Sedco Forex International Inc. through its Constituted Attorney Mr. Navin Sarda vs Commissioner of Income Tax, Meerut & Anr.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4906 OF 2010

SEDCO FOREX INTERNATIONAL INC. THROUGH IT’S CONSTITUTED ATTORNEY MR. NAVIN SARDA .....APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX, MEERUT & ANR. .....RESPONDENT(S)

WITH

CIVIL APPEAL NO. 2166 OF 2012

CIVIL APPEAL NO. 17388 OF 2017 (ARISING OUT OF SLP(C) NO. 2955 OF 2012)

CIVIL APPEAL NO. 4908 OF 2010

CIVIL APPEAL NO. 2631 OF 2013

CIVIL APPEAL NO. 4910 OF 2010

CIVIL APPEAL NO. 4911 OF 2010

CIVIL APPEAL NO. 4907 OF 2010 Signature Not Verified

Digitally signed by CIVIL APPEAL NO. 4913 OF 2010 ASHWANI KUMAR Date: 2017.10.31 16:11:02 IST Reason:

CIVIL APPEAL NO. 4543 OF 2013

CIVIL APPEAL NO. 5005 OF 2014 2

CIVIL APPEAL NO. 17389 OF 2017 (ARISING OUT OF SLP(C) NO. 11560 OF 2014)

CIVIL APPEAL NO. 4920 OF 2010

CIVIL APPEAL NO. 4919 OF 2010

CIVIL APPEAL NO. 4921 OF 2010

CIVIL APPEAL NO. 4916 OF 2010

CIVIL APPEAL NO. 4918 OF 2010

CIVIL APPEAL NO. 4917 OF 2010

CIVIL APPEAL NO. 5015 OF 2015

CIVIL APPEAL NO. 4925 OF 2010

CIVIL APPEAL NO. 4924 OF 2010

CIVIL APPEAL NO. 4922 OF 2010

CIVIL APPEAL NO. 5437 OF 2016

CIVIL APPEAL NO. 5154 OF 2011

CIVIL APPEAL NO. 5152 OF 2011

CIVIL APPEAL NO. 5153 OF 2011

CIVIL APPEAL NO. 5089 OF 2015

CIVIL APPEAL NO. 5090 OF 2015

CIVIL APPEAL NO. 4923 OF 2010

CIVIL APPEAL NO. 8627 OF 2013

CIVIL APPEAL NO. 5155 OF 2011

CIVIL APPEAL NO. 6573 OF 2014 3

CIVIL APPEAL NO. 4909 OF 2010

CIVIL APPEAL NO. 5935 OF 2010

CIVIL APPEAL NO. 5934 OF 2010

CIVIL APPEAL NO. 6651 OF 2014

CIVIL APPEAL NO. 17390 OF 2017 (ARISING OUT OF SLP(C) NO. 20000 OF 2015)

CIVIL APPEAL NO. 17391 OF 2017 (ARISING OUT OF SLP(C) NO. 22343 OF 2012)

CIVIL APPEAL NO. 17392 OF 2017 (ARISING OUT OF SLP(C) NO. 22833 OF 2012)

CIVIL APPEAL NO. 4914 OF 2010

CIVIL APPEAL NO. 4915 OF 2010

CIVIL APPEAL NO. 8595 OF 2010

CIVIL APPEAL NO. 9188 OF 2013

CIVIL APPEAL NO. 8665 OF 2013

CIVIL APPEAL NO. 10294 OF 2016

CIVIL APPEAL NO. 10295 OF 2016

CIVIL APPEAL NO. 10296 OF 2016

CIVIL APPEAL NO. 4926 OF 2010

CIVIL APPEAL NO. 267 OF 2013

CIVIL APPEAL NO. 268 OF 2013

CIVIL APPEAL NO. 17393 OF 2017 (ARISING OUT OF SLP(C) NO. 39683 OF 2013)

CIVIL APPEAL NO. 3695 OF 2012 4

CIVIL APPEAL NO. 435 OF 2017

CIVIL APPEAL NO. 10382 OF 2017

CIVIL APPEAL NO. 10385 OF 2017

CIVIL APPEAL NO. 10383 OF 2017

CIVIL APPEAL NO. 10384 OF 2017

CIVIL APPEAL NO. 10386 OF 2017

CIVIL APPEAL NO. 17394 OF 2017 (ARISING OUT OF SLP(C) NO. 21939 OF 2017)

CIVIL APPEAL NO. 12365 OF 2017

AND

CIVIL APPEAL NO. 12366 OF 2017

JUDGMENT

A.K. SIKRI, J.

Leave granted in SLP(C) No. 2955 of 2012, SLP(C) No. 11560 of

2014, SLP(C) No. 20000 of 2015, SLP(C) No. 22343 of 2012, SLP(C)

No. 22833 of 2012, SLP(C) No. 39683 of 2013 and SLP(C) No. 21939 of

2017.

2) In all these appeals filed by different appellants (hereinafter referred to

as the ‘assessees’) except Civil Appeal No. 3695 of 2012 which is filed 5

by Director of Income Tax (Revenue), the question of law which arises

for consideration is identical and pertains to the scope and interpretation

of Section 44BB of the Income Tax Act, 1961 (hereinafter referred to as

the ‘Act’).

3) For computation of profits and gains of a business, to make it exigible to

tax under the Act, provisions contained in Chapter IV, from Sections 28

to 41, 43 and 43A of the Act apply. However, in those cases where the

assessee is a non-resident and specifically engaged in the business of

exploration etc. of mineral oil, special mechanism is provided in Section

44BB of the Act for computation of profits and gains, on which the tax is

charged. It, however, gives choice to such non-resident assessees to

opt for computation formula provided under Section 44BB or to be

covered by normal computation mechanism contained in Sections 28 to

41, 43 and 43A of the Act. Section 44BB of the Act stipulates that a sum

equal to 10% 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’. Thus, concessional rate of 10% is charged as tax, which is

admittedly much less than the normal tax rate payable on profits and

gains of business or profession. However, this tax @10% is on the

aggregate of the amounts specified in sub-section (2) which are

“deemed” profits and gains of such business. Thus, insofar as 6

calculation of profits and gains of the business under Section 44BB of

the Act is concerned, on which 10% tax is payable, it is worked out on

fictional basis by adopting the formula laid down in sub-section (2).

Sub-section (2) mentions those amounts aggregate whereof is to be

treated as deemed profits and gains of such a business.

4) At this juncture, we reproduce the provisions of Section 44BB of the Act,

as reading of this provision is necessary before spelling out the nature of

dispute which had arisen in these appeals. This section reads as under:

“44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.

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

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

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

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral 7

oils in India; and

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

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.

Explanation.—For the purposes of this section,—

(i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;

(ii) "mineral oil" includes petroleum and natural gas.”

5) A bare reading of the aforesaid provision brings out the following salient

features thereof:

(a) Sub-section (1) is a non-obstante clause, starting with the

expression ‘notwithstanding anything to the contrary contained in

Sections 28 to 41 and Sections 43 and 43A’. Thus, once we apply

this special provision for computation of profits and gains,

provisions for computation of such profits as contained in Sections

28 to 41 and Sections 43 and 43A of the Act stand excluded.

8 (b) In order to attract the provisions of Section 44BB of the Act, two

conditions are to be specified, namely, (i) assessee has to be a

non-resident; and (ii) assessee should be engaged in the business

of exploration etc. in mineral oils of the nature specifically spelled

out in the provision.

(c) Choice is given to such an assessee under sub-section (3) of the

Act to either claim lower profits and gains than the profits and gains

specified in sub-section (2) and covered by normal provisions of

computing profits and gains of business or profession, subject to

fulfilling the conditions of audit etc. as mentioned therein or to be

governed by Section 44BB of the Act.

(d) In case the twin conditions mentioned above are satisfied, the

assessee can take the benefit of paying the tax as per the

provisions of Section 44BB on “deemed profits and gains” of its

business and such profits and gains are to be calculated as per the

formula provided in sub-section (2) thereof. Pertinently, it is a

‘deemed’ provision for calculating profits and gains of business or

profession, which means that such profits and gains are to be

arrived at fictionally, as per provisions contained in sub-section (2).

(e) Sub-section (2) mentions the amounts which are to be added up, 9

and the aggregate of those amounts is deemed to be profits and

gains on which 10% tax is charged as component of income tax.

6) Coming to the lis that is involved in these appeals, it may be seen that

sub-section (2) mentions two kinds of amounts which are to be treated

as profits and gains of the business. In clause (a) of sub-section (2), the

amount referred to are those which are paid or payable to 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 in India. It is

immaterial whether the said amount is paid or payable in India or out of

India. Second kind of amounts mentioned in clause (b) of sub-section

(2) are those sums which are received or deemed to be received by or

on behalf of the assessee on account of 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, extraction or production of

mineral oils outside India. Here, however, only those sums which are

paid or payable in India are to be included.

7) The assessees herein had entered into contracts primarily with Oil and

Natural Gas Commission (ONGC), a public sector company, for hire of

their rig for carrying out oil exploration activities in India. For this

purpose, they were paid mobilisation fee as well, for and on account of 10

mobilisation/movement of rig from foreign soil/country to the off-shore

side at Mumbai (India). The issue that has fallen for consideration is as

to whether aforesaid amount received is to be included for computation

of deemed profits and gains of the business, chargeable to tax under

Section 44BB of the Act. Right from the Assessing Officer (AO) till the

High Court, all the fora have answered this question in affirmative

holding that this amount is to be included for computing profits and gains

of the businesses of the assessees.

8) Civil Appeal Nos. 4906 of 2010, 4907 of 2010, 4915 of 2010 filed by

Sedco Forex International Inc., M/s Transocean Offshore Inc., M/s

Sedco Forex International Drilling Inc. respectively were taken up as

lead matters and, therefore, for the sake of brevity, we recapitulate the

factual matrix from the said appeals, as it would suffice for answering

the question involved.

9) During the years under consideration, the assessees are engaged in

executing the contracts all over the world including India in connection

with exploration and production of mineral oil. The assessees are

companies incorporated outside India and, therefore, non-resident within

the meaning of Section 6 of the Act. The assessees entered into

agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid

agreements provided for the scope of work along with separate 11

consideration for the work undertaken. Since the dispute is about

mobilisation charges, clauses in respect thereof are as under:

“Operating Rate – Receipts for undertaking drilling operations computed by per day rates provided in the contract. The operating rates shall be payable from the time the drilling unit is jacked-up and ready at the location to spud the first well.

Mobilisation – charges for the transport of the drilling unit from a location outside India to a location in India as may be designated by ONGC.”

In addition to the above, assessees also received amounts from

the operator towards reimbursement of expenses like catering,

boarding/lodging, fuel, customs duty, the supply of material etc., with

which we are not concerned.

10) The assessees filed their return of income declaring income from

charter higher of the rig. The same was offered to tax under Section

44BB of the Act. In the case of Sedco Forex International Inc., the

assessee did not include the amount received as mobilisation charges to

the gross revenue for the purpose of computation under Section 44BB of

the Act. In the case of Transocean Offshore Inc., the assessee included

1% of the mobilisation fees. The mobilisation fees were offered to tax on

a 1% deemed profit basis on the ratio of the CBDT Instruction No. 1767

dated July 1, 1987.

11) The AO included the amounts received for 12

mobilisation/demobilisation to the gross revenue to arrive at the “profits

and gains” for the purpose of computing TAX under Section 44BB of the

Act. The Commissioner of Income Tax (Appeals) {hereinafter referred to

as the ‘CIT(A)’} confirmed the action of the AO. The Income Tax

Appellate Tribunal (hereinafter referred to as the ‘ITAT’) in the case of

Sedco Forex International Inc. dismissed the appeal of the assessee

and the action of the AO was upheld insofar as the mobilisation charges

were concerned. In the case of Transocean Offshore Inc., the ITAT

upheld the view taken by the assessee and directed the AO to assess

the profits on mobilisation charges at 1% of the amount received. This

was done following the Circular of CBDT Instruction No. 1767 dated July

1, 1987 and decision of the third Member in the case of Saipem S.P.A.

v. Deputy Commissioner of Income Tax 1. The High Court has held

that the mobilisation charges reimbursed inter alia even for the services

rendered outside India were taxable under Section 44BB of the Act as

the same is not governed by the charging provisions of Sections 5 and 9

of the Act. Even on the issue of reimbursement in M/s. Sedco Forex

International Drilling Inc. (Civil Appeal No. 4915 of 2010), the High Court

followed its earlier judgments dated September 20, 2007 and May 22,

2009 to hold that reimbursement of expenses incurred by the assessee

was to be included in the gross receipts, and taxable under Section

44BB of the Act.

1 88 ITD 213 (Del) 13

12) From the aforesaid brief narration of facts, it may be discerned that

following three types of payments were given by the ONGC to the

assessees:

(i) Mobilisation/demobilisation advance.

(ii) Custom duty reimbursement.

(iii) Operational charges reimbursement.

13) The High Court has held that these payments be also included as

amounts received for computation of aggregate of amounts specified in

sub-section (2) as deemed to be the profits and gains of the businesses

of the assessees, chargeable to tax under the said provision.

14) Mr. Porus F. Kaka, learned senior advocate appearing in some of

these appeals submitted that the aforesaid amounts were, in fact,

towards reimbursement of expenses actually incurred by the assessees.

According to him, the work undertaken was, in fact, the obligation of the

ONGC and it was for ONGC to provide such facilities/material under the

contract. Still the assessees performed the said task at the request of

the ONGC and ONGC simply reimbursed these expenses which did not

have any profit element. It was emphasised by Mr. Kaka that insofar as

the assessee—Sedco Forex International Inc. is concerned, the

expenditure incurred on mobilisation was much higher than the actual

payment received. Thus, this assessee had, in fact, suffered loss on this 14

transaction. He also pointed out that the agreement separately provided

for consideration/remuneration for mobilisation and demobilisation of

drilling unit and reimbursement of cost incurred on behalf of the operator

of ONGC. It was submitted that as this was the nature of the amount

received, namely, reimbursement of expenses without there being any

profit element, it could not be treated as ‘amount’ within the meaning of

sub-section (2) of Section 44BB of the Act.

15) Explaining the taxation of income scheme enumerated under

Sections 4, 5 and 9 of the Act, Mr. Kaka submitted that globally the tax

systems can be classified broadly into two models; Worldwide and

Territorial system. India follows a territorial system of taxation specially

qua business income of non-residents, which is taxed only as it is

attributable to operations within the Indian territory. This, according to

him, was clear from the conjoint reading of Sections 4, 5 and 9 of the

Act. Section 4 is the charging section for levying a tax on income of any

person under the Act which provides that income tax shall be levied at

the rates provided by the Finance Act on the ‘total income’ of the

previous year. Scope of total income is provided under Section 5 of the

Act which deals with total income of residents as well as non-residents.

The learned senior counsel pointed out that insofar as non-residents are

concerned, total income as per Section 5(2) of the Act is the income

which is received or deemed to be received in India in such year or on 15

behalf of such person; or income which accrues or arises or is deemed

to accrue or arise in India during such year. He, thus, argued that in

respect of non-residents only that income which is received or deemed

to be received in India or which accrues or arises or deemed to accrue

or arise in India is taxable. In order to locate the income which is

deemed to accrue or arise in India, Section 9 is the concerned provision.

Section 9 acknowledges principle of attribution of income under the Act.

Section 9 lays down two broad categories of taxable of income i.e. (a)

business income; and (b) income from interest or royalty or fees for

technical services. Insofar as business income is concerned, it

becomes taxable and only that income becomes chargeable to tax in

India which is attributable to operations carried out in India. Insofar as

second category, namely, income in the nature of interest, royalty or fees

for technical services is concerned, such income would be deemed to

accrue or arise in India, irrespective of situs of the services. The learned

senior counsel argued that insofar as payment for mobilisation which

was received by the assessee is concerned, it is neither income receipt

nor deemed to be received in India. It is in respect of services outside

India and, therefore, does not accrue or arise or deemed to accrue or

arise under Section 5 read with Section 9 of the Act.

16) Proceeding further on the aforesaid line of argument, he submitted

that, in the first instance, it has to be determined that income accrues or 16

arises or is deemed to accrue or arise in India. Only when that is

established, the next step is to compute the total income based on other

provisions of the Act and here Chapter IV of the Act which deals with

computation of income from ‘Profits and Gains of Business or

Profession’ gets triggered. It was submitted that, no doubt, Sections

44B, 44BB, 44BBB etc. provide for special mechanism for computing the

income in the case of non-residents on presumptive basis. However,

even when the income is to be computed under any of these provisions,

first pre-requisite is to find out as to whether a particular income has

accrued or arisen or deemed to accrue or arise in India. If that threshold

is not met, the question of treating such payments as ‘income’, merely

because the income is to be computed under special provision, is of no

consequence. Mr. Kaka also referred to Circular No. 495 dated

September 22, 1987 issued by the Central Board of Direct Taxes

(CBDT) which, according to him, explains the Legislature intent behind

inserting Section 44BB in the Act. According to the circular, the

computation of taxable income of a non-resident assessee engaged in

the business of exploration etc. of mineral oils in accordance with the

general mode of computation under Sections 28 to 43A involved a

number of complications. As a measure of simplification, Section 44BB

was inserted by the Finance Act, 1987 with retrospective effect from

April 1, 1983 for determination of income of such tax payers on a 17

presumptive basis, at 10% of the amounts mentioned in sub-section (2)

thereof. Relevant portion of that circular is as under:

“21.1 A number of complications are involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. With a view to simplifying the provisions, the Amending Act has inserted a new Section 44BB which provides for determining of the income of such taxpayers at 10 percent of the aggregate of certain amounts which have been specified. This amount will include the amounts received or due to be received in India on account of such services or facilities or supply of plant and machinery.”

17) After arguing that the provisions have to be read in the aforesaid

manner, proposition advanced by the learned senior counsel is that

Section 44BB of the Act is only a computation provision and does not

override Sections 4 and 5 of the Act. For this purpose, he referred to the

judgment of this Court in Union of India & Anr. v. A. Sanyasi Rao &

Ors.2 wherein Section 44AC of the Act has been interpreted in a similar

manner holding that Section 44AC read with Section 206C is the only

machinery provision and not charging Section.

18) Towing the aforesaid line of argument, another submission of

Mr. Kaka was that since Section 44BB is a computation provision under

the head ‘income’, it cannot override the charging section. For this

purpose, he relied upon the judgment of Bombay High Court in

2 (1996) 3 SCC 465 18

Commissioner of Income Tax v. F.Y. Khambaty3. Mr. Kaka also relief

upon the following judgments:

(a) Anglo-French Textile Company, Ltd., by Agents M/s Best &

Company, Ltd., Madras v. Commissioner of Income Tax, Madras4

(b) Ishikawajma-Harima Heavy Industries Ltd. v. Director of

Income Tax, Mumbai5

(c) Carborandum & Co. v. CIT, Madras6

(d) Commissioner of Income Tax, Madras v. Best and

Company (Private) Ltd., Madras7

19) He also cited judgments on the proposition that CBDT Circulars

are binding on tax authorities; reimbursement of actual expenses does

not represent income and, therefore, cannot be taxed; and normal

concept of income cannot be taken away by presumption provisions.

20) In nutshell, as can be seen from the aforesaid arguments, the

proposition advanced by learned senior counsel are as follows:

(a) Principle of apportionment between India and outside India is a

basic principle of income tax law. Where payments are made to a

non-resident outside India, for services rendered outside India,

3 (1986) 159 ITR 203 4 (1954) 25 ITR 27 (SC) 5 (2007) 288 ITR 408 (SC) = (2007) 3 SCC 481) 6 (1977) 108 ITR 335 (SC) 7 (1966) 60 ITR 11 (SC) 19

namely mobilization charges for drilling rigs from a foreign location to

a location in India, the same is not chargeable to tax in India under

Sections 5 and 9 of the Act and the same cannot be made

chargeable to tax under Section 44BB of the Act.

(b) A computation provision like Section 44BB cannot override the

charging provisions of Sections 4 and 5. It is so stated in the

instruction No. 1767 dated July 1, 1987 issued by the CBDT. The

understanding of the CBDT is binding on the Revenue.

(c) The charges were reimbursed for services rendered outside India.

Services rendered outside India cannot be chargeable to tax under

the Act. There should be sufficient territorial nexus between the

rendering of services and the territorial limits of the Act to make the

income taxable.

(d) Where the actual expenditure incurred by the assessee for the

mobilization of the rigs was higher than the amount reimbursed, there

cannot be any income chargeable to tax under the Act.

(e) Reimbursement of actual expenditure, which was the obligation of

the operator/company cannot be included in receipts under Section

44BB of the Act as the income tax is levied on income. Further, the

fact of such reimbursements being devoid of any profit element has

not been disputed by the Revenue.

21) Mr. Vohra, learned senior counsel appearing for the appellant 20

Pride Foramer S.A. (Civil Appeal No. 4543 of 2013) stated that the

appellant in the said case is a non-resident company incorporated in the

Republic of France. It also entered into contract with ONGC for hire of

its rig for carrying out oil exploration activities by ONGC in India. The rig

was located in Singapore and accordingly, under the contract,

mobilization fees of US$1 million (equivalent to Rs.4,31,10,000/-) was

payable by ONGC to the appellant for and on account of mobilization/

movement of rig from Singapore to the offshore site at Mumbai. In case

of delay, liquidated damages @0.5% of operating day rate subject to a

maximum of 5% of the annual operating charges was payable by the

appellant to ONGC. In Assessment Year 2000-01, during the year under

consideration, the appellant received outside India, net mobilization

charges of US$ 6,42,300 (equivalent to Rs.2,76,89,533/-) after

deduction of liquidated damages for delay, for mobilization from

Singapore to the offshore site (in India).

22) On the aforesaid facts, he submitted that net mobilization charges

received outside India could not be taxed in India, more so, when these

were in the nature of reimbursement of expenses on account of

mobilization/movement of rig from Singapore to the offshore site at

Mumbai. His primary contention was that before this payment could be

included while making computation under Section 44BB of the Act, it had

to be ‘income’ which is taxable in India in the first instance. His 21

submissions on the scheme of Sections 4, 5 and 9 of the Act were the

same as that of Mr. Kaka, already noted above. Additionally, he

submitted that insofar as Section 44BB of the Act is concerned, it only

provides a simplified computation mechanism for computing profits and

gains in case of non-resident assessee engaged in activities relating to

business of exploration of mineral oil etc. Thereby, overriding the normal

computation mechanism contained in Sections 28 to 41, 43 and 43A of

the Act. His emphasis was that this provision does not override charging

provisions as contained in Section 4 read with Sections 5 and 9 of the

Act, thereby bringing to tax an amount which is not at all taxable under

the provisions of the Act. In addition to Circular No. 495 dated

September 22, 1987 (already noted above), he also relied upon

Instruction No. 1767 dated July 1, 1987 issued by CBDT explaining the

computation of business income in case of a contractor engaged in

business of exploration of oil where part of the activities are carried out

in India and part of the activities are carried on outside India. It has

been stated as under:

“3. On these facts, it is clear that income accruing or arising to the non-resident contractor should be apportioned between the various activities carried on by it, some of which would be within India and some outside. Where the ownership in the platform, terminal, treatment plant or other facilities passed outside India, the non-resident will be taxable only in respect of the activities performed in India by way of installation, hook-up and commissioning etc., of the facilities acquired by the Indian enterprises engaged in oil exploration or production…” 22

23) In support of the aforesaid submissions, Mr. Vohra relied upon the

following judgments:

(i) Commissioner of Income Tax and Anr. v. Hyundai Heavy Industries Co. Ltd.8

(ii) State Bank of Travancore v. Commissioner of Income Tax, Kerala9

24) To summarise, proposition advanced by Mr. Vohra are as under:

(i) Mobilization fee was in respect of activities carried outside India

prior to coming into existence of the PE in India and, therefore, this

mobilization fee was not taxable at all, in view of Article 7 of

Double Taxation Avoidance Agreement (DTAA) between India and

France, the relevant portion whereof is as under:

“1. The profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment….”

(ii) In case the payment is held liable to tax in India, then the same

has to be computed in terms of Sections 4, 5 and 9 read with

Section 44BB of the Act. In that situation, only the mobilization fee

pertaining to voyage within the territorial waters of India can be

subjected to tax.

8 (2007) 7 SCC 422 9 (1986) 158 ITR 102 (SC) 23

(iii) Without prejudice to the aforesaid, it is alternatively submitted that

since the appellant only received mobilization fee amounting to

Rs.2,76,89,533/- (equivalent to US$ 6,42,300), after deduction of

liquidated damages, the AO erred in bringing to tax the gross

amount of US$1 million under Section 44BB of the Act.

25) Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates

appearing for some other assessees treaded the same path by adopting

same line of arguments.

26) M/s. Chidananda and Arijit Prasad, learned advocates appearing

for the Revenue put up an emphatic defence to the judgment of the High

Court which has accepted the position taken by the Revenue. It was

argued that assessee Sedco, which is a non-resident company, had

entered into a composite/indivisible contract with ONGC to provide a

drilling unit to carry out drilling operations. A finding of fact to this effect

i.e. a composite/indivisible contract was entered into, was arrived at by

the ITAT and, therefore, matter had to be proceeded on that basis.

Submission was that, as per this contract, it was the obligation of the

assessee to mobilise its resources for the purpose of drilling operations.

According to them, since the payments were made by ONGC to the

assessee in terms of indivisible contract for the purposes of drilling

operations, it was not open to the assessee to claim that mobilisation 24

fee/charges and it should not be included in the aggregate receipts for

the purposes of Section 44BB of the Act and their plea that they are not

actual charges but expenses in the nature of reimbursement by ONGC

was not permissible. It was submitted that though, mobilisation

fee/charges have been separately indicated in the said contract, the

payments have been made by ONGC for supply of drilling unit including

the rigs, for operating these rigs and for providing experts and other

personnel for operating the rigs etc. Therefore, it is a misnomer to term

payment of mobilisation fee/charge as ‘reimbursement’. They are

payments made pursuant to an indivisible contract. Assuming, for the

purposes of argument that it amounts to reimbursement, the same will

not make any difference for the reason that parties may agree to divide

the total amount as a direct payment by way of fees and some part of

the consideration by way of expenses, but this arrangement between the

parties would not alter the character of receipts. A receipt will remain as

such and will not partake the character of an expenditure. According to

the learned counsel, the mobilisation fee/charges paid by ONGC to

assessee amounts to income chargeable to tax.

27) For this purpose, reliance was placed on the definition of “income”

as contained in Section 2(24) of the Act which defines the said

expression in an inclusive manner. Attention was also drawn to Section

2(45) of the Act which defines “total income” to mean total income 25

referred to in Section 5, computed in the manner laid down in the Act. It

was, thus, argued that income had to be computed as per the provisions

of the Act. Even Section 4 of the Act, which is a charging section, clearly

points out that income tax is to be paid ‘in respect of the total income of

the previous year’. Likewise, Section 5 of the Act which deals with

‘scope of total income’ includes all income from whatever the source

derived. It was submitted that, in this hue, Section 9 which deals with

income deemed to accrue or arise in India, had to be looked into.

According to the learned counsel, the assessee had business

connection in India through the equipment owned by it, operating in

India and its employees, experts etc. working in India. Its assets are

employed/used in India and the source of income is in India. Therefore,

the ingredients of Section 9(1)(i) are fulfilled. Thus, assessee has

territorial nexus in India. Further, in a given case, if the assessee fulfils

these requirements and a DTAA applies, this will also constitute a

Permanent Establishment (PE) through which an assessee operates its

business in India. Further, the rigs/equipment are mobilised for its

business operations in India and that source of income is in India,

therefore, the question of apportionment. Thus, the mobilisation

fee/charges paid by ONGC to assessee is an income chargeable to tax

from a conjoint reading of Sections 4, 5 and 9. Therefore, the

submission of the assessee that Section 44BB seeks to tax an event 26

which the charging sections does not seek to tax is incorrect.

28) Adverting to the provisions of Section 44BB of the Act which finds

place in Chapter IV dealing with ‘computation of income’ in respect of

business or profession, it was submitted that the scope and effect of

Section 44BB has been explained in Departmental Circular No. 495

dated September 22, 1987. It has been mentioned in the said circular

that a number of complications were involved in the computation of

taxable income of a taxpayer engaged in the business of providing

services and facilities in connection with or supply of plant and

machinery on hire, used or to be used in the exploration for and

exploitation of mineral oils. Section 44BB was introduced with a view to

simplifying the relevant provisions which provide for determining the

income of such taxpayers at 10 per cent of the aggregate of certain

amounts, which have been specified in the said section. It was

submitted that Section 44BB provides for “presumptive income

determination”. It is a complete code in itself for determining the taxable

income 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. It replaces

Sections 28 to 41 and Sections 43 and 43A (which otherwise mandates

assessee to maintain accounts, claim and prove expenses). Only the 27

receipts are taken into account. Even if the actual profits and gains of

the assessee are more than 10%, only 10% is presumed to be its

income. Thus, 10% is the income and the rest 90% is allowed as

expenditure/allowable claims of the assessee. Assuming that Section

44BB was not on the statute book, assessee would have shown

mobilisation fee as receipt and claimed the actual expenditure and

arrived at the net taxable income. Now, Section 44BB presumes that

only 10% of the aggregate receipts is income and the remaining 90% is

expenditure. It was also argued that in the case of presumptive income

determination like Section 44BB, items of expenditure cannot be claimed

separately, otherwise it would lead to double deduction as Section 44BB

presumes that only 10% of the aggregate receipts is income and the

remaining 90% is expenditure. It was pleaded that when all the

authorities including the final fact finding authority as well as the High

Court have recorded their concurrent findings on consideration of

relevant material, this Court may not disturb those findings. Reliance

was placed on Avasarala Technologies Limited v. Joint

Commissioner of Income Tax, Special Range 1, Bangalore 10 and

Commissioner of Income Tax Bihar and Orissa, Patna v. Ashoka

Marketing Co.11

29) Before we appreciate the rival submissions made by counsel for

10 (2015) 14 SCC 732 11 (1972) 4 SCC 426 28

the parties on both sides, it would be apposite to go into the raison

d’etre behind the orders of the ITAT as well as the High Court.

30) The ITAT in its order has taken note of the relevant clauses of the

agreements entered into between ONGC and assessee (Sedco)

pertaining to mobilisation and mobilisation fee. Clause 3.2 of the

Agreement dated September 3, 1985 relating to providing the Shallow

Dash Water Jack Up Rig covering this aspect reads as under:

“Mobilisation

Operator shall pay to Contractor a mobilisation fee of eight hundred thousand United States Dollars (US $ 800,000) (“Mobilisation Fee”) for the mobilisation of the Drilling Unit from its present location in Setubal, Portugal to the first well location designated by Operator, Offshore Bombay, India. Operator will notify Contractor no later than fifteen (15) days from the execution of this Agreement if it desires to mobilize the Drilling Unit to another location offshore India and no additional costs shall be charged to Operator for mobilisation to such other location. In the event that Operator desires to mobilize the Drilling Unit to another location offshore India and it fails to notify Contractor by such date, any additional costs incurred by Contractor for such mobilisation in excess of the Mobilisation Fee shall be borne by the Operator. Contractor shall invoice Operator for payment of the Mobilization Fee after the Drilling Unit is jacked-up on the first well location and ready to spud the well. Operator shall make payment to Contractor no later than thirty (30) days after receipt of the invoice.”

31) Clause 4.2 of the Agreement dated July 12, 1986 relating to

Mobilisation of the Drilling Unit (including Rig 21) is also reproduced

hereunder:

“Mobilisation and Mobilisation Fee 29

Contractor shall notify Operator when it is prepared to commence mobilisation of the Drilling Unit from Muscat, Oman. Within thirty days of receipt of Contractor’s notice of readiness, Operator shall instruct Contractor to commence mobilisation, and Contractor shall forthwith ship the Drilling Unit to the port of entry (Kandla or Bombay).

Contractor shall be compensated for the mobilisation of the Drilling Unit from its place of origin by a mobilisation fee payable within thirty days following the commencement date.”

32) It also noted that apart from the aforesaid mobilisation fee

stipulated in the aforesaid two contracts, the ONGC had undertaken to

pay compensation based on operating rate of US $ 24,550 per 24 hours

a day for all operating time and US $ 24,060 as non operating rate per

day relating to Sedco 252 Rig. Similarly operating rate – R1 and stand

by rate – R2 was also separately stipulated in the other contract dated

July 12, 1986 relating to Rig-21 etc.

33) Thereafter, the ITAT pointed out that even as per the assessee,

there was no dispute about the applicability of Section 44BB of the Act in

relation to payments made by the ONGC under the aforesaid

agreements by way of operating charges and other payments made by

ONGC to the assessee except in relation to mobilisation fee and

reimbursement of certain other expenses as according to the assessee,

these payments were not in the nature of fee (income) but

reimbursement of expenses only. This argument is dealt with by the

ITAT, taking note of the provisions of Section 44BB of the Act. The ITAT 30

concluded that it was a special provision for computing profits and gains

in connection with the business of exploration of mineral oils, effect

whereof was explained in Departmental Circular No. 495 dated

September 22, 1987. It further noted that agreements between ONGC

and the assessee were indivisible in nature as per which entire

payments had been agreed to be made by ONGC for supply of drilling

unit including the rigs, for operating those rigs, and for providing experts

and other personnel for operating those rigs. Therefore, all these

payments were deemed to be the profits and gains of business for the

purposes of Section 44BB of the Act and 10% thereof was to be treated

as income chargeable to tax. Section 44BB of the Act does not provide

that separate consideration mentioned in the Agreement for

transportation of the drilling units/rigs from their present location to the

designated location in India would be excluded from the correct amount

of gross receipts on which 10% profit rate is required to be applied. The

ITAT held that the mobilisation fee paid by ONGC to the assessee had

no nexus with the actual amount incurred by the assessee for

transportation of drilling units/rigs and, therefore, it could not be said that

this payment was made for reimbursement of actual expenditure.

34) This is the summary of the rationale given by the ITAT in support of

its conclusion, as can be seen from the following detailed discussion:

“2.14 The aforesaid Sec. 44BB making a special provision for 31

computing profits and gains in connection with the business of exploration of mineral oils has been inserted by the Finance Act, 1987 with retrospective effect from 1st April, 1983. The scope and effect of new Sec. 44BB was explained in Departmental Circular No. 495 dated 22 nd September, 1987. It has been mentioned in the said Circular that a number of complications were involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of Plant & Machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. Section 44BB was introduced with a view to simplifying the relevant provisions which provide for determining the income of such tax-payers at 10% of the aggregate of certain amounts, which have been specified in the said Section. The provisions of Section 44BB were amended by the Finance Act, 1988 with retrospective effect w.e.f. 1st April, 1983 which clarifies that applicability of Section 44BB will be restricted to the cases of only non-resident tax-payers. It is clear from the language used in Section 44BB(2)(a) that the amount referred to in Section 44BB(1) on which profits have to be calculated @10% will be the aggregate of amounts paid or payable to the taxpayer or to any person on his behalf whether in or out of India on account of the provisions of such services or facilities.

2.15 A perusal of the relevant Agreements executed between the appellant company and ONGC clearly reveals that both the Agreements are indivisible contracts. It is true that mobilisation fee and operating charges have been separately indicated in the said Agreements but the entire payments have been agreed to be made by ONGC for supply of the Drilling Unit including the Rigs, for operating these Rigs, and for providing experts and other personnel for operating those rigs etc. Section 44BB specifically provides that the aggregate of the amounts referred to in sub-section (2) of Section 44BB will be adopted as the basis for calculating profits @10%, which shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits & Gains of Business or Profession”. It does not provide that separate consideration mentioned in the Agreement for transportation of the Drilling Unit/Rig from their present location to the designated location in India will be excluded from the aggregate amount of gross receipts on which 10% profit rate is required to be applied.

ONGC has made the entire payment including the mobilisation fee, operating charges, daily hire on non operating days etc. for availing the services and facilities and the supply of Plant & Machinery on hire agreed to be provided by the appellant company to ONGC. The mobilisation fee paid by ONGC to the 32

appellant company has no nexus with the actual amount incurred by the appellant company for transportation of the Drilling Unit/Rigs to the specified drilling location in India. Even if the actual expenditure incurred by the appellant company would have been substantially less, ONGC was liable to pay the fixed amount of mobilisation fee stipulated in the respective Agreements.”

35) Before the High Court, argument of the assessee was that amount

of mobilisation charges cannot be included in the amount referred to

under sub-section (2) of Section 44BB of the Act as the mobilisation

charges represent reimbursement of expenses incurred for

transportation of drilling units of rigs from outside India to designated

drilling places in India and the payment has also not been made in India.

In support of his submission, apart from other judgments, heavy reliance

was placed on the decision of this Court in Ishikawajima-Harima

Heavy Industries Ltd. case. The High Court noted that in the said

case, the assessee was a Japanese company, inter alia, engaged in the

business of construction of storage tanks as also engineering etc. It

formed consortium along with few other Japanese companies and one

subsidiary company of the Japanese company. This consortium had

entered into an agreement with an Indian company on January 19, 2001

for setting up a Liquefied Natural Gas (LNG) receiving, storage and

degasification facility at Dahej in the State of Gujarat. A supplementary

agreement was also entered by the parties on March 19, 2001. It was a

turnkey project. At the same time, role and responsibility of each 33

member of the consortium was separately specified and each of the

members of the consortium was to receive separate payments. Insofar

as appellant-assessee is concerned, it was to develop, design, engineer

and procure equipment, materials and supplies to reject and construct

storage tanks of 5 MMTPA capacity, with potential expansion of

10MMTPA capacity at the specified temperature, i.e., 200 degree

celsius. The arrangement also included marine facilities (jetty and island

breakwater) for transmission and supply of LNG to purchaser; to test

and commission facilities relating to receipt and unloading, storage and

regasification of LNG and to send out regasified LNG by means of a

turnkey fixed lump sum price time certain engineering procurement,

construction and commission contract. The contract indisputably

involved: (i) offshore supply, (ii) offshore services, (iii) onshore supply,

(iv) onshore services and (v) construction and erection. The price was

payable for offshore supply and offshore services in US dollars, whereas

that of onshore supply as also onshore services and construction and

erection partly in US dollars and partly in Indian rupees.

36) The High Court noted that while determining the tax liability of the

said foreign company, this Court had taken into consideration Section

5(2), Section 9(1)(i) and Section 9(1)(vii) of the Act and considered the

question of imposition of tax on income arising from a business

connection of the assessee. Holding that income is not taxable in India, 34

the Court premised the conclusion, inter alia, on the ground that as per

clause (a) of Explanation 1 to Section 9(1)(i) of the Act, only such part of

income as is attributable to the operations carried out in India, is taxable

in India and further that sufficient territorial nexus between the rendition

of services and territorial limits of India is necessary to make the income

taxable. As far as offshore supply and offshore services in US$ are

concerned, it was done outside the territory of India and the payment

was also made to the assessee (a foreign company) in US$ outside

India, said payment was not taxable as it was not “income” arising from

a business connection of the said assessee.

37) The High Court, after taking note of the aforesaid judgment, has

held that it is not applicable in the instant case. Reason given is that in

Ishikawajima-Harima Heavy Industries Ltd., the Court had dealt with

the assessment of a non-resident company on its income as per the

provisions of Sections 5 and 9 of the Act and these sections are not

attracted in the instant case, as the same is governed by Section 44BB

of the Act. This is the material distinction, in the opinion of the High

Court, the manner in which the same is discussed needs to be

reproduced. Thus, we hereby quote the relevant portion of the said

discussion:

“…..Therefore, section 5 and section 9 both are aimed a the income for the taxability under section 4 of the Act, while section 44BB does not take into Account the income for calculating the aggregate amount t calculate 10 percent profit 35

and gains. Profit and gains is a type of income to be taxed under a legal fiction, i.e., @10 percent of the amount specified in sub-section (2) of section 44BB. Section 44BB is a special provision relating to non-resident assessee who is providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in or outside India. The section is a complete code in itself. Thus, the reliance placed by Sri Porus Kaka, learned Counsel for the assessee, is misplaced as we have observed that the amount referred in sub-section (2) of Section 44BB are four types of amounts and all the four types of amounts are mutually inclusive and has to be taken into account either all of them or any of them and its clauses themselves provide that whether the payment is made inside India or outside India.

17.In the present case, a finding has been recorded by the ITAT that it was not in dispute before the Tribunal that the payment was made to the appellant company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant company for transportation of drilling units of rigs to the specified drilling locations in India. Hence, the mobilization fee is not the reimbursement of expenditure.

ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee company for the purpose. In view of the fictional taxing provision contained under Section 44BB, the Assessing Officer was right in adding the amount of Rs. 99,04,000/- for the Assessment Year 1986-87 and amount worth Rs. 64,64,530/- for the Assessment Year 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income tax and CIT (Appeals) and ITAT were also right in upholding the order of the Assessing Officer.”

38) We feel that High Court may not be entirely correct in law in

excluding the provisions of Sections 5 and 9 in those cases where the

assessment is opted by the assessee under Section 44BB of the Act.

Submissions of learned counsel for the assessees are justified to the

extent that Section 44BB of the Act is a special provision providing

computation mechanism for computing profits and gains in case of 36

non-resident assessee engaged in activities relating to business of

exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the

Act which deal with charging section, total income and income of

non-resident which arises or deem to arise in India cannot be

sidetracked. These are the provisions which bring a particular income

within the net of income tax. Therefore, it is imperative that a particular

income is covered by the charging provisions contained in Section 5 of

the Act. Indian Income Tax Act, admittedly, follows a territorial system of

taxation. As per this system only that income of a non-resident is

taxable in India which is attributable to operations within the Indian

Territory. Therefore, in the first instance it is to be seen whether a

particular income arises or accrues or deem to arise or accrue within

India. In order to seek this answer, the principles contained in Section 9

have to be applied only when it becomes an income taxable in India as

per Section 9, in case of non-resident, the question of computation of

the said income would arise. To recapitulate the scheme of the Act in

this behalf, it may be stated that Section 4 is the charging section for

levying a tax on the income of any person under the Act and provides

that income-tax shall be levied at the rates provided by the Finance Act

on the ‘total income’ of the previous year of every person. The

expression ‘total income’ has been defined in Section 2(45) of the Act to

mean the total amount of income referred to in Section 5 computed in 37

the manner laid down under the Act.

39) The scope of the total income of any person, which could be

subjected to tax under the provisions of the Act, is defined under Section

5 of the Act and dependent upon the residential status of the persons.

Section 5(1) provides the scope of ‘total income’ in the case of residents,

whereas Section 5(2) provides the scope of ‘total income’ in the case of

non-residents. As per Section 5(2) of the Act, subject to the provisions

of this Act, the ‘total income’ of any previous year of non-resident

includes:

• Income which is received or deemed to be received in India in such

year or on behalf of such person; or

• Income which ‘accrues or arises’ or is deemed to accrue or arise to

him in India during such year.

40) Section 9 enumerates the income which is deemed to accrue or

arise in India. There are two broad categories of taxability of income

provided under this Section, i.e., Business Income and income from

interest or royalty or fees for technical services (FTS).

41) Section 9(1)(i) provides that income is to be deemed to have

accrued or arising in India if the income is accruing directly or indirectly

through any business connection in India or from any property in India or

from any asset or source of income in India or any capital asset situated 38

in India (referred as business income).

Explanation 1(a) to Section 9(1)(i) of the Act provides an exclusion

in the case of operations which are not carried out in India. The

explanation provides that the income of the business deemed under this

clause to accrue or arise in India shall be only that part of the income as

is reasonably attributable to the operations carried out in India. Thus,

business income earned by non-resident is chargeable to tax in India

only to the extent reasonably attributable to the operations carried out in

India.

42) It is, however, pertinent to point out that Section 44BB(2) makes

certain receipts as “deemed income” for the purposes of taxation in the

said provision. Therefore, aid of this provision is to be necessarily taken

to determine whether a particular amount will be “income” within the

meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as

guide to determine whether a particular income is attributed as income

occurred in India. Section 44BB of the Act provides for special provision

for computing profits and gains. However, that would not mean that if

the income is to be computed under this provision, we have to give a

go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High

Court may not be correct. Law in this behalf is settled by the judgment

of this Court in A. Sanyasi Rao case as can be discerned from the

following discussion in the said judgment.

39 “We are further of the view that the basis of a charge relating to income tax is laid down in Sections 4 to 9 of the Act. Section 4 is the charging section. Income-tax is levied in respect of the total income of the previous year of every person. Section 5 deals with the scope of total income. Section 6 deals with the residence in India. Section 7 deals with the income deemed to be received. Section 8 deals with dividend income. Section 9 deals with the income deemed to accrue or arise in India.

xxx xxx xxx

The crucial words in Section 9(1) to the effect that “all income accruing or arising, whether directly or indirectly, through or from any business connection” occurred in Section 42 of the Income Tax Act, 1922 as well. The said section came up for consideration before this Court in Anglo-French Textile Co.

Ltd. v. CIT [(1953) 23 ITR 101…

xxx xxx xxx

The counsel for the revenue Dr. Gaurishankar vehemently contended before us that Section 44AC read with Section 206C are only machinery provisions and not charging sections. We see force in this plea. The charge for the levy of the income that accrued or arose is laid by the charging sections, viz., Sections 5 to 9 and not by virtue of Section 44AC or section 206C…

xxx xxx xxx

However, the denial of relief provided by sections 28 to 43C to the particular businesses or trades dealt with in Section 44AC calls for a different consideration. Even, according to the revenue, the provisions (sections 44AC and 206C) are only ‘machinery provisions’. If so, why should the normal reliefs afforded to all assessees be denied to such traders? Prima facie, all assessees similarly placed under the Income Tax Act are entitled to equal treatment. In the matter of granting various reliefs provided under sections 28 to 43C, the assessees carrying on business are similarly placed and should there be a law, negativing such valuable reliefs to a particular trade or business, it should be shown to have some basis and fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in section 44AC are denied the reliefs available to others. No plea is put forward by the revenue that these trades are distinct and different even for the grant of reliefs under 40 Sections 28 to 43C. The denial of such reliefs to trades specified in section 44AC, available to other assessees, has no nexus to the object sought to be achieved by the Legislature.

(emphasis supplied)”

43) Having corrected the position in law, by emphasising that Sections

4, 5 and 9 of the Act are to be kept in mind even in those cases where

assessment is done under Section 44BB of the Act, we are of the

opinion that the argument of the assessees that Section 44BB is only a

computation provision, is also not entirely justified.

44) In the first blush, assessees may appear to be correct in their

contentions that Section 44BB falls in Chapter IV of the Act. Insofar as

computation of income from ‘Profits or Gains of Business or Profession’

is concerned, it has to be computed as per the provisions of Sections 28

to 43D(2). However, certain provisions are made for providing special

mechanism for computing the income on presumptive basis in case of

non-resident and it includes Section 44BB as well.

45) Having put the law in prospective, we need to examine as to

whether mobilisation charges received by the assessees can be treated

as ‘income’ under Section 5 of the Act and would fall within the four

corners of Section 9, namely, whether it can be attributed as having

arisen or deemed to arise in India. Argument of the learned counsel

appearing for the assessees is that the amount was received by way of

reimbursement of expenses for the operation carried outside India and 41

the payment was also received outside India. It is on this premise,

entire edifice is built to argue that it is not an “income” and, in any case,

not taxable in India at the hands of the assessees which are foreign

entities.

46) We have already reproduced above Clause 3.2 of the Agreement

dated September 3, 1985 and Clause 4.2 of the Agreement dated July

12, 1986. Clause 3.2 of the Agreement dated September 3, 1985

pertains to providing the Shallow Dash Water Jack Up Rig against which

payment was made to the assessees. This Clause says that the

assessees shall be paid ‘mobilisation fee’ for the mobilisation of drilling

unit from its present location in Portugal to the well location designated

by ONGC, offshore Mumbai, India. Fixed amount is agreed to be paid

which is mentioned in the said Clause. The aforesaid mobilisation fee

was payable to the assessees after the jacking up of the drilling at the

designated location and ready to spud the well. After the aforesaid

operation, assessees were required to raise invoice and ONGC was

supposed to make the payment within 30 days of the receipt of this

invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 is

concerned, it related to mobilisation of drilling unit. Here again,

‘mobilisation fee’ was payable for the mobilisation of the drilling unit from

the place of its origin to the port of entry (Kandla Port, Mumbai). What

follows from the above is that a fixed amount of mobilisation fee was 42

payable under the aforesaid contracts as “compensation”. Contracts

specifically describe the aforesaid amounts as ‘fee’. In this hue, we

have to consider as to whether it would be treated as “income” under

Section 5 of the Act and can be attributed as income earned in India as

per Section 9 of the Act. For this purpose, Section 44BB(2) has to be

invoked.

47) Section 44BB starts with non-obstante clause, and the formula

contained therein for computation of income is to be applied irrespective

of the provisions of Sections 28 to 41 and Sections 43 and 43A of the

Act. It is not in dispute that assessees were assessed under the said

provision which is applicable in the instant case. For assessment under

this provision, a sum equal to 10% 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

the business or profession’. Sub-section (2) mentions two kinds of

amounts which shall be deemed as profits and gains of the business

chargeable to tax in India. Sub-clause (a) thereof relates to amount paid

or payable to the assessee or any person on his behalf on account of

provision of services and facilities in connection with, or supply of plant

and machinery on hire used, or to be used in the prospecting for, or

extraction or production of, mineral oils in India. Thus, all amounts

pertaining to the aforesaid activity which are received on account of 43

provisions of services and facilities in connection with the said facility are

treated as profits and gains of the business. This clause clarifies that

the amount so paid shall be taxable whether these are received in India

or outside India. Clause (b) deals with amount received or deemed to

be received in India in connection with such services and facilities as

stipulated therein. Thus, whereas clause (a) mentions the amount which

is paid or payable, clause (b) deals with the amounts which are received

or deemed to be received in India. In respect of amount paid or payable

under clause (a) of sub-section (2), it is immaterial whether these are

paid in India or outside India. On the other hand, amount received or

deemed to be received have to be in India.

48) From the bare reading of the clauses, amount paid under the

aforesaid contracts as mobilisation fee on account of provision of

services and facilities in connection with the extraction etc. of mineral oil

in India and against the supply of plant and machinery on hire used for

such extraction, clause (a) stands attracted. Thus, this provision

contained in Section 44BB has to be read in conjunction with Sections 5

and 9 of the Act and Sections 5 and 9 of the Act cannot be read in

isolation. The aforesaid amount paid to the assessees as mobilisation

fee is treated as profits and gains of business and, therefore, it would be

“income” as per Section 5. This provision also treats this income as

earned in India, fictionally, thereby satisfying the test of Section 9 of the 44

Act as well.

49) The Tribunal has rightly commented that Section 44BB of the Act is

a special provision for computing profits and gains in connection with the

business of exploration of mineral oils. Its purpose was explained by the

Department vide its Circular No. 495 dated September 22, 1987,

namely, to simplify the computation of taxable income as number of

complications were involved for those engaged in the business of

providing 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 etc. Instead of going into the nitigrities of such

computation as per the normal provisions contained in Sections 28 to 41

and Sections 43 and 43A of the Act, the Legislature has simplified the

procedure by providing that tax shall be paid @10% of the ‘aggregate of

the amounts specified in sub-section (2)’ and those amounts are

‘deemed to be the profits and gains of such business chargeable to

tax...’. It is a matter of record that when income is computed under the

head ‘profits and gains of business or profession’, rate of tax payable on

the said income is much higher. However, the Legislature provided a

simple formula, namely, treating the amounts paid or payable (whether

in or out of India) and amount received or deemed to be received in

India as mentioned in sub-section (2) of Section 44BB as the deemed

profits and gains. Thereafter, on such deemed profits and gains 45

(treating the same as income), a concessional flat rate of 10% is

charged to tax. In these circumstances, the AO is supposed to apply the

provisions of Section 44BB of the Act, in order to find out as to whether a

particular amount is deemed income or not. When it is found that the

amount paid or payable (whether in or out of India), or amount received

or deemed to be received in India is covered by sub-section (2) of

Section 44BB of the Act, by fiction created under Section 44BB of the

Act, it becomes ‘income’ under Sections 5 and 9 of the Act as well.

50) It is stated at the cost of repetition that, in the instant case, the

amount which is paid to the assessees is towards mobilisation fee. It

does not mention that the same is for reimbursement of expenses. In

fact, it is a fixed amount paid which may be less or more than the

expenses incurred. Incurring of expenses, therefore, would be

immaterial. It is also to be borne in mind that the contract in question

was indivisible. Having regard to these facts in the present case as per

which the case of the assessees get covered under the aforesaid

provisions, we do not find any merit in any of the contentions raised by

the assessees. Therefore, the ultimate conclusion drawn by the AO,

which is upheld by all other Authorities is correct, though some of the

observations of the High Court may not be entirely correct which have

been straightened by us in the above discussion. For our aforesaid

reasons, we uphold the conclusion. Resultantly, all the appeals of the 46

assessees are dismissed.

51) In this batch of appeals, Civil Appeal No. 3695 of 2012 is the

solitary appeal which is preferred by the Director of Income Tax, New

Delhi (Revenue) against the judgment of the High Court of Uttarakhand.

The computation of income of the assessee was done under Section

44BB of the Act. However, the amount which was sought to be taxed

was reimbursement of cost of tools lost in hole by ONGC. It is, thus,

clear that this was not the amount which was covered by sub-section (2)

of Section 44BB of the Act as ONGC had lost certain tools belonging to

the assessee, and had compensated for the said loss by paying the

amount in question. On these facts, conclusion of the High Court is

correct. Even otherwise, the tax effect is Rs.15,12,344/-. Therefore,

Civil Appeal No. 3695 of 2012 filed by the Revenue is dismissed.

.............................................J. (A.K. SIKRI)

.............................................J. (ASHOK BHUSHAN) NEW DELHI;

OCTOBER 30, 2017.