Case: Oil &amp; Natural Gas Corporation Limited Vs. Commissioner of Income Tax &amp; Another

Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 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 jurisdiction under Entry 53 of List I of the 7th 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 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 mining activity or a mining operation. Viewed thus, it is the 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 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 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 mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct. The said details are set out below. S. No.Civil Appeal No.Work covered under the contract 1.4321Drilling of exploration wells and carrying out seismic surveys for exploratory drilling. 2.740Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3.731Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4.1722Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5.729Capping including subduing of well, fire fighting. 6.738Capping including subduing of well, fire fighting. 7.1528Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8.1532Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9.1520Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells. 10.2794Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation. 11.1524Conducting reservoir stimulation studies in association with personnel of ONGC. 12.1535Laboratory testing under simulated reservoir conditions. 13.1514Consultancy for optimal exploitation of hydrocarbon resources. 14.2797Consultancy for all aspects of Coal Bed Methane. 15.6174Analysis of data of wells to prepare a job design. 16.1517Geological study of the area and analysis of seismic information reports to design 2 dimensional seismic surveys. 17.7226Opinion on hydrocarbon resources and foreseeable potential. 18.7227Opinion on hydrocarbon resources and foreseeable potential. 19.7230Opinion on hydrocarbon resources and foreseeable potential. 20.6016Opinion on hydrocarbon resources and foreseeable potential. 21.6008Evaluation of ultimate resource potential and presentations outside India in connection with promotional activities for Joint Venture Exploration program. 22.1531Review of sub-surface well data, provide repair plan of wells and supervise repairs. 23.733Repair of gas turbine, gas control system and inspection of gas turbine and generator. 24.741Repair and inspection of turbines. 25.737Repair, inspection and overhauling of turbines. 26.736Inspection, engine performance evaluation, instrument calibration and inspection of far turbines. 27.1522Replacement of choke and kill consoles on drilling rigs. 28.1521Inspection of gas generators. 29.1515Inspection of rigs. 30.2012Inspection of generator. 31.1240Inspection of existing control system and deputing engineer to attend to any problem arising in the machines. 32.1529Inspection of drilling rig and verification of reliability of control systems in the drilling rig. 33.2008Expert advice on the device to clean insides of a pipeline. 34.2795Feasibility study of rig to assess its remaining useful life and to carry out structural alterations. 35.925Engineering analysis of rig. 36.1519Imparting training on cased hold production log evaluation and analysis. 37.1533Training on well control. 38.1518Training on implementation of Six Sigma concepts. 39.1516Training on implementation of Six Sigma concepts. 40.6023Training on Drilling project management. 41.2796Training in Safety Rating System and assistance in development and audit of Safety Management System. 42.1239To develop technical specification for 3D Seismic API modules of work and to prepare bid packages. 43.1527Supply supervision and installation of software which is used for analysis of flow rate of mineral oil to determine reservoir conditions. 44.1523Supply, installation and familiarization of software for processing seismic data. The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with 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 works contemplated thereunder. If that be so, we will have no 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]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 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 aggregate of the amounts paid or payable to such non-resident 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 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 will not include payments made in connection with a mining projectReading 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 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 mining activity or a mining operation. Viewed thus, it is the 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 questionwhether 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 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 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 mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correctThe above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with 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 works contemplated thereunder. If that be so, we will have no 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.