DOLPHIN GEOPHYSICAL AS,NEW DELHI vs. CIT CENTRAL CIRCLE-05, NEW DELHI

Before us, the Ld. Counsel for the assessee, Shri Abhimanyu Jhamba, at the outset informed that most of the issues got settled in set-aside proceedings and submitted a chart to point out that the Ld. CIT in his show cause notice issued u/s. 263 had raised as many as twelve issues and set- aside all those issues to the file of the AO for passing a fresh assessment. Now, out of the twelve issues eleven issues stand settled in the consequent assessment order passed by the AO u/s.143(3)/144C vide order dated 02.12.2019. He submitted that on all the issues, the assessee was able to reconcile and whatever details were asked for got verified as per the directions of the Ld. CIT and no adverse inference has been drawn by the Assessing Officer. However, the issue of treating the entire value of Rs.4,14,36,624/- of contract to be taxed as FTS instead of assessed u/s. 44 BB by the Assessing Officer in the original assessment order.

The brief facts of the issue are that the assessee has entered into a composite contract with ONGC for supply of field processing units, installation, commissioning, training and comprehensive AMC which was inextricably linked with prospecting, extraction and production of mineral oil for ONGC. The assessee offered to tax only amount of Rs.15,95,100/- as FTS out of the total value of contract of Rs.4,14,36,624/- and for balance it explained that it was pure off-shore supply. During the course of the original assessment proceedings, the AO took the entire revenue of Rs.4,14,36,624/- as assessable under the Act and held that it is taxable u/s. 44BB of the Act. However, the Ld. CIT held that the entire contract was a composite one and when assessee itself has considered a small part of its contract to be in the nature of FTS then it is not understood why the remaining part of the contract should not be considered as FTS. Thus, he directed the Assessing Officer to treat the entire amount of Rs.4,14,36,624/- as FTS.

Before us, the Ld. Counsel for the assessee submitted that during the course of the assessment proceedings, the assessee has produced the entire Contract with the ONGC which was thoroughly examined by the Assessing Officer and while concluding the assessment, he had considered the entire revenues earned from the supply contract as part of the gross receipts taxable u/s. 44BB of the Act and assessed the entire amount of Rs.4,14,36,624/-. Thus, the entire amount stood taxed and assessed vide assessment order dated 23.02.2017. Apart from that, from the paper book he pointed out that the AO during the course of assessment proceedings, has asked for contract and other details and in response assessee has filed detail reply and drew our attention to page- 7 of the reply dated 23.12.2016 filed before the AO wherein the assessee has given the contract with the ONGC for supply of 10 nos. of field processing units (FPU), its installation, commissioning, training and comprehensive AMC. Thereafter, AO again raised query specifically on this point and assessee vide reply dated 13.02.2017 gave following reply:-

2. Details of Revenue from offshore supply contract It is respectfully submitted that during the year under consideration, DGAS has earned revenues from offshore supply of FPU units to ONGC. The total contract value is for US$ 675,413,.60 (equivalent to Rs.4,14,36,624/-) out of which US$26,000 (equivalent to Rs.15,95,100/-) has been offered to tax @ 10% as fees for technical services under Article-12 of the India Norway tax treaty. Copy of details of revenue earned from the offshore supply contract is enclosed as Annexure 3. It is respectfully submitted that with regard to the subject contract the title in the goods is passed to ONGC outside India and also that: (a) No portion of income is received directly or indirectly by it in India (b) No portion of income accrues or arises to it in India, and (c) No portion of income could be deemed to accrue or arise to it in India. In view of the above, no revenues pertaining to offshore supply of goods can be held as taxable in India. The legal and factual submissions in support of its contention i are enclosed herewith as Annexure-4.

Thus, he submitted that the AO has not only examined this issue but has also made addition and assessed the entire revenue out of the said contract u/s. 44BB of the Act. Now, whether receipts from such activities are covered u/s 44BB or FTS stands squarely covered by the decision of the Hon’ble Supreme Court in the case of ONGC vs CIT reported in (2015) 59 taxmann.com 1(SC). The Hon’ble Supreme Court held that supply, installation, etc for the purpose of seismic survey and seismic data is to be taxed under provision of 44BB and not u/s. 44D or as FTS. Thus, the view taken by the AO was a consonance with the law of the land and therefore the direction and observations of the Ld. CIT cannot be held to be correct and the assessment order on this point cannot be held to be erroneous and prejudicial to the interest of the Revenue.

On the other hand, the Ld. DR strongly relied upon the order of the Ld. CIT.

After considering the rival submissions and on perusal of the relevant observations and findings of the Ld. CIT, we find that the only issue which survives during the course of hearing before us, is that, whether the revenue on offshore supply of equipment and installation for the value of Rs.4,14,36,624/- is to be taxed as FTS or u/s.44B. The main observations and finding of the Ld. CIT is that, since assessee has treated part of contract value as FTS as Rs.15,95,100/- and since it is a composite contract, therefore, the entire contract value should be treated as FTS. It is well settled law that the Ld. CIT can exercise revisionary jurisdiction u/s. 263 only when he is satisfied that the order passed by the AO is not only erroneous but also prejudicial to the interest of the Revenue and if one of the condition is lacking, then recourse cannot be taken u/s. 263 for cancelling/setting aside the assessment order. In this case, during course of assessment proceedings, the assessee has filed the entire contract before the AO which was examined threadbare and also the AO has raised specific query regarding the taxability of the said amount and the assessee has submitted the details and explained that, major revenue earned was from offshore supply of FPU units to ONGC and out of the total contract value of Rs.4,14,36,624/-, only part of the amount can at best, could have been treated as FTS, i.e., Rs.15,95,100/- which was offered to tax @10% as FTS in terms of Article-12 of the India-Norway tax treaty. It has been further submitted that the offshore supply of goods as per the contract, title in the goods were passed to ONGC outside India and therefore, no portion of income was received directly or indirectly by it in India and no income accrued or arises in India and therefore, no revenue pertaining to element of offshore supply of goods can be held to be taxable in India. However, the Ld. AO taxed the entire amount of the contract receipts u/s 44BB of the Act. Undisputedly, the assessee has entered into a contract with ONGC in connection with prospecting, extraction and production of mineral oil. The contract with the ONGC was composite of offshore supply of equipment, installation, commissioning, etc. The AO has treated the entire revenue as a part of the composite contract inextricably linked with prospecting, extraction and production of mineral oil with ONGC and therefore, he has taxed the entire amount u/s 44BB of the Act. This view of the AO is consonance with judgment of the Hon’ble Supreme Court in the case of ONGC vs. CIT (Supra), wherein, Hon’ble Supreme Court after detailed discussion and by giving various illustrations, held that supply, installation, commissioning etc. for the purpose of seismic survey and seismic data which is inextricably linked with the prospecting, extraction or production of mineral oil then it is assessable u/s 44BB. Hon’ble Court held that if the dominant purpose of agreement is to be seen and even though there may be certain ancillary works contemplated thereunder and the payment made by the ONGC is made in this regard and is received by the non- resident or foreign company under the said contracts, is assessable u/s. 44BB and not u/s. 44D of the Act or FTS. Thus, the view taken by the AO is consonance with law of the land and the Ld. CIT without pointing out as to how the entire amount is taxable as FTS has set- aside the order to treat the entire amount as FTS. No where he has given any specific reason why and how the entire amount is taxable as FTS and his entire observation is based on the fact that is small portion of the contract has been treated as FTS by assessee, therefore the receipts must be taxed as FTS. Such hypothesis cannot be the ground to hold that order of the AO is erroneous in law and directed the AO to tax entire amount as FTS. Such a direction is de-hors any valid reason nor in accordance with the law as laid down by the Hon’ble Supreme Court. Accordingly, such observation and direction of the Ld. CIT is quashed and order of the AO is upheld.

In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 20th March, 2020.