DCIT, DEHRADUN vs. INTECSEA ASIA PACIFIC SDN BHD, HYDERABAD

Whether on the fact and circumstances of the case, the Ld. CIT(A) has erred in law in ignoring the finding of Hon'ble Delhi High Court in the case of Paradigm Geophysical Pty. Ltd. Vs. CIT(IT)-3, New Delhi that the judgment of Hon'ble Supreme Court has been discussed in the ONGC case and it has been made amply clear that the nature of receipts in lieu of the contract is defined by the nature of specific activity.

Whether on the facts and in the circumstances of the case, the CIT (A) has erred in law in allowing the appeal of the assessee by allowing the services being nature of mining and to be taxable u/s 44BB of the Income Tax Act.”

We next note that the learned CIT(A) has followed the tribunal’s order in assessee’s appeal (Assessment Year 2015-16) itself whilst concluding that it’s “8. We have heard both the parties and also perused the relevant finding of the impugned order as well as material preferred to before us. During the relevant assessment year the appellant assessee has received consideration from ONGC and Leighton India for providing engineering consultancy services. During the course of assessment proceeding the AO had asked the Appellant to show cause why the receipts from ONGC (and Leighton) should not be treated as FTS. The Appellant explained that the consideration received by it from ONGC and Leighton India were in relation to the exploration and production of oil and natural gas and did not fall within the definition of FTS under section 9(1) (vii) of the Act. Since the consideration received by the Appellant was covered by the exclusion provided in the definition of FTS for “mining or like projects”, the same should not be treated as FTS under section 9(l)(vii) of the Act. The Appellant relied on the decision of the Hon'ble Supreme Court in case of ONGC v CIT [(2015) 59 taxmann.com 1 (SC)], wherein the Hon’ble Supreme Court has held that where the pith and substance of an agreement is providing services for prospecting, extraction or production of mineral oils, payments made to non- resident companies are assessable under the provisions of section 44BB of the Act and not under section 44D of the Act. Relevant extracts of the judgment is reproduced as under: “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 Intecsea Asia Pacific SDN BHD 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.”

Ld. Counsel Shri Ajit Jain before us submitted that the scope of services covered under the ONGC ruling were similar to those rendered by the Appellant. The Appellant also relied upon the Instruction issued by Central Board of Direct Taxes No 1862 dated 22 October 1990, wherein the question whether prospecting for, or extraction or production of, mineral oil can be termed as 'mining operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions 'mining project' or 'like projects' occurring in Explanation 2 to Section 9(1) (ii) of the Income Tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas.

Further, relying on the provisions of section 44BB of the Act, he submitted that the services or facilities provided to ONGC and Leighton India were in connection with prospecting for, or extraction or production of mineral oils. Accordingly, the amount payable by ONGC and Leighton India to the Company should be covered by the provisions of section 44BB of the Act. Also, the Hon'ble Supreme Court in the case of ONGC (supra), held that any payments made by ONGC towards services in connection with extraction and mining of mineral oil and received by the non-resident assessee or foreign companies under the said contracts should be assessed under section 44BB of the Act.

In addition to the above ONGC ruling and the Instruction issued by CBDT, Ld. Counsel also relied upon the following decisions in support of its claim that services in relation to “mining or like activity” are excluded from the definition of FTS vide Explanation 2 under section 9(1)(vii) of the Act and therefore taxable under section 44BB of the Act:

From the perusal of the services and the nature of scope of work, we find that duties carried out by the appellant on contract with ONGC in fact has mining activity which was excluded from the definition of FTS u/s 9(1)(vii) as they are essential to the development and exploration of the oil and gas fields of ONGC. These services ostensibly is to be regarded as exclusion to FTS under section 9(1)(vii) and such activities need not itself be of mining or like nature so long as they are related to 'mining or like project’ as has been clarified in the Circular No. 1862 dated 22.10.1990, that 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.

Thus in parting of training is a part of mining activity only carried out by his appellant in his contract to the aforesaid parties. In so far as the reliance placed by the Ld. DR on the decision of Paradigm Geophysical Pty Limited, was on different facts as the assessee therein was involved in providing software services definition of which is covered under section 9(1)(vi) of the Act whereas Appellant’s case is that of FTS under section 9(1)(vii) read with section 44DA of the Act. AR further explained that section 44DA of the Act can be applied only if the income in the first-place falls within the definition of FTS under section 9(1)(vii). In the Appellant’s case, since the services are covered by the exclusion in section 9(1)(vii), they do not qualify as FTS for invoking section 44DA of the Act.

Accordingly we hold that not only receipt of accounts of services which has been accepted by the Ld. CIT (A) was also other scope of work relating to attending meetings but also the other activities are inextricably linked with the contract of design and engineering of submarine pipeline. Therefore the entire receipts for the ONGC as well as Leighton India are taxable u/s 44BB. Accordingly the appeal of the assessee is allowed.”