In a latest judgment, the Delhi High Court has held that activity of 2D/3D seismic survey carried on by assessee in connection with oil exploration was not fees for technical services u/s 9(1)(vii) but liable to taxation u/s 44BB.
Case Law Details:
ITA 612/2012
PGS Exploration (Norway) ….Appellant vs. Addl. Director of Income Tax …Respondent
Coram: Justice S. Ravindra Bhat and Justice Vibhu Bakhru
Date of Judgment: 08/04/2016
Question involved:
whether the consideration received by the appellant for 2D/3D seismic survey for entities resident in India was “fees for technical services” within the meaning of Explanation 2 to Section 9(1)(vii) of the Act; and, whether the same is taxable under section 115A or Section 44BB of the Act.
Brief Facts of the Case:
The appellant was a company incorporated in Norway and is principally engaged in the business of providing world wide geophysical services including acquiring and processing two dimensional (2D) and three dimensional (3D) seismic data . The acquisition of seismic data is the primary method of exploring for hydrocarbon deposits.
M/s B.G. Exploration and Production India Limited (BG) and Reliance Industries Limited (RIL’) engaged the services of the Assessee with respect to offshore block awarded to them.
The Assessee opted to be taxed on presumptive basis under Section 44BB(1) of the Income Tax Act, 1961 at the rate of 10% of the gross revenue and also applied to the Income Tax for authorizing deduction of tax at source (TDS) at lower rates. RIL also filed an application for deducting TDS at a lower rate. These applications were accepted and orders were also issued u/s 197/195 authorizing deduction of TDS at the rate of 4.223% of the gross amounts payable for the financial year 2007-2008.
However, the Assessing Officer (AO) held that the income of the appellant assessee did not qualify to be taxed on presumptive basis u/s 44BB(1). He held that the services provided by the Assessee were technical in nature and the consideration payable to the Assessee was “fees for technical services” within the scope of Section 9(1)(vii) . Accordingly, the AO held that the tax on such income was to be computed under the provisions of Section 115A of the Act and not under Section 44BB(1) of the Act.
The Assessee objected to the draft assessment order before the DRP, which were rejected and AO completed the assessment as per the draft assessment order as directed by DRP. ITAT also disposed off assessee’s appeal concurring with AO/DRP. The Tribunal remitted the matter to AO for decision afresh with direction to first determine if the assessee had a PE in India and, thereafter determine the tax payable in accordance with its ruling in CGG Veritas Services SA: ITA No. 4653/Del/2010.
Excerpts from High Court Judgment:
A plain reading of proviso to Section 44BB(1) of the Act indicates that it would not apply in a case where provisions of Section 115A of the Act are applicable for computing profits and gains or other income referred to in that Section. It is, thus, necessary to refer to Section 115A of the Act for ascertaining the nature of income that is taxable therein and consequently, expressly excluded from the ambit of Section 44BB(1) of the Act by virtue of the proviso thereto.
Thus, the income of an assessee would be taxable under Section 115A(1)(b) of the Act unless (a) it fell within the exclusionary clause of Explanation 2 to Section 9(1)(vii) of the Act, that is, where the consideration received by the assessee is for “construction, assembly, mining or like project” undertaken by it; or (b) it fell within the scope of Section 44DA (1) of the Act.
the primary issue to be addressed is whether the consideration received by the Assessee for providing Geophysical services would fall within the exclusion provided in Explanation 2 to Section 9(1)(vii) of the Act. In our view, the aforesaid question is no longer res integra and is squarely covered by the decision of the Supreme Court in Oil and Natural Gas Corporation Limited (supra).
In its judgement, the Supreme Court referred to a Circular No.1862 dated 22.10.1990 which in turn referred to the Attorney General’s opinion that prospecting for or extraction or production of mineral oil could be termed as ‘mining operations’ and consequently provided that expression “mining projects” or like projects” as occurring in Explanation 2 to Section 9(1)(vii) of the Act would also cover “rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas”. And, after examining various contracts involved in the appeals before it, the Supreme Court held that the contracts were inextricably connected with prospecting, extraction or production of mineral oil and, accordingly, proceeded on the basis that consideration for such services was not fees for technical services. The Supreme Court held that even though there may be certain ancillary works contemplated under the contracts in question but since the dominant purpose of each of such contract is for prospecting, extraction or production of mineral oils, the income from such services were to be computed under Section 44BB of the Act.
The contention advanced on behalf of the Revenue that “fees for technical services” earned by a foreign company in respect of a contract which is connected with the PE of such foreign company in India would be taxable under Section 44DA(1) of the Act, irrespective of whether the same is connected with extraction/production of mineral oils, cannot be accepted. By virtue of Finance Act, 2003, such income was excluded from the ambit of Section 115A(1)(b) of the Act w.e.f. 01.04.2004. Although, with effect from said date such income was taxable under Section 44DA(1) of the Act but in certain cases where such income was earned by the assessee by carrying on a business of providing services in connection with prospecting for, or extraction or production of mineral oils, the said income would also fall within the express language of Section 44BB(1) of the Act and in view of the decision of this Court in OHM (supra), the provisions of Section 44BB(1) of the Act would be applied in preference to Section 44DA(1) of the Act, in those cases. This conflict between Section 44BB(1) and 44DA(1) of the Act was resolved by the Finance Act, 2010 by including a reference to Section 44DA in the proviso to Section 44BB(1) of the Act with effect from 01.04.2011 and simultaneously introducing a second proviso to Section 44DA(1) …..
we must clarify that the income falling within Section 115A(1)(b) of the Act which does not fall within the four corners of Section 44DA(1) of the Act would also not be taxable under Section 44BB(1) of the Act, for the reason that by virtue of proviso to Section 44BB(1) of the Act, it is expressly excluded. Accordingly, if the consideration received by the Assessee for services rendered is found to be „fees for technical services‟, the AO would specifically have to determine (a) whether the assessee had a PE in India during the relevant period; and (b) if so, whether the contracts entered into by the appellant with BG and RIL were effectively connected with the Assessee‟s PE in India. It is only, if the AO finds that the said two conditions are satisfied, that the income of the assessee would be computed under Section 44BB(1) of the Act. However, if such conditions are not satisfied then the income tax payable by the appellant would have to be computed in accordance with Section 115A(1)(b) of the Act.
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