RESERVED JUDGMENT IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL (1) Income Tax Appeal No. 89 of 2007 (Assessment Year 2002-2003) Commissioner, Income Tax, Dehradun and another. ………. Appellants Versus M/s Enron Expats Services Inc., C/o Nangia & Co., 75/7, Rajpur Road, Dehradun. ………. Respondent (2) Income Tax Appeal No. 130 of 2007 (Assessment Year 1996-1997) Commissioner, Income Tax, Dehradun and another. ………. Appellants Versus M/s Enron Oil & Gas International Inc. C/o Nangia & Company, 75-Rajpur Road, Dehradun. ………. Respondent (3) Income Tax Appeal No. 2 of 2009 (Assessment Year 2001-2002) M/s ENRON EXPAT Services INC., 75/7 Rajpur Road, Dehradun. ………. Appellant Versus The Assistant Commissioner of Income Tax (OSD) Range-1, Dehradun. ………. Respondent 2 (4) Income Tax Appeal No. 5 of 2009 (Assessment Year 2001-2002) M/s ENRON Global Exploration & Production Inc., 75/7 Rajpur Road, Dehradun . ………. Appellant Versus The Assistant Commissioner of Income Tax (OSD) Range-1, Dehradun. ………. Respondent (5) Income Tax Appeal No. 6 of 2009 (Assessment Year 2000-2001) M/s ENRON EXPAT SERVICES INC. 75/7 Rajpur Road, Dehradun. ……. … Appellant Versus The Assistant Commissioner of Income Tax (OSD) Range-1, Dehradun. ………. Respondent (6) Income Tax Appeal No. 7 of 2009 (Assessment Year 2000-2001) M/s ENRON OIL & GAS EXPAT SERVICES INC., 75/7 Rajpur Road, Dehradun. ……. … Appellant Versus The Assistant Commissioner of Income Tax (OSD) Range-1, Dehradun. 3 ………. Respondent ………………………. Sri Ajay Vohra and Sri S.K. Posti Advocates for the Assessees. Sri Arvind Vashisth Advocate for the Revenue. Date: September 11, 2009. Coram: Hon’ble B.C.Kandpal,A.C.J, Hon’ble B.S.Verma,J. (Delivered by Hon’ble B.S. Verma, J.) These appeals, preferred under Section 260A of the Income Tax Act, 1961, are directed against the judgment and orders dated 09.02.2007 in ITA No. 4756/Del/2005 and 09.03.2007 in ITA No. 2141/Del /2005 and the consolidated judgment and order dated 05.09.2008 in ITA Nos. 394/D/2005, 380/D/2005, 381/D/2005, 382/D/2005 respectively passed by the Income Tax Appellate Tribunal, New Delhi. 2. Appeal Nos. 89 of 2007 and 130 of 2007, for the respective assessment year, have been preferred by the Revenue for setting aside the order passed by the Income Tax Appellate Tribunal dated 09.02.2007 and 09.03.2007 respectively as well as the order passed by Commissioner of Income Tax (Appeals) (for short CIT (Appeals)) and to restore the order of Assessing Officer in each case. Appeal Nos. 2 of 2009, 5 of 2009, 6 of 2009 and 7 of 2009, for the respective assessment year, have been preferred by the assessees with the prayer to allow the appeals and for setting aside the consolidated order passed by Income Tax Appellate 4 Tribunal in ITA No.380(Del)/2005, 381 (Del)/2005, ITA No.394 (Del)/2005 and 382 (Del)/2005, by which Appeal No.380 (Del)/2005, 381 (Del)/2005 and 382 (Del)/2005 were partly allowed and Appeal No.394 (Del)/2005 was dismissed. 3. Since the common issue in all these appeals relates to taxability of amounts received by the aforesaid assesses from the consortium between Government of India, Oil and Natural Gas Commission Ltd. (ONGC), Reliance Industries Limited and Enron Oil & Gas India Ltd. (EOGIL), members of the Production Sharing Contract (PSC), towards providing services on cost-to-cost basis, they are taken up together for hearing and are being decided by this single order. 4. Brief facts giving rise to the appeals filed by the Revenue are that the assessee, a non-resident company, filed its return of income declaring NIL income for the respective assessment year, which was processed under Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The assessee NRC is a company incorporated in the United States of America. During the year under consideration, the assessee earned revenues under its contract with M/s Enron Oil and Gas India Ltd. for providing expatriate technicians for Indian operations of EOGIL. The assessee Company has offered nil income from business after claiming expenditure as per its statement of income. The assessee Company was required, vide notice under Section 142 (1) of the Act, to show cause as to why the receipts be not 5 assessed under Section 44BB of the Act. The assessee Company, in its reply, contended that the Company has rendered the service on cost-to-cost basis to EOGIL in terms of Production Sharing Contract entered into by EOGIL with Indian concerns duly approved by the Government of India and payments received through debit notes are only reimbursement of actual expenses. It was also claimed that the income of the assessee Company is not taxable in India in view of Article 7 (3) of Double Taxation Avoidance Agreement (DTAA) with USA. 5. In ITA No.89 of 2007 and ITA No. 130 of 2007 filed by revenue/appellants, learned counsel for the appellants raised the following questions of law:- (1) Whether the ITAT was legally correct in upholding the decision of CIT (Appeals) which was perverse on facts and circumstances of the case in not appreciating the facts that Production Sharing Contract (PSC) was applicable only to the members of the consortium/Joint Venture and the assessee, Enron Expats Services Inc. (EESI) was not a member of consortium/Joint Venture and it was only affiliate of (Enron Oil & Gas India Ltd. (EOGIL). Hence the terms and condition of PSC were not applicable to the EESI at all ? (2) Whether the ITAT was legally correct in upholding the decision of CIT (Appeals) that principle of res-judicata is not applicable to the income tax proceedings when the AO had 6 taken cognizance of fact existing in assessee’s own case in earlier assessment years whereas this Court while deciding the appeal of the department in CIT versus ONGC as agent of Foramer France in ITA No.239 of 2001 had also taken due cognizance of the preceding assessment year ? In ITA Nos. 2 of 2009, 5 of 2009, 6 of 2009 and 7 of 2009 filed by assessees, the following question of law was framed:- Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal erred in law in holding that the income in question was taxable in India, without appreciating that in terms of Article 7(1) of Indo-US Double Taxation Avoidance Agreement, only profits attributable to the permanent establishment of the appellant could be subjected to tax in India ? 6. Sri Arvind Vashisth, learned counsel for the Revenue has contended that provisions of Section 42 of the Act have no application in the case of assessees before this Court for the reason that the said assessees are not the members of PSC. The Enron Expat Services Inc. is an affiliate company of Enron Oil & Gas India Ltd. (EOGIL) which as operator of the joint venture alongwith RIL and ONGC for the contract of development of Panna Mukta and Mid & 7 South Tapti Oil Fields availed the services of its affiliate Enron Expat Services Inc. in the form of availing the services of its employees. The Assessing Officer has rightly held that the assessee Company has itself offered the gross contractual revenue at deemed profit rate of 10% under section 44 BB for the Assessment Year 1997-98 and the income was assessed accordingly. The income for the Assessment Year 1998-99 was assessed under the provisions of Section 44 BB especially because profit element is involved and gross revenues received by the assessee company were offered to tax at deemed profit rate of 10% in the first Assessment Year 1997-98. Learned counsel for the revenue further contended that the ITAT was not legally correct in holding that principle of res judicata is not applicable to the income tax proceedings when the Assessing Officer has taken cognizance. 7. Learned counsel for the Revenue has relied upon the following case laws:- (1) Commissioner of Income-Tax and another versus Halliburton Offshore Services Inc., reported in [2008] 300 ITR 265 (Uttarakhand High Court). (2) Sedco Forex International Inc. versus Commissioner of Income-Tax and another, reported in [2008] 299 ITR 238 (Uttarakhand High Court). 8. We have gone through the said case laws. The said case laws do not deal with the present controversy. These are applicable where admittedly the assessees were residents of a country with which 8 India does not have DTAA and the services were not provided to the PSC which was approved in terms of Section 42 of the Act. As regards the applicability of Section 44BB of the Act, it would have application only in a situation where the foreign company is liable to be assessed under the provisions of the Act. Where the foreign company opts to be assessed in terms of provisions of the relevant DTAA, provisions of section do not come into play. 9. Sri Ajay Vohra and Sri S.K. Posti, learned counsel appearing on behalf of assessee contended that the assessee Company has rendered the services cost-to-cost basis to EOGIL in terms of the Production Sharing Contract (PSC) entered into by EOGIL with Indian concerns duly approved by the Government of India and payments received through debit notes are only reimbursement of actual expenses. It is also contended that the income of the assessee Company is not taxable in India in view of Article 7(3) of DTAA with USA. It is further contended that the payments made to the assessee Company are in respect of scientific or technical personnel and are governed by clause 2.4.2.1 of the Production Sharing Contract, which reads as, “cost of scientific or technical personnel services provided by any Affiliate of Operator for the direct benefit of petroleum operations, which cost shall be charged on a cost of services basis without any element of profit. Charges, therefore, shall not exceed charges for comparable 9 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 personnel without approval of the Management Committee.” 10. It is not disputed that the Government of India, ONGC, Reliance Industries Limited and EOGIL entered into a contract dated 22nd December, 1994 for exploration of oil with respect to contract area identified as Panna and Mukta fields. The PSC was laid before both Houses of the Parliament and approved in terms of Section 42 of the Income-Tax Act, 1961. The said Section 42 of the Act reads as follows:- “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 authorized 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, 10 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 or 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 sunder Section 32: (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……” 11. The taxability of the share of income of each member of the PSC has to be determined in terms of Section 42 which overrides other provisions of the Act. In other words, section 42 is a separate code in itself and the taxability of each member of the 11 PSC has, therefore, to be determined in terms of provisions of PSC read with the said Section, notwithstanding contrary provisions in the Act. Another Division Bench of this Court in the case of Commissioner of Income-Tax and another versus Enron Oil and Gas India Ltd., reported in [2008] 305 ITR 68 has laid down the aforesaid proposition of law. The observations made by Division Bench in its judgment at page 74 are reproduced hereunder:- “Section 42 of the Income-Tax Act, 1961, quoted above, contains a special provision whereby the expenditure incurred by the assessee-NRC in commercial production of mineral oil is to be depreciated in terms of the agreement mentioned therein. It is not the case of the parties that the agreement between the parties is not covered or it does not fulfil the requirements under Section 42 of the aforesaid Act. It is clear from article 1.6.1 of the accounting procedure, quoted above, set out in the Appendix C to the production sharing contract (PSC) that expenditure incurred in foreign exchange by the co-venture during any particular calendar month has to be converted into Indian rupee at the rate which has to be determined at the end of the calendar month….” 12. The aforesaid view taken by the Division Bench of this Court has been affirmed by the Hon’ble 12 Supreme Court in the case reported as CIT versus Enron Oil and Gas India Limited : [2008] 305 ITR 75 (SC). 13. It is an admitted fact that the PSC subject of consideration before this Court and the Hon’ble Supreme Court in the above referred case is same PSC being considered in these appeals. 14. It has also been contended on behalf of the assessee that in terms of 3.1.4(b) of the Appendix - C of the Production Sharing Contract (PSC), no profit can be charged by any affiliate company. The provisions of Section 3.1.4(b) of the PSC is being reproduced hereunder :- “3.1.4.Charges for services : (a) ……. (b) Affiliated Company Contracts (i) Professional and administrative Services and expenses Cost of professional and administrative services provided by any Affiliate for the direct benefit of petroleum operations, legal, financial, insurance accounting and computer services division other than those covered by 3.1.4(b)(ii) which contractor 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 13 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 Petroleum Industry practice and experience.” The term ‘affiliate’ is defined in Article 1.2 of the PSC as follows:- “1.2. “Affiliate” means a company that directly or indirectly controls or is controlled by a Party to this Contract or a company which directly or indirectly controls or is controlled by a company which controls a Party to this Contract, it being understood that “control” means ownership by one company of more than fifty percent (50%) of the voting securities of the other company, or the power to direct, administer and dictate policies of the other company even where the voting securities held by such company exercising such effective control in that other company is less than fifty percent (50%) and the term “controlled” shall have a corresponding meaning.” 15. It is an admitted and undisputed position that the aforesaid assessees/entities are affiliates of EOGIL. In terms of the provisions of the PSC, more 14 specifically Section 3.1.4(b), the assessees/entities are obligated to provide services to the EOGIL, which is one of the members and operator of the PSC, on cost-to-cost basis. In other words, the aforesaid entities cannot expect to receive any element of profit from provision of such services, nor can EOGIL compensate the aforesaid entities on cost-plus basis. Accordingly, the aforesaid entities received an amount equal to the cost incurred in providing such services to EOGIL. 16. The learned counsel for the assessees further submitted that the liability of tax in India of a non-resident is determined by the provisions of the Act or the relevant DTAA between India and the country of residence of the non-resident, whichever is more beneficial to the non-resident under Section 90(2) of the Act. The provision of Section 90 (2) of the Act reads as under:- “90. Agreement with foreign countries- (2) Where the Central Government has entered into an agreement with the Government of any country outside India 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 the assessee.” 15 17. Sub-section (2) of Section 90 of the Act clearly states that where there is a double taxation avoidance agreement, the provisions of the Act can be applied only to an extent at which such provisions are more beneficial to the assessee as compared to the DTAA and in the exercise of the powers conferred by the above Section 90 of the Act, the Central Government entered into an agreement for avoidance of double taxation of income with the United States of America. We find force in the argument of learned counsel for the assessees that Section 44BB of the Act, invoked by the Assessing Officer, had no application, once the assessees were to be assessed under the provisions of DTAA. 18. Article 7 of the DTAA deals with the taxation of business profits which reads as under:- “Article 7. BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through 16 that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm’s length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. 17 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of banking enterprises, by way of interest on moneys lent to the permanent establishment, likewise, no account shall be taken, in the determination of the profits of a permanent 18 establishment, for amounts charged (otherwise than toward reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. ….. …… …..” 19. A perusal of paragraph -1 of Article 7 of the said DTAA reveals that business profits arising to a US enterprise are liable to tax in India only if the US enterprise has a permanent establishment (“PE”) in India. Paragraph (3) of Article 7 provides that in determining the profits attributable to PE, deduction shall be allowed for expenses incurred in relation to earning of such income. The findings recorded by the Tribunal in this regard in ITA Nos.4756 & 4757 /Del/2005 dated 09.02.2007 require no interference. 20. The submission of the learned counsel for the Revenue that the matter is covered against the assessees by the decisions reported in [2008] 300 ITR 265 (Uttarakhand High Court) and [2008] 299 ITR 238 (Uttarakhand High Court) (supra) is totally incorrect because of the fact, as held above, the 19 present controversy did not arise for determination by this Court in these appeals. 21. The principle of res judicata shall not operate on the legal issues. The Tribunal has held that no objection seems to have been taken by the Income Tax Authorities on the basis of estoppel. The Tribunal also referred the judgment passed by Delhi High Court in CIT versus Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303, in which the Delhi High Court has held that there is no estoppel in the Income-Tax Act and if the assessee includes a particular income in the return, but later puts forth the claim that it is not taxable, it must be taken that the assessee had resiled from the position which it had wrongly taken while filing the return. It was further held that quite apart form it, it is incumbent on the Income-tax department to find out whether a particular income was assessable in the year or not and merely because the assessee wrongly included the income in the return for a year, it cannot confer jurisdiction on the department to tax that income in that year even though legally the income did not pertain to that year. On the basis of ratio of the aforesaid judgment, the learned Tribunal has not committed any error in holding that the principle of res judicata shall not operate. Thus, the fact that in some of the earlier years, the assessee had offered to pay tax under Section 44BB, cannot operate as estoppel against it. 20 22. The learned Tribunal in its judgment has rightly held that there is no material to which the Assessing Officer has drawn attention to show that the debit notes issued were not for reimbursement of