to supply of services and the other relating to supply of spares, but that may have been done by the assessee for lower tax. But that does not mean that Section 44BB will not be applicable to the activity carried on by the assessee being a nonresident assessee.
10. In the case of CIT vs. B.]. Services Co. Middle East (supra), the assessee being a non-resident company had disclosed income of 3,27,770/- under the provisions of sub-section (2) of Section 44BB of the Act which was 5% of the total receipts towards handling charges on the original cost. The assessee was supplying the spare parts to the ONGC which was a sum of 69,45,264/-. The Assessing Officer applied 10% rate as per the provisions of Section 44BB (2). The CIT (A) held that the assessee was entitled to deduction of 66,17,495/- as the same was received as cost of material, etc. and was an actual reimbursement of expenses of such material incurred by the assessee in execution of the contract with ONGC and the same was on actual basis and was not in any way on a fixed percentage basis. The Tribunal upheld the order of the CIT (A). On these facts, it was decided by the Hon’ble High Court as under:-
“8. Sub-section (1) of Section 44BB specifically provides that aggregate of amounts specified in Sub-section (2) shall be taken into account, 10 per cent of which shall be deemed to be profits and gains. Sub-section (2) provides that amounts referred shall be amount paid or payable to the assessee (whether in or out of India) and the amount received or deemed to be received in India 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. Explanation appended to Section 44BB provides that for the purpose of this section, plant includes ships, aircrafts, apparatus and equipments used for the purpose of said business and mineral oils include petroleum and natural gas. Thus, the amount received by the assessee on account of supply of spare parts is squarely covered under Section 44BB. Therefore, the A.O. was right in calculating the 10 per cent of total amount of Rs.69,45,264, which was received by the assessee non-resident company from the ONGC. The claim of the assessee that the amount of Rs.66,17,495 could not be included for the purpose of calculating the amount referred to in Sub-section (2) of Section 44BB as it was reimbursement while the assessee himself has claimed 5 per cent handling charges on the original cost of material i.e., spare parts. Therefore, Rs.69,45,264 was the cost of spare parts and was duly received by the assessee non-resident company and hence was an amount referred to under Sub-section (2) of Section 44BB of the Act as it was a receipt during the course of business.
14. In the result, the appeal filed by the assessee is partly allowed in the manner aforesaid.
The order pronounced in the open court on 25.03.2011.
