Section 44BB is a special provision for computing profits and gains of a non-resident in connection with business of providing services or facilities in connection with, or supplying plant and machinery on hire, used or to be used, in the prospecting for or extraction or production of mineral oils, including petroleum and natural gas.
Text of Section 44BB
[1][44BB. Special
provision for computing profits and gains in connection with the business of
exploration, etc., of mineral oils.
(1) Notwithstanding anything to the contrary
contained in sections 28 to 41 and sections 43 and 43A, [2][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 [3][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 the assessee or to any person on his behalf on account of the
provision of services and facilities in connection with, or supply of plant and
machinery on hire used, or to be used, in the prospecting for, or extraction or
production of, mineral oils in India; and
(b) the amount received or deemed to be received in
India by or on behalf of the assessee on account of the provision of services
and facilities in connection with, or supply of plant and machinery on hire
used, or to be used, in the prospecting for, or extraction or production of,
mineral oils outside India.
[5][(4) Notwithstanding anything contained in sub-section (2) of section 32 and sub-section (1) of section 72, where an assessee declares profits and gains of business for any previous year in accordance with the provisions of sub-section (1), no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year.
Explanation. - For the purposes of this section, -
(i) “plant”
includes ships, aircraft, vehicles, drilling units, scientific apparatus and
equipment, used for the purposes of the said business;
(ii) “mineral oil” includes petroleum and natural
gas.]
KEY NOTE
1. Inserted by the
Finance Act, 1987, with retrospective effect from 01.04.1983
2. Substituted for the words “in the case of an
assessee” by the Finance Act, 1988, with retrospective effect from 01.04.1983
3. Inserted by the Finance Act, 2010, with
effect from 01.04.2011.
4. Inserted by the
Finance Act, 2003, with effect from 01.04.2004.
5. Inserted by the
Finance Act, 2023, with effect from 01.04.2024.
Purpose of Section 44BB
Section
44BB begins with a non obstante clause that excludes the application of
sections 28 to 41 and sections 43 and 43A to assessments under section 44BB. It
introduces the concept of presumptive income and states that 10 per cent credit
of the amounts paid or payable or deemed to be received by 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 in India' shall be deemed to
be the profits and gains chargeable to tax. The purpose of this provision is to
tax what can be legitimately considered as income of the assessee earned from
its business and profession.
Section 44BB applicable to Non Resident
Provisions
of Section 44BB applicable to Non Resident who engaged in the
following activities:
(i)
Prospecting
for or extraction or production of mineral oils.
(ii)
Services
for in relation to prospecting for or extraction or production of minerals
oils.
(iii)
Providing
facilities in connection with prospecting for or extraction or production of
minerals oils.
(iv)
Supplying
plant and machinery on hire used or to be used in prospecting for or extraction
or production of minerals oils.
Section
44BB says, the receipts from the aforesaid activities can be taxed on a
presumptive basis by applying the rate of 10% on gross basis.
In spite of written in sections 28 to 41, 43 and 43A which is contrary to written in section 44BB, Leaving aside written in those sections, a sum equal to 10% of the aggregate amount specified in section 44BB(2) shall be deemed to be the profits and gains of such business chargeable to tax [
[Section 44BB(1)]
Notwithstanding anything to the contrary contained
in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being
a non-resident, engaged in the business of providing services or facilities in
connection with, or supplying plant and machinery on hire used, or to be used,
in the prospecting for, 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”.
Non Applicability of Section 44BB [Proviso to Section
44BB(1)]
Section 44BB is not applied where the provisions of
section 42, 44D, 44DA, 115A or section 293A apply. The provisions of section
44BB shall not apply to following incomes:
|
Section |
Provision |
|
42 |
Special provision for
deductions in case of business for prospecting, etc., for mineral oil |
|
44D |
Special provisions for
computing income by way of royalties, etc., in the case of foreign companies |
|
44DA |
Special provisions for
computing income by way of royalties and Fees for technical services in case
of non-residents. |
|
115A |
Tax on dividends, royalty and
fees for technical services in case of foreign companies |
|
293A |
Power to make exemption, etc.,
in relation to participation in the business of prospecting for, extraction,
etc., of mineral oils. |
Deemed Income = 10% of following: [Section 44BB(2)]
(a) Section 44BB (2)(a)
The amount paid or payable (whether in or out of
India) to the assessee or to any person on his behalf on account of the
provision of services and facilities in connection with, or supply of plant and
machinery on hire used, or to be used, in the prospecting for, or extraction or
production of, mineral oils in India; AND
(b) Section 44BB (2)(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.
Assessee may claim lower profits, but he has maintain such books of accounts and get them audited by a CA and his case shall be decided under section 143(3) of the Act [Section 44BB(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
No set off of unabsorbed depreciation and brought forward loss shall be allowed if Income declared under presumptive schemes under section 44BB [Section 44BB(4)]
Where an
assessee declares profits and gains of business for any previous year in
accordance with the provisions of section 44BB(1), no set off of unabsorbed
depreciation and brought forward loss shall be allowed to the assessee for such
previous year.
When assessee is required to get books of accounts audited?
Section 44AB provides for auditing the books of
accounts of an assessee engaged in business or profession. The table below
enumerates the requirements to get the books of accounts audited by different
taxpayers:
|
Nature of Business or
Profession |
Category of Taxpayer |
When is the audit
mandatory? |
|
Business eligible for
presumptive tax scheme under Section 44BB |
Non-resident assessee
engaged in the exploration of mineral oil |
The taxpayer claims that
his profits from the business are lower than the profit computed under
Section 44BB. |
Oil Rig’s entry in India relevant for construing PE instead of actual drilling Deep Drilling
Bombay High Court upholds ITAT order where in it
was held that the time period of 183 days as stipulated in Article 5(5) of
India-Singapore DTAA will commence from the moment the drilling rig enters
Indian territory in connection with exploration, exploitation or extraction of
mineral oil to meet the contractual requirement and not when the actual
services under the contract begins; Assessee, a Singapore based Company,
engaged in the business of providing Jack-up drilling rig and platform well operations services,
entered into agreement with Gujarat State Petroleum Corporation Ltd. (GSPC) for
provision of the said services; Assessee, for Assessment year 2011-12, earned
Rs. 64.88 Cr from the GSPC and did not offer the same to tax on the ground that
the drilling services were provided only for a period of 119 days for the
relevant Assessment year, thus it would not be covered under Article 5(5) of
the India-Singapore DTAA, as it requires provision of service or facility for a
period of more than 183 days in the fiscal year; Revenue noted that Assessee
has consistently offered its income for taxation under Section 44BB and held
Assessee’s income for the relevant Assessment year to be taxable under Section
44BB; CIT(A) allowed Assessee’s appeal, while ITAT held the consideration to be
taxable in India and held that the services will be considered to begin the
moment when the rig enters Indian territory; Aggrieved, Assessee preferred the
present appeal; High Court notes Assessee’s claim that the date on which the count
of 183 days will begin is only when the rig actually begins to perform under
the contract, i.e. 03.12.2010 in the present case, however, observes that if
the rig started to perform in December 2010, then: (i) there was no need to
bring the rig in India as early as in April 2010, (ii) there was no need to
hold meetings with GSPC in April 2010, (iii) fittings could have been made
outside the country and the rig could have been brought into India later, (iv)
Assessee could always claim that since, in the middle of the contract of
drilling, the rig broke down, thus on those days when the rig was not working
should not be added in counting 183 days; Remarks that theoretically, it is
possible that in March end the rig may have a sudden break down and in April
the rig may start working again to escape the requirement of 183 days; Observes
that even though the actual contract was entered into with GSPC on 18.06.2010,
and even accepting that the drilling work actually commenced on 03.12.2010,
still the fact that the rig was undergoing necessary upgrades/repairs to meet
the GSPC requirements as on 27.04.2010 shows that the rig was already in the
contracting state for providing the services or facilities in connection with
the exploitation, exploration or extraction of mineral oil as early as on
27.04.2010; Thus, concurs with the ITAT’s view that the day from which such
fabrication, positioning and upgradation, activity started which in the present
case can be said to have commenced from 26.04.2010 as evident from the minutes
of the meeting between GSPC and the Assessee, the Assessee would be considered
to have an establishment in connection with its services and activity for GSPC;
Thus dismisses Assessee’s appeal as devoid of any substantial question of law.
[In favour of revenue] (Related Assessment year : 2011-12) – [Deep Drilling
1 Pte. Ltd. v. DCIT [TS-402-HC-2023(BOM)] – Date of
Judgement : 05.07.2023 (Bom.)]
NOTE
As per Article 5(5) of India-Singapore DTAA, an
enterprise shall be deemed to have a PE in a Contracting State and to carry on
business through that PE if it provides services or facilities in that
Contracting State for a period of more than 183 days in any fiscal year in
connection with the exploration, exploitation or extraction of mineral oils in
that Contracting State.
Receipts from leasing/ hiring of Rigs are taxable as business profit under section 44BB
ITAT Delhi held that receipts from leasing/ hiring of
Rigs are taxable as business profit under section 44BB of the Income Tax Act.
Such receipts are not in the nature of royalty and hence cannot be taxed under
section 9(1)(vi) read with section 115A of the Income Tax Act. The short issue
arising for consideration in these appeals is, whether the receipts from
leasing/hiring of RIGs are taxable as business profits under section 44BB of
the Act on gross basis or they are in the nature of royalty, hence, taxable
under section 9(1)(vi) read with section 115A of the Act. It was held that in
our view, the conclusion drawn by learned DRP that the amounts received are in
the nature of royalty under section 9(1)(vi) read with section 115A of the Act
is unacceptable. On the contrary, we accept the position taken by the assessee
in offering the income to tax under section 44BB of the Act, as, it is in
accordance with the statutory provision. Accordingly, we direct the Assessing
Officer to compute the income in both the assessment years under dispute under
the provisions of section 44BB of the Act. [In favour of assessee] (Related Assessment
years : 2012-13 & 2017-18) – [UMW Sher (L) Ltd. v. Assessing Officer, Assessing
Officer (International Taxation) [2023] 148 taxmann.com 269 (ITAT Delhi)]
Section 44BB ‘computation provision’, inapplicable
sans PE; Rejects offshore supply’s taxability in India
ITAT rejects applicability of Section 44BB
in the absence of a finding on Assessee’s PE existence in
India; Thus, holds that offshore manufacture and supply of equipment and parts
by Assessee to ONGC is not taxable in India; Assessee (Baker Hughes Energy
Technology UK Limited) is a tax resident of UK and was awarded contract
from ONGC along with four other consortium members whereby
Assessee was required to manufacture and supply subsea production system
components; Revenue held that since the consortium member is working on behalf
of the Assessee, it forms Assessee’s PE and as the payments in respect of
survey, installation and commissioning of the equipment in India could not be
bifurcated, the entire receipt of the Assessee was taxable in India under
Section 44BB, which was confirmed by DRP; ITAT notes that Section 44BB is a
computation provision and provides a presumptive taxation rate for computation
of profits but does not override provision of sections 5, 9 or section 90;
Refers to Supreme Court ruling in Sedco Forex International v. CIT 399 ITR
1 (SC) wherein Supreme Court expounded that Sections
4, 5 & 9 are to be kept in mind, where assessment is done under Section
44BB, also refers to ITAT ruling in R&B Falcon
Offshore Ltd. v. ACIT, ITA No.389(Del)/2005, Order dated 10.09.2010, wherein
it was held that unless the Revenue is able to prove that the
assessee has a PE in India, its business profits cannot be subject to tax in
India; Observes that in the instant case, the Revenue has not given a
finding as to when does the PE came into existence or how the
offshore supply of equipment was attributable to the PE, accepts
Assessee’s contention that there is no finding in the assessment order as to
which consortium member and which office of such consortium member constitutes
PE of the Assessee in India; Opines that DRP’s conclusion of PE
issue is academic in nature and contradictory to ITAT
ruling in R&B Falcon; Relies on Supreme Court ruling in ADIT
v. E-Funds (2018) 13 SCC 294 (SC) and holds "burden of proving
the existence of PE lies on the Revenue which has not been
discharged. In this view of the matter, assessee succeeds that there
is no finding of PE in this case, hence section 44BB will not
apply." Thus, allows Assessee’s appeal. [In favour of assessee]
(Related Assessment year : 2020-21) – [Baker Hughes Energy Technologies UK
Ltd. v. ACIT(International Taxation) [TS-299-ITAT-2023(DEL)]
- Date of Judgement : 06.06.2023 (ITAT
Delhi)]
Existence
of PE 'no prerequisite' under Section 44BB for taxability of charter-hire
receipts
Delhi ITAT
holds that payment received by a Singapore-based entity for hire of vessels for
transportation of coated wires and seismic support duties in India is
assessable under Section 44BB on presumptive basis and not taxable as royalty
under Section 9(1)(vi); Rejects DRP’s reasoning that in absence of PE,
provisions of Section 44BB would not apply, states that “Section 44BB
applies to a non-resident entity carrying on business in connection with
prospecting for, or extraction or production of mineral oils. The provision,
unlike section 44DA, does not put any mandatory condition of existence of PE
for the applicability of the provision.”; States that once the receipts are
covered within the provisions of Section 44BB, automatically, they are excluded
from the definition of royalty as provided under Explanation 2(via)
to Section 9(1)(vi); Assessee, a Singapore based company with no
Permanent Establishment (PE) in India, received Rs. 23.85 Cr from Larsen &
Toubro Ltd. and Polarcus DMCC (Charterers) towards hiring of vessels for
seismic support duties and transportation of coated pipes in India; Although
tax under Section 195 was withheld, Assessee did not file return of income, thus
holding that income chargeable to tax has escaped assessment, reassessment
proceedings were initiated under Section 147; AO completed the
assessment on best judgement and treated the receipts of Rs. 23.85 Cr as
royalty under Section 9(1)(vi) and taxed the same at 10% under Section
115A; DRP dismissed Assessee’s objection that the receipts pertain to hiring of
vehicles for extraction of mineral oils, thus taxable under Section 44BB and
held that the said section applies only in case where the non-resident has PE
in India and since Assessee did not have PE, Section 44BB would not be
applicable and held that the said receipts were in the nature of royalty in
terms of Explanation 2(vi) to Section 9(1)(vi); ITAT observes that as per the
charter hire agreement, the vessels were given on hire for seismic support
duties in India and vessels are operated by Assessee’s personnel, notes that
requirement of vessel for drilling, testing, completing were also defined in
the charter hire agreement; Referring to definition of royalty under
Explanation 2(iva), ITAT opines that DRP overlooked the second limb
of the clause which carves out an exception by providing that the amounts
referred to in Section 44BB cannot be treated as royalty, remarks that “once
the receipts are covered under section 44BB of the Act, automatically, they are
excluded from the definition of royalty as provided under Explanation 2(via) to
section 9(1)(vi) of the Act.”; States that since the receipts of Rs. 23.85
Cr pertains to hiring of vessels for use in prospecting or exploration or
production activities, covered under Section 44BB, it cannot be treated as
royalty under Section 9(1)(vi), also holds that language employed in Section
44BB is wide enough to encompass the activities of seismic duties and
transportation of coated pipes; Relies on Delhi ITAT's Third Member's
ruling in Western Geco International Ltd.
[TS-943-ITAT-2022 (Del) wherein
it was held that the seismic data services and mining projects are
inextricably linked to activities covered under Section 44BB; Also
relies on Bombay High Court ruling in Larsen
& Toubro Ltd. [TS-124-HC-2022(Bom) and Mumbai
ITAT ruling in Valentine Maritime (Gulf) LLC v. ADIT (2017)
78 taxmann.com 109 (ITAT Mumbai) wherein
it was held that the receipts from giving on hire tugs and barges to be used in
prospecting or extraction of mineral oils would come within Section 44BB;
Accordingly, directs Revenue to tax the receipts under Section 44BB; As regards
Assessee’s contention that Revenue considered double the amount appearing in
Form 26AS as actual receipts, ITAT notes that DRP, on perusal of Form 26AS,
opined that prima facie it seemed to be case of double counting and had
directed Assessee to provide reconciliation along with bank statements, however
while framing the final order, Assessing Officer repeated
the addition alleging that Assessee failed to provide requisite documents;
Remarks that when the requisite documents were furnished before DRP, there is
no reason why the same could not be furnished before Assessing Officer,
accordingly, directs assessee to furnish requisite documents before Assessing Officer
and rectify the mistake of double addition. [In favour of
assessee] (Related Assessment year : 2012-13) – [Pacific Crest Pte. Ltd. v. DCIT (International
Taxation) [TS-162-ITAT-2023(DEL)] – Date of Judgement : 31.03.2023 (ITAT Delhi)]
Absent
change in factual matrix, rejects change in profit attribution to PE
Delhi ITAT
allows Assessee’s appeal, deletes addition made in respect of receipts from
offshore activities amounting to Rs. 180.80 Cr at 10% on gross basis under
Section 44BB; Holds that computation of profit attributable to PE under Section
44BB is in direct contravention of Article 7(6) of India-Singapore DTAA as
Revenue departed from consistent approach followed in the earlier years,
without showing difference in factual position in the subject Assessment year
vis-Ã -vis past Assessment years; Assessee-Company, a tax resident of
Singapore, engaged in business of offshore supply of equipment, providing
services in connection therewith and supplying plant and machinery on hire
basis for extraction, production of mineral oil and had entered into two
separate contracts with ONGC – for supply of sub-see production system and for
services of equipments and installation and commissioning of supplied items;
For Assessment year 2018-19, Assessee earned receipts from India for: (a)
Offshore supply of equipment; (b) Rent/Leasing of equipment; and (c) Provision
of services and repairs; While receipts from onshore activities offered to tax
under Section 44BB, receipts from offshore supply of plants and equipments
were not offered to tax claiming that no part of the activity was carried in
India; Revenue held that though, the supply of plants and equipments is
integrally connected to the installation and commissioning activity, hence,
part of composite contract; However, held that they have been
artificially split into two contracts and thus installation
PE got constituted, thereby offshore supply of plants and equipments
were taxable in India under Section 44BB, which was confirmed by DRP; ITAT
notes that Revenue while completing assessment for Assessment year 2010-11 to
2017-18, had not accepted the position taken by the Assessee and devised a
mechanism to attribute 1% of the receipts from the offshore supplies of
equipment to the PE in India, observes that the said position regarding
taxability of offshore supply of equipment has been accepted both by the
Assessee and the Revenue over the years till Assessment
year 2016-17 and in Assessment year 2017-18 when the Revenue attempted
departure from the mechanism, it was set aside by coordinate
bench; Remarks that “it is manifest, both the Assessing Officer and
learned DRP have failed to provide any good and sufficient reason while
departing from the methodology adopted by the department in respect of
attribution of profit to the PE on receipts from offshore supply of equipment
in past assessment years. Therefore, the decision of the departmental
authorities militate against the specific provision contained under Article
7(6) of the tax treaty.”; Accordingly holds that computation of profit
under Section 44BB is unsustainable as, it is not consistent with the position
taken on the issue in past AYs and directs Revenue to attribute 1% of the
receipts from offshore supply of equipment as profit of the PE. [In favour of
assessee] (Related Assessment year : 2018-19) – [Vetco Gray Pte. Ltd. v. DCIT
(International Taxation) [TS-120-ITAT-2023(DEL)]
– Date of Judgement : 15.03.2023 (ITAT Delhi)]
Reimbursement
of service tax cannot to be included in aggregate of amounts specified in
clauses (a) and (b) of section 44BB(2), as it is not an amount received by
assessee on account of services provided by them in prospecting, extraction or
production of mineral oils
These
income tax references arise from the orders passed by the Income-tax Appellate
Tribunal, Dehradun Bench, New Delhi in different ITAs' preferred by the
Revenue. The issue, which came up for consideration before the ITAT, was with
regard to the interpretation of sections 44 BB(1) and 44 BB(2) of the
Income-tax Act. The specific issue, that arose for consideration was, whether
the service tax collected by the assessees in the course of provision of
services and facilities in connection with, or supply of plant and machinery on
hire, in the prospecting for, or extraction or production of, mineral oils in
India, was liable to be included in the amount paid or payable for the purpose
of computation of the 'presumptive taxable income' of the assessee. The Tribunal
while passing the impugned orders, held in favour of the assessee. While doing
so, the Tribunal relied upon the Full Bench judgment of this Court in DIT
(Int. Tax.) v. Schlumberger Asia Services Ltd. (2019) 414 ITR 1 : 264 Taxman
108 : 104 taxmann.com 353.
Reimbursement
of service tax ought not to be included in aggregate of amounts specified in
clauses (a) and (b) of section 44BB(2), as it is not an amount received by
assessee on account of services provided by them in prospecting, extraction or
production of mineral oils. [In favour of assessee] – [CIT (International
Taxation) v. B.J. Services Co. Me Ltd. (2022) 145 taxmann.com 430 (Uttarakhand)
Third
Member holds seismic data services & mining projects ‘inextricably linked’,
covered by Section 44BB
Delhi ITAT
Third Member concurs with Judicial Member’s views, holds
that the revenue received by Assessee from provision of
facilities and services of seismic data acquisition, planning and carrying out
of pre-survey study, software maintenance/upgradation, is not in the nature of
fees for technical services; Opines that the services are covered by the
exclusion provided in Explanation 2 to Section 9(1)(vii), being consideration
for ‘mining or like projects’ and thus is not taxable under Section
44DA; Holds that the services are inextricably connected with prospecting
for or extraction or production of, mineral oils and is taxable under Section
44BB by relying on Supreme Court ruling in ONGC v. CIT (2015) 376 ITR
306 (SC); During Assessment year 2011-12, Assessee-Company, a non-resident
company having a PE in India, provided services to Indian companies
under various contracts entered into mainly with RIL, ONGC and GSPCL,
such as processing of 2D/3D seismic data, survey, lease of marine technology,
hiring of vessel and technology, etc; Assessee offered the receipts from
such services to tax on presumptive basis under Section 44BB,
however, the Revenue held that the services were in the
nature of FTS and not covered by exclusion contained in Explanation 2 to
Section 9(1)(vii) and thus was taxable under Section 44DA, relying on
Uttarakhand High Court ruling in ONGC; While the Judicial Member
held that income from provision of services such as seismic data acquisition,
planning and carrying out of pre-survey study was excluded from definition of
FTS as per Explanation 2 to Section 9(1)(vii) and thus taxable under
Section 44BB; On the other hand, the Accountant Member opined that
Assessee’s income is in the nature of FTS, thus, could not
be taxed under Section 44BB; ITAT Third Member concurs with
Assessee’s submission that the Uttarakhand High Court ruling relied upon by
Revenue was subsequently overruled by Supreme Court, rejects
Revenue’s argument that Supreme Court ruling in ONGC was
inapplicable to the present case, since the ruling was rendered in the context
of interplay between Section 44D and Section 44BB and Supreme Court had no
occasion to examine applicability of Section 44DA, specifically the interplay
between Section 44BB and amended provisions of Section 44DA; Explains that the
although the question posed before the Supreme Court was relating to
applicability of Section 44BB vis-Ã -vis Section 44D, “a careful perusal of
the judgement…. clearly shows that the issue relating to applicability of
Section 44BB of the Act in the facts of the case was independently examined…”; The
Third Member points out that Supreme Court, taking note of CBDT Circular dated
22.10.1990, wherein it was clarified that consideration for services such as
imparting of training and carrying out drilling operations for exploration of
oil and natural gas, would be covered under the term ‘mining project’ for the
purposes of Explanation 2 to Section 9(1)(vii), holds that the
contracts were inextricably linked with extraction/production of mineral oil
and thus ONGC’s receipts under the contracts were appropriately assessable
under Section 44BB and not Section 44D; Also highlights that while Section 44D
was inserted vide Finance Act, 1976 for taxability of income in the nature of
royalty and FTS and a special provision was introduced by way of Section 44BB
vide Finance Act, 1987, Section 44DA was introduced by Finance Act, 2003 which
also provided a sunset clause to operation of Section 44D; States that both the
provisions of Section 44D and Section 44DA pertain to the same subject matter
i.e. taxation of income by way of royalties and FTS, thus rejects Revenue’s
argument that Supreme Court ruling in ONGC which dealt with interplay of
Section 44BB and 44D cannot be applied to present case involving applicability
of Section 44BB and Section 44DA; Refers to Delhi High Court ruling in DIT
v. OHM Ltd. (2013) 352 ITR 406 (Del.) wherein considering the
amendments in Section 44BB and 44DA, it was held that income from geophysical
services to oil & gas exploration industry taxable under Section 44BB and
not 44DA as specific provision of Section 44BB prevails over provisions of
Section 44DA, which are broader & more general in nature and also that the
amendment by Finance Act, 2010 to Sections 44DA and 44BB cannot change
fundamental nature of both provisions & respective spheres of their
operation; Further refers to Delhi High Court ruling in Paradigm
Geophysical wherein it was held that Section 44BB is inapplicable
where the software services to oil industry ‘takes color of royalty/FTS’,
states that in the present case the services are similar to the services
provided in case of ONGC, which as held by Supreme Court, are inextricably
linked to extraction of mineral oil and thus not FTS, thus Section 44BB is
applicable in the present case and not Section 44DA; As regards Revenue’s
reliance on Delhi High Court ruling in PGS Geophysical holding
that services provided in connection with prospecting for mineral oils,
constituted FTS, opines that the Delhi High Court did not have benefit of Supreme
Court ruling in ONGC rendered subsequently; With respect to inclusion of
service tax in gross turnover for the purpose of Section 44BB, ITAT notes
that the issue is squarely covered by Uttarakhand High Court ruling in Schlumberger
Asia and Delhi High Court ruling in Mitchell
Drilling wherein it was held that service tax received as
reimbursement shall not form part of income under Section 44BB, as it is not an
amount received by the Assessee on account of services provided by them in
the prospecting, extraction or production of mineral oils; Accordingly holds
that the amount received as reimbursement of service tax is not includible in
gross receipts. [In favour of assessee] (Related Assessment year : 2011-12) – [Western
Geco International Ltd. v. DDIT, Dehradun [TS-943-ITAT-2022(DEL)] – Date of Judgement : 30.09.2022 (ITAT Delhi)]
When
there are two provisions in an enactment which cannot be reconciled with each
other, the doctrine of harmonious construction should be applied and attempt
should be to interpret the provisions, if possible, giving effect to both
Court
held that the assessee had not segregated its activities into supply of
software and maintenance and support services. The entire income derived under
the contracts was offered for taxation under section 44BB. Whether the services
of updating the software and renewal of licence or warranty services or
maintenance of software were inextricably and essentially linked to the supply
of the software and were ancillary services was a question of fact that would
require determination after examining the dominant purpose of such contracts.
There was no factual clarity on this aspect. No distinction or segregation
could be inferred with respect to the receipts in the hands of the assessee
under the contracts executed by it. The Commissioner being a fact-finding body
had failed to give a reasoned order with respect to the nature of income and
its subsequent application. Matter remanded to the Commissioner to assess the
assessee’s income and tax payable thereon by first determining the nature of
the income/receipts in the hands of the assessee. Court also held that it is
well settled that when there are two provisions in an enactment which cannot be
reconciled with each other, the doctrine of harmonious construction should be
applied and attempt should be to interpret the provisions, if possible, giving
effect to both. (Related Assessment year : 2012-13) – [Paradigm Geophysical (P)
Ltd. v. CIT (2020) 424 ITR 521 : 315 CTR 522 : 189 DTR 260 : 115 taxmann.com
254 (Del.)]
Section
44BB is a special section and, thus, its provisions will prevail over
provisions of section 44B
Section
44BB is a special section and, thus, its provisions will prevail over
provisions of section 44B. Where assessee, a non-resident, gave vessels on hire
to Indian companies, in view of fact that said vessels were used by hirers for
transporting men and machines to locations where it was doing
exploration/production of mineral oil, said service being ‘in connection with’
prospecting for and exploration activities, income arising out of such
activities had to be assessed under section 44BB and not under section 44B. [In
favour of revenue] (Related Assessment years : 2008-09 to 2010-11)-[Swiwar Offshore
Pte. Ltd. v. Additional Director of Income-tax (International Taxation,
Range-2), Mumbai (2018) 193 TTJ 951 : 89 taxmann.com 346 (ITAT Mumbai)]
Amounts received as “mobilisation
fee” on account of provision of services and facilities in connection with the extraction
etc., of mineral oil in India attracts Section 44BB and have to be assessed as
business profits
Dismissing the appeal of the
assessee the Court held that the amounts received as “mobilisation fee” on
account of provision of services and facilities in connection with the
extraction etc., of mineral oil in India attracts Section 44BB and have to be
assessed as business profits. Section 44BB has to be read in conjunction with sections
5 and 9 of the Act. Sections 5 and 9 cannot be read in isolation. The argument
that the mobilisation fee is “reimbursement of expenses” and so not assessable
as income is not acceptable because it is a fixed amount paid which may be less
or more than the expenses incurred. Incurring of expenses, therefore, would be
immaterial. Also, the contract was indivisible.
Therefore, the ultimate
conclusion drawn by the Assessing Officer, which is upheld by all other
authorities is correct, though some of the observations of the High Court may
not be entirely correct which have been straightened by us in the above
discussion. For our aforesaid reasons, we uphold the conclusion. Resultantly,
all the appeals of the assessees are dismissed. [In favour of assessee]
(Related Assessment years : 1986-87 & 1987-88) – [Sedco Fores
International Inc v. CIT (2017) 87 taxmann.com 29 (SC)]
Service
tax collected by assessee and passed on to Government does not have any element
of income and therefore cannot form part of gross receipts for purposes of
computing ‘presumptive income’ of assessee under section 44 BB
Assessee-company
was engaged in business of providing equipment on hiring and manpower etc. for
exploration and production of mineral oil and natural gas. In computing gross
receipts for determining taxable income under section 44BB, it did not include
service-tax collected from its customers - Assessing Officer however held that
same was to be included. Service-tax was not an amount paid or payable, or
received or deemed to be received by assessee for services rendered by it. Assessee
was only collecting service-tax for passing it on to Government. Thus, for
purpose of computing presumptive income of assessee under section 44BB,
service-tax collected by assessee was not to be included in gross receipt in
terms of section 44BB(2), read with section 44BB(1). [In favour of assessee] (Related
Assessment year : 2008-09) – [Director of Income-tax v. Mitchell Drilling
International (P) Ltd. (2016) 380 ITR 130 : (2015) 234 Taxman 818 : 62
taxmann.com 24 (Del.)]
Payment
for providing various services in connection with prospecting, extraction or
production of mineral oil, would be assessed under section 44BB, and not under
section 44DA
The
revenue preferred the instant appeals against the order of the Dispute
Resolution Panel whereby it directed the Assessing Officer to apply the deemed
profit rate of 10 per cent under section44BB on the revenues earned by the
assessee from a non-resident company on account of provision of technical
personnel for executing contracts with ONGC.
The
assessee submitted that the issue was squarely covered in its favour by the
order of the Supreme Court in the case of ONGC v. CIT (2015) 376 ITR 306 :
233 Taxman 195 : 59 taxmann.com 1 (SC) wherein it has been held that the
payments for providing various services in connection with prospecting,
extraction and production of oil would be assessed under section44BB and not
under section 44DA. The revenue however contended that the DRP was not
justified in directing the Assessing Officer to apply the deemed profit rate of
10 per cent under section44BB.
Held
: Payment received by assessee from a non-resident company for providing
operations of highly specialized offshore personnel being an integral part of
prospecting, extraction or production of mineral oil, would be assessed under
section 44BB, and not under section 44DA. [In favour of assessee] (Related
Assessment year : 2009-10) - [Additional Director of Income-tax,
International Taxation, Dehradun v. International Technical Services LLC (2016)
159 ITD 958 : 71 taxmann.com 351 (ITAT Delhi)]
Payment
for providing various services in connection with prospecting, extraction or
production of mineral oil, would be assessed under section 44BB, and not under
section 44D
Assessee-company
‘ONGC’ and a non-resident/foreign company had entered into an agreement by
which non-resident company had agreed to provide various services in connection
with prospecting, extraction or production of mineral oil. Pith and substance
of each of contracts/agreements was inextricably connected with prospecting,
extraction or production of mineral oil and dominant purpose of each of such
agreement was for prospecting, extraction or production of mineral oils though
there may be certain ancillary works contemplated thereunder. Payments made by
ONGC and received by non-resident assessees or foreign companies under said
contracts was more appropriately assessable under provisions of section 44BB,
and not section 44D. (Related Assessment years : 1985-86 and 1986-87) – [Oil
& Natural Gas Corporation Ltd. v. CIT (2015) 233 Taxman 495 : 59
taxmann.com 1 (SC)]
Condition
precedent for availing benefit of section 44BB is that plant or machinery
supplied or let on hire by assessee, a non-resident, should be used in
prospecting for or extraction or production of minerals oils, however, said
section does not distinguish between main contractor or sub-contractor as long
as plant or machinery hired is used for aforesaid purpose
One
CGG Services entered into contract with ONGC for providing personnel and
equipment, plan and execute acquisition of 3D seismic data and basic 3D seismic
data processing. Assessee provided two seismic survey vessels to CGG Services
for carrying out seismic operations offshore India. Assessee offered revenues
from such leasing of vessels to be taxed under section 44BB. Assessing Officer
as well as DRP held that benefit of section 44BB was available when plant and
machinery were used by hirer for prospecting, extraction or production of
mineral oils but term did not imply that it could be used by hirer or sub-hirer
or any other hirer in chain which might be unending. Accordingly, assessee’s
claim was rejected. Condition precedent for availing benefit of section 44BB is
that plant or machinery supplied or let on hire by assessee, a non-resident,
should be used in prospecting for or extraction or production of minerals oils,
however, said section does not distinguish between main contractor or a
sub-contractor as interpreted by Assessing Officer and DRP. Therefore, impugned
order was to be set aside and assessee’s income was to be assessed in terms of
section 44BB. [In favour of assessee] (Related Assessment year : 2007-08) – [Louis
Dreyfus Armateures SAS v. ADIT, International Taxation (2015) 153 ITD 579 : 54
taxmann.com 366 (ITAT Delhi)]
Section
44BB special provision, Section 5 bar not applicable in taxing mobilization
advances under section 44BB
High Court upholds ITAT’s order, mobilization advance received
by a Norwegian company (‘assessee’) on account of vessel operated outside
India, pursuant to contracts with ONGC/Reliance, falls within ambit of Section
44BB levy; Rejects assessee’s stand that in view of charging Section 5(2),
mobilization advance received outside India cannot be subject matter of levy under
section 44BB (which is merely a computation provision); Holds Section 44BB is a
special provision & provides for taxation with reference to pre-ordained
criteria; Observes Section 44BB (2) also provides for reckoning amount received
outside India for calculating total amount; Clarifies that Section 44BB is a
special mechanism to obviate the procedure of regular assessment which would
have been made, had the assessee not invoked aid of Section 44BB; Further
rejects assessee’s stand that the non-obstante clause under section 44BB does
not take within its fold Section 4 & 5 and it was only confined to Section
28 to 41; Holds Section 5(2) will not bar Revenue from including the amount of
mobilization advance received by assessee, while calculating income under
section 44BB. – [Fugro Geoteam AS v. Addl. CIT (international taxation),
Dehradun [TS-173-HC-2015(UTT)] – Date of Judgement : 31.03.2015 (Uttarakhand)]
Section
44BB applies only to such an assessee, who is a non- resident and not to an
assessee, who has a permanent establishment or fixed place of profession in
India
Section
44BB applies only to such an assessee, who is a non-resident and not to an
assessee, who has a permanent establishment in India or has a fixed place of
profession situated in India. Where Assessing Officer did not make any inquiry
regarding assessee a non-resident, having fixed place of profession or
permanent establishment in India, issue of applicablity of section 44BB was to
be remitted back. [Matter remanded] – [Director of Income-tax (International
Taxation) v. Western Geco International Ltd. (2013) 216 Taxman 216 : 35
taxmann.com 345 (Uttarakhand)]
Income from
geophysical services to oil & gas exploration industry taxable under
section 44BB & not under section 44DA; Affirms AAR ruling
Income from geophysical services to oil & gas
exploration industry taxable under section
44BB & not under section 44DA;
Affirms AAR ruling; Specific provision under section 44BB to prevail over provisions under
section 44DA, which are broader &
more general in nature; Amendment by Finance Act, 2010 to Section 44DA &
Section 44BB can't change fundamental nature of both provisions &
respective spheres of their operation; Co-ordinate bench ruling in Jindal
Drilling and Industries Ltd relied upon
The assessee, OHM Ltd, is a UK company engaged in the business of providing geophysical services to oil and gas exploration industry. It conducts electromagnetic survey, processing and interpretation of data. Two companies namely Petro Gas E&P, LLC and CGG Veritas Services SA awarded contracts to the assessee for procuring data, processing and interpreting the data in respect of an offshore exploration block in India. The assessee was paid for mobilisation as well as de-mobilisation of its vessels from the site area and for providing services in connection with prospecting for extraction or production of mineral oils.
The assessee approached the AAR for a ruling on whether as per Section 44BB, only 10% of its revenues were taxable at 4.223%. Section 44BB is applicable to the revenues earned in respect of services in connection with the prospecting for extraction or production of mineral oils. The Revenue had argued that the assessee was liable to be taxed under section 44DA (special provision for computing income by way of royalties, etc in case of non-residents) @ 10%, since the receipts amounted to ‘FTS’ as per Section 9(1)(vii).
Finance Act 2010 inserted a reference to Section 44DA in the proviso to Section 44BB(1) with effect from 01.04.2011, providing that the latter shall not apply in case to which the former applies. Simultaneously, the second proviso to Section 44DA was inserted with effect from Assessment year 2011-12, according to which provisions of Section 44BB(1) would not be applicable in respect of income referred to in Section 44DA.
The AAR ruled in favour of the assessee [TS-205-AAR-2011], holding that the assessee’s income was taxable under section 44BB. The Revenue filed a writ against the AAR ruling before High Court.
Ruling in favour of the assessee, a division bench of Delhi High Court affirmed the AAR ruling. High Court noted that in concluding that Section 44BB was the appropriate provision, AAR had followed its earlier ruling in Geofyzika [TS-43-AAR-2009]. Further, a similar view was taken by the High Court in case of Jindal Drilling and Industries Ltd (2010) 320 ITR 104. High Court further noted that in Jindal's case, though there was no express reference to Section 44DA, there was reference to Explanation 2 to Section 9(1)(vii), which is found to be incorporated into Section 44DA.
High Court concluded, We do not think that there is any error in the view taken by AAR. Basically the rule that the specific provision excludes the general provision has been applied.” High Court observed that Section 44BB was a special provision, while Section 44DA was a broader provision, more general in nature. Further Section 44DA is applicable where the non-resident carries on business in India through a PE. High Court held, Under section 44BB one does not find any reference to a permanent establishment in India. The type of services contemplated by the provision is more specific than what is contemplated by Section 44DA. Section 44BB refers specifically to ‘services or facilities in connection with, or supplying plant and machinery on hire, used or to be used in the prospecting for, or extraction or production of mineral oils.’ Revenues earned by the non-resident from rendering such specific services are covered by Section 44BB.”
High Court further held, If as contended by the Revenue, Section 44DA covers all types of services rendered by the non-resident, that would reduce section 44BB to a useless lumber or dead letter and such a result would be opposed to the very essence of the rule of harmonious construction.”
High Court also noted that the difference of approach in taxing profits of the NR in both the provisions. In Section 44BB, a flat rate of 10% of the revenues received by the NR was deemed to be profits chargeable to tax in India. Under Section 44DA, deduction of expenditure wholly and exclusively incurred by the NR for the business of the PE / expenditure towards reimbursement of actual expense by the PE to its head office, was allowed from the revenues received by the NR. High Court ruled, Because of the different modes or methods prescribed in the two sections for computing the profits, it apparently became necessary to clarify the position by making necessary amendments. That perhaps is the reason for inserting the second proviso to sub-section (1) of Section 44DA and a reference to section 44DA in the proviso below sub-section (1) of Section 44BB.”
High Court held, A careful perusal of both the provisos shows that they refer only to computation of the profits under the sections. If both the sections have to be read harmoniously and in such a manner that neither of them becomes a useless lumber, then the only way in which the provisos can be given effect to is to understand them as referring only to the computation of profits, and to understand the amendments as having been inserted only to clarify the position. the amendment made by the Finance Act, 2010 with effect from 01.04.2011 in both the sections, cannot have the effect of altering or effacing the fundamental nature of both the provisions or their respective spheres of operation or to take away the separate identity of Section 44BB.” Thus, High Court dismissed the Revenue’s appeal. – [Director of Income Tax v. OHM Ltd. [TS-879-HC-2012(DEL)] – Date of Judgement : 06.12.2012 (Del.)]
Reopening of assessment to deny concessional tax rate under section 44BB, to income from ‘oil exploration activity’, invalid; Re-opening on the basis of prospective amendment in Finance Act or subsequent judgement of court invalid
The assessee, B J Services
Company Services Middle East Ltd, a UK resident, was engaged in the business of
'providing services and facilities in respect of exploration, extraction and
production of mineral oil’. It was assessed under
section 44BB whereby 10% of its gross receipts were deemed to be taxable
‘profits of business or profession’ . For Assessment year 2003-04, Assessing Officer
passed assessment order under section 143(2) after due verification of facts,
contracts and other documents.
However, subsequently, Assessing
Officer reopened the assessment under section 147 holding that he had a ‘reason
to believe’ that income had escaped assessment in view of decision of
Uttarakhand High Court in case of ‘ONGC as an agent of Foramer France (299 ITR
438)’. Assessing Officer also reasoned
that the assessee’s income was not covered under section 44BB, but was
assessable as ‘Fees for Technical Services (FTS). Further, Assessing Officer
held that in view of amendment by Finance Act, 2011 and explanatory notes to
the Bill, the combined effect of Sections 44BB, 44DA and 115A was that Section
44BB would be applicable only to the income for services and facilities in
connection to exploration activity which are not in the nature of FTS.
Further, income in the nature of FTS would be taxable under section 44DA
or Section 115A depending on whether it was effectively connected with a PE.
The assessee filed a writ petition before Uttarakhand High
Court challenging the reopening.
Uttarakhand High Court held that
amendment by Finance Act, 2011 was prospective in nature and effective from Financial
year 2010-11 and combined effect of amended provisions of Sections 115A, 44BB
and 44DA did not have any bearing on the case under consideration. Accordingly,
for the relevant year under consideration Assessment year 2003-04, it was open
to the Assessing Officer to tax the income of the assessee under section 44BB,
44DA or 9(1)(vii) read with section 115A on the basis of material produced
before him. When the Assessing Officer, after due enquiry and verification of
material facts, applied his mind and held that income was taxable under section
44BB, it was not open to him to reopen the completed assessment on the basis of
aforesaid amendment. Accordingly, High Court quashed the reopening notice as
also any proceeding initiated or order passed on the basis of such notice. High
Court also observed that reopening on the basis of subsequent pronouncement of
court was also not valid. [In favour of assessee] – [B J Services Company Middle East Ltd & Others v. Deputy
Director of Income Tax, (International Taxation), Dehradun – Date of Judgement
: 27.08.2011 (Uttarakhand)]
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