Income Tax Appellate Tribunal - Delhi
Ongc vs Assistant Commissioner Of Income Tax on 31 March, 2006
Equivalent citations: (2007)107TTJ(DELHI)551
ORDER
B.R. Jain, A.M.
1. This appeal by the assessee against the order dt. 21st July, 2004 of the learned CIT(A)-I, Dehradun, raises the following grounds:
1. The learned CIT(A)-I, Dehradun, has erred in law and on the facts and circumstances of the case in rejecting the appellant's contention that the receipts of the non-resident were taxable under Section 44BB of the IT Act, 1961, and not as 'fees for technical services' under Section 44D r/w Section 115A of the IT Act, 1961.
2. The learned CIT(A)-I, Dehradun, has erred in law and on the facts and circumstances of the case in confirming the AO's order on the issues of withdrawal of interest under Section 244A and charging of interest under Section 234D.
2. Briefly, the facts are that ONGC Ltd. filed return declaring income of Rs. 15,490 in its capacity as representative assessee of M/s Baker Hughes Process Systems, U.K., in the status of non-resident company, hereinafter referred as "NRC". The NRC vide work order No. MRBC/OBGSHP/PWC/08, dt. 20th May, 1998 had rendered services in connection with assessment of internal damage of CPI units of SHG platform and providing estimate of replacement. The assessee has offered the Revenues receipts taxable as per provisions of Section 44BB of the Act as its profits in connection with the business of exploration, etc. of mineral oils.
3. The AO was of the view that the services rendered in no way can be with reference to the services used in Section 44BB of the Act as the services rendered were purely for 'technical services' offered in connection with assessment (inspection) of internal damages to CPI units of SHG platform. According to him provisions of Section 44D r/w Section 115A of the Act were attracted.
4. In assessment proceedings before the AO, the assessee claimed that the services rendered by NRC are directly connected with the exploration for extraction and production of mineral oils. It further claimed that as per Board Instruction No. 1862, dt. 22nd Oct., 1990, rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas will be covered by the exception under the expressions "mining project" or "like project" recurring in Expln. 2 to Section 9(1)(vii). The AO did not accept the pleas raised by appellant for several reasons as under:
(i) The scope of work nowhere mentions of services referred in Section 44BB.
(ii) The work is managerial and technical in nature.
(iii) The services have arisen in the course of assessee's business. Section 44D will include within its purview also the royalties and fee for technical services arising in the course of business. Reference was made to Advance Ruling Petition No. P.6 of 1995, ABC, In re (1998) 148 CTR (AAR) 481 : (1998) 234 ITR 371 (AAR).
(iv) Because of its terms and conditions it is categorized as "Service", the same will fall within the purview of Section 44D.
(v) Since the foreign company did not provide any training nor carried out drilling operations for exploration or exploitation of oil and natural gap, the benefit of circular cannot be extended to it.
Accordingly, the AO held that the services provided by the assessee are technical services covered by Section 44D r/w Section 115A of the Act and thus he completed the assessment at an income of Rs. 1,47,786.
5. Before the learned CIT(A), the appellant filed written submissions, inter alia, raising following pleas:
(i) That the work done was a necessary prerequisite and step-in-aid to the mining for mineral oils which include both petroleum and natural gas.
(ii) The services were rendered in connection with the exploration for, extraction and production of mineral oils and, therefore, provisions of Section 44BB were applicable.
(iii) The receipts for the services rendered could not be termed as 'fees for technical services'.
It was also explained that services rendered were for carrying out survey of the produced water conditioner which is used to condition the water produced on the offshore platform to make it suitable for being used by the personnel carrying out production operations on the platform. These services were rendered to ensure trouble-free running of equipment. The receipts of the non-resident in respect of such services are claimed to be taxable under Section 44BB of the Act and in case they are held to be "technical services", the same would be exempt from tax in view of Notification No. GSR 304(E), dt. 31st March, 1983.
6. The learned CIT(A) vide para 8 of his order held as under:
8. The written submissions and arguments of the appellant have been considered. Section 9(1)(vii) deals with income deemed to accrue or arise in India by way of 'fees for technical services'. Explanation 2 to Section 9(1)(vii) excludes "consideration for any construction, assembly, mining or like project undertaken by the recipient" from the definition of 'fees for technical services'. On the other hand, in Section 44BB of the IT Act, there is a special provision for computing profits and gains in connection with the business of exploration, etc. of mineral oils. The section applies to an assessee, being a non-resident engaged in 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 oil and states that a sum equal to 10 per cent of the aggregate amount specified in Sub-section (2) shall be deemed to be profits and gains of such business. This section includes business of providing 'services or facilities' in connection with prospecting, extraction, production of mineral oils and Explanation to Section 44BB defines mineral oil to include petroleum and natural gas.
The argument of the appellant that the nature of services provided were a necessary prerequisite and step-in-aid to the mining for mineral oils which include petroleum and natural gas and, therefore, covered under the expression "mining or like project" has been considered. The argument of the appellant that on similar analogy, Hon'ble Tribunal, Delhi, have held that the word 'construction' occurring in Expln. 2 to Section 9(1)(vii) would include 'engineering and bid evaluations' as a step-in-aid to construction in the case of Agland Investment Services Inc. v. JTO (1985) 22 Taxman 9 (Del) (Mag) has also been considered. The argument of the appellant that in similar cases relief was allowed by the then CIT(A), Dehradun, in several other appeals in the past has also been considered. The AO, on the other hand, has not given any cogent reason for not following the CBDT Instruction No. 1862 in the instant case.
However, a simple reading of the terms of the contract shows that the contract was not for providing 'services or facilities' as contemplated under Section 44BB. The appellant was hired only for work assessment and estimate for drinking water plant for personnel. The applicability of Section 44D r/w Section 115A, therefore, cannot be denied. No interference is, therefore, called for and the claim of the appellant is being rejected.
7. Shri Kaveesh Syal, senior F & AO, made appearance on behalf of the appellant. He contends that the services rendered were in connection with exploration and production of mineral oils taxable under Section 44BB of the Act. The payment made for such services rendered by the foreign company does not amount to fee for technical services. In fact, the assessee had rendered services for the assessment of internal damages of CPI units at SHG platform and providing estimate for replacement. SHG is one of the many offshore platforms of ONGC which are used to be able to produce oil and gas from offshore areas. The units in respect of which services were rendered by the non-resident are used to prepare water fit for human consumption from the sea water. Presence of men on offshore platforms is necessary to carry out oil and gas production and drinkable water is a basic necessity for human survival. Therefore, the proper maintenance of units producing drinkable water is very important for oil and gas production. It was further contended that the services rendered by the non-resident in the instant case are a step-in-aid to the process of mining for oil and gas owing to the following reasons:
The services rendered by the non-resident help or aid mining by making drinkable water available for the personnel who are required to stay on the platform to carry out oil and gas production. Hence, as per the ratio of Agland's case, the services rendered in the instant case are as 'step-in-aid' to mining and receipts, therefore, cannot be termed as 'fees for technical services'.
The services rendered by the non-resident help, especially by making it easier, to do mining. Even assuming that drinkable water could have been transported from onshore for consumption by the personnel, that would have been much more difficult and costlier than producing drinkable water from sea water at the offshore platform itself. Therefore, the services rendered by the non-resident which help, especially by making it easier, to carry out oil and gas production on the offshore platform, amount to a step-in-aid to mining even as per the dictionary meaning. Even if it is contended that the services rendered by the non-resident are not an integral step of mining, the same is still a step-in-aid thereto since it aids mining, especially by making it easier.
Again, assuming that drinkable water could have been transported from onshore for consumption by the personnel, the services rendered by the nonresident still amount to a step-in-aid to mining since the conversion of sea water to drinkable water though may not have a direct nexus to mining but only an indirect one, this indirect nexus is sufficient for the services to be considered as a step-in-aid to mining as per the ratio of the Hon'ble Supreme Court's decision in Civil Appeal No. 7178 of 2002 and Writ Petition (C) No. 294 of 2001.
The services rendered by the non-resident help to promote, advance or accelerate the mining for oil and gas and, therefore, as per the ratio of the Hon'ble Patna High Court's decision in Darogi Mondal v. Kameshwar Singh , they amount to a step-in-aid to mining.
Use of de-salinators on offshore platforms is a practice accepted worldwide and, therefore, proper running and maintenance of such de-salinators is an important step-in-aid to the mining for oil and gas.
8. Reliance was placed to the Tribunal judgment in the case of Agland Investment Services Inc. v. ITO (1985) 22 Taxman 9 (Del) (Mag) where bid evaluation and engineering services were held to be a step-in-aid for construction of factories and plants of the corporation. Reference was also made to another judgment by 'A' Bench of the Tribunal in the case of Jt CIT v. ONGC in ITA No. 1098/Del/2000, dt. 4th Feb., 2004, where the service related to inspection of gas turbine filtration system was accepted as income of the foreign company assessable under Section 44B of the Act.
9. As an alternate, the learned Representative for assessee contends that the services so rendered cannot be considered as fees for "technical services" for the sole reason that Article 13 of convention between Government of Republic of India and the Government of United Kingdom of Great Britain for avoidance of double taxation, has used the expression "make available" while defining "technical services". This expression however, has not been explained or defined in the treaty. This expression is found defined under Article 12 concerning fees for included services in US-India tax treaty, copy at assessee paper book, pp. 39 to 45, as under:
Para 4(b) Para 4(b) of Article 12 refers on technical or consultancy services that make available to the person acquiring the service, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in para 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of para 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.
In support, reliance was placed on the Tribunal judgment in the case of Dy. CIT v. Boston Consulting Group Pte. Ltd. (2005) 93 TTJ (Mumbai) 293 : (2005) 94 ITD 31 (Mumbai) with a prayer to hold accordingly.
10. On the other hand, learned Departmental Representative supported the findings reached and conclusion arrived by both the authorities.
11. I have heard the parties with reference to precedents cited and material on record. The urge of the appellant as can be inferred from the grounds in appeal is that for the nature of services rendered by the foreign company, whether the provisions of Section 44BB or provisions of Section 44D of the Act would be applicable. Undisputedly, the appellant took services of foreign company to assess internal damage caused to its existing CPI units of SHG platform and provide estimate of replacement. The immediate purpose of this assessment was to see that the water produced on the offshore platform is fit for human consumption. It will therefore, be useful to make reference to Sections 44BB, 44D, Expln. 2 to Clause (vii) of Sub-section (1) of Section 9 of the Act as under:
44BB. Special provision for computing profits and gains in connection with the business of exploration, etc. of mineral oils. - (1) Notwithstanding anything to the contrary contained in Sections 28 to 41 and Sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in 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, of extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in Sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession":
Provided that this sub-section shall not apply in a case where the provisions of Section 42 or Section 44D or Section 115A or Section 293A apply for the purposes of computing profits and gains or any other income referred to in those sections.
(2) The amounts referred to in Sub-section (1) shall be the following, namely:
(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf 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) the amount received or deemed to be received in India by or on behalf of the assessee 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.
(3) Notwithstanding anything contained in Sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under Sub-section (2) of Section 44AA and gets his accounts audited and furnishes a report of such audit as required under Section 44AB, and thereupon the AO shall proceed to make an assessment of the total income or loss of the assessee under Sub-section (3) of Section 143 and determine the sum payable by, or refundable to, the assessee.
Explanation.- For the purposes of this section,-
(i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;
(ii) "mineral oil" includes petroleum and natural gas.
44D. Special provisions for computing income by way of royalties, etc. in the case of foreign companies.-Notwithstanding anything to the contrary contained in Sections 28 to 44C, in the case of an assessee, being a foreign company,-
(a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trademark or similar property;
(b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern after the 31st day of March, 1976, but before the 1st day of April, 2003.
Explanation. - For the purposes of this section,-
(a) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause (vi) of Sub-section (1) of Section 9;
(b) "foreign company" shall have the same meaning as in Section 80B;
(c) "royalty" shall have the same meaning as in Expln. 2 to Clause (vi) of Sub-section (1) of Section 9.
(d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to Clause (vi) of Sub-section (1) of Section 9, to have been made before the 1st day of April, 1976.
9. Income deemed to accrue of arise in India. - (1) The following incomes shall be deemed to accrue or arise in India:
(vii) income by way of fees for technical services payable by-
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1. - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2. - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
12. In order to be eligible under Section 44BB of the Act, the amount paid to the non-resident has to be on account of the provision of services and facilities in connection with, or supply of plant and machinery in the prospecting for, or extraction or production of, mineral oils. The expression "mineral oil" is also stated to include petroleum and natural gas. It is thus evident that the provision of service and facility should be in connection with or supply of plant and machinery in the basic activity of extraction or production of mineral oils. The CDI units that are used for preparation of water fit for human consumption are independent to the plant and machinery required for such basic business. If an activity which is not connected with the prospecting of mineral oils, the same would not fall within the scope of Section 44BB of the Act. In case the appellant's plea is allowed to be accepted, then activities like sale of food stuff which are not even remotely connected with the prospecting, extraction or production of mineral oil, will have to be included under Section 44BB of the Act. For the expression "in connection with" used in this section, only such services can be included which have solely been provided for the basic activity of prospecting, extraction or production of mineral oils. The same principle emanates from the decision of the Calcutta High Court in the case of CIT v. Chunilal Prabhudas & Co. wherein it was held that:
Looking at the list of deductions, as for instance in Section 12B(2)(i), there is 'expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer'. It means that only that deduction is allowable which is in respect of an expenditure incurred solely for this purpose.
Thus, on a perusal of the aforesaid extract, it can be said that the service in connection with assessing the feasibility of water for human consumption is an activity wholly unrelated to the prospecting for mineral oil and is having a farfetched relationship with the same. The intention of the section is to cover the activities having a proximate relation to the activity of extracting. Therefore, the present activities cannot be said to be 'in connection with' oil extraction and would not qualify under Section 44BB of the Act.
13. The assessee's contention that this service was a step-in-aid to the basic activity can also not be accepted as this is an independent activity unrelated to the basic activity. The expression "step-in-aid" used in various pronouncements was with respect to basic activity which was inextricably linked thereto. Two Tribunal orders referred before me were also not rendered on the service under consideration. The Tribunal judgment in Boston Consulting Group (P) Ltd. 's case (supra) does not refer to Section 44BB of the Act, which is under consideration in this appeal and thus shall have no application to the facts of the present case in appeal.
14. Also, it is finding of fact of the authorities below that the services in the present case are not rendered in connection with prospecting, extracting or production of mineral oils. The assessee was asked to furnish the copy of the agreement with respect to the present services. The assessee has failed to furnish this vital document despite adequate opportunities. In such circumstances, the only resort can be to the facts as established by the lower authorities. On this footing also, this ground in appeal is liable to be rejected.
15. Alternatively, the learned Authorised Representative has argued that the present services do not qualify as 'fee for technical services' under the Indo-UK treaty since no technical information is 'made available' to ONGC. In this regard, the learned Authorised Representative has made a valiant attempt to draw my attention towards the meaning of "fee for technical services". As defined in the Indo-US treaty, particular services would fall within the purview of 'fee for technical services' if the technical know-how involved is "made available" to the end-user. However, it is a settled position that whenever an expression is not defined under a treaty, the resort is had to the domestic law. Reference in this regard may be had on the decision of the Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs , wherein the Court rejected the plea that capital gains, since not defined under the treaty, would not be taxed as an income. It was held that:
The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the treaty cannot be accepted at all because for purpose of the Act, capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the treaty cannot be accepted because in the terms of the treaty wherever any expression is not defined the expression defined in the IT Act would be attracted. The definition of 'income' would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and, therefore, Article 6 would be attracted.
Further, it has also been decided in various cases that the terms not defined in a treaty would get their import from domestic laws. Reference may be had to the following judgments:
(i) Abdul Razak A. Meman, In re ;
(ii) DHV Consultants BV, In re (2005) 197 CTR (AAR) 105 : (2005) 277 ITR 97 (AAR);
(iii) DLJMB Mauritius Investment Co., In re ;
(iv) Morgan Stanley & Co. International Limited, In re ;
(v) Hindalco Industries Ltd. v. Asstt. CIT (2005) 94 TTJ (Mumbai) 944 : (2005) 2 SOT 528 (Mumbai);
(vi) Clifford Chance, United Kingdom v. Dy. CIT (2002) 76 TTJ (Mumbai) 725 : (2002) 82 ITD 106 (Mumbai).
16. Article 3(1) of Indo-UK treaty, which is the basic document to be resorted to in the present case, emphatically states as follows:
3. As regards the application of this convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contacting State relating to the taxes which are the subject of this convention.
Since the answer to the question posed for making a reference for the meaning of "fees for technical services" or the expression "make available" used thereunder to another treaty or tax law of Contracting State is available in the treaty under consideration, I do not find any logic to resort to Indo-US treaty for the meaning of the term "made available" used in the definition of "fee for technical services" under Article 13 of convention between Government of India and Government of United Kingdom. The treaty between the two States has to be read as a whole. Upon such reading, if a term is not found defined, then one has to understand the meaning assigned to such term under the laws of that Contracting State alone. In the present case, it is therefore, unthinkable to go to Indo-US treaty and import the meaning of expression "made available" in that treaty, to the treaty under consideration, moreso, when the model of convention of both the countries is also altogether different. In view of this, it is emphatically clear that the meaning of "fees for technical services" has to be understood from Expln. 2 to Section 9(1)(vii) of the Act and accordingly the service rendered is found to be covered by the definition given under the Indian IT Act. Exception carved therein for mining or like project being not applicable to the nature of service rendered by the appellant, the consideration so received has to be treated as "fee for technical services" within the meaning of Section 9 of the Act and as such Section 44D of the Act is found to have rightly been applied for making assessment of income in this case. Finding no merit in the first ground in appeal, the same stands rejected.
17. Ground No. 2 being consequential, the AO shall give consequential effect.
18. In the result, the appeal is dismissed.