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Income Tax Appellate Tribunal - Mumbai

Micoperi S.P.A. Milano vs Deputy Commissioner Of Income Tax on 31 August, 2001

Equivalent citations: [2002]82ITD369(MUM), (2003)79TTJ(MUM)681

ORDER

Behari Lal, A.M.

1. These cross appeals by the assessee and the Department have been directed against the order of the CIT(A)-XVII, Mumbai, dt. 31st Jan., 1992 for the asst. yr. 1985-86. We are disposing of these appeals with one consolidated order as the issues involved are identical, for the sake of convenience and brevity.

2. The assessee is a limited company incorporated under the laws of Italy. The company was engaged in the business of engineering, transportation, installation of platforms, raisers, pipe laying and testing site services etc. During the year, the assessee entered into two sub-contracts, one with M/s Hyundai Heavy Industries Co. Ltd., Korea (hereinafter referred to as HHI) on 5th Dec., 1982 and another with Mazagaon Dock Ltd., Bombay (hereinafter referred to as MDL). Both the HHI and MDL had entered into main contract with Oil & Natural Gas Commission (hereinafter referred to as ONGC). Under the said sub-contracts, HHI and MDL were obliged to discharge corporate tax liability of the assessee, if any, under their respective sub-contracts. The main installation and other activities were carried out outside the territorial waters of India but in the Exclusive Economic Zone and Continental Shelf of India. The Government of India had issued a Notification bearing No, 304(E) (5147 F. No. 133(7)/82-TPL), dt. 31st March, 1983 extending the provisions of IT Act, 1961 (hereinafter referred to as Act) and the Companies (Profits) Surtax Act, 1964 to the Exclusive Economic Zone and Continental Shelf of India w.e.f. 1st April," 1983.

3. The original return of income was filed on 30th June, 1986 declaring an income of Rs. 71.15 lakhs. This return of income was treated as filed under Section 139(4) of the Act on the ground that this was filed beyond the stipulated time under Section 139(1) of the Act. The assessee, however, submitted before the CIT(A) that the AO has not taken into account the fact that the extension of time for submission of tax return in Form No. 6 was duly filed under Section 139(1) of the Act. The CIT(A) after examining the submissions of the assessee-company found merit in it. Therefore, he directed the AO to look into the Form No. 6 filed by the assessee and after verification, treat the return of income as having been filed under Section 139(1) of the Act.

4. The assessment of the assessee-company was completed on 25th March, 1988. This assessment was set aside by the Division Bench of the Bombay High Court and the AO was directed to redo the assessment afresh. Pursuant to the aforesaid order of the Court, the AO passed the assessment order on 26th Dec., 1988. In appeal, the CIT(A) set aside the order with the directions to allow the assessee a fresh opportunity of being heard on the various issues involved. Fresh assessment order was passed on 15th March, 1991 by raising the total demand of tax payable at Rs. 16,92,52,797. Aggrieved by the order of the AO, the assessee-company filed appeal before the CIT(A). The learned CIT(A) vide his order dt. 31st Jan., 1992 partly allowed the appeal of the assessee. Aggrieved by the order of the CIT(A), both the Department and the assessee filed the present appeals against the above said order of the CIT(A) to the Tribunal.

5. The first ground of appeal taken up by the assessee reads as follows :

(i) The learned CIT(A)-XVII, Bombay (hereinafter referred to as 'the CIT(A)') erred in law and on facts in holding that in view of the general nature of the Clause (b) of the Notification No. 304(E) (5147 F.No. 133(7)/82/(TPL)) dt. 31st, March, 1983 issued by the Government of India, the activities of your appellants are covered by the said notification and thereby in holding that your appellants' income are chargeable to Indian Income-tax.

(ii) The CIT(A) ought to have appreciated your appellants' submissions that your appellants being a sub-contractor for a portion of contract Hyundai Heavy Industries Company Limited (hereinafter referred to as HHI) had with Oil & Natural Gas Commissions (hereinafter referred to as ONGC) can in no case be deemed as engaged in the activities mentioned in the aforesaid notification.

6. It was argued before the AO that the Central Government has issued a Notification (supra) under which Government of India has extended the IT Act, 1961 to the Continental Shelf of India and Exclusive Economic Zone of India w.e.f. 1st April, 1983. Under this Notification, provisions of IT Act would apply only in respect of income derived from all or any of the following activities :

(a) The prospecting for or extraction or production of mineral oils in the Continental Shelf of India or Exclusive Economic Zone of India.

(b) The provision of any services or facilities for 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) or Clause (b).

It was also argued that the activities of the assessee non-resident company in respect of the above two contracts are not in the nature of any of the categories specified in the abovesaid Notification. Therefore, the assessee non-resident company cannot be brought to tax on income received on account of the above two contracts. It was also submitted before the AO that the said Notification was applicable to those assessees who are engaged in the exploration for production of mineral oil and those who are engaged in providing services and/or facilities to those who are engaged in exploration for production of mineral oil. The assessee also argued that the assessee-company was not engaged in any of the above activities. They were not covered under the said Notification and were not liable to be taxed under the provisions of IT Act. The AO did not accept the submissions made by the assessee. According to him, the assessee-company was sub-contracts to HHI and MDL. Both the companies were engaged in the activities covered under the said Notification. Therefore, the assessee-company was also engaged in such activities. The AO has further stated that as per the terms of contract, the assessee-company was directly engaged in the activities of the above work because the actual work was done by the assessee-company being sub-contractors of HHI and MDL being main contractors had not done the actual work. The AO had further stated that the intention of the legislature must be to tax any type of income which was earned in India and outside India in respect of the work contract done in India, The AO has also referred to the CBDT Instruction No. 1767, dt. 1st July, 1987 for the non-resident companies who are engaged in the activities of business of providing services or 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 wherein it had been held that their income earned outside India in respect of the above activities of contract to the extent of 1 per cent of the gross receipt was taxable. In the present case, the assessee has earned income in India in respect of the above activities, therefore, the same is liable to tax under the IT Act. The learned CIT(A) confirmed the findings of the AO and held that in view of the general nature of Clause (B) of the said Notification, the assessee's contention that its activities were not covered under the said Notification was not correct.

7. At the time of hearing, the learned counsel for the assessee contended that installation of pipelines is a specialised job. As per the agreement between HHI and the assessee-company, HHI engaged the assessee-company as sub-contractor to perform and complete the work which is described in Appendix-E hereto and which forms part of the work to be executed by the contractor under the contract (p. 7 of the compilation), The learned counsel referred to the Notification issued by the Government of India and contended that the Notification was not applicable to the assessee-company as the assessee-company was carrying on the work assigned to them by the main contractors and no services were rendered directly by the assessee-company to ONGC. Therefore, according to him, Clauses (A) and (B) of the Notification were not applicable to the assessee-company. The learned counsel argued that the extraction was done by ONGC. The assessee also did not supply any services or facilities or any ship, aircraft, machinery or plant in connection with prospecting for or extraction or production of mineral oils in the Continental Shelf of India or the Exclusive Economic Zone of India. The learned counsel further stated that Clause (C) of the Notification applies only to the individuals. Therefore, all the three Clauses (A), (B) and (C) of the Notification are not applicable to the assessee-company. He argued that the Notification was not applicable to the assessee-company because it was only a subcontractor. He contended that the Notification was applicable only to contractors and not to sub-contractors as has been held by the Bombay Tribunal in the case of Dy. CIT v. National Petroleum Construction Co. Ltd. (ITA No. 8499 (Bom) of 1989 for the asst. yr. 1987-88 dt. 13th June, 1998]. The learned counsel also invited our attention to the contract entered into by the assessee-company with HHI, dt. 5th Dec., 1982 (p. 2 of compilation) and contended that the same was a sub-contract with HHI. He also invited our attention to p. 7 of the compilation for the activities which were included in the assessee's scope of work for the project. Similarly, the learned counsel referred to the letter dt. 6th March, 1984 written by MDL to the assessee wherein the assessee's scope of work in the project is mentioned (compilation pp. 18 & 19). Thus, the learned counsel contended that the facts of the present case are similar to the aforesaid case decided by the Tribunal and therefore, the earlier decision of the Tribunal squarely applies to this case. To support his contention that the sub-contractor is not covered with the Notification, the learned counsel referred to the following Court cases :

(i) V.A. Vasumathi v. CIT (1980) 123 ITR 94(Ker)

(ii) (ii) Mrs. Bacha F. Guzdar v. CIT (1955) 27 ITR 1 (SC)

(iii) CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) He contended that it is not denied that the various works of engineering, fabrication, installation, laying of pipes etc., as has been carried out by the assessee may be related to the ultimate objective of prospecting for extraction or production of mineral oil but it is nowhere related to the services or facilities in connection with any of the three activities. He also argued that the close reading of the Notification would clearly show that the intention is to bring into tax-net only those services or facilities that are provided in connection with prospecting, extraction and production of mineral oil and not of those activities which are merely preliminary in nature for the achievement of the above three objectives. He also argued that since the Notification clearly states that the provision of any services or facilities in connection with any of the 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 prospecting or extraction or production of mineral oil but are ultimately used to achieve either of the three activities. He finally contended that the Notification does not apply to any of the activities carried on by the assessee. He also contended that the subcontractor who was only assisting the main contractor in its engineering, transportation, installation of platforms, raisers, pipe-laying and testing services etc., cannot be held to have any connection with the three activities. He also contended that the Notification needs to be given its plain meaning especially when there is no ambiguity in it. He contended that legislature by this Notification has extended the applicability of the IT Act to the territorial waters of Bombay High, therefore, it is absolutely must for the Courts to give strict interpretation. He pleaded that the Courts have been insistent that the statutes 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. The learned counsel also argued that the term 'derived from' mentioned in the Notification is having a very restricted meaning. In the present case, the assessee had not derived income directly from the activity of mineral oil extraction. To support his contention, the learned counsel referred to the provisions of Section 194C and Section 194J and contended that providing services is different from execution of services. Thus, according to him, these are two different types of work. The learned counsel further contended that the services had been rendered to the ONGC through the main contractor. Therefore, the assessee had not derived any income from the extraction of mineral oil. He referred to Section 44BB and contended that the provisions of Section 44BB are applicable on the basis of Rule 10 of Indian IT Rules. He placed his reliance on the following Court cases :

(i) CIT v. Sterling Foods (1999) 237 ITR 579 (SC)

(ii) Orissa State Warehousing Corporation v. CIT (1999) 237 ITR 589 (SC)

(iii) CIT v. Cement Distributors Ltd. (1994) 208 ITR 355 (Del)

(iv) CIT v. Ahmedabad Electric Co. Ltd. (1993) 203 ITR 521 (Bom)

(v) Cambay Electric Supply Industries Co. Ltd. v. CIT (1978) 113 ITR 84 (SC)

(vi) Hindustan Lever Ltd. v. CIT (1980) 121 ITR 951 (Bom)

(vii) CIT v. Raja Benoy Kumar Sahas Roy (supra) (viii) Mrs. Bacha F. Guzdar v. CIT (supra)

(ix) New India Industries Ltd. v. CIT (1994) 207 ITR 1010 (Gui)

(x) CIT v. Oil India Ltd. (1992) 196 ITR 366 (Cal)

(xi) CIT v. Andaman Timber Industries Ltd. (2000) 242 ITR 204 (Cal)

8. The learned Departmental Representative invited our attention to pp. 3, 7, 8 & 9 of the compilation filed by the assessee. At p. 3, there is an agreement between HHI and the assessee. As per this agreement, HHI entered only a contract with ONGC for the designing, procurement, fabrication, construction, inspection, testing, pre-commissioning, load out, sea fastening, tow out, transportation, installation, commissioning and start-up on a turnkey basis of the WIN Process Platform facilities at the company's Bombay High offshore site and HHI engaged the assessee as sub-contractor to perform and complete the work which is described in Appendix-E hereto and which forms part of the work to be executed by the contractor under the contract. As per Appendix-E, the various activities are mentioned which are included in the assessee's scope of work. Thus, the learned Departmental Representative argued that the various services mentioned in the contract had been rendered to ONGC for the extraction of mineral oil and therefore, he contended that the activities of the assessee are covered by the said Notification issued by the Government of India. The learned Departmental Representative specifically invited our attention to p. 13 of the compilation. Para 7.2 of Appendix-E pertains to 'Pipeline Crossings' which reads as follows :

"The work consists of building a standard vertical separation frame at the point where two pipelines intersect. Micoperi will build pipeline crossings in accordance with the relevant specifications, in the following positions.

All required materials such as sandbags, markers etc., as per ONGC specifications will be provided by Micoperi. Prior to installing the sand bags, marker etc., Micoperi shall perform the sea bottom visual inspection with divers of crossings at his care and cost."

Thus, the learned Departmental Representative argued that the services were being rendered by the assessee directly to ONGC though it was appointed as sub-contractor by HHI. Therefore, the services rendered by the assessee are covered by the aforesaid Notification of the Government of India. Whether the work falls under the Notification or under Section 44BB of the Act, the learned Departmental Representative invited our attention to the decision of the Delhi Bench of the Tribunal in the case of McDermott International Inc. v. Dy. CIT (1994) 49 TTJ (Del) 301. In the aforesaid case, the Tribunal held that "Notification No. 5147, dt. 31st March, 1983 has extended the scope of Indian Income-tax to the Continental Shelf of India and the Exclusive Economic Zone of India w.e.f. 1st April, 1983 with the only rider that it shall apply only in respect of income derived by every person from all or any of the activities specified in the said Notification. The Notification states that it is restricted to the income derived by every person from it or any of the activities carried on within the Continental Shelf and Exclusive 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, plant or machinery (whether by way of sale or hire) in connection with any activities, namely, prospecting for, extraction or production of mineral oils. The prospecting for or extraction or production of mineral oils or natural gas in high seas requires digging of deep sea wells and their construction followed by laying of pipelines for drawing of mineral oil or natural gas and other engineering constructions like platform and many other ancillary related thereto, These constructions are the basic infrastructure required without which carrying out any of the three activities described in the Notification is impossible. These construction works form the foundation for enabling the carrying out of the three activities and are directly connected with those activities. There is no denial that these construction works do not by themselves lead to the prospecting or extraction or production but it is also not denied that without these basic structures, none of the three activities can be carried out. The Government of India with a view to augment its oil resources had decided to proceed with the prospecting, extraction and production of oil from Bombay High. In this connection, it requires services, equipments etc., of persons who are familiar with these activities and had invited them.

The Government realised that Section 5(2) of the IT Act which had defined the scope of total income of non-residents did not include in its hold the various activities in the Bombay-High and the income derived therefrom. Thus, it could do so by bringing out the Notification and by extending IT Act to the activities in the Bombay High.

Since the Government of India was aware of the process involved such as construction of platforms, oil rigs, laying of pipelines, their installation, testing, commissioning followed by either of the three activities and also of the process and support that were necessary for carrying out the three activities and since the ownership of the activities was 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 services or facilities provided in connection with those three activities.

Therefore, the intention being so clear to hold that the services and facilities provided in connection with the activities is to cover post construction works only would defeat the very intention. The intention in the present case is to engulf into the tax net, the income derived from prospecting, extraction and production of mineral oil and natural gas and income derived in the rendering of services or provisions of facilities that include supply of ship, aircraft, plant and machinery in connection with all the three activities. There is no warrant for excluding of the operation of works before the commencement of any of 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 the actual prospecting, extraction and production, The emphasis is on the words 'in connection with any activity' and it would only mean that everything that is connected with any of the three activities. The facilities provided by the assessee are linked or related to the activities and/or to associate with three activities because the three activities could not be carried out in isolation without the aid of these facilities. It is but clear that the Notification covers all or any activities that involve rendering of any services or provision of any facilities that assist or aid in the prospecting, extraction or production of mineral oil and natural gas. There is no ambiguity in the Notification and therefore, two interpretations not being possible, the view favourable to the assessee could not be taken. Sub-clauses (a) and (b) of Section 44BB contain the words 'used or to be used' which clearly indicate that words '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 prospecting for or 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 prospecting, extraction or production though before actual operation or prospecting etc., are duly covered and are rightly considered for liability of tax under Section 44BB. The Tribunal thus concluded that the assessee engaged in laying down basic structure without which the work of prospecting, extraction and production of mineral oil would not be possible, its activities are, therefore, covered by the abovesaid Notification No. 5147, dt. 31st March, 1983 and Section 44BB. The learned Departmental Representative thus contended that the case of the assessee is squarely covered with the aforesaid case of McDermott International Inc. (supra). He also contended that the case of National Petroleum Construction Co. Ltd. (supra) referred by the learned counsel cannot be relied upon as the same had been decided without discussing the above case of McDermott International Inc. (supra) as the same perhaps was not brought to the notice of the Tribunal though the same was available at the relevant time. He also respectfully differed with the findings of the Tribunal that "To execute a special work does not tantamount to providing services". The learned Departmental Representative further argued that Section 44BB is a special provision. He referred to the case of Dy. CIT v. Geo Services Eastern Inc. (1995) 55 ITD 227 (Bom) of Bombay Tribunal wherein the Tribunal has brought out the intention of the legislature on pp. 231 and 232. He also referred to Clause 11 of "Notes on Clauses" of Finance Bill, 1987, [(1987) 165 ITR 125 (St)]. The Clause 11 pertains to the insertion of a new Section 44BB in the IT Act which reads as follows :

"Under the proposed provision, the income of an assessee engaged in the business of providing services and facilities in connection with or supplying plant and machinery on hire used or to be used in the exploration for and exploitation of mineral oils will be determined at 10 per cent of the aggregate of certain amounts. The amounts in respect of which the provisions will apply would be amounts paid or payable to the assessee or to any person on his behalf whether in or out of India on account of provisions of services or facilities in connection with or supply of plant and machinery on hire used or to be used in the exploration for and exploitation of mineral oils in India. The amount also include the amounts received or due to have been received in India by or on behalf of the assessee on account of such services or facilities or the supply of plant and machinery on hire in respect of the exploration for and exploitation of mineral oils outside India."

Thus according to the learned Departmental Representative, the intention of the legislature is very clear that the facilities provided by the assessee are linked or related to the activities and are associated with the exploration and exploitation of mineral oils because the exploration and exploitation of mineral oils could not be carried out without the aid of facilities provided by the assessee. The learned Departmental Representative also argued that the words 'derived from' should not be read in isolation. As per the Notification, services are inter-linked and inter-connected. The services provided by the assessee are covered by the provisions of Section 44BB. The learned Departmental Representative referred to the case of Lloyd Helicopters International Pty. Ltd. decided by the Authority for Advance Ruling wherein the applicant, a non-resident company entered into a contract with C, another non-resident company to provide helicopter services to facilitate the operation of a joint venture project of extraction and production of mineral oil on various sites in India. Under the agreement, the applicant has to place its helicopter services at the disposal of C for its oil operation. Agreement nowhere mentioned any consideration for carrying of passengers and eguipments and makes no distinction between charges for passengers and charges for goods. Consolidated consideration was chargeable for a package of services. The Authority for Advance Ruling held that though the business operation of the applicant attracts Sub-section (1) of Section 44BBA, the income derived by it cannot be brought within the categories of receipts outlined in Sub-section (2) of Section 44BBA. The income of the applicant can be related only to provisions of services and facilities and hire of plant and machinery in relation to oil business, therefore, the same is assessable under Section 44BB and not under Section 44BBA. The learned Departmental Representative thus contended that the assessee in the present case had rendered services for extracting mineral oil from the sea-bed by laying down the platforms, pipelines and other services mentioned in the agreement. The fact remains that the services had been rendered though as a subcontractor for prospecting for or extraction or production of mineral oil. Therefore, the case of the assessee is covered by the aforesaid Notification and the provisions of Section 44BB of the Act.

9. The learned counsel for the assessee in rejoinder contended that what is binding is the ratio of the judgment and not the conclusion at the bottom. He thus argued that the cases relied upon by the learned Departmental Representative of McDermott International Inc. (supra) and Lloyd Helicopter International Pty. Ltd. (supra) are not applicable to the facts of the present case. He contended that providing services is different from execution of services. In this connection, he referred to the provisions of Sections 194J and 194C of the Act wherein two different nature of works are mentioned which are statutorily recognised. According to him, in the case of McDeimott International Inc. (supra), this issue had not been considered. Therefore, this case is not applicable to the facts of the present case as the same issue was not before the Court. He also argued that the case of Lloyd Helicopter International Pty. Ltd. (supra) is inapplicable because in the aforesaid case, services were rendered but in the present case, the assessee had rendered services in the construction activity as sub-contractor. He further argued that the income has not been derived directly from the prospecting for or extraction or production of mineral oil. Therefore, the abovesaid Notification is of no application to the facts of this case.

10. We have carefully considered the submissions made by the rival parties. We have also gone through the various documents produced before us during the course of hearing. In the present case, the assessee is a non-resident company incorporated under the laws of Italy. During the year, the assessee entered into two sub-contracts, one with HHI and another with MDL. Both HHI and MDL had entered into main contracts with ONGC. Under the sub-contracts, HHI and MDL were obliged to discharge the corporate tax liability of the assessee, if any, under their respective sub-contracts. The first issue for consideration is regarding the Notification No. 5147 dt. 31st March, 1983 issued by the Government of India. According to the learned counsel for the assessee, the Notification is not applicable to the sub-contractors. He contended that the reading of the Notification indicated that the same has been issued to cover only those cases of contracts that are related to provision of any services or facilities such as provision of supply of ship, aircraft, plant and machinery in connection with the activities of prospecting for or extraction or production of mineral oils. He argued that the assessee was engaged in the business of engineering, transportation, installation of platform, raisers, pipe laying and testing site services, etc., and had been engaged by the main contractors i.e., HHI and MDL for doing the above job at Bombay High. He referred to the provisions of Section 80HHB(1)(b) and submitted that the said clause has specifically provided that the contract of work undertaken abroad, that form 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 subcontractors similar to the provision in Section 80HHB(1)(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 meaning and by that process, it is only logical to exclude the application of Notification to sub-contractors. He pleaded that the apex Court in the case of Mrs. Bacha F. Guzdai (supra) held that though the company may derive income from agriculture but the dividend received by its shareholders is not agricultural income. He thus contended that the meaning of a word has to be given its true meaning by carrying it to its logical consideration. Similarly, the learned counsel also referred to the case of CIT v. Sir Kameshwar Singh (1935) 3 ITR 305 (PC) wherein the Court held "Agricultural income is excluded altogether from the scope of the Act. The exemption is conferred indelibly on a particular kind of income and does not depend upon the character of the receipts. Such income cannot be assessable as business profits mainly because it is received by the assessee, not as an ordinary landlord or proprietor, but as a part of the income, profits or gains of a money lending business carried on by him." He also made reference to the case of Raja Benoy Kumar Sahas Roy (supra) wherein the Hon'ble High Court has held that "Every activity relating to the land could not be categorised as agriculture". Thus, the learned counsel contended that the said Notification issued by the Government of India is of no application to the facts of the present case. The above said Notification issued by the Government of India reads as follows :

"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 IT Act, 1961 (43 of 1961) to the Continental Shelf of India and the Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976), the Central Government hereby extends the IT Act, 1961 (43 of 1961) to the Continental Shelf of India and the Exclusive Economic Zone of India w.e.f. the 1st April, 1983 subject to the 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."

The above Notification has extended the scope of Indian IT Act to the Continental Shelf of India and the Exclusive Economic Zone of India w.e.f. 1st April, 1983 with the only rider that it shall apply only in respect of income derived by every person from all or any of the activities specified in the said Notification. 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 Exclusive 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 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 for or extraction or production of mineral oil or natural gas in the high seas requires digging of deep sea wells and their construction followed by laying of pipelines for drawing of mineral oil or natural gas and other engineering constructions like platforms and many other ancillaries related thereto. These structures are basic infrastructures required without which carrying out any of the three activities described by the Notification is not possible. These construction works form the foundation for enabling the carrying out of the three activities and are directly connected with those activities.

11. In the present case, the assessee entered into two agreements with HHI and MDL for transportation, installation and hook-up of certain platforms at Bombay High offshore, The various other services rendered by the assessee are mentioned in detail in the respective agreements with HHI and MDL. The services rendered by the assessee are absolutely necessary for the prospecting for, extraction or production of mineral oils in the Continental Shelf of India or the Exclusive Economic Zone of India. The language used in Clause (B) is without any ambiguity and it is mentioned therein that "The provision of any services or facilities or supply of any ship, aircraft, machinery or plant." The assessee had made provisions of various services and facilities for prospecting for or extraction or production of mineral oil in the Continental Shelf of India or Exclusive Economic Zone of India. The contention of the learned counsel that the Notification issued by the Central Government is not applicable to the assessee's case because the assessee is a sub-contractor and the services to the ONGC had been rendered by the main contractors HHI and MDL is without any logical basis. The language used in the Notification is quite plain and clear and it only speaks about the services or facilities rendered for prospecting for or extraction or production of mineral oil. The Notification does not make a distinction between the contractor and the sub-contractor. The main contractors had not rendered any services for prospecting for or extraction or production of mineral oil from the High sea. They had only engaged the assessee to perform such services on High sea. But for the services of the assessee, it would not have been possible to prospect for or extract or produce any mineral oil from the High sea. Therefore, the services rendered by the assessee are intrinsically connected with the extraction of oil. Therefore, to say that the assessee had not rendered services to ONGC for the extraction of oil from the High sea is without any logical basis.

12. A statute is an edict of the legislature and the conventional way of interpreting or construing a statute is to seek the intention of its maker. A statute is to be construed according to the intent of them that make it and the duty of judicature is to act upon the true intention of the legislature. The object of interpreting a statute is to ascertain the intention of the legislature enacting it. If a statutory provision is open to more than one interpretation, the Court has to choose that interpretation which represents the true intention of the legislature. The functions of the Courts is only to expound and not to legislate is a fundamental rule. The first and primary rule is that the intention of the legislature must be found in the words used by the legislature itself. The second rule of construction is that the intention of the legislature must be found by reading the statute as a whole. Every clause of statute should be construed with reference to the context and other clauses of the Act so as, as far as possible, to make a consistent enactment of the whole statute or series of statutes relating to the subject-matter. The third rule of construction is that a statute or any enacting provision therein must be so construed as to make it effective and operative. The fourth main rule of interpretation of a statute is that when the words of the statute are clear, plain or unambiguous, that is, they are reasonably susceptible to only one meaning, the Courts are bound to give effect to that meaning irrespective of consequences. The fifth rule of interpretation is the rule of appraisal of the principle. It may look somewhat paradoxical that the plain meaning rule is not plain and requires some explanation. The rule that plain words require no construction starts with the premise that the words are plain, which is itself a conclusion reached after construing the words, It is not possible to decide whether certain words are plain or ambiguous unless they are studied in their context and construed. The rule, therefore, in reality means that after you have construed the words and have come to the conclusion they can bear only one meaning, your duty is to give effect to that meaning. The sixth principle of interpretation is that due consideration must be given to the law as it stood before the amendment and the purpose of enactment, the remedy, if any, defect that existed before the enactment.

13. 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, due consideration must be given to the situation that existed before the enactment of the law, its purpose, removal of defect, if any, etc. The Government of India with a view to augment its oil resources had decided to proceed with the prospecting for, extraction and production of oil from the Bombay High. In this connection, it require services and equipment for laying down the platform, pipelines, etc. The Government of India invited persons who were familiar with these activities. The Government realised that Section 5(2) of the IT Act which had defined the scope of total income of non-residents but did not include in its fold the various activities in the Bombay High and the income derived therefrom. The Government of India could include in its fold the various activities by bringing out the aforesaid Notification by extending the IT Act to the Bombay High. Since the Government of India was aware of the processes involved such as erection of platforms, oil rigs, laying of pipelines, their installation, testing and commissioning followed by either of the three activities and also of the process and support that were necessary for carrying out the three activities and since the ownership of the activities was vested with the Government of India, it had clearly spelt out that the Notification could cover the income derived from the three activities and from the services or facilities provided in connection with those three activities. It is also clearly spelt out in the Notification that the said Act shall apply only in respect of income derived by every person from all or any of the activities mentioned in Clauses (A), (B) and (C). Clause (B) applies to the provision of any services or facilities or supply of any ship, aircraft, machinery and plant in connection with the activities referred to in Clause (A). In the present case, the services and facilities had been rendered in transportation of WIN platform jacket from HHI shipyard quay at Ulsan (South Korea) to ONGC installation site in Bombay High offshore, Bombay, installation of the jacket, installation of four pipeline crossings and number of other activities mentioned in the agreements entered by the assessee with HHI and MDL. Therefore, the intention being so clear, to hold that services and facilities provided by the assessee in connection with the activities mentioned in the Notification are not covered in the case of the assessee would defeat the very purpose of issue of Notification by the Government of India. The intention of the Government for issuing this Notification was to engulf into the tax-net, the income derived from prospecting, extraction or production of mineral oil and the income derived in the rendering of services or provision of facilities that include supply of any ship, aircraft, machinery and plant in connection with all the three activities. There is no warrant of excluding the sub-contractors who are rendering the services unless it is specifically mentioned in the Notification. The Notification is intended only to include in its purview, the provision of any services or facilities or supply of any ship, aircraft, machinery or plant as mentioned in Clause (B) of the Notification irrespective of the fact whether these services have been rendered by the contractor or the sub-contractor. The Notification has not made any distinction between the contractor and the sub-contractor. The Notification is applicable if the services have been rendered for extracting the mineral oil.

14. The other rule of interpretation of tax statutes is to give the words used in the Notification their ordinary and plain meaning. The term used in the Notification is the provision of any services or facilities in connection with any of the activities, namely, prospecting for, extraction or production of mineral oils. The emphasis is on the words in connection with any activity and this would only mean that every thing which is connected with any of the three activities. The word 'connected' means closely connected. Thus, the facilities provided by the assessee are linked or related to the activities and are associated with the three activities because the three activities could not be carried out in isolation without the aid of the facilities provided by the assessee. According to another principle of rule of interpretation of tax statutes, the words have to be given their meaning with reference to the context in which they have been used. The services or facilities are in connection with any of the three activities indicating that it would include all the 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 rendered by the assessee are intrinsically linked with three main activities. The Notification has extended the operation of the income-tax to the Continental Shelf and Exclusive Economic Zone of India. Therefore, the limited extension of the Act is on income derived from all or any of the defined activities therein. The Notification is not intended to cover the income derived by any person from all or any of the activity carried out within the Continental Shelf or Exclusive Economic Zone of India which does not involve prospecting for or extraction or production of mineral oil or rendering services or provision of any facility in connection with the three activities. Another rule of interpretation of tax statutes is that when the words of statute are clear or unambiguous i.e., they are reasonably susceptible to one meaning only, the Courts are bound to give affect to that meaning irrespective of the consequences. The literal meaning of the word 'connected' being related to or linked to the services and facilities provided in connection with the three activities cover the sub-contractor also. It was not possible to carry out the activities of prospecting etc., without the services rendered by the sub-contractor. There is no ambiguity in the language used in the Notification and it plainly speaks about the services rendered for the achievement of prospecting, extraction or production of mineral oil. Another rule of construction is that statute or any enacting provision therein must be so construed as to make it effective and operative. In the present case, if the services rendered by the sub-contractor are excluded from the purview of the Notification issued by the Government, it would defeat the very purpose of issuing the Notification. Therefore, the Notification has to be interpreted in such a manner so that it makes its operation effective. The words used in the Notification are quite plain and clear and there is no ambiguity. The language used, therefore, includes all those persons who are going to render the services for the achievement of prospecting for or extraction or production of mineral oil. We are, therefore, of the considered view that the Notification cover all or any activities that involve rendering of any services or provision of any facilities that assist or aid in the prospecting for or extraction or production of mineral oil. In the present case, the assessee-company has rendered services which are mentioned in Clause (B) of the Notification for prospecting for or extraction or production of mineral oil from the Bombay High. Therefore, the income received by the assessee-company is squarely covered with the Notification issued by the Government.

15. In the present case, the prospecting for or extraction or production of mineral oil became possible only with the help of the services rendered by the assessee-company. The assessee rendered various services such as transportation of WIN platform, jacket from HHI shipyard from South Korea to ONGC installation site in Bombay offshore field, installation of the jackets, installation of pipelines and number of other services mentioned in the agreement. But for the services rendered by the assessee, the prospecting, extraction or production of mineral oil would not have been possible. Therefore, the services rendered by the assessee are directly connected with the extraction of mineral oil, Therefore, the various cases relied upon by the learned counsel have no application to the facts of the present case. In the case of Bacha F. Guzdar (supra), the Hon'ble Supreme Court held that "Though the company may derive income from agriculture but the dividend received by its shareholders is not agricultural income." In this case, the agriculture operation has no connection whatsoever with the earning of dividend income. The Supreme Court further laid down that "In fact and in truth, dividend is derived from the investment made in the shares by the company and the foundation of it rests on the contractual relations between the company and the shareholders. The dividend is not derived by a shareholder by his direct relationship with the land. There can be no doubt that the initial source which has produced the revenue is land used for agricultural purpose but to give to the words 'revenue derived from land' the unrestricted meaning apart from its direct association or relation with the land would be quite unwarranted." For agriculture income, agriculture operation is an integrated activity of basic operation followed by subsequent operations. The dividend income has not been earned by performing the agriculture operation on land. Hence, it cannot be said as agriculture income. But in the present case, the income has directly emanated from the extraction of mineral oil. But for the services rendered by the assessee, there would not have been any extraction or production of oil and natural gas. In the case of V.A. Vasumathi (supra), the Kerala High Court held that "In computing capital gains, expenditure incurred wholly and exclusively in connection with the transfer of capital asset has to be deducted under Section 48 of the IT Act, 1961. The words 'in connection with such transfer' occurring in the section mean intrinsically related to the transfer. Only such expenditure as is wholly and exclusively related in an intrinsic manner to the transfer is deductible expenditure." In the present case, the services rendered by the assessee are intrinsically connected with the prospecting for or extraction or production of mineral oil and natural gas. But for the services of the assessee, there would have not been any extraction or production of mineral oil. Therefore, this case moreover supports the case of the Department. In the case of Raja Benoy Kumar Sahas Roy (supra), the Hon'ble Supreme Court held that "Not every activity relating to the land could be categorised as agriculture". This decision also makes it clear that there has to be a distinction between the main activities and the related functions to the main activities which has been so brought out by the Notification itself. The Supreme Court in the case of CIT v. East West Import & Export (P) Ltd. (1989) 176 ITR 155 (SC) 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 of the three activities has to be given a 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 for the actual prospecting for or extraction or production of mineral oil. In the present case, the assessee has provided services for the actual prospecting for or extraction or production of mineral oil.

16. The learned counsel referred to the case of CIT v. Thana Electricity Supply Ltd. (supra) and contended that the precedents are binding. He also argued that what is binding is the ratio and not the conclusion at the bottom. According to him, providing services is different from execution of services. In this connection, he referred to the provisions of Section 194J and Section 194C wherein two different nature of works are mentioned. Section 194C pertains to carrying out any work whereas Section 194J pertains to providing services. Thus, he contended that carrying out any work is different from providing services. According to him, in the case of McDermott International Inc. (supra) services were provided but in the case of National Petroleum Construction Co. Ltd. (supra), the subcontractors carried on the work for the main contractors and did not provide any services. Therefore, he contended that the assessee's case is squarely covered with the case of National Petroleum Construction Co. Ltd. (supra) and the case of McDermott International Inc. (supra) is not applicable. The assessee was only a sub-contractor to HHI and MDL and he did not provide any services directly to ONGC. The learned counsel placed his reliance on the case of Thane Electric Supply Ltd. (supra) to support his contention. He also referred to the case of CIT v. Modu Timblo (1994) 206 ITR 647 (Bom), wherein the Bombay High Court has held "The principle of diversion of income by overriding title is not applicable, It will not be proper to try to apply the principle of ejusdem generis to give the same restricted meaning to the newly introduced expression 'BOI' as has been given by the Supreme Court to 'AOP' on the interpretation of the word 'association'. The fact that both the expressions are placed under the common item does not justify such restricted interpretation. The expression 'BOI' must receive a wider interpretation than the 'AOP'." We do not find any force in the arguments of the learned counsel and the cases referred by him have also no application to the facts of the present case. In the present case, as we have mentioned earlier, the assessee had rendered services which are intrinsically connected with the prospecting, extraction or production of mineral oil by the ONGC. Therefore, the assessee is covered by the Notification issued by the Government of India. The issue involved in the present case is exactly similar to the issue involved in the case of McDermott International Inc. (supra) relied upon by the Department. 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 or Exclusive Economic Zone of India. The said activities are for 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 in connection with any activities namely, prospecting for, extraction or production of mineral oil. The prospecting for or extraction or production of mineral oil in High seas requires digging up of deep sea wells and their construction followed by laying of pipeline for drawing the mineral oil or natural gas and other engineering constructions like laying platforms and many other ancilliaries related thereto. These structures are the basic infrastructure required without which carrying out any of the three activities described by the Notification is impossible, These construction works form the foundation for enabling the carrying out of the three activities and are directly connected with those activities. Without the extension of these basic structures, none of the three activities could be carried out. In the present case, the assessee has earned income in the rendering of services of transportation, installation of platforms, raisers, pipe laying and testing site services, etc., which are in connection with any of the three activities. Therefore, there is no warrant for excluding the operation of various items of work performed by the assessee for prospecting, extraction or production of mineral oil. In the present case, services rendered by the assessee are closely linked with or related to the three activities. Therefore, the Notification covers all or any activities that involve rendering of any services or provision of any facility that assist or aid in prospecting for or extraction or production of mineral oil. But for the services rendered by the assessee, it would not have been possible to carry out either of the three activities. Therefore, there is a direct and close connection between the services rendered by the assessee and the three main activities. The facts of the present case are, therefore, exactly similar to the facts of the case McDermott International Inc. (supra). Therefore, there is no doubt about the application of the Notification to the facts of the present case.

17. The learned counsel also argued that the case of Lloyd Helicopter International Pty. Ltd. (supra) relied upon by the learned Departmental Representative is not applicable to the facts of the present case. The learned counsel argued that in the aforesaid case, services were provided but in the case of the assessee, it was construction activity and not helicopter services. In the above case, the non-resident company derived profits and gains from the business of exploration etc., of mineral oils or operation of aircrafts. The company entered into a contract with C, another non-resident company to provide helicopter services to facilitate the operation of a joint venture project of extraction and production of mineral oil at various sites in India. Under the agreement, the applicant has to place his helicopter services at the disposal of C for its oil operation. Agreement nowhere mentioned any consideration for carrying of passengers or equipment and makes no distinction between the charges for passengers and charges for goods. Consolidated compensation was chargeable for a package of services. Though the business operation of the applicant attracts Sub-section (1) of Section 44BBA but the Authority for Advance Rulings held that the income derived by it cannot be brought within the category of receipts outlined in Sub-section (2) of Section 44BBA, but the income can be related only to provision of services and facilities and hire of plant and machinery in relation to oil business, therefore, the same is assessable under Section 44BB. The helicopters were used for the frequent conveyance of men and material from their base to the actual work sites. In our opinion, the services provided by the assessee-company by way of its construction activities are comparable to the services rendered by the above helicopter company to facilitate the operation of joint venture project of extraction and production of mineral oil at various sites in India. Both have rendered services or facilities for the prospecting, extraction or production of mineral oil. The construction activity of the assessee-company was ultimately the services rendered for the prospecting for or extraction or production of mineral oil. Similarly, the helicopter company also provided services for providing transport for the frequent conveyance of men and material from their base to their actual work spots for the prospecting, extraction or production of mineral oil. Therefore, both the companies have rendered services for the same purpose i.e., for prospecting, extraction or production of mineral oil and the distinction drawn by the learned counsel has no logical basis. The manner in which the services have been rendered and the nature of services is not important to decide the issue. What is relevant is the rendering of services in connection with the prospecting, extraction or production of (sic-mineral) oil. In the aforesaid case of Lloyd Helicopter International Pty. Ltd (supra) and in the assessee's case, services have been rendered for prospecting, extraction or production of mineral oil. The assessee has rendered services by providing transport facilities, installation of platforms, raisers, laying of pipelines, etc., and in the case of Lloyd Helicopters International Pty. Ltd, the services have been rendered for providing transport for the frequent conveyance of men and material to the actual work spots. Thus, both the companies have provided services for prospecting for or extraction or production of mineral oil. Therefore, both the cases i.e., McDermott International Inc. (supra) and Lloyd Helicopter International Pty. Ltd. (supra) are comparable and the case of the assessee is fully covered with the facts of the aforesaid cases.

18. The learned counsel also argued that the income has not been directly derived from the three activities mentioned in the Notification. According to him, the income earned by the assessee may be attributable to three activities but it has not been 'derived from' such activities. In this connection, we would like to refer to the decision of the Delhi High Court in the case of Cement Distributors Ltd. (supra). This judgment was delivered by the Hon'ble High Court in connection with the relief to be granted under Section 80-I of the Act. The High Court held that the source of a particular income by an assessee for which a rebate is sought for must have directly emerged from the running of the industrial undertaking, yielding profits and gains. Such profits must have been derived from the industrial undertaking which must itself be the source of that profit. In the present case, the only source of income is the prospecting of or extraction or production of mineral oil. Therefore, the income earned by the assessee has directly emerged from the prospecting of or extraction or production of mineral oil. Therefore, the same has been derived from the main source of income, There is a direct connection of the services rendered by the assessee and the income earned. The services have been rendered for the only source of income i.e., prospecting of or extraction or production of mineral oil. There is no other source from which it can be said that the income has been directly derived from. The learned counsel has referred to the various Court cases to support his contention. In the case of Sterling Foods (supra) the assessee was engaged in the processing of prawns and other sea foods which it exported. It also earned import entitlements granted by the Central Government under the Export Promotion Scheme. The assessee was entitled to use the import entitlements by itself or sell the same to others. It sold import entitlements that it had earned to others. The assessee claimed relief under Section 80HH of the Act in respect of the sale proceeds of the import entitlements. High Court held that the sources of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlement could only be said to be the Export Promotion Scheme of the Central Government where under the export, entitlements became available. The Hon'ble High Court laid down that "There must be, for the application of words 'derived from' a direct nexus between the profits and gains and the industrial undertaking. In the present case, the nexus was not direct but only incidental." In our opinion, these facts of this case have no application to the facts of the present case, In the present case, there is a direct nexus between the income of the assessee and the prospecting of or extraction or production of mineral oil. The income has been 'derived from' the three activities by rendering services which are directly connected with the prospecting of or extraction or production of mineral oil. There is no other source of income from which the assessee can say that the income has been 'derived from'. The only source of earning the income is prospecting of or extraction or production of mineral oil from which source the assessee has directly derived the income. In the case of Orissa State Warehousing Corporation (supra) relied upon by the learned counsel, the Hon'ble Supreme Court held "On a plain reading of Section 10(29) of the IT Act, 1961, it appears that the prerequisite element for the entitlement as regards the claim for exemption is the income which is derived from letting' out of godowns or warehouse for storage, processing or facilitating marketing of commodities and not otherwise. If the letting out of the godowns or warehouses is for any other purpose, the question of exemption would not arise. Section 10(29) is categorical in its language and this exemption is applicable only in the circumstances as envisaged under the section. The words 'any income' as appearing in the body of the statute is restrictive in its application by reason of the user of the expression 'derived from'. The Supreme Court further held that income received from fixed deposits in the banks, income from procurement of grains for FCI/State Government and miscellaneous income are not exempt under Section 10(29) as, such income has not been derived by letting out the godowns for storage, processing or facilitating marketing of its commodities". In this case also, the income would be exempt if the same has been derived from a particular source. In the present case, the income has been directly earned from the main source i.e., prospecting of or extraction or production of mineral oil by rendering services for these three activities. There is no activity from which it can be said that the assessee has derived income from. This case, therefore, is not relevant to the facts of the present case. The case of Cement Distributors Ltd. (supra) has already been discussed by us in the foregoing paragraphs. It has been held in the above case that lease amount is not profits 'derived from' industrial undertaking. But in the present case, the income has been directly derived from the main activities i.e., prospecting of or extraction or production of mineral oil which are the only activities in connection with which the assessee has rendered services. This case moreover supports our view that the income of the assessee has been directly derived from the three activities mentioned in the Notification. This case is, therefore, of no assistance to the contention of the learned counsel. In the case of Ahmedabad Electric Co. Ltd. (supra) relied upon by the learned counsel, Bombay High Court has distinguished the expression 'attributable to' and the expression 'derived from' and has laid down that the expression 'attributable to' is certainly wider in import than the expression 'derived from' and wherever the legislature wanted to give a restricted meaning, it has used the expression 'derived from'. We do not find any relevance of this case to the facts of the present case. In the present case, the income has been derived by the assessee directly from the three activities mentioned in the Notification. Therefore, the expression 'attributable to' has no relevance to the income of the assessee. The expression 'attributable to' is used only to cover income which has not been generated by direct sources or direct exploitation of the business assets. But in the present case, the income has been 'derived from' the main business i.e., prospecting of or extraction or production of mineral oil by rendering services in connection with these three activities. In the case of Cambay Electric Supply Industries Co. Ltd. (supra), the Hon'ble Supreme Court has laid down that the balancing charge arising as a result of the sale of old machinery and buildings and worked out in accordance with Section 41(2) irrespective of its real character has to be taken into account and included as income of the business for the purpose of computing the deduction of 8 per cent under Section 80E. The Supreme Court further held that the legislature has directly used the expression 'attributable to' having a wider import than the expression 'derived from' thereby intending to cover receipts from services other than actual conduct of the business of the specified industry. Again in this case, the income i.e., balancing charge has not been earned out of the actual conduct of the business of the specific industry. But in the present case, the income received by the assessee is directly earned from the business of prospecting of or extraction or production of mineral oil to which the assessee has rendered services. Therefore, the income in the present case has been 'derived from' the direct source but in the above case, balancing charge is not derived from the conduct of business but the same has been earned during the course of business, therefore, such income has been considered as 'attributable to' the business of specified industry. Therefore, this case is also not comparable to the facts of the present case. In the case of Hindustan Lever Ltd. (supra) the assessee-company effected exports of various products made by it during the previous year relevant to the asst. yrs. 1962-63 and 1963-64. It claimed deduction out of income-tax and super-tax payable by it on the profits and gains claimed to have been derived from by it through these exports under Section 2(5)(i) of the Finance (No. 2) Act, 1962. The assessee claimed that no separate accounts of the export sales had been maintained by it and accordingly under Section 2(3) of the IT (Determination of Export Profits) Rule, 1962, the profits on export sales was to be taken as a proportionate fraction of the profits and gains of the whole business of which such exports formed a part. On the quantum of profits in respect of which deduction had been claimed, it was urged by the company that in consideration of the company having exported its products, the Government had issued import entitlements to it. On these licences, the company had imported large quantity of palm oil and other products at a rate cheaper than the rate prevailing in the home market. It has submitted that the saving so effected by it were derived from the export of goods. In the alternative, the company claimed the benefit of Section 2(5)(i) in respect of a part of the exports which had in fact yielded profits. The ITO rejected all the alternative contentions but on appeal, all the contentions were accepted by the AAC. On further appeal, the Tribunal held that the words 'derived from the export of any goods' referred to profit and gains directly connected with the export of goods and the savings effected by the assessee-company on the import of palm oil which was utilised by it could not be treated as profit derived by it from the export of groundnut oil. On reference, Bombay High Court held that "As far as income tax law is concerned, the word 'derived' has been given a narrow meaning, a strict meaning by Courts and has been understood in the restricted sense of a direct derivation and not understood in the broad sense as equivalent to derived directly or indirectly. In other words, only the proximate source has to be considered and not the sense to which it may ultimately be referable. Giving the word 'derived' in Section 2(5)(i) of the Finance (No. 2) Act, 1962, a meaning consistent with the restricted sense, the words 'derived from exports' cannot be accepted as equivalent to 'referable to exports'. The construction to be put on a statutory provision cannot either be enlarged or restricted by the rules framed which are for the purpose of computation of the qualified income. Hence, the rules framed by the Central Board of Revenue on exercise of powers conferred by Clause (ii) of Section 2(5) cannot enlarge the meaning of the word 'derived' used in Section 2(5)." In this case, the Hon'ble Bombay High Court has defined the word 'derived' which has been given a strict meaning by the Courts. 'Derived' means a direct derivation and only the proximate source has to be considered and not the source which is ultimately referable. In the present case, the source of income of the assessee is direct and proximate from the prospecting of or extraction or production of mineral oil from the Bombay High. There is no other source of income which can be said to be indirect. The only source of income is from the three activities mentioned in the Notification and the assessee has derived income from that source only by rendering services to the abovesaid three activities. Therefore, this case is also of no assistance to the contention of the learned counsel that the income earned by the assessee is attributable to the three activities and the same has not been derived from such activities. Similarly, the case of New India Industries Ltd. (supra) has no application to the facts of the present case. In the case of Oil India Ltd. (supra), the assessee was engaged in the production, transportation and sale of mineral oil. The Tribunal found that but for the business of production and transportation of its own crude, the assessee would not have undertaken to transport the crude belonging to ONGC. Calcutta High Court held that "In view of the above findings, it would be clear that the transportation of the crude to ONGC was undertaken by the assessee as part of its business of transportation of its own crude and of the crude of ONGC were integrally connected with the business of the assessee. The income of the assessee from the transportation of crude oil belonging to ONGC is attributable to the profits of its priority industry. The assessee was entitled to the special deduction under Section 80-I in respect of such income." Again the Hon'ble Court has interpreted the expression 'attributable to' and 'derived from' and has held that the expression 'attributable to' is certainly wider in import than the expression 'derived from'. Whenever the legislature wanted to give a restricted meaning in the manner suggested, it had used the expression 'derived from'. In the present case, the legislature has used the words 'derived from' in the Notification to give it a restricted meaning because the income was to be brought to tax only if the same is derived from the only source of prospecting of or extraction or production of mineral oil. The assessee has derived income from the above three activities by rendering services in connection with such activities. Therefore, the direct source of income is from the three activities mentioned in the Notification. Similarly, in the case of Andaman Timber Industry Ltd. (supra), the Calcutta High Court has again interpreted the expressions 'attributable to' and 'derived from'. The Court also held that for the purpose of deduction under Section 80HH in the case of a new industrial undertaking in backward areas, the profits should be derived from industrial undertaking. In this case, the transport subsidy was received from the Government. Therefore, the Court held that the subsidies received are not the profits 'derived from' industrial undertaking and, as such, this amount is not to be taken into account in computing the special deduction under Section 80HH. But in the present case, the income has been derived by the assessee by rendering services for prospecting of or extraction or production of mineral oil. Therefore, the services rendered are directly connected with the main source of income and the same is, therefore, assessable as per the Notification issued by the Government of India. In view of the aforesaid discussions, we do not find any force in the arguments of the learned counsel that the income is not derived from the three activities mentioned in the Notification but the same is attributable to such activities. What is important for consideration is that the derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of business assets, In the present case, the income has been earned by the assessee by rendering services for the prospecting of or extraction or production of mineral oil. Therefore, the derivation of income is directly connected with the three activities. Therefore, the income has been directly derived from the three activities. We, therefore, decide this issue against the assessee and in favour of the Revenue.

19. The second ground of appeal taken up by the assessee reads as follows :

"(i) The CIT(A) has erred in law and on facts in not giving a clear ruling on your appellants ground No. 4.1 which reads as :

4.1 The DC erred in law and on facts in holding that your appellants had a PE in India during the previous year for the HHI and MDL sub-contracts as envisaged in Article 5 of the Tax Treaty.

The CIT(A), however, erred in proceeding to give his further direction purportedly on the premises that your appellants had a PE in India during the previous year.

(ii) The CIT(A) has erred in law and on facts in holding that the alternate ground No. 4.3 will have to be r/w ground Nos. 10.2, 5.1 & 5.2, even after holding that in view of Article 5/Article 7 of the Tax Treaty, the appellants' contention that only that portion of the profits which are attributable to the Permanent Establishment in India and not the entire profits appears acceptable in principle.

(iii) The CIT(A) ought to have directed the DC to bring into tax only that portion of profits which are attributable to the Permanent Establishment (hereinafter referred to as the PE) in India." .

20. The AO in his assessment order has stated that the assessee non-resident company had an office for the contracts between the assessee non-resident company and MDL and also HHI. According to him, the assessee-company had an office in India and the address shown is as under :

M/s Micoperi SpA 819/820, Tulsiani Chambers, Nariman Point, Murnbai-21 Thus, it is stated that the assessee non-resident company had maintained an office in India during the accounting year relevant to the assessment year under consideration. The AO has further supported his findings by stating that the accounts filed by the assessee with him also indicated the various heads of expenses which have been paid by the assessee and charged to the P&L a/c out of the rupee payments from India project office on account of postage, telephone, telex etc. The AO has further stated that the definition of the term 'Permanent Establishment' is an inclusive definition and the same is indicative of extension and expansion and not restriction. Thus, the intention of the enactment was to give a wide meaning to that word itself apart from definition. Further, the non-resident company was engaged in India for construction, installation, hook up and assembling project in respect of extraction of mineral oil and also in the supervisory capacity in this connection on the sites and location earmarked. As such activities of the assessee non-resident company were through the PE in India as defined in Articles 5(1) and 5(2) of the Direct Tax Avoidance Agreement (DTAA) between India and Italy. Thus, the AO held that the assessee non-resident company had PE in India and income accruing or arising through such PE is taxable in India. Regarding the application of Article 7 of DTAA, it is stated that this article relates to the determination of business profits attributable to permanent establishments, The AO has also stated that as per Article 7(4), the determination of profits of the PE would only be worked out after allowing deduction on account of expenses which have been incurred for the purpose of business for the said PE including executive and general administration expenses, so incurred in the state in which the PE is situated or elsewhere. The learned CIT(A) supported the findings of the AO but accepted the contention of the assessee that only that portion of profits which are attributable to the PE in India and not the entire profits should be subjected to tax. He accepted the contention of the assessee in principle subject to his findings regarding the ground of appeal pertaining to production of books of account, etc.

21. At the time of hearing, the learned counsel for the assessee invited our attention to Articles 5 and 7 of the Indo-Italy Tax Treaty, and contended that the office maintained by the assessee non-resident company in Bombay at 819/820, Tulsiani Chambers, Nariman Point, Bombay does not constitute PE in India. He contended that the entire profits cannot be taxed in India. He referred to Article 7(4) and argued that the determination of profits of PE would only be worked out after allowing deduction' on account of expenses which have been incurred for the purpose of business for the said PE including executive and general administrative expenses so incurred in the state in which the PE is situated or elsewhere. He also contended that only that portion of the profits which are attributable to the PE in India and not the entire profits should be worked out. The learned Departmental Representative relied on the findings of the authorities below.

22. We have considered the submissions made by the rival parties, We have also gone through the Article 5 and Article 7 of the Indo-Italy Tax Treaty. As per Article 5 of the Treaty, the PE means a fixed place of business in which the business of the enterprise is wholly or partly carried on. The term PE shall include especially :

(a) A place of management

(b) A branch

(c) An office

(d) A factory

(e) A workshop

(f) Premises used as a sales outlet or for reviving or soliciting orders

(g) A mine, quarry or other places of extraction of natural resources

(h) A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity in continuous for a period of more than three months.

Clause 1 of Article 7 of the Treaty reads as follows :

"The profits of an enterprise of a contracting state shall be taxable only in that contracting state unless the enterprise carries on business in the other contracting state through a PE situated therein. If the enterprise carried on business as aforesaid, the profits of the enterprise may be taxed in the other contracting state but only so much of them as is attributable to that PE."

Clause 4 of Article 7 of the Treaty reads as follows :

"In the determination of the profits of a PE, there shall be allowed as deduction of expenses which are incurred for the purpose of the business of the PE including executive and general administration expenses so incurred whether in the state in which the PE is situated or elsewhere."

There is no doubt regarding the PE of the assessee non-resident company as has been established by the authorities below. The assessee-company was maintaining an office at India at 819/820, Tulsiani Chambers, Nariman Point, Bombay. The assessee-company has also incurred expenses under various heads out of the rupee payments from Indian project office on account of postage, telephone, telex etc. Thus, as per the Article 5 of the Indo-Italy Tax Treaty, the non-resident assessee-company is maintaining a PE in India but as per art, 7 of the Treaty, only so much of the profits are to be taxed which are attributable to that PE. We, therefore, fully endorse the views of the learned CIT(A) subject to the condition that the expenses would be allowed as deduction which have actually been incurred for the purpose of business of the PE including executive and general administration expenses so incurred.

23. The third ground of appeal taken up by the assessee reads as follows :

"(i) The CIT(A) has erred in law and on facts in not giving appropriate ruling and/or directions to the DC on ground Nos, 7.4 and 7.5, even after accepting your appellants' grounds 6.1 to 6.3 in principle in part.

(ii) The C!T(A) ought to have directed the DC to take cognizance of the audited accounts produced before the DC, Auditors Report issued by the Indian auditors and the two independent P&L a/cs certified by their Italian auditors for the HHI and MDL sub-contracts to compute the total income of your appellants under the Tax Treaty and he ought to have computed the income under Article 7 of the Tax Treaty."

24. The AO in his order has stated that the assessee non-resident company has made the claim of expenses incurred for the PE in India as provided in Article 7 of the Tax Treaty. Therefore, the assessee-company was required to produce books of account so that the genuineness of expenses could be verified. According to the AO, no such books were produced. It was contended on behalf of the assessee that the books of account relating to dollar payments were maintained in Italy, the Head Office of the company and the only thing that could be produced was the photocopy of the vouchers of the receipts and expenditure. It was further contended that books of account relating to rupee payments portion were only maintained in India which were in the nature of ledger and cash book. The assessee produced the books of account relating to Indian project for both the contracts. The AO further stated that the representative of the assessee denied maintaining any books of account in India for dollar portion of payment. Thus, according to the AO, the genuineness of the expenses relating to the PE in India could not be verified. The AO further observed that the representative of the assessee-company, M/s Price Water House had only audited the accounts relating to rupee portion of payments and their report was based on only the photocopy of the balance sheet provided by the assessee-company of their auditors in Italy. The Indian auditor had not actually examined the books of account and original vouchers of the assessee-company. Therefore, the AO did not place any reliance on such books of account. The AO has further observed that the assessee had also not made any compliance with the provisions of Section 44AB of the IT Act which was obligatory on the part of the assessee to get its accounts audited relating to the Indian project as the gross turnover of the assessee-company exceeded the amount statutorily fixed under the law. Thus the AO has stated that in the absence of audited books of account of the assessee relating to the Indian project, the results shown in the return of income cannot be accepted and the income of the assessee has to be determined by adopting a reasonable basis for the determination of profit rate in accordance with the provisions of IT Act, The learned CIT(A), however, observed that the assessee made available the voluminous details in respect of the various expenses but the AO is always empowered to verify the genuineness/quantification of the expenses. The learned CIT(A) has further stated that the AO should also be in a position to ascertain as to whether these expenses were in accordance with the legitimate business needs of the assessee or not. He further stated that the assessee accepted that the accounts in respect of outside India receipts cannot be verified. The learned CIT(A), therefore, justified the action of the AO for applying the provision of Rule 10 of the IT Rules for determining taxable income under Section 44BB of the Act.

25. At the time of hearing, the learned counsel for the assessee contended that the Italian books of account were audited by the Italian Chartered Accountants. He invited our attention to p. 94 of the compilation and contended that books of account were produced. The learned counsel also referred to para 37 of the CIT(A)'s order and contended that necessary information was produced before him but the AO never looked into it. He also argued that all the expenses were audited by the Italian Chartered Accountants and the payments had also been genuinely made. The learned Departmental Representative, however, supported the findings of the lower authorities and contended that the AO is empowered to determine taxable income of the assessee as per the provisions of law if the books of account and other documents are not produced before him. The AO is to satisfy himself whether the expenses claimed are genuine and whether such expenses had actually been incurred for the purpose of business of the assessee.

26. We have considered the submissions made by the rival parties. A tax payer is obliged to give any information that may be required by the officers of the IT Department not only in matters relating to his own assessments but that of others. Nagpur High Court in the case of Tejmal Bhojraj v. CIT (1952) 22 ITR 208 (Nag) held that "The ITO is the sole judge to decide which books are required to be produced. The assessee cannot take the stand that some of the books called for were not really required and that the assessment could have been made without those books." Article 7 of DTAA between India and Italy relates to the determination of business profits attributable to the PE. It was contended before us that as per Article 7(4) of the DTAA, the determination of profits of PE would only be worked out after allowing deduction on account of expenses which have been incurred for the purpose of business for the said PE including executive and general administrative expenses so incurred in the state in which the PE is situated or elsewhere. Therefore, the assessee-company was required to produce books of account so that the genuineness of expenses as claimed could be verified. The assessee non-resident company did not produce the books of account in spite of the fact that the assessment was set aside twice as stated earlier. But the assessee-company contended that the books of account relating to dollar payments were maintained in Italy, the Head Office of the company. The learned counsel contended that the books of the assessee-company were audited by the Italian Chartered Accountants of the Company and the photocopies of the vouchers of receipts and expenses were produced before the AO. It was further contended by the learned counsel that the books of account relating to rupee payments portion were only maintained in India which were in the nature of ledger and cash book. These books of account relating to rupee payments of Indian projects for both the contracts were produced before the AO. The assessee-company was not maintaining any books of account in India for dollar portion of payments. Under the circumstances how the AO could have certified the genuineness of the expenses relating to the PE in India. It was also observed by the AO that the representative of the assessee-company, M/s Price Water House had only audited the accounts relating to rupee portion of payments and their report is based only on the photocopy of the balance sheet produced by the company from their auditors in Italy. Thus, the Indian auditors had not actually examined the books of account and original vouchers of the assessee-company. Therefore, the AO has rightly pointed out that such books of account cannot be relied upon for determining the profits attributable to the PE. It is the duty of the AO to consider whether or not the books disclosed the true state of accounts and whether the correct income can be deduced therefrom. The Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC) has laid down that "It is incorrect to say that the officer is bound to accept the system of account regularly employed by the assessee, the correctness of which had not been questioned in the past. There is no estoppel in these matters and the Officer is not bound by the method followed in the earlier years." Further, in the case of CIT v. McMillan & Co. (1958) 33 ITR 182 (SC), the apex Court held that "The words in the opinion of the ITO are not to be construed in the sense of mere discretionary power, but in the context of the words used in Section 145, they impose a statutory duty on the ITO to examine in every case, the method of accounting and to see (i) whether or not it is regularly employed and (ii) to determine whether the income, profits and gains can properly be deduced therefrom." In the present case, the AO called for the books of account relating to dollar payments which are maintained in Italy. The assessee could not produce the books of account, instead produced some photocopies of the vouchers of the receipts and expenses. The assessee got the chance to produce such books of account thrice as the assessment order of the assessee-company was set aside twice. The learned counsel argued that such books of account are voluminous and it is difficult for the assessee to bring those books to India. The arguments of the learned counsel are without any substance. The assessee is a non-resident company and must be having their business spread over in many parts of the world. The company is capable of lifting aircrafts, huge plant and heavy machinery, etc., to Bombay High and other parts of the world. But it is quite unbelievable that the company cannot produce the books of account on the pretext that they are voluminous, The AO has to determine the correct profit and for that purpose he has to go through the books of account. The assessee-company had claimed various expenses and the onus was on the assessee to produce the relevant evidence to support their genuineness, The main office of the assessee is in Italy and the AO could not have direct access to that office. Therefore, it was the duty of the assessee to produce the books of account. The photocopies of the vouchers of receipts and expenses are not enough to determine the correct profits of the assessee. The photocopies cannot be admitted as an evidence unless they are supported by the original documents, Under the circumstances, the AO has rightly rejected the books of account as such books of account cannot be relied upon for determining the correct profit of the company taxable in India. This ground of appeal is, therefore, decided in favour of the Revenue and against the assessee.

27. The fourth ground of appeal of the assessee reads as follows :

"(i) The CIT(A) has erred in law and on facts in holding that the DC was right in invoking the provisions of Rule 10 and in applying the provisions of Section 44BB in determining the total income of your appellants, even after accepting your appellants1 contention that the DC ought to have taken cognizance of the auditors reports and P&L a/c.

(ii) The CIT(A) has erred in law and on facts in holding that the DC was justified in invoking the provisions of Rule 10 and also in applying the provisions of Section 44BB, even after holding that the DC has not brought on record any other concrete evidence for not accepting the details of expenses (furnished by your appellants) which he found were 'voluminous' in nature."

28. The AO in his order has stated that the books of account pertaining to the dollar payments were maintained in Italy, Head Office of the company. The assessee-company did not produce the original books of account but produced only copies of the vouchers pertaining to receipts and expenditure. The assessee, however, produced the books of account relating to Indian projects for both the contracts. Under the circumstances, the AO came to the conclusion that the genuineness of the expenses relating to the PE in India could not be verified. It has also been pointed out by the AO that the assessee-company also did not make any compliance with the provisions of Section 44AB of the Act which was obligatory on the part of the assessee to get its books of account audited relating to the Indian project as the gross turnover of the assessee-company exceeded the amount statutorily fixed under the law. As the assessee could not produce the audited books of account pertaining to the Indian projects, the AO applied the provisions of Section 44BB for determining the taxable income of the assessee as according to him, there are no specific provisions in the DTAA for computing profits from the services rendered in mineral oil sector. The AO referred to Circular No. 333, dt. 2nd April, 1982 wherein it has been stated that where specific provisions are not incorporated in DTAA, the specific provisions in law would continue to apply. The learned CIT(A) has stated that the accounts in respect of the Indian project were verifiable as the books of account duly audited by the Price Water House were available. But at the same time, the learned CIT(A) has also stated that in respect of dollar payments, even though the audited accounts were made available, duly audited by the Italian auditors, but the AO was not in a position as has been stated in his assessment order to ascertain or verify the quantification of various expenses. Thus, the learned CIT(A) concluded that the AO was justified in invoking the provisions of Rule 10 of IT Rules and also applying the provisions of Section 44BB of the Act.

29. At the time of hearing, the learned counsel for the assessee contended that the assessee non-resident company was not having any PE in India in view of DTAA between India and Italy, as per Articles 5 and 7. Therefore, according to him, no income and expenditure was attributable to PE. He invited our attention to p. 76 of the compilation and contended that the period of contract with the MDL was less than 71 days as the same is from 20th March, 1984 to 29th May, 1984. Similarly, the learned counsel invited our attention to p. 143 of the compilation which pertains to the permission of Reserve Bank of India under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 for opening project office in India to execute a sub-contract. He specifically invited our attention to para 2 of the letter where it is mentioned that the opening of the project office at Bombay is upto 31st March, 1984. He also pointed out that the condition No. 2(i) is applicable to the case of the assessee which reads as follows :

"The operation of the office in India will be restricted exclusively to execution of the contract as approved by the Government of India."

Thus, according to the learned counsel, there was no PE in India as per the DTAA between India and Italy. The learned Departmental Representative, however, contended that there was a PE in India as has been pointed out by the AO in his order. He also pointed out that the period for the works carried out as per contract with MDL is from 29th March, 1984 to 9th Nov., 1984 as per the invoices issued for the work as per pp. 77 to 79 of the compilation. Therefore, the period is more than 8 months and not less than 71 days as has been stated by the learned counsel. Therefore, the assessee-company was having PE in India. The learned counsel, however, contended that 'heading' is relevant for determining the period and not the contents given therein. According to him, the heading pertains to the period from 20th March, 1984 to 29th May, 1984, therefore, the contract is only for 71 days. The learned counsel also contended that the Italian books of account were audited by Italian Chartered Accountants and the assessee-company was also willing to produce such books of account before the AO as mentioned in their letter dt. 10th Jan., 1991 addressed to Dy. CIT, Special Range 26, Bombay (compilation pp. 94 & 95).

30. We have carefully considered the submissions made by the rival parties. The books of account maintained by the assessee relating to dollar payments were not produced before the AO and only copies of vouchers pertaining to receipts and expenditure were produced. Therefore, it was not possible for the AO to determine the taxable income of the assessee. Article 7(4) of the Tax Treaty between India and Italy reads as follows :

"In the determination of the profits of a PE, there shall be allowed as deduction of expenses which are incurred for the purpose of the business of the PE including executive and administrative expenses so incurred, whether the state in which the PE is situated or elsewhere."

Now in the present case, the assessee-company has not produced the books of account pertaining to the dollar payments. Therefore, the profits of the company cannot be determined as per the provisions of Article 7(4) of the DTAA. The AO, therefore, correctly resorted to the provisions of Section 44BB for the determination of the profits from the services rendered in the mineral oil sector. Circular No. 333, dt. 2nd Aug., 1982 is also quite specific on this issue which reads as follows :

"Where Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law that is IT Act that will govern the taxation of the income."

In the present case, there is no specific mode of computation of income in the DTAA, as per Article 7. But the correct income cannot be determined as we have pointed out earlier because the books of account pertaining to dollar payments were not verifiable as the same were not produced by the assessee-company at the time of assessment, Therefore, the specific mode for the computation of income given in the DTAA cannot be applied in this case, There is no other mode specified in the DTAA for the computation of income. Therefore, the AO had rightly computed the taxable income under the provisions of the IT Act as laid down in Circular No. 333, dt. 2nd April, 1982. The contention of the learned counsel that the CIT(A) held against the AO in para 39 of his order that the Italian books of account were not produced is without any basis. In fact, the CIT(A) has stated that the appellants' contention that the accounts in respect of Indian project were verifiable and the books of account duly audited by the Price Water House were also available. But the CIT(A) has further clarified that in respect of dollar payments, the work relating to outside India, the audited accounts were produced before the AO but the AO in his order has clearly mentioned that the representative of the non-resident assessee-company, M/s Price Water House has only audited the accounts relating to rupee portion of payment and their report regarding dollar payments is only based on the photocopy of the balance-sheet produced by the assessee-company of their auditors in Italy. Indian auditors have not actually examined the books of account and original vouchers of the assessee-company pertaining to the dollar payments. The CIT(A) has made reference to these findings of the AO and concluded that the AO has correctly resorted to the provisions of Rule 10 of the IT Rules and also the provision of Section 44BB. The term PE as mentioned in art, 5 of the Tax Treaty between India and Italy would be relevant only if the profits are to be determined as per Article 7 of the Tax Treaty. The computation of income of the assessee has been correctly done by the AO as per the provisions of Rule 10 of the IT Rules and as per the provisions of Section 44BB of the Act as we have mentioned in the foregoing paras. Therefore, the period of three months mentioned in the Sub-clause (h) of Clause 2 of Article 5 of the Tax Treaty is not relevant. Even otherwise, the non-resident assessee-company had an office in India as stated above, therefore, it had a PE in India as per Sub-clause (c) of Clause 2 of Article 5 of the Tax Treaty. Therefore, the period of 71 days or more does not have any relevance for computing the taxable income of the assessee-company. The contention of the learned counsel that the period of contract was only 71, days with MDL also does not appear to be correct because the period from April, 1984 to November, 1984 has been mentioned at p. 90 of the compilation under the heading "MDL Contract-Materials (consumables and spare parts)". The reference made to RBI letter dt. 23rd Sept., 1983 by the learned counsel (p. 143 of compilation) has also no bearing on the determination of taxable profits of the assessee-company because it also does not refer to any particular fixed period. The contention of the learned counsel that the assessee-company wanted to produce the books of account as per their letter dt. 10th Jan., 1991 addressed to the AO (p. 94 of the compilation) is also without any force. The company only promised to produce the books of account, vouchers and invoices but such books of account were never produced before the AO. The learned counsel also referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP) and contended that the Treaty must be implemented. We agree with the learned counsel that the DTAA must prevail over the IT Act and that is what has also been stated in Circular No. 333, dt. 2nd April, 1982. But where there is no specific provision in the agreement for the determination of the taxable income, it is the basic law that i.e., IT Act that will govern the taxation of income. This is exactly what the AO has done in this case. The assessee-company did not produce the books of account pertaining to the dollar payments. The assessee-company has also not made any compliance with the provisions of Section 44AB of the Act which was obligatory on the part of the assessee to get the accounts audited relating to Indian projects as the gross turnover of the assessee-company exceeded the amount statutorily fixed by the law. Therefore, it was not possible to determine the taxable income under the DTAA. Therefore, the AO applied the provisions of Rule 10 of the IT Rules and the provisions of Section 44BB of the Act for the determination of taxable income of the assessee. Under the circumstances, we do not find any infirmity with the findings of the learned CIT(A) and the same are confirmed.

31. The fifth ground of appeal taken up by the assessee reads as follows :

"(i) The CIT(A) has erred in law and on facts in not directing the DC to take cognizance of the 'voluminous' details/information and explanations offered by your appellants in respect of the following expenses:

 

Details US$

(a) Payments to sub-contractors 1,24,15,784

(b) Materials & spare parts consumed 12,95,780

(c) Project expenses 3,64,734

(d) Boat rentals  

(ii) The CIT(A) has erred in law and on facts in holding that the DC should always be in a position not only to verify the genuineness/quantification of the expenses but also should be in a position to ascertain whether these expenses were in accordance with the legitimate business needs, even after holding that your appellants made available. Voluminous' details in respect of various expenses.

(iii) The CIT(A) ought to have held that the DC either should take the information furnished into consideration or should state reasons for not accepting them."

32. The AO in his assessment order has stated that the amount of US $ 1,24,15,784 has been paid to sub-contractors who are not residents. The assessee-company did not file any details. Therefore, the genuineness of these expenses could not be verified. The assessee-company also has made claim of boat expenditure as rentals. All these boats and ships were called from outside (India). The staff operating the boats and ships was also engaged from outside India. The maintenance like food, uniform, repairs to vessels etc., were also carried out outside India. The assessee did not file full details for verification. Similarly, the assessee also claimed expenses on material and spare parts consumed of US $ 12,95,780. The verification could not be done in the absence of details. The assessee also incurred expenses of US $ 3,64,734 on salaries to non-resident staff during their stay in India, project office expenses, hotel expenses, air fares from Bombay to Italy, head office expenses etc. The AO has stated that in the absence of details, it would not be possible to verify the nature of such expenses and also whether they were allowable as per the provisions of IT Act. The assessee also incurred expenses on certain equipments which had been taken on rent and also incurred agency expenses in respect of these contracts to the tune of US $ 3,00,201. The assessee could file only explanatory notes regarding these expenses. Thus, the AO has stated that even though the details of various expenses incurred have been furnished by the assessee-company but exact amount incurred under these heads could not be ascertained, quantified or verified in the absence of relevant details. The assessee could file only the copies of various vouchers. Under the circumstances, the AO concluded that application of the provision of Section 44BB was inevitable and the provisions of DTAA cannot be made applicable. The learned CIT(A) supported the findings of the AO.

33. At the time of hearing, the learned counsel for the assessee contended that the details of the various expenses incurred outside (India) were made available to the AO. The AO did not verify the details and resorted to the provisions of Section 44BB. He also argued that as per the provisions of Section 90 of the IT Act, Tax Treaty must be implemented. The learned Departmental Representative, however, contended that where there is no conflict between the DTAA and the IT Act, the IT Act would have preference because of special provisions of Section 44BB of the Act.

34. We have heard the rival parties. The learned counsel has argued that as per the Tax Treaty between India and Italy, profits attributable to the PE are to be taxed. In other words, the assessment is to be completed under the provisions of DTAA. We have already discussed in details in the aforesaid paras that the assessee-company did not produce the books of account at the time of assessment proceedings in spite of the fact that they could get sufficient opportunity to do so. Payments have been made in dollar accounts. The recipients of these amounts are non-residents. The assessee-company filed only photocopies of vouchers. Therefore, we do not find any infirmity with the order of the CIT(A) because the AO was duty bound to verify the genuineness of the expenditure incurred. The expenses have been claimed by the assessee, Therefore, the onus was on the assessee to produce the original books of account and other relevant documents regarding the payments in dollar. The AO was fully justified to determine the taxable profits under the provisions of Rule 10 of IT Rules and the provisions of Section 44BB of the Act as to complete the assessment under the provisions of DTAA was not possible. The findings of the authorities below do not require any interference and the same are upheld.

35. The sixth ground of appeal taken up by the assessee reads as follows :

"(i) The CIT(A) has erred in law and on facts in upholding the addition of 'tax perquisite' in addition to the deemed profit computed on the gross payments received under contracts.

(ii) The CIT(A) has erred in law and on facts in not accepting your appellants' alternate plea that only 10 per cent of such taxes payable by HHI and MDL should be considered as notional income in terms of the provisions of Section 44BB(2) of the Act.

(iii) The CIT(A) has erred in law and on facts in rejecting your appellants' contention that only 10 per cent and not the entire 'tax perquisite' should be taken as notional income and in holding that the said contentions are not in conformity with the provisions of Section 195A of the Act.

(iv) The CIT(A) ought to have directed the DC to apply the tax rate applicable to an Indian national similarly placed while calculating the 'tax perquisites' on 'single stage grossing up method'."

The Department has also taken up a similar ground of appeal which reads as follows :

"(i) On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the AO to adopt the single stage grossing up method in respect of receipts from HHI as against the multiple stage grossing up method as rightly adopted by the AO because once the assessee receives the income net of tax then the correct taxable income can be arrived at only by multiple stage grossing up and further because this is a case of an agreement between two private parties and not between Government Companies as a result of which the concessional treatment as per ratio of the case relied upon also has no application."

36. We are taking up both the grounds together as the issue involved is similar. The AO took up 10 per cent of gross receipts as taxable income. In terms of agreement dt. 5th Dec., 1982 between the assessee-company and HHI, the tax liability in respect of Indian corporate tax out of such sub-contracts was that of HHI. Since the tax liability was being borne by the persons other than one who received the income the AO grossed up such tax perquisite on multiple stage basis under Section 195A of the Act. The learned CIT(A) in his order has observed that the AO has not pointed out in his order as to why multiple stage gross up method was resorted to. He also observed that the AO in his earlier assessment order dt. 26th Dec., 1988 did not resort to multiple stage gross up and has only added 'tax perquisite' for determining the taxable income on single stage basis. Thus, he directed the AO to adopt single stage gross up method and not multiple stage method.

37. The learned counsel contended that 10 per cent of tax payable by HHI and MDL should be considered as notional income in terms of the provisions of Section 44BB(2) 'Of the Act. He further contended that 10 per cent and not the entire perquisite should be taken as notional income. In this connection, the learned counsel referred to the provisions of Section 195A of the Act. The learned counsel also contended that tax rate applicable to an Indian national similarly placed while calculating the tax perquisite should be applied to the assessee on single stage grossing up. He placed his reliance on the following Court cases :

(i) Oil India Ltd. v. CIT (1995) 212 ITR 225 (Ori)

(ii) Dy. CIT v. Compagnie General Degeophysique (1994) 48 ITD 424 (Jp) (Hi) McDermott International Inc.'s case (supra) The learned Departmental Representative, however, contended that multiple stage method has been correctly applied by the AO because once the assessee received the income net of tax then the correct taxable income can be arrived at only by multiple stage gross up. He placed his reliance on the following Court cases :

(i) Clouth Gummimerke Aktiengesellschaft v. CIT and Mannesrnianri Denvag Lauchammes v. CIT (1999) 238 ITR 861 (AP)

(ii) Asian Development Service v. CIT (1999) 239 ITR 713(Ker)

38. We have considered the submissions made by the rival parties. In the case of McDermott International Inc. (supra), the Delhi Tribunal held that the amount of tax 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 has be limited to 10 per cent of this aggregate. The addition of tax to be done once at the beginning only. The Tribunal referred to the case of Oil & Natural Gas Commission v. IAC (1990) 35 ITD 31 (Del) where the action of the AO for single stage grossing up of the income-tax for arriving at the gross income was upheld. But in the case of Clouth Gummimerke Aktiengesellschaft (supra) relied upon by the learned Departmental Representative, the Andhra Pradesh High Court held that in view of the specific provision inserted in Section 2(24)(iva) of the Act under which any sum paid by the representative assessee in respect of any obligation which but for such payment would have been paid by the beneficiary is to be added to the income, the Tribunal was correct in upholding the grossing up of income by calculating tax on tax until zero difference was arrived at and not restricting the grossing up of income merely to the tax on the net amount. Similarly in the case of Asian Development Service (supra) relied upon by the learned Departmental Representative, Kerala High Court held that "In case of agreement between a resident and non-resident pursuant to which amounts were paid to the non-resident, if the contract provides that the tax liability, if any, in respect of amounts so paid to the non-resident is to be borne by the resident company, the amount of tax payable by the non-resident company has to be added to the income remitted to the non-resident and the tax liability of the non-resident should be determined with reference to the gross figure arrived at." The decision of the Andhra Pradesh High Court (supra) appears to be quite logical because as per the agreement, the tax has to be paid by the resident company and that amount has to be added to the income of the non-resident company as its income. Again, the resident company would pay tax on the earlier tax amount and that additional tax paid would again be added to the income of the non-resident company and the resident company would pay further tax on the additional tax paid and it would further be added to the income of the non-resident company. This process would continue till the tax payable by the resident company reduces to Nil. The contention of the learned counsel that only 10 per cent and not the entire tax perquisite should be taken as notional income in terms of the provisions of Section 44BB(2) is without any force. 10 per cent is the actual income of the assessee out of the total amount payable to him i.e., 10 per cent is the net income after considering the probable expenses etc., whereas tax paid on behalf of the non-resident is the net income and there is no question of reducing it further by any expenses incurred for earning that income. Therefore, the tax paid is net income taxable in the hands of the non-resident. The decision of the learned CIT(A) on this issue is set aside and that of the AO is restored. The assessee's ground is dismissed and the Department's ground is allowed.

39. The seventh ground of appeal taken up by the assessee reads as follows :

"(i) The CIT(A) has erred in law and on facts in upholding the actions of the DC in applying the tax rates of 70 per cent increased by Union Surcharge of 5 per cent (applicable to non-residents) in total disregard to the provisions of Article 25 of the Tax Treaty.

(ii) The CIT(A) ought to have held that in view of the non-discrimination clause contained in Article 25 of the Tax Treaty, the rate of tax applicable to your appellants is the same as applicable to an Indian national similarly placed."

40. It is contended that the AO has wrongly adopted the tax rate of 73.5 per cent without taking into account the non-discrimination clause contained in Article 25 of the Tax Treaty.

It was also contended by the learned counsel that the tax which should be made applicable to him should be the same as applicable to Indian nationals in similar situation. It is further contended that the AO erred in law in considering the entire receipts instead of the deemed profits for grossing up. The learned Departmental Representative relied on the findings of the authorities below.

41. After going through the facts of this case and hearing both the parties, we find full justification in adopting the rate of 73.5 per cent. The AO has rightly not taken into consideration Article 25 of the Tax Treaty because the taxable income of the non-resident company has not been determined as per the provisions of the Tax Treaty. Therefore, the provisions of Article 25 of Tax Treaty would not be applicable in this case. The AO resorted to the provisions of Section 44BB of the Act and determined the taxable income of the assessee by applying Rule 10 of the IT Rules because the assessee failed to produce the books of account, as discussed earlier. Therefore, resorting to the provisions of Section 44BB, the AO has been quite reasonable. Once the provisions of Section 44BB have been applied, the tax rates have to be determined accordingly. Section 44BB is specific and states that in the case of a nonresident company, 10 per cent of gross receipts would be taken as taxable income. Therefore, the tax rate to be applied in the assessee's case has to be the same as in the case of other non-resident companies governed by the provisions of Section 44BB. Therefore, the AO was fully justified in adopting the tax rate of 73.5 per cent. Surcharge which is in addition to the tax rates has also been correctly applied. The issue of grossing up has already been discussed in the foregoing paras, and there is no mistake as pointed out by the assessee. We, therefore, do not find any infirmity with the findings of the learned CIT(A) and the same are upheld.

42. The ground Nos. 8, 9 and 10 of the assessee-company pertain to the charging of interest under Section 217, validity of the issuance of notice under Sections 271(1)(a), 271B, 273(2)(b) and 201(1A). These grounds of appeal are consequential and therefore, they do not require any consideration.

43. The first and second grounds of appeal taken up by the Department read as follows :

"(i) On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the AO to exclude the charges received by the assessee-company from M/s HHI on account of mobilisation/demobilisation activities and insurance connected therewith from the gross receipts while computing the taxable income under Section 44BB of the IT Act.

The learned CIT(A) has failed to appreciate that the D.B. Crawler Barge have ultimately been brought to locations within the Continental Shelf/Exclusive economic zone of India and any receipts on this account have necessarily to be treated as receipts arising because of work done in India and are thus liable to be assessed under Section 44BB of the Act.

(ii) On the facts and in the circumstances of the case and in law the learned CIT(A) further erred in directing the AO to apply Board's Instruction No. 1767, dt. 1st July, 1987 after verification and to take 1 per cent only if the receipts on account of mobilisation/demobilisation and insurance as taxable in India as against the provisions of Section 44BB correctly applicable to such receipts in the assessee's case."

44. The learned CIT(A) in his order has stated that the AO was not justified in including in the gross receipts the payments received outside India in respect of the work performed outside India. According to him, the AO can only take 1 per cent of the receipts as taxable in India under Instruction No. 1767 of the Board provided certain conditions laid down therein are satisfied. Thus, he directed the AO to exclude the receipts pertaining to the activities carried out outside India such as mobilisation/demobilisation costs etc., while computing the gross receipts under Section 44BB. The learned Departmental Representative contended that the assessee-company has received the amounts by hiring their machinery and plant for the prospecting of or extraction or production of mineral oil, as stated in Clause (B) of the Notification issued by the Government of India. Therefore, the income is covered under the Notification and the same has been derived from the three activities mentioned in the Notification. Therefore, he argued that the CIT(A) has wrongly directed the AO to exclude these amounts from the gross receipts while computing the gross receipts under Section 44BB. He also argued that the insurance amount received by the assessee-company is also closely connected with the three activities mentioned in the Notification. Hence, the income is also squarely covered under the Notification. The learned counsel for the assessee, however, contended that the mobilisation/demobilisation costs have been paid by HHI to the assessee in order to enable the assessee to bring its D.B. Crawler and Barge from outside the country to its location on the Continental Shelf/Exclusive Economic Zone of India. Thus, according to him, the amount was paid ,for the work which was performed entirely outside India. He, thus, argued that no part of such income could be said to have accrued or arisen or to be deemed to accrue or arise in India. Similarly, he contended that the insurance charges received by the assessee would in no circumstance come within the ambit of Notification.

45. We have considered the rival submissions. The assessee non-resident company has received the mobilisation/demobilisation costs from HHI in order to enable the assessee-company to bring its D.B. Crawler and Barge from outside the country to its location on the Continental Shelf/Exclusive Economic Zone of India. The assessee has received the income for providing the services or facilities in bringing the D.B. Crawler Barge from outside the country to its location on the Continental Shelf/Exclusive Economic Zone of India. Therefore, the assessee-company has rendered services for providing facilities for the supply of plant or machinery which is squarely covered with the provisions of Clause (B) of the Notification. The income has been received by the company which is directly connected with the prospecting of or extraction or production of mineral oil in the Continental Shelf of India or the' Exclusive Economic Zone of India. Therefore, it is squarely covered with the provisions of the Notification. The findings of the learned CIT(A) that the payment have been received outside India are not relevant to the facts of the case. The income has to be assessed under the provisions of the Notification if the non-resident company received the income in providing the services for prospecting of or extraction or production of mineral oil. The receipt of the payments in India or outside is having no bearing on the taxability of the amount which is squarely covered with the Notification issued by the Government of India. The income has, therefore, been directly derived by the assessee from the prospecting of or extraction or production of mineral oil. The arguments of the learned counsel that the income has not accrued or arisen or to be deemed to accrue or arise in India are also without any substance. The assessee has earned the income by providing services for D.B. Crawler and Barge for facilitating the prospecting of or extraction or production of mineral oil. Therefore, this income has also been derived by the assessee from the prospecting of or extraction or production of mineral oil in the Continental Shelf/Exclusive Economic Zone of India. In our considered opinion, the AO has, therefore, correctly included the receipts pertaining to the mobilisation/demobilisation and the insurance charges for the computation of the gross receipts under Section 44BB of the Act. The directions given by the learned CIT(A) for taking 1 per cent of the receipts as taxable in India under Instruction No. 1767 of the Board are also erroneous in view of our aforesaid findings that the receipts have to be included while computing the gross receipts under Section 44BB. The findings of the learned CIT(A) are, therefore, set aside and that of the AO are restored.

46. The learned counsel pleaded that the issue involved in the present case is squarely covered with the decision of the Bombay Tribunal in the case of National Petroleum Construction Co. Ltd. (supra). After considering the facts of the aforesaid case, we do not find any force in the arguments of the learned counsel. Firstly, the decision of the Delhi Tribunal in the case of McDermott International Inc. (supra) wherein this issue has been dealt with in depth was available when the above order was passed but the same has not been considered. Secondly, the latest order of the Authority for Advance Rulings in the case of Lloyd Helicopters International Pty. Ltd. (supra) is now available wherein this issue has been decided in favour of the Revenue. Under the circumstances, the case of National Petroleum Construction Co. Ltd. (supra) cannot be considered as proper precedent for deciding this issue. Therefore, the contention raised by the learned counsel is without any substance and the same is rejected.

In the result, the appeal of the assessee is dismissed whereas the appeal of the Department is allowed.