ONGC wins tax case; payments to foreign firms for oil extraction services taxable under Section 44BB, not 44D.

Case Name:

Oil & Natural Gas Corporation Limited vs Commissioner of Income Tax

Civil Appeal No. 731 of 2007

Key Takeaways:

- Payments made by ONGC to foreign companies for services related to oil and gas extraction are taxable under Section 44BB, not Section 44D.

- The court looked at the "pith and substance" of the agreements, which were inextricably linked to oil and gas prospecting, extraction, and production.

- The dominant purpose of the agreements was for oil and gas activities, even if ancillary technical services were involved.

- The court overturned the High Court's decision and restored the view of the Income Tax Appellate Tribunal.

Issue:

Whether the payments made by ONGC to foreign companies for providing various services in connection with prospecting, extraction, or production of mineral oil should be taxed as "fees for technical services" under Section 44D or on a presumptive basis under Section 44BB of the Income Tax Act.

Facts:

ONGC entered into agreements with various foreign companies to provide services related to oil and gas exploration, extraction, and production. The tax authorities initially assessed these payments under Section 44D (fees for technical services), but the Appellate Commissioner and Income Tax Appellate Tribunal held that they should be taxed under Section 44BB (income from the business of prospecting for mineral oils). The High Court of Uttarakhand overturned this view and ruled in favor of taxation under Section 44D. ONGC appealed to the Supreme Court.

Arguments:

- ONGC argued that the "pith and substance" of the agreements was inextricably linked to oil and gas prospecting, extraction, and production, even if technical services were involved. Therefore, Section 44BB should apply.

- The Revenue contended that the agreements clearly involved the rendering of technical services by the foreign companies, making Section 44D applicable.

Key Legal Precedents:

- The court cited the principles of strict interpretation of fiscal statutes and exemption notifications, as established in cases like Swedish Match AB v. SEBI, CIT v. Ajax Products Ltd, B. Premanand v. Mohan Koikal, Novopan India Ltd. v. CCE, and Hansraj Gordhandas v. CCE and Customs.

Judgement:

The Supreme Court allowed ONGC's appeals and set aside the High Court's orders. The court held that the "pith and substance" of each agreement was inextricably connected with prospecting, extraction, or production of mineral oil, even if ancillary works were contemplated. The dominant purpose was oil and gas activities, so the payments should be taxed under Section 44BB, not Section 44D. The court restored the view of the Income Tax Appellate Tribunal.

FAQs:

Q1: What is the significance of this case?

A1: This case clarifies the taxation of payments made by oil and gas companies to foreign firms for services related to exploration and extraction activities. It establishes that such payments should be taxed under Section 44BB, which deals specifically with the business of prospecting for mineral oils, rather than the more general Section 44D for technical services.

Q2: How did the court determine the applicable section?

A2: The court looked at the "pith and substance" or dominant purpose of the agreements between ONGC and the foreign companies. Since the agreements were inextricably linked to oil and gas prospecting, extraction, and production, even if technical services were involved, the court held that Section 44BB should apply.

Q3: What legal principles did the court rely on?

A3: The court relied on the principles of strict interpretation of fiscal statutes and exemption notifications, as established in various precedents. It emphasized that the clear language of the provisions should be followed, and exemptions or exceptions should be interpreted narrowly.

Q4: What does this mean for ONGC and the foreign companies?

A4: ONGC will be able to assess the payments made to foreign companies under Section 44BB, which may have different tax implications than Section 44D. The foreign companies may also be impacted by the change in the applicable tax section.

Q5: Does this case have broader implications for the oil and gas industry?

A5: Yes, this case provides clarity on the taxation of payments made by oil and gas companies to foreign firms for services related to exploration and extraction activities. It establishes a precedent for how such payments should be taxed under the Income Tax Act, which could impact other companies in the industry.

1. The issue that arise for consideration in this group of appeals is common and may be summarized as follows.

“Whether the amounts paid by the ONGC to the non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as “fees for technical services” under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act or will such payments be taxable on a presumptive basis under Section 44BB of the Act”?

2. The appellant-ONGC has been assessed in a representative capacity on behalf of the different foreign companies with whom it had executed separate agreements for services to be rendered by such companies in connection with prospecting, extraction or production of mineral oils by ONGC.

3. The primary/assessing authority took the view that the assessments should be made under Section 44D of the Act and not Section 44BB of the Income Tax Act (hereinafter referred to as the ‘Act’). The Appellate Commissioner and the Income Tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of separate appeals before the High Court of Uttrakhand in respect of each of the assessments made for the years in question. The High Court considered the facts of Civil Appeal No. 731 of 2007 (Income Tax Appeal No. 239 of 2001 before the High Court) as the lead case and on the grounds and reasons assigned in the impugned order dated 15.12.2005, the High Court overturned the view taken by the Appellate Commissioner and the learned Tribunal and held the payments made to be liable for assessment under Section 44D of the Act. Aggrieved, the ONGC has filed the present group of appeals.

4. We have heard Shri Arvind P. Datar, learned senior counsel appearing for the appellant and Shri Guru Krishna Kumar, learned senior counsel for the Revenue.

5. As the facts of Civil Appeal No. 731 of 2007 corresponding to I.T.A. No. 239 of 2001 has been considered in detail by the High Court and the view expressed in the said proceeding have been followed in all the other appeals before the High Court, it may be necessary to notice in detail the said facts arising in the appeal in question.

6. The appellant-ONGC and a non resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for the assessment year 1986-87. Faced with the different views taken by the authorities under the Act, as mentioned above, the High Court proceeded to analyse the different clauses of the contract between the parties. A consideration of such analysis made by the High Court would go to show that it had come to light before the High Court that the contract between the parties visualized operation of the oil rigs including drilling operations by the personnel made available under the contracts/agreements, which fact was further stated on affidavit before the High Court by an authorized official of the ONGC in the following terms.

“That under the said agreement, Foramer was required, through its personnel listed in Exhibit-A to the said agreement, to carry out inter-alia the drilling operations specified in clause 4.3 to 4.10 of the said agreement.”

Despite the above, the High Court took the view that under the agreement payment to M/s. Foramer France was required to be made at the rate of 3450 USD per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company. Specifically, taking the view that the contract did not mention that the personnel of the non-resident company was also carrying out the work of drilling of wells and as the company had received fees for rendering service the payments made were liable to be taxed under the provisions of Section 44D of the Act. As already noticed, in the rest of the appeals before the High Court the aforesaid decision dated 15.12.2005 passed in I.T.A. No. 239 of 2001 was followed on the basis that the facts in all the appeals were similar to those involved in I.T.A. No. 239 of 2001.

7. It will be convenient and in fact necessary for the purposes of present adjudication to take a careful note of the provisions of Sections 44BB, 44D and also clause (vii) of Explanation 2 to Section 9(1) of the Income Tax Act, 1961 (hereinafter for short the ‘Act’).

“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 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.]” “44D. Special provision for computing income by way of royalties, etc., in the case of foreign companies.- Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,—

(a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received [from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property;

(b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received [from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] after the 31st day of March, 1976 [but before the 1st day of April, 2003];

(c) [***]

(d) [***]

Explanation.—For the purposes of this section,—

(a) "fees for technical services" shall have the same meaning as in [Explanation 2] to clause (vii) of sub-section (1) of section 9;

(b) "foreign company" shall have the same meaning as in section 80B;

(c) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(d) royalty received [from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern] after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976.]”

“ 9. (1) (vii) income by way of fees for technical services payable by—

(a) the Government ; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.]

[Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.]

[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".]

(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.

[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]”

8. A careful reading of the aforesaid provisions of the Act goes to show that under Section 44BB(1) in case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10% of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in Sub-section (2). On the other hand, Section 44D contemplates that if the income of a foreign company with which the government or an Indian concern had an agreement executed before 1.4.1976 or on any date thereafter the computation of income would be made as contemplated under the aforesaid Section 44D. Explanation (a) to Section 44D however specifies that “fees for technical services” as mentioned in Section 44D would have the same meaning as in Explanation 2 to Clause (vii) of Section 9(1). The said explanation as quoted above defines “fees for technical services” to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. “fees for technical services” any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head “salaries”. Fees for technical services, therefore, by virtue of the aforesaid explanation will not include payments made in connection with a mining project.

9. Before the High Court, a Circular No. 1862 dated 22.10.1990 having a bearing on the subject was placed for consideration by the appellant-assessee. The aforesaid instruction may be conveniently reproduced herein below.

“Subject: Definition of “fees for technical services” in Explanation to Section 9(1) (vii) of the Income Tax Act, 1961 whether prospecting for or extraction of production of mineral oil are “mining” operations-clarification regarding. The expression “fees for technical services” has been defined in Explanation 2 to Section 9(1) (vii) of the Income Tax Act, 1961 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".

2. The question whether prospecting for, or extraction or production of, mineral oil can be termed as ‘mining operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions ‘mining project’ or ‘like projects’ occurring in Explanation 2 to Section 9(1) (ii) of the Income Tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas.

3. In view of the above opinion, the consideration for such services will not be treated as fees for technical services for the purpose of Explanation 2 to Section 9(1) (vii) of the Income-tax Act, 1961. Payments for such services to a foreign company, therefore, will be income chargeable to tax under the provisions of section 44BB of the Income-tax Act, 1961 and not under the special provision for the taxation of fees for technical services contained in section 115A read with section 44D of the Income-tax Act, 1961.

4. A copy of the statement of the case dated 16.3.1990 (without annexures) and a copy of the Attorney General’s opinion dated 13.5.90 are enclosed.

5. These instructions may brought to the notice of all the officers in your region. [F.No.500/6/89-FTD dt.22.10.90 from CBDT]”

10. Before us the opinion of the learned Attorney General has been placed by the learned counsel for the appellants at great length to contend that the views expressed by the learned Attorney which had been accepted by the CBDT were based on an exhaustive consideration of the provisions of the Mines Act, 1952 and the Mines and Minerals (Regulation and Development) Act, 1957 read with the relevant Entries in the Union and the State List in the 7th Schedule to the Constitution of India. It is urged that the eventual test is one of pith and substance of the agreement, namely, whether the works contemplated or services to be rendered under the agreement is directly and inextricably linked with the prospecting, extraction or production of mineral oil. It is submitted on behalf of the appellants that the agreements in question satisfy the above test for which purpose the appellants have categorized the different contracts under 8 heads which may be conveniently set out at this stage hereinbelow.

1. Carrying out seismic surveys and drilling for oil and gas

2. Services starting/re-starting/enhancing production of oil and gas from wells

3. Services for prospecting for exploration of oil and or gas

4. Planning and supervision of repair of wells

5. Repair, Inspection or Equipment used in the exploration, extraction or production of oil and gas

6. Imparting Training

7. Consultancy in regard to exploration of oil and gas

8. Supply, Installation, etc. of software used for oil and gas exploration”

11. It is also urged on behalf of the appellants that the instruction/Circular dated 22.10.1990 issued by the CBDT was binding on the primary authority on the ratio of the decision of this Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Others1 . It has been further pointed on behalf of the appellants that even under the provisions of Section 3D of the Oil Fields (Regulation and Development) Act 1948 a mining lease means a lease granted for the purposes of searching for, winning, working, getting, making merchandisable, carrying away or disposing of mineral oils or for the purpose connected therewith and such a lease includes an exploring or prospecting lease. Reference has also been made to the Petroleum and Natural Gas Rules, 1959 framed under Section 5 of the aforesaid Act. Under Rule 4 of the said Rules no person can prospect for petroleum except pursuant to a Petroleum Exploration License (PEL) granted under the Rules and no person can mine petroleum except in pursuance of a Petroleum Mining License (PML) granted under the Rules. It is pointed out that under Rule 7 of the Rules of 1959 a petroleum mining license (PML) entitles the licensee to carry out construction and maintenance in and on such land, works, buildings, plants, waterways, roads, pipelines etc. as may be necessary for full enjoyment of the PML. On the said basis it is argued that rendering any service in connection with prospecting and extraction is an integral part of mining and that the expression “mining” in the Explanation 2 to Section 9(1) of the Income Tax Act, in the absence of any definition under the Income Tax Act, has to be understood as per the provisions of the Oil Fields (Regulation and Development) Act, 1948 read with the Petroleum and Natural Gas Rules, 1959.

12. Opposing the contentions advanced on behalf of the appellants, Shri Gurukrishna Kumar, learned senior counsel for the Revenue has urged that the opinion of the Attorney General relied upon and the CBDT Circular has no relevance to the present case inasmuch as the agreements between ONGC and the non-resident companies made it abundantly clear that what is paid to the non-resident company are fees for technical services rendered. Though such services may have some connection with the prospecting, extraction or production of mineral oil, the primary service rendered by the non-resident companies on the basis of the agreements is not for prospecting, extraction or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned counsel for the revenue has even suggested that if it is held that the High Court ought to have examined each agreement or contract to find out its real purpose and intent the revenue would have no objection if the matters are remanded for a complete exercise to be made on the above basis.

13. The Income Tax Act does not define the expressions “mines” or “minerals”. The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct. The said details are set out below.

S. No. Civil Appeal No.

Work covered under the contract

1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling.

2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel.

3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel.

4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit.

5. 729 Capping including subduing of well, fire fighting.

6. 738 Capping including subduing of well, fire fighting.

7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring.

8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests.

9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells.

10. 2794 Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation.

11. 1524 Conducting reservoir stimulation studies in association with personnel of ONGC.

12. 1535 Laboratory testing under simulated reservoir conditions.

13. 1514 Consultancy for optimal exploitation of hydrocarbon resources.

14. 2797 Consultancy for all aspects of Coal Bed Methane.

15. 6174 Analysis of data of wells to prepare a job design.

16. 1517 Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys.

17. 7226 Opinion on hydrocarbon resources and foreseeable potential.

18. 7227 Opinion on hydrocarbon resources and foreseeable potential.

19. 7230 Opinion on hydrocarbon resources and foreseeable potential.

20. 6016 Opinion on hydrocarbon resources and foreseeable potential.

21. 6008 Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program.

22. 1531 Review of sub-surface well data, provide repair plan of wells and supervise repairs.

23. 733 Repair of gas turbine, gas control system and inspection of gas turbine and generator.

24. 741 Repair and inspection of turbines.

25. 737 Repair, inspection and overhauling of turbines.

26. 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines.

27. 1522 Replacement of choke and kill consoles on drilling rigs.

28. 1521 Inspection of gas generators.

29. 1515 Inspection of rigs.

30. 2012 Inspection of generator.

31. 1240 Inspection of existing control system and deputing engineer to attend to any problem arising in the machines.

32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig.

33. 2008 Expert advice on the device to clean insides of a pipeline.

34. 2795 Feasibility study of rig to assess its remaining useful life and to carry out structural alterations.

35. 925 Engineering analysis of rig.

36. 1519 Imparting training on cased hold production log evaluation and analysis.

37. 1533 Training on well control.

38. 1518 Training on implementation of Six Sigma concepts.

39. 1516 Training on implementation of Six Sigma concepts.

40. 6023 Training on Drilling project management.

41. 2796 Training in Safety Rating System and assistance in development and audit of Safety Management System.

42. 1239 To develop technical specification for 3D Seismic API modules of work and to prepare bid packages.

43. 1527 Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions.

44. 1523 Supply, installation and familiarization of software for processing seismic data.

The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal.

14. Consequently, all the appeals are allowed with no order as to the costs.

........................................J.

[RANJAN GOGOI]

........................................J.

[PINAKI CHANDRA GHOSE]

NEW DELHI;

JULY 01, 2015.

1. A short and precise question which is common to all the appeals under consideration has arisen in the present group of appeals instituted by the Oil and Natural Gas Corporation (ONGC) which has been assessed as a representative assessee within the meaning of Section 160-A of Income Tax Act, 1961. The assessments in question have been made under the provisions of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the ‘Surtax Act’).

2. The question posing for an answer revolves around the true and correct purport and effect of exemption notification bearing No.GSR 307(E) dated 31.03.1983 issued under Section 24AA of the Surtax Act. For a quick understanding of the question that arise for consideration, the provisions of Section 24-AA of the Surtax Act and the contents of the notification bearing No.GSR 307(E) may be extracted below :

“24AA. Power to make exemption, etc., in relation to participation in the business of prospecting for, extraction, etc., of mineral oils.

(1) If the Central Government is satisfied that it is necessary or expedient so to do in the public interest, it may, by notification in the official Gazette, make in exemption, reduction in rate or other modification in respect of surtax in favour of any class of foreign companies specified in sub-section (2) or in regard to the whole or any part of the profits chargeable of such class of companies. Explanation.-For the purposes, of this sub-section, "foreign company" shall have the meaning assigned to it in clause (4) of section 80B of the Income-tax Act.

(2)The foreign companies referred to in sub-section (1) are the following, namely:-

(a) foreign companies with whom the Central Government has entered into agreements for the association or participation of that Government or any person authorized by that Government in any business consisting of the prospecting for or extraction or production of mineral oils; and

(b) foreign companies providing any services or facilities or supplying any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any business consisting of the prospecting for or extraction or production of mineral oils carried on by that Government or any person specified by that Government in this behalf by notification in the official Gazette.

(3) Every notification issued under this section shall be laid before each House of Parliament. Explanation.-For the purposes of this section, "mineral oil" includes petroleum and natural gas.”

“GSR No. 307(E) - Exemption from surtax of foreign companies with whom Central Government has ente... Exemption from surtax of foreign companies with whom Central Government has entered into agreements for participation in business of prospecting for or extraction of mineral oils -Notification issued under sub-section (1)

Whereas the Central Government is satisfied that it is necessary and expedient in the public interest to make an exemption in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for the association or participation of that Government or any person authorised by that Government in any business consisting of the prospecting for or extraction or production of mineral oils; Now, therefore, in exercise of the powers conferred by section 24AA of the Companies (Profits) Surtax Act, 1964 (7 of 1964), the Central Government hereby provides that no surtax shall be payable by such foreign companies. Explanation : For the purposes of this notification :

(a) "foreign company" shall have the meaning assigned to it in clause (4) of section 80B of the Income-tax Act, 1961 (43 of 1961);

(b) "mineral oil" includes petroleum and natural gas. Notification : GSR No. 307(E), dated 31-3-1983.”

3. Section 24-AA of the Surtax Act, as it would appear, vests in the Central Government the power to make exemption, reduction in rate or other modification in respect of Surtax in favour of any class of foreign companies which are specified in sub-section (2), in regard to the whole or any part of the chargeable profits liable to tax under the Surtax Act. Sub-section (2) of Section 24-AA refers to two categories of foreign companies. The first is foreign companies with whom the Central Government has entered into agreements for association or participation, including participation by any authorized person, in any business consisting of the prospecting or extraction or production of mineral oils. The second category of foreign companies mentioned in sub-section (2) is foreign companies that may be providing services or facilities or supplying any ship, aircraft, machinery or plant in connection with any business of prospecting or extraction or production of mineral oils carried on by the Central Government or any authorised person. Specifically the Section states that mineral oils will include petroleum and natural gas.

4. The exemption notification bearing No.GSR 307(E) dated 31.3.1983, as it has been noticed, specifically grants exemption in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for association or participation of that Government or any authorized person in the business of prospecting or extraction or production of mineral oils.

5. In the present appeals, the ONGC had executed agreements with different foreign companies for services or facilities or for supply of ship, aircraft, machinery and plant, as may be, all of which were to be used in connection with the prospecting or extraction or production of mineral oils. Such agreements do not contemplate a direct association or participation of the ONGC (a person authorized by the Central Government by notification dated 2.8.1989) in the prospecting or extraction or production of mineral oils but involved the taking of services and facilities or use of plant or machinery which is connected with the business of prospecting or extraction or production of mineral oils.

6. In the above situation, the primary authority took the view that the agreements executed by the ONGC with the foreign companies being for services to be rendered and such agreements not being for association or participation in the prospecting or extraction or production of mineral oils, would not be covered by the exemption notification in question which by its very language granted exemption only to foreign companies with whom there were agreements for participation by the Central Government or the person authorized in the business of prospecting, extraction or production of mineral oils. The agreements in question, according to assessing authority, were, therefore “Service Agreements” and hence covered by sub-section 2(b) of Section 24-AA of the Surtax Act and were accordingly beyond the purview of the exemption notification.

7. The said view was reversed by the learned Appellate Commissioner and upheld by the Learned Income Tax Appellate Tribunal. In the appeal under Section 260A of the Act, the High Court of Uttarakhand in the lead case (CA No.730 of 2007) overturned the view taken by the Appellate Commissioner and the learned Tribunal leading to the institution of the present appeal by the aggrieved representative assessee i.e. the ONGC.

8. We have heard Shri Arvind P. Datar, learned senior counsel appearing for the appellant and Shri Guru Krishna Kumar, learned senior counsel for the Revenue.

9. The respective arguments though have been elaborate the point urged is brief. Shri Datar would contend that as the exemption notification contains/uses the same language as found in sub-section 2(a) of Section 24-AA of the Surtax Act its applicability should be understood with reference to the existence of agreement with the foreign companies rather than the immediate purpose of such agreement, namely, involvement of the Central Government or the authorized person in the business of prospecting or extraction or production of mineral oils. It is further argued by the learned senior counsel that regardless of the fact whether the agreement brings about association or participation of the Central Government or the authorized person in such business of prospecting or extraction or production of mineral oils or such agreement results in rendering of service, so long as the rendering of such service is directly associated with the business of prospecting or extraction or production of mineral oils, Sub-section 2(a) of Section 24-AA of the Surtax Act must be understood to include even such foreign companies with whom the ONGC had executed agreements to provide such services or to make available plant or machinery. The exemption notification dated 31.3.1983 must be understood in the above light, it is argued. If that be so, according to Shri Datar, sub-section 2(b) of Section 24-AA would only include foreign companies with whom the ONGC has no direct agreement though such foreign companies may nevertheless be providing similar services, may be, on the strength of separate agreements with the foreign companies with whom the ONGC has executed an agreement as contemplated in Sub-section 2(a) of Section 24-AA of the Surtax Act.

10. Shri Guru Krishna Kumar, learned senior counsel appearing for the Revenue, has countered the arguments advanced on behalf of the appellants by contending that the relevant provisions of the Surtax Act i.e. Section 24-AA and the exemption notification must be construed by its plain and unambiguous language which indicate two separate situations in respect of which power to grant exemption is conferred by section 24-AA. It is contended that though the Central Government has also been empowered to grant exemptions in respect of the situations covered by sub-section 2(b), namely, where only services are provided, yet, the Central Government while issuing the exemption notification dated 31.3.1983 had clearly chosen to grant exemption in respect of situation covered by sub-section 2(a) of Section 24-AA, alone, namely, in respect of agreements with foreign companies resulting in direct association or participation of the Central Government or the authorized person in the business of prospecting or extraction or production of mineral oils. Situations where the foreign Company is providing services or making available plant or machinery though may be connected in the business of prospecting, extraction or production of mineral oils are clearly excluded from the purview of exemption by the notification in question, it is contended.

11. It will not be necessary to traverse the long line of decisions of this Court dealing with the fundamental principles of interpretation of a taxing statute or an exemption notification. The core of aforesaid principles have been reiterated in a recent decision of this Court in Commissioner of Income Tax-III Vs. Calcutta Knitwears, Ludhiana2 . It is the aforesaid principles, extracted below, that will have to be applied to the present case and the correct meaning and purport of the exemption notification has to be determined on the said basis. 20. Section 158-BD of the Act provides for “undisclosed income” of any other person. Before we proceed to explain the said provision, we intend to remind ourselves of the first or the basic principles of interpretation of a fiscal legislation. It is time and again reiterated that the courts, while interpreting the provisions of a fiscal legislation should neither add nor subtract a word from the provisions of instant meaning of the sections. It may be mentioned that the foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule. (Swedish Match AB v. SEBI and CIT v. Ajax Products Ltd.)

30. In B. Premanand v. Mohan Koikal this Court has observed as follows: (SCC p. 273, para 24)

“24. The literal rule of interpretation really means that there should be no interpretation. In other words, we should read the statute as it is, without distorting or twisting its language. We may mention here that the literal rule of interpretation is not only followed by Judges and lawyers, but it is also followed by the layman in his ordinary life. To give an illustration, if a person says ‘this is a pencil’, then he means that it is a pencil; and it is not that when he says that the object is a pencil, he means that it is a horse, donkey or an elephant. In other words, the literal rule of interpretation simply means that we mean what we say and we say what we mean. If we do not follow the literal rule of interpretation, social life will become impossible, and we will not understand each other. If we say that a certain object is a book, then we mean it is a book. If we say it is a book, but we mean it is a horse, table or an elephant, then we will not be able to communicate with each other. Life will become impossible. Hence, the meaning of the literal rule of interpretation is simply that we mean what we say and we say what we mean.”

31. Thus, the language of a taxing statute should ordinarily be read and understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative animation. A taxing statute should be strictly construed; common sense approach, equity, logic, ethics and morality have no role to play. Nothing is to be read in, nothing is to be implied; one can only look fairly at the language used and nothing more and nothing less. (J. Srinivasa Rao v. State of A.P. and Jagdambika Pratap Narain Singh v. CBDT.) Specifically, insofar as an exemption notification is concerned the view expressed in Commissioner of Central Excise, New Delhi Vs. Hari Chand Shri Gopal and Others3 would require notice.

29. The law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. A provision providing for an exemption, concession or exception, as the case may be, has to be construed strictly with certain exceptions depending upon the settings on which the provision has been placed in the statute and the object and purpose to be achieved. If exemption is available on complying with certain conditions, the conditions have to be complied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, though at times, some latitude can be shown, if there is a failure to comply with some requirements which are directory in nature, the non-compliance of which would not affect the essence or substance of the notification granting exemption.

30. In Novopan India Ltd. this Court held that a person, invoking an exception or exemption provisions, to relieve him of tax liability must establish clearly that he is covered by the said provisions and, in case of doubt or ambiguity, the benefit of it must go to the State. A Constitution Bench of this Court in Hansraj Gordhandas v. CCE and Customs held that (Novopan India Ltd. case4, SCC p. 614, para 16)

“16. ... such a notification has to be interpreted in the light of the words employed by it and not on any other basis. This was so held in the context of the principle that in a taxing statute, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification i.e. by the plain terms of the exemption.”

12. Section 24-AA of the Surtax Act vests power in Central Government, inter alia, to grant exemption to foreign companies with whom agreements have been executed by the Central Government for association or participation in the prospecting or extraction or production of mineral oils and also to foreign companies who are providing support services or facilities or making available plant and machinery in connection with the business of prospecting or extraction or production of mineral oils in which the Central Government or an authorized person is associated. In other words, the power to grant exemption is two-fold and covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business. There is nothing in the provisions of the Act which could have debarred the Central Government from granting exemptions to both categories of foreign companies mentioned above or to confine the grant of exemption to any one or a specified category of foreign companies. Reading the notification No.GSR 307(E) dated 31.3.1983 it clearly appears that the exemption has been granted only to foreign companies with whom the Central Government had executed agreements for direct association or participation by the Central Government or the persons authorized by it (ONGC) in the prospecting or extraction or production of mineral oils. In other words, the exemption notification confines or restricts the scope of the exemption to only one category of foreign companies which has been specifically enumerated in sub-section 2(a) of Section 24-AA of the Surtax Act. The second category of foreign companies that may be providing services as enumerated in sub-section 2(b) of Section 24-AA is specifically omitted in the exemption notification. The power under Section 24-AA of the Surtax Act, as already noticed, is wide enough to include even this category of foreign companies. The omission of this particular category of foreign companies in the exemption notification, notwithstanding the wide amplitude and availability of the power under Section 24-AA, clearly reflects a conscious decision on the part of the Central Government to confine the scope of the exemption notification to only those foreign companies that are enumerated in and covered by sub-section 2(a) of Section 24-AA of the Surtax Act. 13. Section 24-AA of the Surtax Act was brought into the statute book by Act 16 of 1981 i.e. Finance Act, 1981 with effect from 1.4.1981. The explanatory notes on the provisions of Finance Act [Paragraph 11(4) and 26(1)] clearly goes to show that the legislative intent behind inclusion of Section 24-AA is to encourage foreign companies to enter into participating contracts with the Union Government in the business of oil exploration or production. The further legislative intent was to seek greater participation of foreign companies in the matter of providing services including supply of ships, aircrafts, machinery or plant in connection with business of extraction or production of mineral oils. The aforesaid legislative intent which is two-fold is manifested by the two limbs of sub-section 2 of Section 24AA of the Surtax Act to which the power of exemption was intended to operate i.e. sub-section 2(a) and 2(b) of Section 24AA. If out of the two limbs where the power of exemption was intended to operate, the repository of the power i.e. Central Government, had consciously chosen to grant exemption in one particular field i.e. foreign companies covered by sub-section 2(a) of Section 24-AA, the scope of the grant cannot be enhanced or expanded by a judicial pronouncement which is what the arguments made on behalf of the appellants intend to achieve. Any such interpretation must, therefore, be avoided. Consequently, we see no reason to depart from the basic principles of interpretation, as already noticed, that should govern the present issue. We, accordingly, do not find any merit in any of the appeals under consideration. The same are, therefore, dismissed, however, without any order as to costs. The orders of the High Court, under challenge in the appeals are affirmed.

........................................J.

[RANJAN GOGOI]

........................................J.

[PINAKI CHANDRA GHOSE]

NEW DELHI;

JULY 01, 2015.