Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income-Tax, New ... vs Pgs Geophysical As, Gurgaon on 15 January, 2019
ITA No.- 1401/Del/2015.
M/s PGS Geophysical AS.
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH: 'F': NEW DELHI)
BEFORE SHRI K.N. CHARY, JUDICIAL MEMBER
AND
SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER
ITA No:- 1401/Del/2015
(Assessment Year: 2010-11)
Deputy Commissioner of Income M/s PGS Geophysical AS,
Tax Circle 2(2) (2), International Vs. Stradevien 4, P.O. Box 290
Taxation, New Delhi. N-1326 Lysaker, Norway,
C/o BMR & Associates, 22nd
Floor, Building No. 5, Tower-
A DLF Cyber City, DLF Phase
-III, Gurgaon-122002.
PAN No: AACCP3237B
APPELLANT RESPONDENT
Revenue by : Shri G.K. Dhall, CIT(DR),
Assessee by : Shri Amit Bablani, CA and
Shri Sahil Gupta, CA
ORDER
PER: ANADEE NATH MISSHRA, AM This is an appeal filed by Revenue. The Assessee is registered as a Company in Norway and is a 100% subsidiary of Petroleum Geo-Services ASA. The Company operates vessels which are provided on time charter basis to PGS Group entities. As part of charter hire, the assessee provides operational and vessel management services which include maritime management services, health, security and environment and accounting Page 1 of 34 ITA No.- 1401/Del/2015.
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services. It is also engaged in conducting geophysical surveys offshore with special emphasis 3D collection of seismic data, processing and sale of such data, and other activities of similar nature. During the year the assessee provided vessels on hire to PGS Exploration (Norway) AS ("PGS Norway", for short) and Petroleum Geo-Services Asia Pacific Pte Ltd ("PGS Singapore", for short). PGS Norway and PGS Singapore were in contract with India entities like Oil & Natural Gas Corporation ("ONGC", for short) and Reliance Industries Limited ("RIL", for short) for the purpose of undertaking seismic data acquisition and on board processing. The assessee opted to offer income @ 10% of gross receipt as per Section 44BB of Income Tax Act, 1961 ("I.T. Act, for short). Vide Draft Assessment Order dated 25.03.2014, the Assessing Officer ("AO", for short) did not agree with assessee's claim of applicability of Section 44BB of I.T. Act. The AO proposed to invoke Rule 10 of Income Tax Rules, 1962 ("I.T. Rules", for short) and proposed to determine assessee's income @ 15% of the gross receipt by applying Rule 10 of I.T. Rules. The Assessee filed objections before Dispute Resolution Panel ("DRP", for short).
Vide order dated 02.12.2014, DRP held that, the amount received by the assessee during the year under consideration on account of hire charges of the vessels should be brought to tax by applying the deemed profit ratio of 10%, U/s 44BB of the I.T. Act. Acting on the directions of the DRP, the AO passed Assessment Order dated 12.01.2015 U/s 144C(13) read with Section 143(3) of I.T. Act wherein the assessee's income determined that 10% of the gross receipts U/s 44BB of I.T. Act. Aggrieved, the Revenue has filed this appeal in Income Tax Appellate Tribunal ("ITAT", for short), with the following grounds of appeal are as under:
Page 2 of 34ITA No.- 1401/Del/2015.
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i. Whether on the facts and circumstances of the case, the Hon'ble Dispute Resolution Panel ("DRP") has erred in directing the Assessing Officer to apply the deemed profit rate of 10% u/s 44BB of the Income Tax, 1961 ("the Act") on the Revenues earned by assessee on account of providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing, as against the proposed action of the AO to bring the revenue to tax as royalty u/s 9(1 )(vi) of the Act at an estimated net income @15% of gross receipts r.w.s 44DA of the Act.
1.1 Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in not appreciating that the terms services or facilities used therein are not defined and the two terms used are general in nature and therefore, once the payments take the-character of Royalty as defined u/s 9(l)(vi), they go outside the purview of section 44BB and have to be taxed at rates applicable to Royalty u/s 115A/44DA of the Act.
2. Whether on the facts and circumstances of the case the Hon'ble DRP has erred in its interpretation of the legislative intent behind the scheme of taxation envisaged in 9(l)(vi)/9(l)(vii) read with sections 115A/44DA and 44BB , ignoring the decisions in the cases of M/s Rolls Royce Pvt Ltd [2007-TII-03-HC-UKHAND-INTL] and M/s ONGC As Agent of M/s Foramer France [(2008) 299 ITR 438 Uttarakhand.
2.1 Whether on the facts and circumstances of the case, Hon'ble DRP has erred in not appreciating the fact that proviso to section 44DA brought about by the Finance Act 2011 was only clarificatory in nature and its application has to be read into the main provisions with effect from the time the main provision came into effect in view of the decision of the Hon'ble Supreme Court in the case of Sedco Forex International Drilling v/s CIT.
2.2 Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that even in terms of ratio of the judgment in the said of OHM Ltd [[352, ITR 406 (Delhi)] cited by it, the provisions of section 44BB are not applicable where the scope of the services/facilities provided by an assessee is general in nature falling under section 115A/44DA of the Act.
2.3 The Hon'ble DRP has erred in mechanically following the decision in the case of M/s OHM Ltd without first adjudicating upon the issue as to whether and how the scope of the services/facilities rendered under the contracts is not general in nature and therefore, does not qualify as Royalty u/s 9(l)(vi) of the Act and taxable under section 44DA of the Act read with section 7 of the DTAA.
3. Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in holding that the provisions of section 44BB of the Act are more special provisions which shall prevail over the provisions of section Page 3 of 34 ITA No.- 1401/Del/2015.
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9(l)(vi) read with sections 115A/44DA of the Act, not appreciating the fact that both set of provisions are special in nature which operate in their own clearly defined spheres and therefore, once a particular receipt or income takes on the character of Royalty/FTS as defined in section 9(l)(vi)/9(l)(vii), it cannot be considered for treatment u/s 44BB and has to be taxed u/s 115A/44DA of the Act
4. Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred,in holding that sections 115A and 44DA apply only to cases where the income by way of Royalty or FTS is earned by a non- resident by way of royalty or FTS from Government or an Indian Concern and where an income is received by a non-resident from another nonresidents, the provisions of section 115A/44DA do not apply. 4.1 Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that sections 44DA/115A enshrine the source rule of taxation and is intended to cover all the payments in the form of Royalties/FTS etc. where the source of such payments lies in India.
4.2 Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that the payments in the present case have been made by a non resident entity in respect of contracts being executed by it in India and therefore the source of the payments as well as the situs of the activity to which these payments pertain lies in India.
4.3 Whether the Hon'ble DRP has erred in not appreciating the fact that the phrase 'Indian Concern' in sections 115A/44DA having not been defined, it has to be given a purposive construction and, therefore, a Non- Resident entity executing contracts in India and making payments in respect of services availed for execution of such contracts in India should be treated as Indian Concern for the purpose of the section 115 A/44 DA of the Act.
5. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal."
(2) In the course of appellate proceedings in ITAT, Assessee filed Paper Books dated 15th May, 2018 and 16th October, 2018 containing the following particulars:
1. Copy of decision of the Supreme Court in the case of ONGC vs. CIT [2015] 376 ITR 306 (SC) Page 4 of 34 ITA No.- 1401/Del/2015.
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2. Copy of decision of the Delhi High Court in the case of PGS Exploration (Norway) AS vs ADIT [2016] 383 ITR 178 (Delhi)
3. Copy of decision of Delhi High Court in the case of DIT vs OHM Limited (2012) (212 taxman 440) (Del)
4. Copy of the decision of the Uttrakhand High Court in the case of CGG Veritas Services SA vs CIT (ITA No 08 of 2012)
5. Copy of decision of the Uttrakhand High Court in the case of CIT vs M/s Expro Gulf Limited & Others (ITA No 34 of 2015) (High Court)
6. Copy of the decision of the Delhi ITAT in the case of Louis Dreyfus Armateures SAS Vs ADIT (2015) (153 ITD 579) (Delhi-Trib)
7. Copy of decision of the Uttrakhand High Court in the case of BJ Services Co Middle East (Special appeal no. 316 and 317 of 2012)
8. Copy of decision of the Uttrakhand High Court in the case of M/s western Geco International Limited (ITA no 39 of 2012)
9. Copy of the decision of the Delhi ITAT in the case of Schlumberger Asia Services Ltd vs ADIT (ITA No 6063 of 2010)
10. Copy of the ruling of AAR in case of Bourbon Offshore Asia Pte Ltd vs DIT (2011) (337 ITR 122) (AAR)
11. Copy of the ruling of AAR in case of Wavefield Inseis ASA (2010) (230 CTR 106) (AAR)
12. Copy of the decision of Delhi ITAT in the case of Swiber Offshore Marine Pte Ltd vs ADIT (ITA NO 5652/Del/2011)\
13. Copy of the decision of Delhi ITAT in the case of ADIT vs Baker Hughes Singapore Pte Ltd (2015) (41 ITR (T) 212) (Delhi-Trib)
14. Copy of the decision of the Delhi Bench of the ITAT in the case of Baker Hughes Asia Pacific Ltd vs ADIT -(2014) (34 ITR (T) 192) (Delhi -Trib.)
15. Copy of the ruling of AAR in case of Specturn Geo Limited vs DIT (2012) (346 ITR
422) (AAR)
16. Copy of decision of the Supreme Court in the case of DIT vs Morgan Stanley Inc and Co (2007) (292 ITR 416) (SC)
17. Form 35A
18. Annexure to Form 35A Page 5 of 34 ITA No.- 1401/Del/2015.
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19. Certified true copy of the transfer pricing order dated December 3, 2013 passed by the transfer pricing officer under section 92CA(3) of the Income-tax Act, 1961 ("Act")
20. Certified true copy of the draft assessment order dated March 25, 2014 passed by the assessing Officer ("AO") under section 144C (1)/143(3) of the Act
21. Copy of the return of income for the subject year along with computation
22. Copy of the relevant pages of the contracts entered into by PGS Exploration (Norway) AS ("PGSEN") and Petroleum Geo-Services Asia Pacific Pte Ltd ("PGSAP") with Oil & Natural Gas Corporation and Reliance Industries Lifmited ("RIL") respectively evidencing that the activities of seismic data acquisition and processing were carried on by PGSAP and PGSEN
23. Copy of the submission dated April 27, 2012 filed before the AO during the course of assessment proceedings
24. Copy of the submissions dated February 24, 2014 filed before the AO during the course of assessment proceedings
25. Copy of submissions dated March 7,2014 filed before the AO during the course of assessment proceedings
26. Copy of submission dated March 12, 2014 filed before the AO during the course of assessment proceedings along with the following annexures:
• Copy of the contract entered into between the assessee and PGSEN for the hire of vessels.
• Copy of relevant extract of the contract entered into PGSEN with RIL for rendering seismic data acquisition and processing services.
• Copy of the snapshot from the website of Directorate General of Foreign Trade Depicting the import-export code of PGSEN • Copy of mobilization and demobilization certificates duly certified by PGSEN and RIL • Copy of invoices raised by the assessee on PGSEN for the hire of vessels.
• Copy of the invoices raise by the vendors on PGSEN for rendering custom clearance services, supply o food items and other consumables for consumption of vessels in India, supply of spares for the purpose of operation in India etc. Page 6 of 34 ITA No.- 1401/Del/2015.
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27. Certified true copy of the directions dated December 2,2014 issued by the Hon'ble Dispute Resolution Panel -II ("DRP") under section 144C(5) of the Act.
28. Certified true copy of the final assessment order dated January 12, 2015 passed by the AO under section 144C(13)/143(3) of the Act.
29. Text of section 44BB and section 9 of the Act.
30. Copy of the tax residency certified issued by the Norwegian Fiscal authorities for AY 2010-11."
(2.1) During appellate proceedings in ITAT, Ld. Commissioner of Income Tax (Departmental Representative), ["CIT(DR)", for short], filed written submissions, relevant portion of which is reproduced as under:
"SUBMISSIONS In the above case, it is humbly submitted that the following decisions may kindly be considered with regard to Applicability of Section 44BB
1. ONGC LTD vs. CIT (2015) f2015-TII-03-SC-INTLJ(SC| In that case, the facts as discussed by Hon'ble Supreme Court were that -
"6. The appellant-ONGC and a non resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for the assessment year 1986-87. Faced with the different views taken by the authorities under the Act, as mentioned above, the High Court proceeded to analyse the different clauses of the contract between the parties. A consideration of such analysis made by the High Court would go to show that it had come to light before the High Court that the contract between the parties visualized operation of the oil rigs including drilling operations by the personnel made available under the contracts/agreements, which fact was further stated on affidavit before the High Court by an authorized official of the ONGC in the following terms.
"That under the said agreement, Foramer was required, through its personnel listed in Exhibit-A to the said agreement, to carry out inter-alia the drilling operations specified in clause 4.3 to 4.10 of the said agreement."Page 7 of 34
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Despite the above, the High Court took the view that under the agreement payment to M/s. Foramer France was required to be made at the rate of 3450 USD per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company. Specifically, taking the view that the contract did not mention that the personnel of the non-resident company was also carrying out the work of drilling of wells and as the company had received fees for rendering service the payments made were liable to be taxed under the provisions of Section 44D of the Act. /Is already noticed, in the rest of the appeals before the High Court the aforesaid decision dated 15.12.2005 passed in l.T.A. No. 239 of 2001 was followed on the basis that the facts in all the appeals were similar to those involved in I.T.A. No. 239 of 2001"
(emphasis provided) The Hon'ble Supreme Court held that -
"13. The Income Tax Act does not define the expressions "mines" or "minerals".
The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the nonresident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions "mining projects" or "like projects"
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occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the work covered under each of the said contracts as culled out by the appellant and placed before the Court is correct. The said details are set out below:
S.No. Civil Appeal No. Work covered under the contract
1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling
2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel.
3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel.
4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit.
5. 729 Capping including subduing of well, fire fighting.
6. 738 Capping including subduing of well, fire fighting.
7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring.
8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests.
9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells.
10. 2794 Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation.
11. 1524 Conducting reservoir stimulation studies in association with personnel of ONGC
12. 1535 Laboratory testing under simulated reservoir conditions
13. 1514 Consultancy for optimal exploitation of hydrocarbon resources.Page 9 of 34
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14. 2797 Consultancy for all aspects of Coal Bed Methane
15. 6174 Analysis of data of wells to prepare a job design
16. 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys.
17. 7226 Opinion on hydrocarbon resources and foreseeable potential
18. 7227 Opinion on hydrocarbon resources and foreseeable potential
19. 7230 Opinion on hydrocarbon resources and foreseeable potential
20. 6061 Opinion on hydrocarbon resources and foreseeable potential
21. 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program.
22. 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs.
23. 733 Repair of gas turbine, gas control system and inspection of gas turbine and generator.
24. 741 Repair and inspection of turbines.
25. 737 Repair, inspection and overhauling of turbines
26. 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines.
27. 1522 Replacement of choke and kill consoles on drilling rigs.
28. 1521 Inspection of gas generators
29. 1515 Inspection of rigs.
30. 2012 Inspection of generator.
31. 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines.
32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig.
33. 2008 Expert advice on the device to clean insides of a pipeli.
34. 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations.
35. 925 Engineering analysis of rig.
36. 1519 Imparting raining on cased hold production log evaluation and analysis.
37. 1533 Training on well control.
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38. 1518 Training on implementation of Six Sigma concepts.
39. 1516 Training on implementation of Six Sigma concepts.
40. 6023 Training on Drilling project management.
41. 2796 Training in safely rating system and assistance in development and audit of Safety Management system.
42. 1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages.
43 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions.
44. 1523 Supply, installation and familiarization of software for processing seismic data.
The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated there under. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal."
(emphasis Supplied) As evident from the above, the entire observation is with respect of "Drilling" i.e. whether "drilling" would amount to a 'mining operation' and the proximity of works contemplated under the contract to "Drilling". The Hon'ble SC has been repeatedly emphasizing a few expressions and terms like -
"Proximity of the works"
"Directly and inextricably linked"
"Direct associated"
"Inextricably connected"
"Dominant Purpose"
"Pith & Substance"Page 11 of 34
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to highlight the tests and degree of association that is needed to bring a transaction under the purview of section 44BB. In the words of Hon'ble SC, "there may be certain 'ancillary works" but what matters is whether the "dominant purpose" is prospecting, extraction or production of mineral oil The above intention of the Hon'ble Apex Court is clearly discernable from the sample of work covered under agreements which are directly and inextricably associated with drilling, rig operation & management of drilling rigs & drilled wells and other such activities related to prospecting, extraction or production of mineral oils. This intention of Hon'ble Supreme Court to distinguish activities which are directly associated and inextricably connected with the prospecting, extraction or production of mineral oils from others has been clearly spelt out again by the very same Bench in their order of the same date in the case of the same appellant i.e. ONGC while deciding a related bunch of appeals relating to the provisions of Companies (Profits) Surtax Act, 1964. (Order dt. 1-7-15 in Civil Appeal Nos.730 of 2007) The issue in question was the true and correct purport and effect of exemption notification bearing No. GSR 307(E) dt. 31.03.1983 under section 24AA of the Surtax Act. Section 24AA of the Surtax Act, much like the provisions of Section 44BB of the Income Tax Act, is a beneficial provision that empowers the govt, to make exemptions etc. in relation to participation in the business of prospecting for extraction etc. of mineral oil.It distinguishes between two types of foreign participation in the business of prospecting or extraction or production of mineral oils i.e. Sec. 24AA (2)
(a) Foreign companies with whom the Central Govt has entered into agreements for the association or participation of that Govt, or any person authorized by that Govt in any business consisting of the prospecting or extraction or production of mineral oils; and
(b) Foreign companies with whom the central Govt has entered into agreement for the association or participation of that Govt. or any person authorized by that Govt. providing any services or facilities or supplying any ship, aircraft, machinery or plant (whether by way of sale on hire) in connection with any business consisting of in any business consisting of the prospecting or extraction or production of mineral oil carried on by that Govt. or any person specified by that Govt................
The Hon'ble Supreme Court did not accede to the contentions of the appellant that-
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"...applicability should be understood with reference to the existence of agreement with foreign companies rather than the immediate purpose of such agreement...... (beneficiaries should also) include foreign companies with whom the ONGC has no direct agreement though such foreign companies may nevertheless be providing similar services, may be, on the strength of separate agreements with the foreign companies with whom the ONGC has executed an agreement...."
(emphasis and clarifications added) The Hon'ble SC held that "...the power to grant exemption is twofold and covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business.'' Thus, the above terms i.e. "Proximity of the works", "Directly and inextricably linked", "Directly associated", "Inextricably connected", "Dominant Purpose", "Pith & Substance"
as used by Hon'ble Supreme Court must be understood and given effect to in the context in which they have been used. This approach has also been followed by Hon'ble ITAT in the case of ONGC as representative assessee of University of Calgary vs. ADIT (2017) (ITANo.4877/Del/2013 & 1327/Del/2016) (copy enclosed) In view of the above, since the activities of the assesse are not directly associated or intrinsically linked with the prospecting, extraction or production of mineral oils it is not eligible for taxation u/s 44BB of the Act.
Even assuming (without admitting) that the above decision of Hon'ble Supreme Court under the provisions of Companies (Profits) Surtax Act, 1964 should not be imported/used to interpret the provisions of Income Tax Act, it may be seen that the Hon'ble Supreme Court in their order in the case of ONGC under Income Tax Act (2015-TII-C3-SC-INTL) have clearly identified activities which are directly related to drilling and exploration. Thus, activities listed/described in the table in Para-13 of the order can be described under the following heads-
Sr. No. In Table Activity
1 Drilling & Seismic Surveys for Exploratory Drilling
2-4 Provision of Manpower of to Drilling Rig
5,6 Capping and Firefighting of Oil Wells
7,8,15 Study, Analysis and Designing
9-12 & 16 Stimulation studies & Seismic Surveys
13-21 & 33-35 Consultancy, Advice, Opinion, Analysis & Studies on
resources potential
22 Repair of wells
23-26 Repair of Turbines & Generators
27 Replacement of consoles on drilling rigs
28-32 Inspection of Oil Rigs & Gas generators
36-41 Training
42-44 Software
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The activities of the assessee are not covered under any of the above activities. "The assessee provided vessels on hire on time charter basis" to non-resident companies [DRP, Para-2] The business of such hirers or whether and to what extent such hirers deployed the hired vessels in their business has no effect on the taxability of the income received by the assessee. In the annexure to its objections before DRP, the assessee described its business as under -
" The assessee....operates vessels which are provided on time charter basis.....As part of charter hire, the assessee provides operational and vessels management services which include maritime management services, health, security and environment and accounting services.
It is also engaged in conducting geophysical surveys offshore whith special emphasis on 3D collection of seismic data, processing and sale of such data and other activities of similar nature". [p.3 Appeal Set] In other words, the assessee is engaged in two types of activities i.e. Income from the operation of vessels on charter hire basis and Income from processing and sale of seismic data & Geophysical Surveys.
As has been claimed before lower authorities, the "The assessee provided vessels on hire on time charter basis" to non-resident companies. [DRP. Para-2] ] The business of such hirers or whether and to what extent such hirers deployed the hired vessels in their business has no effect on the taxability of the income received by the assessee. The Hon'ble Supreme Court has held the 'Proximity' and Intrinsic connection' of the activities carried on by the assessee as the determining factor. It is not the claim of the assessee that it is providing services in the nature of Seismic Studies as described in S. Nos. 1,9-12 & 16 of the order of the Hon'ble Supreme Court. The AO and DRP confirmed that the income received by the assessee is from the hiring of the vessels only. Yet. the Hon'ble DRP erred in holding that the income is taxable u/s 44BB of the Act In view of the above, the order of the AO may be confirmed."
(2.2) The Ld. Counsel for Assessee filed synopsis, the relevant portion of which is reproduced as under:
• "The Assessee, a company incorporated under the laws of Norway, is engaged in providing equipments, services and facilities in connection with prospecting for or extraction or production of mineral oils.
• During the relevant previous year, the Assessee entered into a contract with Page 14 of 34 ITA No.- 1401/Del/2015.
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PGS Exploration (Norway) AS ("PGSEN") and Petroleum Geo-Services Pacific Pte Ltd ("PGSAP") for providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing in pursuance of their respective contracts with Oil and Natural Gas Corporation ("ONGC") and Reliance Industries Limited ("RIL"). Copy of the contracts is attached at pages 159-174 of the paperbook.
• In the return of income, the Assessee had offered its revenues (amounting to INR 786,887,676) earned by it to tax as per the provisions of section 44BB of the Income-tax Act, 1961 ("the Act") and declared taxable income of INR 78,688,767. Copy of the return of income along with computation of income is attached at pages 55-81 of the paperbook.
• The assessment proceedings were initiated by the Assessing Officer ("AO") under section 143(2) of the Act. The matter was also referred to the Transfer Pricing Officer ("TPO") and the TPO vide order dated December 3, 2013, completed the transfer pricing assessment by accepting the arm's length price determined by the Assessee and did not make any adverse inference in the case of the Assessee. Copy of the order passed by TPO is attached at pages 35-36 of the paperbook.
• In the draft assessment order (dated March 25, 2014), the AO proposed to deny the applicability of section 44BB to the income received by the Assessee by holding that the plant and machinery supplied to PGSEN and PGSAP were in turn supplied to third party contractors like ONGC and RIL. Therefore, the first leg contractors, ie PGSEN and PGSAP may be justified in availing the benefit of section 44BB of the Act, but not the Assessee. Consequently, the AO held that such income would qualify as 'royalty' and proposed to tax the aforesaid income as per the provisions of section 28 of the Act read with rule 10 of the Income tax Rules ("Rules"), 1962. The AO arbitrarily proposed to attribute 15 per cent of the gross revenues as profits of the Assessee by applying rule 10 of the Rules and the total income was proposed to be assessed at INR 118,033,105 (effective rate of tax being 6.335 percent). Copy of the draft assessment order is attached at pages 37-54 of the paperbook.
• Aggrieved with the draft assessment order, Assessee filed objections before the Dispute Resolution Panel - II, New Delhi ("DRP"). The DRP issued directions and held that the amount received by Assessee during the year under consideration on account of hire charges of vessels should be brought to tax by applying the deemed profit ratio of 10 per cent under section 44BB of the Act (copy of DRP directions enclosed at pages 218-231 of the paperbook).
Our submissions Royalty has been defined under Explanation to section 9(l)(vi) of the Act to inter-alia include consideration for the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to Page 15 of 34 ITA No.- 1401/Del/2015.
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in section 44BB of the Act.
It is, thus, clear that the definition of royalty specifically excludes the consideration paid for the use of industrial, commercial or scientific equipment where such consideration is taxable as per the provisions of section 44BB of the Act.
In the instant case, for the reasons elaborated hereinafter, the Assessee is governed by the provisions of section 44BB of the Act and accordingly, the provisions of section 9(l)(vi) of the Act for taxation of royalty would not be applicable.
Section 44BB of the Act provides for the deemed profit regime in case of income earned by non-residents engaged in the business of:
• providing services or facilities in connection with prospecting for, or extraction, or production of mineral oils (first limb); or • supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction, or production of mineral oil (second limb).
Applicability of second limb of section 44BB of the Act in the instant case • The Explanation to section 44BB of the Act provides that the term 'plant' would include ships, aircraft, vehicles, drilling units, scientific apparatus and equipment used for the purposes of the said business. As per the above provisions, it is clear that the supply of plant and machinery on hire to be used in the prospecting for, extraction and production of mineral oil would be liable to tax under the provisions of section 44BB of the Act. Also, the term 'plant and machinery' would include ships.
In the case of the assessee, the vessels were provided on hire for the purpose of prospecting for, extraction and production of mineral oil.
• It is beyond doubt that the vessels used for prospecting for, extraction and production of mineral oil would be considered as ships. Reliance in this regard is placed on the following decisions:
- Sedco Forex International Drilling Inc vs ACIT (1996) (58 ITD 177) (Del)
- ACIT vs Interocean Shipping India Private Limited (1994) (51 ITD 582) (Del)
- Wavefield Inseis ASA vs DIT (2009) (320 ITR 290) (AAR)
- Seabird Exploration FZ LLC UAE (2010) (326 ITR 558) (AAR) • Without prejudice to the above, the Delhi Bench of ITAT in the case of ACIT vs Interocean Shipping India Private Limited (1994) (51 ITD 582) (Del) has also held that the ships should be considered as machinery thereby, eligible to be categorized / covered under section 44BB of the Act • In the instant case, the ship / vessel provided by the Assessee is used for the purpose of prospecting for mineral oil pursuant to the Production Page 16 of 34 ITA No.- 1401/Del/2015.
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Sharing Contract ("PSC") entered into by ONGC, RIL etc with the Government of India. It is also to be noted that for any oil and gas exploration activity, seismic survey is the first important step and in order to undertake seismic operations, the companies engaged in such activities would need support of seismic vessel which has specialized equipments for use in seismic data acquisition and process. Therefore, there is no dispute that the seismic activities are inseparable part of prospecting of mineral oil and the seismic survey vessel plays a crucial role in such operations. The seismic vessel provided by the Assessee is unique in nature and can be utilized only for the purpose of undertaking seismic activities, being integral to prospecting of mineral oil and accordingly, hire charges received would be chargeable to tax as per the provisions of section 44BB of the Act.
Applicability of first limb of section 44BB of the Act in the instant case • Without prejudice to the above, in the instant case, the provision of vessels on hire by the Assessee to for conducting of seismic activities, shall be regarded as provision of a 'facility' 'in connection with' prospecting for or extraction or production of mineral oil, thereby liable to tax as per the provisions of section 44BB of the Act.
• In absence of a definition under the Act, the same would need to be understood by placing reliance on its ordinary and normal meaning as per various dictionaries.
Advanced Law Lexicon (Book 2; page no 1749) "the quality of being easily performed; absence of difficulty; dexterity; ease in performance; that which promotes the ease of any action"
Concise Oxford English Dictionary (Indian Edition; Page 509) "a building, service, or piece of equipment provided for a particular purpose; absence or difficulty or effort"
• Since the term 'facility' has wide connotation and includes any activity that eases the performance of an action by another, the provision of a vessel by the Assessee (for the purposes of 'prospecting' through acquisition and processing of seismic data) would be construed as a facility in connection with the prospecting etc of mineral oils.
• Thus, the provision of seismic vessels on hire by the Assessee clearly constitutes a 'facility' provided 'in connection with' prospecting for, or extraction or production of, mineral oil', and hence, would satisfy the conditions stipulated under the first limb of section 44BB of the Act. • The expression 'in connection with' has not been defined in the Act and thus, reliance is placed on the decision of the Apex Court in the case of Doypack Systems (P) Ltd vs UOI and Ors, National Textile Corpn and Anr, Swadeshi Mining and Mfg Co Ltd (1988) (36 ELT 201) (SC). The interpretation of the term 'in connection with' as emerging from above Page 17 of 34 ITA No.- 1401/Del/2015.
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decision suggests that the expression includes matter occurring prior to as well as subsequent to so long as these are related to the principal thing. Judicial precedents, in the context of section 44BB of the Act have given a wide interpretation of the expression so as to include within its ambit services or facilities which are closely connected to the activities of prospecting for, or extraction or production of mineral oil such as helicopter services for transporting men to the area where exploration activities are undertaken and seismic data processing activities [Lloyd Helicopters International Pty Ltd (2001) (249 ITR 162) (AAR)].
• Attention is also invited to the decision of the Delhi Bench of the ITAT in the case of ACIT vs Paradigm Geophysical Private Limited (2008) (117 TTJ 812) (Del), wherein, the assessee had entered into a contract with RIL for undertaking seismic data processing activities. On the issue of determining whether the activities would be covered by the provisions of section 44BB of the Act, the ITAT held that any consideration of whatever nature received in connection with prospecting for, or extraction or production of mineral oil would be taxed on a presumptive basis as per section 44BB of the Act. The scope of section 44BB of the Act is very wide and would cover all kinds of services including services in the nature of managerial, technical or consultancy. This decision of the ITAT has been affirmed by the Uttarakhand High Court.
• Therefore, from a plain reading of the above, it can be reasonably concluded that the Assessee is rendering services 'in connection with' (through provision of vessel on hire) prospecting etc of mineral oils. • Further, it is respectfully submitted that the decision of Uttarakhand High Court in case of CIT vs ONGC as an agent of M/s Foramer France (2005) (299 ITR 438) (Uttarakhand HC) relied on by the Revenue Authorities in ground of appeal no 2 has been overruled by the Hon'ble Supreme Court of India in case of ONGC vs CIT [2015] 376 ITR 306 (SC) (copy of the decision is enclosed on pages 1-23 of the paperbook). The Supreme Court held that where the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oils, the income from such contracts would be taxable under the provisions of section 44BB of the Act. • In its decision, the Supreme Court did not distinguish between first and second leg contractors while allowing the benefit of section 44BB of the Act. Additionally, the Supreme Court allowed the benefit of section 44BB to 44 different contracts including contracts for training, inspection, repair and supply of software for processing seismic data. From a perusal of the Supreme Court decision, it is abundantly clear that the Supreme Court has interpreted the scope of section 44BB in a very wide manner and not limited it only to first leg contractors as alleged by the AO. • Following the Supreme Court decision, the Delhi High Court in case of Assessee's own case PGS Exploration (Norway) AS vs ADIT [2016] 383 ITR 178 (Delhi) (copy of the decision is enclosed on pages 24-37 of the paperbook) and Uttarakhand High Court in case of CIT vs M/s Expro Gulf Limited & Others (ITA No 34 of 2015) (Uttarakhand High Court) (copy of the decision is enclosed on pages 49-52 of the Page 18 of 34 ITA No.- 1401/Del/2015.
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paperbook) have allowed the benefits of section 44BB of the Act to non- resident taxpayers. Further, this Bench has also followed the Supreme Court decision in the following cases:
- DDIT vs RPS Energy Pty Ltd (2018) (92 taxmann.com 77) (Delhi-Trib)
- BJ Services Company Middle East Ltd vs ADIT (2017) (77 taxmann.com 218) (Delhi-Trib)
- ACIT vs Landmarks Graphics Corp (2017) (87 taxmann.com 311) (Delhi Trib)
- Viking Maritime Inc vs DCIT (2016) (69 taxmann.com 303) (Delhi -
Trib)
- Western Geco International Ltd vs ACIT (2016) (71 taxmann.com 166) (Delhi -Trib) • The following recent case laws have followed the Supreme Court decision:
- Seabird Exploration FZ LLC (2018) (92 taxmann.com 328) (AAR)
- National Oil Well Maintenance Company vs DCIT (2018) (89 taxmann.com24) (Jaipur - Trib)
- Production Testing Services Inc vs DCIT (2018) (89 taxmann.com 416) (Mumbai -Trib) First leg versus second leg contract • In the draft assessment order, the AO held that the provisions of section 44BB of the Act is applicable only to first leg contractors and it does not cover the second leg contractors. In this regard, it is submitted that the provisions of this section does not make any difference between first leg and second leg contractors as long as the non-resident is engaged in providing services or facilities in connection with prospecting, extraction or production of mineral oils or providing plant and machinery used or to be used in prospecting etc of mineral oils.
• Attention is invited to the decision of Delhi Bench of ITAT in the case of Louis Dreyfus Armateures SAS vs ADIT (2015) (153 ITD 579) (Delhi-Trib) (copy of the decision is enclosed on pages 53-80 of the paperbook), wherein it was held that section 44BB does not distinguish between the main contractor or a sub-contractor. The provision clearly envisages the nonresident Assessee to be engaged in the business of supplying plant and machinery on hire. The only condition imposed is that, such plant and machinery has to be used or should be used, for the purposes of prospecting for, or extraction or production of mineral oils. The basic condition to be satisfied in the said provisions is that the plant and machinery supplied or let on hire by the Assessee, non-resident should be used in prospecting for or extraction or production of mineral oils, or where the equipment has been supplied, such equipment should have been used for the purposes of prospecting for or extraction or production of mineral Page 19 of 34 ITA No.- 1401/Del/2015.
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oils.
• In this regard, reliance is also placed on the following judicial precedents:
- Micoperi SPA Milano vs DCIT (2002) (82 ITD 369) (Mum);
- McDermott International Inc vs DCIT (1994) (49 ITD 590) (Del)
- Bourbon Offshore Asia Pte Ltd (2011) (337 ITR 122) (AAR);
- Spectrum Geo Ltd (2012) (346 ITR 422) (AAR);
- Wavefield Inseis ASA (2010) (230 CTR 106) (AAR);
- Lloyd Helicopters Pty Ltd (2001) (249 ITR 162) (AAR)
- Pride Offshore International LLC vs ADIT (2015) (59 taxmann.com 23)
(Delhi - Trib)
- Valentine Maritime Gulf LLC vs ADIT (2017) (163 ITD 32) (Mumbai-
Trib)
- Technip UK Limited vs DIT (2017) (81 taxman 311) (Delhi-Trib)
- Saipem Portugal Commercio Maritimo vs DCIT (ITA no 2071/2016)
(Dellhi-Trib)
• Further, the AO held that the vessels provided on hire by the Assessee to PGSEN and PGSAP were in turn let out to ONGC and RIL which is not a true fact. The vessels were used by PGSEN and PGSAP for conducting seismic data acquisition and processing in pursuance of the contract entered into with ONGC / RIL.
• As mentioned above, the vessels, in the instant case, are being used by PGSEN and PGSAP for rendering seismic data acquisition and processing services which is the first step of prospecting of mineral oil. Thus, even for sake of argument, if the contention of the AO be accepted that the provisions of section 44BB of the Act is applicable only to first leg contractors, the provisions of the aforesaid section would be applicable to the Assessee as it is providing facilities / plant and machinery for prospecting of mineral oil only.
• The words "....used or to be used for the business of prospecting for, or extraction or production of, mineral oils..." clearly signifies that the plant or machinery supplied on hire for the aforesaid activities would fall within the ambit of section 44BB.
Section 44DA of the Act not applicable • Section 44DA read with section 9(l)(vi) of the Act provides that 'income from royalty receipts' would be taxable as 'business profits' in India if such receipts are received from Government or an Indian concern in pursuance of an agreement made by a non-resident with Government or the Indian concern after March 31, 2003, having a Permanent Establishment in India. However, the provisions of section 44DA have been included in the proviso to section 44BB with effect from April 1, 2011 i.e. applicable only from AY 2011-12 onwards. In this regard, reliance is placed upon the following:Page 20 of 34
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- Memorandum to the Finance Bill 2010, which provides that the application of section 44DA of the Act in the proviso to section 44BB is prospective in nature.
- PGS Exploration (Norway) AS vs ADIT (Supra)
- B J Services Co Middle East (Special Appeal no 316 and
317 of 2012) copy of the decision is enclosed on pages 81-82 of the paper book)
- Uttarakhand High Court in the case of DIT vs M/s Western Geco International Limited (ITA No 39 of 2012) (copy of the decision is enclosed on pages 83-84 of the paperbook)
- CGG Veritas Services SA vs Addl DIT (2012) (50 SOT 335) (Delhi-Trib) (copy of the decision is enclosed on pages 48 of the paperbook)
- Schlumberger Asia Services Ltd vs ADIT (International Tax) (ITA No 6063 (Delhi) of 2010) (copy of the decision is enclosed on pages 85-103 of the paperbook) • Further, section 44DA and section 115A of the Act are not applicable to transactions between two non-residents. Therefore, the Assessee cannot be taxed under the provisions of section 44DA and 115A of the Act and the same has also been accepted by the AO in the draft assessment order.
Reliance in this regard is placed on the ruling of the AAR in the case of Spectrum Geo Limited vs DIT (2012) (346 ITR 422) (AAR) (copy of the ruling is enclosed on pages 193-198 of the paperbook).
Rebuttal of the decisions quoted in the grounds of appeal • Reliance has been placed on the decision of CIT vs ONGC as a representative assessee of M/s Rolls Royce Pvt Ltd (2007) (TII-03) (Uttarakhand HC) wherein it has been held the advice given was purely technical in nature and held that the service rendered was a technical service. On a perusal of the decision in the case of ONGC (supra), it will be noted that the facts of that case and, particularly, the nature of activities involved are entirely different from the activities undertaken by the assessee in the present case. The services rendered in that case and those rendered by the assessee herein are tabulated and contrasted as under
Particulars ONGC (as Assessee representative assessee of Rolls Royce, Singapore) Page 21 of 34 ITA No.- 1401/Del/2015.
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Nature of activities "Inspection of the Providing vessels on
existing control system hire to be used by
and utilizing services of another company for
engineers for Y2K roll the purpose of
over time at offshore undertaking seismic
installation" data, acquisition and
on board processing
in pursuance of
contract for
exploration,
prosecuting and
production of mineral
oil entered into by
ONGC
Counter Party to the ONGC (Indian resident) PGS GAS (non-
Contract resident)
Adhoc attribution of the profits
• The AO has applied deemed profit of 15 percent on the gross receipts received by the Assessee from supplying plant and machinery to PGSEN and PGSAP. The application of deemed profit rate of 15 percent is based on conjectures and surmises. The Assessee, as per the provisions of section 44BB, is not required to maintain books of accounts and other documents. Therefore, the action of the AO in deeming a profit rate of 15 percent on the gross receipts from PGSEN and PGSAP, in the absence of books of accounts, is incorrect and deserves to be deleted. In this regard kind attention is drawn on Rule 10 of the Income-tax rules, 1962:
"Determination of income in the case of non-residents.
10. In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated
(i) at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable, or
(ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or
(iii) in such other manner as the Assessing Officer may deem suitable."
• From a perusal of the above, it is evident that for invoking rule 10 of the Rules, a precondition is that income of the non-resident which is accruing or Page 22 of 34 ITA No.- 1401/Del/2015.
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arising in India should be unascertainable. In the instant case, it is submitted that the receipts earned from operations in India have been properly documented and offered to tax by the Assessee. Copy of the invoices raised by the Assessee during the subject year were duly submitted to the AO vide submissions dated April 27, 2012. Further, all the other information / documents called for by the AO were duly submitted by the Assessee.
• Therefore, it cannot be in any way said that the income accruing or arising to assessee in India cannot be ascertained. Hence, precondition for invoking rule 10 of the Rules is not satisfied in the instant case and therefore, no further profit attribution can be made than what has already been offered to tax by the Assessee under section 44BB of the Act.
• Without prejudice to the above, it is submitted that the Assessee has earned its entire income during the subject year from its Associated Enterprises and the same has been subjected to transfer pricing provisions. In this regard, it is submitted that the Assessee has been duly remunerated at arm's length price which has been approved by the transfer pricing officer (please refer pages 35-36 of the paperbook). Accordingly, no further profits can be attributed to Assessee's Permanent Establishment ("PE") in India as per the decision of the Supreme Court in the case of DIT vs Morgan Stanley Inc and Co (2007) (292 ITR 416) (SC) (copy of the decision is enclosed on pages 199-214 of the paperbook)."
(3) At the time of hearing before us, the Ld. CIT(DR) relied on his written submissions as well as on the aforesaid Draft Assessment Order dated 25.03.2014. In his oral submissions, the Ld. CIT(DR) contended that the assessee has two types of activities:
firstly, it has income from the operation of vessels on charter hire basis and secondly, it has income from processing and sale of seismic data & Geophysical Surveys. The Ld. CIT(DR) contended that the income from the former activities i.e. from operation of vessels on charter hire basis does not fall within the scope of Section 44BB of I.T. Act, because it has no 'proximity' or 'intrinsic' connection' with activity of prospecting for, or extraction or production of mineral oils, within the meaning of Section 44BB of I.T. Act.
The Ld. CIT(DR) contended that the business of PGS Norway and PGS Singapore, to Page 23 of 34 ITA No.- 1401/Del/2015.
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whom vessels were hired by the assessee has no effect on the taxability of the income received by the assessee. He contended that, it is only the income of the assessee from the latter activities, namely from processing and sale of seismic data & Geophysical Services which can be considered for Section 44BB of I.T. Act, provided it was in connection with prospecting for, or extraction or production of mineral oils, if other condition U/s 44BB of I.T. Act are met. He contended that there was nothing on record to show that the income of the assessee consisted of income from processing and sale of seismic data & Geophysical Services. He drew our attention to the facts that both DRP and AO confirmed that income of the assessee was from hiring of vessels only. He also contended that there was nothing on record to show that shipping vessels given to PGS Norway and PGS Singapore on hire basis by the assessee, had necessary equipments, or technical capacity for processing of seismic data or for Geophysical Services. It is quite possible that PGS Norway and PGS Singapore might have installed such equipments and / or acquired technical capacity for the vessels, either by themselves, or through some other parties, to fulfill their contract with ONGC and RIL; the Ld. CIT(DR) contended. On the other side, the Ld. Counsel for Assessee drew our attention to the decision of the Delhi ITAT in the case of Louis Dreyfus Armateures SAS vs ADIT (2015) (153 ITD
579) (Delhi-Trib) and also the decision of Delhi ITAT in the case of ADIT vs Baker Hughes Singapore Pte Ltd (2015) (41 ITR(T) 212) (Delhi-Trib). The Ld. Counsel for assessee also referred to the decision of the Delhi High Court in assessee's own case reported at PGS Exploration (Norway) AS vs. ADIT [2016] 383 ITR 178 (Delhi) but admitted forthwith that facts were distinguishable because the order of Hon'ble Delhi Page 24 of 34 ITA No.- 1401/Del/2015.
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High Court was in relation to services of different nature. The Ld. Counsel also took us through the Paper Books to support the case of the Assessee. The Ld. Counsel for assessee placed reliance on the Paper Books filed by the assessee and the synopsis filed by the Ld. Counsel. In rebuttal, the Ld. CIT(DR) contended that the reliance placed by the Ld. Counsel of the Assessee, on Louis Dreyfus Armateures SAS (supra) and Baker Hughes Singapore Pte Ltd (supra) is wrong because the facts are distinguishable. In the case of Louis Dreyfus Armateures SAS (supra) it was not in dispute that the shipping vessels provided on hire by the assessee were seismic survey vessels whereas in the case before us this fact is disputed, the Ld. CIT(DR) submitted. He further submitted that in the case of Baker Hughes Singapore Pte Ltd (supra) also it was not in dispute that the equipments given on hire were for rendering services to entities engaged in Oil Exploration Work whereas in the case before us, this fact is in dispute. The Ld. CIT(DR) also submitted that the order of Hon'ble Delhi High Court does not advance the case of the assessee, because admittedly, the order of Hon'ble Delhi High Court was admittedly in relation to services of different nature. He further drew attention to the invoices of the assessee, copies whereof were filed by assessee in the Paper Book, to make the point that on its perusal it cannot be said with certainty that the vessel given on hire by the assessee to PGS Norway and PGS Singapore had the necessary equipments, or technical capacity for processing of seismic data or for Geophysical Services.
(4) We have heard both sides patiently. We have perused materials on record carefully. We have considered the judicial precedents brought to our attention, at the time of hearing before us, or referred to in the written submissions / synopsis filed by Page 25 of 34 ITA No.- 1401/Del/2015.
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the two sides or mentioned in the orders of the lower authorities namely the AO and DRP. Although several grounds of appeal have been taken by the Revenue in the present appeal before us, in essence all the grounds of appeal pertain to the issue whether Section 44BB of I.T. Act has application in the case of the Assessee. For ease of reference, the Provisions of Section 44BB of I.T. Act are reproduced as under:
"(1) Notwithstanding anything to the contrary contained in Section 28 to 41 and Section 43 and 43A, in the case of an assessee [, being a non-resident,] engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" :
Provided that this sub-section shall not apply in a case where the provisions of Section 42 or section 44D or [section 44DA or] section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.
(2) The amounts referred to in sub-section (1) shall be the following, namely :--
(a) the amount paid or payable (whether in or out of India) to be assessee or to any person on his behalf on account of the provision of services and facilities' in connection with, or supply of plant and machinery on hire used, or to be used, in prospecting for, or extraction or production, of mineral oils in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.
[(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub- section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.] Explanation.--For the purposes of this section,--
Page 26 of 34ITA No.- 1401/Del/2015.
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(i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;
(ii) "mineral oil" includes petroleum and natural gas."
(4.1) On careful perusal of Section 44BB of I.T. Act it is found that the Section is applicable only for such amounts, which are either on account of provision of services and facilities in connection with prospecting for or extraction or production of mineral oils; or which are on account of supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. It is not the case of the Assessee that the assessee itself has provided services and facilities in connection with prospecting for or extraction or production of mineral oils. To this extent, there is no dispute between the two sides. There is also no dispute between the two sides that the assessee has two types of business activities; firstly, it has income from the operation of vessels on charter hire basis and secondly, it has income from processing and sale of seismic data & Geophysical Surveys. The assessee has claimed applicability of Section 44BB of I.T. Act, in respect of income from vessels hired by the assessee to PGS Norway and PGS Singapore on charter hire basis; and not on income from processing and sale of seismic data & Geophysical Surveys on its own. The claim of the assessee U/s 44BB of I.T. Act is based on the contention that it has supplied plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The assessee has claimed that receipts from providing vessels on hire to PGS Norway and PGS Singapore is to be treated as receipts from supply of plant and machinery on hire Page 27 of 34 ITA No.- 1401/Del/2015.
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used, or to be used, in the prospecting for, or extraction or production of, mineral oils;
and income therefrom is to be assessed U/s 44BB of I.T. Act. This claim of the assessee is disputed by Revenue. It is in dispute between the two sides whether income from operation of vessels hired to PGS Norway and PGS Singapore on charter hire basis can be said to be on account of supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils.
(4.2) We are of the view that in the case before us, it is only when the vessels given on hire by the Assessee are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; that assessee can legitimately claim applicability of Section 44BB of I.T. Act. The aforesaid equipments and technical capacity can be in the area of seismic data & Geophysical Services or in any other area useful in the prospecting for, or extraction or production of, mineral oils.
However, it is necessary for the claim of the assessee for applicability of Section 44BB of I.T. Act to succeed, that the vessels given on hire by the Assessee are shown to be fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils. In addition, it is also necessary for assessee's claim U/s 44BB of I.T. Act to succeed, that the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the Page 28 of 34 ITA No.- 1401/Del/2015.
M/s PGS Geophysical AS.
assessee. On perusal of the aforesaid order dated 02.12.2014 of DRP, we find that there is no mention in the order of the DRP that these requirements are fulfilled in the case of the assessee. The order of DRP is silent on the crucial facts as to whether the vessels hired by the Assessee to these companies i.e PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and whether the vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. When a statutory order lacks in adequate discussion of the crucial facts necessary for deciding question of fact; it suffers from the defect of factlessness and is liable to be set aside. A statutory order should be endowed with factfulness in the sense that it should contain a discussion on the relevant facts on which the decision on the question of fact is based. In view of the foregoing, we find that the order of DRP lacks factfulness and suffers from factlessness.
(5) While the order of the DRP is found to be suffering from the defect of factlessness and lacking in factfulness, as mentioned earlier; yet we have attempted to find from the records available to us whether the aforesaid crucial facts in support of assessee's claim for applicability of Section 44BB of I.T. Act can be discovered from sources other than the order of the DRP. However, we find that these facts do not emerge either from the orders of the lower authority (namely the AO) or Page 29 of 34 ITA No.- 1401/Del/2015.
M/s PGS Geophysical AS.
from the Paper Books filed by the Assessee. In this connection, we have carefully perused the assessee's contracts for hiring of shipping vessels, copy thereof was filed vide pages 159-174 of Paper Book dated 15th May, 2018. Firstly, the period of hire stated in the documents is 1st January, 2008 to 10th June, 2008 which is not in correspondence with the Financial Year (i.e. 2009-10) relevant for Assessment Year 2010-11 to which this appeal pertains. Even then, there is nothing in the document to conclusively establish that the shipping vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and that the shipping vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. In fact, vessels specification (pages 161-162 of the Paper Book dated 15th May, 2018) is blank in the sense that information regarding vessels specification is not filled up at all.
Perusal of Page 164 of Paper Book dated 15th May, 2018 shows that the shipping vessels were to be delivered by the owners "free of cargo" and "with clean tanks"
suggesting that the shipping vessels might have been oil tankers and /or cargo vessels instead of being vessels fitted with necessary equipments, and having the technical capacity for use in the prospecting for, or extraction or production of, mineral oils. We have also perused what has been termed by the assessee to be the Copies of the invoices (vide pages 198-217 of Paper Book dated 15th May, 2018) filed by the Page 30 of 34 ITA No.- 1401/Del/2015.
M/s PGS Geophysical AS.
assessee. From the discernible description on some of these invoices, it is found that expenses are account of over-time of cabin crew, baggage clearance for crew, food allowance, mobile recharge, lashing charges, Sony LCD TV, Coke cans, Milk, Sugar, Eggs, Amul cream, Prawns, French Fries, White Vinegar, Fruit Juice, Toast Bread Sliced, Tomatoes, Cucumber, Cauliflower, Onions, Radish, Spring Onion, Green Bell Paper, Papaya, Mineral Water, Pineapple, Paper Cups, Mushroom in tin, Curry Leaves, Pepper Green, Pepper Read, Lettuce Inceberg, Celery, Chinese Cabbage, Adocada, Coconut Fresh, Grapes Red Imported, Kiwi Fruit Imported, Lemon Big, Honey dew Melon ,Chocolate Biscuit Britannia, Cashew Nuts, Peanuts Fresh Roasted Local, Potato Chips Assorted Pringles, Milk Chocolate with nut, etc. We find nothing in the description and information contained in these invoices to conclusively establish that the shipping vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and that the shipping vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee. Moreover, we have also perused copies of invoices raised by the assessee (vide pages 182 to 197 of the Paper Book dated 15th May 2018). The description on these invoices is 'Charter hire' 'ship prof', and 'std. vessel cost'. From the description of the amounts charged by the assessee as per these invoices, we find nothing to firmly establish that the amounts charged by the Page 31 of 34 ITA No.- 1401/Del/2015.
M/s PGS Geophysical AS.
assessee pertained to providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils; or that the vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; or that the shipping vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PSG Norway and PSG Singapore from the assessee. In the absence of any categorical findings by DRP on these crucial issues of facts; and in the absence of anything on record to conclusively establish relevant facts as aforesaid; it is not possible for us to uphold the order of DRP.
(6) Although both sides have relied on judicial precedents to support their respective positions on assessee's claim for applicability of Section 44BB of I.T. Act; we find that the crucial facts whether the shipping vessels hired by the Assessee to PGS Norway and PGS Singapore are fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils; and whether the shipping vessels used by PGS Norway and PGS Singapore for their contract with ONGC and RIL were the same vessels (fitted with necessary equipments, and has the technical capacity for use in the prospecting for, or extraction or production of, mineral oils) that were taken on hire by PGS Norway and PGS Singapore from the assessee; are not available on our record. Further, in the absence of crucial facts, the order of DRP is Page 32 of 34 ITA No.- 1401/Del/2015.
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defective as it suffers from factlessness, as held by us earlier, and is liable to be set aside. We have already held in foregoing paragraph (4.2) of this order that when a statutory order lacks in adequate discussion of the crucial facts necessary for deciding the question of fact; it suffers from the defect of factlessness; and that a statutory order should be endowed with factfulness in the sense that it should contain a discussion on the relevant facts on which the decision on question of facts is based. We are of the view that the issue requires fresh consideration by DRP so that there is proper marshalling of facts. Therefore, we set aside the order of DRP and restore the disputed issue to the file of the DRP for fresh order. The DRP is directed to pass a denovo order, which should be a speaking order, containing proper discussion of relevant facts; in accordance with law and in accordance with principles of natural justice. The AO is directed to pass fresh Assessment Order in accordance with fresh directions of DRP contained in denovo order of DRP pursuant to this order.
(7) In the result, appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced in the open court on 15th day of January, 2019.
Sd/- Sd/-
(K.N. CHARY) (ANADEE NATH MISSHRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 15.01.2019
Pooja/-
Copy forwarded to:
Page 33 of 34
ITA No.- 1401/Del/2015.
M/s PGS Geophysical AS.
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date of dictation Draft
dictated on
computer on
14/1/19
Date on which the typed draft is placed before the 15.01.19 dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order Page 34 of 34