(i) S. 44BB : Actual reimbursements cannot be considered as income for the purpose of S. 44BB. 571 (ii) Article 12(2) of DTAA : Interest on Income-tax refund is subject to Article 12(2) of DTAA and not under Article 12(5).

15 ACIT v. Pride Foramer France Sas (2008) 116
TTJ 369 (Del.)

(i) The assessee was a French company operating in India in
oil drilling operations and related services under several contracts with ONGC.
Under one of the contracts, the assessee had charter-hired its drilling rig and
received gross fee for drilling operations and had offered the income for
taxation in accordance with S. 44BB of Income-tax Act. While working out the
receipts, the assessee had not taken into computation gross sum of Rs.34.73
lakhs, which was received by it from ONGC by way of reimbursements. Relying on
the Delhi Tribunal’s decision in Sedco Forex International Drilling Inc v.
Deputy CIT, (2000) 67 TTJ 670 (Del.), the assessee claimed that
reimbursements of actual cost of supply should not be included for the purpose
of computing receipts in terms of S. 44BB of Income-tax Act. The AO observed
that the reimbursements were part of contractual receipts and hence were
includible while computing profit u/s.44BB of Income-tax Act.

The assessee’s contention was that the reimbursements were
wholly unrelated to the project. For instance, these pertained to loss of
equipment, use of satellite communication and supply of dry fruits. After
considering that the AO had found that there was no element of profit in
reimbursements, CIT(A) found that supply of material was obligation of ONGC and
assessee had merely provided these services to ONGC. Relying on the Delhi
Tribunal’s decision in Sedco forex International Inc (supra),
CIT(A) held that the reimbursed expenses were not taxable u/s.44BB.

The Tribunal noted that S. 44BB is a code in itself, which
excludes application of normal business income computation provisions and to
assess any income u/s.44BB, the activity should be the one described in S.
44BB(2). The reimbursements made by ONGC had nothing to do with activity of
prospecting for, or extraction, or production of, mineral oils. Also, the
reimbursements were based on actual expenditure and there was no element of
profit. Hence, reimbursements were rightly held to be excludible by CIT(A).

(ii) The assessee had received interest on income-tax refund.
The assessee claimed that such interest should be taxed at the rate applicable
in terms of Article 12(2) of India-France DTAA (which restricts the tax rate to
15%). According to AO, the interest should be considered in terms of Article
12(5) (which applies in case the recipient of interest carries on business
through a PE) read with Article 7 of DTAA, since interest had accrued to the
assessee through its PE in India. The assessee’s contention was that the
interest received by it was not in respect of debt which was effectively
connected with PE, which is one of the conditions under Article 12(5) and
therefore, Article 12(5) could not be applied. The AO, however, considered
interest as chargeable to tax under Article 12(5) at the rate of tax applicable
to a foreign company. In appeal, the CIT(A) upheld the order of the AO.

The Tribunal noted that similar issue was considered in
Application No P 17 of 1998, In re (1999) 236 ITR 637 (AAR) wherein the
AAR had held that such case was covered under Article 12(2) of DTAA. The
Tribunal observed that although the order of AAR would not have a binding force,
it would have persuasive value. Further, the tax authorities did not bring any
contrary decision to the effect that the interest should be considered under
Article 12(5) of DTAA to the notice of the Tribunal. The Tribunal also noted
that in the assessee’s own case in earlier year, the Tribunal had observed that
the assessee was not in the business of obtaining income-tax refunds and earning
interest thereon and therefore, the interest was neither derived from, nor
attributable to the business activity of the assessee. Considering both the
abovementioned reasons, the Tribunal held that the interest cannot be taxed
under Article 12(5) of DTAA.