Supreme Court upholds strict interpretation of tax exemption notification, denying ONGC's claim.

Case Name:

Oil & Natural Gas Corporation Limited vs. Commissioner of Income Tax

Civil Appeal No. 730 of 2007

Key Takeaways:

- The court emphasized the principles of strict interpretation of fiscal statutes and exemption notifications.

- Exemptions or exceptions should be interpreted narrowly and cannot be expanded beyond their intended scope.

- The court rejected ONGC's argument that the agreements with foreign companies were inextricably linked to oil and gas prospecting, extraction, and production, and thus exempt under Section 24AA(2)(a) (of Income Tax Act, 1961).

- The court upheld the view of the tax authorities that the agreements were "service agreements" covered by Section 24AA(2)(b) (of Income Tax Act, 1961), which deals with fees for technical services.

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 24AA(2)(b) (of Income Tax Act, 1961) or be exempt as income from the business of prospecting for mineral oils under Section 24AA(2)(a) of the Companies (Profits) Surtax Act, 1964.

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 24AA(2)(b) (of Income Tax Act, 1961) (fees for technical services). However, the Appellate Commissioner and Income Tax Appellate Tribunal held that they should be exempt under Section 24AA(2)(a) (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 24AA(2)(b) (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, the payments should be exempt under Section 24AA(2)(a) (of Income Tax Act, 1961).

- The Revenue contended that the agreements clearly involved the rendering of technical services by the foreign companies, making Section 24AA(2)(b) (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.

- The court relied on the view expressed in Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal and Others regarding the strict interpretation of exemption notifications.

Judgement:

The Supreme Court dismissed ONGC's appeals and upheld the High Court's orders. The court held that the "pith and substance" of each agreement was rendering technical services, even if ancillary works related to oil and gas activities were contemplated. Therefore, the payments should be taxed under Section 24AA(2)(b) (of Income Tax Act, 1961) as "fees for technical services," and not exempt under Section 24AA(2)(a) (of Income Tax Act, 1961). The court emphasized that the scope of the exemption notification could not be expanded beyond its intended scope.

FAQs:

Q1: What is the significance of this case?

A1: This case reinforces the principles of strict interpretation of fiscal statutes and exemption notifications. It clarifies that exemptions or exceptions should be interpreted narrowly and cannot be expanded beyond their intended scope through judicial interpretation.

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 primarily for rendering technical services, even if related to oil and gas activities, the court held that Section 24AA(2)(b) (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 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.

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

A4: ONGC will have to assess the payments made to foreign companies under Section 24AA(2)(b) (of Income Tax Act, 1961) as "fees for technical services," which may have different tax implications than the exemption claimed under Section 24AA(2)(a) (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 Companies (Profits) Surtax Act, 1964, which could impact other companies in the industry.

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 Income Tax Act, 1961) of the

Surtax Act. For a quick understanding of the question that arise for

consideration, the provisions of Section 24-AA (of Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) of Section 24-AA (of Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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, Ludhiana. 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 Others 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) of Section

24-AA is specifically omitted in the exemption notification. The

power under Section 24-AA (of Income Tax Act, 1961) 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 Income Tax Act, 1961) of the Surtax Act.

13. Section 24-AA (of Income Tax Act, 1961) 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.

[RANJAN GOGOI]

[PINAKI CHANDRA GHOSE]

NEW DELHI;

JULY 01, 2015.