Oil and Natural Gas Corporation Ltd. vs. CIT (2015) 376 ITR 306 (SC)
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 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 the assessment year 1986-87.
The appellant – ONGC has been assessed in a representative capacity on behalf of the foreign company with whom it had executed agreements for services to be rendered by such company in connection with prospecting extraction or production of mineral oils by ONGC. The primary/assessing authority took the view that the assessments should be made u/s. 44D of the Act and not section 44BB of the Act. The Appellate Commissioner and the Income-tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of appeal before the High Court of Uttarakhand. The High Court overturned the view taken by the Appellate Commissioner and the Tribunal and held the payments made to be liable for assessment u/s. 44D of the Act.
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 3,450 $ per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company as the contract did not mention that the personnel of the non-resident company were also carrying out the work of drilling of wells and as 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.
Aggrieved, the ONGC has filed appeal before the Supreme Court.
The Supreme Court held that a careful reading of the provisions of the Act goes to show that u/s. 44BB(1) in the case of a non-resident providing services or facilities in connection with or supplying plant 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 per cent of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in s/s. (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 1st April, 1976, or on any date thereafter but before April, 2003 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, defines “fees for 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, therefore, by virtue of the aforesaid Explanation would not include payments made in connection with a mining project.
The Supreme Court noted that the Income-tax Act does not define the expressions “mines” or “minerals”. The said expressions however were found defined and explained in the Mines Act, 1952, and the Oil Fields (Development and Regulations) Act, 1948. The Supreme Court having regard to the said definition and to the Seventh Schedule of the Constitution, held that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it was the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or a mining operation 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 u/s. 44BB or section 44D of the Act. The Supreme Court noted that the Central Board of Direct Taxes had accepted the said test and had in fact issued a Circular as far back as 22nd October, 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.
According to the Supreme Court, it was not possible to take any other view if the works or services mentioned under a particular agreement was directly associated or inextricably connected with prospecting, extraction or production of mineral oils. Keeping in mind the above provisions and looking into each of the contracts involved in the group of cases before it, it found that the pith and substance of each of the contracts/agreements was inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement was for prospecting, extraction or production of mineral oils though there would be certain ancillary works contemplated thereunder. The Supreme Court therefore held that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts was more appropriately assessable under the provisions of section 44BB and not section 44D of the Act.
