Sbs Marine Ltd., vs Assessee

M/s SBS Marine Ltd. Vs. Addl. Director of Income-tax Old Stoneywood Chrch, International Taxation, Dehradun Bankhead Road, Bucksburn, Aberdeen AB21 9HQ

(PAN AAICS 2595 R)

(Appellant) (Respondent)

Appellant by : Smt. Rashmi Chopra, Advocate Respondent by: Smt. P.K. Sidhu DR.

ORDER

PER SHRI GEORGE GEORGE K, JM:

1. This appeal, at the instance of the assessee, is directed against the final

assessment order dated 8.11.2011 passed by the assessing officer under section 143(3)

read with section 144C of the Income tax Act, 1961 (Act for short hereafter) pursuant to

DRP's directions dated 26.9.2011. The relevant assessment year is 2008-09.

2. The grounds raised read as follows:

"(i) On the Facts, in law and in the circumstances of the case, the learned Dispute Resolution Panel [DRP] /Add l. Director of Income-tax, International Taxation, Dehradun [Assessing Officer] erred in hold that the income arising to the appellant from rendering of marine logistic services cannot be computed by applying the provisions of section 44BB of the Act and that the services provided by the appellant is not covered by section 44BB of the Act;

(ii) On the Facts, in law and in the circumstances of the case, the DRP/AO erred in assessing the income earned by the appellant as fees for technical services/royalty as per the provisions of section 9(1)(vii)/ 9(1)(vi) of the Act;

ITA No. 107/Del/2012 2 (iii) On the Facts, in law and in the circumstances of the case, the DRP/AO erred in assessing the income received, on account of reimbursements as royalty as against u/s 44BB of the Act;

(iv) On the Facts, in law and in the circumstances of the case, the AO erred in not granting credit for TDS, aggregating to Rs.5,17,866/-;

(v) On the Facts, in law and in the circumstances of the case, the AO erred in levying interest u/s 234B of the Act;

(vi) On the Facts, in law and in the circumstances of the case, the AO erred in levying interest u/s 220 of the Act;

(vii) On the Facts, in law and in the circumstances of the case, the AO erred in levying interest u/s 234C of the Act."

3. The facts of the case, in brief, are as follows:

. The assessee is a Non-resident Company based in Aberdeen, United

Kingdom. It is engaged in the business of providing offshore supply and allied vessels on

hire. For the year under consideration, the assessee had filed the return of income on

9.9.2008, declaring total income of Rs.9,24,52,396/- The assessee computed the total

income under section 44BB of the Income tax Act, 1961 (Act for short hereafter) treating

10% of revenue from hire charges i.e., 10% of Rs. 92,45,23,957/- as income chargeable

under the head 'Profits and gains of business'.

4. During the assessment proceedings, the assessee was asked to explain as

to how the conditions of section 44BB are satisfied and to show-cause as to why the

aggregate receipts of Rs. 93,40,01,820 (Rs. 92,45,23,957/- disclosed in the return of

income plus income inadvertently not considered by the assessee of Rs. 7,34,77,387/-

plus a sum of Rs. 21,30,128/- being sum received on account of bunkering charges)

should not be considered as taxable income and be taxed at 10% as royalty under section

115A of the Act.

5. Referring to agreements entered into with the hirer of vessels, the assessee

explained that it was engaged in providing marine logistics services and facilities and, ITA No. 107/Del/2012 3

hence, the requirements of section 44BB are satisfied. Without prejudice, it was submitted

that the provision of vessels on hire which was used in prospecting for or extraction or

production of mineral oil also satisfies the requirement of section 44BB.

6. The assessing officer did not agree with the submissions of the assessee. The

draft assessment order u/s 144C was passed on 28.12.2010. In the said order, it was held

that section 44BB does not apply in the case of the assessee for the following reasons:

(i) Section 44BB is applicable for two streams of revenue; one is for services which are in connection with prospecting, exploration or production of mineral oil and the second stream is for rental of equipment used or to be used for prospecting, exploration or production of mineral oil. [para 4.2 of draft assessment order]

(ii) If equipment is used for any other service which is only in connection with the above and not directly applied in prospecting, exploration or production of mineral oil, the benefit of section 44BB is not applicable. [para 4.2]

(iii) In the present case, payment received by the assessee on rental of tools is not covered under section 44BB since they are not used for prospecting, exploration and production of mineral oil but for other services. [para 4.3]

(iv) Provisions of section 44BB do not apply in the case of the assessee for the reason that it is not undertaking the activities specified in section 44BB itself. It is only supplying 'plant and machinery' on hire to a person, who further leases the same to the operators for putting to use for the purposes as specified in section 44BB. The intention of this provision was to provide benefit to the persons supplying 'plant and machinery' on hire to the entities involved in business of prospecting for or extracting or production of mineral oil exploration itself. [para 4.6]

(v) If the interpretation put forth by the assessee is adopted it would mean that an owner/ lessor of plant and machinery, which is ultimately used in prospecting for, extraction or production of mineral oil will be eligible for claiming benefit of provisions of presumptive taxation u/s 44BB even if such owner / lessor is removed from the actual activity of prospecting for or extracting or production of mineral oil by any number of steps. Such an interpretation would be abuse of the tax provisions and there is no scope for extending the provision beyond hirers, for the benefit of sub-hirers in the statute. [para 4.6]

(vi) Income by way of FTS or royalties covered under section 115A is excluded from section 44BB in view of proviso to section 44BB and the said proviso introduced by the Finance Act, 2010 w.e.f. 1.4.2011 is clarificatory in nature. [para 4.12] ITA No. 107/Del/2012 4

(vii) In view of the above, the receipts of the assessee cannot be treated as eligible u/s 44BB for taxation and bearing the character of equipment rental of second leg, have to be treated as 'royalty' under section 9(1)(vi). [para 4.8]

(viii) Since the assessee is rendering services through its PE the provisions of section 44DA are applicable in the case of the assessee and as per section 115A, the gross receipts are taxable at the rate of 10%. [para 4.25]

7. For the above reasons, the AO treated the revenue from hire charges amounting

to Rs. 92,45,23,957/-, income inadvertently not considered and added by assessee itself

amounting to Rs. 7,34,77,387/- and reimbursement of fuel charges amounting to Rs.

21,30,128/-,totaling to Rs. 93,40,01,823/- as 'royalty' taxable at 10% as per section 115A

of the Act. .At page 32 of the draft assessment order, while computing the taxable income,

the AO has mentioned that the sum of Rs. 93,40,01,823/- as 'taxable income to be taxed

as FTS/Royalty'.

8. The assessee filed objections before the Dispute Resolution Panel (DRP), Delhi, on

28.1.2011. The DRP, vide its directions dated 26.9.2011,endorsed the views of the AO

and held that section 44BB is not applicable to a non-resident who supplies plant and

machinery on hire to a person who does not itself undertake the activities of providing

services or facilities in connection with prospecting for or extracting or production of

mineral oil exploration. Accordingly, the DRP was of the view that the receipts of the

assessee by way of rentals for leasing of vessels would constitute income by way of

royalty as has been proposed by the AO in the draft assessment order. In coming to the

above conclusion, the DRP followed its stand taken in similar other cases.

9. The Assessing Officer passed the final assessment order on 8.11.2011,

against which, the present appeal has been filed. Grounds 1 and 2 of assessee's appeal

deal with the contention that the assessee's taxable income is to be computed under

section 44BB and as not under section 115A. The assessee has filed the paper book ITA No. 107/Del/2012 5

containing copy of the agreements entered into with the hirers of vessels and the written

submissions explaining as to why its taxable income should be computed under section

44BB. The learned DR has also filed the written arguments and decisions justifying the

AO's action in taxing the gross receipts at 10% under section 115A. The learned AR and

the learned DR argued the matter at length.

10. We have considered the rival contentions and perused the material on record.

The dispute in the present case is regarding the applicability or otherwise of section 44BB

of the Act. The said section as applicable during the year under consideration is

reproduced hereunder.

"(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely:--

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of ser-vices and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils in India; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils outside India.

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-

section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed ITA No. 107/Del/2012 6

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.

11. Section 44BB is applicable to 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. There are

two limbs to section 44BB. Under the first limb, providing services or facilities in connection

with prospecting for, or extraction or production of, mineral oils is covered. Under the

second limb, supplying plant and machinery on hire used or to be used in the prospecting

for, or extraction or production of, mineral oils is covered. On satisfaction of either first limb

or second limb, a sum equal to ten per cent of the aggregate of the amounts specified in

sub-section (2) of section 44BB is deemed to be the profits and gains of such business

chargeable to tax under the head "Profits and gains of business or profession".

12. The assessee's arguments is that it is engaged in providing services or

facilities in connection with prospecting for, or extraction or production of, mineral oils and

hence covered by section 44BB. The revenue on the other hand contends that the

assessee is not providing any service or facility, it is not undertaking the activities specified

in section 44BB itself, it is only supplying 'plant and machinery' on hire to a person, who

further leases the same to the operators for putting to use for the purposes as specified in

section 44BB. It is contended that the intention of section 44BB was to provide benefit to

the persons supplying 'plant and machinery' on hire directly to the entities involved in

business of prospecting for or extracting or production of mineral oil exploration itself. It is

also contended by the learned DR that section 44BB would apply to assessee had the

assessee directly entered into agreement with ONGC. It is argued that the scope of the

words 'in the' in the expression 'supplying plant and machinery on hire used, or to be used, in

the prospecting for, or extraction or production of, mineral oils' is much more limited than the ITA No. 107/Del/2012 7

words 'in connection with' in the expression 'providing services or facilities in connection with

prospecting for, or extraction or production of, mineral oils'.

13. In order to decide on the nature of activities carried on by the assessee, it

is necessary to examine the agreements entered into by the assessee. The contracts

entered into by the assessee with the hirers of vessels are placed in the paper book. There

are totally five agreements. Two of these agreements were entered into by the appellant

on August 2nd 2006 with M/s Transocean Offshore Deepwater Drilling Inc and the

remaining three agreements were entered into by the assessee on May 5 2006 with M/s

Transocean Offshore International Ventures Ltd. Each agreement is in respect of a

particular vessel. The five vessels covered under these five agreements are, namely, SBS

Nimbus, SBS Stratus, SBS Torrent, SBS Typhoon and SBS Cirrus respectively. The

agreements are described as 'uniform time charter party for offshore service vessels'. The

assessee is described as owners of vessels and the hirers i.e., M/s Transocean Offshore

Deepwater Drilling Inc and M/s Transocean Offshore International Ventures Ltd are

described as charterers. The place of delivery and redelivery of vessels is in India. The

period of hire in respect of vessels SBS Nimbus and SBS Stratus is from the date of

delivery of vessels through termination of charterer's three year primary term integrated

service contract with ONGC. In respect of other three vessels viz., SBS Torrent, SBS

Typhoon and SBS Cirrus, period of hire is mentioned as 'three years firm'. In respect of all

five contracts, area of operations of vessels is mentioned [box 17 of the contract] as

Offshore India, East and West Coasts, Year Round Operations. The employment of

vessels (are) is restricted to offshore drilling support services, always within the safe

operating capabilities of the vessel [box 18]. Para 1 of Part II of all five contracts state that

the owners i.e., the assessee let and the charterers hire the vessel for the period as ITA No. 107/Del/2012 8

agreed in the agreement. Para 5 of Part II of all five contracts deals with employment and

area of operation of vessels and it states that the vessel shall be employed in offshore

activities that are lawful in accordance with the law of the place of the vessel's flag and / or

registration and of the place of operation. It also states that the above activities shall be

restricted to the services as stated in box 18 and to voyages between any good and safe

port or place and any place or offshore unit where the vessel can safely lie always afloat

within the area of operation as stated in box 17 of the contract. Para 5 of Part II of

Contracts in respect of vessels viz., SBS Torrent, SBS Typhoon and SBS Cirrus further

states that the vessel shall perform the services as described in box 18 for Transocean

Offshore International Ventures Ltd (operator of rigs, JT Angel & Randolph Yost), and / or

Sedco Forex International Drilling Inc. (operator of rig, Trident 2) and / or R & B Falcon (A)

Pty. Ltd (operator of rig, Ron Tappmeyer), and / or Triton Holdings Ltd (operator of rig,

Trident 12) Para 6 and 7 of Part II of all five contracts deals with the responsibilities of the

assessee as a owner of the vessel. As per this clause, the operation and management of

the vessel including control and command of the master, officers and crew is undertaken

by the assessee as an owner of the vessel and not by the charterers. Following clauses

are relevant in this connection and the same is reproduced hereunder.

"6. Master and Crew

(a)(i) The Master shall carry out his duties promptly and the vessel shall render all reasonable services within her capabilities by day and by night and at such times and on such schedules as the charterers may reasonably require without any obligations of the charterers to pay to the owners or the master, officers or the crew of the vessel any excess or overtime payments. The charterers shall furnish the master with all instructions and sailing directions and the master and engineer shall keep full and correct logs accessible to the charterers or their agents.

(ii) The Master shall sign cargo documents as and in the form presented, the same, however, not to be Bills of lading, but receipts which shall be non-negotiable documents and shall be marked as such. The charterers shall indemnify the owners against all consequences and liabilities arising from the Master, Officers or agents signing under the direction of the charterers, those cargo documents or other ITA No. 107/Del/2012 9

documents inconsistent with this charter party or from any irregularity in the papers supplied by the charterers or their agents.

(b) The vessel's crew if required by charterers will connect and disconnect electric cables, fuel, water and pneumatic hoses when placed on board the vessel in port, as well as alongside the offshore units; will operate the machinery on board the vessel for loading and unloading cargoes; and will hook and unhook cargo on board the vessel when loading or discharging alongside offshore units. If the port regulations or the seamen and / or labor unions do not permit the crew of the vessel to carry out any of this work, then the charterers shall make, at their own expense, whatever other arrangements may be necessary, always under the direction of the Master.

(c) If the charterers have reason to be dissatisfied with the conduct of the master or any officer or member of the crew, the owners on receiving particulars of the complaint shall promptly investigate the matter. Charterers and owners shall mutually agree on whether to remove the offending master, officer or crew member, or if such agreement is not reached, owners shall remove such master, officer or crewmember at their cost.

(d) The entire operation, navigation and management of the vessel shall be in the exclusive control and command of the owners, their master, officers and crew. The vessel will be operated and the services hereunder will be rendered as requested by the charterers subject always to the exclusive right of the owners or the master of the vessel to determine whether operation of the vessel may be safely undertaken. In the performance of the charter party, the owners are deemed to be an independent contractor, the charterers being concerned only with the results of the services performed."

7. Owners to Provide

(a) The owners shall provide and pay for all provisions, wages and all other expenses of the master, officers and crew; all maintenance and repair of the vessel's hull, machinery and equipment as specified in Annex A, also, except as otherwise provided in this Charter Party, for all insurance on the vessel, all dues and charges directly related to the vessel's flag and / or registration, all deck, cabin and engine room stores, all hose connectors and adapters, all bulk hoses to allow transfers between vessel and other offshore supply vessels of water, fuel and bulk supplies, all lubricants, cordage required for ordinary ship's purposes mooring alongside in harbor, and all fumigation expenses and de-ratisation certificates. The owner's obligations under this clause extend to cover all liabilities for consular charges appertaining to the master, officers and crew, customs or import duties arising at any time during the performance of this charter party in relation to the personal effects of the master, officers and crew, and in relation to the stores, provisions and other matters as aforesaid which the owners are to provide and / or pay for and the owners shall refund to the charterers any sums they or their agents may have paid or been compelled to pay in respect of such liability.

(b) Not used

(c) The owners shall pay for all permits, costs involved in establishing import guarantee bonds, and clearance expenses, both for the vessel and / or equipment, ITA No. 107/Del/2012 10

required for or arising out of this charter party, taking into account all relevant exemptions provided by / through ONGC as detailed in clause 25 below."

14. Attachment F in respect of all five contracts deals with the scope of work

of the assessee. Sections 1 to 3 of Attachment F are relevant in this connection and the

same are reproduced hereunder:

"Section 1 - SBS Nimbus and SBS Stratus "Any specifications, quantities, standards, quality, description set out or referred to in this scope of work are minimum requirements only. Owner shall be responsible for determining and providing all necessary personnel, equipment, facilities and materials, engineering, designs, programs, dockside space, permits and licenses in such quantities and of such qualities necessary to fulfill the requirements of this Charter Party, including without limitation this scope of work, so as to ensure that the work is conducted without interruption and in accordance with the standards of a good and prudent marine service chartered engaged in the oil and gas industry. All work shall be in compliance with all/any applicable laws and regulations of India and other applicable standards and regulations."

Section 1 - SBS Torrent, SBS Typhoon and SBS Cirrus The following companies have been awarded a contract to operate 5 Jack up rigs on integrated service basis for a period of 3 years commencing within the window from 30th Nov 2006 to 30th April 2007.

· Transocean Offshore International Ventures Ltd · SedcoForex International Drilling Inc · R&B Falcon (A) Pty Ltd · Triton Holdings Limited Transocean Offshore International Ventures Limited and / or the above companies (Transocean) have agreed to charter a fleet of marine vessels on a shared basis between the aforesaid companies to provide marine logistics services, inclusive of towing services as part of their scope of work.

It may also be noted that the vessels though chartered by any one or more of the companies i.e., Transocean Offshore International Ventures Ltd, Sedco Forex International Drilling Inc, R&B Falcon (A) Pty Ltd, and / or Triton Holdings Limited, all the vessels shall render service as described in the scope of work at the agreed rates and prices and charter hire, to all of the aforesaid four companies and their rigs, namely, JT Angel, Randolph Yost, Ron Tappmeyer, Trident 2 & Trident 12. The aforesaid 4 companies shall share the services of the boats chartered, and the charter hire shall be shared and paid by the operators of the rigs which are operational for the time being in force, in equal proportion.

ITA No. 107/Del/2012 11

15. Section 3 - common for all 5 agreements read as follows:

"Owner will ensure marine logistics support in the event of any operational emergencies within the least response time in event of failure.

1. Responsibilities of Vessel Owner / operator:

1.1 To carry personnel & materials between base and offshore installations, as well as between offshore installations.

1.2 To carry out standby & rescue operations in offshore, if required. 1.3 To assist in emergencies arising out of mud loss, blow out etc., occurring in offshore.

1.4 To carry out routine surveillance in offshore for safety and security reasons. 1.5 To carry out any other fieldwork as instructed by Transocean. 1.6 The vessel should be available for offshore work round the clock 24 hours a day during the term of contract.

1.7 The responsibility for obtaining all statutory clearances like DG shipping, clearance for operating the vessels on the Indian coast, naval clearance from ministry of defense, customs clearance etc, rests with the owner."

16. Under section 2 of Attachment F to all five contracts, location of drilling is

mentioned as ONGC Deepwater blocks East and West Coast of India / ONGC locations in

coastal India.

17. From the aforesaid terms of the contracts entered into by the assessee, it

is evident that the assessee not only provided the vessel on hire but also provided

services or facilities to the charterers. The entire operation, navigation and management of

the vessel was under the exclusive control and command of the owners, their master,

officers and the crew. The assessee provided the services of carrying personnel &

materials between base and offshore installations, as well as between offshore

installations, standby & rescue operations in offshore, assistance in emergencies arising

out of mud loss, blow out etc., occurring in offshore, routine surveillance in offshore for

safety and security reasons, any other fieldwork as instructed by Transocean. The

assessee ensured that the vessel was available for offshore work round the clock 24 hours

a day during the term of contract. The responsibility for obtaining all statutory clearances ITA No. 107/Del/2012 12

like DG shipping, clearance for operating the vessels on the Indian coast, naval clearance

from ministry of defense, customs clearance etc, rested with the owner.

18. In view of the above facts, it is manifest that the assessee was engaged in

providing services or facilities along with the apparatus of vessels provided on hire.

Further, from the terms of the contracts, it is evident that these services / facilities and the

vessels were provided by the assessee from delivery date through termination of

charterer's three year primary term integrated service contract with ONGC. The location of

operation of vessel is mentioned as ONGC Deepwater blocks East and West Coast of

India and ONGC locations in coastal India. There is no dispute to the fact that the services

/ facilities and the vessels provided by the assessee are used in offshore drilling

operations. In fact, the draft assessment order itself at para 2 states that the vessels are

used to support offshore drilling operations undertakes in connection with oil and gas

exploration activities. It is, thus, further evident that the assessee has provided services /

facilities and the vessels on hire which are used by the charterers in the process of

prospecting for or extraction or production of mineral oils. In view of the above, we are of

the view that the requirement of section 44BB that the services or facilities should be in

connection with the prospecting or extraction or production of mineral oil is satisfied in the

present case.

19 There is no merit in the revenue's contention that it was not a case of hiring

of a vessel for a stipulated period on terms which gave the charterer possession and

control of the ship, including the right to appoint the master and crew. In contrast, the

assessee retained the operation and control of the vessels. The master and the crew were

appointed by the assessee and not by the charterers. Thus, there is no merit in the ITA No. 107/Del/2012 13

contention of the revenue that the present case is a simple hiring of vessels by the

assessee. The revenue's contention that the provenance of Attachment F is doubtful is

devoid of merits as the charter party was entered into pursuant to an invitation for offer

made by the Transocean entities and the said invitation clearly made a reference to

attachment 'F', which spells out the scope of work and made it clear that the said

attachment was to be a part of the charter party. The other argument of the revenue that

the hire charges are based on each day of use and, hence, it is a case of simple hiring is

also not correct since as held by the Hon'ble Supreme Court in Senairam Doongarmall v

CIT [1961] 42 ITR 392 (SC) the measure and method of its payment is not decisive of the

character of a payment. In the above decision, it was held by the 3 Judge Bench of the

Hon'ble Supreme Court that compensation paid for requisition of assessee's tea factory

and buildings is a capital receipt irrespective of the fact that the said compensation was

computed based on estimate of tea that would have been manufactured.

20. Be that as it may, even if one were to consider that the assessee was

engaged in simple hiring of vessels, the same, in our opinion, would still be covered by the

second limb of section 44BB which deals with supplying plant and machinery on hire used

or to be used in the prospecting for or extraction or production of mineral oils. As per the

Explanation to section 44BB, the term 'plant' includes ships, aircraft, vehicles, drilling units,

scientific apparatus and equipment, used for the purposes of the said business. Thus, an

aircraft or vehicle given on hire and used / to be used in the prospecting for or extraction or

production of mineral oil is an eligible activity under section 44BB. There can be no dispute

that an aircraft or a vehicle cannot be directly used in the prospecting for or extraction or

production of mineral oils. Thus, section 44BB does not envisage direct use of the plant or

machinery in the prospecting for or extraction or production of mineral oil. It is sufficient if ITA No. 107/Del/2012 14

the plant or machinery is used for the purposes of the business of prospecting for or

extraction or production of mineral oil.

21. In Lloyd Helicopters International Pty. Ltd., In re (249 ITR 162), the Authority

for Advance Ruling ruled that the consideration received by the assessee from Command

Petroleum India Pty. Ltd. by way of a charter hire for providing helicopters for transporting

men and material to an offshore location would be governed by the provisions of section

44BB. In WavefieldInsesis ASA In re: (320 ITR 290), the Authority for Advance Ruling

held that the charter hire payable by Wavefield to P.F. Thor for taking on hire a chase

vessel which was used by Wavefield in providing seismic services to ONGC would have to

be assessed in terms of section 44BB and, therefore, Wavefield would be justified in

deducting taxes at source from payment made to P.F.Thor at the rate of 4.23%. Similarly,

in Siem Offshore Inc. In re: (337 ITR 207)the Authority for Advance Ruling held that the

consideration received for providing marine logistic services have to be dealt under section

44BB.

22. The revenue has unduly stressed on the word 'in the' forming part of the

expression 'supplying plant and machinery on hire used, or to be used, in the prospecting for or

extraction or production of, mineral oils' A plain reading of the above expression only

provides that the assessee should be engaged in the business of supplying plant and

machinery on hire and such plant or machinery are used or to be used in the prospecting

for or extraction or production of, mineral oils. The activity for which the plant or machinery

are used or to be used is the only criteria and that activity is prospecting for or extraction or

production of, mineral oils. There is no requirement under section 44BB that the services

or facilities or supplying of plant and machinery should be provided only to the main

person who is engaged in prospecting for or extraction or production of, mineral oils i.e., ITA No. 107/Del/2012 15

ONGC in the present case. In other words, the applicability of section 44BB is not only

restricted to the assessee (first leg contractors) who has directly entered into a contract

with the person who is engaged in prospecting for or extraction or production of, mineral

oils i.e., ONGC in the present case. The revenue's argument is that the words 'used or to

be used' are used in terms of the 'Plant and Machinery' and not to specify the person who

shall use it, i.e. the clause 'used, or to be used' is in conjunction with the clause 'in the

prospecting for, or extraction or production of, mineral oils'. This argument actually support

the case of the assessee since what really matters is the activity for which the plant and

machinery is used i.e., prospecting for or extraction or production of, mineral oils

irrespective of who uses the plant and machinery whether (it is used) by first leg

contractors i.e., hirers, or by the person actually engaged in prospecting for, or extraction

or production of, mineral oils i.e., ONGC in the present case.

23. Further, there is no requirement of a direct contract or agreement with the

person actually engaged in prospecting for, or extraction or production of, mineral oils as

canvassed by the revenue for the applicability of section 44BB. One may refer other

provisions of the statue which insists on an agreement. For instance, section 42 deals with

allowances allowable in computing the profits or gains of any business consisting of the

prospecting for or extraction or production of mineral oils in relation which the Central

Govt. has entered into an agreement. Section 80IA(4)(i)(b) provides that the enterprise

carrying on the business of developing, operating and maintaining any infrastructure

facility has to enter into an agreement with the Central Government of a State Govt. or a

local authority etc. In the absence of any requirement in section 44BB that the person

providing services, facilities or plant and machinery on hire should have directly entered

into a contract or agreement with the person actually engaged in prospecting for or ITA No. 107/Del/2012 16

extraction or production of, mineral oils, one cannot curtail the scope or applicability of

section 44BB to second leg contractors whose contracts or agreements are with first leg

contractors but whose services or facilities or plant and machinery are used in connection

with prospecting for or extraction or production of, mineral oils as required under section

44BB. The Hon'ble Supreme Court in ICDS Ltd v CIT [2013] 350 ITR 527 held that the

assessee leasing the vehicles to others who use the said vehicles in their business of

running them on hire is entitled for higher rate of depreciation on the vehicles given on

lease. It was held by the Hon'ble Supreme Court that the lessor need not himself use the

vehicles in the business of running them on hire. The rationale of the aforesaid decision of

the Supreme Court may be applied in the context of section 44BB in as much as section

44BB does not mandate that the assessee should directly enter into contract with the

person engaged in the business of prospecting for or extraction or production of, mineral

oils or the services or facilities or plant and machinery on hire should be directly provided

to the said person alone. We have already given a finding of fact that the services and

facilities provided by the assessee along with plant and machinery are used in offshore

drilling operations i.e., the activity of prospecting for or extraction or production of mineral

oils. Consequently, the requirements of section 44BB are satisfied in the present case.

24. In view of the above, there is no merit in the contentions of the revenue that

the assessee is not an eligible assessee under section 44BB since it has not directly

entered into contract with the ONGC and it is not undertaking the activities specified in

section 44BB itself and being second leg contractors they are not eligible under section

44BB.

25. The contention of the revenue that the gross receipts of the assessee are

taxable under section 44DA and / or section 115A is also fallacious for the reason that ITA No. 107/Del/2012 17

under both section 44DA and section 115A, the payer of royalty or fees for technical

services has to be either the Government or an Indian concern. In the present case, the

assessee is in receipt of income from M/s Transocean Offshore Deepwater Drilling Inc,

M/s Transocean Offshore International Ventures Ltd and its affiliates which are not

Government or Indian concerns. These entities are non-residents. Consequently, section

44DA and section 115A are inapplicable in the present case.

26. Proviso to section 44BB states that section 44BB shall not apply in a case

where the provisions of section 42 or section 44D or section 115A or section 293A apply

for the purpose of computing profits or gains or any other income referred to in those

sections. Reference to section 44DA was also made in the above proviso by the Finance

Act, 2010 w.e.f. 1.4.2011. The Jurisdictional High Court in DIT v OHM Ltd [2013] 352 ITR

406 interpreting the above proviso held as under.

"The proviso to sub-section (1) of section 44BB can only mean that the flat rate of 10 per cent. of the revenues cannot be deemed to be the profits of the non-resident where the services are of the type which do not fall under that section, but are more general in nature so as to fall under section 44DA . Similarly, the second proviso to sub-section (1) of section 44DA can only be interpreted to mean that where the services are general in nature and fall under the sub-section read with Explanation 2 to section 9(1)(vii) , an assessee rendering such services as provided in section 44BB cannot claim the benefit of being assessed on the basis that 10 per cent. of the revenues will be deemed to be the profits as provided in section 44BB . In other words, the amendment made by the Finance Act, 2010, with effect from April 1, 2011, in both sections, cannot have the effect of altering or effacing the fundamental nature of the provisions or their respective spheres of operation or to take away the separate identity of section 44BB .

If a special provision is made in respect of a certain matter, that matter is excluded from the general provision. When, in an enactment two provisions exist, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both."

27. It was also held that if section 44DA covers all types of services rendered

by the non-resident, that would reduce section 44BB to a useless lumber or dead letter ITA No. 107/Del/2012 18

and such a result would be opposed to the very essence of the rule of harmonious

construction. Referring to the inclusion of section 44DA in the proviso section 44BB and

the introduction of second proviso to section 44DA by the Finance Act, 2010 w.e.f.

1.4.2011, the Hon'ble Jurisdictional High Court in PGS Geophysical AS v Additional

Director of Income tax [2014] 369 ITR 27 held at page 39 - para 19 :

'Thus, after April 1 2011, income falling within the scope of section 44DA(1) of the Act would be excluded from the scope of section 44BB of the Act. However, during the period from April 1, 2004 to April 1, 2011, i.e., period when income falling within section 44DA(1) of the Act was excluded from the ambit of section 115A(1)(b) of the Act but was not expressly excluded from the scope of section 44BB(1) of the Act the same was liable to be taxed under section 44BB(1) of the Act. Since the assessment year 2008-09 falls within the period, the income of the assessee, to the extent it falls within the scope of section 44DA(1) of the Act and stands excluded from section 115A(1)(b) of the Act would be computed in accordance with section 44BB(1) of the Act."

28. Impliedly, the Hon'ble Jurisdictional High Court held that the amendments

made by Finance Act, 2010 w.e.f. 1.4.2011 are prospective in nature and not clarificatory.

The learned DR's argument that the above amendments are clarificatory in nature is

therefore fallacious. In any case, since section 115A and section 44DA requires the payer

of royalty / FTS to be Government or Indian concern and given the fact that hirers / payers

in the present case are not Government or Indian concerns, section 115A and section

44DA are not applicable and consequently the question as to whether the above

amendments are clarificatory in nature is not relevant.

29.. The Revenue has heavily relied on the judgment of the Hon'ble Supreme

Court of India in Union of India vs. Gosalia Shipping Pvt. Ltd.,113 ITR 307 and the

judgment of the Hon'ble Madras High Court in Poompuhar Shipping Corporation Ltd.

vs. ITO, 360 ITR 257 in contending that the contracts entered into by the assessee with

its customers are in the nature of a contract for hire of equipment. In Gosalia's case, the

Hon'bleSupreme Court had to consider whether a hire charge paid under a time charter ITA No. 107/Del/2012 19

was a payment on account of carriage of goods. In this context, the Hon'ble Supreme

Court held at page-311 that in order that it may be said that amount was payable on

account of the carriage of goods, it would be necessary to show that one is the

consideration for other, that is to say, that the payment which the charterers had agreed to

make to the owners of the ship was in consideration of the carriage of goods. It was

observed that if the charterers were liable to pay the amount irrespective of whether they

carry the goods or not, it would be difficult to say that the amount was payable on account

of carriage of goods. It was held that the character of the payment cannot change

according to the use to which the charterers put the ship or according as to whether the

ship is loaded with goods in a port in India.

30. In the present case, the issue as to whether the payment made by the

assessee's customers was on account of carriage of goods does not arise. The issue, that

arises, is whether the assessee is rendering a service, providing a facility or giving a plant

on hire. In fact, the Supreme Court observes at page-311 that one must have regard to the

substance of the matter and, if necessary, tear the veil in order to see whether the true

character of a payment is something other than what, by a clever device of drafting, it is

made to appear. On a whole reading of the agreement entered into by the assesseewith

the charterers, we have already given a finding of fact that the assessee was providing

services or facilities in connection with the activity of prospecting for or extraction or

production of mineral oils. The revenue's reliance of the above decision of the Supreme

Court is therefore misplaced.

31. The judgment of the Hon'ble Madras High Court in Poompuhar Shipping

Corporation Ltd. vs. ITO, 360 ITR 257 is not applicable since the said decision does not

deal with the applicability or otherwise of section 44BB. The revenue's reliance on section ITA No. 107/Del/2012 20

9(1)(vi) to categorize the assessee's income for hire of vessels as 'royalty' is also not

correct since clause (iva) of section 9(1)(vi) excludes amounts referred to in section 44BB.

The other arguments, decisions relied on by the learned DR including the one on 'Base

erosion profit shifting' are also not relevant in the factual matrix of the present case and

considering what we have already held. In view of the above, we hold that the income of

the assessee for the year under consideration is to be computed in accordance with

section 44BB of the Act. Consequently, Ground Nos. 1 and 2 are allowed.

32. In Ground No. 3, it is urged that the learned DRP/AO erred in assessing

the amount received on account of reimbursements cannot be considered as royalty. The

assessee has voluntarily offered the reimbursement of expenses to tax under section

44BB.

32.1. We have already held that income of the assessee for the year under

consideration is to be computed in accordance with section 44BB of the Act.

Consequently, the reimbursement of expenses also should be included for the purpose of

computation of income under section 44BB. This ground is allowed.

33. In Ground No. 4, it is contended that the AO has erred in not granting

credit for TDS amounting to Rs. 5,17,866/- We direct the AO to verify this aspect and to

decide about the allow-ability of the above TDS credit in accordance with law. This ground

is, therefore, allowed for statistical purposes.

34. Ground No. 5 deals with levy of interest u/s 234B of the Act. Revenue

has relied on the decision of the Delhi High Court in DIT v. Alcatel Lucent USA Inc. (264

CTR 240) wherein it was held that a non-resident assessee which does not admit income

chargeable to tax must be inferred to have induced the Indian payer not to deduct TDS

and so it is liable for interest under section 234B. It is argued by the learned DR that ITA No. 107/Del/2012 21

despite this addition being made year after year the assessee has not paid advance tax at

the correct rate. However, the assessee has relied on the decision of the Delhi High Court

in DIT v. Jacobs Civil Incorporated (330 ITR 578) wherein, it was held that a non-resident

whose entire income was subject to deduction of tax at source and if the payer who had to

make payments to the non-resident had defaulted in deducting the tax at source from such

payments, the non-resident is not absolved from payment of taxes thereupon. It was held

that, in such a case, the non-resident is liable to pay tax and the question of payment of

advance tax would not arise.

35. In the present case, the Transocean entities as well as their affiliates have

deducted tax at source on the payments made to the assessee on the basis that section

44BB would apply to assessee on their understanding of the law. The revenue has not

brought on record any material to justify that the assessee had induced the payer to

deduct tax at source at the rate of 4.23%.Hence, the judgment of the Hon'ble Delhi High

Court in the case of Alkatel Lucent is distinguishable.

36. The proviso inserted into the provisions of section 209 enables the revenue

to levy interest in a case where the payer has not deducted tax at source when he makes

payment to a non- resident recipient. However, the proviso was introduced vide Finance

Act, 2012 with effect from AY 2012-13 onwards and, thus not applicable in the present

case. Consequently, interest cannot be levied under section 234B. Ground No. 5 is,

therefore, allowed.

37. Ground Nos. 6 and 7 are consequential to the allow-ability of TDS credit by

the assessing officer. These grounds are, therefore, treated as allowed for statistical

purposes.

ITA No. 107/Del/2012 22

38. In the result, the assessee's appeal is partly allowed.

The decision was pronounced in the open Court on 13th February,

2015.

Sd/- Sd/- (S.V MEHROTRA) (GEORGE GEORGE K.) Accountant Member Judicial Member

Dated: 13th February, 2015. Aks/- DCOM

Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi