SCHLUMBERGER ASIA SERVICES LTD.,DEHRADUN vs. DCIT, CIRCLE- 2, INTL. TAXATION, DEHRADUN

O R D E R PER M. BALAGANESH, A. M.: The appeal in and 5223/Del/2018 filed by the 1. assessee and ITA No. 6173/Del/2017 and ITA No. 5305/Del/2018 filed by the Revenue for AYs 2014-15 and 2015-16 2012-13, arises out of the order of the Commissioner of Income Tax (Appeals)-2, Noida, [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 75/CIT(A)-2,2016-17 for ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd AY 2014-15 dated 26.07.2017 and 94/CIT(A)-2/2017-18/Noida dated 31.05.2018 for AY 2015-16 against the order of assessment passed u/s 143(3)/144C(a) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 11.11.2016 by the Assessing Officer, DCIT, International Taxation, Circle-2, Dehradun for AY 2014-15 and 16.01.2018 by the ACIT, International Taxation, Circle-2, Dehradun (hereinafter referred to as ‘ld. AO’).

2. Identical issues are involved in all these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience.

3. Both the parties mutually pleaded that the appeals for Asst Year 2015-16 to be taken as the lead year and the decision rendered thereon would apply with equal force for Asst Year 2014-15 also, except with variance in figures.

4. The Ground Nos. 1 to 4 raised by the assessee and Ground Nos. 1 to 7 raised by the revenue are regarding the taxability of services includible in the revenue chargeable to tax u/s 44BB of the Act.

4.1. We have heard the rival submissions and perused the materials available on record. The assessee is incorporated in and under the laws of Hongkong and accordingly a tax resident of Hongkong . The assessee had set up a Project office in India for execution of the contracts, which is the Permanent Establishment (PE) of the assessee in India. The return of income for the Asst Year 2015-16 was filed by the assessee on 30.09.2015 declaring total income of Rs 194,73,02,820/-. The assessee in its return of income admitted that there is a Permanent Establishment (PE) in India. The ld. AO observed that for availing the benefit of provisions of sectin 44BB of the Act, it is essential that assessee should have a PE in India Page | 2

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd through which it is carrying out business in India. The ld. AO noted that the assessee had not claimed any benefit under the Double Taxation Avoidance Agreement (DTAA) nor has filed any tax residency certificate and therefore, the case is to be discussed and assessed under the provisions of the Act. The assessee entered into contracts with the various companies that are listed out in pages 2 to 8 of the assessment order.

4.2. During the year, the assessee derived revenues from the various contracts amounting to Rs 1933,20,29,195/- and offered to tax u/s 44BB of the Act on presumptive basis @ 10% of receipts amounting to Rs 193,32,02,920/-.

4.3. We find that there is absolutely no dispute that the assessee is engaged in the business of exploration of mineral oils. We find that the assessee had offered income on presumptive basis by applying the provisions of section 44BB(1) of the Act. It is not in dispute that the activities carried out by the assessee in India are through its PE in India. The payments received by the assessee are also for rendition of aforesaid services by the assessee. The assessee contended that the activities carried out are mining activities and accordingly would not be covered by definition of fee for technical services u/s 9(1)(vii) of the Act.

4.4. We find that the ld. AO had sought to treat the receipt of services for contracts mentioned in Serial Numbers 1 to 215 as business income of the assessee to be taxed on presumptive basis as per section 44BB(1) of the Act. The ld. AO arrived at the figure thereon at Rs 215,71,88,592/-. However, with regard to the contracts mentioned in Serial Numbers 216 to 231, the ld. AO observed that the said services to be taxed as fees for technical services u/s 9(1)(vii) of the Act and accordingly the provisions of section 44DA of the Act on net income basis would have to be applied.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd The ld. AO observed that these services cannot be considered as any activity relating to mining activity as in the opinion of the ld. AO, in these activities, the assessee is providing technical and consultancy services by providing annual maintenance contract for software supplied and for software maintenance. Accordingly, the ld. AO estimated the profits of the PE for Contracts mentioned in Serial Numbers 216 to 231 at 25% of gross receipts i.e Rs 4,33,41,255/- (25% of Rs 17,33,89,023/-) and completed the assessment. The ld. AO further observed that the following receipts were not considered as part of gross contractual receipts by the assessee :- a) Service tax receipts amounting to Rs 241,32,45,767/- b) Lost in Hole amounting to Rs 80,68,19,422/- c) Reimbursement amounting to Rs 10,84,47,712/-. 4.5. The ld. AO held that the service tax receipts mentioned in a) above should be included as part of gross contractual receipts taxable u/s 44BB of the Act. As far as amount received towards Lost in Hole, the ld. AO by following the decision of Hon’ble Supreme Court in the case of Sedco Forex Intl. Inc. vs CIT in Civil Appeal No.. 4906 of 2012 dated 30.10.2017 held to be not taxable. As far as reimbursement is concerned, the ld. AO held that reimbursements are to be treated as part of gross contractual receipts taxable u/s 44BB of the Act.

4.6. We find that the assessee had always pleaded that the revenues in respect of fluid analysis, sample services, subsurface sample transfer and shipping services, supply of materials for controlling mud loss, MR scanner data processing, diagnostics and optimization along with operating personnel, ELAN multi model analysis, provision of geo-mechanical modeling and wellbore stability studies and pre stack inversion studies for heavy oil bearing for exploitation of oil and gas are inextricably linked with the oil and gas exploration and production activities. The assessee also Page | 4

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd placed reliance on the decision of Hon’ble Supreme Court in the case of Oil and Natural Gas Corporation (ONGC) vs CIT reported in 59 taxmann.com 1 (SC) in support of its contentions and submitted that the revenue received out of rendition of aforesaid services cannot be construed as Fee for Technical Services (FTS).

“5.4 Since the issue is identical to the case of the appellant for AY 2014-15, in similar lines it is also held in the relevant assessment year that except the services for subsurface sample transfer and shipping services and supply of materials for controlling Mud loss, all other provision for services ie fluid analysis, sample services, MR scanner data processing, diagnostics and optimization along with operating personnel, ELAN multi model analysis, provision of geo-mechanical modeling and wellbore stability studies, pre stack inversion studies for heavy oil bearing and provision of services for consultancy study for assessment of gas availability and feel development plan are inextricably linked with exploitation of oil and gas. 5.5 The assessing officer is therefore directed to consider the revenue from the services for subsurface sample transfer and shipping services and supply of materials for controlling Mud loss u/s 44DA of the Act. Revenue from all other services, mentioned at paragraph 8.1 of the assessment order, should be taxed u/s 44 BB of the Act. Estimation of profit is to be modified accordingly. Hence, ground of appeal no. 1 is, therefore, partly allowed. )” 5.1. With regard to the estimation of profits @ 25% of gross receipts made by the ld. AO as profits attributable to PE, the ld. CIT(A) observed as under:-

“Adjudication 5.9 Since in Ground No. 1 it has been considered that the except the services for subsurface sample transfer and shipping services and supply of materials for controlling Mud loss, all other provision for services Le fluid analysis, sample services, MR scanner data processing, diagnostics and optimization along with operating personnel, ELAN multi model analysis, provision of geo-mechanical modeling and wellbore stability studies, pre stack inversion studies for heavy oil bearing and provision of services for consultancy study for assessment of gas availability and feel development plan are inextricably linked with exploitation of ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd oil and gas are taxable under section 44 BB of the Act, this Ground of Appeal becomes infructuous to that extent. 5.10 In regard to the services for subsurface sample transfer and shipping services and supply of materials for controlling Mud loss for which it is held that the same are taxable U/s 44. DA of the Act, I do not see any infirmity in the reasoning of the assessing officer to tax the same at 25%. In view of the above discussion, the ground of appeal is partly allowed.” 5.2. With regard to the inclusion of service tax component to be part of gross receipts, the ld. CIT(A) observed that the service tax component is being received by the assessee only as an agent and passed on to the account of the Central Government . The ld. CIT(A) by following various decisions of Hon’ble High Courts and Tribunal decisions, granted relief to the assessee in this regard.

5.3. With regard to the inclusion of reimbursement portion in the gross receipts to the tune of Rs 10,84,47,712/-, the ld. CIT(A) by following the decisions of Hon’ble Jurisdictional High Court held the issue against the assessee.

a) Sample is collected by drilling an open hole. b) Sample is collected to ascertain whether the reservoir consists of oil, gas or water or mixture of all and certain other parameters as well such as flow of hydrocarbons, characteristics of reservoir etc.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd c) Collected sample is to be transferred in a specific quality bottle (controlled by Nitrogen and other chemicals) and transferred to another transportation facility ensuring it doesn’t get spoiled. d) Several bottom holes samples would be collected during wireline formation testing (MDT) in different wells in the block. The samples will be transferred from MDT sample chambers to specified bottles. e) Post that considering that said samples are waxy in nature, higher temperature would be maintained during the transport . The equipment / experts would be suitable to perform successful transfer to specified bottles and then supply said bottles to the designated location outside or inside India. f) Bottles supplied to the specialized lab for further testing / detailed analysis.

6.1. We find that the ld. DR vehemently relied on the order of the ld. CIT(A), wherein the ld. CIT(A) had merely held that they are only transport services. Per Contra, the ld.AR vehemently relied on the decision of the Hon’ble Supreme Court in the case of ONGC Ltd vs CIT reported in 59 taxmann.com 1 (SC). We find lot of force in the argument of the ld. AR that once the sample is extracted from mine , they are to be tested and hence sent through transport. This, in our considered opinion, would be an activity inextricably linked with extraction and hence would be covered u/s 44BB of the Act. We have gone through the decision of the Hon’ble Supreme Court in the case of ONGC Ltd and are convinced that the services rendered by the assessee squarely fall within the list of services listed out by the Hon’ble Supreme Court in the aforesaid case. The relevant observations of the Hon’ble Apex Court are reproduced below:-

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd “10. Before us the opinion of the learned Attorney General has been placed by the learned counsel for the appellants at great length to contend that the views expressed by the learned Attorney which had been accepted by the CBDT were based on an exhaustive consideration of the provisions of the Mines Act, 1952 and the Mines and Minerals (Regulation and Development) Act, 1957 read with the relevant Entries in the Union and the State List in the 7th Schedule to the Constitution of India. It is urged that the eventual test is one of pith and substance of the agreement, namely, whether the works contemplated or services to be rendered under the agreement is directly and inextricably linked with the prospecting, extraction or production of mineral oil. It is submitted on behalf of the appellants that the agreements in question satisfy the above test for which purpose the appellants have categorized the different contracts under 8 heads which may be conveniently set out at this stage hereinbelow.

11. It is also urged on behalf of the appellants that the instruction/Circular dated 22.10.1990 issued by the CBDT was binding on the primary authority on the ratio of the decision of this Court in K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 . It has been further pointed on behalf of the appellants that even under the provisions of Section 3D of the Oil Fields (Regulation and Development) Act 1948 a mining lease means a lease granted for the purposes of searching for, winning, working, getting, making merchandisable, carrying away or disposing of mineral oils or for the purpose connected therewith and such a lease includes an exploring or prospecting lease. Reference has also been made to the Petroleum and Natural Gas Rules, 1959 framed under Section 5 of the aforesaid Act. Under Rule 4 of the said Rules no person can prospect for petroleum except pursuant to a Petroleum Exploration License (PEL) granted under the Rules and no person can mine petroleum except in pursuance of a Petroleum Mining License (PML) granted under the Rules. It is pointed out that under Rule 7 of the Rules of 1959 a petroleum mining license (PML) entitles the licensee to carry out construction and maintenance in and on such land, works, buildings, plants, waterways, roads, pipelines etc. as may be necessary for full enjoyment of the PML. On the said basis it is argued that rendering any service in connection with prospecting and extraction is an integral part of mining and that the expression "mining" in the Explanation 2 to Section 9(1) of the Income Tax Act, in the absence of any definition under the Income Tax Act, has to be understood as per the provisions of ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd the Oil Fields (Regulation and Development) Act, 1948 read with the Petroleum and Natural Gas Rules, 1959.

12. Opposing the contentions advanced on behalf of the appellants, Shri Gurukrishna Kumar, learned senior counsel for the Revenue has urged that the opinion of the Attorney General relied upon and the CBDT Circular has no relevance to the present case inasmuch as the agreements between ONGC and the non-resident companies made it abundantly clear that what is paid to the non- resident company are fees for technical services rendered. Though such services may have some connection with the prospecting, extraction or production of mineral oil, the primary service rendered by the non-resident companies on the basis of the agreements is not for prospecting, extraction or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned counsel for the revenue has even suggested that if it is held that the High Court ought to have examined each agreement or contract to find out its real purpose and intent the revenue would have no objection if the matters are remanded for a complete exercise to be made on the above basis.

13. The Income Tax Act does not define the expressions "mines" or "minerals". The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct. The said details are set out below. (emphasis supplied by us) S. No. Civil Work covered under the contract Appeal No. 1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells. 10. 2794 Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation. 11. 1524 Conducting reservoir stimulation studies in association with personnel of ONGC. 12. 1535 Laboratory testing under simulated reservoir conditions. 13. 1514 Consultancy for optimal exploitation of hydrocarbon resources. 14. 2797 Consultancy for all aspects of Coal Bed Methane. 15. 6174 Analysis of data of wells to prepare a job design. 16. 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal.

14. Consequently, all the appeals are allowed with no order as to the costs.”

6.1.1 Respectfully following the aforesaid decision of Hon’ble Supreme Court, we hold that the receipts of the assessee would be liable to be taxed only u/s 44BB of the Act and not u/s 44DA of the Act.

6.2. With regard to revenue from supply of material for controlling mud loss, the ld. AR placed on record the following description of services :- a) Chemicals are pumped to ensure that there is no overflow at the time of drilling. This is a very critical activity at the time of drilling a well for oil extraction. b) It also helps in drilling bit cooling, manages flow of waste and captures mud if any. Hence, these are consumables used during specified drilling activity for oil extraction.

6.2.1. We find that the ld. AR is right in placing reliance on the assessment order framed in assessee’s own case for the Asst Year 2016-17 u/s 143(3) r.w.s 144C(3) of the Act dated 14.01.2019 wherein the same services were ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd accepted by the ld. AO to be taxable u/s 44BB of the Act by following the decision of Hon’ble Supreme Court in the case of ONGC Ltd referred supra. Hence we hold that the receipts of the assessee would be liable to be taxed only u/s 44BB of the Act and not u/s 44DA of the Act.

6.3. It is also pertinent to note that the entire gamut of the dispute raised in Ground Nos. 1 to 3 of the assessee and Ground Nos. 1 to 7 of the revenue, we find that the co-ordinate bench of this tribunal in assessee’s own case for the Asst Year 2013-14 in dated 07.12.2021 by following the decision of Hon’ble Supreme Court in the case of ONGC Ltd supra , among other decisions, had held as under:-

12. In the said order the Hon’ble Court had examined the contracts involved in the group of cases and summarized the brief description of the works covered under each of the said contracts in a table between pg 19-21 of the said order. In view of the ratio of the above judgment, it is to be seen whether the receipts under the head “post-stack inversion study, core pressure and well-bore study, data processing and maintenance services is covered within the scope of work under the contracts examined by the Hon’ble Supreme court in the said order. It is the scope of work and nature of service that determines taxability under section 44 BB and 44DA of the Act.

14. On perusal of the material on wellborn analysis it is found that “Wellbore study” is done to avoid drilling related failures. Many drilling related failures are caused by unstable boreholes, poor hole cleaning or stuck BHA and casing, Wellbore study identifies the wellbore instability, along with the mode of failure and is critical in correcting and reducing the cost associated with it. A range of measures based on wellbore acoustics and seismic as well as laboratory measurements assess the significance of the surroundings and reduces the risk.

15. Similarly, core pressure study is part of the Core Analysis which is done in course of Oil exploration to study the rock samples yield data basic to the evaluation of the productive potential of the hydrocarbon reservoir. Unbroken

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd pieces of reservoir rock are obtained through coring techniques, either from the bottom during drilling or from the site of the borehole walls after drilling.

17. Similarly, serial no. 10, 15, 22 and 44 of the table inserted in the ONGC Ltd. case (supra) covers the services of data processing given by the assessee with the scope of work involved, in the contracts examined by the Hon’ble Supreme court in the above said order.

2. Contract of supply, supervision and installation of software which is used for analysis of f low rate of mineral oil to determine reservoir conditions. …………………..

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd being customs duties paid, by the Assessee on behalf of its clients, equipments lost in hole etc. It has been submitted that the inclusion of this amount within the scope of receipts for purpose of determining income of the Assessee is contrary to the settled law on the issue and decisions in the case of the Assessee itself. Income tax is leviable only on those receipts, which constitute ' income'. "Income" as contemplated under the Act does not include "reimbursement of expenses". There is no element of profit and. gains in the reimbursements received by the Assessee, which has incurred expenses for and on behalf of other companies. Contractually the liability to incur these expenses was with those companies. Therefore the amounts towards reimbursement cannot be considered as income of the Assessee. Furthermore, we note that assessee's contention is that that Ld. Assessing Officer has also erred on facts and in law in not following the decision of the jurisdictional High Court of Uttarakhand in Assessee's own cases DIT v. Schlumberger Asia Services Limited [2009] 317 ITR 156/ and CIT v. Schlumberger Asia Services Limited (ITA No. 58 of2006, Order dated 26-10-2007, in which it was held, that such reimbursement does not constitute income. These decisions have also been followed by the Hon'ble Tribunal in Assessee's own case ACIT ./2010 v. Schlumberger Asia Services Limited, ITA No. 4180(Del)/2006 Order dated 13-04-2007. We find considerable cogency in assessee's submission as above. Hence, we hold that the Assessing Officer has erred in including Rs.72359963/- received by the assessee as reimbursements for determining the taxable income of the assessee.” 5.25 Respectful ly fol lowing the decision of the Jurisdictional Tribunal and Hon’ble High Court.

25. Since, the order of the ld. CIT(A) is relied on the order of the ITAT and the Hon’ble Jurisdictional High Court, we decline to interfere with the order of the ld. CIT(A).

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd 6.5. In view of the above observations and respectfully following the judicial precedents relied upon hereinabove, the Ground Nos. 1 to 4 raised by the assessee for the Asst Year 2015-16 are allowed and Ground Nos. 1 to 7 raised by the revenue for the Asst Year 2015-16 are dismissed.

8. The Ground Nos. 10 to 13 raised by the revenue are challenging the deletion of service tax component in the gross receipts chargeable to tax u/s 44BB of the Act. We find that this issue is covered in favour of the assessee in its own case by the Full Bench decision of Hon’ble Jurisdictional High Court reported in 104 taxmann.com 353 (Uttarakhand) wherein it was held as under:-

“45. Service tax is levied, under the Finance Act, 1994, on services. Service tax is, therefore, a tax on "service", and does not form part of the consideration paid for the services rendered, much less services rendered in connection with the prospecting, extraction or production of mineral oils. Reimbursement of service tax by the service recipient to the service provider, representing the amount of tax already paid by the service provider to the Government, would not constitute a part of the amount received for the services rendered by the service provider- assessee to the service recipient-ONGC, much less a part of the amount received for services rendered by the assessee in the prospecting for or the extraction or production of mineral oils.” 8.1. Respectfully following the same, the Ground Nos. 10 to 13 raised by the revenue are dismissed.

9. The Ground No. 14 raised by the revenue is general in nature and does not require any specific adjudication.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

10.1. We have heard the rival submissions and perused the materials available on record. The assessee also offered interest income on Income Tax Refund under the head ‘income from other sources’ amounting to Rs 1,40,99,903/- u/s 244A of the Act at the Maximum Marginal Rate. With regard to the interest income on income tax refund, the assessee submitted during the course of assessment proceedings that it would be entitled for benefit as provided in section 115A(1)(a)(ii) of the Act . The ld. AO observed that the benefit of section 115A(1)(a)(ii) of the Act cannot be granted here as it would be allowable only if there is a debt in foreign currency. The ld. AO held that the income tax refund is nether a debt and nor is it incurred in foreign currency. The ld. AO further observed that the claim of section 115A(1)(a)(ii) of the Act was not made by the assessee in the return of income and hence by following the ratio laid down by the Hon’ble Supreme Court in the case of Goetze India Ltd vs CIT reported in 284 ITR 323 (SC), the same need not be entertained at the assessment stage. Accordingly, this new claim of the assessee was held to be not tenable by the ld. AO in the assessment.

10.2. The ld. CIT(A) at the outset observed that the assessee though had not made this claim in the return of income is entitled to make a fresh claim and since the matter is pending before the appellate authority, the same could be entertained and started adjudicating the same on merits of the issue. The ld. CIT(A) upheld the findings of the ld. AO that income tax refund cannot be arising out of a debt and further observed that the assessee had not established how income tax refund could become a debt so as to fall under the provisions of section 115A(1)(a)(ii) of the Act . Page | 18

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd Accordingly, the ld. CIT(A) held that the interest on income tax refund would be taxed only at Maximum Marginal Rate.

10.3. The ld. AR submitted that one of the grievance of the ld. CIT(A) is that the assessee had not established the income tax refund to be a debt. The ld. AR placed reliance on the decision of Hon’ble Supreme Court in the case of Union of India vs Tata Chemicals Ltd reported in 43 taxmann.com 240 (SC) to prove that income tax refund would be ‘debt owed by revenue’ to the assessee and accordingly the assessee’s case would squarely fall under the provisions of section 115A(1)(a)(ii) of the Act. The ld. AR also placed reliance on the decision of Hon’ble Madras High Court in the case of Ansaldo Energia SPA vs CIT reported in 69 taxmann.com 369 (Mad). With regard to yet another observation made by the ld. CIT(A) that the debt should be in foreign currency, the ld. AR submitted that the refund in the instant case arises to the assessee due to excess deduction of tax at source by the parties while making contract payments to the assessee. The customers had admittedly paid contract receipts to the assessee only in US Dollars after withholding tax. To the extent of withholding tax, the assessee has been denied actually the foreign currency. The ld.AR also placed reliance on the CBDT Circular No. 473 dated 29.10.1986 issued in the context of section 115A of the Act. Hence it is a debt owed to the assessee in foreign currency. The ld. AR further placed reliance on the decision of Special Bench of Delhi Tribunal in the case of ACIT vs Clough Engineering Ltd reported in 130 ITD 137 (Delhi)(SB) dated 06.05.2011 in support of his contentions. The ld. AR also placed reliance on the decision of Ahmedabad Tribunal in the case of DCIT vs Sidhpur Isabgol Processing Co. reported in 13 taxmann.com 113 (Ahd Trib) to consider the CBDT Circular if the reliance placed thereon gives a logical and righteous conclusion.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd 10.4. The ld. DR at the time of hearing sought time to file his written submissions which was ultimately filed by him vide letter dated 26.6.2023. For the sake of convenience, the entire written submissions of the ld. DR on this issue is reproduced below:-

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd 10.5. The ld. AR also filed rejoinder reply to the submissions of the ld. DR.. The rejoinder reply filed by the assessee is reproduced hereunder:-

“BEFORE THE INCOME-TAX APPELLATE TRIBUNAL DEHRADUN BENCHES IN THE MATTER OF SCHLUMBERGER ASIA SERVICES LTD. ASSESSMENT YEARS 2014-15 AND 2015-16 ITA Nos.: 6126/Del/2017 and 6173/Del/2017 5223/Del/2018 and 5305/Del/2018 REBUTTALS TO THE ARGUMENTS MADE BY THE DEPARTMENTAL REPRESENTATIVE [DR] VIDE A NOTE DATED 26 JUNE 2023-copy received by the assessee on 10 July 2023 1. On the issue raised in by the DR in Para 2 of the Note i.e. the assessee has offered the 'income from interest on income-tax refund' in its the return of income for both the years under the head 'business income, and that the claim of taxability of the said income under the head income from other sources' was only made before the Assessing Officer / appellate authorities: In this connection it is submitted that the issue vis-à-vis raising a fresh claim before the appellate authorities, which was not made in the return of income, is settled in the favour of the assessee by the decision of the Bombay High Court in the case of Pruthvi Stock Brokers and Shareholders Pvt. Ltd. [2012] 349 ITR 336 (copy enclosed) wherein it has been held that the appellate authority certainly has power and jurisdiction to entertain a fresh claim of the assessee if the relevant fact for deciding such issue are available on record.

2. On the issue raised by the DR in Para 4(a) of the Note i.e. "interest on income-tax refund" is not a "debt" and that the decision of the Apex Court in the case of UOI v/s. Page | 21

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd Tata Chemicals Ltd. [2014] 43 taxmann.com 240 is not applicable to the facts of the instant case: In this connection, attention of the Bench is once again invited to the decision of the Madras High Court in the case of Ansaldo Energia SPA v/s. CIT [2016] 69 taxmann.com 369 (submitted as a part of the case law compilation - Vol 1 - please refer page Nos. 23 to 28 of the compilation), wherein after a very detailed discussion it has been held that the Supreme Court has not made a stray observation in Para 38 of the its decision in case of the Tata Chemicals Ltd. (supra) and that the statement to that effect viz. "refund due and payable to the assessee is debt owed payable by the revenue" is actually a perfect statement of law relevant extracts are given hereunder for your Honour's ready reference: "25. For a moment, we will keep aside the decision of the Supreme Court in Tata Chemicals Ltd.'s case (supra) and have a plain look at Section 244-A of the Income Tax Act. Under Sub-section (1) of Section 244-A, an assessee is made entitled to receive in addition to any amount of refund that has become due to him, simple interest calculated in the manner provided therein. Subsection (1) of Section 244-A uses two important expressions, namely (i) becomes due, and (ii) be entitled to. The expression "becomes due" is a clear indication that an assessee will be entitled to the benefit of Section 244-A only if the refund of any amount has become due. If a refund has become due, interest on the refund is also automatic subject to the satisfaction of other conditions. Anything that is due and which a person is entitled to collect, is naturally in the nature of a debt claim. Therefore, we do not think that the Supreme Court made a very stray observation in paragraph 38 of its decision in Tata Chemicals Ltd.'s case (supra) without realising what they were actually indicating. The statement found in paragraph 38 of the decision in Tata Chemicals Ltd.'s case (supra) to the effect "refund due and payable to the assessee is debt owed payable by the revenue" is actually a perfect statement of law. It is certainly a theorem, but not Euclid's theorem. Therefore, the law as we see is well settled to the effect that what was due as a refund and what was payable as interest on such refund are debt claims within the meaning of Article 12.4. As a consequence, they satisfy the parameters of Article 12.3(a). Hence, the first question of law is answered in favour of the appellant. Consequently, the second question of law does not arise for consideration. The appeal stands allowed. There will be no order as to costs." (emphasis supplied) It is submitted that the ratio laid down in the aforesaid decision in the case of Ansaldo Engineering SPA (supra) has not been rebutted by the DR during the course of the hearing or in the Note submitted.

3. On the issue raised by the DR in Para 4(b) and (c) of the Note viz. the CBDT Circular No. 473 dated 29 October 1986 cannot be applied to the facts of the instant case as the same was in the context of deposit in NRE and FCNR bank accounts and deposits in public limited companies: In this connection it is submitted, as was argued during the course of the hearing on 23 June 2023, that the Ahmedabad Bench of the Tribunal in the case of DCIT v/s. Sidhpur Isabgol Processing Co. [2011] 13 taxmann.com 113 submitted as a part of the case law compilation Vol I- please refer page Nos. 29 to 35 of the compilation) has held - that one can take the shelter of Circular No. 473 (supra), if the reliance on the same gives a logical and a righteous conclusion (relevant portion extracted):

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd "6.4 The Id. Counsel Mr. Mukesh M. Patel has cited a decision of Hon'ble Supreme Court pronounced in the case of CIT v. Ajax Products Ltd. [1965] 55 ITR 741 for the legal proposition that there must be strict interpretation of the charging provisions and an amount should not be taxed unless the charging provision clearly imposes the obligation. There is no two opinion if the words of a Statute are precise and unambiguous, they must be accepted as it existed if declaring the express intention of the Legislature. We have to give a simple and a natural meaning of the old provisions of the Statute that (1) a "reserve" was required to be created and that (ii) the "reserve" was required to be used for the business of the assessee. The said twin conditions were fulfilled by the assessee, hence there was no infringement of the Rules. Further, there was no guidelines in the said section about its distribution, therefore, there is no harm in taking the shelter of the Circular No. 463 (supra) to arrive at a logical and a righteous conclusion." (emphasis supplied) It is submitted that the ratio laid down in the aforesaid decision in the case of Sidhpur Isabgul Processing Co. (supra) has not been rebutted by the DR during the course of the hearing or in the Note submitted.

4. On the issue raised by the DR in Para 4(d) of the Note viz. the decision of the Special Bench of the Tribunal in the case of Clough Engineering Ltd. [2011] 9 ITR(T) 618 (Del SB), was not applicable to the facts of the instant case, as the same was in connection with whether Income-tax refund was taxable under Article 11 of the concerned Double Taxation Avoidance Agreement ['DTAA]. Further, it has been submitted that the decision of the Uttarakhand High Court in the case of B.J. Services Co. Middle East Ltd. v/s. ACIT [2016] 380 ITR 138¹ has held that interest income is taxable at the business income, chargeable at the maximum marginal rate and not at 15% under the relevant DTAA. In this connection, it is pointed out that the decision of the Special Bench in the case of Clough Engineering Ltd. (supra) (copy enclosed) was referred to by the assessee during the course of the hearing to demonstrate that interest on income- tax refund cannot be said to be effectively connected with the Permanent Establishment and hence, would be subject to tax under the head income from other sources' relevant extracts given hereunder: "11.4 Thus, we are again left with the fundamental question as to whether the debt-claim in this case can be said to be effectively connected with the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign company. The same is determined after computation of its income and the tax forms not an expenditure for earning the income but an item of appropriation of profit. Therefore, even if the debt is connected with the receipts of the PE, it cannot be said to be effectively connected with such receipts because the responsibility to pay the tax lies on the shoulders of the assessee-company from the final profit ascertained as on the last date of the previous year and on closing the books of account. It is for the company to pay the tax from any source available with it. It so happened in this case that the tax got automatically deducted from the receipts of the PE by operation of law. Such collection of tax by force of law would not establish effective connection of the indebtedness with the ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

PE as ultimately it is only the appropriation of profit of the assessee company. However, we may add that we do not venture to say that the interest income has to be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant. Thus, there may be cases where Interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income-tax refund. Such interest is not effectively connected with PE either on the basis of asset-test or activity-test. Accordingly, it is held that this part of Interest is taxable under paragraph No. 2 of Article XI. Thus, the ground referred to the Special Bench is partly allowed. The Division Bench shall dispose off the appeal in conformity with this order." Further, the decision of the Uttarakhand High Court sought to be relied upon by the DR is not relevant to the facts of the instant case since the Hon'ble High Court in that case had to specifically deal with the provisions of clause 6 of Article 12 of the India-UK DTAA, which states that the provisions of clauses 1, 2 and 3(a) of the Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises through a permanent establishment and in such case the provisions of Article 7 (Business profits) of the India- UK DTAA shall apply. The question of taxability of the interest on income-tax refund under a DTAA does not arise in the instant case, as the assessee is a tax resident of Hongkong and therefore, the DTAA provisions are not applicable. Further, taxability of interest u/s. 9 of the Income- tax Act, 1961 does not have a clause similar to Article 12(6) of the India-UK DTAA, and therefore, it is once again submitted that the aforesaid decision in case of B.J. Services Co. Middle East Ltd. will not apply to the facts of the instant case. The only issue that arises for consideration is whether the interest earned has to be assessed at the rate provided for under the relevant Finance Act or in section 115A. Further, it would not be out of place to mention here that the question of taxability of the interest income u/s. 115A was not raised before the High Court, and therefore the said decision is not applicable on that count too. In addition to the above it is submitted that, the Tribunal after the decision of the Uttarakhand High Court in B.J. Services Co. Middle East Ltd. (supra), held that interest on income-tax refund is not effectively connected with the Permanent Establishment in the following cases: • Dehradun Bench of the Tribunal in the case of Baker Hughes Singapore Pte. Ltd. vs. ACIT [ITA No. 5337/DDN/2018] dated 08 February 2022 (copy enclosed); • Delhi Bench of the Tribunal in the case of Transocean Offshore International Ventures Ltd. v/s. DCIT [2022] 136 taxmann.com 351 (Delhi - Trib.) (copy enclosed).”

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd 10.6. From the perusal of the submissions of both the sides, we deem it fit to address the issue in dispute by placing reliance on certain case laws to understand the meaning of certain expressions used in section 115A(1)(a)(ii) of the Act. First we would like to place reliance on the decision of Hon’ble Supreme Court in the case of Union of India vs Tata Chemicals Ltd reported in 43 taxmann.com 240 (SC) wherein the relevant observations are as under:-

“37. A "tax refund" is a refund of taxes when the tax liability is less than the tax paid. As per the old section an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to a special order passed by the assessing officer/Income Tax Officer. In the appeal filed against the said order the assessee has succeeded and a direction is issued by the appellate authority to refund the tax paid. The amount paid by the resident/deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a resident/deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

(emphasis supplied by us)”

10.6.1. Hence it is very clear that any amount retained by the Government is a debt owed by the Government to an assessee.

10.6.2. Let us now examine the decision of Hon’ble Madras High Court in the case of Ansaldo Energia SPA vs CIT reported in 69 taxmann.com 369 (Mad). The relevant observations are reproduced hereunder:-

“These appeals filed by the assessee under Section 260-A of the Income-tax Act, were admitted on 02.02.2016 on the following substantial questions of law:— "(i) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that interest under Section 244A of the Act on refund of income tax is not covered within the term 'interest' under Article 12(4) and accordingly, the same is not outside the purview of taxation by India as provided in Article 12(3)(a) of the Double Taxation Avoidance Agreement between India and Italy? 8. Paragraphs 1 to 4 of Article 12 read as follows:— '1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in both the Contracting States.

2. Notwithstanding the provisions of paragraph 1, the tax chargeable in a Contracting State on interest arising in that State and paid to a resident of the other Contracting State in respect of loans or debts shall not exceed 15 per cent of the gross amount of such interest.

3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State, if:— (a) the payer of the interest is the Government of that Contracting State or a local authority thereof, or (b) the interest is paid to any agency or instrumentality (including a financial institution) which may be agreed upon in this behalf by the two Contracting States.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

10.7. Let us now examine the aspect whether the debt is owed by the Government in foreign currency. In this regard , it would be pertinent to refer to the CBDT Circular No. 473 dated 29.10.1986 which is reproduced hereinbelow:-

SECTION 115A OF THE INCOME-TAX ACT, 1961 - FOREIGN COMPANIES-TAX ON DIVIDENDS, ROYALTY AND TECHNICAL SERVICES - INTEREST INCOME IN THE CASE OF FOREIGN COMPANIES - RATE OF TAX APPLICABLE CIRCULAR : NO. 473 [F. NO. 478/33/86-FTD], DATED 29-10-1986 1. Under section 115A(1), income by way of interest received by a foreign company from Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency, is chargeable to tax at the rate of 25 per cent.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

10.7.1. We find that in the instant case, admittedly, the remittances came to the assessee from its customers in US Dollars. Hence this Circular would be relevant to drive home the point that what is crucial is how the remittance come to the assessee. The case of the ld AR is that the remittance in assessee’s case came in US Dollars and the refund arose due to TDS on such remittances. Hence it would be debt in foreign currency. 10.8. In order to make the provisions of section 115A(1)(a)(ii) of the Act applicable, two conditions should be cumulatively satisfied :- a) First, there should be a debt owed by the Government - This is already satisfied in the instant case as per the decision of Hon’ble Supreme Court and Hon’ble Madras High Court supra b) Second, the debt should be in foreign currency - In this regard, it is pertinent to note that the income tax department had not made any borrowings in foreign currency. No doubt the refund due to TDS might occur to the assessee out of foreign remittances from customers. But that is the transaction in foreign currency between payer and payee and income tax department has no role to play in the same. Hence it could be safely concluded that though there is a debt owed, but that debt owed is not in ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd foreign currency for the income tax department. Hence the second condition prescribed in section 115A(1)(a)(ii) of the Act is not satisfied in the instant case.

10.9. The ld. AR had stated that the decision of Delhi Tribunal in the case of B J Services Co. Middle East reported in [200] 29 SOT 312 (Delhi) has decided the issue in favour of the revenue. But this decision has been considered by the Special Bench of Delhi Tribunal in the case of ACIT vs Clough Engineering Ltd reported in 138 TTJ 385 (Delhi)(SB). We have gone through the decision of Special Bench and we find in that case, the issue was concerned with taxability under treaty provisions and particularly interpreting the expression ‘in connection with PE’. Whereas in the instant case before us, the assessee had admittedly offered the income under the domestic provisions and had not even disputed the same. Hence the decision of Special Bench of Delhi Tribunal relied upon by the ld. AR does not come to the rescue of the assessee in the instant case. 10.10. Moreover, we find that the decision of Delhi Tribunal relied by ld. DR in the case of B J Services Co. Middle East has been approved by the Hon’ble Jurisdictional High Court reported in 380 ITR 138 (Uttarakhand) wherein it was held that interest on refund u/s 244A of the Act arising to a foreign company would be taxed at Maximum Marginal Rate. 10.11. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, the Ground No. 5 raised by the assessee for the Asst Year 2015-16 is dismissed.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

13. We find that the assessee had filed an additional ground before us on 07.07.2021 praying to tax the interest income on income tax refund to be taxed in terms of section 115A(1)(a)(ii) of the Act instead of at Maximum Marginal Rate. This is purely a legal issue and does not require any verification of facts. Hence in view of the decision of the Hon’ble Supreme Court in the case of NTPC Ltd reported in 229 ITR 383 (SC), the additional ground raised by the assessee is admitted and taken up for adjudication.

13.1. The issue raised in Additional Ground is already decided by us hereinabove for the Asst Year 2015-16 vide original ground no. 5 thereon. Hence the decision rendered by us for Asst Year 2015-16 shall apply with equal force for the Additional Ground in Asst Year 2014-15 also.

ITA No. 6126/Del/2017 & (Assessee) & ITA No. 5305/Del/2018 (Revenue) Schlumberger Asia Services Ltd

Order pronounced in the open court on 15/09/2023.