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

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 such companies in connection with prospecting, extraction or production of mineral oils by ONGC3. 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 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 the High Court) as the lead case and on the grounds and reasons 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 appeals4. We have heard Shri Arvind P. Datar, learned senior counsel appearing for the appellant and Shri Guru Krishna Kumar, learned senior counsel for the Revenue5. As the facts of Civil Appeal No. 731 of 2007 corresponding to 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 question6. 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. Faced with the different views taken 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 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 agreementDespite 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 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 company was 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. 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.

Reasoning: 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.