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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ NEW DELHI
Before: SHRI SUNIL KUMAR YADAV & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
These three appeals have been filed by the Assessee against the assessment orders passed by ADIT(Intl. Taxation) in compliance to directions of DRP, New Delhi, dated 17.06.2010, 27.09.2011 & 12.07.2012 u/s. 143(3)/144C(13) of the Income Tax Act, 1961 (for short ‘the Act’). The grounds raised by the assessee in respective appeals read as under :
Grounds of appeal No. 3889/Del./2010 (2007-08): 1. “That the ld. AO has erred in including Service Tax and Vat in gross amount for the purpose of deeming profit @ 10% u/s 44BB.
2. That the ld AO has erred in treating equipment rental received from Triton Holding Ltd. Sedco Forex International Drilling Inc. and Pride
Foramer as royalty and thus taxing it at 25% deemed income as against 10% deemed income u/s 44BB.
3. That the ld.AO has erred in taxing interest on Income Tax Refund at 41.82% as against 15% as envisaged in Article 12 of DTAA between India and U.K.
4. That the ld.AO has erred in charging interest u/s 234B.”
Grounds of appeal No. 421/Del./2012 (2008-09):
Addition qua services in connection with exploration/prospecting/extraction of mineral
1. That the Ld. AO/DRP erred on facts and in law in completing assessment under section 144C/143(13) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 4,891,233,532/- as against the income of Rs. 481,586,605/- returned by the appellant.
2. The Ld. AO/DRP has erred on the facts and in law in dismissing the claim of the appellant that revenue of Rs 4,883,904,056 earned from rendering services in connection with prospecting for, extraction or production of mineral oils was covered by the provisions of Section 44BB of the Act.
3. Without prejudice to the claim of the appellant that the entire revenue was chargeable to tax u/s 44BB, the appellant claims that the Ld. AO/DRP erred on facts and in law in not following the directions of the DRP and contrary to the directions of the DRP held the revenue received from the PSC partners of Rs 4,546,323,086 in connection with exploration/prospecting/exploration of mineral oil under section 9(1)(vii)/9(1)(vi) of the Act as opposed to section 44BB of the Act.
The DRP had observed that there was no change of facts in the case of the assessee vis-a-vis the previous year and directed the AO to complete the assessment on the same lines as that of previous year and restrict the benefit of section 44BB to companies other than non-PSC partners.
4. That the Ld. AO erred on facts and in law in not following the directions of the DRP though the directions of the DRP are binding on the AO.
5. That the Ld. AO/DRP erred on facts and in law in holding that revenues of Rs. 276,799,697/- received from non-PSC partners arising from services used in the exploration/prospecting/extraction of mineral oil were fees for technical services/royalty under section 9(1)(vii)/9(1)(vi) of the Act as opposed to revenues chargeable to tax in terms of section 44BB of the Act.
Addition qua revenue reimbursement 6. That the Ld. AO/DRP erred on facts and in law in adding a sum of Rs.66,624,319/- to the gross receipts of the appellant to be taxed as fees for technical services/royalty under section 9(1)(vii)79(1)(vi) without appreciating that the said amount represented reimbursement of actual expenses received from PSC partners incurred by the appellant.
7. That the assessing officer erred on facts and in law in adding a sum of Rs. 1,227,983/- to the gross receipts of the appellant to be taxed as fees for technical services/royalty under section 9(1)(vii)/9(1)(vi) without appreciating that the said amount represented reimbursement of actual expenses from non-PSC partners incurred by the appellant.
Addition qua VAT 8. That the Ld. AO/DRP erred on facts and in law in adding a sum of Rs. 1,250,900/-to the gross receipts without appreciating that the said amount represented reimbursement of VAT which is not chargeable to tax.
9. That the Ld. AO/DRP erred on facts and in law in holding that income from the aforesaid reimbursement of VAT of Rs. 1,250,900 was in the nature of fees for technical services/ royalty as opposed to claimed not chargeable to tax.
Initiating of penalty proceedings 10. That the Ld. AO/DRP has erred on facts and in law in levying penalty under section 271B especially when the entire receipts of the assessee was liable to be chargeable to tax u/s 44BB and the assessee was neither required to maintain books of accounts nor get the same audited.
Levy of interest
11. That the Ld. AO/DRP erred on facts and in law in levying interest under section 234B of the Act especially when there was no liability on the assessee to pay advance tax under section 209(1 )(d) of the Income-tax Act, 1961.
12. That the Ld. AO/DRP erred on facts and in law in not following the decision of the Hon'ble Jurisdictional High Court of Uttarakhand in the case of DIT vs Maersk Co. Ltd. [240 CTR 218] wherein the Hon'ble High Court held that interest u/s 234B was not chargeable where the entire income is subject to tax deduction at source.
13. That the Ld. AO/DRP erred on facts and in law in levying interest under section 234C as interest under section 234C can be levied only on the returned income and not assessed income.
Grounds of appeal No. 4831/Del./2012 (2009-10):
Addition with respect to services rendered in connection with Exploration/prospecting/extraction of mineral.
1. That the Ld. AO/DRP erred on facts and in law in completing assessment under section 144C/143(13) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 623,135,555/- as against the income of Rs. 472,078,860/- returned by the appellant.
2. That the Ld. AO/DRP erred on facts and in law in holding that the revenue of Rs. 807,780,879 did not qualify for determination of income under section 44BB for the reason that the same was received from customers who were not party to a Production Sharing Contract as opposed to the clear provisions of section 44BB, the applicability of which is not dependent on the fact as to whether or not the payer is party to a Production Sharing Contract or not.
3. That the Ld. AO/DRP has erred in law in holding that the amendments made by the Finance Act, 2010 to section 44DA and to the proviso to sub-section (1) of section 44BB, would be applicable with retrospective effect., including assessment year 2009-10, despite the fact that the amendments are applicable only with effect from assessment year 2011-12 onwards.
4. That the Ld. AO/DRP erred on facts and in law in holding that the revenue of Rs. 807,780,879 was to be taxable as fees for technical services under section 44DA read with section 9(1)(vii) as opposed to section 44BB of the Act despite the fact that section 44DA does not have any applicability to the facts of the assessee for the assessment year in question.
5. That the Ld. AO/DRP erred on facts and in law in holding that the income from fees for technical services was to be determined by applying an estimated profit rate of 25 per cent under section 44DA.
Addition qua service-tax receipts: 6. That the Ld. AO/DRP erred on facts and in law in adding a sum of Rs.297,082,563/-received on account of service-tax to the income of the assessee taxable under section 44BB and section 44DA respectively without appreciating that the said amount represented an actual government levy which does not result in any taxable income for the appellant.
Addition qua VAT receipts 7. That the Ld. AO/DRP erred on facts and in law in adding a sum of Rs.1,813,114/- received on account of VAT to the income of the assessee taxable under section 44BB and section 44DA respectively without appreciating that the said amount represented an actual government levy which does not result in any taxable income for the appellant.
Levy of interest 8. That the Ld. AO/DRP erred on facts and in law in levying interest under section 234B of the Act especially when there was no liability on the assessee to pay advance tax under section 209(1 )(d) of the Income-tax Act, 1961.
That the Ld. AO/DRP erred on facts and in law in not following the decision of the Hon'ble Jurisdictional High Court of Uttarakhand in the case of DIT vs Maersk Co. Ltd.-[240 CTR 218] wherein the Hon'ble High Court held that interest u/s 234B was not chargeable where the entire income is subject to tax deduction at source.
2. Since the issues involved in all these three appeals are identical, therefore, all these appeals are being disposed of by this consolidated order for the sake of convenience and brevity.
The brief facts of the cases are that the assessee company was engaged in providing services and facilities in connection with exploration and production of mineral oils and received Revenue against the work executed with different companies, as mentioned in the respective assessment orders.
The nature of services rendered for various companies include cementing services, equipment rentals, provision of cementing, consumable and services, hiring of cementing services , provision of cementing equipment, products and services, provisions of well bore clean up and filtration equipment services and provision of well stimulation services etc. The appellant company filed its returns of income for all the three assessment years under consideration as under : Asstt. Year Date of filing the return Income declared 2007-08 23.10.2007 21,07,73,089 2008-09 23.09.2008 48,18,19,207 2009-10 26.09.2009 47,20,78,860 The appellant company filed these returns of income u/s. 44BB(1) on the premise that it is engaged in providing of services and facilities in connection with, or supplying plant and machinery on ire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The AO did not accept the stands of the appellant company and applying the provisions of section 115A/44DA computed the incomes of the assessee u/s. 28 of the IT Act. Out of total receipts, the assessee company offered the revenue received from various contracts after reducing the receipts on account of Service tax and VAT for computation of income as per provisions of section 44BB of the Act on the premise that receipt of service tax and VAT do not form part of receipts as per section 44BB(1). The AO, however, included these receipts in the total receipts of contracts. The assessee also offered interests received on IT refund for taxation at the rate of 15% as per article 12 of DTAA, the Taxation agreement between India & UK. The AO, however, was not agreed with this stand of the assessee company and applied tax rate of 40% as per normal provisions of the Act. The draft assessment orders were accordingly passed against which the assessee company filed objections before the learned DRP. The learned DRP directed the AO to tax the assessee’s income from contracts with the companies which are members of a Production Sharing Contract (PSC) u/s. 44BB and sustained the orders of AO with respect to taxability of income from the contracts with non-PSC companies. Regarding the inclusion of VAT and Service tax in the receipts, the ld. DRP supported the assessment orders for the purpose of determining profit u/s. 44BB of the Act.
The conclusion of AO on the taxability of interest on refund was also affirmed by learned DRP. In pursuance to the directions of ld. DRP, the AO, accordingly made the impugned assessment orders, assessing the total incomes of the assessee u/s. 143(3) read with sec. 144C(13) at Rs.21,59,89,644/-, Rs.4,89,12,33,530/- and Rs.62,31,35,555/- respectively for the assessment years 2007-08, 2008-09 and 2009-10. Being aggrieved, the appellant/assessee is in appeals before the Tribunal.
4. From the above narration of facts, and the grounds of appeals raised before us, we find that the major issues, involved in the present appeals are as under :
(i) Whether the assessee company is entitled to benefit of section 44BB(1) on the income from contracts of non-PSC companies or such receipts would be taxable u/s. 115A/44DA as per normal provisions of the Act.
(ii). Whether VAT & Service Tax received by assessee has to be considered as part of total receipts or it is excludible from the total receipts for the purpose of taxation.
(iii). Whether the interest received on Income-tax Refund should be taxed @ 15% under Article 12 of DTAA, treaty with UK or should be taxed @ 40% as per normal provision of the Act.
(iv). Whether the reimbursement of actual expenditure is exigble to tax as FTS or not.
Adverting to the first issue regarding availability of benefit of section 44BB(1) with respect to receipts from non-PSC contracts, the ld. AR of the assessee submitted that this issue is squarely covered by the order of ITAT, Delhi Bench in the case of SBS Marine Ltd. vs. ADIT (Intl. Taxation) in ITA No. 107/Del./2012 in favour of the assessee vide order dated 13.02.2015, wherein the Tribunal has decided the issue as under :
“23. Further, there is no requirement of a direct contract or agreement with the person actually engaged in prospecting for, or extraction or production of, mineral oils as canvassed by the revenue for the applicability of section 44BB. One may refer other provisions of the statue which insists on an agreement. For instance, section 42 deals with allowances allowable in computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation which the Central Govt. has entered into an agreement. Section 80IA(4)(i)(b) provides that the enterprise carrying on the business of developing, operating and maintaining any infrastructure facility has to enter into an agreement with the Central Government of a State Govt. or a local authority etc. In the absence of any requirement in section 44BB that the person providing services, facilities or plant and machinery on hire should have directly entered into a contract or agreement with the person actually engaged in prospecting for or extraction or production of, mineral oils, one cannot curtail the scope or applicability of section 44BB to second leg contractors whose contracts or agreements are with first leg contractors but whose services or facilities or plant and machinery are used in connection with prospecting for or extraction or production of, mineral oils as required under section 44BB. The Hon’ble Supreme Court in ICDS Ltd v CIT [2013] 350 ITR 527 held that the assessee leasing the vehicles to others who use the said vehicles in their business of running them on hire is entitled for higher rate of depreciation on the vehicles given on lease. It was held by the Hon’ble Supreme Court that the lessor need not himself use the vehicles in the business of running them on hire. The rationale of the aforesaid decision of the Supreme Court may be applied in the context of section 44BB in as much as section 44BB does not mandate that the assessee should directly enter into contract with the person engaged in the business of prospecting for or extraction or production of, mineral oils or the services or facilities or plant and machinery on hire should be directly provided to the said person alone. We have already given a finding of fact that the services and facilities provided by the assessee along with plant and machinery are used in offshore drilling operations i.e., the activity of prospecting for or extraction or production of mineral oils. Consequently, the requirements of section 44BB are satisfied in the present case.
In view of the above, there is no merit in the contentions of the revenue that the assessee is not an eligible assessee under section 44BB since it has not directly entered into contract with the ONGC and it is not undertaking the activities specified in section 44BB itself and being second leg contractors they are not eligible under section 44BB.”
This decision of ITAT has been confirmed by Uttaranchal High Court in of 2015. The issue is further covered by the decision of Hon’ble Apex Court in the case of ONGC vs. CIT, 376 ITR 306 (SC), wherein the appellant company before us, was also the intervener in Civil Appeal No. 2008 of 2008.
The Hon’ble Supreme Court has held as under :
“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 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.
S. No. Civil Appeal Work covered under the contract 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. 17. 7226 Opinion on hydrocarbon resources and foreseeable potential. 18. 7227 Opinion on hydrocarbon resources and foreseeable potential. 19. 7230 Opinion on hydrocarbon resources and foreseeable potential. 20. 6016 Opinion on hydrocarbon resources and foreseeable potential. 21. 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program. 22. 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs. 23. 733 Repair of gas turbine, gas control system and inspection of gas turbine and generator. 24. 741 Repair and inspection of turbines. 25. 737 Repair, inspection and overhauling of turbines. 26. 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines. 27. 1522 Replacement of choke and kill consoles on drilling rigs. 28. 1521 Inspection of gas generators. 29. 1515 Inspection of rigs. 30. 2012 Inspection of generator. 31. 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines.
1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig.
2008 Expert advice on the device to clean insides of a pipeline. 34. 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations. 35. 925 Engineering analysis of rig. 36. 1519 Imparting training on cased hold production log evaluation and analysis. 37. 1533 Training on well control. 38. 1518 Training on implementation of Six Sigma concepts. 39. 1516 Training on implementation of Six Sigma concepts. 40. 6023 Training on Drilling project management. 41. 2796 Training in Safety Rating System and assistance in development and audit of Safety Management System.
1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages. 43. 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. 44. 1523 Supply, installation and familiarization of software for processing seismic data.
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.”
The issue is also covered in favour of the assessee by another decision of ITAT, Delhi Bench in the case of Halliburton Offshore Services Inc. vs. Addl. CIT in ITA No. 5284Del./2010 dated 30.06.2016, wherein the Tribunal has decided the issue as under :
We have carefully considered the rival contentions and also perused the relevant orders of coordinate bench cited before us. Cordinate bench in case of ADIT Vs. Baker Hughes Singapore Pte. Ltd.41 ITR (T) 12 ( Delhi ) it is held as under :- 6. We have heard the rival contentions at considerable length, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
Learned Commissioner (DR) has, even while accepting that the same issue came up for consideration before coordinate benches in the cases of Baker Hughes Asia Pacific Ltd. v. Addl. DIT (Int. Tax.) [2014] 47 taxmann.com 1/151 ITD 79 (Delhi) and Baker Hughes Asia Pacific Ltd. v. ADIT [ITA No. 6476/Del/12; order dated 5th September 2014] and this issue was decided in favour of the assessee, contended that "no case can be held to be covered, standing as it does on own facts which are distinguishable". She has elaborate arguments in support of the stand of the Assessing Officer and urged us to take an independent view of the matter. Her line of reasoning, in broad terms, is like this. It is pointed out that the payments for use and hire of equipment and personnel is equipment royalty/ fees for technical services, and that the income being in nature of royalty/ FTS, and not for a project undertaken by the appellant, is not eligible for benefit of Section 44BB as it would be contrary to the decisions of Hon'ble jurisdictional High Court in the cases of Foamer France and Rolls Royce. It is contended that the provisions of Section 44DDA, as in force with effect from 1st April 2011, are clarificatory in nature and have to be read into the provisions of the Act. Its her contention that the provisions of Section 44BB are meant for the first leg contractors engaged in prospecting, extracting and producing mineral oils, and that the benefit of these provisions cannot be extended to the vendors and suppliers of such first leg contractors. It is submitted that doing so would amount to base erosion and profit shifting from developing countries. A reference is then made Heydon's rule and submitted that the amendments in the scheme of Section 44BB and 44DA, vide Finance Act 2010, though stated to be effective from assessment year 2011-12 must be treated as clarificatory in nature. A reference is made to the decision of Hon'ble Supreme Court, in the case of Union of India v. Gosalia Shipping (P.) Ltd [1978] 113 ITR 307 for the proposition that when payment is made to a shipping company for time charter, its payment for hire of shipment and not for the purpose of carrying goods, and by the same logic, when payment is made by the first leg contractor to the supplier of equipment or personnel, the payment is for such equipment or personnel and not for the purposes in which the equipment or personnel are put to use. It is then submitted that the decision of PGS Geophysical AS v. Addl. DIT [2014] 369 ITR 27/[2015] 55 taxmann.com 394 (Delhi) contradicts the findings in the earlier Hon'ble Delhi High Court decision in the case of DIT v. OHM Ltd. [2013] 352 ITR 406/212 Taxman 440/[2012] 28 taxmann.com 120, based on which the coordinate bench has decided this issue in favour of the assesse. It is submitted that the decision of the coordinate bench in the case of Baker Hughes Asia Pacific Ltd. (supra), by which this issue in appeal is stated to be covered in favour of the assessee, did not take account the binding judicial precedents in the cases of PGS Geophysical AS (supra) and Gosalia Shipping (P.) Ltd. (supra) as also many other relevant decisions, we should not be guided by the same.
8. Learned counsel for the assessee, on the other hand, submits that as the issue is squarely covered in favour of the assessee by decisions of the coordinate benches and these decisions are not yet overturned by the Hon'ble Courts above, there is no occasion to deviate from the same. We are thus urged to confirm the findings of the CIT(A) and decline to interfere in the matter.
9. We have noted that the issue is directly covered by the decisions of the coordinate benches and there are no direct decisions on the issue by any higher forums. The meticulous research done by the learned Commissioner (DR), as also her erudite arguments, are of not of any practical effect at this stage. As for the BEPS considerations, as so strenuously argued by the learned counsel, base erosion and profit shifting is a tax policy consideration which is relevant for the process of law making, but it cannot have a role in the judicial decision making process because judicial process will infringe neutrality if it is to be swayed by such policy consideration. The judicial neutrality must not only be neutral vis-à-vis the party but also value neutral vis-à-vis competing ideologies. Judicial authorities are to interpret the law as it exists and not as it ought to be in the light of certain underlying value notions. As for the legal arguments advanced by the learned Commissioner (DR), as was laid down by Hon'ble Supreme Court in the case of Ambika Prasad Mishra v. State of UP AIR 1980 SC 1762, "Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent... A decision does not lose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned....". Similarly, in the case of Kesho Ram & Co. v. Union of India [1989] 3 SCC 151, Hon'ble Supreme Court had observed that "(t)he binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with the reference to which the argument is advanced subsequently was actually decided in the earlier decision " In view of these discussions, we see no reason to take any other view of the matter than the view taken by the coordinate benches and respectfully following the views of the coordinate bench, we approve the conclusions arrived at by the learned CIT (A) and decline to interfere in the matter.”
On the basis of the above, following the decision of the coordinate bench we held that the revenue of the second leg contracts are also eligible for benefit of preferential tax treatment provided in section 44BB of the Income Tax Act and therefore, ground No. 8 of the appeal is allowed.”
6. The learned DR, though relied upon the orders of the authorities below, but could not adduce any contrary decisions or material before us to discard the stand of the assessee already decided by various courts, as stated above.
The decisions relied by the AO of Hon’ble Uttaranchal High Court in the case of ONGC as agent of Foramer France (ITA No. 231/2001) and ONGC as Agent of Rolls Royce (ITA No. 86 of 2007) for holding that the income of the assessee was in the nature of Fees for Technical Services/Royalty, have been overruled by the decision of Hon’ble Supreme Court in Civil Appeal No. 731 of 2007 and 1240 of 2008. Therefore, respectfully following the above judgments, supporting the stand of the assessee, we decide this issue in favour of the assessee and against the Revenue. Accordingly, ground No. 2 for A.Y. 2007-08, grounds Nos. 1, 2 & 5 for A.Y. 2008-09 and Grounds Nos. 1 to 5 for A.Y. 2009- 10, are allowed.
7. Coming to the next issue – whether VAT & Service Tax received by appellant company forms part of total receipts or not as per section 44BB of the Act, the ld. AR submitted that these are statutory dues and therefore, it cannot be considered as part of the receipts for the purpose of section 44BB. It has been received as per terms of the agreement. He submitted that the appellant has collected it as an agent of the Government and paid it to the Government accordingly. The Service tax issue has been decided by Hon’ble Jurisdictional High Court in the case of Mitchell Drilling International Pty. Ltd. in vide order dated 28.09.2015, wherein it has been held that service tax being statutory levy should not form part of gross receipts as
per provisions of section 44BB of the IT Act. Relevant paras 16 & 17 of the order are reproduced for ready reference as under :
16. The Court concurs with the decision of the High Court of Uttarakhand in DIT v. Schlumberger Asia Services Ltd (supra) which held that the reimbursement received by the Assessee of the customs duty paid on equipment imported by it for rendering services would not form part of the gross receipts for the purposes of Section 44 BB of the Act.
The Court accordingly holds that for the purposes of computing the ‘presumptive income’ of the assessee for the purposes of Section 44 BB of the Act, the service tax collected by the Assessee on the amount paid t it for rendering services is not to be included in the gross receipts in terms of Section 44 BB (2) read with Section 44 BB (1). The service tax is not an amount paid or payable, or received or deemed to be received by the Assessee for the services rendered by it. The Assessee is only collecting the service tax for passing it on to the government.
The learned DR, on the other hand, relied on the order of the lower authorities and he submitted a written synopsis regarding taxability on VAT receipts, which reads as under :
The Assessment Order and DRP orders are emphatically relied upon. Following additional submissions are made.
2. Section 44BB makes a special provision for computing profits and gains of the non-resident assessee engaged in the business of exploration, etc., of mineral oils. Sub-section (1) provides that in respect of such an assessee, notwithstanding anything contained in sections 28 to 41 and sections 43 to 43A, an assessee shall be deemed to have earned ten per cent profit on the amount mentioned in sub-section (2) received by him. 3. Section 44BB is a complete code in itself. It provides by a legal fiction to be the profits and gains of the non-resident assessee engaged in the business of oil exploration at the rate of 10 per cent of the aggregate amount specified in sub-section (2). Accordingly, the Hon’ble jurisdictional Uttrakhand HC has consistently held the aggregate amount received, including the following, to be included in total income for taxation under section 44BB:
Citation Receipt [2008] 169 TAXMAN 138 Reimbursement of freight and (UTTARAKHAND) Halliburton Offshore transportation charges Services Inc. [2009] 181 TAXMAN 46 Reimbursement of catering (UTTARAKHAND) Ensco Maritime Ltd. charges [2009] 181 TAXMAN 144 Reimbursement fuel expenses (UTTARAKHAND) RBF Rig Corporation [2008] 170 TAXMAN 459 Mobilization charges (UTTARAKHAND) Sedco Forex International Inc. [2008] 170 TAXMAN 286 Reimbursement of cost of spare (UTTARAKHAND) B.J. Services Co. parts Middle East
Accordingly, Vat receipts also need to be included in aggregate amount brought to tax under section 44BB because: (i) Section 44BB is a self contained code providing for computation of profits at a fixed percentage of gross receipts of the assessee and all the deductions, exemptions and exclusions from income are deemed to have been allowed; (ii) It is open to those assessees who want to claim deductions, exemptions and exclusions in assessment to opt to proceed under section 44BB(3). (iii) Once the receipts are offered to tax u / s 44BB(1) & (2), which provides for computation of profits on gross basis, there is no scope for computing or re-computing the profits by excluding any element of receipts from the total turnover as the same would amount to defeating the very purpose of providing for a scheme of simpler mode of computation of profits and obviating the need for accounting for individual receipts or payments.
5. The amount mentioned in sub-section (2) of section 44BB clearly shows that the amount paid to the assessee on account of provision of services and facilities in connection with the extraction or production of mineral oil, whether paid in or outside India, are to be included. The Vat receipt squarely falls within the principle enunciated in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) wherein it was laid down that sales tax charged forms part of the trading receipts and is as such liable to be assessed to income tax. Since then the courts have consistently held similarly for all kinds taxes or government receipts (that were received during the relevant PY) that these are taxable receipts:
CITATION TAX / RECEIPT [1997] 228 ITR 112 (All) Jagdish Prasad Excise Duty Nigam [2006] 154 TAXMAN 266 (ALL) Mohan Central Sales Tax and Shramic Udyog Ltd Local Sales Tax [2012] 28 TAXMANN.COM 94 (CAL) Poddar Surcharge is part of Projects Rent [2013] 35 taxmann.com 565 (Allahabad) UP Luxury Tax Hotels [1982] 9 Taxman 173 (Punj_Har) Kunjpura Royalty (payable to Kiln government) [2006] 154 Taxman 274 (Allahabad) Rampur Export Duty Distillery [2015] 58 taxmann.com 206 (Bombay) Ovira Service Tax Logistics
6 Accordingly, the receipt of VAT is definitely connected with the business of of exploration and / or extraction of oil and needs to be included in the aggregate amount to be brought to tax under section 44BB. (It is also notable that VAT ‘succeeded / replaced’ the sales tax and terefore the principal enunciated in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) applies squarely.)
7. It is submitted that for the purpose of working of deduction u / s 80HHC, the Hon’ble SC in Lakshmi Machine Works [2007] 160 TAXMAN 404 (SC) has held that sales tax and excise duty cannot form part of the ‘Total Turnover’ since these are not relatable to exports and inclusion of these would make the specific formula therein unworkable. It is notable that such interpretation is indisputably done to make the specific formula of section 80HHC workable. Accordingly, it would not be appropriate to apply such specific interpretation, as applied to u / s 80HHC, to the matter under consideration. CONCLUSION 8. In view of the above, it is prayed that the matter be kindly decided in favour of revenue and the VAT receipts be included in the aggregate amount being brought to tax u / s 44BB.
After hearing both the parties and perusing the material available on record, we find that the service tax and VAT are statutory dues which are paid to the Government as liability of the assessee. A perusal of the record as well as the assessment order nowhere reveals that the Service Tax and VAT have been separately charged by the appellant company on the bills. The record further does not reveal whether the assessee has separately accounted for the amounts of Service Tax and VAT so charged, in the books of account. The assessment order also does not whisper anything as to whether the Service tax and VAT have been charged by the appellant company in terms and conditions of the agreements. These aspects, in our opinion, need proper examination and verification at the stage of Assessing Officer before deciding the question whether the Service Tax and VAT charged by the assessee would form part of the receipts or not. We, therefore, direct the AO to examine – (i) the procedure for collecting the Service Tax and VAT; (ii) whether the assessee has issued bills for charging Service Tax & VAT and if yes, whether the Service Tax and VAT have been separately charged in the bills or not and (iii) whether the Service Tax and VAT have been separately accounted for and have been accordingly paid to the Government. In case, the Service-tax and/or VAT have been separately charged in the bills and accordingly accounted for, then, in our opinion, these would not form part of the receipts and if it is found that these items are included in the consolidated amount of bills, then it should form the part of the receipts. Accordingly, this issue is restored to the file of Assessing Officer for deciding the same afresh after making proper examination as observed above. As a result, ground No. 1 for A.Y. 2007-08, grounds Nos. 8 & 9 for A.Y. 2008-09 and grounds Nos. 6 & 7 for A.Y. 2009-10 are allowed for statistical purposes.
The third issue is whether the interest received on Income-tax Refund should be taxed @ 15% under Article 12 of DTAA, treaty with UK or should be taxed @ 40% as per normal provision of the Act. In this regard, the ld. AR of the appellant submitted that this issue is covered under Article No. 12 of the DTAA, according to which the interest on refund is taxable @ 15%. Article No. 12 of DTAA reads as under :
" 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, such interest may also be taxed in the contracting state in which it arises and according to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15% of the gross amount of the interest.
Even if para 1 and 2 of Article 12 are read with para 6 thereof, even then interest income has to be taxed at 12% as envisaged by para 2 of Article 12 because of the following reasons: a). Interest income is always taxed as income from other source and not as income from business. b). By application of wrong law by the AO huge demand were created against the NRC which demands were either deducted from the refund due or were deposited by the NRC . Upon relief from the higher courts the amounts were rendered refundable to the NRC. It is as per the provision of the Income Tax Act, 1961 that interest is to be paid on refund. In such a case it cannot be said that the interest has been received against any debit claim as mentioned is para 6 of Article 12. "
On the other hand, the ld. DR relied on the orders of the lower authorities.
Having heard the submissions of both the parties, we find that this issue is covered against the assessee by the decision of Uttaranchal High Court in the case of assessee itself in of 2010, wherein it has been held that interest on Income-tax Refund is taxable @ 40%. The relevant portion of the order of Hon’ble High court reads as under :
“9. We would think that in this analysis of the provisions of the Clauses of the Treaty, there is no error as such committed by the Assessing Officer as confirmed by the First Appellate Authority and the Tribunal and, therefore, the question of law as framed must necessary be answered against the appellant in all the cases and we do so.”
In view of this decision of Hon’ble Jurisdictional High Court, this issue is decided against the assessee. Accordingly, ground No. 3 for A.Y. 2007-08 is dismissed.
Grounds Nos. 6 & 7 in appeal for A.Y. 2008-09 pertain to the last issue of taxability on reimbursement of expenses. The ld. AR has conceded that this issue is covered against the assessee and in favour of the Revenue by the decision of Hon’ble Uttarakhand High Court in the case of CIT vs. Halliburton Offshore Services Inc., 300 ITR 265. The Hon’ble Court has held as under on this issue :
5. Sec. 44BB provides that the deemed profits and gains under sub-s. (1) shall be @ 10 per cent of the aggregate amount specified in sub-s. (2).
We proceed to analyze sub-s. (2). Clause (a) of sub-s. (2) refers to the amounts, (A) paid to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India, and (B) payable to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India. Clause (b) of sub-s. (2) refers to the amounts, (A) received by assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India, and (B) deemed to be received by the assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.
Thus, it is clear from the perusal of s. 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the assessee @ 10 per cent. Therefore, in our view, the Tribunal fell into error in not appreciating the difference between the amount and the income. Amount paid or received refers to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under s. 2(24) of the IT Act and s. 5 and s. 9 deal with the income and accrued income and deemed income. Sec. 4 is the charging section of the IT Act and definition as well as the incomes referred in ss. 5 and 9 are for the purpose of imposing the income-tax under s. 143 (3). Sec. 44BB is a complete code in itself. It provides by a legal fiction to be the profits and gains of the non-resident assessee engaged in the business of oil exploration @ 10 per cent of the aggregate amount specified in sub-s. (2). It is not in dispute that the amount has been received by the assessee company. Therefore, the AO added the said amount which was received by the non-resident company rendering services as per provisions of s. 44BB to the ONGC and imposed the income-tax thereon.
In view of this decision, grounds Nos. 6 & 7 of appeal for A.Y. 2008-09 are dismissed.
Charging of interest u/s. 234B is consequential in nature and the AO is directed to act accordingly. No other issue or grounds are pressed in any of these appeals.
In the result, all the three appeals of the assessee are partly allowed for statistical purposes.
Order pronounced in the open court on 09.12.2016.