U.O.I. AND ORS. vs. KESHAR SINGH

1 NON-REPORTABLE IN THE SUPREME COURT OF INDIA

JUDGMENT J U D G M E N T RANJAN GOGOI, J. 1. The issue that arise for consideration in this group of appeals is common and may be summarized as follows. Page 1 2 “Whether the amounts paid by the ONGC to the non-resident assessees /foreign companies for providing various services in connection

mineral oil is chargeable to tax as “fees for technical services” under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act or will such payments be taxable on a presumptive basis under Section 44BB of the Act”? 2. The appellant-ONGC has been assessed in a representative capacity on behalf of the different foreign companies with whom it had executed separate agreements for services to be rendered by JUDGMENT such companies in connection with prospecting, extraction or production of mineral oils by ONGC. 3. The primary/assessing authority took the view that the assessments should be made under Section 44D of the Act and not Section 44BB of the Income Tax Act (hereinafter referred to as the ‘Act’). The Appellate Commissioner and the Income Tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of separate appeals before the High Court Page 2 3 of Uttrakhand in respect of each of the assessments made for the years in question. The High Court considered the facts of Civil Appeal No. 731 of 2007 (Income Tax Appeal No. 239 of 2001 before

assigned in the impugned order dated 15.12.2005, the High Court overturned the view taken by the Appellate Commissioner and the learned Tribunal and held the payments made to be liable for assessment under Section 44D of the Act. Aggrieved, the ONGC has filed the present group of appeals. 4. We have heard Shri Arvind P. Datar, learned senior counsel appearing for the appellant and Shri Guru Krishna Kumar, learned senior counsel for the Revenue. 5. As the facts of Civil Appeal No. 731 of 2007 corresponding to JUDGMENT I.T.A. No. 239 of 2001 has been considered in detail by the High Court and the view expressed in the said proceeding have been followed in all the other appeals before the High Court, it may be necessary to notice in detail the said facts arising in the appeal in question. 6. The appellant-ONGC and a non resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory Page 3 4 staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for

by the authorities under the Act, as mentioned above, the High Court proceeded to analyse the different clauses of the contract between the parties. A consideration of such analysis made by the High Court would go to show that it had come to light before the High Court that the contract between the parties visualized operation of the oil rigs including drilling operations by the personnel made available under the contracts/agreements, which fact was further stated on affidavit before the High Court by an authorized official of the ONGC in the following terms. “ That under the said agreement, Foramer JUDGMENT was required, through its personnel listed in Exhibit-A to the said agreement, to carry out inter-alia the drilling operations specified in clause 4.3 to 4.10 of the said agreement.” Despite the above, the High Court took the view that under the agreement payment to M/s. Foramer France was required to be made at the rate of 3450 USD per day and that the contract clearly Page 4 5 contemplated rendering of technical services by personnel of the non-resident company. Specifically, taking the view that the contract did not mention that the personnel of the non-resident

the company had received fees for rendering service the payments made were liable to be taxed under the provisions of Section 44D of the Act. As already noticed, in the rest of the appeals before the High Court the aforesaid decision dated 15.12.2005 passed in I.T.A. No. 239 of 2001 was followed on the basis that the facts in all the appeals were similar to those involved in I.T.A. No. 239 of 2001. 7. It will be convenient and in fact necessary for the purposes of present adjudication to take a careful note of the provisions of Sections 44BB, 44D and also clause (vii) of Explanation 2 to Section 9(1) of the Income Tax Act, 1961 (hereinafter for short the ‘Act’). JUDGMENT “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 Page 5 6

Page 6 7 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.]” “44D. Special provision for computing income by way of royalties, etc., in the case of foreign companies.- Notwithstanding anything to the contrary contained in sections 28 to 44C , in the case of an assessee, being a foreign company,— JUDGMENT (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received [from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern] before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, Page 7 8

(c) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9 ; (d) royalty received [from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern] after the 31st day of March, Page 8 9

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8. A careful reading of the aforesaid provisions of the Act goes to show that under Section 44BB(1) in case of a non-resident providing services or facilities in connection with or supplying plant Page 10 11 and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10% of the

assessee as mentioned in Sub-section (2). On the other hand, Section 44D contemplates that if the income of a foreign company with which the government or an Indian concern had an agreement executed before 1.4.1976 or on any date thereafter the computation of income would be made as contemplated under the aforesaid Section 44D. Explanation (a) to Section 44D however specifies that “fees for technical services” as mentioned in Section 44D would have the same meaning as in Explanation 2 to Clause (vii) of Section 9(1). The said explanation as quoted above defines “fees for JUDGMENT technical services” to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the explanation excludes from consideration for the purposes of the expression i.e. “fees for technical services” any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head “salaries”. Fees for technical services, Page 11 12 therefore, by virtue of the aforesaid explanation will not include payments made in connection with a mining project. 9. Before the High Court, a Circular No. 1862 dated 22.10.1990

reproduced herein below. “Subject: Definition of “fees for technical services” in Explanation to Section 9(1) (vii) of the Income Tax Act, 1961 whether prospecting for or extraction of production of mineral oil are “mining” operations-clarification regarding. The expression “fees for technical services” has been defined in Explanation 2 to Section 9(1) (vii) of the Income Tax Act, 1961 as under: “Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". JUDGMENT 2. The question whether prospecting for, or extraction or production of, mineral oil can be termed as ‘mining operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions ‘mining project’ or ‘like projects’ occurring in Explanation 2 to Section 9(1) (ii) of the Income Tax Act would cover rendering of services like imparting of training and Page 12 13

10. Before us the opinion of the learned Attorney General has JUDGMENT been placed by the learned counsel for the appellants at great length to contend that the views expressed by the learned Attorney which had been accepted by the CBDT were based on an exhaustive consideration of the provisions of the Mines Act, 1952 and the Mines and Minerals (Regulation and Development) Act, 1957 read th with the relevant Entries in the Union and the State List in the 7 Schedule to the Constitution of India. It is urged that the eventual Page 13 14 test is one of pith and substance of the agreement, namely, whether the works contemplated or services to be rendered under the agreement is directly and inextricably linked with the prospecting,

the appellants that the agreements in question satisfy the above test for which purpose the appellants have categorized the different contracts under 8 heads which may be conveniently set out at this stage hereinbelow. 1. Carrying out seismic surveys and drilling for oil and gas 2. Services starting/re-starting/enhancing production of oil and gas from wells 3. Services for prospecting for exploration of oil and or gas 4. Planning and supervision of repair of wells JUDGMENT 5. Repair, Inspection or Equipment used in the exploration, extraction or production of oil and gas 6. Imparting Training 7. Consultancy in regard to exploration of oil and gas 8. Supply, Installation, etc. of software used for oil and gas exploration” 11. It is also urged on behalf of the appellants that the instruction/Circular dated 22.10.1990 issued by the CBDT was Page 14 15 binding on the primary authority on the ratio of the decision of this Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and 1 Others . It has been further pointed on behalf of the appellants

(Regulation and Development) Act 1948 a mining lease means a lease granted for the purposes of searching for, winning, working, getting, making merchandisable, carrying away or disposing of mineral oils or for the purpose connected therewith and such a lease includes an exploring or prospecting lease. Reference has also been made to the Petroleum and Natural Gas Rules, 1959 framed under Section 5 of the aforesaid Act. Under Rule 4 of the said Rules no person can prospect for petroleum except pursuant to a Petroleum Exploration License (PEL) granted under the Rules and JUDGMENT no person can mine petroleum except in pursuance of a Petroleum Mining License (PML) granted under the Rules. It is pointed out that under Rule 7 of the Rules of 1959 a petroleum mining license (PML) entitles the licensee to carry out construction and maintenance in and on such land, works, buildings, plants, waterways, roads, pipelines etc. as may be necessary for full enjoyment of the PML. On the said basis it is argued that rendering 1 (1981) 4 SCC 173 Page 15 16 any service in connection with prospecting and extraction is an integral part of mining and that the expression “mining” in the Explanation 2 to Section 9(1) of the Income Tax Act, in the absence

per the provisions of the Oil Fields (Regulation and Development) Act, 1948 read with the Petroleum and Natural Gas Rules, 1959. 12. Opposing the contentions advanced on behalf of the appellants, Shri Gurukrishna Kumar, learned senior counsel for the Revenue has urged that the opinion of the Attorney General relied upon and the CBDT Circular has no relevance to the present case inasmuch as the agreements between ONGC and the non-resident companies made it abundantly clear that what is paid to the non-resident company are fees for technical services JUDGMENT rendered. Though such services may have some connection with the prospecting, extraction or production of mineral oil, the primary service rendered by the non-resident companies on the basis of the agreements is not for prospecting, extraction or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned counsel for the revenue has even suggested that if it is held Page 16 17 that the High Court ought to have examined each agreement or contract to find out its real purpose and intent the revenue would have no objection if the matters are remanded for a complete

13. The Income Tax Act does not define the expressions “mines” or “minerals”. The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of th the 7 Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the JUDGMENT 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive th jurisdiction under Entry 53 of List I of the 7 Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically Page 17 18 relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a

proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a JUDGMENT circular as far back as 22.10.1990 to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We Page 18 19 do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of

into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each

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The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with Page 22 23 prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary

hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal. JUDGMENT 14. Consequently, all the appeals are allowed with no order as to the costs. …….…………………………...J. [RANJAN GOGOI] …………………………….……J. [PINAKI CHANDRA GHOSE] NEW DELHI; JULY 01, 2015. Page 23