Income Tax Appellate Tribunal - Delhi
Mcdermott International Inc. vs Deputy Commissioner Of Income-Tax on 21 February, 1994
Equivalent citations: [1994]49ITD590(DELHI)
ORDER
A. Kalyanasindharam, Accountant Member
1. The assessee, is a non-resident, carrying on contracts works for various concerns in connection with Bombay High Off-shore Oil Rigs, has filed these appeals. For the assessment year 1984-85, the appeals are against the order of the Commissioner of Income-tax (CIT) passed under Section 263 of the Income-tax Act, 1961 and against the order of CIT(A) arising out of the reversionary proceedings. The appeals for the assessment years 1985-86 & 1986-87 are arising from the order of CIT(A). The appeals involve the common issue that relate to the non-applicability of the notification issued dated 31-3-1993 to its activities. The alternative claim is that, Section 44BB of the Act which overrides the provisions of Section 28 to 41 of the Act, does not permit adding of the taxes paid on its behalf as its receipts for arriving at its taxable income. The second related alternative claim is that, the grossing up of the tax to the receipts should be done once only, the probable Surtax liability could not have been treated as perquisite and that, the assessee could not have been burdened with tax on such assumed figures. The last of the common issue is that, the cash system of accounting adopted by it for accounting its income should not have been disturbed.
2. The brief facts of the case are brought out below. In the previous year relevant to the assessment year under appeal, it had receipts for contract works which are stated to be tax-protected, which have been taxed on cash receipt basis through ONGC as agent of the assessee, and therefore were not included for direct assessment on the assessee. In addition to the above, the assessee had receipts from six other contracts, of which only the contract with Nippon Steel Corpn., Japan is stated to be not tax-protected. The engineering contracts were for Mazagon Dock Ltd. Nos. D2827, D2318 & D2332. Sumitomo Heavy Ind. No. D2206, Nippon Steel Corpn. No. D2329, and Nippon Kokan KK Japan No. D2301. The contracts are turnkey projects that included fabrication, installation, hook-up, commissioning, modification and transportation of various platforms, so sub-contracted by the above parties, who had entered those contracts with ONGC. Some of these works are noted as carried out of India, but, works like hook-up, installation, commissioning, etc., of various platforms, structures are stated to be carried in India.
The assessee had initially filed its return for accounting of the profits on completed contract basis, which has been modified to cash receipt basis. This started with the initiation of the proceedings under Section 263 of the Act and the assessment proceedings for the assessment years 1985-86 and 1986-87. The assessee had agreed before the Commissioner of Income-tax (CIT) for the assessment being made on cash basis by applying Section 44BB of the Act, but, had objected to the treating of the taxes paid by the main contractor on certain contracts as part of its profits, because, Section 44BB did not provide for any such addition unlike what is provided for in Section 28(1)(iv) of the Act. It had raised an alternative plea that, if at all grossing up of the taxes paid to the receipts shown is to be upheld, then, it should be done initially, and the rate of profit of 10% is to be applied.
3. The order of CIT under Section 263 is a short one and the same is reproduced below for the sake of facility :
1. The assessee filed its return on 30-10-1986. The assessment was made on 3-7-1987. In the return the assessee was showing receipts on the basis of completed contracts. On that basis the return showed loss. The proceedings were filed on the basis of the return on 3-7-1987.
2. Considering that the assessments were being framed in this case on the basis of cash receipts in the relevant year. It was found that there are large numbers of contracts which receipts were not shown in this year on receipt basis. Some such contracts are : Contract Nos. 2206, 2229, 2301, 2318 & 2332. Out of these contracts, contract No. 2329 was non-tax protected and the rest were contracts to which tax was protected by various companies (not ONGC).
3. In response to the notice Shri Hingwala attended and stated that he has no objection for inclusion of the receipts that escaped from the original return on the basis of cash payments. Accordingly the proceedings filed vide letter dated 3-7-1987 are cancelled and the Assessing Officer is directed to frame the assessment after looking into the accounts and receipts of these contracts into account. During the course of the proceedings before him the Assessing Officer should also consider Shri Hingwala's request that there should not be any grouping of tax in the tax protected contracts in view of the overriding provisions of Section 44BB; if there is any grossing, it should be done on a single stage basis; the single stage grouping should be by applying a rate of 10% and wherever possible the tax may be recovered from the customers because of lapse of long period after the original receipts.
4. The filing of proceedings vide order dated 3-7-1987 is cancelled.
4. The Assessing Officer (AO) in the proceedings consequent to the direction of the CIT, noting that, the system of accounting adopted by the assessee as "cash system" had in regard to the six contracts for which the assessee had shown receipts in the previous year, observed that, some part of the works though done out of India, it should be treated as part of the composite contract because, the project was a turnkey one on lump basis, in the nature of sale of goods/machinery in India and on that basis calculated 10% as income from profits under Section 44BB of the Act. He concluded that, 10% of receipts for work done in India plus 1% (10% of receipts for works done out of India) are liable for inclusion under Section 44BB of the/Act.
On the claim of inapplicability of Section 28(iv) of the Act to the taxes paid by the main contractor, he observed that, though Section 44BB overrides the provisions of Section 28 to 41, the suggestion in Section 28(iv) for treatment of perquisites could be considered, because, that section again only talks of computation of income from profits from business. He proceeded to take into account the actual receipts as the starting point of computation.
On the contract No. D2332, which was in respect of technical services and royalty for imparting information, he considered separately because, the rates of taxation were 40% & 20% respectively and calculated the tax by converting the US Dollar into Indian rupees. On the contract No. D2229, he considered the receipts in India and outside India, converted it into Indian rupees, applied 10% & 1% to them and determined the total income, applying the tax rate, determined the amount of tax. On the tax protected contracts, he applied the same formula, with the only addition of tax perquisite and the Surtax perquisite and calculating the amount of tax payable on the aggregate of the three amounts. He adopted the same lines for the assessment years 1985-86 & 1986-87.
5. The CIT(A), observed that the Assessing Officer had adopted the mixed system of accounting which is proper, because, it was in line with CBDT's Instruction No. 1767, which he states as accepted by the assessee. He also observed to the acceptance expressed in the proceedings under Section 263 on the applicability of the guidelines issued by the CBDT as Instruction No. 1767. On the treatment of tax perquisites, he upheld the order of Assessing Officer and he also rejected the contention of the appellant that, the tax should be included in the year of actual payment, by observing that, it would be lost sight of. On the inclusion of tax perquisites under Section 44BB, as provided in Section 28(iv), he upheld the observations of the Assessing Officer.
On the additional grounds of appeal raised by the assessee. which was permitted by him, by allowing the opportunity to the Assessing Officer also, he held that, the assessee though a sub-contractor but being engaged in the rendering of services or provision of facilities in connection with prospecting, extraction or production of oils in the Continental Shelf and the Exclusive Economic Zone of India, was liable for taxation.
6. Shri Dinesh Vyas, the learned Senior Advocate, during the hearing did not insist on the common ground, which read - "the learned CIT & CIT(A) have erred in law and on facts in not holding that if at all the tax perquisite is to be added the same should have been considered only in the year of actual payment by customer by applying a rate of 10%" and accordingly this ground is dismissed.
7. Shri Vyas filed a paper book containing extracts from various subcontract Nos. D2206, D2229, D2801, D2355, D2238, D2266, D2808, D2806, D2301, D2318 & D2807 and the copy of the Notification [No. 304(E) No. 5147/F. No. 133(7)/82-TPL dated 31-3-1993]. He contended that, the present claim of the appellant non-resident company is closely linked to the interpretation of the notification, pleaded that he be heard on the legal plea.
He contended that, the reading of the notification indicated that, this has been so issued to cover only those cases of contracts that are related to provision of any service or facility such as provision of supply of ship, aircraft, machinery or plant in connection with the activities of prospecting for or extraction or production of mineral oils. He contended that, the assessee is an engineering construction company and has been engaged by the main contractor for engineering, fabrication and installation of items such as well-cum-production platform deck, flare tripods, flare bridges, interconnection submarine pipelines on a turnkey basis at the Bombay High South Offshore site.
He contended that, the various works relating to the prospecting for, extraction or production requires certain works which are construction works, with the help of which the activities of prospecting, extraction or production are carried out. He pleaded that, there are other works that are in the nature of services rendered or facilities provided in relation to actual prospecting, extraction or production of mineral oils. He pleaded that, the notification which refers to the services or facilities in connection with the three main activities, is intended to cover the second phase of prospect ion, extraction or production.
He contended that, the work of the assessee is restricted to the first of the phase, which is setting up of the business and it is a stage unrelated to either prospecting, extraction or production of mineral oils. He contended that, it is not denied that, the various works of engineering, fabrication, installation, etc., as are carried out by the assessee may be related to the ultimate objective of prospecting, extraction or production of mineral oils, but, it is in no way related to the service or facility in connection with any of three activities. He contended that, the close reading of the notification would clearly show that, the intention is to bring into the tax net only those services or facilities that are provided in connection with prospecting, extraction and production and not of those activities, which are mere preliminaries in nature for the achievement of the above three objectives. He contended that, the work of the assessee is similar to the supplier of a machinery, who may also be called upon to install the machinery and carry out the test run. He pleaded that the work of the supplier of the machinery stops with the installation and the trial run and the act of manufacture with the aid of that machinery that is subsequent to the installation and carried on by the buyer of the machine, which manufacturing process cannot be related to the machinery supplier.
He contended that, he had cited the example of setting up of the business only with the sole purpose of highlighting the fact that, the work that is carried out by the appellant is that stage, after which only either of the three main activities as stated in the notification starts. He pleaded that, since, the notification clearly states that, provision of any service or facility in connection with any three activities, would also be covered, it is only those services that aid and assist in the prospecting or extraction or production, while the services or facilities provided by the assessee are not for any prospect ion or extraction or production, but are ultimately used for the achievement of either of the three activities. He accordingly contended that, the notification does not apply to any of the activities carried on by the assessee.
He contended that, if the main contractor, who is to carry out works of engineering construction are not themselves connected with any of three activities, then, the sub-contractor who assists such main contractor in its engineering construction cannot be held to have any connection with the three activities. He pleaded that, the end of the stage of engineering construction by the assessee, marks the beginning of either of the three main activities and therefore, it could not be held that, the service or facility provided by the assessee is in connection with either of the three activities.
He pleaded that, the notification needs to be given its plain meaning, especially when there is no ambiguity in it. He contended that, the Legislature by this notification has extended the applicability of the Income-tax Act, to the territorial waters of Bombay High and therefore, it is an absolutely must that, the Courts give such notification strict interpretation. He pleaded that, courts have been insistent that, the statute should be given their plain meaning and it is not the duty of the courts to assume or add or remove any word therefrom and give their own interpretation. He derived support for this contention from the authoritative book on Income-tax by the learned authors Kanga & Palkhiwala, 8th edition, pages 4,103, 482 & 623.
He referred to the provisions of Section 80HHB(l)(b) and submitted that, the said clause has specifically provided that the contract of work undertaken abroad, that formed part of the project would also be considered for that section. He contended that, the said notification does not contain any specific mention about covering sub-contractors similar to the provision in Section 80HHB(l)(b) and therefore, it should be held that, the notification is intended to cover only the main contractors. He contended that, the interpretation has to be given their logical application, by appreciating their plain meaning, and by that process, it is only logical to exclude the application of the notification to the sub-contractors.
He contended that, the Supreme Court in CIT v. East West Import & Export (P.) Ltd. [1989] 176 ITR 1551 have held that, the meaning of a word has to be given its true meaning by carrying it to its logical conclusion. He submitted that, the apex court in CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 have held that, for understanding the meaning of the term agriculture there is no warrant for extending its meaning to all activities that have some relation to the land or are in any way connected with the land. He pleaded that, the apex court in Mrs. Bacha F. Guzdarv. CIT[ 1955] 27 ITR 1 had held that, though the company may derive income from agriculture, but, the dividend received by its shareholder is not agricultural income.
He pleaded that, the three authorities support the view advanced by him, that, the term 'provision of any services or facilities in connection with any activities referred to in Clause (A)' has to be limited to those services or facilities for prospect ion, extraction and production and not to those that are carried out before the commencement of any of those three activities. He submitted that, the alternative plea is concerning Section 44BB and Section 28(1)[iv) of the Act. He contended that, Section 44BB starts with the words 'notwithstanding anything to the contrary contained in Sections 28 to 41, and Section 43 & 43A', which clearly indicates that, in so far as Section 44BB is concerned, whatever is contained in that section, that alone is relevant. He contended that, Section 44BB has excluded the provisions that are applied for determination of the income from profits & gains of business or profession, and thereby has taken the place of a total code governing the computation of the profits & gains in connection with the business of exploration, etc., of mineral oils.
He contended that, the Assessing Officer was wrong in considering the tax paid by the main contractor as a business perquisite, then adding it to the income, for determining 10% of the profits as described in Section 44BB of the Act. In support of this argument, he placed reliance on the decision of the Tribunal in ONGC v. IAC 11990] 35 ITD 31 and drew our attention to the observations contained at page 41 of that order. In support of the argument that, the provisions of Section 44BB overrides those contained in Section 28 of the Act, he also relied on Nedlloyd Lines b.v. v. Dy. CIT [1992] 43 ITD 433 (Bom.).
He contended that, Section 44BB would come into operation only if, the notification could be held as covering the business activities of the assessee and not otherwise. He contended that, the work of the main contractors did not involve any activity that could be stated as income from exploration of mineral oils and therefore, the assessee could not be held to have rendered any service or as having provided any facility for the three main activities mentioned in the notification, and accordingly, Section 44BB would also not be operative at all.
8. Smt. Surabhi Sinha, the learned senior departmental representative submitted that, the notification only suggested that, the services or facilities provided in connection with the three main activities, but, do not make any distinction between the services and facilities before the start of any of the three main activities and those provided after the start of the three main activities. She submitted that, without the basic infrastructure, it was not possible for carrying out of any of the three activities.
She filed a copy of the instruction 1767 dated July 1987, which is a guideline in the computation of income, issued by CBDT to all the Commissioners of Income-tax on the subject of taxability of foreign contractors engaged in the business of exploration and exploitation of oil and natural gas in India. She contended that, this instruction clearly shows that, there is no distinction intended between those who carry out contracts before start of the three main activities and for those who carry out contract work after the start of any of the three main activities.
She contended that, the notification does not exclude the sub-contractor from its purview. She contended that, the legal plea as raised by the appellant is not justified because, it makes a distinction between works before the commencement and after the commencement of the three main activities, which is not so intended.
9. The rival submissions have been very carefully considered and the relevant material placed on our record have been perused and the case laws relied upon have also been perused. The controversy being related to the notification dated 31-3-1993, which extended the applicability of the Income-tax Act, 1961, to the Continental Shelf and the Exclusive Economic Zone of India, we reproduce the same.
Notification No. 5147/F.No. 133(7)/82-TPL dated 31st March, 1983.
GSR 304(E): In exercise of the powers conferred by Clause (A) of Sub-section (6) of Section 6 and Clause (A) of Sub-section (7) of Section 7 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) the Central Government hereby extends the Income-tax Act, 1961 (43 of 1961)to the Continental Shelf of lndia and the Exclusive Economic Zone and other Maritime Zone Act, 1976 (80 of 1976). The Central Government hereby extends the Income-tax Act, 1961 (43 of 1961) to the Continental Shelf of India and the Exclusive Economic Zone of India with effect from 1st day of April, 1983 subject to restriction and modification that the said Act shall apply only in respect of income derived by every person from all or any of the following activities, namely :
(A) The Prospecting for or Extraction or Production of Mineral Oils in the Continental Shelf of India or the Exclusive Economic Zone of India.
(B) The provision of any services or facilities or supply of any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any activities referred to in Clause (A).
(C) The rendering of services as an employee of any person engaged in any of the activities referred to in Clause (A) or Clause (B).
Explanation - For the purpose of this notification, 'Mineral Oil' includes petroleum and natural gas.
10. The above notification has extended the scope of Indian Income-tax Act to the Continental Shelf of India and the Exclusive Economic Zone of lndia with effect from 1st day of April, 1983 with the only rider that it shall apply only in respect of income derived by every person from all or any of activities specified in the said notification. Section 5 of the Income-tax Act defines the scope of total income of a resident and a non-resident. Sub-section (2) of Section 5 defines the scope of total income of a non-resident, and since, in the instant case, the assessee is a non-resident company, we reproduce the relevant provisions contained in that section below :
Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1 : Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only that it is taken into account in a balance sheet prepared in India.
Explanation 2 : For removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that is received or deemed to be received by him in India.
11. The notification states that, it is restricted to the income derived by every person from all or any of the activities carried on within the Continental Shelf and Economic Zone of India. The stated activities are, prospecting for or extraction or production of mineral oils; the provision of any services or facilities or supply of any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any activities namely, prospecting for or extraction or production of mineral oils. The prospecting of or extraction of or production of mineral oil or natural gas in high seas requires digging of deep sea wells and their construction, followed by laying of pipe lines for drawing of mineral oil or natural gas, and other engineering construction like platform, and many other ancillaries related thereto. These structures are the basic infrastructure required without which carrying out of any of three activities described by the notification is impossible. These construction works form the foundation for enabling the carrying out the three activities and are directly connected with those activities. There is no denial as pointed out by the learned counsel for the appellant Shri Vyas that, these construction works do not by themselves lead to the prospecting or extraction or production, but, it is also not denied that, without the existence of these basic structures, none of the three activities could be carried out.
Shri Vyas has drawn our attention to the meaning of the term 'activity' as defined in Oxford Illustrated Dictionary, Reader's Digest - Use the Right Word and Shroud's Judicial Dictionary, as "exertion of energy, state or quality of being active, energy, diligence, liveliness, active force or operation"; "the state of being in motion, or the expenditure of energy, activity is a broad word, applicable to physical or mental exertions or pursuits by a person or a group, and is often used to convey the idea of a number of separate simultaneous or successive operations"; and "activity [Landlord & Tenant Act, 1954, Sections 23(2)] was held to include the provision by the landlords of accommodation, furniture and staff for a separate body with whom they were planning to share the accommodation, activity carried on by a body of persons has the same meaning namely, combination of operations undertaken by such a body and does not include the mere ownership of business premises", respectively. Shri Vyas by referring to the above meaning of the term activity submitted that, the services or facilities that are connected with the three main activities indicate only those services that are rendered for prospect ion, extraction and production and not to those that are rendered before the commencement of any of the three activities.
The recognised rule of interpretation of a tax statute is the appreciation of the object which the Legislature intends to achieve. The second cardinal principle of interpretation is that, the words which are precise and plain, they should be given their ordinary and plain meaning. The third cardinal principle of interpretation is that, the meaning of the term has to be given with reference to the context in which they have been used. The fourth cardinal principle of interpretation is that, due consideration must be given to the law as it stood before the enactment, the purpose of enactment, the remedy of any defect that existed before the enactment. The fifth is that, in cases of ambiguity, words must be interpreted in favour of the tax payer. The sixth is that, literal meaning must be adhered to even if it results in any injustice. Last but not the least, it is not the duty of any court to supply for any omissions to the enactment.
According to the above principles of interpretation, the first is to appreciate the intention of the Legislature. The other principle that goes with the above is, due consideration must be given to the situation that existed before the enactment of the law, its purpose, the removal of defect, if any.
The Government of India with a view to augment its oil resources, had decided to proceed with the prospect ion, extraction and production of oil from the Bombay High. In this connection, it required the services, equipments etc., of persons who are familiar with these activities and had invited them.
The Government realised that, Section 5(2) of the Income-tax Act which had defined the scope of the total income of non-residents, but, did not include in its fold the various activities in the Bombay High and the income derived therefrom. This it could do so by bringing out the notification, and by extending the Income-tax Act to the activities in the Bombay High.
Since the Government of India was aware of the processes involved, such as construction of platforms, oil rigs, laying of pipe lines, their installation, testing, commissioning, followed by either of the three activities and also of the processes and support that were necessary for carrying out the three activities, and since the ownership of the activities were vested on the Government of India, it had clearly spelt out that, the notification would cover the income derived from the three activities and from the service of facility provided in connection with those three activities.
Therefore, the intention being so clear, to hold that, the service and facility provided in connection with the three activities is to cover post construction works only, in our opinion, would defeat the very intention. The intention in the instant case is to engulf into the tax net the income derived from prospecting, extraction or production of mineral oils and natural gas and the income derived in the rendering of services or provision of facilities that include supply of ship, aircraft, machinery or plant in connection with any of the three activities. There is no warrant for excluding of the operation of works before the commencement of any of the three main activities, unless it has been so specifically provided that, it is intended only to include in its purview the works of services and facilities related to actual prospect ion, extraction and production.
The second is to give the words their ordinary and plain meaning. The term used in the notification is "the provision of any services or facilities in connection with any activities namely, prospecting for or extraction or production of mineral oils". The emphasis is on the words in connection with any activity and this would only mean that, everything that is connected with any of the three activities. The word 'connect' means to tie or fasten together, to establish a relation between, to associate and the word 'connected' means joined, linked, coherent, related (Chamber's Twentieth Century Dictionary, 1972 edition, page 275). The facilities provided by the assessee are linked or related to the activities and are to associate with the three activities, because, the three activities could not be carried in isolation without the aid of these facilities.
According to the third principle, the words have to be given their meaning with reference to the context in which they have been used. As observed earlier, the services or facilities are in connection with any of the three facilities, indicating that, it would include all those services and facilities with the help of which, those three activities are possible and are carried out. The words in connection with have been used to link or relate the services or facilities to the three main activities. Therefore, the services or facilities that provide the link or relate to the main activity are included.
We had earlier observed that, the notification has extended the operation of the Income-tax Act to the Continental Shelf and the Exclusive Economic Zone of India and now the limited extension of the Act is, on income derived from all or any of the defined activities therein. The notification as it stood at the relevant point of time, makes it abundantly clear that, it is not intended to cover the income derived by any person from all or any activity carried on within the Continental Shelf and the Exclusive Economic Zone, which does not involve prospect ion or extraction or production of mineral oil and natural gas or rendering of service or provision of any facility in connection with the three activities. Carrying this to the logical extent, it is but clear that, the notification covers all or any activities that involve rendering of any service or provision of any facility that assist or aid in the prospect ion, extraction or production of mineral oil and natural gas.
It is not denied that, but for these engineering construction works, it would be impossible for carrying out either of three activities and in that case, there is a direct and close connection between the service and facility to the three main activities.
The argument of the learned Senior Advocate of the present works being in the nature of setting up of the business itself suggests that, the setting up of the business in the instant case being towards the achievement of the three objectives, is clearly connected with those three activities.
The Supreme Court in Raja Benoy Kumar Sahas Roy's case (supra) had held that, not every activity relating to the land could be categorised as agriculture. This decision also only goes to make it clear that, there has to be a distinction between the main activities and the related functions that assist the main activity, which has been so brought out by the notification itself.
The Supreme Court in East West Import & Export (P.) Ltd's case (supra) had clearly held that, the words in a statute has to be given their plain meaning. Applying this rule, the services or facilities in connection with any three activities has to be given the meaning to include those services or facilities that are rendered or provided for the achievement of those three activities and also those that are rendered or provided with the actual prospect ion or extraction or production of mineral oil and natural gas.
The fifth principle states that, if there is any ambiguity, then alone the interpretation has to be in favour of the tax payer. As observed earlier, there is no ambiguity and therefore, two interpretations not being possible, the view favourable to the assessee could not be taken. We had observed earlier that, considering the literal meaning of the word connected being related to or linked to, the services or facilities provided in connection with the three activities covers both pre and post operations, because, without the works of construction carried out before actual prospection etc., it was not possible to carry out the activities of prospection etc. Therefore, in our view, the services or facilities provided in connection with the three activities would also cover those that are so rendered or provided before actual prospection etc.
12. The claim of the appellant that, Section 44BB overrides the provisions of Sections 28 of the Act, is fully justified because, the said section begins with the words notwithstanding anything contained in Sections 28 to 41. Whatever is provided in Sections 28 cannot therefore be imported into Section 44BB of the Act. To this extent, the assessee succeeds.
13. Section 44BB was inserted into the Income-tax Act by Finance Act, 1987, with retrospective effect from 1-4-1983 for purposes of computing the profits & gains in connection with the business of exploration, etc., of mineral oils. We shall reproduce this section because, it being a complete code in itself, to appreciate whether, the taxes paid by the main contractor on behalf of the assessee could be termed as the amount payable to the assessee or not, to which the said section also makes reference of.
(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 nonresident, 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 oils, a sum equal to ten per cent of the aggregate of the amounts specified in subsection (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 Sections 115A or Sections 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.
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.
14. Sub-clauses (a) & (b) contain the words used or to be used, which also clearly indicate that, words the services or facilities rendered or provided in connection with the three main activities, are meant to include both before the actual operation and during the operation of prospection, extraction or production. Therefore, there is absolutely no doubt that, the works of construction that are in the nature of facilities provided in connection with the prospection, extraction or production though before actual operation of prospection etc., are duly covered and are rightly considered for liability to tax under Section 44BB of the Act.
15. Sub-Clause (a) of Sub-section (2) of Section 44BB provides for the inclusion of 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 computing the profits under this section. The income-tax paid by the main contractor is on behalf of the assessee, which has been so undertaken for the various services provided by the assessee in its capacity as a sub-contractor to the main contractor, who had in turn rendered the services or provided the facilities, in connection with the prospecting for, extraction of or for production of mineral oils. Therefore, on a plain reading of Sub-clause (a) of Sub-section (2) of Section 44BB of the Act, the taxes paid on its behalf has to be considered in the computation of the profits and gains under this section.
Since, the amount of tax so paid, is to be initially added to the receipts of the assessee, the aggregate amount of which would be treated as the total receipts and the factor of income have to be limited to ten per cent of this aggregate. The addition of tax is to be done once at the beginning only. We derive support in this regard from the order of the Tribunal in ONGC's case (supra), where the action of the Assessing Officer for single stage grossing up of the income-tax, for arriving at the gross income, was upheld.
Insofar as the probable Surtax liability is concerned it would lead to multiple stage grossing up, which in our view is not proper and is accordingly deleted.
We may observe that, Section 44BB clearly provides for exclusion from its purview, those receipts which are liable for consideration under Sections 42, 44D, 115A and 293A. The Assessing Officer was therefore clearly in error when he included the income from technical services and royalty of contract No. D2332, that are levied taxes with reference to Section 115A and hence, deleted. The levy of interest under Sections 139(8), 215 & 217 have been stated to be consequential and we have only to direct the Assessing Officer to recalculate the interest after giving effect to our order.
The appeals of the assessee against the orders of CIT(A), for all the three assessment years, are allowed in part as above. For the assessment year 1984-85, the issues as had arisen from the order of CIT(A), having been considered on their merits and order pronounced thereupon, the appeal against the order of CIT made under Sections 263 of the Act, for that assessment year, is held as in fructuous.