Court upholds taxation of non-resident's foreign income under Section 44BB (of Income Tax Act, 1961)

Get the full picture - access the original judgement of the court order here

Case Name:

Fugro Geoteam As Vs Additional Commissioner of Income Tax, International Taxation (High Court of Uttarakhand)

Income Tax Appeal No. 13 of 2015

Key Takeaways

1. Non-resident companies must include all income, whether received in India or abroad, when calculating income under Section 44BB (of Income Tax Act, 1961).

2. Section 44BB (of Income Tax Act, 1961) provides a special taxation scheme for non-residents in specific industries, overriding general provisions.

3. The non-obstante clause in Section 44BB (of Income Tax Act, 1961) doesn't extend to Sections 4 and 5, but this doesn't prevent taxation of foreign income.

4. Assessees can opt for lower profits under Section 44BB(3) (of Income Tax Act, 1961) if they maintain proper books and get audited.

Issue

Can mobilization advance received by a non-resident company outside India be included in calculating income under Section 44BB (of Income Tax Act, 1961)

Facts

- FUGRO GEOTEAM AS is a Norwegian company engaged in 3D seismic data acquisition.

- The case pertains to the assessment year 2008-2009.

- The company filed a return declaring income of ₹18,27,42,870 under Section 44BB (of Income Tax Act, 1961).

- The assessing officer rejected the claim for taxation under Section 44BB (of Income Tax Act, 1961) and treated the income as fees for technical services.

- The Dispute Resolution Panel affirmed the assessing officer's view.

- The Income Tax Appellate Tribunal also rejected the company's contention.

- The company received mobilization/demobilization fees of ₹28,21,23,166 for services provided outside India.

Arguments

Appellant (FUGRO GEOTEAM AS):

1. Section 5 (of Income Tax Act, 1961) is a charging section, while Section 44BB (of Income Tax Act, 1961) is a computation section.

2. Computation section (44BB) cannot override the charging section (5).

3. Income received outside India cannot be taxed as per Section 5(2) (of Income Tax Act, 1961).

4. The non-obstante clause in Section 44BB (of Income Tax Act, 1961) doesn't include Sections 4 and 5.

Revenue Department:

1. Section 44BB (of Income Tax Act, 1961) is a special provision for non-residents in specific industries.

2. All amounts received, whether in India or abroad, must be included for calculation under Section 44BB (of Income Tax Act, 1961).

3. The case is already settled by a previous judgment (Sedco Forex International Inc. versus Commissioner of Income Tax and another).

Key Legal Precedents

1. (2008) 299 ITR 238 (Uttarakhand) (Sedco Forex International Inc. versus Commissioner of Income Tax and another) - The revenue department argued that this case had already settled the matter.

Judgement

1. The High Court dismissed the appeal, ruling against FUGRO GEOTEAM AS.

2. The court held that amounts received by a non-resident, whether in India or outside, must be included for calculating income under Section 44BB (of Income Tax Act, 1961).

3. Section 44BB (of Income Tax Act, 1961) provides a special taxation scheme that can be opted for by non-residents, or they can choose to be governed by Sections 4 & 5 read with Sections 28 to 42.

4. The provisions of Section 5(2) (of Income Tax Act, 1961) do not prevent the inclusion of mobilization advance received outside India in the calculation under Section 44BB (of Income Tax Act, 1961).

5. The court noted that the appellant did not claim the benefit of Section 44BB(3) (of Income Tax Act, 1961), which allows for claiming lower profits if proper books are maintained and audited.

FAQs

Q1: What is Section 44BB (of Income Tax Act, 1961)?

A1: Section 44BB (of Income Tax Act, 1961) is a special provision for computing profits and gains for non-resident companies engaged in providing services or facilities related to oil and gas exploration.

Q2: Can a company choose not to be taxed under Section 44BB (of Income Tax Act, 1961)?

A2: Yes, companies can opt for regular assessment under Sections 28 (of Income Tax Act, 1961) to 42 instead of Section 44BB (of Income Tax Act, 1961).

Q3: What is the significance of Section 44BB(3) (of Income Tax Act, 1961)?

A3: It allows assessees to claim lower profits if they maintain proper books of accounts and get them audited.

Q4: Does this judgment apply to all non-resident companies?

A4: This judgment specifically applies to non-resident companies in industries covered by Section 44BB (of Income Tax Act, 1961), such as oil and gas exploration services.

Q5: How does this judgment impact international taxation?

A5: It clarifies that for specific industries under Section 44BB (of Income Tax Act, 1961), global income must be considered for tax calculation in India, potentially increasing tax liability for non-resident companies.

1. The appeal has been filed under Section 260A (of Income Tax Act, 1961) (hereinafter referred to as ‘the Act’). The assessee is foreign company incorporated under the laws of Norway. It is engaged in the activities relating to acquisition of 3D sesismic data under contracts with Reliance Industries Ltd. and ONGC. The relevant assessment year is 2008-2009. The return of income was filed on 28.11.2008 declaring income of 18,27,42,870/- from contract receipt under Section 44BB (of Income Tax Act, 1961). It was selected for scrutiny. The assessee’s claim for being taxed under Section 44BB (of Income Tax Act, 1961) was rejected and its income has been taxed as fees from technical services. Appellant/assessee moved an objection before the Dispute Resolution Panel. The Panel affirmed the view taken by the assessee. Assessee filed an appeal. After the matter received the attention at the hands of the Income Tax Appellate Tribunal and the contention of the appellant not being accepted, appellant is before us.

2. We have heard learned counsel for the appellant and also learned counsel for the Department.

3. The questions of law, which have been raised, are as follows:-

“a. Whether on facts and in the circumstances of the case, the Honble Tribunal erred in law in not appreciating the true construction of Section 44BB (of Income Tax Act, 1961) ?

b. Whether on the facts and circumstances of the case and in law, the Tribunal erred in law in holding that the mobilization/demobilization fee amounting to 28,21,23,166/- received by the appellant on account of services provided/vessel operated outside India were to be included in calculating the aggregate amount referred to in sub-section (2) of Section 44BB (of Income Tax Act, 1961) ?

c. Whether on the facts and in the circumstances of the case and in law the findings of the Tribunal can be said to be perverse ?

4. According to the Department, the question of law stands answered by virtue of decision of this Court reported in (2008) 299 ITR 238 (Uttarakhand) (Sedco Forex International Inc. versus Commissioner of Income Tax and another).

5. Learned counsel for the appellant would, however, contend that the substantial question of law, which is raised in this case, specifically, namely, substantial question of law No.2, which is, whether the income of the appellant received outside India can be brought to tax under Section 44BB (of Income Tax Act, 1961) has not been answered by the said judgment.

6. Per contra, learned counsel for the revenue submits that the questions are answered. We allowed the learned counsel for the appellant to argue the matter on merits. He drew our attention to sub-section (2) of Section 5 (of Income Tax Act, 1961). According to him, Section 5 (of Income Tax Act, 1961) is a charging Section. Section 44BB (of Income Tax Act, 1961) is the computation Section. Therefore, computation section cannot go against the charging section, runs the argument of the appellant. In other words, he would submit that it is the case where the appellant has received income in the form of mobilization advance both within the territory of India as defined in the Act as also beyond the territory of India or rather outside India. In regard to the mobilization advance which was received within the territory of India, there can be no objection and the appellant offered it also. But the objection is taken to the said amount being the subject matter of levy under Section 44BB (of Income Tax Act, 1961) for the reason that if that was permitted that would be in the teeth of the provision contained under sub-section (2) of Section 5 (of Income Tax Act, 1961). Sub-section (2) of Section 5 (of Income Tax Act, 1961), no doubt, relates to a charge of Income-Tax in respect of the income of the non-residents. It certainly proclaims that the tax is to be levied with reference to either receipt or accrual with reference to the territory of India. In other words, unless there is a receipt or accrual of income by the non-resident within the territory of India there cannot be no levy of tax. Section 44BB (of Income Tax Act, 1961), on the other hand, reads as follows:-

“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 not-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 (of Income Tax Act, 1961) or section 44D (of Income Tax Act, 1961) or section 44DA (of Income Tax Act, 1961) or section 115A (of Income Tax Act, 1961) or section 293A (of Income Tax Act, 1961) 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 assesse 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.

(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 (of Income Tax Act, 1961) and gets his accounts audited and furnishes a report of such audit as required under section 44AB (of Income Tax Act, 1961), 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 (of Income Tax Act, 1961) and determine the sum payable by, or refundable to, the assessee.”

7. Sub-section (1) of Section 44BB (of Income Tax Act, 1961) proclaims that in respect of a non-resident which the appellant claims it is, if it is to be computed under section 44BB (of Income Tax Act, 1961) it will be assessed as provided in sub-section (2) of the Act. It starts with a non-obstante clause but the non- obstante clause is confined in its field to Sections 28 to 41 and 43 & 43A of the Act. One of the arguments of the learned counsel for the appellant is that the non-obstante clause does not take within its fold Sections 4 and 5 and since Sections 4 and 5 stand, it is not open to the authorities to have a parallel system of taxation contrary to Sections 4 and 5. We are unable to accept any of the contentions of the appellant. The appellant is admittedly a non-resident. Section 44BB (of Income Tax Act, 1961) provides for special scheme for taxation in respect of the income of a non-resident and relating to the activities which are mentioned therein. It provides for taxation with reference to pre-ordained criteria which are mentioned in the provision itself. In other words, the mechanism is specified by the statute. The amounts received or payable to the assessee, who is a non-resident, whether in India or outside India, have to be included for the purpose of calculating the income under Section 44BB (of Income Tax Act, 1961). This is a special provision which may be availed of by the non-resident or he may choose to be governed by the provisions contained in Sections 4 & 5 read with Sections 28 to 42. Section 28 (of Income Tax Act, 1961) deals with the computation of income under the head of income profits and gains. This is a special mechanism to obviate the procedure of regular assessment which would have to be made if the assessee did not invoke the aid of Section 44BB (of Income Tax Act, 1961). This is clear from the provision of sub-section (3) of Section 44BB (of Income Tax Act, 1961), as sub-section (3) of Section 44BB (of Income Tax Act, 1961) provides that it is open to the assessee to claim lower profits and gains, if he keeps and maintains such books of account and other documents as required under sub-section (2) of Section 44AA (of Income Tax Act, 1961) and gets the accounts audited and furnish a report. There is no case for the appellant that the appellant is invoking the aid of sub-section (3) of Section 44BB (of Income Tax Act, 1961). In view of the admitted position that the appellant does not claim the benefit of sub-section (3) of Section 44BB (of Income Tax Act, 1961), we do not see how the appellant can be heard to argue that the amount which he has received by way of mobilization advance outside India should not be included for the purpose of calculating the income under section 44BB (of Income Tax Act, 1961) in the teeth of the clear provision contained in sub-section (2) of Section 44BB (of Income Tax Act, 1961). On our understanding, the provisions contained in Section 5(2) (of Income Tax Act, 1961) will not stand on the way of the Authorities insisting on the amount of mobilization advance received by the appellant outside India being included. The provisions contained in sub-section (2) of Section 44BB (of Income Tax Act, 1961), clearly provides for reckoning the amount received outside India also for calculating the amount. The question is answered against the appellant.

8. In such circumstances, there is no merit in the appeal.

The appeal is dismissed. No order as to costs.

(V.K. Bist, J.) (K.M. Joseph, C.J.)

31.03.2015 31.03.2015