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Case Law Details

Case Name : Frontier Offshore Exploration (India) Ltd. Vs DCIT (ITAT Chennai)
Appeal Number : ITA No. 200/Mds/2009
Date of Judgement/Order : 04/02/2011
Related Assessment Year : 2004- 05

Chennai Bench of Income-tax Appellate Tribunal (the “Tribunal”), in the case of  Frontier Offshore Exploration (India) Ltd. Vs DCIT ITA No. 200/Mds/2009, held that where payment to a non-resident is covered under the special regime of section 44BB, withholding of appropriate tax by the payer through the application of the special regime and without approaching the Assessing Officer (“AO”) will not lead to any violation of withholding tax provisions. Accordingly, expenses cannot be disallowed for short withholding of taxes.


The assessee, a provider of oil field services, entered into an agreement with ONGC and M/s Hardy Exploration & Production (India) to drill oil wells in Indian waters.

For this purpose, the assessee took two drilling units owned by two foreign companies. The assessee was to pay hire charges for the drilling units in the form of bare boat charges. The assessee considered these charges to be covered by special regime of section 44BB of the Act. Accordingly, the assessee deemed income at rate of 10% of gross receipts and withheld tax at a rate of 4.1% on the bare boat charges.

The AO contended that the entity responsible for making payment cannot itself decide the proportion of income chargeable to tax either by applying any special regime or general provisions. Instead it should make a mandatory application to the AO for the determination of appropriate proportion of income which is chargeable to tax. Accordingly, the AO disallowed the deduction of the hire charges on account of short withholding of taxes.

The AO followed the Tribunal’s order, in the assessee’s own case (Frontier Offshore Exploration (India) Ltd. v. DCIT [2007] 314 ITR 193 (Mad)) for an earlier year, wherein it was held that the determination of the applicability of the special regime of section 44BB to a payee cannot be determined by the assessee themselves and that the assessee should approach the AO to determine the appropriate proportion of income on which taxes have to be withheld. In the absence of such an application, the deduction of the expenses was disallowed.

Issues :- In case where the assessee has withheld taxes by applying the special regime of section 44BB without making any application to the AO, whether the AO can then disallow the deduction of the expenses on account of alleged short payment of tax.

Tribunal’s Observation and Ruling

• The Supreme Court (“SC”), in the case of G. E. India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC), has held that the obligation to withhold tax is limited to the appropriate portion of income which is chargeable to tax and forms part of the gross sum payable to the non-resident. Ordinarily, the assessee would not be able to quantify the income of the non-resident. However, where the law provides for a special regime to deal with a special type of income, such a provision will supercede the general provision. Accordingly, on account of the special provisions of section 44BB, 10% of the gross receipts can be deemed as income chargeable to tax in India for the purposes of withholding tax.

• The assessee’s own Tribunal case no longer constitutes sound a legal precedent in view of the SC’s decision in G. E. India Technology Centre (P.) Ltd. and in view of the jurisdictional High Court decision in the case of CIT v. Hi Tech Arai [2009] 321 ITR 477 (Mad).

Conclusion :- This decision is a step forward and helps strengthen the practical position whereby assessees withhold taxes from payments made to non-resident service providers by applying the special regime of section 44BB without making any application to the AO. Nevertheless, assessees must be cautious while deciding whether the activities of a non-resident are covered by the special regime. If the AO takes a different view, assessees will be exposed to tax demands, interest and penalties in addition to the expenses being disallowed.

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June 2024