ONGC wins tax case; payments to foreign firms for oil extraction services taxable under Section 44BB (of Income Tax Act, 1961), 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 (of Income Tax Act, 1961), not Section 44D (of Income Tax Act, 1961).

- 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 (of Income Tax Act, 1961) or on a presumptive basis under Section 44BB (of Income Tax Act, 1961).

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 (of Income Tax Act, 1961) (fees for technical services), but the Appellate Commissioner and Income Tax Appellate Tribunal held that they should be taxed under Section 44BB (of Income Tax Act, 1961) (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 (of Income Tax Act, 1961). 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 (of Income Tax Act, 1961) should apply.

- The Revenue contended that the agreements clearly involved the rendering of technical services by the foreign companies, making Section 44D (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961), not Section 44D (of Income Tax Act, 1961). 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 (of Income Tax Act, 1961), which deals specifically with the business of prospecting for mineral oils, rather than the more general Section 44D (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961), which may have different tax implications than Section 44D (of Income Tax Act, 1961). 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 (of Income Tax Act, 1961) read with Explanation 2 to Section 9(1)(vii) (of Income Tax Act, 1961) or will such payments be taxable on a

presumptive basis under Section 44BB (of Income Tax Act, 1961)”?

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 Income Tax Act, 1961) and not Section 44BB (of Income Tax Act, 1961) (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 Income Tax Act, 1961). 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 Income Tax Act, 1961). 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 (of Income Tax Act, 1961) or [section 44DA (of Income Tax Act, 1961) or] section

115A 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 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 (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 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 (of Income Tax Act, 1961);

(b) "foreign company" shall have the same meaning as

in section 80B (of Income Tax Act, 1961);

(c) "royalty" shall have the same meaning as

in Explanation 2 to clause (vi) of sub-section (1)

of section 9 (of Income Tax Act, 1961);

(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 (of Income Tax Act, 1961), 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) (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961). Explanation (a) to

Section 44D (of Income Tax Act, 1961) however specifies that “fees for technical services” as

mentioned in Section 44D (of Income Tax Act, 1961) would have the same meaning as in

Explanation 2 to Clause (vii) of Section 9(1) (of Income Tax Act, 1961). 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 Income Tax Act, 1961),

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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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) (of Income Tax Act, 1961)

(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 Income Tax Act, 1961)

of the Income-tax Act, 1961 and not under the special

provision for the taxation of fees for technical services

contained in section 115A (of Income Tax Act, 1961) read with section 44D (of Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Rules, 1962) 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 Income Tax Act, 1961), 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 Income Tax Act, 1961) 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) (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) or Section 44D (of Income Tax Act, 1961). 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 Income Tax Act, 1961) 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 Income Tax Act, 1961). 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 (of Income Tax Act, 1961)

and not Section 44D (of Income Tax Act, 1961). 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 Income Tax Act, 1961).

(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,

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 Income Tax Act, 1961),

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 (of Income Tax Act, 1961) 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 Income Tax Act, 1961)

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 Income Tax Act, 1961), 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 Income Tax Act, 1961) 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 (of Income Tax Act, 1961))

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 Income Tax Act, 1961) 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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961). 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) (of Income Tax Act, 1961), 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 (of Income Tax Act, 1961)),

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 Income Tax Act, 1961) 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 Income Tax Act, 1961)) 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 (of Income Tax Act, 1961))

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 (of Income Tax Act, 1961), 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 Income Tax Act, 1961) 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 (of Income Tax Act, 1961) 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 Income Tax Act, 1961) of

Section 24AA of the Surtax Act to which the power of exemption was

intended to operate i.e. sub-section 2(a) (of Income Tax Act, 1961) and 2(b) of Section 24AA (of Income Tax Act, 1961). 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 (of Income Tax Act, 1961)), 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.