Income Tax Appellate Tribunal - Jaipur
Oriental Earthmovers Private Limited, ... vs Assistant Commissioner, Circle-2, ... on 27 November, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SH. KUL BHARAT, JM & SH. VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ ITA No. 732/JP/2015
fu/kZkj.k o"kZ@Assessment Year :2012-13
M/s National Oil Well cuke DCIT,
Maintenance Company, International Taxation,
Vs.
Jodhpur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. - AADCN2122J
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ I.T(I.T.) A. No. 02/JP/2017
fu/kZkj.k o"kZ@Assessment Year :2013-14
M/s National Oil Well cuke DCIT,
Maintenance Company, International Taxation,
Vs.
Jodhpur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. - AADCN2122J
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by: Sh. Prashant Bansal (CA)
& Sh. Mahesh Gehlot (Advocate)
jktLo dh vksj ls@ Revenue by : Sh. Varindra Mehta
lquokbZ dh rkjh[k@ Date of Hearing : 29/08/2017
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 27/11/2017.
vkns'k@ ORDER
PER: SH. VIKRAM SINGH YADAV, A.M. These are two appeals filed by the assessee against the order of Assessing Officer passed pursuant to the directions of the Dispute Resolution ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur Panel u/s 144(C)(13) read with section 143(3) of the Act for A.Y 2012-13 and 2013-14 respectively. The respective grounds of appeal are as under:
ITA No. 732/JP/2015:" (1) Under the facts and circumstances of the case and in Law, the Assessment Order passed u/s 143(3) r.w.s. 144C of the Income Tax Act 1961 dated 30/01/2015 by the ld. DCIT, International Taxation, Jaipur is bad in Law and bad in facts.
(2) Under the facts and circumstances of the case and in law, the ld.
AO in pursuance of the direction of Dispute Resolution Panel Delhi u/s 144C erred in rejecting the income declared u/s 44BB and the income was wrongly assessed u/s 44DA of the I.T. Act 1961 for the cementing services and construction of mineral oil and gas wells.
(3) Under the facts and circumstances of the case and in law, the ld. AO disallowed the payment of transportation expenses of Rs. 1,51,900/-made directly to the transporter's Bank A/c u/s 40A(3A). The payment was covered under exceptions under Rule 6DD r.w.s. 40A (3A) of I.T. Act, 1961.
(4) Under the facts and circumstances of the case and in Law, the learned AO disallowed the payment of transportation expenses of Rs. 13,09,476/- which was part of "Contract for sales" made to Shree Digvijay Cement, u/s 40(a) (ia) on account of non-deduction of TDS. The aforesaid transaction was 'contract for sale' and covered under Circular no. 681 dated 08/03/1994 and also covered by the Proviso to section 194C.
(5) Under the facts and circumstances of the case and in law, the Learned AO disallowed u/s 44DA(1) and 40(a) (ia) the payment made against ERP Cost and Training Expenses of Rs. 1,18,560/- and Rs. 1,90,252/- respectively, which was wholly incurred for the purpose of cementing services and construction of mineral oil and gas wells.
(6) Under the facts and circumstances of the case and in law, the learned AO has erred in charging interest u/s 234A, 234B and 234C.
2 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur (7) Under the facts and circumstances of the case and in Law, the learned AO has wrongly initiated the penalty proceedings u/s 271(1)(c) of the Income Tax Act 1961."
I.T.(I.T) A. No. 02/JP/2017:
"(1) Under the facts and circumstances of the case and in law, the Assessment Order passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 dated 09/12/2016 by the ld. DCIT, International Taxation, Jaipur in pursuance of the direction of Dispute Resolution Panel Delhi u/s 144C is bad in law and bad in facts. Therefore, the order needs to be set aside.
(2) Under the facts and circumstances of the case and in Law, the ld. AO in pursuance of the direction of Dispute Resolution Panel Delhi u/s 144C erred in rejecting the income declared u/s 44BB and the income was wrongly assessed u/s 44DA of the I.T.Act 1961 for the cementing services and construction of mineral oil and gas wells. (3) Under the facts and circumstances of the case and in law, the learned AO has on the basis of assumptions and presumptions without appreciating the facts and merits of the case, disallowed u/s 44DA(1) and 40(a) (ia) the payment made against ERP Cost and Training Expenses of Rs. 7,22,163.47/-, whereas these expenses were incurred wholly for the purpose of cementing services provided, construction of mineral oil and gas wells in India which is an integral part, main activity and important element in providing services or facilities in prospecting for, or extraction or production of mineral oil and natural gas. These expenses are also not covered u/s 195 of the I.T.Act 1961.
(4) Under the facts and circumstances of the case and in Law, the Learned AO has on the basis of assumptions and presumptions without appreciating the facts and merits of the case, charged interest u/s 234B, 234C and 234D and withdrawing the interest u/s 244A(3) of the Act.
(5) Under the facts and circumstances of the case and in Law, the learned AO on the basis of assumptions and presumptions without appreciating the facts and merits of the case has initiated penalty u/s 271(1)(c) of the Act."3 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17
M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
2. In its appeal for AY 2012-13, the assessee company has challenged the action of the Assessing Officer in rejecting the income offered u/s 44BB of the Act by the assessee in its return of income and wrongly assessing the same u/s 44DA of the Act in respect of cementing services undertaken by the assessee company during the impunged assessment year 2012-13.
3. The principle contention raised by the ld. AR is that cementing services provided by the assessee company are not in the nature of technical services and falls under the exclusion clause as provided under explanation to section 9(1)(vii) of the Act. It was further contended that the cementing services are part of construction of mineral oil and gas wells and are inextricably linked with prospecting for or extraction or production of mineral oil and the revenue from such services have been duly offered to tax u/s 44BB of the Act. It was further contended that since cementing services does not qualify as technical services u/s 9(1)(vii), the provisions of section 44DA are not applicable in the instant case. It was further contended that even if it was held that provisions of section 44DA are equally applicable, the provisions of section 44BB being more specific in the facts of the instant case shall be applicable.
4. In support of its contention that the services under its contracts with Oil India Ltd and Gail (India) Limited are not in the nature of technical services, the ld AR placed reliance on the decision of the Hon'ble Supreme Court in case of ONGC vs. CIT (2015) 59 Taxmann.com 1. In support of its contention that section 44BB, being more specific provision, shall prevail over section 44DA, the ld AR placed reliance on the decision of Hon'ble Delhi High Court in case of DIT vs. OHM (2012) 28 taxmann.com 120 and it was submitted that the said decision of the Hon'ble Delhi High Court had considered the amendment which has been brought in by the Finance Act 2010 in section 44BB as well as section 44DA of the Act.
4 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
5. The ld. DR relied on the findings of the Assessing Officer as well as the Dispute Resolution Panel and submitted that in view of the specific amendments brought in by the Finance Act 2010 in section 44BB and section 44DA, the services provided by the assessee company being in the nature of technical services have been rightly brought to tax u/s 44DA of the Act.
6. In order to appreciate the rival contentions advanced by both the parties, firstly, it would be relevant to refer to the nature of the services and scope of work under the two contracts entered into by the assessee company with Oil India Ltd. and Gail (India) Limited revenues from which have been offered to tax in the return of income for AY 2012-13.
7. The contract with Oil India Ltd. Dated 27.11.2009 is titled as "Hiring of cementing services" which is available at APB pages 96 to 250 and the scope of work is contained in Section II of the contract and the relevant provisions reads as under:-
"2.0 Preamble 2.1 Rajasthan Project of Oil India (OIL), a Govt of India Enterprise, is engaged in the exploration and production of natural gas from its Jaisalmer Basin and heavy oil from Bikaner-Nagaur basins of Western Rajasthan, India.
2.2 Presently, OIL plans to extend its exploration activities in the Jaisalmer and Bikaner, Nagaur Basins of Western Rajasthan by drilling about 18 to 19 wells (1200 + 1950m) in its various NELP Blocks in Western Rajasthan.
2.3 The down-hole drilling conditions and geology in the proposed drilling locations are expected to be normal and similar to those of gas fields of Jaisalmar Basin where 40 wells in the depth range of 1050- 5 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur 4500m and heavy oil field or Baghewala in Bikaner Nagaur Basin where 12 wells (630-1400m) have so far been drilled.
3.0 AREA OF OPERATION 3.1 Topography The proposed area of operation will be based at Jaisalmer the district headquarters, and is the major town falling within Jaisalmer Basin and Bikaner/Bikampur for Bikaner-Nagaur Basin. The area of operation is a desert (Thar Desert) covered with sand dunes varying in size from a few meters to dunes running in kilometres. The general elevation of the area varies between 80 to 120m above mean sea level.
3.2 .....
3.3 .....
3.4 .....
3.5 ....
3.6 No. of wells & Target Depths (TD): A total of about 18-19 exploratory as well as development wells have been planned to be drilled during the contractual period of initial twenty one months for which the Contractor will be required to provide the Cementing services as per terms. The target depths (TD) of the wells will vary between 1200-1950 mtrs. These wells are proposed to be drilled in various NELP Blocks in Rajasthan, India, where Oil is the Operator. However, the number of wells may also vary and Company's decision in this regard will be final and binding.
4.0 Description of work 6 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur The scope of work involved equipment required as well as expected quantum of jobs to be performed during a period of initial twenty one months operation are furnished in Annexure-I, Annexure-II and Annexure-III respectively in this section. However, the quantum of jobs may vary depending upon various drilling activities to be taken up by the Company during the course of the contract and need to be attended by the Contractor. The Contractor, following mobilization of crew and equipment will be required to provide the intended services as desired by Company as per contractual terms. Company has planned to start the operations initially with only one Rig and from early 2010, two drilling rigs may be deployed and the activities will be so co-ordinated that only one cementing unit and one set of Crew can cater for the well cementation requirements of both the rigs.
DETAILS OF SERVICES TO BE PERFORMED BY THE CONTRACTOR (Annexure -I)
1) To operate cementing/ pumping units.
2) Primary cementing jobs
3) Two stage cementing jobs
4) Cement/Barytes/Bentonite-diesel-gunk etc. plug, jobs through drill pipe/tubing
5) BOP Stack testing/LOT
6) Casing Test
7) To provide services on cementing programme, slurry design etc. for exploratory/developmental drilling of oil/gas wells.
8) To maintain and service all equipment belonging to Contractor and thus avoid downtime.
9) Any other job normally required to be done by cementing unit.
10) To carry out relevant API and other tests on cement and additives in the nearest laboratory.7 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17
M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
11) To perform squeeze job (optional) if required by retrievable packer/cement retainer on mutually agreed terms & conditions.
12) Pre-stressing for thermal wells where experts for this will be called separately by OIL.
13) Any other jobs generally connected with such services for bringing- in a well to health should be provided by the Contractor when called upon to do so including supply of extra items/equipment/cement additives (on reimbursement basis on mutually agreed terms & conditions)."
8. It would be equally relevant to note the schedule of rates for the above scope of work which is provided in section IV of the above contract with OIL, and the relevant provisions reads as under:-
"1.0 MOBILISATION CHARGES: US$ 12,000.00 (US Dollars Twelve Thousand only) 2.0 DEMOBILISATION CHARGES : NIL 3.0 RENTAL CHARGES FOR EQUIPMENT: US $ 14,500.00 per Month (US Dollars Fourteen Thousand Five Hundred only) 4.0 PERSONNEL CHARGES: US $ 27,965.00 per Month per Engineer (US Dollars Twenty Seven Thousand Nine Hundred Sixty Five only) 5.0 OPERATIONAL CHARGES: US$ 95.00 per job (US Dollars Ninety Five only) 6.0 INTERLOCATION MOVE CHARGES: US$ 6.00 per KM (US Dollars Six only) 7.0 CHARGES FOR ADDITIONAL SERVICES (AS & WHEN REQUIRED BASIS):
(a) MOB-DEMOB CHARGES FOR TWO BATCH MIXERS
(b) RENTAL CHARGES FOR BATCH MIXERS
(c) PERSONNEL CHARGES FOR CASING PRE-STRESSING JOB"8 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17
M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
9. The contract with Gail (India) Ltd. dated 06.04.2011 available at APB pages 116 to 186 is again for hire of cementing services and the scope of work is contained in section VI and the relevant provisions reads as under:
1.0 General The Equipment and Services to be provided during the term of the Contract shall be in respect of GAIL's six well drilling programme in the RJ-ONN-2004/1 Block in Western India. Contractor shall provide all necessary management, administrative and technical support to fully support the work for the first three wells and contract is extendable for remaining three wells, if required.
Additionally, Contractor shall prepare and submit comprehensive reports as requested.
1.1 Mobilization of Services Contractor will be responsible for procuring, loading and unloading of chemical and consumables required for the contract/three wells. Space will be provided by the Company at its warehouse for storage of material. The Company will also provide craneage and forklift at warehouse and at drill site for loading and unloading equipment, chemicals and consumables. But Contractor will be responsible for security of the materials at warehouse and transportation of materials from warehouse to drill site and during inter location movements. Contractor shall coordinate drilling schedules, transportation of equipments and materials to avoid delay.
Contractor shall mobilize all equipment and personnel within 45 days of receipt of mobilization notice.
For subsequent requirements, Contractor will be responsible for planning and coordinating all requirements in consultation with the GAIL's representatives and Contractor shall mobilize inter-location movements in accordance with the instructions given, and the Contractor will be held responsible for any failure 9 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur to provide such personnel, materials, equipment and supplies as agreed to be provided under this tender.
1.2 Services/Contract Co-ordinator An experienced Services/ Contract Co-ordinator who is familiar with the proposed services and the area in which the work will be performed, shall be available to GAIL for discussions with respect to technical, planning, operational and logistical matters, attendance at meetings and general liaison and shall monitor onshore progress on a continuous basis prior to and during the operations, thus facilitating daily reporting.
1.3 Specialist Provider of Services The Contractor as a specialist provider of services under this scope of work is responsible to bring to our attention any additional items or services not specifically identified, but nonetheless considered by you as required to carry out GAIL's drilling program.
2.0 CEMENTING SERVICES:
Contractor shall provide a comprehensive Cementing service in support of GAIL's drilling program in the Rajasthan area for the drilling of first three exploratory wells. The services need to be extended to remaining three wells if required."
10. It would be equally relevant to note the schedule of rates for the above scope of work which is provided in letter of acceptance issued by GAIL dated 6.4.2011 and the relevant provisions reads as under:-
Schedule of Rates Tender No.: GAIL/IND/E&P -C&P/RJW27 ETENDER NO 8000002800 10 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur Job: Hiring of Cementing Services & Accessories M/s National Oil Well Services S. No. Name of the Section Quoted Price ($) 1 Part A- Rental Equipments 199,700.00 2 Part B- Personnel Charges 87,917.00 3 Part C- Cement and Additive 397,565.59 4 Part D- Isolation Equipments 73,020.00 5 Part E- Float Equipments 371,982.00 6 Part F- Casing Accessories 87,616.40 A Total for Cementing Services & Accessories 1,217,801.09 B Service [email protected]% 125,433.51 C=A+B Total inclusive of Service Tax 1,343,234.60 INR @ Rs. 45.36/USD 60,929,121.56
11. On review of above scope of work and related payment under the two contracts, it is noted that under contract with OIL, the assessee company was required to provide cementing services in relation to about 18-19 exploratory as well as development wells which have been planned to be drilled during the contractual period in various NELP Blocks in Rajasthan where OIL is the Operator. Similarly, in respect of contract with GAIL, the assessee company was required to provide cementing services in respect of GAIL's six exploratory well drilling programme in the RJ-ONN-2004/1 Block in Western India. The consideration under both the contracts are thus for provision of comprehensive cementing services through equipment, material and personnel which have to be undertaken by the assessee, along with drilling services, as part of the exploratory and development well programme for oil and gas fields.
12. The question that arises for consideration is whether the consideration for provision of comprehensive cementing services through equipment, material and personnel as described above will qualify as fees for technical services or 11 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur qualify for exclusion from technical services under Explanation 2 to section 9(1)(vii) which reads as under:
"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".
13. During the course of hearing, the ld. AR explained that cementing services are part of the drilling services for drilling of the oil and gas wells and submitted that well cementing is the process of introducing cement to the annular space between the well-bore and casing or to the annular space between two successive casing strings. Oil Well cementing is the oilfield operation which isolates the unwanted rock formation from the reservoir by providing barrier. Cementing operation also assists to support the casing pipe with the side walls and protects the well from any unwanted fluid influxes from the formation. The bottom part of the cement assists to guide the Drill bit through drilling of the well.
14. It was further explained that the well cementing consists of two principal operations - primary cementing and remedial cementing. Primary cementing is the process of placing a cement sheath in the annulus between the casing and the formation. Remedial cementing occurs after primary cementing, when engineers inject cement into strategic well locations for various purposes, including well repair and well abandonment.
15. It was further explained that the cementing services are part of the drilling activity without which the well construction is not possible and it was 12 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur submitted that the role of cementing services in mineral oil exploration and production can be appreciated as under:-
• To support the vertical and radial loads applied to the casing • Isolate porous formations from the producing zone formations • Exclude unwanted sub-surface fluids from the producing interval • Protect casing from corrosion • Resist chemical deterioration of cement • Confine abnormal pore pressure • To increase the possibility to hit the target • Permanently shut off water penetration into the well • Seal the annulus after a casing string has been run in a wellbore • Seal a lost circulation zone, or an area where there is a reduction or absence of flow within the well.
• To plug a well
16. Here, it would be relevant to refer to the judgement of the Hon'ble Supreme Court in ONGC vs. CIT (supra) wherein the following question of law came up for consideration:
'Whether the amounts paid by the ONGC to the non-resident assessees/foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as "fees for technical services" under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act or will such payments be taxable on a presumptive basis under Section 44BB of the Act'?
The Hon'ble Supreme Court was pleased to hold as under:
"8. A careful reading of the aforesaid provisions of the Act goes to show that under Section 44BB(1) in case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in 13 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10% of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in Sub-section (2). On the other hand, Section 44D contemplates that if the income of a foreign company with which the government or an Indian concern had an agreement executed before 1.4.1976 or on any date thereafter the computation of income would be made as contemplated under the aforesaid Section 44D. Explanation (a) to Section 44D however specifies that "fees for technical services" as mentioned in Section 44D would have the same meaning as in Explanation 2 to Clause (vii) of Section 9(1). The said explanation as quoted above defines "fees for technical services" to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. "fees for technical services" any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head "salaries". Fees for technical services, therefore, by virtue of the aforesaid explanation will not include payments made in connection with a mining project."
"13. The Income Tax Act does not define the expressions "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 materia 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 14 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur 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.15 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17
M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur S. Civil Work covered under the contract No. 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.
6. 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 in 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.16 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17
M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
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.17 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17
M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
28. 1521 Inspection of gas generators.
29. 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 18 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur 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."
17. The legal proposition thus laid down by the Hon'ble Supreme Court is as follows:
1) Fees for technical services, by virtue of the explanation 2 to section 9(1)(vii) will not include payments made in connection with a mining project.
2) The Income Tax Act does not define the expressions "mines" or "minerals". As per 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, drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation.
3) It is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining 19 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur 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.
4) The test of pith and substance of the agreement has been accepted as a reasonable test for determining the nature of contract/services under a given contract.
5) The Hon'ble Supreme Court has given equal recognition to the fact that the CBDT had accepted the said test and had in fact issued a circular no. 1862 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. In light of that, it was held that "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."
18. In the instant case, applying the above test of the pith and substance, both the contracts which provides for provision of comprehensive cementing services is directly associated with drilling operations and inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of these contracts is for prospecting, extraction or production of mineral oils. The payments under the two contracts will thus fall in the exclusion from "Fees for technical services", by virtue of the explanation 20 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur 2 to section 9(1)(vii) which doesn't not include payments made in connection with a mining project for prospecting, extraction or production of mineral oils.
19. We are conscious of the fact that above decision of the Hon'ble Supreme Court has been rendered in the context of Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act and in the instant case, the AO has invoked provisions of section 44DA of the Act. At the same time, we find that both under section 44D as well as under section 44DA, fees for technical services has been defined as per explanation 2 to section 9(1)(vii) of the Act. Though there have been amendments made to section 44BB and section 44DA by the Finance Act 2010, there has been no amendment that has been made by the legislature to the said definition of fees for technical services. Further, on pointed question raised by the Bench during the course of hearing, the ld AR submitted that the circular issued by the CBDT no. 1862 dated 22.10.1990 continues to be operative and has not been withdrawn by the CBDT. In light of the same, in our considered view, the above decision of the Hon'ble Supreme Court continues to hold the field, even in the amended legislative regime, post amendment by the Finance Act 2010 in section 44BB and section 44DA and is clearly applicable and supports the case of the assessee company for the impunged assessment year 2012-
13.
20. In light of the above discussions, the consideration for provision of comprehensive cementing services through equipment, material and personnel will qualify for exclusion from fee for technical services under Explanation 2 to section 9(1)(vii) of the Act.
21. In view of our decision that the consideration for services rendered by the assessee company under the two contracts cannot be construed as "fees for technical services", the second question regarding computation of income either under section 44BB or under section 44DA doesn't arise for 21 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur consideration. The reason for the same is obvious. Section 44DA presupposes the nature of income as fees for technical services as defined in explanation to section 9(1)(vii) and then goes about defining the mechanism of taxability of the same. As we have held above that consideration under the two contracts doesn't qualify as fees for technical services, the applicability of section 44DA is ruled out at the threshold itself. Thus, the provisions of section 44BB are applicable in the instant case which has rightly been applied by the assessee company while offering its income to tax in the return of income filed for the impunged assessment year.
22. At the same time, given that both the parties have advanced their respective contentions on the applicability of section 44BB or section 44DA, we consider it appropriate to address the same on the assumption that the consideration received by the assessee company for the services rendered qualifies as 'fees for technical services'.
23. It is the contention of the ld AR that section 44BB being more specific provision shall prevail over section 44DA and in support, reliance was placed on the decision of Hon'ble Delhi High Court in case of DIT vs. OHM (2012) 28 taxmann.com 120 and it was submitted that the said decision of the Hon'ble Delhi High Court had considered the amendment which has been brought in by the Finance Act 2010 in section 44BB as well as section 44DA of the Act.
24. Per contra, the contention of the ld DR is that by the Finance Act, 2010, the amendments have been made in section 44BB as well as section 44DA of the Act and the rational for the said amendments was explained in memorandum explaining the provisions of the Finance Bill, 2010 which reads as under:-
"Combined effect of the provisions of sections 44BB, 44DA and 115A is that 22 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur In the income of a non-resident is in the nature of fee for technical services, it shall be taxable under the provisions of either section 44DA or section 115A irrespective of the business to which it relates. Section 44BB applies only in a case where consideration is for services and other facilities relating to exploration activity which are not in the nature of technical services.
However, owing to judicial pronouncements, doubt were raised regarding the scope of section 44BB vis-a-vis section 44DA as to whether fee for technical services relating to the exploration sector would also be covered under the presumptive taxation provisions of section 44BB. In order to remove doubts and clarify the distinct scheme of taxation of income by way of fee for technical services, it is proposed to amend the proviso to section 44BB so as to exclude the applicability of section 44BB of the Income which is covered under section 44DA. Similarly, section 44DA is also proposed to be amended to provide that provisions of section 44BB shall not apply to the income covered under section 44DA. These amendments are proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years."
25. It was contended by the ld DR that the claim of the assessee relates to assessment years 2012-13 and has therefore to be considered in light of the amendment brought-in by the Finance Act, 2010. Before the amendments, as a result of decision in Geofizyka and other cases, the expression "in connection with" has been widely misunderstood and the benefits of section 44BB(1) extended to activities in connection with mining. However, after the amendment by the Finance Act, 2010, in respect of fees for technical services, the applicability of section 44BB(1) has to be considered in the context of that amendment.
23 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
26. We find that the above conflict in the provisions of section 44BB and section 44DA after taking into consideration the amendment brought-in by the Finance Act, 2010 has been considered by the Hon'ble Delhi High Court in case of DIT vs. OHM Ltd (supra). The question for consideration before the Hon'ble Delhi High Court was whether assessee company which was engaged in the business of providing geophysical services to oil and gas exploration industry and conducting electromagnetic survey, processing and interpretation of data for use in offshore oil industry was to be assessed under the provisions of section 44BB of the Act or section 44DA of the Act. The Hon'ble Delhi High Court after considering the amendment brought in by the Finance Act, 2010 has held that section 44BB being more specific provision shall prevail over section 44DA and the relevant findings are as under:
"11. We do not think that there is any error in the view taken by AAR. Basically the rule that the specific provision excludes the general provision has been applied. Section 44BB is a special provision for computing the profits and gains of a non-resident in connection with 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 including petroleum and natural gas. Section 44DA is also a provision which applies to non-residents only. It is, however, broader and more general in nature and provides for assessment of the income of the non-resident by way of royalty or fees for technical services, where such non-resident carries on business in India through a permanent establishment situated therein or performs services from a fixed place of profession situated in India and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with the permanent establishment or fixed place of profession. Such income would be computed and assessed under the head "business" in accordance with the provisions of the Act, subject to the condition that no deduction would be allowed in 24 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur respect of any expenditure or allowance which is not wholly or exclusively incurred for the business of such permanent establishment or fixed place of profession or in respect of amounts, if any, paid by the permanent establishment to its head office or to any of its other offices. Under section 44BB one does not find any reference to a permanent establishment in India. The type of services contemplated by the provision is more specific than what is contemplated by Section 44DA. Section 44BB refers specifically to "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". Revenues earned by the non-resident from rendering such specific services are covered by Section 44BB. It is a well settled rule of interpretation that if a special provision is made respecting a certain matter, that matter is excluded from the general provision under the rule which is expressed by the maxim "Generallia specialibus non derogant". It is again a well-settled rule of construction that when, in an enactment two provisions exist, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This was stated to be the "rule of harmonious construction" by the Supreme Court in Venkataramana Devaru v. State of Mysore AIR 1958 SC 255. If as contended by the Revenue, Section 44DA covers all types of services rendered by the non-resident, that would reduce section 44BB to a useless lumber or dead letter and such a result would be opposed to the very essence of the rule of harmonious construction. In South India Corpn. (P.) Ltd. v. Secretary, Board of Revenue Trivandrum, AIR 1964 SC 207 it was held that a familiar approach in such cases is to find out which of the two apparently conflicting provisions is more general and which is more specific and to construe the more general one as to exclude the more specific.
12. The second proviso to sub-section (1) of Section 44DA inserted by the Finance Act, 2010 w.e.f. 01.04.2011 makes the position clear. Simultaneously a reference to Section 44DA was inserted in the proviso to sub-section (1) of 25 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur section 44BB. It should be remembered that section 44DA also requires that the non-resident or the foreign company should carry on business in India through a permanent establishment situated therein and the right, property or contract in respect of which the royalty or fees for technical services is paid should be effectively connected with the permanent establishment. Such a requirement has not been spelt out in Section 44BB; moreover, a flat rate of 10% of the revenues received by the non-resident for the specific services rendered by it are deemed to be profits from the business chargeable to tax in India under Section 44BB, whereas under Section 44DA, deduction of expenditure or allowance wholly and exclusively incurred by the non-resident for the business of the permanent establishment in India and for expenditure towards reimbursement of actual expense by the permanent establishment to its head office or to any of its other offices is allowed from the revenues received by the non-resident. Because of the different modes or methods prescribed in the two sections for computing the profits, it apparently became necessary to clarify the position by making necessary amendments. That perhaps is the reason for inserting the second proviso to sub-section (1) of Section 44DA and a reference to section 44DA in the proviso below sub- section (1) of Section 44BB. A careful perusal of both the provisos shows that they refer only to computation of the profits under the sections. If both the sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber then the only way in which the provisos can be given effect to is to understand them as referring only to the computation of profits, and to understand the amendments as having been inserted only to clarify the position. So understood, the proviso to sub-section (1) of Section 44BB can only mean that the flat rate of 10% of the revenues cannot be deemed to be the profits of the non-resident where the services are of the type which do not fall under that section, but are more general in nature so as to fall under Section 44DA. Similarly, the second proviso to sub-section (1) of Section 44DA can only be interpreted to mean that where the services are 26 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17 M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur general in nature and fall under the sub-section read with Explanation 2 to Section 9(1)(vii) of the Act, then an assessee rendering such services as provided in Section 44BB cannot claim the benefit of being assessed on the basis that 10% of the revenues will be deemed to be the profits as provided in Section 44BB. In other words, the amendment made by the Finance Act, 2010 w.e.f. 01.04.2011 in both the sections, cannot have the effect of altering or effacing the fundamental nature of both the provisions or their respective spheres of operation or to take away the separate identity of Section 44BB. We do not, therefore, see how these amendments can assist the Revenue's contention in the present case, put forward by the learned Senior Standing Counsel. We, therefore, agree with the AAR that in the present case the profits shall be computed in accordance with the provisions of section 44BB of the Act and not section 44DA."
27. In light of above and respectfully following the decision of the Hon'ble Delhi High Court in DIT vs OHM Ltd (supra), given the nature of cementing services which are inextricably linked with activities of prospecting for, extraction or production of mineral oil, the provisions of section 44BB are applicable in the instant case, being more specific than the general provisions contained in section 44DA of the Act.
28. In light of above discussions and in the entirety of facts and circumstances of the case, we are of the considered view that consideration for the services under the contracts for provision of cementing services fall under the exclusion and doesn't qualify as fees for technical services as per explanation to section 9(1)(vii) and in any case, the provisions of section 44BB being more specific, shall be applicable and provisions of section 44DA are not applicable in the instant case. The assessee company has therefore rightly offered its income under the subject contracts in terms of section 44BB of the Act. In the result, ground no. 2 of assessee's appeal is allowed.
27 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur
29. In view of the above, grounds no. 3, 4 & 5 which are in the context of section 44DA become academic and are treated as infructuous. Ground no. 6 which is pertaining to levy of interest u/s 234A, 234B and 234C is consequential in nature and it doesn't require separate adjudication. Ground no. 7 is pertaining to levy of penalty u/s 271(1)(c) doesn't arise out of order under appeal and is hereby dismissed.
I.T.(I.T) A. No. 02/JP/17
30. In I.T.(I.T) A. No. 02/JP/17 for AY 2013-14, both parties agree and submit that ground no. 2 relates to applicability of section 44BB vis-à-vis 44DA and facts and circumstances of the case are pari-materia. It was submitted that during the year under consideration, revenues have accrued from earlier contracts with GAIL and Oil India and also from two new contracts with Dart Energy and Hydrocarbon Development Co. ltd. The nature of services under all these contracts is provision of cementing services for exploratory drilling of oil wells which are not in dispute. Our finding and directions contained in ITA No. 732/JP/15 shall accordingly apply mutatis mutandis to this appeal as well and provisions of section 44BB are held applicable and ground no. 2 is allowed in favour of the assessee. Ground no. 3 which is in the context of section 44DA becomes academic and is hereby treated as infructuous. Ground no. 4 which is pertaining to levy of interest u/s 234A, 234B and 234C is consequential in nature which doesn't require separate adjudication. Ground no. 5 is pertaining to levy of penalty u/s 271(1)(c) doesn't arise out of order under appeal and is hereby dismissed.
In the result, the appeal filed by the assessee for the both the years are allowed.
28 ITA No. 732/JP/15 & I.T.(I.T) A. No. 02/JP/17M/s National Oil Well Maintenance Company Vs. DCIT, International Taxation, Jaipur Order pronounced in the open court on 27/11/2017.
Sd/- Sd/-
(KUL BHARAT) (VIKRAM SINGH YADAV)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur
Dated:- 27/ 11/2017.
*Ganesh Kr.
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s National Oil Well Maintenance Company, Jodhpur
2. izR;FkhZ@ The Respondent- DCIT, International Taxation, Jaipur
3. vk;dj vk;qDr@ CIT-2, Jaipur
4. vk;dj vk;qDr¼vihy½@The CIT(A)-2, Jaipur
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No.732/JP/2015 & I.T(I.T) A. No.02/JP/2017 vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar 29