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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
Date of Hearing : 01.02.2021 Date of Order : 17.02.2021 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Selan Exploration Technology Ltd. (hereinafter referred to as ‘the assessee’) by filing the present appeal sought to set aside the impugned order dated 30.11.2016 passed by the Commissioner of Income-tax (Appeals)-41, New Delhi qua the assessment year 2016-17 on the grounds inter alia that :-
“1. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in holding that the sum of Rs.3,52,633/- is taxable u/s 115A of the Income- tax Act, 1961 (hereinafter called the Act) and accordingly tax is deductible at such percentage. 2. It is contended that the sum of Rs.3,52,633/- is taxable under the provisions of section 44BB of the Act. 3. The above grounds of appeal are independent and without prejudice to one another.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : Assessee is into the business of extraction and production of crude from the oil fields located in the State of Gujarat. To carry out its work of exploration and extraction of crude petroleum, the assessee has received services from non- residents and had made payments to them. Centralized Processing Cell – Tax Deducted at Source (CPC-TDS) flagged short deduction of tax deducted by the assessee under section 44BB of the Income- tax Act, 1961 (for short ‘the Act’) whereas short deduction has been determined by the CPC-TDS in respect of deductees by treating that the tax was deductible at 10% u/s 115A of the Act.
CPC-TDS raised demand of Rs.3,52,633/- of short deduction.
3, Assessee carried the matter before the ld. CIT (A) by way of filing the appeal who has partly allowed the appeal. Feeling aggrieved by the order passed by the ld. CIT (A), the assessee has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Ld. AR for the assessee by relying upon the decision rendered by Hon’ble Supreme Court in case of as Oil & Natural Gas Corporation Ltd. vs. CIT - (2015) 376 ITR 306 (SC) contended that services rendered by M/s. ESG Solutions are not in the nature of technical services to be covered u/s 115A of the Act rather these are covered u/s 44BB of the Act being inextricably connected with exploration and extraction of crude petroleum. However, on the other hand, ld. DR for the Revenue relied upon the order passed by the ld. CIT (A). 6. In the backdrop of the aforesaid facts and circumstances of the case and arguments addressed by the ld. Authorized Representatives of the parties to the appeal, the short question arises for determination in this case is :-
“as to whether payment made by the assessee to M/s. ESG Solutions for rendering services for micro- seismic acquisition, processing and interpretation of micro-seismic data in two observation wells during hydro-fracturing operations carried out in the wells at Bakrol oil field is in the nature of fee for technical services covered u/s 115A of the Act or it is inextricably connected with processing, extraction or production of mineral oil u/s 44BB of the Act?
Undisputedly, as per agreement letter of award to Engineering Seismology Group Canada Inc. (M/s. ESG Solutions), deductee had been engaged for micro-seismic acquisition, processing and interpretation of micro-seismic data in two observation wells during hydro-fracturing operations carried out in wells at Bakrol oil field. Ld. CIT (A) held these services not directly covered under the services and facilities mentioned in section 44BB(2)(a) of the Act rather the services are in the nature of analysis and interpretation of data which are back-end services and are in the nature of technical services covered u/s 115A of the Act, which is under challenge before the Tribunal.
Hon’ble Apex Court in case of as Oil & Natural Gas Corporation Ltd. vs. CIT (supra) set at rest the controversy at hand in favour of the assessee in identical facts and circumstances of the case by determining following findings :-
“13. The income Tax Act does not define the expression “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 material 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 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.
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 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.
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. 32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33. 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. 42. 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.”
Following the decision rendered by Hon’ble Apex Court in Oil & Natural Gas Corporation Ltd. (supra), we are of the considered view that ld. CIT (A) has erred in treating the services rendered by M/s. ESG Solutions to the assessee in the nature of technical services to be covered u/s 115A of the Act rather these services are inextricably connected with prospecting, extraction or production of mineral oil petroleum products and these services are to achieve dominant purpose by rendering services for micro seismic acquisition, processing and interpretation of micro-seismic data in two observation wells during hydro-fracturing operations carried out in wells at Bakrol oil fields. Consequently, services rendered by the non-resident company fall within the purview of presumptive provision of section 44BB of the Act and the addition made by the AO and confirmed by the ld. CIT (A) is not sustainable, hence ordered to be deleted. Consequently, the appeal filed by the assessee is allowed. Order pronounced in open court on this 17th day of February, 2021.