VIRTUE DRILLING PTE LTD,SINGAPORE vs. DCIT,CIRCLE INTL. TAX-3(1)(1), DELHI

PER YOGESH KUMAR, U.S. JM: The present appeal is filed by the Assessee against the Final Assessment Order dated 21/01/2025 passed u/s 143(3) r.w.Section144C(13) of the Income Tax Act, 1961 ('Act' for short) pertaining to Assessment Year 2022-23. 2. Brief facts of the case are that, the Assessee being a Company incorporated under the laws of Singapore, engaged in the business of engineering, design and consultancy services, supporting mining, oil and gas extraction and offshore exploration activities, and renting of jack up rigs for drilling operations in India. The Assessee had entered into a Charter Agreement dated 15/10/2019 with Jidnal Drilling and 2 Industries Ltd., for giving on hire the drilling unit (jack up drilling rig) for re-hiring it to ONGC on charter hire basis for the purposes of oil and gas drilling operations in the offshore waters of India only. During the year under consideration, the Assessee had derived rig hire charges of Rs. 65,12,35,200/- which were offered to tax u/s 44BB of the Act, @ 10% of such receipts (i.e. Rs. 6,51,23,520/-). 3. The Ld. A.O. in the draft assessment order dated 26/03/2024 u/s 144C (1) of the Act, proposed to treat the income of the Assessee as royalty u/s 9(1)(vi) of the Act at an ad-hoc 25% proportion of the gross receipts of the Assessee, taxable at 40% in accordance with the provisions of Section 44DA of the Act and Article 7 and 12 of India- Singapore DTAA. Thereafter, the Assessee filed objections before DRP, which has affirmed the view taken by A.O. however, directed the A.O. to attribute only 50% of the total profit margin, taxable at 40%.In compliance of the direction of the DRP, assessment order came to be passed on 21/01/2025 u/s 143(3) r.w. Section 144C (13) of the Act by assessing the total income of the Assessee at Rs. 8,14,04,400/-, taxable at 40% plus surcharge and cess as per Section 44DA of the Act and Article 7 & 12 of the India-Singapore DTAA. 4. As against the assessment order dated 21/01/2025, the Assessee preferred the present Appeal.

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5. The Ld. Counsel for the Assessee vehemently submitted that the issue involved in the present appeal is squarely covered by the Judgment of Hon'ble High Court of Delhi in similarly place to the Assessee in the case of CIT, International Taxation Vs. UMW Sher (L) Ltd., [2024] 160
taxmann.com 695 (Delhi) dated 04/03/2024, wherein it is held that since giving rigs on hire for prospecting, extraction or production of mineral oil will be covered under the provisions of Section 44BB of the Act, therefore, the provisions of Section 9(1)(vi) cannot be made applicable. Thus, sought for allowing the Appeal.
6. Per contra, the Ld. Department's Representative relying on the orders of the Lower Authorities, sought for dismissal of the Appeal.
7. We have heard both the parties and perused the material available on record. The Hon'ble High Court of Delhi in a case similar to the Assessee in CIT, International Taxation Vs. UMW Sher (L) Ltd., [2024]
160 taxmann.com 695 (Delhi), vide order dated 04/03/2024, observing that rigs were given on hire by the Assessee therein to M/s Jaybee
Energy Pvt. Ltd. in respect of a drilling contract awarded by M/s Oil
India Ltd., held that since giving rigs on hire for prospecting, extraction or production of mineral oil will be covered under the provisions of Section 44BB of the Act, therefore, the provisions of Section 9(1)(vi) of the Act cannot be made applicable in following manners:-

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“2.1Weather on the facts and circumstances of the case. Ld.
ITAT has erred in holding the Act) on the earned from Indian payer on account of drilling rights on hire (equipment rental) under contracts, as against the stand of the AO to bring the revenue to tax u/s 9(1)(vi) read with section 115A of the Act and Article 12 of the India-Malayasia DTAA?
2.2 Whether on the facts and circumstances of the case, the Ld.
ITAT has erred in allowing the appeal of the Assessee without appreciating the fact that the receipts in the hands of the non resident is clearly not a business receipt in view of settled legal position as per the Hon'ble Supreme Court decision in the case of R.D. Aggarwal (56) ITR 20,24) and accordingly such receipts are not liable to be taxed under section 44BB of the Act?
2.3 Whether on the facts and circumstances of the case, the Ld.
ITAT has erred in not appreciating the fact that the definition of royalty income under clause (iva) to Explanation -2 of section 9(1)(vi) covers lease income from vessels being in the category of use or right to use of industrial, commercial and Scientific equipment as the receipt are not subject matter of taxation under section 44BB of the Act?
2.4 Whether on the facts circumstances of the case, Ld. ITAT erred in allowing the appeal of the assessee by ignoring the fact that in the instant case the Assessee, M/s UMW Sher (1)
Ltd. is not engaged in prospecting the exploration of oil as the contract of such prospecting/exploration was not with it and therefore, is beyond the scope of section 44BB?
2.5 Whether on the facts circumstances of the case, Ld. ITAT erred in holding that the income of the assesse from non PSC partner was a business receipts earned in connection to mineral exploration whereas in the instant case, the receipts in hands of the non-resident is clearly not a business receipts and accordingly such receipt is clearly not a business receipt and accordingly such receipt are not liable to be taxed under section 44BB of the Act?"
6. We note from a reading of the impugned order that on facts the supply of machinery on a hire purchase / leasebasis was not disputed. This is evident from the following observations as appearing in the order of the ITAT. "5. We have heard at length learned Representatives appearing for the parties and perused

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Virtue Drilling PTE Ltd. Vs. DCIT materials on record. We have also applied our mind to the judicial precedents cited before us. As discussed earlier, the dispute between the parties is qua the nature of receipts from hiring/leasing of rigs, whether to be treated as business profits under section 4488 of the Act as claimed by the assessee or royalty under section 9(1)(vi) read with section 115A and as per the definition of royalty under the treaty provision. As far as the factual aspect of the issue is concerned, it is established on record that the assessee has given on hire/lease rigs to an Indian entity, who intended to employ them for drilling and exploration of mineral oils in the North Eastern States in India, in pursuance to the contract entered with M/s Oil India. Thus, it is beyond dispute, the amounts received by the assessee subject to tax in the impugned assessment years are towards leasing/giving on hire rigs to be used in the drilling/exploration of mineral oils. It is a fact on record that the assessee has offered the income received from giving on hire/leasing of rigs as profits under section 44BB of the Act. While the Assessing
Officer at the time of framing the draft assessment orders has treated it as FTS, learned DRP is of the view that the receipts are in the nature of royalty under section 9(1)(vi) of the Act.
7. It was in the aforesaid backdrop that the assessee appears to have contended that Section 44BB of the Income Tax Act.
1961 ['Act'] stood attracted. We note that Explanation 2 to Section 9(1)(vi) of the Act while defining the word "royalty"
provides as under-
"Explanation 2-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains) for-
(i)…………………
(ii)………………
(iii)…………………
(iv)………………..
(iv-a) the use or right to use any industrial, commercial or scientific equipment but not including the amountsreferred to in Section 44-BB;

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(v)………………..
(vi)……………….
8. As would be manifest from clause (iv-a) of the Act, although the "right to use any industrial, commercial or scientific equipment" is otherwise covered under the expression
"royalty", it makes a clear exclusion in respect of amounts which would be referable to Section 44BB of the Act
9. In view of the aforesaid, we find no justification to interfere with the view as taken by the ITAT. The appeal fails and shall stand dismissed."