1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4906 OF 2010
SEDCO FOREX INTERNATIONAL INC.
THROUGH IT’S CONSTITUTED
ATTORNEY MR. NAVIN SARDA .....APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX,
MEERUT & ANR. .....RESPONDENT(S)
W I T H
CIVIL APPEAL NO. 2166 OF 2012
CIVIL APPEAL NO. 17388 OF 2017
(ARISING OUT OF SLP(C) NO. 2955 OF 2012)
CIVIL APPEAL NO. 4908 OF 2010
CIVIL APPEAL NO. 2631 OF 2013
CIVIL APPEAL NO. 4910 OF 2010
CIVIL APPEAL NO. 4911 OF 2010
CIVIL APPEAL NO. 4907 OF 2010
CIVIL APPEAL NO. 4913 OF 2010
CIVIL APPEAL NO. 4543 OF 2013
CIVIL APPEAL NO. 5005 OF 2014
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CIVIL APPEAL NO. 17389 OF 2017
(ARISING OUT OF SLP(C) NO. 11560 OF 2014)
CIVIL APPEAL NO. 4920 OF 2010
CIVIL APPEAL NO. 4919 OF 2010
CIVIL APPEAL NO. 4921 OF 2010
CIVIL APPEAL NO. 4916 OF 2010
CIVIL APPEAL NO. 4918 OF 2010
CIVIL APPEAL NO. 4917 OF 2010
CIVIL APPEAL NO. 5015 OF 2015
CIVIL APPEAL NO. 4925 OF 2010
CIVIL APPEAL NO. 4924 OF 2010
CIVIL APPEAL NO. 4922 OF 2010
CIVIL APPEAL NO. 5437 OF 2016
CIVIL APPEAL NO. 5154 OF 2011
CIVIL APPEAL NO. 5152 OF 2011
CIVIL APPEAL NO. 5153 OF 2011
CIVIL APPEAL NO. 5089 OF 2015
CIVIL APPEAL NO. 5090 OF 2015
CIVIL APPEAL NO. 4923 OF 2010
CIVIL APPEAL NO. 8627 OF 2013
CIVIL APPEAL NO. 5155 OF 2011
CIVIL APPEAL NO. 6573 OF 2014
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CIVIL APPEAL NO. 4909 OF 2010
CIVIL APPEAL NO. 5935 OF 2010
CIVIL APPEAL NO. 5934 OF 2010
CIVIL APPEAL NO. 6651 OF 2014
CIVIL APPEAL NO. 17390 OF 2017
(ARISING OUT OF SLP(C) NO. 20000 OF 2015)
CIVIL APPEAL NO. 17391 OF 2017
(ARISING OUT OF SLP(C) NO. 22343 OF 2012)
CIVIL APPEAL NO. 17392 OF 2017
(ARISING OUT OF SLP(C) NO. 22833 OF 2012)
CIVIL APPEAL NO. 4914 OF 2010
CIVIL APPEAL NO. 4915 OF 2010
CIVIL APPEAL NO. 8595 OF 2010
CIVIL APPEAL NO. 9188 OF 2013
CIVIL APPEAL NO. 8665 OF 2013
CIVIL APPEAL NO. 10294 OF 2016
CIVIL APPEAL NO. 10295 OF 2016
CIVIL APPEAL NO. 10296 OF 2016
CIVIL APPEAL NO. 4926 OF 2010
CIVIL APPEAL NO. 267 OF 2013
CIVIL APPEAL NO. 268 OF 2013
CIVIL APPEAL NO. 17393 OF 2017
(ARISING OUT OF SLP(C) NO. 39683 OF 2013)
CIVIL APPEAL NO. 3695 OF 2012
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CIVIL APPEAL NO. 435 OF 2017
CIVIL APPEAL NO. 10382 OF 2017
CIVIL APPEAL NO. 10385 OF 2017
CIVIL APPEAL NO. 10383 OF 2017
CIVIL APPEAL NO. 10384 OF 2017
CIVIL APPEAL NO. 10386 OF 2017
CIVIL APPEAL NO. 17394 OF 2017
(ARISING OUT OF SLP(C) NO. 21939 OF 2017)
CIVIL APPEAL NO. 12365 OF 2017
A N D
CIVIL APPEAL NO. 12366 OF 2017
J U D G M E N T
A.K. SIKRI, J.
Leave granted in SLP(C) No. 2955 of 2012, SLP(C) No. 11560 of
2014, SLP(C) No. 20000 of 2015, SLP(C) No. 22343 of 2012, SLP(C)
No. 22833 of 2012, SLP(C) No. 39683 of 2013 and SLP(C) No. 21939 of
2017.
2) In all these appeals filed by different appellants (hereinafter referred to
as the ‘assessees’) except Civil Appeal No. 3695 of 2012 which is filed
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by Director of Income Tax (Revenue), the question of law which arises
for consideration is identical and pertains to the scope and interpretation
of Section 44BB of the Income Tax Act, 1961 (hereinafter referred to as
the ‘Act’).
3) For computation of profits and gains of a business, to make it exigible to
tax under the Act, provisions contained in Chapter IV, from Sections 28
to 41, 43 and 43A of the Act apply. However, in those cases where the
assessee is a non-resident and specifically engaged in the business of
exploration etc. of mineral oil, special mechanism is provided in Section
44BB of the Act for computation of profits and gains, on which the tax is
charged. It, however, gives choice to such non-resident assessees to
opt for computation formula provided under Section 44BB or to be
covered by normal computation mechanism contained in Sections 28 to
41, 43 and 43A of the Act. Section 44BB of the Act stipulates that a sum
equal to 10% 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’. Thus, concessional rate of 10% is charged as tax, which is
admittedly much less than the normal tax rate payable on profits and
gains of business or profession. However, this tax @10% is on the
aggregate of the amounts specified in sub-section (2) which are
“deemed” profits and gains of such business. Thus, insofar as
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calculation of profits and gains of the business under Section 44BB of
the Act is concerned, on which 10% tax is payable, it is worked out on
fictional basis by adopting the formula laid down in sub-section (2).
Sub-section (2) mentions those amounts aggregate whereof is to be
treated as deemed profits and gains of such a business.
4) At this juncture, we reproduce the provisions of Section 44BB of the Act,
as reading of this provision is necessary before spelling out the nature of
dispute which had arisen in these appeals. This section reads as under:
“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, 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
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
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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,—
(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.”
5) A bare reading of the aforesaid provision brings out the following salient
features thereof:
(a) Sub-section (1) is a non-obstante clause, starting with the
expression ‘notwithstanding anything to the contrary contained in
Sections 28 to 41 and Sections 43 and 43A’. Thus, once we apply
this special provision for computation of profits and gains,
provisions for computation of such profits as contained in Sections
28 to 41 and Sections 43 and 43A of the Act stand excluded.
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(b) In order to attract the provisions of Section 44BB of the Act, two
conditions are to be specified, namely, (i) assessee has to be a
non-resident; and (ii) assessee should be engaged in the business
of exploration etc. in mineral oils of the nature specifically spelled
out in the provision.
(c) Choice is given to such an assessee under sub-section (3) of the
Act to either claim lower profits and gains than the profits and gains
specified in sub-section (2) and covered by normal provisions of
computing profits and gains of business or profession, subject to
fulfilling the conditions of audit etc. as mentioned therein or to be
governed by Section 44BB of the Act.
(d) In case the twin conditions mentioned above are satisfied, the
assessee can take the benefit of paying the tax as per the
provisions of Section 44BB on “deemed profits and gains” of its
business and such profits and gains are to be calculated as per the
formula provided in sub-section (2) thereof. Pertinently, it is a
‘deemed’ provision for calculating profits and gains of business or
profession, which means that such profits and gains are to be
arrived at fictionally, as per provisions contained in sub-section (2).
(e) Sub-section (2) mentions the amounts which are to be added up,
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and the aggregate of those amounts is deemed to be profits and
gains on which 10% tax is charged as component of income tax.
6) Coming to the lis that is involved in these appeals, it may be seen that
sub-section (2) mentions two kinds of amounts which are to be treated
as profits and gains of the business. In clause (a) of sub-section (2), the
amount referred to are those which are paid or payable to 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. It is
immaterial whether the said amount is paid or payable in India or out of
India. Second kind of amounts mentioned in clause (b) of sub-section
(2) are those sums which are received or deemed to be received by or
on behalf of the assessee on account of 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, extraction or production of
mineral oils outside India. Here, however, only those sums which are
paid or payable in India are to be included.
7) The assessees herein had entered into contracts primarily with Oil and
Natural Gas Commission (ONGC), a public sector company, for hire of
their rig for carrying out oil exploration activities in India. For this
purpose, they were paid mobilisation fee as well, for and on account of
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mobilisation/movement of rig from foreign soil/country to the off-shore
side at Mumbai (India). The issue that has fallen for consideration is as
to whether aforesaid amount received is to be included for computation
of deemed profits and gains of the business, chargeable to tax under
Section 44BB of the Act. Right from the Assessing Officer (AO) till the
High Court, all the fora have answered this question in affirmative
holding that this amount is to be included for computing profits and gains
of the businesses of the assessees.
8) Civil Appeal Nos. 4906 of 2010, 4907 of 2010, 4915 of 2010 filed by
Sedco Forex International Inc., M/s Transocean Offshore Inc., M/s
Sedco Forex International Drilling Inc. respectively were taken up as
lead matters and, therefore, for the sake of brevity, we recapitulate the
factual matrix from the said appeals, as it would suffice for answering
the question involved.
9) During the years under consideration, the assessees are engaged in
executing the contracts all over the world including India in connection
with exploration and production of mineral oil. The assessees are
companies incorporated outside India and, therefore, non-resident within
the meaning of Section 6 of the Act. The assessees entered into
agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid
agreements provided for the scope of work along with separate
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consideration for the work undertaken. Since the dispute is about
mobilisation charges, clauses in respect thereof are as under:
“Operating Rate – Receipts for undertaking drilling operations
computed by per day rates provided in the contract. The
operating rates shall be payable from the time the drilling unit
is jacked-up and ready at the location to spud the first well.
Mobilisation – charges for the transport of the drilling unit from
a location outside India to a location in India as may be
designated by ONGC.”
In addition to the above, assessees also received amounts from
the operator towards reimbursement of expenses like catering,
boarding/lodging, fuel, customs duty, the supply of material etc., with
which we are not concerned.
10) The assessees filed their return of income declaring income from
charter higher of the rig. The same was offered to tax under Section
44BB of the Act. In the case of Sedco Forex International Inc., the
assessee did not include the amount received as mobilisation charges to
the gross revenue for the purpose of computation under Section 44BB of
the Act. In the case of Transocean Offshore Inc., the assessee included
1% of the mobilisation fees. The mobilisation fees were offered to tax on
a 1% deemed profit basis on the ratio of the CBDT Instruction No. 1767
dated July 1, 1987.
11) The AO included the amounts received for
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mobilisation/demobilisation to the gross revenue to arrive at the “profits
and gains” for the purpose of computing TAX under Section 44BB of the
Act. The Commissioner of Income Tax (Appeals) {hereinafter referred to
as the ‘CIT(A)’} confirmed the action of the AO. The Income Tax
Appellate Tribunal (hereinafter referred to as the ‘ITAT’) in the case of
Sedco Forex International Inc. dismissed the appeal of the assessee
and the action of the AO was upheld insofar as the mobilisation charges
were concerned. In the case of Transocean Offshore Inc., the ITAT
upheld the view taken by the assessee and directed the AO to assess
the profits on mobilisation charges at 1% of the amount received. This
was done following the Circular of CBDT Instruction No. 1767 dated July
1, 1987 and decision of the third Member in the case of Saipem S.P.A.
v. Deputy Commissioner of Income Tax1
. The High Court has held
that the mobilisation charges reimbursed inter alia even for the services
rendered outside India were taxable under Section 44BB of the Act as
the same is not governed by the charging provisions of Sections 5 and 9
of the Act. Even on the issue of reimbursement in M/s. Sedco Forex
International Drilling Inc. (Civil Appeal No. 4915 of 2010), the High Court
followed its earlier judgments dated September 20, 2007 and May 22,
2009 to hold that reimbursement of expenses incurred by the assessee
was to be included in the gross receipts, and taxable under Section
44BB of the Act.
1 88 ITD 213 (Del)
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12) From the aforesaid brief narration of facts, it may be discerned that
following three types of payments were given by the ONGC to the
assessees:
(i) Mobilisation/demobilisation advance.
(ii) Custom duty reimbursement.
(iii) Operational charges reimbursement.
13) The High Court has held that these payments be also included as
amounts received for computation of aggregate of amounts specified in
sub-section (2) as deemed to be the profits and gains of the businesses
of the assessees, chargeable to tax under the said provision.
14) Mr. Porus F. Kaka, learned senior advocate appearing in some of
these appeals submitted that the aforesaid amounts were, in fact,
towards reimbursement of expenses actually incurred by the assessees.
According to him, the work undertaken was, in fact, the obligation of the
ONGC and it was for ONGC to provide such facilities/material under the
contract. Still the assessees performed the said task at the request of
the ONGC and ONGC simply reimbursed these expenses which did not
have any profit element. It was emphasised by Mr. Kaka that insofar as
the assessee—Sedco Forex International Inc. is concerned, the
expenditure incurred on mobilisation was much higher than the actual
payment received. Thus, this assessee had, in fact, suffered loss on this
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transaction. He also pointed out that the agreement separately provided
for consideration/remuneration for mobilisation and demobilisation of
drilling unit and reimbursement of cost incurred on behalf of the operator
of ONGC. It was submitted that as this was the nature of the amount
received, namely, reimbursement of expenses without there being any
profit element, it could not be treated as ‘amount’ within the meaning of
sub-section (2) of Section 44BB of the Act.
15) Explaining the taxation of income scheme enumerated under
Sections 4, 5 and 9 of the Act, Mr. Kaka submitted that globally the tax
systems can be classified broadly into two models; Worldwide and
Territorial system. India follows a territorial system of taxation specially
qua business income of non-residents, which is taxed only as it is
attributable to operations within the Indian territory. This, according to
him, was clear from the conjoint reading of Sections 4, 5 and 9 of the
Act. Section 4 is the charging section for levying a tax on income of any
person under the Act which provides that income tax shall be levied at
the rates provided by the Finance Act on the ‘total income’ of the
previous year. Scope of total income is provided under Section 5 of the
Act which deals with total income of residents as well as non-residents.
The learned senior counsel pointed out that insofar as non-residents are
concerned, total income as per Section 5(2) of the Act is the income
which is received or deemed to be received in India in such year or on
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behalf of such person; or income which accrues or arises or is deemed
to accrue or arise in India during such year. He, thus, argued that in
respect of non-residents only that income which is received or deemed
to be received in India or which accrues or arises or deemed to accrue
or arise in India is taxable. In order to locate the income which is
deemed to accrue or arise in India, Section 9 is the concerned provision.
Section 9 acknowledges principle of attribution of income under the Act.
Section 9 lays down two broad categories of taxable of income i.e. (a)
business income; and (b) income from interest or royalty or fees for
technical services. Insofar as business income is concerned, it
becomes taxable and only that income becomes chargeable to tax in
India which is attributable to operations carried out in India. Insofar as
second category, namely, income in the nature of interest, royalty or fees
for technical services is concerned, such income would be deemed to
accrue or arise in India, irrespective of situs of the services. The learned
senior counsel argued that insofar as payment for mobilisation which
was received by the assessee is concerned, it is neither income receipt
nor deemed to be received in India. It is in respect of services outside
India and, therefore, does not accrue or arise or deemed to accrue or
arise under Section 5 read with Section 9 of the Act.
16) Proceeding further on the aforesaid line of argument, he submitted
that, in the first instance, it has to be determined that income accrues or
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arises or is deemed to accrue or arise in India. Only when that is
established, the next step is to compute the total income based on other
provisions of the Act and here Chapter IV of the Act which deals with
computation of income from ‘Profits and Gains of Business or
Profession’ gets triggered. It was submitted that, no doubt, Sections
44B, 44BB, 44BBB etc. provide for special mechanism for computing the
income in the case of non-residents on presumptive basis. However,
even when the income is to be computed under any of these provisions,
first pre-requisite is to find out as to whether a particular income has
accrued or arisen or deemed to accrue or arise in India. If that threshold
is not met, the question of treating such payments as ‘income’, merely
because the income is to be computed under special provision, is of no
consequence. Mr. Kaka also referred to Circular No. 495 dated
September 22, 1987 issued by the Central Board of Direct Taxes
(CBDT) which, according to him, explains the Legislature intent behind
inserting Section 44BB in the Act. According to the circular, the
computation of taxable income of a non-resident assessee engaged in
the business of exploration etc. of mineral oils in accordance with the
general mode of computation under Sections 28 to 43A involved a
number of complications. As a measure of simplification, Section 44BB
was inserted by the Finance Act, 1987 with retrospective effect from
April 1, 1983 for determination of income of such tax payers on a
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presumptive basis, at 10% of the amounts mentioned in sub-section (2)
thereof. Relevant portion of that circular is as under:
“21.1 A number of complications are involved in the
computation of taxable income of a taxpayer engaged in the
business of providing services and facilities in connection with
or supply of plant and machinery on hire, used or to be used in
the exploration for and exploitation of mineral oils. With a view
to simplifying the provisions, the Amending Act has inserted a
new Section 44BB which provides for determining of the
income of such taxpayers at 10 percent of the aggregate of
certain amounts which have been specified. This amount will
include the amounts received or due to be received in India on
account of such services or facilities or supply of plant and
machinery.”
17) After arguing that the provisions have to be read in the aforesaid
manner, proposition advanced by the learned senior counsel is that
Section 44BB of the Act is only a computation provision and does not
override Sections 4 and 5 of the Act. For this purpose, he referred to the
judgment of this Court in Union of India & Anr. v. A. Sanyasi Rao &
Ors.2
wherein Section 44AC of the Act has been interpreted in a similar
manner holding that Section 44AC read with Section 206C is the only
machinery provision and not charging Section.
18) Towing the aforesaid line of argument, another submission of
Mr. Kaka was that since Section 44BB is a computation provision under
the head ‘income’, it cannot override the charging section. For this
purpose, he relied upon the judgment of Bombay High Court in
2 (1996) 3 SCC 465
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Commissioner of Income Tax v. F.Y. Khambaty3
. Mr. Kaka also relief
upon the following judgments:
(a) Anglo-French Textile Company, Ltd., by Agents M/s Best &
Company, Ltd., Madras v. Commissioner of Income Tax, Madras4
(b) Ishikawajma-Harima Heavy Industries Ltd. v. Director of
Income Tax, Mumbai5
(c) Carborandum & Co. v. CIT, Madras6
(d) Commissioner of Income Tax, Madras v. Best and
Company (Private) Ltd., Madras7
19) He also cited judgments on the proposition that CBDT Circulars
are binding on tax authorities; reimbursement of actual expenses does
not represent income and, therefore, cannot be taxed; and normal
concept of income cannot be taken away by presumption provisions.
20) In nutshell, as can be seen from the aforesaid arguments, the
proposition advanced by learned senior counsel are as follows:
(a) Principle of apportionment between India and outside India is a
basic principle of income tax law. Where payments are made to a
non-resident outside India, for services rendered outside India,
3 (1986) 159 ITR 203
4 (1954) 25 ITR 27 (SC)
5 (2007) 288 ITR 408 (SC) = (2007) 3 SCC 481)
6 (1977) 108 ITR 335 (SC)
7 (1966) 60 ITR 11 (SC)
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namely mobilization charges for drilling rigs from a foreign location to
a location in India, the same is not chargeable to tax in India under
Sections 5 and 9 of the Act and the same cannot be made
chargeable to tax under Section 44BB of the Act.
(b) A computation provision like Section 44BB cannot override the
charging provisions of Sections 4 and 5. It is so stated in the
instruction No. 1767 dated July 1, 1987 issued by the CBDT. The
understanding of the CBDT is binding on the Revenue.
(c) The charges were reimbursed for services rendered outside India.
Services rendered outside India cannot be chargeable to tax under
the Act. There should be sufficient territorial nexus between the
rendering of services and the territorial limits of the Act to make the
income taxable.
(d) Where the actual expenditure incurred by the assessee for the
mobilization of the rigs was higher than the amount reimbursed, there
cannot be any income chargeable to tax under the Act.
(e) Reimbursement of actual expenditure, which was the obligation of
the operator/company cannot be included in receipts under Section
44BB of the Act as the income tax is levied on income. Further, the
fact of such reimbursements being devoid of any profit element has
not been disputed by the Revenue.
21) Mr. Vohra, learned senior counsel appearing for the appellant
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Pride Foramer S.A. (Civil Appeal No. 4543 of 2013) stated that the
appellant in the said case is a non-resident company incorporated in the
Republic of France. It also entered into contract with ONGC for hire of
its rig for carrying out oil exploration activities by ONGC in India. The rig
was located in Singapore and accordingly, under the contract,
mobilization fees of US$1 million (equivalent to Rs.4,31,10,000/-) was
payable by ONGC to the appellant for and on account of mobilization/
movement of rig from Singapore to the offshore site at Mumbai. In case
of delay, liquidated damages @0.5% of operating day rate subject to a
maximum of 5% of the annual operating charges was payable by the
appellant to ONGC. In Assessment Year 2000-01, during the year under
consideration, the appellant received outside India, net mobilization
charges of US$ 6,42,300 (equivalent to Rs.2,76,89,533/-) after
deduction of liquidated damages for delay, for mobilization from
Singapore to the offshore site (in India).
22) On the aforesaid facts, he submitted that net mobilization charges
received outside India could not be taxed in India, more so, when these
were in the nature of reimbursement of expenses on account of
mobilization/movement of rig from Singapore to the offshore site at
Mumbai. His primary contention was that before this payment could be
included while making computation under Section 44BB of the Act, it had
to be ‘income’ which is taxable in India in the first instance. His
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submissions on the scheme of Sections 4, 5 and 9 of the Act were the
same as that of Mr. Kaka, already noted above. Additionally, he
submitted that insofar as Section 44BB of the Act is concerned, it only
provides a simplified computation mechanism for computing profits and
gains in case of non-resident assessee engaged in activities relating to
business of exploration of mineral oil etc. Thereby, overriding the normal
computation mechanism contained in Sections 28 to 41, 43 and 43A of
the Act. His emphasis was that this provision does not override charging
provisions as contained in Section 4 read with Sections 5 and 9 of the
Act, thereby bringing to tax an amount which is not at all taxable under
the provisions of the Act. In addition to Circular No. 495 dated
September 22, 1987 (already noted above), he also relied upon
Instruction No. 1767 dated July 1, 1987 issued by CBDT explaining the
computation of business income in case of a contractor engaged in
business of exploration of oil where part of the activities are carried out
in India and part of the activities are carried on outside India. It has
been stated as under:
“3. On these facts, it is clear that income accruing or arising to
the non-resident contractor should be apportioned between the
various activities carried on by it, some of which would be
within India and some outside. Where the ownership in the
platform, terminal, treatment plant or other facilities passed
outside India, the non-resident will be taxable only in respect of
the activities performed in India by way of installation, hook-up
and commissioning etc., of the facilities acquired by the Indian
enterprises engaged in oil exploration or production…”
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23) In support of the aforesaid submissions, Mr. Vohra relied upon the
following judgments:
(i) Commissioner of Income Tax and Anr. v. Hyundai Heavy
Industries Co. Ltd.8
(ii) State Bank of Travancore v. Commissioner of Income Tax,
Kerala9
24) To summarise, proposition advanced by Mr. Vohra are as under:
(i) Mobilization fee was in respect of activities carried outside India
prior to coming into existence of the PE in India and, therefore, this
mobilization fee was not taxable at all, in view of Article 7 of
Double Taxation Avoidance Agreement (DTAA) between India and
France, the relevant portion whereof is as under:
“1. The profits of an enterprise of one of the Contracting
States shall be taxable only in that Contracting State unless
the enterprise carries on business in the other Contracting
State through a permanent establishment situated therein. If
the enterprise carries on business as aforesaid, the profits of
the enterprise may be taxed in the other Contracting State
but only so much of them as is attributable to that permanent
establishment….”
(ii) In case the payment is held liable to tax in India, then the same
has to be computed in terms of Sections 4, 5 and 9 read with
Section 44BB of the Act. In that situation, only the mobilization fee
pertaining to voyage within the territorial waters of India can be
subjected to tax.
8 (2007) 7 SCC 422
9 (1986) 158 ITR 102 (SC)
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(iii) Without prejudice to the aforesaid, it is alternatively submitted that
since the appellant only received mobilization fee amounting to
Rs.2,76,89,533/- (equivalent to US$ 6,42,300), after deduction of
liquidated damages, the AO erred in bringing to tax the gross
amount of US$1 million under Section 44BB of the Act.
25) Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates
appearing for some other assessees treaded the same path by adopting
same line of arguments.
26) M/s. Chidananda and Arijit Prasad, learned advocates appearing
for the Revenue put up an emphatic defence to the judgment of the High
Court which has accepted the position taken by the Revenue. It was
argued that assessee Sedco, which is a non-resident company, had
entered into a composite/indivisible contract with ONGC to provide a
drilling unit to carry out drilling operations. A finding of fact to this effect
i.e. a composite/indivisible contract was entered into, was arrived at by
the ITAT and, therefore, matter had to be proceeded on that basis.
Submission was that, as per this contract, it was the obligation of the
assessee to mobilise its resources for the purpose of drilling operations.
According to them, since the payments were made by ONGC to the
assessee in terms of indivisible contract for the purposes of drilling
operations, it was not open to the assessee to claim that mobilisation
24
fee/charges and it should not be included in the aggregate receipts for
the purposes of Section 44BB of the Act and their plea that they are not
actual charges but expenses in the nature of reimbursement by ONGC
was not permissible. It was submitted that though, mobilisation
fee/charges have been separately indicated in the said contract, the
payments have been made by ONGC for supply of drilling unit including
the rigs, for operating these rigs and for providing experts and other
personnel for operating the rigs etc. Therefore, it is a misnomer to term
payment of mobilisation fee/charge as ‘reimbursement’. They are
payments made pursuant to an indivisible contract. Assuming, for the
purposes of argument that it amounts to reimbursement, the same will
not make any difference for the reason that parties may agree to divide
the total amount as a direct payment by way of fees and some part of
the consideration by way of expenses, but this arrangement between the
parties would not alter the character of receipts. A receipt will remain as
such and will not partake the character of an expenditure. According to
the learned counsel, the mobilisation fee/charges paid by ONGC to
assessee amounts to income chargeable to tax.
27) For this purpose, reliance was placed on the definition of “income”
as contained in Section 2(24) of the Act which defines the said
expression in an inclusive manner. Attention was also drawn to Section
2(45) of the Act which defines “total income” to mean total income
25
referred to in Section 5, computed in the manner laid down in the Act. It
was, thus, argued that income had to be computed as per the provisions
of the Act. Even Section 4 of the Act, which is a charging section, clearly
points out that income tax is to be paid ‘in respect of the total income of
the previous year’. Likewise, Section 5 of the Act which deals with
‘scope of total income’ includes all income from whatever the source
derived. It was submitted that, in this hue, Section 9 which deals with
income deemed to accrue or arise in India, had to be looked into.
According to the learned counsel, the assessee had business
connection in India through the equipment owned by it, operating in
India and its employees, experts etc. working in India. Its assets are
employed/used in India and the source of income is in India. Therefore,
the ingredients of Section 9(1)(i) are fulfilled. Thus, assessee has
territorial nexus in India. Further, in a given case, if the assessee fulfils
these requirements and a DTAA applies, this will also constitute a
Permanent Establishment (PE) through which an assessee operates its
business in India. Further, the rigs/equipment are mobilised for its
business operations in India and that source of income is in India,
therefore, the question of apportionment. Thus, the mobilisation
fee/charges paid by ONGC to assessee is an income chargeable to tax
from a conjoint reading of Sections 4, 5 and 9. Therefore, the
submission of the assessee that Section 44BB seeks to tax an event
26
which the charging sections does not seek to tax is incorrect.
28) Adverting to the provisions of Section 44BB of the Act which finds
place in Chapter IV dealing with ‘computation of income’ in respect of
business or profession, it was submitted that the scope and effect of
Section 44BB has been explained in Departmental Circular No. 495
dated September 22, 1987. It has been mentioned in the said circular
that a number of complications were involved in the computation of
taxable income of a taxpayer engaged in the business of providing
services and facilities in connection with or supply of plant and
machinery on hire, used or to be used in the exploration for and
exploitation of mineral oils. Section 44BB was introduced with a view to
simplifying the relevant provisions which provide for determining the
income of such taxpayers at 10 per cent of the aggregate of certain
amounts, which have been specified in the said section. It was
submitted that Section 44BB provides for “presumptive income
determination”. It is a complete code in itself for determining the taxable
income 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. It replaces
Sections 28 to 41 and Sections 43 and 43A (which otherwise mandates
assessee to maintain accounts, claim and prove expenses). Only the
27
receipts are taken into account. Even if the actual profits and gains of
the assessee are more than 10%, only 10% is presumed to be its
income. Thus, 10% is the income and the rest 90% is allowed as
expenditure/allowable claims of the assessee. Assuming that Section
44BB was not on the statute book, assessee would have shown
mobilisation fee as receipt and claimed the actual expenditure and
arrived at the net taxable income. Now, Section 44BB presumes that
only 10% of the aggregate receipts is income and the remaining 90% is
expenditure. It was also argued that in the case of presumptive income
determination like Section 44BB, items of expenditure cannot be claimed
separately, otherwise it would lead to double deduction as Section 44BB
presumes that only 10% of the aggregate receipts is income and the
remaining 90% is expenditure. It was pleaded that when all the
authorities including the final fact finding authority as well as the High
Court have recorded their concurrent findings on consideration of
relevant material, this Court may not disturb those findings. Reliance
was placed on Avasarala Technologies Limited v. Joint
Commissioner of Income Tax, Special Range 1, Bangalore10 and
Commissioner of Income Tax Bihar and Orissa, Patna v. Ashoka
Marketing Co.11
29) Before we appreciate the rival submissions made by counsel for
10 (2015) 14 SCC 732
11 (1972) 4 SCC 426
28
the parties on both sides, it would be apposite to go into the raison
d’etre behind the orders of the ITAT as well as the High Court.
30) The ITAT in its order has taken note of the relevant clauses of the
agreements entered into between ONGC and assessee (Sedco)
pertaining to mobilisation and mobilisation fee. Clause 3.2 of the
Agreement dated September 3, 1985 relating to providing the Shallow
Dash Water Jack Up Rig covering this aspect reads as under:
“Mobilisation
Operator shall pay to Contractor a mobilisation fee of eight
hundred thousand United States Dollars (US $ 800,000)
(“Mobilisation Fee”) for the mobilisation of the Drilling Unit from
its present location in Setubal, Portugal to the first well location
designated by Operator, Offshore Bombay, India. Operator will
notify Contractor no later than fifteen (15) days from the
execution of this Agreement if it desires to mobilize the Drilling
Unit to another location offshore India and no additional costs
shall be charged to Operator for mobilisation to such other
location. In the event that Operator desires to mobilize the
Drilling Unit to another location offshore India and it fails to
notify Contractor by such date, any additional costs incurred by
Contractor for such mobilisation in excess of the Mobilisation
Fee shall be borne by the Operator. Contractor shall invoice
Operator for payment of the Mobilization Fee after the Drilling
Unit is jacked-up on the first well location and ready to spud
the well. Operator shall make payment to Contractor no later
than thirty (30) days after receipt of the invoice.”
31) Clause 4.2 of the Agreement dated July 12, 1986 relating to
Mobilisation of the Drilling Unit (including Rig 21) is also reproduced
hereunder:
“Mobilisation and Mobilisation Fee
29
Contractor shall notify Operator when it is prepared to
commence mobilisation of the Drilling Unit from Muscat, Oman.
Within thirty days of receipt of Contractor’s notice of readiness,
Operator shall instruct Contractor to commence mobilisation,
and Contractor shall forthwith ship the Drilling Unit to the port
of entry (Kandla or Bombay).
Contractor shall be compensated for the mobilisation of the
Drilling Unit from its place of origin by a mobilisation fee
payable within thirty days following the commencement date.”
32) It also noted that apart from the aforesaid mobilisation fee
stipulated in the aforesaid two contracts, the ONGC had undertaken to
pay compensation based on operating rate of US $ 24,550 per 24 hours
a day for all operating time and US $ 24,060 as non operating rate per
day relating to Sedco 252 Rig. Similarly operating rate – R1 and stand
by rate – R2 was also separately stipulated in the other contract dated
July 12, 1986 relating to Rig-21 etc.
33) Thereafter, the ITAT pointed out that even as per the assessee,
there was no dispute about the applicability of Section 44BB of the Act in
relation to payments made by the ONGC under the aforesaid
agreements by way of operating charges and other payments made by
ONGC to the assessee except in relation to mobilisation fee and
reimbursement of certain other expenses as according to the assessee,
these payments were not in the nature of fee (income) but
reimbursement of expenses only. This argument is dealt with by the
ITAT, taking note of the provisions of Section 44BB of the Act. The ITAT
30
concluded that it was a special provision for computing profits and gains
in connection with the business of exploration of mineral oils, effect
whereof was explained in Departmental Circular No. 495 dated
September 22, 1987. It further noted that agreements between ONGC
and the assessee were indivisible in nature as per which entire
payments had been agreed to be made by ONGC for supply of drilling
unit including the rigs, for operating those rigs, and for providing experts
and other personnel for operating those rigs. Therefore, all these
payments were deemed to be the profits and gains of business for the
purposes of Section 44BB of the Act and 10% thereof was to be treated
as income chargeable to tax. Section 44BB of the Act does not provide
that separate consideration mentioned in the Agreement for
transportation of the drilling units/rigs from their present location to the
designated location in India would be excluded from the correct amount
of gross receipts on which 10% profit rate is required to be applied. The
ITAT held that the mobilisation fee paid by ONGC to the assessee had
no nexus with the actual amount incurred by the assessee for
transportation of drilling units/rigs and, therefore, it could not be said that
this payment was made for reimbursement of actual expenditure.
34) This is the summary of the rationale given by the ITAT in support of
its conclusion, as can be seen from the following detailed discussion:
“2.14 The aforesaid Sec. 44BB making a special provision for
31
computing profits and gains in connection with the business of
exploration of mineral oils has been inserted by the Finance
Act, 1987 with retrospective effect from 1st April, 1983. The
scope and effect of new Sec. 44BB was explained in
Departmental Circular No. 495 dated 22nd September, 1987. It
has been mentioned in the said Circular that a number of
complications were involved in the computation of taxable
income of a taxpayer engaged in the business of providing
services and facilities in connection with or supply of Plant &
Machinery on hire, used or to be used in the exploration for
and exploitation of mineral oils. Section 44BB was introduced
with a view to simplifying the relevant provisions which provide
for determining the income of such tax-payers at 10% of the
aggregate of certain amounts, which have been specified in
the said Section. The provisions of Section 44BB were
amended by the Finance Act, 1988 with retrospective effect
w.e.f. 1st April, 1983 which clarifies that applicability of Section
44BB will be restricted to the cases of only non-resident
tax-payers. It is clear from the language used in Section
44BB(2)(a) that the amount referred to in Section 44BB(1) on
which profits have to be calculated @10% will be the
aggregate of amounts paid or payable to the taxpayer or to any
person on his behalf whether in or out of India on account of
the provisions of such services or facilities.
2.15 A perusal of the relevant Agreements executed between
the appellant company and ONGC clearly reveals that both the
Agreements are indivisible contracts. It is true that mobilisation
fee and operating charges have been separately indicated in
the said Agreements but the entire payments have been
agreed to be made by ONGC for supply of the Drilling Unit
including the Rigs, for operating these Rigs, and for providing
experts and other personnel for operating those rigs etc.
Section 44BB specifically provides that the aggregate of the
amounts referred to in sub-section (2) of Section 44BB will be
adopted as the basis for calculating profits @10%, which shall
be deemed to be the profits and gains of such business
chargeable to tax under the head “Profits & Gains of Business
or Profession”. It does not provide that separate consideration
mentioned in the Agreement for transportation of the Drilling
Unit/Rig from their present location to the designated location
in India will be excluded from the aggregate amount of gross
receipts on which 10% profit rate is required to be applied.
ONGC has made the entire payment including the mobilisation
fee, operating charges, daily hire on non operating days etc.
for availing the services and facilities and the supply of Plant &
Machinery on hire agreed to be provided by the appellant
company to ONGC. The mobilisation fee paid by ONGC to the
32
appellant company has no nexus with the actual amount
incurred by the appellant company for transportation of the
Drilling Unit/Rigs to the specified drilling location in India. Even
if the actual expenditure incurred by the appellant company
would have been substantially less, ONGC was liable to pay
the fixed amount of mobilisation fee stipulated in the respective
Agreements.”
35) Before the High Court, argument of the assessee was that amount
of mobilisation charges cannot be included in the amount referred to
under sub-section (2) of Section 44BB of the Act as the mobilisation
charges represent reimbursement of expenses incurred for
transportation of drilling units of rigs from outside India to designated
drilling places in India and the payment has also not been made in India.
In support of his submission, apart from other judgments, heavy reliance
was placed on the decision of this Court in Ishikawajima-Harima
Heavy Industries Ltd. case. The High Court noted that in the said
case, the assessee was a Japanese company, inter alia, engaged in the
business of construction of storage tanks as also engineering etc. It
formed consortium along with few other Japanese companies and one
subsidiary company of the Japanese company. This consortium had
entered into an agreement with an Indian company on January 19, 2001
for setting up a Liquefied Natural Gas (LNG) receiving, storage and
degasification facility at Dahej in the State of Gujarat. A supplementary
agreement was also entered by the parties on March 19, 2001. It was a
turnkey project. At the same time, role and responsibility of each
33
member of the consortium was separately specified and each of the
members of the consortium was to receive separate payments. Insofar
as appellant-assessee is concerned, it was to develop, design, engineer
and procure equipment, materials and supplies to reject and construct
storage tanks of 5 MMTPA capacity, with potential expansion of
10MMTPA capacity at the specified temperature, i.e., 200 degree
celsius. The arrangement also included marine facilities (jetty and island
breakwater) for transmission and supply of LNG to purchaser; to test
and commission facilities relating to receipt and unloading, storage and
regasification of LNG and to send out regasified LNG by means of a
turnkey fixed lump sum price time certain engineering procurement,
construction and commission contract. The contract indisputably
involved: (i) offshore supply, (ii) offshore services, (iii) onshore supply,
(iv) onshore services and (v) construction and erection. The price was
payable for offshore supply and offshore services in US dollars, whereas
that of onshore supply as also onshore services and construction and
erection partly in US dollars and partly in Indian rupees.
36) The High Court noted that while determining the tax liability of the
said foreign company, this Court had taken into consideration Section
5(2), Section 9(1)(i) and Section 9(1)(vii) of the Act and considered the
question of imposition of tax on income arising from a business
connection of the assessee. Holding that income is not taxable in India,
34
the Court premised the conclusion, inter alia, on the ground that as per
clause (a) of Explanation 1 to Section 9(1)(i) of the Act, only such part of
income as is attributable to the operations carried out in India, is taxable
in India and further that sufficient territorial nexus between the rendition
of services and territorial limits of India is necessary to make the income
taxable. As far as offshore supply and offshore services in US$ are
concerned, it was done outside the territory of India and the payment
was also made to the assessee (a foreign company) in US$ outside
India, said payment was not taxable as it was not “income” arising from
a business connection of the said assessee.
37) The High Court, after taking note of the aforesaid judgment, has
held that it is not applicable in the instant case. Reason given is that in
Ishikawajima-Harima Heavy Industries Ltd., the Court had dealt with
the assessment of a non-resident company on its income as per the
provisions of Sections 5 and 9 of the Act and these sections are not
attracted in the instant case, as the same is governed by Section 44BB
of the Act. This is the material distinction, in the opinion of the High
Court, the manner in which the same is discussed needs to be
reproduced. Thus, we hereby quote the relevant portion of the said
discussion:
“…..Therefore, section 5 and section 9 both are aimed a the
income for the taxability under section 4 of the Act, while
section 44BB does not take into Account the income for
calculating the aggregate amount t calculate 10 percent profit
35
and gains. Profit and gains is a type of income to be taxed
under a legal fiction, i.e., @10 percent of the amount specified
in sub-section (2) of section 44BB. Section 44BB is a special
provision relating to non-resident assessee who is providing
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 or outside India.
The section is a complete code in itself. Thus, the reliance
placed by Sri Porus Kaka, learned Counsel for the assessee, is
misplaced as we have observed that the amount referred in
sub-section (2) of Section 44BB are four types of amounts and
all the four types of amounts are mutually inclusive and has to
be taken into account either all of them or any of them and its
clauses themselves provide that whether the payment is made
inside India or outside India.
17.In the present case, a finding has been recorded by the ITAT
that it was not in dispute before the Tribunal that the payment
was made to the appellant company outside India and the
mobilization fee as claimed by the assessee was paid to the
appellant by ONGC has no nexus with the actual amount
incurred by the appellant company for transportation of drilling
units of rigs to the specified drilling locations in India. Hence,
the mobilization fee is not the reimbursement of expenditure.
ONGC was liable to pay a fixed sum as stipulated in the
contract regardless of actual expenditure which may be
incurred by the assessee company for the purpose. In view of
the fictional taxing provision contained under Section 44BB,
the Assessing Officer was right in adding the amount of Rs.
99,04,000/- for the Assessment Year 1986-87 and amount
worth Rs. 64,64,530/- for the Assessment Year 1987-88
received by the assessee towards mobilization charges for the
purpose of imposing income tax and CIT (Appeals) and ITAT
were also right in upholding the order of the Assessing Officer.”
38) We feel that High Court may not be entirely correct in law in
excluding the provisions of Sections 5 and 9 in those cases where the
assessment is opted by the assessee under Section 44BB of the Act.
Submissions of learned counsel for the assessees are justified to the
extent that Section 44BB of the Act is a special provision providing
computation mechanism for computing profits and gains in case of
36
non-resident assessee engaged in activities relating to business of
exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the
Act which deal with charging section, total income and income of
non-resident which arises or deem to arise in India cannot be
sidetracked. These are the provisions which bring a particular income
within the net of income tax. Therefore, it is imperative that a particular
income is covered by the charging provisions contained in Section 5 of
the Act. Indian Income Tax Act, admittedly, follows a territorial system of
taxation. As per this system only that income of a non-resident is
taxable in India which is attributable to operations within the Indian
Territory. Therefore, in the first instance it is to be seen whether a
particular income arises or accrues or deem to arise or accrue within
India. In order to seek this answer, the principles contained in Section 9
have to be applied only when it becomes an income taxable in India as
per Section 9, in case of non-resident, the question of computation of
the said income would arise. To recapitulate the scheme of the Act in
this behalf, it may be stated that Section 4 is the charging section for
levying a tax on the income of any person under the Act and provides
that income-tax shall be levied at the rates provided by the Finance Act
on the ‘total income’ of the previous year of every person. The
expression ‘total income’ has been defined in Section 2(45) of the Act to
mean the total amount of income referred to in Section 5 computed in
37
the manner laid down under the Act.
39) The scope of the total income of any person, which could be
subjected to tax under the provisions of the Act, is defined under Section
5 of the Act and dependent upon the residential status of the persons.
Section 5(1) provides the scope of ‘total income’ in the case of residents,
whereas Section 5(2) provides the scope of ‘total income’ in the case of
non-residents. As per Section 5(2) of the Act, subject to the provisions
of this Act, the ‘total income’ of any previous year of non-resident
includes:
• Income which is received or deemed to be received in India in such
year or on behalf of such person; or
• Income which ‘accrues or arises’ or is deemed to accrue or arise to
him in India during such year.
40) Section 9 enumerates the income which is deemed to accrue or
arise in India. There are two broad categories of taxability of income
provided under this Section, i.e., Business Income and income from
interest or royalty or fees for technical services (FTS).
41) Section 9(1)(i) provides that income is to be deemed to have
accrued or arising in India if the income is accruing directly or indirectly
through any business connection in India or from any property in India or
from any asset or source of income in India or any capital asset situated
38
in India (referred as business income).
Explanation 1(a) to Section 9(1)(i) of the Act provides an exclusion
in the case of operations which are not carried out in India. The
explanation provides that the income of the business deemed under this
clause to accrue or arise in India shall be only that part of the income as
is reasonably attributable to the operations carried out in India. Thus,
business income earned by non-resident is chargeable to tax in India
only to the extent reasonably attributable to the operations carried out in
India.
42) It is, however, pertinent to point out that Section 44BB(2) makes
certain receipts as “deemed income” for the purposes of taxation in the
said provision. Therefore, aid of this provision is to be necessarily taken
to determine whether a particular amount will be “income” within the
meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as
guide to determine whether a particular income is attributed as income
occurred in India. Section 44BB of the Act provides for special provision
for computing profits and gains. However, that would not mean that if
the income is to be computed under this provision, we have to give a
go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High
Court may not be correct. Law in this behalf is settled by the judgment
of this Court in A. Sanyasi Rao case as can be discerned from the
following discussion in the said judgment.
39
“We are further of the view that the basis of a charge relating to
income tax is laid down in Sections 4 to 9 of the Act. Section 4
is the charging section. Income-tax is levied in respect of the
total income of the previous year of every person. Section 5
deals with the scope of total income. Section 6 deals with the
residence in India. Section 7 deals with the income deemed to
be received. Section 8 deals with dividend income. Section 9
deals with the income deemed to accrue or arise in India.
xxx xxx xxx
The crucial words in Section 9(1) to the effect that “all income
accruing or arising, whether directly or indirectly, through or
from any business connection” occurred in Section 42 of the
Income Tax Act, 1922 as well. The said section came up for
consideration before this Court in Anglo-French Textile Co.
Ltd. v. CIT [(1953) 23 ITR 101…
xxx xxx xxx
The counsel for the revenue Dr. Gaurishankar vehemently
contended before us that Section 44AC read with Section
206C are only machinery provisions and not charging sections.
We see force in this plea. The charge for the levy of the
income that accrued or arose is laid by the charging sections,
viz., Sections 5 to 9 and not by virtue of Section 44AC or
section 206C…
xxx xxx xxx
However, the denial of relief provided by sections 28 to 43C to
the particular businesses or trades dealt with in Section 44AC
calls for a different consideration. Even, according to the
revenue, the provisions (sections 44AC and 206C) are only
‘machinery provisions’. If so, why should the normal reliefs
afforded to all assessees be denied to such traders? Prima
facie, all assessees similarly placed under the Income Tax Act
are entitled to equal treatment. In the matter of granting
various reliefs provided under sections 28 to 43C, the
assessees carrying on business are similarly placed and
should there be a law, negativing such valuable reliefs to a
particular trade or business, it should be shown to have some
basis and fair and rational. It has not been shown as to why
the persons carrying on business in the particular goods
specified in section 44AC are denied the reliefs available to
others. No plea is put forward by the revenue that these trades
are distinct and different even for the grant of reliefs under
40
Sections 28 to 43C. The denial of such reliefs to trades
specified in section 44AC, available to other assessees, has no
nexus to the object sought to be achieved by the Legislature.
(emphasis supplied)”
43) Having corrected the position in law, by emphasising that Sections
4, 5 and 9 of the Act are to be kept in mind even in those cases where
assessment is done under Section 44BB of the Act, we are of the
opinion that the argument of the assessees that Section 44BB is only a
computation provision, is also not entirely justified.
44) In the first blush, assessees may appear to be correct in their
contentions that Section 44BB falls in Chapter IV of the Act. Insofar as
computation of income from ‘Profits or Gains of Business or Profession’
is concerned, it has to be computed as per the provisions of Sections 28
to 43D(2). However, certain provisions are made for providing special
mechanism for computing the income on presumptive basis in case of
non-resident and it includes Section 44BB as well.
45) Having put the law in prospective, we need to examine as to
whether mobilisation charges received by the assessees can be treated
as ‘income’ under Section 5 of the Act and would fall within the four
corners of Section 9, namely, whether it can be attributed as having
arisen or deemed to arise in India. Argument of the learned counsel
appearing for the assessees is that the amount was received by way of
reimbursement of expenses for the operation carried outside India and
41
the payment was also received outside India. It is on this premise,
entire edifice is built to argue that it is not an “income” and, in any case,
not taxable in India at the hands of the assessees which are foreign
entities.
46) We have already reproduced above Clause 3.2 of the Agreement
dated September 3, 1985 and Clause 4.2 of the Agreement dated July
12, 1986. Clause 3.2 of the Agreement dated September 3, 1985
pertains to providing the Shallow Dash Water Jack Up Rig against which
payment was made to the assessees. This Clause says that the
assessees shall be paid ‘mobilisation fee’ for the mobilisation of drilling
unit from its present location in Portugal to the well location designated
by ONGC, offshore Mumbai, India. Fixed amount is agreed to be paid
which is mentioned in the said Clause. The aforesaid mobilisation fee
was payable to the assessees after the jacking up of the drilling at the
designated location and ready to spud the well. After the aforesaid
operation, assessees were required to raise invoice and ONGC was
supposed to make the payment within 30 days of the receipt of this
invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 is
concerned, it related to mobilisation of drilling unit. Here again,
‘mobilisation fee’ was payable for the mobilisation of the drilling unit from
the place of its origin to the port of entry (Kandla Port, Mumbai). What
follows from the above is that a fixed amount of mobilisation fee was
42
payable under the aforesaid contracts as “compensation”. Contracts
specifically describe the aforesaid amounts as ‘fee’. In this hue, we
have to consider as to whether it would be treated as “income” under
Section 5 of the Act and can be attributed as income earned in India as
per Section 9 of the Act. For this purpose, Section 44BB(2) has to be
invoked.
47) Section 44BB starts with non-obstante clause, and the formula
contained therein for computation of income is to be applied irrespective
of the provisions of Sections 28 to 41 and Sections 43 and 43A of the
Act. It is not in dispute that assessees were assessed under the said
provision which is applicable in the instant case. For assessment under
this provision, a sum equal to 10% 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
the business or profession’. Sub-section (2) mentions two kinds of
amounts which shall be deemed as profits and gains of the business
chargeable to tax in India. Sub-clause (a) thereof relates to amount paid
or payable to the assessee or any person on his behalf on account of
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. Thus, all amounts
pertaining to the aforesaid activity which are received on account of
43
provisions of services and facilities in connection with the said facility are
treated as profits and gains of the business. This clause clarifies that
the amount so paid shall be taxable whether these are received in India
or outside India. Clause (b) deals with amount received or deemed to
be received in India in connection with such services and facilities as
stipulated therein. Thus, whereas clause (a) mentions the amount which
is paid or payable, clause (b) deals with the amounts which are received
or deemed to be received in India. In respect of amount paid or payable
under clause (a) of sub-section (2), it is immaterial whether these are
paid in India or outside India. On the other hand, amount received or
deemed to be received have to be in India.
48) From the bare reading of the clauses, amount paid under the
aforesaid contracts as mobilisation fee on account of provision of
services and facilities in connection with the extraction etc. of mineral oil
in India and against the supply of plant and machinery on hire used for
such extraction, clause (a) stands attracted. Thus, this provision
contained in Section 44BB has to be read in conjunction with Sections 5
and 9 of the Act and Sections 5 and 9 of the Act cannot be read in
isolation. The aforesaid amount paid to the assessees as mobilisation
fee is treated as profits and gains of business and, therefore, it would be
“income” as per Section 5. This provision also treats this income as
earned in India, fictionally, thereby satisfying the test of Section 9 of the
44
Act as well.
49) The Tribunal has rightly commented that Section 44BB of the Act is
a special provision for computing profits and gains in connection with the
business of exploration of mineral oils. Its purpose was explained by the
Department vide its Circular No. 495 dated September 22, 1987,
namely, to simplify the computation of taxable income as number of
complications were involved for those engaged in the business of
providing 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 etc. Instead of going into the nitigrities of such
computation as per the normal provisions contained in Sections 28 to 41
and Sections 43 and 43A of the Act, the Legislature has simplified the
procedure by providing that tax shall be paid @10% of the ‘aggregate of
the amounts specified in sub-section (2)’ and those amounts are
‘deemed to be the profits and gains of such business chargeable to
tax...’. It is a matter of record that when income is computed under the
head ‘profits and gains of business or profession’, rate of tax payable on
the said income is much higher. However, the Legislature provided a
simple formula, namely, treating the amounts paid or payable (whether
in or out of India) and amount received or deemed to be received in
India as mentioned in sub-section (2) of Section 44BB as the deemed
profits and gains. Thereafter, on such deemed profits and gains
45
(treating the same as income), a concessional flat rate of 10% is
charged to tax. In these circumstances, the AO is supposed to apply the
provisions of Section 44BB of the Act, in order to find out as to whether a
particular amount is deemed income or not. When it is found that the
amount paid or payable (whether in or out of India), or amount received
or deemed to be received in India is covered by sub-section (2) of
Section 44BB of the Act, by fiction created under Section 44BB of the
Act, it becomes ‘income’ under Sections 5 and 9 of the Act as well.
50) It is stated at the cost of repetition that, in the instant case, the
amount which is paid to the assessees is towards mobilisation fee. It
does not mention that the same is for reimbursement of expenses. In
fact, it is a fixed amount paid which may be less or more than the
expenses incurred. Incurring of expenses, therefore, would be
immaterial. It is also to be borne in mind that the contract in question
was indivisible. Having regard to these facts in the present case as per
which the case of the assessees get covered under the aforesaid
provisions, we do not find any merit in any of the contentions raised by
the assessees. Therefore, the ultimate conclusion drawn by the AO,
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
46
assessees are dismissed.
51) In this batch of appeals, Civil Appeal No. 3695 of 2012 is the
solitary appeal which is preferred by the Director of Income Tax, New
Delhi (Revenue) against the judgment of the High Court of Uttarakhand.
The computation of income of the assessee was done under Section
44BB of the Act. However, the amount which was sought to be taxed
was reimbursement of cost of tools lost in hole by ONGC. It is, thus,
clear that this was not the amount which was covered by sub-section (2)
of Section 44BB of the Act as ONGC had lost certain tools belonging to
the assessee, and had compensated for the said loss by paying the
amount in question. On these facts, conclusion of the High Court is
correct. Even otherwise, the tax effect is Rs.15,12,344/-. Therefore,
Civil Appeal No. 3695 of 2012 filed by the Revenue is dismissed.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
OCTOBER 30, 2017.
