Non-resident company's oil exploration services taxed at 15%, not 10%

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Case Name:

Commissioner of Income Tax & Anr Vs ONGC Ltd. (High Court of Uttarakhand)

Income Tax Appeal No.112 of 2007

Date: 8th April 2008

Key Takeaways:

1. Technical services for oil exploration by non-resident companies are taxable at 15% under Section 44D read with Section 115A.

2. The nature of services, not just the industry, determines the applicable tax rate.

3. Upgrading equipment for oil exploration qualifies as technical services.

Issue: 

Should the income received by the non-resident company for services rendered to ONGC for oil exploration be taxed at 10% under Section 44BB or 15% under Section 44D read with Section 115A of the Income Tax Act, 1961?

Facts:

Let's chat about what happened here. So, during the 2001-02 assessment year, this non-resident company (NRC) provided some services to ONGC. What kind of services, you ask? Well, they did three main things:

1. They upgraded the instrumentation of some solar equipment at offshore platforms.

2. They overhauled a Solar Mars Gas Turbine.

3. They commissioned a Solar Engine and did a boroscope inspection at the Neelam Complex.

All of this was for oil exploration, extraction, and production. Pretty technical stuff, right?

Arguments:

Now, here's where things get interesting. The NRC (our non-resident company) said, "Hey, we should be taxed at 10% under Section 44BB." Their argument was that they were providing services related to oil exploration, which falls under that section.

But the Revenue (that's the tax department) disagreed. They said, "No, no, what you're doing is providing technical services. That means you should be taxed at 15% under Section 115A read with Section 44D."

So, it all came down to how these services were classified. Are they general oil exploration services or specific technical services? That's what the court had to figure out.

Key Legal Precedents:

In this case, the court didn't really rely on previous cases. Instead, they focused on interpreting the relevant sections of the Income Tax Act, 1961. They looked closely at Section 44BB, Section 44D, and Section 115A, as well as the explanation of "fees for technical services" in Section 9(1)(vii).

Judgement:

The High Court sided with the Revenue. They said, "Look, these services aren't just general oil exploration services. They're specific technical services."

The court's reasoning went like this:

1. The NRC didn't supply any plants or machinery during the assessment year.

2. The services they provided were for upgrading existing equipment.

3. This kind of work falls under the definition of "technical services" as per the Act.

So, the court concluded that the NRC should pay tax at 15% under Section 44D read with Section 115A, not 10% under Section 44BB. They overturned the earlier decisions by the CIT (Appeals) and ITAT, and upheld the original assessment by the Assessing Officer.

FAQs:

Q1: What was the main dispute in this case?

A1: The main dispute was whether the services provided by the non-resident company should be taxed at 10% or 15%.

Q2: Why did the court rule for the higher tax rate?

A2: The court determined that the services provided were technical in nature, falling under the definition of "fees for technical services" in the Income Tax Act.

Q3: Does this ruling apply to all oil exploration services?

A3: Not necessarily. The ruling suggests that the nature of the specific services provided, rather than the industry alone, determines the applicable tax rate.

Q4: What sections of the Income Tax Act were key in this case?

A4: Sections 44BB, 44D, and 115A were the main sections discussed, along with the explanation in Section 9(1)(vii).

Q5: Could this ruling affect other non-resident companies working in oil exploration?

A5: Yes, it could. Non-resident companies providing similar technical services in oil exploration might now be subject to the higher 15% tax rate.

This appeal, preferred under Section 260A of the Income Tax Act, 1961, is directed against the judgment and order dated 16.10.2006, passed by the Income Tax Appellate Tribunal, Delhi Bench ‘G’, (hereinafter referred as ITAT), whereby the order dated 27.01.2004, passed by Commissioner of Income Tax Appeals (hear in after referred as CIT (Appeals), Dehradun, is affirmed. CIT (Appeals) allowed the appeal of the assessee and set aside the assessment order passed by the Assessing Officer under Section 143(3) of Income Tax Act, 1961.

2) Heard learned counsel for the parties.

3) Brief facts of the case are that Oil & Natural Gas Commission Limited (hereinafter referred as ONGC) is representative of the non-resident company (hereinafter referred as NRC)-respondent assessee in the case. The assessee has rendered its services to ONGC for the purposes of exploration, extraction and production of mineral oils. During the assessment year 2001-02 assessee NRC rendered following services to ONGC:-

(a) for retrofit/upgradation of instrumentation of solar “SATURN & CANTAUR” pac at BHN & BHF offshore platforms.

(b) for carrying out zero hour overhaul of Solar Mars Gas Turbine and

(c) for commissioning of Solar Engine and boroscope inspection of Solar engine at Neelam Complex.

(4) The case of assessee is that tax is to be charged on the income of assessee under Section 44BB of Income Tax Act, 1961, while that of the revenue / present appellant, is that the assessee has rendered the technical services for which he has been paid fee and his case is covered under Section 115A read with Section 44D of the Act.

(5) The question of law involved in this appeal is that whether in respect of the receipts for the aforementioned three services rendered by NRC, the tax is chargeable under Section 44BB of Income Tax Act, 1961, or under Section 115A read with Section 44D of the Act?

(6) Before further discussions, we think it just and proper to quote the relevant provision of law referred by the parties. Sub section (1) of Section 44BB of Income Tax Act, 1961 reads as under:-

“44BB. (1) Notwithstanding anything to the contrary contained in section 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 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.”

The above sub-section (1) of Section 44BB of the Act contains the proviso quoted above which provides that the sub-section would not apply where the provisions of 42, 44D, 115A or 293A are applicable in computing the profits and gains or income of the assessee. Learned counsel for the appellants has argued that since the assessee has only rendered technical services for which he has been paid the fee as such his case is covered under Section 115A read with Section 44D of the Income Tax Act, 1961. Section 44D contains special provision for computing income by way of royalties or fee for technical services, in the case of foreign companies. Section 115A of the Act provides the rates of tax on dividends, royalties and technical service fees in the case of foreign companies. In both the sections an explanation has been added clarifying that expression “fee for technical services” shall have same meaning as in the case of explanation 2 to clause (vii) of sub-section (1) of Section 9 of the Act. Said explanation 2 of clause (vii) of sub-section (1) of Section 9 reads as under:-

“Explanation 2. For the purposes of this clause “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.”

(7) Learned counsel for respondent argued that the services rendered by the assessee respondent relate to upgradation of plant and machineries for the purposes of drilling and oil exploration. However, it is not the case of the respondent assessee that the plants and machineries were supplied by it during the Assessment Year, as such the services rendered by NCR assessee is nothing but the technical services rendered by it in the work of oil exploration for which he has charged the fee.

(8) In the above circumstances, we do not agree with the view taken by CIT (Appeal) and ITAT in the matter, and uphold the view taken by the Assessing Officer whereby the assessee as a technical service provider has been directed to pay tax at the rate of 15 per cent under Section 44D read with Section 115A of Income Tax Act, 1961, instead of 10 percent chargeable under Section 44BB of the Act. The appeal is allowed. Impugned order passed by ITAT and CIT (Appeals) are set aside. The substantial question of law accordingly stands answered.

(Dharam Veer, J.) (Prafulla C. Pant, J.)