Full Judgment Text
T.C.A.Nos.733 to 735 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On: 17.04.2026 Delivered On: 02.06.2026
CORAM
THE HONOURABLE DR JUSTICE G. JAYACHANDRAN
AND
THE HONOURABLE MR. JUSTICE R. SAKTHIVEL
T.C.A.Nos.733 to 735 of 2010
T.C.A.No 733 . of 2010
M/s.Vedanta Limited,
(Successor in Interest to Cairn India Limited),
ASF Center, Tower B, 362-363, Jwala Mill Road,
Phase IV, Udyog Vihar, Gurugram,
Haryana-122 016. … Appellant
Cause title amended vide court order dated 13.03.2026 made in CMP.No.1065/2025 in
TCA.No.733/2010 (GJJ and SSAJ)
vs.
The Assistant Commissioner of Income Tax,
TDS-II,
Chennai 600 034. … Respondent
Prayer: Tax Case (Appeal) filed under Section 260-A of the Income Tax Act,
1961, against a consolidated order dated 11.12.2009 passed by the Income Tax
Appellate Tribunal, Chennai in ITA No.881/Mds/2002, 880/Mds/2002 and
879/Mds/2002 for the Assessment years 1998-99 (Financial Year 1997-98),
2000-2001 (Financial Year 1999-2000) and 1999-2000 (Financial Year 1998-
th
1999) respectively served on the appellant on 4 January 2010.
_____________
Page Nos.1/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
T.C.A.No 734 . of 2010
M/s.Vedanta Limited,
(Successor in Interest to Cairn India Limited),
ASF Center, Tower B, 362-363,
Jwala Mill Road, Phase IV,
Udyog Vihar, Gurugram,
Haryana-122 016. … Appellant
Cause title amended vide court order dated 13.03.2026 made in CMP.No.1064/2025 in
TCA.No.734/2010 (GJJ and SSAJ)
vs.
The Assistant Commissioner of Income Tax,
TDS II,
Chennai 600 034. … Respondent
Prayer: Tax Case (Appeal) filed under Section 260-A of the Income Tax Act,
1961, against a consolidated order dated 11.12.2009 passed by the Income Tax
Appellate Tribunal, Chennai in ITA No.881/Mds/2002, 880/Mds/2002 and
879/Mds/2002 for the Assessment years 1998-99 (Financial Year 1997-98),
2000-2001 (Financial Year 1999-2000) and 1999-2000 (Financial Year 1998-
th
1999) respectively served on the appellant on 4 January 2010.
T.C.A.No 735 . of 2010
M/s.Vedanta Limited,
(Successor in Interest to Cairn India Limited)
ASF Center, Tower B, 362-363,
Jwala Mill Road, Phase IV, Udyog Vihar,
Gurugram, Haryana-122 016. … Appellant
Cause title amended vide court order dated 13.03.2026 made in CMP.No.994/2025 in
TCA.No.735/2010 (GJJ and SSAJ)
vs.
The Assistant Commissioner of Income Tax,
TDS II, Chennai 600 034. … Respondent
_____________
Page Nos.2/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Prayer: Tax Case (Appeal) filed under Section 260-A of the Income Tax Act,
1961, against a consolidated order dated 11.12.2009 passed by the Income Tax
Appellate Tribunal, Chennai in ITA No.881/Mds/2002, 880/Mds/2002 and
879/Mds/2002 for the Assessment years 1998-99 (Financial Year 1997-98),
2000-2001 (Financial Year 1999-2000) and 1999-2000 (Financial Year 1998-
th
1999) respectively served on the appellant on 4 January 2010.
For Appellant : Mr.Srinath Sridevan, Senior Advocate,
in all cases for M/s.M.V.Swaroop, Gayathri,
B.Devadharshini, Hredai, Thivakkaran
Rajagopalan, Sankar
For Respondent : Mr.B.Ramana Kumar, Senior Standing Counsel (IT)
in all cases & Mr.Avinash Krishnan Ravi,
Junior Standing Counsel
COMMON JUDGMENT
These three Tax Case Appeals are filed by the assessee, directed
against the consolidated order dated 11.12.2009 passed by ITAT in ITA
Nos:879, 880 and 881 of 2002. The Tribunal dismissed the assessee’s appeal,
thereby confirming the order of the Assessing Officer (AO). In short, the issue
in these appeals is whether the payments made by the assessee to its parent non-
resident company as reimbursement of the expenses, will attract tax in view of
Section 44 BB of the Income Tax Act.
_____________
Page Nos.3/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
2. The Assessing Officer, the Appellate Authority, as well as the
Tribunal concurrently held that the payments made for services rendered by the
parent company is not reimbursement of expenses but ‘fees for technical
services’ or ‘normal service charges’. Hence, Section 44 BB of the Income Tax
Act is applicable to the payments made by the assessee to its Non-resident
parent company and to the third parties, even though such payments are made in
terms of the Production Sharing Contract (PSC).
3. The assessee, in alternate had claimed that, even if the payment
made to reimburse the expenses is to be construed as ‘payment for service’, the
same cannot be taxed in view of the DTAA (Double Taxation Avoidance
Agreement) between India (where the assessee company is located) and
Australia (where the parent company is located). According to the assessee, the
recipient of payment has to pay tax, if any, only to the Australian Government.
However, the Department rejected the alternate plea also by holding that the
DTAA and Section 90 of the Income Tax Act has no role to play in the case of
the assessee.
_____________
Page Nos.4/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Brief Facts:
4(i) On 28.10.1994, in order to exploit the petroleum resources in the
Territorial waters and continental shelf of India, the Union of India, along with
the Oil and Natural Gas Corporation (ONGC), to get financial assistance and
technical know-how had entered into a Production Sharing Contract with three
Private Companies, viz., Videocon Petroleum Limited, Command Petroleum
(India) Pvt. Ltd., and Ravva Oil (Singapore) Pvt Ltd.
4(ii) M/s.Command Petroleum (India) Pvt Ltd, is a company
incorporated in Australia. It was later taken over by M/s.Cairn Energy Pvt
Limited and presently M/s.Vedanta Limited is the successor-in-interest to Cairn
India Limited which is the assessee/appellant.
4(iii) Though the subject matter in appeals are the assessment orders
for three different years and figures are different, nonetheless the issue
considered and adjudicated before the Appellate Authority as well as the
Tribunal were almost similar. Therefore, composite order was passed by the
Appellate Authority as well as by the Tribunal.
5. For the sake of brevity and convenience, the figures in respect of
Assessment Year 1998-99 alone is extracted below. For the Assessment Years
_____________
Page Nos.5/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
1999-2000 and 2000-01, the amounts disclosed in the returns alone differs,
hence, we omit to extract those figures, since they are not necessary for deciding
the disputed question of law.
6. The assessee, M/s.Cairn Energy India Ltd., filed its return of
Income for the Assessment Year 1998-99 (financial year 1997-98) declaring
‘NIL’ income. The return was processed under Section 143(1)(a) and 30% of
book profit was computed at Rs.22,36,07,273/- Pending assessment, the
assessee filed its revised return to rectify error in calculation and same was also
entertained and considered. The Assessing Officer (AO), disallowed a
substantial amount debited on account of provision for site restoration costs.
According to the Assessing Officer, the amount kept aside for site restoration
costs, not actually paid, but only a provision for future. Such deduction is
neither as per the Production Sharing Contract (PSC) nor under the existing
provisions of the Income Tax Act as existed during the relevant financial years.
7. The argument of the assessee that the deduction of Rs.1,49,31,918/-
shown as the time-cost wages was admissible under Section 42 and therefore
outside the purview of Section 40 (a)(i) was not accepted by the Assessing
_____________
Page Nos.6/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Officer. The assessee relied on Clause 1.4.9, Article 1.65 (Site restoration) and
Article 2.4 (Accounting procedures) to sustain its claim. However, the
Assessing Officer held that, for the purpose of computation of Income Tax,
Article 17 of the PSC allow expenses in relation to commercial production and
expenses in respect of drilling and exploration activities alone incurred before or
after production commences. The terms of the agreement/contract cannot be
prejudice to the computation of income tax under the applicable provisions of
the Income Tax, 1961. Hence, the Assessing Officer added back a sum of
Rs.1,01,63,385/-.
8. This part of the assessment order is subject matter of yet another set
of appeals, pending for consideration before us.
9. That apart, in the course of assessment proceedings, it was found
by the Assessing Officer that certain payments to the assessee non-resident
parent company in respect of the expenditure incurred by the parent company in
connection with the business activity carried on by the assessee in India,
however the assessee has not deducted the tax at source (TAS) in terms of
_____________
Page Nos.7/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Section 195 of the Income Tax Act. Hence, the assessee held liable for payment
of tax along with interest under Sections 201(1) and 201(1A).
10. The deduction of tax at source and interest payment for the
respective assessment years, as computed by the Assessing Officer, are as
below:-
Assessment Year Short deduction Interest on short deduction
1998-1999 Rs.75,99,719/- Rs.41,92,115 /-
1999-2000 Rs.70,28,012/- Rs.29,77,163/-
2000-2001 Rs.13,62,800/- Rs.3,88,273/-
Subsequently, the order was rectified after considering the arithmetic
error pointed out by the assessee.
11. The second part of the assessment orders imposing Tax and
Penalty for not deducting Tax at Source (TAS) alone is the subject matter under
consideration in the appeals.
12. The Assessee assailed the computation of tax and imposition of
interest under Sections 201(1) and 201(1A) before the Commissioner of Income
_____________
Page Nos.8/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Tax (Appeals). The appeal was dismissed, thereby confirming the assessment
order. On further appeal, the Income Tax Appellate Tribunal (ITAT) examined
the grounds of appeal raised by the assessee and narrowed down the point for
consideration as follows ‘The solitary common issue arises for consideration
and adjudication is whether the CIT(A) is justified in confirming the order of
the Assessing Officer passed under Sections 201(1) and 201(1A) of the Income
Tax Act and holding the provisions of Section 44BB are applicable in all the
payments made by the assessee to non-residents.’
13. Following its earlier orders in the case of Poombuhar Shipping
Corporation Ltd vs. ITO reported in (2008) ITR (AT) 219 [Chennai] and the
judgment of the Hon’ble Supreme Court rendered in the case of Transmission
Corporation of A.P vs. ITO reported in (1999) 239 ITR 587 (SC) at page 594,
dismissed the appeals of the assessee insofar as the assessment orders for the
Assessment Years 1999-2000 and 2001-2001. In respect of the assessment
order for the Assessment Year 1998-1999, the appeal was partly allowed. The
case was remitted back to the CIT (A) with a direction to give opportunity of
hearing to the assessee and to consider the items of expenditures not considered
and adjudicated by him in the order impugned.
_____________
Page Nos.9/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
14. Unsatisfied, the assessee has preferred the present appeals under
Section 260A of the Income Tax Act, before this Court. Considering the
conclusions and reasoning of the Tribunal, the following substantial questions
of law were framed:-
T.C.(A).No.733 of 2010:
1. Whether the Tribunal was correct in
confirming the order made under Section 201(1) and
Section 201(1A) of the Act, in respect of reimbursement
made by the assessee Company to Cairn Energy Asia
Limited, Australia (CEAL) and unrelated third parties
when there is no liability to deduct taxes at source under
Section 195 for reimbursement of expenses, which are
not chargeable to income tax?
2. Whether the Tribunal was correct in
holding that Section 44BB of the Act, would be
applicable to reimbursement of expenses made to the
parent company outside India and payment to third
parties for services?
3. Whether the Tribunal was correct in
holding that the payments made under the Production
Sharing Contract (PSC) were not reimbursements of
expenses, but “fees for technical services” or “normal
service charges” covered under Section 44BB of the Act?
4. Whether the Tribunal is correct in
upholding the interpretation of Clause of 3.14 of Section
_____________
Page Nos.10/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
3 of Production Sharing Contract made by the
Commissioner (Appeal) in its order?
5. Whether the Tribunal is correct in holding
that the provisions of DTAA was inapplicable in the facts
and circumstances of the case?
In T.C.(A).Nos.734 & 735 of 2010, in addition to the above five issues,
th
the following 6 issue was framed:-
6. Whether the Tribunal erred in not setting
aside the issues, which are not adjudicated by the
Commissioner of Income- Tax (Appeals)?
15. For the purpose of discussion and decision, the above substantial
questions of law can be précised as below:-
Whether the payment made to the non-resident company towards
reimbursement of the expenses in compliance of the terms of the Production
Sharing Contract (PSC) is assessable to tax. If so, whether the assessee is liable
to deduct tax at source under Section 195 of the Income Tax Act and whether
failure to deduct the tax at source will attract interest under Sections 201(1) and
201(1A) and if tax demand on the said payment will amount to double taxation.
_____________
Page Nos.11/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
16. The contention of the Learned Senior Counsel for the Assessee/
Appellant is that the expenses incurred by M/s.Cairn Energy Asia Limited
(CEAL), at the instance of the assessee, M/s.Cairn Energy India Limited
(CEIL), were basically related to Geological & Geophysical services, seismic
processing, petroleum engineering, information technology and communication
services etc. CEAL has recharged the assessee with the actual costs and
expenses. This expense reimbursed to CEAL by including the time cost charges
(wages) paid by CEAL to its employee who have worked on Indian Ravva Joint
Venture. Since there was no profit element embedded in the said
reimbursement, no income chargeable to tax in India under the provisions of
Income Tax Act and also in accordance with the Double Taxation Avoidance
Agreement (DTAA) between India and Australia. Therefore, the assessee had
not deducted tax at source on the amount reimbursed. When the amount
expended is only a reimbursement, there is no element of income for the
receiver i.e., the non-resident company or any liability on the assessee to deduct
tax at source under Section 195(2). While so, the payment of interest under
Sections 201 (1) and 201(1A) does not arise.
_____________
Page Nos.12/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
17. The Learned Senior Counsel for the appellant/assessee relied on
the following judgments to sustain the grounds of appeal:-
1) Commissioner of Income Tax vs. Dunlop
Rubber Co. Ltd: (1982) 10 Taxmann 179 (Calcutta).
2) Commissioner of Income Tax vs. Siemens
Aktiongesellschaft: (2009) 177 Taxmann 81(Bombay) .
3) Director of Income Tax (International
Taxation) vs. Krupp Udhe GMBH: (2013) 40
Taxmann.com 38 (Bombay) .
4) Commissioner of Income Tax vs. Enron
Expat Services Inc: (2009 SCC OnLine UTT 1416.
5) GE India Technology Centre (P) Ltd vs.
Commissioner of Income-Tax: (2010) 327 ITR 456 (SC) .
6) Commissioner of Income Tax, Dehradun vs.
Enron Oil and Gas India Ltd: (2008) 173 Taxman 348
(SC) .
18. On behalf of the respondent/Income Tax Department, the Senior
Standing Counsel submitted that the scheme of the Income Tax Act, in the case
of business for prospecting, etc., for mineral oil provides special provisions for
deductions (Section 42) and for computing profits and gains (Section 44BB).
Where a person responsible for paying any such sum chargeable under the Act
(other than salary) to a non-resident considers that the whole of such sum would
_____________
Page Nos.13/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
not be income chargeable in the case of the recipient, he may make an
application to the Assessing Officer to determine the appropriate proportion of
such sum so chargeable [Section 195(2)]. The provisions of Section 195 of the
Act is applicable for all kinds of payment, irrespective of the element of profit.
This proposition of law settled by the Hon’ble Supreme Court in the case of
Transmission Corporation of Andhra Pradesh Ltd vs. CIT reported in (1999)
239 ITR 587 (SC) . The sum chargeable to tax on remittance made to a non-
resident is liable for deduction at source. The expenditures sought as
reimbursement for services rendered by the non-resident are not part of the
Production Sharing Agreement and those services were availed within the
territory of India. Therefore, the assessee either should have deducted tax at
source for those payments or should have applied to the Commissioner under
Section 195(2) for determination of the appropriate apportionment. The failure
to opt either of these two options, had disentitled the assessee for deduction
under Section 42 of the Act and also liable for payment of interest on the
disallowed portion.
19. According to the Learned Counsel for the
Department/Respondent, the law as it stood during the relevant assessment
_____________
Page Nos.14/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
years, the Double Taxation Relief was only in case of agreement with
Government of foreign countries under Chapter-IX of the Act. This chapter not
apply to private companies incorporated in foreign Territories. Only after the
Finance Act, 2006, with effect from 01.06.2006, after adoption by the Central
Government, the double taxation relief got extended to specific associations
outside India other than Foreign Governments. Therefore, the alternate plea of
benefit under the Double Taxation Avoidance Agreement (DTAA) is not
available to the assessee.
20. According to the Learned Senior Standing Counsel for the
Department, the ITAT had rightly confirmed the order of the Assessing Officer
and the CIT(A) by holding against the assessee. Section 44BB is applicable to
any payment made to the parent company outside India for the services
rendered. The payments made under the Production Sharing Contract (PSC)
were not reimbursements of expenses, but “fees for technical services” or
“normal service charges” covered under Section 44BB of the Act. The benefit
of the DTAA was inapplicable in the facts and circumstances of the case.
21. Heard the Learned Senior Counsels on either side.
_____________
Page Nos.15/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
22. The assessee had claimed deduction of the amounts paid to the
non-resident parent company under the heads Time Cost Wages, Consultant
Costs Reimbursement, Financing Documentation drafting, IT &
Communication, Taxation Consultants and International Travel Expenses, as
reimbursements made to the parent company without any element of profit and
those payment is not chargeable to tax. As a consequence Tax at source (TAS)
is not payable.
23. Contrarily, the Learned Counsel for the Department vehemently
argued that, on reading of the charging sections and the special provisions
dealing with computation of tax on Companies such as the assessee involved in
prospecting mineral oil, the remittance to the non-resident claimed as
reimbursement of actual expenditure were, in fact, “fees for technical service”
or “normal service charges.” Hence, the assessee, who desired to get deduction,
ought to have satisfied the mandatory requirement under Section 195 of the Act.
In Transmission Corporation of AP Ltd vs. CIT (1999) 239 ITR 587 (SC) , the
Hon’ble Supreme Court has categorically held that any remittance to a non-
resident includes an element of income is eligible to tax in India. The
accounting procedure annexed to the Production Sharing Contract in it. Article
_____________
Page Nos.16/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
3.1.4 mandates the parties to the contact to charge only the actual costs for the
service rendered. However, by incorporating the ‘arm’s length’ clause in Article
1.8, it only restricts the costs and expenditure shall not be higher than the
competitive basis with third parties. Therefore, the payment to the non-
residential company will not take away the character of ‘income’. Thus, the
ITAT has rightly held that the expenditure charged by the parent company in
comparison is at par with the third party for bringing similar services under
similar terms and conditions. Therefore, the payments though made under the
head “reimbursement of Expenses”, the same was a normal service charges in
the normal course of business of the parent company.
24. Before adverting further on the rival contentions, it is appropriate
and also profitable to have a birds-eye view of the relevant provisions.
Section 9(1): The following income shall be
deemed to accrue or arise in India:-
….
(vii): Income by way of fees for technical services
payable by –
(a) the Government; or
(b) …
_____________
Page Nos.17/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(c) a person who is a non-resident, where the fees
are payable in respect of services utilised in a business or
profession carried on by such persons in India or for the
purposes of making or earning any income from any source in
India.
Section 42: Special provision for deductions in
the case of business for prospecting, etc., for mineral oil.
[(1)] For the purpose of computing the profits or
gains of any business consisting of the prospecting for or
extraction or production of mineral oils in relation to which the
Central Government has entered into an agreement with any
person for the association or participation [of the Central
Government or any person authorised by it in such business]
(which agreement has been laid on the Table of each House of
Parliament), there shall be made in lieu of, or in addition to,
the allowances admissible under this Act, such allowances as
are specified in the agreement in relation—
(a) to expenditure by way of infructuous or abortive
exploration expenses in respect of any area surrendered prior
to the beginning of commercial production by the assessee;
(b) after the beginning of commercial production,
to expenditure incurred by the assessee, whether before or after
such commercial production, in respect of drilling or
exploration activities or services or in respect of physical
assets used in that connection, except assets on which
allowance for depreciation is admissible under section 32:
[Provided that in relation to any agreement entered
into after the 31st day of March, 1981, this clause shall have
effect subject to the modification that the words and figures
_____________
Page Nos.18/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
“except assets on which allowance for depreciation is
admissible under section 32” had been omitted; and]
(c) to the depletion of mineral oil in the mining area
in respect of the assessment year relevant to the previous year
in which commercial production is begun and for such
succeeding year or years as may be specified in the agreement;
and such allowances shall be computed and made
in the manner specified in the agreement, the other provisions
of this Act being deemed for this purpose to have been modified
to the extent necessary to give effect to the terms of the
agreement.
(2) Where the business of the assessee consisting of
the prospecting for or extraction or production of petroleum
and natural gas is transferred wholly or partly or any interest
in such business is transferred in accordance with the
agreement referred to in sub-section (1), subject to the
provisions of the said agreement and where the proceeds of the
transfer (so far as they consist of capital sums)—
(a) are less than the expenditure incurred
remaining unallowed, a deduction equal to such expenditure
remaining unallowed, as reduced by the proceeds of transfer,
shall be allowed in respect of the previous year in which such
business or interest, as the case may be, is transferred;
(b) exceed the amount of the expenditure incurred
remaining unallowed, so much of the excess as does not exceed
the difference between the expenditure incurred in connection
with the business or to obtain interest therein and the amount
of such expenditure remaining unallowed, shall be chargeable
to income-tax as profits and gains of the business in the
_____________
Page Nos.19/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
previous year in which the business or interest therein, whether
wholly or partly, had been transferred:
Provided that in a case where the provisions of this
clause do not apply, the deduction to be allowed for
expenditure incurred remaining unallowed shall be arrived at
by subtracting the proceeds of transfer (so far as they consist of
capital sums) from the expenditure remaining unallowed.
Explanation.—Where the business or interest in
such business is transferred in a previous year in which such
business carried on by the assessee is no longer in existence,
the provisions of this clause shall apply as if the business is in
existence in that previous year;
(c) are not less than the amount of the expenditure
incurred remaining unallowed, no deduction for such
expenditure shall be allowed in respect of the previous year in
which the business or interest in such business is transferred or
in respect of any subsequent year or years:
Provided that where in a scheme of amalgamation
or demerger, the amalgamating or the demerged company sells
or otherwise transfers the business to the amalgamated or the
resulting company (being an Indian company), the provisions
of this sub-section—
(i) shall not apply in the case of the amalgamating
or the demerged company; and
(ii) shall, as far as may be, apply to the
amalgamated or the resulting company as they would have
applied to the amalgamating or the demerged company if the
latter had not transferred the business or interest in the
business.
_____________
Page Nos.20/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Explanation.—For the purposes of this section,
“mineral oil” includes petroleum and natural gas.
Section 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 5
[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 oils in India; and
_____________
Page Nos.21/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(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.
Section 90. Agreement with foreign countries or
specified territories.—
(1) The Central Government may enter into an
agreement with the Government of any country outside India or
specified territory outside India,—
_____________
Page Nos.22/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-
tax under this Act and income-tax in that country or specified
territory, as the case may be, or
(ii) income-tax chargeable under this Act and under
the corresponding law in force in that country or specified
territory, as the case may be, to promote mutual economic
relations, trade and investment, or
(b) for the avoidance of double taxation of income
under this Act and under the corresponding law in force in that
country or specified territory, as the case may be, or
(c) for exchange of information for the prevention
of evasion or avoidance of income-tax chargeable under this
Act or under the corresponding law in force in that country or
specified territory, as the case may be, or investigation of cases
of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and
under the corresponding law in force in that country or
specified territory, as the case may be, and may, by notification
in the Official Gazette, make such provisions as may be
necessary for implementing the agreement.
(2) Where the Central Government has entered into
an agreement with the Government of any country outside
India or specified territory outside India, as the case may be,
under sub-section (1) for granting relief of tax, or as the case
may be, avoidance of double taxation, then, in relation to the
assessee to whom such agreement applies, the provisions of this
Act shall apply to the extent they are more beneficial to that
assessee.
_____________
Page Nos.23/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(2A) Notwithstanding anything contained in sub-
section (2), the provisions of Chapter X A of the Act shall apply
to the assessee even if such provisions are not beneficial to him.
(3) Any term used but not defined in this Act or in
the agreement referred to in sub-section (1) shall, unless the
context otherwise requires, and is not inconsistent with the
provisions of this Act or the agreement, have the same meaning
as assigned to it in the notification issued by the Central
Government in the Official Gazette in this behalf.
(4) An assessee, not being a resident, to whom an
agreement referred to in sub-section (1) applies, shall not be
entitled to claim any relief under such agreement unless 2 [a
certificate of his being a resident] in any country outside India
or specified territory outside India, as the case may be, is
obtained by him from the Government of that country or
specified territory.
(5) The assessee referred to in sub-section (4) shall
also provide such other documents and information, as may be
prescribed.
Section 195. Other sums.—
(1) Any person responsible for paying to a non-
resident, not being a company, or to a foreign company, [any
interest (not being interest referred to in section 194LB or
section 194LC)] [or section 194LD] or any other sum
chargeable under the provisions of this Act (not being income
chargeable under the head “Salaries” shall, at the time of
credit of such income to the account of the payee or at the time
of payment thereof in cash or by the issue of a cheque or draft
_____________
Page Nos.24/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
or by any other mode, whichever is earlier, deduct income-tax
thereon at the rates in force:
Provided that in the case of interest payable by the
Government or a public sector bank within the meaning of
clause (23D) of section 10 or a public financial institution
within the meaning of that clause, deduction of tax shall be
made only at the time of payment thereof in cash or by the issue
of a cheque or draft or by any other mode:
Explanation 1.—For the purposes of this section,
where any interest or other sum as aforesaid is credited to any
account, whether called “Interest payable account” or
“Suspense account” or by any other name, in the books of
account of the person liable to pay such income, such crediting
shall be deemed to be credit of such income to the account of
the payee and the provisions of this section shall apply
accordingly.
Explanation 2.—For the removal of doubts, it is
hereby clarified that the obligation to comply with sub-section
(1) and to make deduction thereunder applies and shall be
deemed to have always applied and extends and shall be
deemed to have always extended to all persons, resident or
non-resident, whether or not the non-resident person has—
(i) a residence or place of business or business
connection in India; or
(ii) any other presence in any manner whatsoever
in India.
(2) Where the person responsible for paying any
such sum chargeable under this Act (other than salary) to a
non-resident considers that the whole of such sum would not be
_____________
Page Nos.25/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
income chargeable in the case of the recipient, he may make an
application to the [Assessing Officer] to determine, [by general
or special order], the appropriate proportion of such sum so
chargeable, and upon such determination, tax shall be
deducted under sub-section (1) only on that proportion of the
sum which is so chargeable.
(3) Subject to rules made under sub-section (5), any
person entitled to receive any interest or other sum on which
income-tax has to be deducted under sub-section (1) may make
an application in the prescribed form to the [Assessing Officer]
for the grant of a certificate authorising him to receive such
interest or other sum without deduction of tax under that sub-
section, and where any such certificate is granted, every person
responsible for paying such interest or other sum to the person
to whom such certificate is granted shall, so long as the
certificate is in force, make payment of such interest or other
sum without deducting tax thereon under sub-section (1).
(4) A certificate granted under sub-section (3) shall
remain in force till the expiry of the period specified therein or,
if it is cancelled by the [Assessing Officer] before the expiry of
such period, till such cancellation.
(5) The Board may, having regard to the
convenience of assessees and the interests of revenue, by
notification in the Official Gazette, make rules specifying the
cases in which, and the circumstances under which, an
application may be made for the grant of a certificate under
sub-section (3) and the conditions subject to which such
certificate may be granted and providing for all other matters
connected therewith.
_____________
Page Nos.26/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(6) The person responsible for paying to a non-
resident, not being a company, or to a foreign company, any
sum, whether or not chargeable under the provisions of this
Act, shall furnish the information relating to payment of such
sum, in such form and manner, as may be prescribed.
(7) Notwithstanding anything contained in sub-
section (1) and sub-section (2), the Board may, by notification
in the Official Gazette, specify a class of persons or cases,
where the person responsible for paying to a non-resident, not
being a company, or to a foreign company, any sum, whether
or not chargeable under the provisions of this Act, shall make
an application to the Assessing Officer to determine, by general
or special order, the appropriate proportion of sum
chargeable, and upon such determination, tax shall be
deducted under sub-section (1) on that proportion of the sum
which is so chargeable.
Section 201. Consequences of failure to deduct or
pay.
(1) Where any person, including the principal
officer of a company,—
(a) who is required to deduct any sum in
accordance with the provisions of this Act; or
(b) referred to in sub-section (1A) of section 192,
being an employer, does not deduct, or does not pay, or after so
deducting fails to pay, the whole or any part of the tax, as
required by or under this Act, then, such person, shall, without
prejudice to any other consequences which he may incur, be
deemed to be an assessee in default in respect of such tax:
_____________
Page Nos.27/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Provided that any person, including the principal
officer of a company, who fails to deduct the whole or any part
of the tax in accordance with the provisions of this Chapter on
the sum paid to a resident or on the sum credited to the account
of a resident shall not be deemed to be an assessee in default in
respect of such tax if such resident—
(i) has furnished his return of income under section
139;
(ii) has taken into account such sum for computing
income in such return of income; and
(iii) has paid the tax due on the income declared by
him in such return of income, and the person furnishes a
certificate to this effect from an accountant in such form as may
be prescribed:
Provided [further] that no penalty shall be charged
under section 221 from such person, unless the Assessing
Officer is satisfied that such person, without good and sufficient
reasons, has failed to deduct and pay such tax.
(1A) Without prejudice to the provisions of sub-
section (1), if any such person, principal officer or company as
is referred to in that sub-section does not deduct the whole or
any part of the tax or after deducting fails to pay the tax as
required by or under this Act, he or it shall be liable to pay
simple interest,—
(i) at one per cent for every month or part of a
month on the amount of such tax from the date on which such
tax was deductible to the date on which such tax is deducted;
and
_____________
Page Nos.28/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(ii) at one and one-half per cent for every month or
part of a month on the amount of such tax from the date on
which such tax was deducted to the date on which such tax is
actually paid, and such interest shall be paid before furnishing
the statement in accordance with the provisions of subsection
(3) of section 200.
Provided that in case any person, including the
principal officer of a company fails to deduct the whole or any
part of the tax in accordance with the provisions of this
Chapter on the sum paid to a resident or on the sum credited to
the account of a resident but is not deemed to be an assessee in
default under the first proviso to sub-section (1), the interest
under clause (i) shall be payable from the date on which such
tax was deductible to the date of furnishing of return of income
by such resident.
(2) Where the tax has not been paid as aforesaid
after it is deducted, [the amount of the tax together with the
amount of simple interest thereon referred to in sub-section
(1A) shall be a charge] upon all the assets of the person, or the
company, as the case may be, referred to in sub-section (1).
(3) No order shall be made under sub-section (1)
deeming a person to be an assessee in default for failure to
deduct the whole or any part of the tax from a person resident
in India, at any time after the expiry of seven years from the
end of the financial year in which payment is made or credit is
given.
_____________
Page Nos.29/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(4) The provisions of sub-clause (ii) of sub-section
(3) of section 153 and of Explanation 1 to section 153 shall, so
far as may, apply to the time limit prescribed in sub-section (3).
Explanation.—For the purposes of this section, the
expression “accountant” shall have the meaning assigned to it
in the Explanation to sub-section (2) of section 288.
Appendix C of the Production Sharing Contract (PSC)
Accounting Procedure
Article 1.8: Arms Length Transactions:
Unless otherwise specifically provided for in the
Contract, all transactions giving rise to revenues, costs or
expenditures which will be credited or charged to the accounts
prepared, maintained or submitted hereunder shall be
conducted at arms length or on such a basis as will assure that
all such revenues, costs or expenditures will not be lower or
higher, as the case may be, than would result from a
transaction conducted at arms length on a competitive basis
with third parties.
Article 3.1.4: Charges for services:
(i) Third Party
The actual costs of contract services, services of
professional consultants, utilities and other services necessary
for the conduct of Petroleum Operations under the Contract
performed by third parties other than an Affiliate of the
Contractor, provided that the transactions resulting in such
costs are undertaken pursuant to Section 1.8 of this Accounting
Procedure.
_____________
Page Nos.30/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(ii) Affiliates of Contractor
(a) Professional and Administrative Services and
Expenses:
Cost Of professional and administrative services
provided by any Affiliate of the Contractor for the direct benefit
of Petroleum Operations, including, but not limited to, services
provided by the production, exploration, legal, financial,
insurance, accounting and computer services divisions other
than those covered by Section 3.1.4 (ii) (b) which Operator may
use in lieu of having its own employees. Charges shall be equal
to the actual cost of providing their services, shall not include
any element of profit and shall not be any higher than the most
favourable prices charged by the Affiliate to third parties for
comparable services under similar terms and conditions
elsewhere and will be fair and reasonable in the light of
prevailing international oil industry practice and experience.
b) Scientific or Technical Personnel:
Cost of scientific or technical personnel services
provided by any Affiliate of Contractor for the direct benefit of
Petroleum Operations, which cost shall be charged on a cost of
service basis. Charges therefor shall not exceed charges for
comparable services currently provided by outside technical
service organizations of comparable qualifications. Unless the
work to be done by such personnel is covered by an Approved
Budget and Work Programme, Operator shall not authorize
work by such personnel without approval of the Management
Committee.
_____________
Page Nos.31/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
C) Equipment, Facilities and Property of Affiliates:
Equipment, Facilities and Property owned and
furnished by the Contractor’s and furnished by the
Contractor’s Affiliates, at rates commensurate with the cost of
ownership and operation provided, however, that such rates
shall not exceed those currently prevailing for the supply of like
equipment, facilities and property on comparable terms in the
are where the Petroleum Operations are being conducted. The
equipment and facilities referred to herein shall exclude major
investment items such as (but not limited to) drilling rigs,
producing platforms, oil treating facilities, oil and gas loading
and transportation systems, storage and terminal facilities and
other major facilities, rates for which shall be subject to
separate agreement with the Management Committee.”
25. Insofar as those assessees involved in business for prospecting
etc., of mineral oil, special provisions such as Sections 42, 44BB and 195 of the
Income Tax Act deals about deductions and computations. That apart, the terms
of the agreement in Production Sharing Contract (PSC), which has received the
approval of the Parliament, also play a role when the issue of payment of tax on
income to non-resident arises.
26. The High Court of Bombay, in Director of Income-Tax
(International Taxation) vs. Krupp Udhe GMBHE case, had an occasion to
_____________
Page Nos.32/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
deal with similar plea of the assessee in respect of reimbursement of air tickets
to the technicians. Following the decision of Calcutta High Court, the Division
Bench of Bombay High Court held as below:-
6. The question as to whether a reimbursement for
expenses would form part of the taxable income is not res
integra in so far as this court is concerned. In CIT v. Siemens
Aktiongesellschaft(2009) 310 ITR 320 (Bom), a Division Bench
of this court held that it was in agreement with the view taken
by the Calcutta High Court in CIT v. Dunlop Rubber Co. Ltd.
(1983) 142 ITR 493 (Cal) and by the Delhi High Court in CIT
v. Industrial Engineering Projects (P.) Ltd. (1993) 202 ITR
1014 (Delhi). The observations of this court in Siemens (2009)
310 ITR 320 (Bom) are as follows (page 340):
“That leaves us with the last contention as to
whether the amounts by way of reimbursement are liable to
tax. To answer that issue, we may gainfully refer to the
judgment of a Division Bench of the Delhi High Court in
CIT v. Industrial Engineering Projects (P.) Ltd. (1993) 202
ITR 1014 (Delhi). The learned Division Bench of the Delhi
High Court was pleased to hold that reimbursement of
expenses can, under no circumstances, be regarded as a
revenue receipt and in the present case the Tribunal had
found that the assessee received no sums in excess of
expenses incurred. A similar issue had also come up for
consideration before the Division Bench of the Calcutta
High Court in CIT v. Dunlop Rubber Co. Ltd. (1983) 142
ITR 493 (Cal). The learned Division Bench was answering
the following question:
‘Whether, on the facts and in the circumstances
of the case, the amounts received by the assessee (English
company) from M/s. Dunlop Rubber Co. (India) Ltd.
_____________
Page Nos.33/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
(Indian company) as per the agreement dated January 29,
1957, constituted income assessable to tax?’
On considering the issue the learned Bench
noted that the Tribunal was of the view that what was
recouped by the English company was part of the expenses
incurred by it. The learned court upheld the said finding.
The learned Bench was pleased to hold that sharing of
expenses of the research utilised by the subsidiaries as well
as the head office organisation would not be income which
would be assessable to tax. A similar view was taken in
CIT v. Stewarts and Lloyds of India Ltd. (1987) 165 ITR
416 (Cal).”
27. In GE India Technology Cen.(P) Ltd case (cited supra) , the
Hon’ble Supreme Court had elaborately discussed the scope of Section 195 and
when the assessee is responsible to deduct tax at source while making payments
to a non-resident Company. The relevant portion of the judgment reads as
below:-
5. At the outset, we quote hereinbelow the relevant
provisions of Section 195, as it stood at the relevant time.
“195. (1) Any person responsible for paying to a
non-resident, not being a company, or to a foreign company,
any interest (not being interest on securities) or any other sum
chargeable under the provisions of this Act (not being income
chargeable under the head ‘Salaries’) shall, at the time of
credit of such income to the account of the payee or at the time
of payment thereof in cash or by the issue of a cheque or draft
_____________
Page Nos.34/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
or by any other mode, whichever is earlier, deduct income tax
thereon at the rates in force:
(2) Where the person responsible for paying any
such sum chargeable under this Act, other than interest on
securities and salary to a non-resident considers that the whole
of such sum would not be income chargeable in the case of the
recipient, he may make an application to the assessing officer
to determine, by general or special order, the appropriate
proportion of such sum so chargeable, and upon such
determination, tax shall be deducted under sub-section (1) only
on that proportion of the sum which is so chargeable:
(3) Subject to rules made under sub-section (5), any
person entitled to receive any interest or other sum on which
income tax has to be deducted under sub-section (1) may make
an application in the prescribed form to the assessing officer
for the grant of a certificate authorising him to receive such
interest or other sum without deduction of tax under that sub-
section, and where any such certificate is granted, every person
responsible for paying such interest or other sum to the person
to whom such certificate is granted shall, so long as the
certificate is in force, make payment of such interest or other
sum without deducting tax thereon under sub-section (1).”
……
7.... While deciding the scope of Section 195(2) it is
important to note that the tax which is required to be deducted
at source is deductible only out of the chargeable sum. This is
the underlying principle of Section 195. Hence, apart from
Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of
DTAA are also relevant, while applying tax deduction at source
_____________
Page Nos.35/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
provisions. Reference to ITO(TDS) under Section 195(2) or
Section 195(3) either by the non-resident or by the resident
payer is to avoid any future hassles for both the resident as well
as the non-resident. In our view, Sections 195(2) and 195(3)
are safeguards. The said provisions are of practical
importance. This reasoning of ours is based on the decision of
this Court in Transmission Corpn. [(1999) 7 SCC 266 : (1999)
239 ITR 587] in which this Court has observed that the
provision of Section 195(2) is a safeguard. From this it follows
that where a person responsible for deduction is fairly certain
then he can make his own determination as to whether the tax
was deductible at source and, if so, what should be the amount
thereof.
28. In Director of Income-Tax, International Taxation, Delhi-II vs.
Schlumberger Asia Services Ltd , the judgment of Uttarakhand High Court, is in
respect of reimbursement of customs duty paid for the machinery imported for
the purpose of extraction of mineral oil. However, the Court declined to accept
the plea of the Revenue, when the assessee was levied tax under Section 44BB.
The Court observed as below:-
7. Learned counsel for the respondent submitted that
for import of the machinery or equipment, liability to pay the
customs duty was on the Oil and Natural Gas Corporation (for
short “the ONGC”), who has hired the services of the assessee
in contract. It is further submitted that there cannot be element
of profit in reimbursement of the customs duty, paid by the
_____________
Page Nos.36/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
assessee. As such, it is contended on behalf of the
respondent/assessee that the Commissioner of Income-tax
(Appeals) and the Income-tax Appellate Tribunal, has rightly
held that the said amount, received by the assessee is to be
excluded in computing profits under section 44BB of the Act.
8. Having considered the submissions of learned
counsel for the parties, we are of the view that reimbursement
towards the customs duty, paid by the assessee, being statutory
in nature, cannot form part of amount for the purposes of
deemed profits unlike the other amounts received towards
reimbursement. Therefore, we do not find any sufficient reason
to interfere with the impugned orders, passed by the Income-tax
Appellate Tribunal, which has affirmed the view taken by the
Commissioner of Income-tax (Appeals). The question of law
stands answered accordingly.
9. For the reasons, as discussed above, the appeal
is dismissed.
29. In Commissioner of Income-Tax vs. Enron Expat Services Inc.
(cited supra) , the issue regarding the taxability of amounts paid for the services
provided on a cost-to-cost basis under a Production Sharing Contract came up
for consideration before the High Court of Uttarakhand, wherein the Hon’ble
Judges held in favour of the assessee, observing that:
“….in terms of Article 3.1.4 of Appendix C of
the Production Sharing Contract the assessee cannot
_____________
Page Nos.37/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
charge a profit from the joint venture as it is an affiliate of
EOGIL. The production sharing contract has been passed
by both the Houses of Parliament as required under
section 42(1) of the Act. The assessees have clearly
substantiated the fact that there is no element of profit,
therefore, in terms of article 7 of the Double Taxation
Avoidance Agreement between India and the USA, the
assessees cannot be taxed.”
30. In Commissioner of Income-Tax, Dehradun vs. Enron Oil & Gas
India Ltd., (cited supra), while considering the issue of reimbursements of
expenditure under the Production Sharing Contract in the business for
prospecting/exploration of mineral oil, the Hon’ble Apex Court had said:-
16. Section 42 of the 1961 Act was enacted to
ensure that where the structure of PSC was at variance with the
accounting principles generally used for ascertaining taxable
income, the provisions of PSC would prevail. Section 42
provides for deduction on expenditure incurred on prospecting
for or extraction or production of mineral oil whereas Section
44-BB contains special provision for computing profits and
gains in connection with the business of exploration or
extraction or production of mineral oils. The headnote itself
indicates that Section 42 is a special provision for deduction on
expenditure incurred on prospecting, extraction or production
of mineral oils.
_____________
Page Nos.38/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
17. PSC is a contract in which the Central
Government is not only a party, it is a partner in the process.
Such contracts are required to be placed before each House of
Parliament under Section 42.
18. Analysing Section 42(1), it becomes clear that
the said section is a special provision for deductions in the case
of business of prospecting, extraction or production of mineral
oils. As stated above, Section 42(1) inter alia provides for
deduction of certain expenses.
19. Broadly speaking, Section 42(1) provides for
admissibility in respect of three types of allowances provided
they are specified in PSC. They relate to expenditure incurred
on account of abortive exploration, expenditure incurred before
or after the commencement of commercial production in
respect of drilling or exploration activities and expenses
incurred in relation to depletion of mineral oil in the mining
area. If one reads Section 42(1) carefully it becomes clear that
the above three allowances are admissible only if they are so
specified in PSC. For example, in PSC in question expenses
incurred on account of depletion of mineral oil is not provided
for. Therefore, to that extent, the respondent would not be
entitled to claim deduction under Section 42(1)(c). Under
Section 42(1) it is made clear that for the purpose of computing
the profits or gains of any business consisting of prospecting,
extraction or production of mineral oil, an assessee would be
entitled to claim deduction in respect of the abovementioned
three items of expenditure in lieu of or in addition to the
allowances admissible under the 1961 Act. Further, such
allowances shall be computed and made in the manner
specified in the agreement. In short, an assessee is entitled to
_____________
Page Nos.39/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
allowances which are mentioned in PSC. According to the
Department, translation losses claimed by EOGIL are not
specified in PSC, hence they cannot be claimed as deduction
under Section 42(1).
31. From the provisions of law and the above judgments which has
interpreted the relevant provisions of law in respect of reimbursements to non-
resident company, it is amply clear that if the terms of Production Sharing
Contract (PSC) restricts reimbursement of expenditure on cost-to-cost basis, the
application of Section 44 BB of Income Tax Act is not called for. Contrarily, if
the assessee makes a consolidated claim of expenses under the head
‘reimbursement’ without break- up details, the assessee is not entitled for relief,
without determination by the Commissioner under Section 195(2). The ‘arm’s
length’ principle laid down in Article 1.8 of PSC is not a Rule of Presumption.
The assessee, in its profit and gain statement as well as in the return of income
has to provide details about the nature of expenditure which can be taken as
reimbursement. In the appeal before the High Court under Section 260A of the
Act, the assessee for the first time submits that the expenses incurred by
M/s.Cairn Energy Asia Limited (CEAL) at the instance of the assessee-Cairn
Energy India Limited (CEIL), related to Geological & Geophysical services,
seismic processing, petroleum engineering, information technology and
_____________
Page Nos.40/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
communication services etc. Hence, Section 44BB of Income Tax Act is not
applicable and as a consequence it is not a deemed income of the non-resident
company so as to deduct tax at source under Section 195 of the Act.
Unfortunately, the assessee had failed to satisfy the Assessing Officer by
placing expenditures on those individual heads and got determination of the
taxability, which is mandatory under Section 195 (2).
32. Precisely, in Transmission Corporation of A.P. Ltd v.
Commissioner of Income Tax , the Hon’ble Supreme Court has held that:-
“10. The scheme of sub-sections (1), (2) and (3) of
Section 195 and Section 197 leaves no doubt that the
expression “any other sum chargeable under the provisions of
this Act” would mean “sum” on which income tax is leviable.
In other words, the said sum is chargeable to tax and could be
assessed to tax under the Act. The consideration would be —
whether payment of sum to a non-resident is chargeable to tax
under the provisions of the Act or not? That sum may be
income or income hidden or otherwise embedded therein. If so,
tax is required to be deducted on the said sum. What would be
the income is to be computed on the basis of various provisions
of the Act including provisions for computation of the business
income, if the payment is trade receipt...”
_____________
Page Nos.41/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
33. In the light of the above discussion, we are of the considered view
that the ITAT, on facts had considered the claim of the assessee and found
unsustainable, since the expenses alleged to have made as reimbursement not
substantiated with particulars or break-up. A consolidated amount claimed as
deduction under the head ‘Reimbursement of Expenses’ to the non-resident
parent company under the PSC is impermissible. The alternate plea to take
umbrage under DTAA is a misconceived claim made to defeat the legal right of
the Revenue. During the relevant assessment years under consideration, the
benefit of double taxation relief was restricted to Foreign Governments and not
to consortium of the private parties having contracted with Government of India
and ONGC.
34. As a result, the substantial questions of law are answered against
the appellant/assessee. Consequently, the common order of the Income Tax
Appellate Tribunal is upheld. The Tax Appeals Nos.733 to 735 of 2010 stand
dismissed. There shall be no order as to costs.
( Dr . G.JAYACHANDRAN , J. ) & ( R. SAKTHIVEL, J. )
02-06-2026
_____________
Page Nos.42/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Index :Yes/No.
Neutral Citation :Yes/No.
To,
1. The Income Tax Appellate Tribunal, Chennai.
2. The Assistant Commissioner of Income Tax,
TDS-II,
Chennai 600 034.
_____________
Page Nos.43/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )
T.C.A.Nos.733 to 735 of 2010
Dr. G.JAYACHANDRAN, J.
&
R. SAKTHIVEL, J.
bsm
Pre-Delivery common judgment made in
T.C.A.Nos.733 to 735 of 2010
02-06-2026
_____________
Page Nos.44/44
https://www.mhc.tn.gov.in/judis ( Uploaded on: 03/06/2026 04:59:47 pm )