PRODUCTION TESTING SERVICES INC,MUMBAI vs. DCIT (IT) 3(3)(2), MUMBAI

आदेश / O R D E R PER RAVISH SOOD, JUDICIAL MEMBER The present appeal is directed against the order passed by the Assessing Officer (for short ‘A.O’), under Sec. 143(3) r.w.s 144C(13), dated. 27.01.2015, wherein the latter had given effect to the directions given by the Dispute Resolution Panel-III, Mumbai (for short

Production Testing Services Inc. vs. DCIT(IT) 2 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 ‘DRP’), vide its order dated 26.12.2014,4 which in itself was passed pursuant to the objections filed by the assessee to the additions/variations made by the A.O in his draft assessment order passed under Sec. 143(3) r.w.s 144C(1) of the Income Tax, 1961 (for short ‘Act’), dated 14.03.2014. The assessee assailing the order of the A.O had raised before us the following grounds of appeal.:- “1. The ld. Assessing Officer has erred in holding that income received by Appellant constitutes fees for technical services and covered under section 115A of the Income tax Act, 1961 instead of applying the provisions of section 44BB of the Income-tax Act, which is a special provision for computing profits and gains in connection with the business of exploration etc of mineral oils. 2. Without prejudice to the above Appellant submits that A.O has erred in holding that BJ services has given a sub contract to the Appellant who has agreed to perform the services indirectly for ONGC and wrongly stated that the payments are made by ONGC to Appellant. These observations are factually incorrect and further contrary to the various judicial decisions which were cited by the Appellant, therefore the said order is bad in law and deserves to be quashed. 3. Without prejudice to the above Appellant submits that learned Assessing officer has failed to appreciate that sec. 44BB of the Income tax act overrides all other provisions of the Income tax act, being a special provision specifically for the purpose of assessee engaged in the business of prospecting for, or extraction or production of mineral oils. 4. Without prejudice to the above Appellant submits that Appellant is a non resident company and provides services to another non resident company. Hence, provisions of sec. 115A are not applicable to the facts instead sec. 44BB is applicable in the Appellants case. Appellant therefore prays that order deserves to be set aside. 5. Without prejudice to the above, Assessing officer overlooked that sec. 115A is applicable only when income for technical fees is received from Government or an Indian concern. In the Appellant companys case, income is not received from an Indian concern nor from the Government. Appellant assessee therefore prays that provisions of Section 115A are not applicable. 6. Appellant company submits that the Assessing Officer has not construed the law and judicial pronouncements on the subject. Hence,

Production Testing Services Inc. vs. DCIT(IT) 3 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 the Appellant company prays that assessment be made u/s 44BB of the Income-tax act, 1961. 7. Appellant craves leave to add, alter, amend, modify or omit any of the aforesaid grounds as the occasion may arise or demand.”

Production Testing Services Inc. vs. DCIT(IT) 4 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 further held a conviction that Fracturing Flow Services were technical services that were provided by the assessee for prospecting extraction or production of mineral oil. The A.O further observed that the certificates issued under Sec. 197(1) clearly provided for deduction of tax at source @10% under Sec. 194J on the gross amount payable by B.J Services Company (Middle East ) Ltd to the assessee in respect of fees for technical services. The A.O further took note of the fact that even the TDS certificates filed by the assessee pertained to deduction of tax at source on fees for technical fees under Sec. 194J. 4. Thus, the A.O in the backdrop of the aforesaid facts called upon the assessee to show cause as to why the amount of Rs. 2,65,46,753/- received by it from B.J Services Company (Middle East ) Ltd may not be treated as fees for technical services and brought to tax as per the provisions of Sec. 115A of the ‘Act’. The assessee submitted at length before the A.O that as per Sec. 90(2) of the ‘Act’, the provisions of Double Taxation Avoidance Agreement (‘DTAA”) or the provisions of the Income-tax act, 1961, whichever was more beneficial to the assessee would be taken as its income. The assessee thereafter referring to Article 7 of the DTAA, therein submitted that the provisions of Sec. 44BB would be applicable in its case as they were more beneficial to the assessee. The assessee submitted before the A.O that the provisions of Sec. 44BB were clearly applicable in its case. However, the A.O after deliberating on the explanation of the assessee did not find favour with the same. The A.O primarily driven by the facts, viz. (i). that as B.J Services Company (Middle East ) Ltd was carrying out Fracturing Flow Back Services and various operations at the Oil rigs pursuant to the contract with ONGC, therefore, the assessee who was sub-contracted the said work by B.J Services Company (Middle East ) Ltd was indirectly performing the services for ONGC; (ii). that the certificates issued under Sec. 197(1) clearly

Production Testing Services Inc. vs. DCIT(IT) 5 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 provided for deduction of tax at source @10% under Sec. 194J on the gross amount payable by B.J Services Company (Middle East ) Ltd to the assessee in respect of fees for technical services; and (iii). that even the TDS certificates filed pertained to deduction of tax at source as per the provisions of Sec. 194J on account of fees for technical fees, therefore, vide his Draft assessment order passed under Sec. 143(3) r.w.s 144C(1) brought the amount of Rs. 2,65,46,753/- to tax under Sec. 115A as amount received by the assessee by way of ‘Fess for technical services’. 5. Aggrieved with the adjustments/variations made by the A.O in the draft assessment order the assessee filed its objections with DRP- III, Mumbai. The assessee assailed the draft assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(1), and to drive home its contention that the amount of Rs.2,65,46,753/- received from B.J Services Company (Middle East ) Ltd had rightly been offered for tax under Sec. 44BB of the ‘Act’, therein submitted before the DRP as under: (i). The assessee had in its application filed with the department under Sec. 197(1) sought for lower rate of TDS @4.22% under Sec. 44BB of the ‘Act’. (ii). That as the business of providing Fracturing Flow Back Services by the assessee was of a specific nature as envisaged under Sec. 44BB, therefore, the computation provisions of Sec. 44BB would prevail over the provisions of Sec. 44DA. It was further stated that the provisions of Sec. 44BB would not apply in a case where the provisions of Sec. 42 or Sec. 44DA or Sec. 115A or Sec. 293A applied for the purpose of computing profits and gains or any other income referred to in those sections.

Production Testing Services Inc. vs. DCIT(IT) 6 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 (iii). That as per the assessee the provisions of Sec. 115A were not applicable in its case as the assessee had not entered into an agreement with Government or an Indian concern, but with a non- resident, viz. B.J Services Company (Middle East ) Ltd. (iv). That as the income derived by the assessee from the activity of extraction or production of mineral oil at the oil rigs from a Foreign company was liable to be assessed under the provisions of Sec. 44BB of the ‘Act’, therefore, the amount of Rs. 26,54,675/- (i.e 10% of gross receipts of Rs. 2,65,46,753/-) was rightly offered for tax by the assessee. 6. The DRP after deliberating on the contentions of the assessee was however not persuaded to accept the same. The DRP referring to the nature of services involved in Fracturing Flow Back Services provided by the assessee, therein observed that the same were highly technical services. That after examining at length the process involved in extraction or production of mineral oil, the DRP concluded that the payments received by the assessee for rendering of the Fracturing Flow Back Services to the oil companies could safely be characterized as fees for technical services. The DRP further agreed with the view of the A.O that as the certificates under Sec. 197(1), as well as the TDS certificates furnished during the course of the assessment proceedings were for deduction of tax at source fees for technical services under Sec. 194J, which had consistently been accepted by the assessee, therefore, his aforesaid view that the amounts received by the assessee were in the nature of fees for technical services stood fortified. The DRP further being of the view that as the assessee had carried out services on behalf of B.J Services Company (Middle East) Ltd, therefore, it had performed the Fracturing Flow Back Services for ONGC, and its contention that the payments received from B.J

Production Testing Services Inc. vs. DCIT(IT) 7 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 Services Company (Middle East) Ltd were not being in the nature of payments from Government or Indian concern, thus, fell beyond the sweep of Sec. 115A could not be accepted. The DRP observed that as the source of payments received by the assessee had originated from ONGC, which had thereafter been distributed between the assessee and B.J Services Company (Middle East) Ltd, being sub-contractor and contractor, respectively, therefore, it could safely be concluded that the assessee had indirectly received the payment from ONGC. The DRP further held that even if the version of the assessee that it had not done any work for ONGC was to be accepted, even then, the amount received by the assessee was clearly in the nature of fees for technical services. The DRP further concluded that as per Explanation 2 to Sec. 9(1)(vii), the technical services rendered by a non-resident has been used and utilized in India, hence the same was assessable as fees for technical services as per Explanation below Sec. 115A(1)(b) of the ‘Act’. Thus, in the backdrop of its aforesaid observations the DRP upheld the findings of the A.O. 7. The A.O giving effect to the directions of the DRP framed the assessment vide his order passed under Sec. 143(3) r.w.s 144C(13), dated. 27.01.2015. The A.O following the directions of the DRP, brought the amount of Rs. 2,65,46,753/- received by the assessee from B.J Services Company (Middle East) Ltd for rendering of Fracturing Flow Back Services to tax as per the provisions of Sec. 115A of the ‘Act’. 8. Aggrieved, the assessee had assailed before us the order passed by the A.O under Sec. 143(3) r.w.s 144C(13). The ld. Authorised representative (for short ‘A.R’) for the assessee at the very outset of the hearing of the appeal relied on the judgment of the Hon’ble Supreme Court in the case of ONGC Vs. CIT (2015) 376 ITR 306 (SC), and

Production Testing Services Inc. vs. DCIT(IT) 8 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 submitted that the Hon’ble Apex Court had held that prospecting for or extraction or production of mineral oil is not to be treated as technical services for the purpose of Explanation 2 of Sec. 9(1)(vii), and would rather be covered by Sec. 44BB of the ‘Act’. It was submitted by the ld. A.R that as Sec. 44BB contemplates special and specific provisions for computing profits and gains of a non-resident as regards the business of providing services or facilities in connection with or supplying plant and machinery on hire used or to be used in the prospecting for or extraction or production of mineral oils, therefore, the Fracturing Flow Back Services rendered by the assessee in connection with extraction or production of mineral oil would squarely be covered by the provisions of Sec. 44BB. The ld. A.R submitted that as Sec. 115A presupposes the rendering of ‘technical services’ by the assessee, therefore, now when the Hon’ble Apex Court had held that prospecting for extraction or production of mineral oil is not to be treated as technical services, the provisions of Sec. 115A thus would not be applicable to the case of the assessee. The ld. A.R further took us through the contract executed between ONGC and B.J Services. The ld. A.R drew our attention to Page 23-24 – Para 35 of the aforesaid contract, and therein referring to the contents submitted that it was clearly stated that the contractor, viz. B.J Services Company (Middle East) Ltd shall be solely responsible for the manner in which the work assigned to it was performed. The ld. A.R further submitted that it was mentioned in unequivocal terms that if any sub- contractor was engaged by the contractor for performing the contract, then he shall be under the complete control of the contractor and there shall be no contractual relationship between any such sub- contractor and the company, viz. ONGC. The ld. A.R in the backdrop of the aforesaid terms of the contract submitted that now when the assessee who was engaged as a sub-contractor by B.J Services

Production Testing Services Inc. vs. DCIT(IT) 9 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 Company (Middle East) Ltd had nothing to do with the company, viz. ONGC, therefore, the DRP was wrong in concluding that the amount received by the assessee from B.J Services Company (Middle East) Ltd for rendering Fracturing Flow Back Service were indirectly received from ONGC. Per Contra, the ld. Departmental representative (for short ‘D.R’) relied on the provisions of Sec. 44DA of the ‘Act’. The ld. D.R in support of his contention that the amount received by the assessee from rendering of Fracturing Flow Back Services was liable to assessed under Sec. 44DA, therein relied on the judgment of the Hon’ble High Court of Uttarakhand in the case of CIT Vs. ONGC (as representative assessee of Rolls Royce (P). Ltd.) (2008) 170 Taxman 563 (Uttarakhand). The ld. A.R rebutting the aforesaid contention of the revenue relied on the Explanation 2 of Sec. 9(1)(vii), and submitted that the same clearly excluded any amount received by an assessee from assembly, mining or like project undertaken from the sweep of ‘fees for technical services’. 9. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the assessee ,viz. Production Testing Services Inc., Texas, USA, which is a Foreign company incorporated in USA, is engaged in providing fracturing flow back services to oil companies. We find that B.J Services Company (Middle East) Ltd., a company incorporated in Scotland and having a project office in Mumbai was awarded a contract for Fracturing Flow Back Services by Oil and Natural Gas Commission (for short ‘ONGC’). That B.J Services Company (Middle East) Ltd. in turn awarded the contract to the assessee, vide agreement dated. 15.07.2007. We find that the assessee pursuant to the sub-contract awarded by B.J Services Company (Middle East) Ltd. had rendered Fracturing Flow Back Services and various operations at the Oil rigs. We have deliberated on the terms of

Production Testing Services Inc. vs. DCIT(IT) 10 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 the contract between ONGC and B.J Services Company (Middle East) Ltd., and after perusing Page 23-24 – Para 35 of the said contract find that the contractor, viz. B.J Services Company (Middle East) Ltd. was solely responsible for the manner in which the work assigned to it was performed. We are persuaded to be in agreement with the ld. A.R that as the contents of the aforesaid contract clearly stated that if any Sub- contractor was engaged by the contractor for performing the contract, then he shall be under the complete control of the contractor and there shall be no contractual relationship between any such Sub- contractor and the company, viz. ONGC. We thus, are of the considered view that in the backdrop of the aforesaid clear terms of the contract, now when the assessee who was engaged as a Sub- contractor by B.J Services Company (Middle East) Ltd had nothing to do with the company, viz. ONGC, therefore, the A.O/DRP were wrong in concluding that the amount received by the assessee from B.J Services Company (Middle East) Ltd for rendering Fracturing Flow Back Services were indirectly received from ONGC. We thus set aside the aforesaid observations of the A.O/DRP and hold that the amount under consideration was received by the assessee from B.J Services Company (Middle East) Ltd. 10. We further find that pursuant to the judgment of the Hon’ble Supreme Court in the case of ONGC Vs. CIT (2015) 376 ITR 306 (SC), it stands settled as on date that prospecting for extraction or production of mineral oil is not to be treated as technical services for the purpose of Explanation 2 of Sec. 9(1)(vii), and would rather be covered by Sec. 44BB of the ‘Act’. We are of the considered view that after the aforesaid judgment of the Hon’ble Supreme Court, the issue that prospecting for extraction or production of mineral oil is not to be treated as technical services for the purpose of Explanation 2 of Sec. 9(1)(vii) stands settled and is no more found to be res integra. We are

Production Testing Services Inc. vs. DCIT(IT) 11 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 of the considered view that Sec. 115A(b) clearly presupposes existence of ‘fees for technical services’, which further as per the Explanation (a) contemplated therein refers to Explanation 2 of Sec. 9(1)(vii). That now when pursuant to the judgment of the Hon’ble Supreme Court in the case of ONGC vs. CIT (2015) 376 ITR 306 (SC), the issue that prospecting for or extraction or production of mineral oil is not to be treated as technical services for the purpose of Explanation 2 of Sec. 9(1)(vii), therefore, it can safely be concluded that the payments received by the assessee from rendering of Fracturing Flow Back Services for extraction or production of mineral oil would not fall within the realm of ‘fees for technical services’. We thus, are of the considered view that as the precondition for invoking of Sec. 115A is in itself found to be missing, therefore, the same would not be attracted to the case of the assessee. We have further given a thoughtful consideration to the contention of the assessee that as it had received the amounts for rendering the services of Fracturing Flow Back Services from B.J Services Company (Middle East) Ltd., which itself was a foreign company, viz. a company incorporated in Scotland ,therefore, the said sums not having been received by the assessee from Government or an Indian concern, therefore, for the said reason also excluded the applicability of the provisions of Sec. 115A and Sec. 44DA. We are of the considered view that as observed by us hereinabove, the assessee had received the amount from B.J Services Company (Middle East) Ltd. and not from ONGC, therefore, the aforesaid contention of the ld. A.R carries substantial force. We thus, also on the said count that the assessee had not received the amount for rendering of services of Fracturing Flow Back Services in extraction or production of mineral oil from the Government or an Indian concern, therefore, hold that the applicability of the provisions of Sec.

Production Testing Services Inc. vs. DCIT(IT) 12 ITA NO. 1782/Mum/2016 – A.Y. 2011-12 115A and Sec. 44DA to the facts of the case of the present assessee would stand excluded. 11. We thus, in the backdrop of our aforesaid observations set aside the order of the A.O assessing the amount of Rs. 2,65,46,753/- received by the assessee from B.J Services Company (Middle East) Ltd. for rendering of Fracturing Flow Back Services at the oil rigs to tax as per the provisions of Sec. 115A of the ‘Act’. We are persuaded to be in agreement with the ld. A.R that now when Sec. 44BB contemplates special and specific provisions for computing profits and gains of a non-resident in connection with the business of providing services or facilities in connection with or supplying plant and machinery on hire used or to be used in the prospecting for or extraction or production of mineral oils, therefore, the Fracturing Flow Back Services rendered by the assessee in connection with extraction or production of mineral oil would squarely be covered by the provisions of Sec. 44BB. We thus, set aside the order of the A.O and direct him to assess the amount of amount of Rs. 2,65,46,753/- received by the assessee from B.J Services Company (Middle East) Ltd as per the provisions of Sec. 44BB. The Grounds of appeal No. 1 to 6 raised by the assessee before us are allowed in terms of our aforesaid observations. The Ground of appeal No. 7 being general is dismissed as not pressed. 11. The appeal of the assessee is allowed. Order pronounced in the open court on 27/10/2017.

Sd/- Sd/- (R.C SHARMA) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER भ ंफई Mumbai; ददनांक 27.10.2017

Production Testing Services Inc. vs. DCIT(IT) 13 ITA NO. 1782/Mum/2016 – A.Y. 2011-12

आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : 1. अऩीराथी / The Appellant प्रत्मथी / The Respondent. 2. आमकय आम क्त(अऩीर) / The CIT(A)- 3. आमकय आम क्त / CIT 4. विबागीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भ ंफई / 5. DR, ITAT, Mumbai गार्ड पाईर / Guard file. 6. सत्मावऩत प्रतत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भ ंफई / ITAT, Mumbai