Pride Offshore International Llc ... vs Assessee

Pride Offshore International LLC vs. Addl. DIT (presently known as Ensco Offshore International Taxation, International LLC), Aayakar Bhawan, 13A, C/o S.P. Puri & Co. Subhash Road, 4/18, Asaf Ali Road, Dehradun. New Delhi. (PAN AAECP6665P) (APPELLANT) (RESPONDENT)

ASSESSEE BY :Shri Vidur Puri, CA, Shri Baldev Raj, CA REVENUE BY : Shri Sanjeev Sharma, CIT. DR

Date of hearing: 25.03.2015 Date of pronouncement: 22.05.2015

ORDER

PER I. C. SUDHIR, JUDICIAL MEMBER:

The assessee has questioned assessment order on the following

grounds:-

1. "The learned Assessing Officer erred in law and on facts in holding that the assessee is not eligible for benefit of section 44BB of the Income Tax Act and treated the payment received by the assessee from leasing of oil drilling rig as royalty as per Article 12 of India-

USA Double Tax Avoidance Treaty.

2 ITA No. 5406/Del/2012

2. The learned Assessing Officer erred in law in charging interest u/s 234B & 234C, when there was no obligation for advance tax ,as income received by the Assessee was subject to tax deduction at source and tax was also deducted in accordance with order passed under section 195 of the Income Tax Act.

3. The learned Assessing Officer erred in law by charging surcharge and education cess on income tax rate in excess of the maximum rate of tax prescribed under Article 12 of India-USA Double Tax Avoidance Treaty.

4. The Appellant craves leave to add, amend, modify, delete and or change all or any of the ground on or before the date of hearing. The learned Assessing officer erred in law and on facts in not allowing TDS credit of Rs. 5,75,40,691".

2. We have heard and considered the arguments advanced by the parties

in view of orders of the authorities below, material made available on record

and the decisions relied upon.

GROUND NO. 1

3. The issue raised this ground is as to whether assessee is eligible for

benefit of section 44BB of the I.T. Act on the payment received by it from

leasing of oil drilling rig as royalty ?

4. The relevant facts are that the assessee company incorporated in USA

is pride group entity. The assessee is in the business of providing drilling rig,

services and facilities in connection with prospecting production and

extraction of mineral oil under the contract with pride foramer as accepted by

Oil and Natural Gas Commission (ONGC). The assessee provided offshore

drilling regarding "pride Hawai".T he assessee executed a Charter agreement 3 ITA No. 5406/Del/2012

and delivered the rig outside India to pride foramer . Pride foramer SAS is a

French company which is engaged in drilling activities in India for ONGC in

Bombay offshore region. In its return for year, the assessee declared income

u/s 44BB(1) of the Act on the ground that it was supplied plant and

machinery on hire to be used in prospecting for or extraction or production of

mineral oil and was thus taxable u/s 44BB(1) of the Act. The AO passed a

draft order in which he proposed to tax the assesee's income as royalty u/s

9(1)(vi) (Article 12) of the India USA DTA Agreement @ 10% as against the

demand profit rate of 10% of revenue as adopted by the assesee u/s 44BB(1)

of the Act. The assessee raised objection against the proposal before the Ld.

DRP but could not succeed. Being aggrieved the assessee has preferred

present appeal before us.

5. At the outset of hearing Ld. AR pointed out that in the assessment

year 2009-10 the Ld. DRP in the case of assessee itself " who is presently

known as ensco Offshore International LLC, vide order dated 27.12.2013

has held that the income derived by the assessee are to be computed in

accordance with the provisions of section 44BB (1) of the Act. The Ld. AR

submitted further that an identical issue has also been decided in favour of

the assessee by the Advance Ruling Authority, Tribunal and Hon'ble High

Court in the following cases :-

Frontier Offshore Exploration (India) Ltd. vs. DCIT (2012) 13 ITR (TRIB) 168/(2011)10 taxmann.com 250 (Chennai) 4 ITA No. 5406/Del/2012

Director of Income-tax-II vs. OHM Ltd. (2012) 26 taxmann.com 120 (Delhi)/(2013)352 ITR 406

Stumpp, Schuele and Somappa Ltd. vs. CIT (1991) 190 ITR 152 (Kar)

Microperi S.P.A. Milano Vs. DCIT (2002) 321 ITR 369 (Mumb.)

CGC Marine Resources Vs. DCIT (2012) 21 Taxman. Com 502 (Del)

Wavefield Inseis ASA 320 ITR290, 322 ITR 645 (AR)

6. The Ld. AR referred provisions laid down u/s 44BB(1) of the I.T. Act

with this submission that the assessee fulfils all the conditions provided

therein to claim eligibility of benefit available for it u/s 44BB(1) of the Act. He

submitted that there is no dispute that the assessee, being a non resident is

engaged in the business of providing services and facilities in connection with

or supplying plant and machinery on hire used or to be used in the

prospecting for or extraction of production of mineral oil . The Ld. AR also

referred contents of para No. 1.5.1 to 1.6 at page Nos. 20 & 21 of the paper

book which is extract of contract between pride foramer and ONGC for

providing the services for drilling rig "Pride Hawai". He submitted further that

in para No. 1 page No. 1 of the asstt. order and in para No. 4.4 at page No. 3

of the asstt. order the AO has wrongly inserted the word "directly" going

beyond the provisions laid down u/s 44BB(1) of the Act. She was thus not

correct in saying that the word "used" were not directly applied to the

activities in connection with prospecting, exploration and production of

mineral oil etc. Ld. AR also referred para No. 3 at page No. 5 of the asstt. 5 ITA No. 5406/Del/2012

order with this submission that the assessment has been finalized at the

instruction of Ld. DRP making it clear that the intention of the legislature was

not to include the receipt of sub hiring within the scope of section 44BB

otherwise the words "in connection with" would have been employed for the

activity of supplying plant & machinery on hire as well. The Ld. AR also

referred page 26 of the paper book i.e. letter issued by the office of the

Deputy Commissioner of Income Tax on 7.8.2007 to M/s. Pride Foramer SAS

making it clear by mentioning nature of services for charter hire of M/s. Pride

Foramer SAS for drilling operations for a company with ONGC".

7. Ld. CIT(DR) on the other hand submitted that there is no any direct

decision on the issue by the Tribunal. The order dated 27.12.2013 of the DRP

in subsequent year 2009-10 allowing the eligibility of the assessee for the

benefit of section 44BB(1) of the Act has not become final. Taking assistance

of the contents of the page No. 1 of the agreement dated 31.3.2007 between

the assessee and M/s. Pride Foramer SAS made available at page 1 to 16 of

the paper book, the Ld. CIT(DR) submitted that the services and equipments

were hired from the assesee as a sub contractor. He also referred contents of

page No. 17 and 18 of the extract of contract dated 22.1.06 of M/s. Pride

Foramer SAS and ONGC for providing services through drilling unit M/s. Pride

Foramer SAS made available at page Nos. 17 to 21 of the paper book. While

concluding his arguments the Ld.CIT(DR) pointed out that the Delhi Bench of 6 ITA No. 5406/Del/2012

the ITAT in the case of Siem Offshore A.S. & Ors. Vs. ADIT - ITA No.

1295/Del/2013 (A.Y. 2008-09) and ors. Vide order dated 09.09.2014 in view

of the decision of Hon'ble Delhi High Court in the case of PGS Geophysical

A.S. vs. ADIT - ITA Nos. 612 of 2012, order dated 09.07.2014 has set aside

the matter to the file of the Assessing Officer to verify the varying nature of

the contract to decide the issue afresh regarding the eligibility of assesee for

the benefit made available u/s 44BB of the Act. Learned CIT(DR) submitted

that the Hon'ble Delhi High Court in the case of PGS Geophysical A.S. (supra)

has been pleased to hold that the receipt of the assessee can be taxed under

sec. 44BB only if the assessee has a PE in India during the relevant period

and the contract entered into by the assessee in India was effectively

connected with the PE in India.

8. The Learned AR rejoined with the submission that the ratio of PGS

Geophysical A.S. (supra) is not applicable in the case of the assessee as the

assessee is another non-resident and section 44DA is not applicable in the

case of a non-resident. He pointed out further that in its recent decision

dated 17.2.2015, the Delhi Bench of the ITAT in the case of Louis Dreyfus

Armadeures SAS vs. ADIT (2015) - 54 Taxmann.com 366 (Delhi - Trib) has

decided an identical issue in favour of the assessee. He submitted that as per

the said decision of the ITAT where the provision under sec. 44BB of the Act

does not create any discrimination between the person who actually does the 7 ITA No. 5406/Del/2012

activity of prospecting for or extraction of production, and the person who

supplies the plants and machinery, the narrow interpretation of the provisions

is not permitted.

9. Considering the above submission we find that the essence of providing

benefit u/s 44BB of the Act is that besides the foremost condition of assessee

being a non-resident the assesee should be,

(a) first limb, engaged in the business of providing services or facilities in

connection with the prospecting production and extraction of mineral

oil,

(b) second limb, engaged in the business of supplying of 'plant and

Machinery' on hire used or tobe used in the prospecting, or

extraction of mineral oils.

Thus we find that for second limb the

conditions are :-

i) supply of plant and machinery on hire

ii) and that plant and machinery are use or to be used for prospecting

for extraction or production of mineral oils. The emphasis is on "use

for" and not "use by".

10. The contention of the assessee remained that the second limb of

section 44BB is attracted in the case of the present assessee on the following

grounds :-

8 ITA No. 5406/Del/2012

a) The Assessee is a non-resident engaged in the business of providing the drilling rig on hire.

b) The rig is a plant and machinery c) The rig has been taken on hire by the Pride Foramer for the purpose of enabling

the Pride Foramer to carry on the provide the drilling operation services under the contract with ONGC and rig is the key plant and machinery for prospecting and extraction of mineral oil.

d) The requirement of sub-section (1) of section 44BB is that the plant and equipment must be used in the prospecting for or extraction of mineral oils.

. e) Without the utility of Rig no drilling operation can be carried out for extraction or prospecting of mineral Oil

f) The second part of section 44BB(1) is triggered as deployment of the Rig in the extraction/ prospecting operations is considered to be integral part of such operations.

g) Whether the Rig is deployed in the prospecting activities pursuant to a direct contract with the oil producing company or pursuant to a contract with sub- contractor is nowhere the condition or any mandatory provision of section 44BB and thus it is immaterial whether it is directly or through sub-contractor. The only essence is that it is used in the prospecting for or extraction of mineral oils.

11. The contention of the AO against the claimed benefit by the assessee

remained that the drilling unit is not "directly" in use by ONGC. As per him,

second limb of the provision laid down u/s 44BB of the Act is not attracted

since the rig is supplied not by enterprise having a direct contract with ONGC

but by sub contractor. The stand of the AO was that for oil related activities,

rig hire is not applicable for sub-contractor.

12. Having gone through the decisions relied upon, we find that

Mumbai Bench of the Tribunal in the case of M/s. Microperi S.P.A Milano vs.

DCIT (supra) has held that section 44BB does not make any distinction

between the main contractor and sub-contractor as regards its applicability .

The Advance Ruling Authority in the cited cases (supra) have also held that

taxability u/s 44BB under circumstances where a seismic vessel was provided 9 ITA No. 5406/Del/2012

to the contractor. In the case of Wavefield Inseis ASA (supra) before the

Authorities for Advance Ruling (supra) for the purpose of executing contract

with ONGC, the applicant has entered into a contract with the PF from the

company incorporated in Faroe Islands which had provided a chase vessel on

time charter basis. Under agreement, entire operations, navigation and

management of vessel provided on hire will be in exclusive command and

control of vessel owner and vessel will be in exclusive command and control

of vessel owner and vessel will be operated and services will be rendered as

and when required by applicant. The issue before the authority was as to

whether second limb of section 44BB is attracted in that case and therefore

income derived by PF ought to be computed in accordance with the

provisions of section 44BB. The further issue raised was as to whether as

amounts falling u/s 44BB has been excluded from purview of definition of

royalty, consideration for services provided by PF cannot be construed to be

in nature of royalty u/s 9(1)(vi). After discussing in detail the authority have

answered both the issues in affirmative. Similar view has been expressed in

other cited decisions by the Hon'ble authority. The Delhi Bench of the

Tribunal in the case of CGG Marine Resources vs. DCIT (supra) has

observed in para No. 8.4 that AAR in the case of Wavefield Inseis ASA has

clearly decided that it is immaterial whether there was a direct contract of the

oil producing company or not. The case of the assessee cannot be more

direct as the oil drilling operations and contract cannot be executed without 10 ITA No. 5406/Del/2012

the drilling unit. The Hon'ble Delhi High Court in the case of Director of

Income Tax vs. OHM Ltd. (2013) 352 ITR 406 (Delhi) referring a division

bench decision in the case of Director of Income Tax vs. Jindal drilling and

Industries Ltd. (2010) 320 ITR 104 (Delhi) has gone to confirm that services

rendered by a Sub-Contractor at the offshore rigs of a contractor is part and

parcel of activities engaged by the rigs set up for extraction, prospecting and

production of mineral oil.

13. Besides, the Ld. DRP in the case of assessee itself for the asstt. year

2009-10 following decisions of Mumbai Bench of the Tribunal in the case of

Micoperi S.P.A. Milano vs. DCIT (Supra), the Hon'ble Authority of Advance

Rulling in the case of Wavefield Inserts ASA (Supra) and Bourbon Offshore

Asia Pte Ltd. 337 ITR 122 , Hon'ble Jurisdictional High Court in the case of

DCIT vs. OHM Ltd. (supra) as well as the decision of authority for advance

ruling in the case of Spectrum Geo Ltd. (2012) 209 Taxman 397 has come to

the conclusion that the amounts received by the assesseee during the year

under consideration on account of hire charges of the drilling rig should be

brough to tax by applying the deemed profit ratio of 10% u/s 44BB of the

Act. The Ld. DRP has accordingly directed the AO to decide the issue as such

while allowing the objection raised by the assesee. The learned CIT(DR) has

reproduced the relevant para No. 12 of the decision of the Hon'ble Authority

of Advance Ruling in the case of Spectrum Geo Ltd. as under :- 11 ITA No. 5406/Del/2012

"12. The inquiry now is whether the income derived by. the applicant from performing its contract with the UAE Company would be assessable to tax as, fees for technical services under section 440, 44DA, or 115A of the Act. Admittedly, the income derived by the applicant Is from a UAE company and not from the Government or an India concern. In other words, income derived by the applicant is from a non-resident company of foreign company. On the wording of these sections, the income cannot be brought within their purview, because they only speak of Income by way of fees for technical services received from Government or an Indian concern. On this short ground, the contention of the Revenue that the Income derived by the applicant Is independently assessable under section 115A or 44DA of the Act, has to be rejected. Since, income derived by the applicant, is from an activity in connection with the prospecting for mineral oils and from a foreign company, the applicant would be entitled to claim to be assessed under section 44BB(1) of the Act. The ruling; therefore, on question no 3 is that the Income derived by the applicant are to be computed in accordance with the provisions of section 44 BB (1) of the Act." (Emphasis supplied)."

14. As discussed above, the Hon'ble Delhi Bench of the ITAT in the case

of Louis Dreyfus Armateures SAS vs. ADIT (supra) has decided an identical

issue in favour of the assessee has observed that if the legislature intention

as contended by the Revenue was to restrict the benefit of sec. 44BB of the

Act only to the main contractor or ONGC then the words after "the assessee

engaged in the business of supplying plants and machinery on hire" or

"providing services or facilities" ought to have been omitted. Hence, where

the provision does not create any discrimination between the person who

actually does the activity of prospecting for or extraction or production, and

the person who supplies the plants and machinery, the narrow interpretation

of the provisions is thus not permitted. It has been held that the basic 12 ITA No. 5406/Del/2012

condition to be satisfied in the said provision is that the plant or machinery

supplied or lented on hire by the assessee, a non-resident should be used in

the prospecting for or extraction or production of mineral oils or where

equipment has been supplied, such equipment should have been used for the

purposes of prospecting for or extraction or production of mineral oils. The

ITAT thus came to the conclusion that the fetter assumed by the authorities

below while interpreting the provisions of sec. 44BB of the Act are manifestly

absent and there is nothing in the said provisions so as to disentitled a sub-

contractor from invoking the said provisions. The ITAT thus did not find any

fault in the claim of the assessee that Revenue received under the chartered

agreements with CGG for providing two seismic survey vessels are in

consideration with prospecting for extraction or production of mineral oils

and, therefore, taxable under sec. 44BB of the Act.

15. We, however, find that the decision dated 09.07.2014 of Hon'ble

Delhi High Court in the case of PGS Geophysical A.S. vs. ADIT (supra) has not

been cited before the ITAT in the case of Louis Dreyfus Armateures SAS vs.

ADIT (supra). Hon'ble Delhi High Court in the case of PGS Geophysical A.S.

vide para No. 20 of the judgment has been pleased to hold that the receipt of

the assessee can be taxed under sec. 44BB of the Income-tax Act, 1961 only

(i) if the assessee has a PE in India during the relevant period and (ii) the

contract entered into by the assessee in India was effectively connected with 13 ITA No. 5406/Del/2012

that PE in India. In the present case before us, the Assessing Officer at page

No. 4 para No.5 had himself noted that the assessee had got PE in India,

thus, first condition of getting benefit under sec. 44BB of the Act as laid down

by the Hon'ble High Court in the above sited case is fulfilled. So far as the

second condition that the contract entered into by the assessee in India was

effectively connected with that PE in India is concerned, the dispute in this

regard remained that the assessee being sub-contractor as per the

Authorities below was not eligible for the benefit of section 4BB of the Act.

The Delhi Bench of the ITAT in the case of Louis Dreyfus Armateures SAS vs.

ADIT (supra) after discussing the issue in detail has held that the provision

does not create any discrimination between the persons who actually does

the activity of prospecting for or extraction or production and the person who

supplies the plants and machinery, the narrow interpretation of the provisions

is thus not permitted. It has been held that the basic condition to be satisfied

in the said provision is that the plant or machinery supplied or lented on hire

by the assessee, a non-resident should be used in the prospecting for or

extraction or production of mineral oil or where equipment has been supplied,

such equipment should have been used for the purpose of prospecting for or

extraction or production of mineral oil. Thus, we find that there is no dispute

that the contract entered into by the assessee in India was effectively

connected with that PE in India and the dispute as to whether letting out

drilling rig, services and facilities by the assessee in connection with 14 ITA No. 5406/Del/2012

prospecting production and extraction of mineral oil under the contract with

Pride Foramer as accepted by ONGC is a sub-contract and hence the

assessee is not entitled to have benefit of taxability under sec. 44BB of the

Act has been decided in favour of the assessee by the Co-ordinate Bench of

the ITAT in the case of Louis Drefus Armateures SAS vs. ADIT (supra). Since

both the conditions as pointed out by the Hon'ble Delhi High Court in the case

of PGS Geophysical AS vs. ACIT (supra) have been fulfilled in the present

case, we are of the view that the assessee is very much eligible for the

benefit available under sec. 44BB of the Act towards the hire charges of the

drilling rig by applying the deemed profit ratio of 10% under the said

provisions. It is held accordingly with direction to the Assessing Officer to

compute the tax as such by allowing the benefit of the provisions laid down

under sec. 44B of the Act. Ground No.1 is accordingly allowed.

Ground No. 2 & 3

16. In these grounds assessee has raised issue of chargeability of interest

u/s 234 B and 234C of the Act on the basis that when there was no

obligation for advance tax as income received by the assessee was subject to

tax deduction at source and tax was also deducted in accordance with order

passed u/s 195 of the Act and further that the AO has erred in law by

charging surcharge and education cess on income tax rate in excess of the

maximum rate of tax prescribed under Article 12 of the India USA Double 15 ITA No. 5406/Del/2012

Tax Avoidance Treaty. These issues are consequential in nature to the issue

raised in ground No. 1 adjudicated herein above. These grounds thus do not

need independent adjudication.

Ground No. 4

17. In this ground the action of the AO in not allowing TDS credit of Rs.

5,75,40,691/- has been questioned. At the time of hearing the Ld AR

submitted that the assessee / appellant does not wish to press this ground.

The ground is accordingly rejected as withdrawn.

18. Consequently appeal is allowed.

The order is pronounced in the open court on 22.05.2015.

Sd/- Sd/-

(T.S. KAPOOR) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 22 /05/2015 *Mohan Lal*

Copy of order forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR

Assistant Registrar, ITAT