AAR : The Applicant under the seismic data acquisition and processing contract with BHP Billiton in India are taxable in accordance with section 44BB

Authority For Advance Rulings (Income-Tax) New Delhi

Western Geco International Ltd., In Re

Section : 44BB

Justice P.K. Balasubramanyan, Chairman And V.K. Shridhar, Member

A.A.R. No. 938 Of 2010

July 25, 2011

RULING

V.K. Shridhar, Member. – The applicant, Western Geco International Ltd. (WGIL), is a company incorporated under the laws of British Virgin Islands and is a tax resident of British Virgin Islands. It is engaged in the business of acquisition and processing of 2D and 3D seismic data for companies engaged in the exploration and production of mineral oils in India. Applicant submits that the seismic data acquisition means the generation and recording of seismic data relating to formation of sub-surface. The required data is collected on large storage tapes and then processed by specialist professionals with the help of specialized equipments to present the sub-surface data in a manner that can help geologist draw conclusions about existence of hydro-carbon in the areas. The applicant submits that it has entered into a contract with BHP Billiton Petroleum (International Exploration) Pty. Ltd. (BHP Billiton), a company incorporated under the laws of Australia. The contract relates to carrying out 2D marine seismic data acquisition and processing services in oil and gas blocks located some 350 km south-west of Mumbai and 300 km north-west of Cochin off shore, the west coast of India.

2. Applicant submits that section 44BB of the Income-tax Act, 1961 (Act) provides special provision for taxation of non-residents engaged in specified activities in the oil and gas sector. The revenues earned by the applicant under the seismic data acquisition and processing contract with BHP Billiton in India are taxable in accordance with section 44BB of the Act. The applicant is of the view that in view of Explanation to section 9(1)(i) of the Act, in the case of a business of which all the operations are not carried out in India, the income that accrue or arise in India is only such part of the income as is reasonably attributable to the operations carried out in India. The mobilization revenues are primarily linked to the journey undertaken from the place of origin to the work site situated in Indian territory and the demobilization revenues are linked journey undertaken by vessel from the work site situated in Indian territory to the site situated outside India. The mobilization/demobilization revenues taxable in the hands of the applicant in India should be restricted only to the revenues attributable to the distance travelled in the Indian territorial water as compared to the total distance travelled to/from India. Without prejudice, if the income is taxable under section 44BB, the applicant submits that it should not be taxed as fees for technical services under the provisions of section 115A and section 44DA of the Act. The applicant has drawn attention to the rulings of this Authority in Geofizyka Torun Sp. zo. O.. In re [2010] 186 Taxman 213 and in Seabird Exploration FZ LLC, In re [2010] 187 Taxman 37 , wherein it has been held that the services of data acquisition and processing are covered under the provisions of section 44BB of the Act.

3. On the basis of above facts the applicant desires to obtain a ruling on the following questions —

“1.Whether revenues to be earned by the Applicant under the seismic data acquisition and processing contract with BHP Billiton in India are taxable in accordance with section 44BB of the Income-tax Act, 1961 (Act)?

2.Whether the revenues arising under the contract with BHP Billiton on account of mobilization/demobilization activities attributable to distance travelled by the vessel outside India will be subject to tax in India?”

4. The revenue contends that proviso to section 44BB restricts the applicability of the substantive provisions of section 44BB in relation to those persons who are either engaged in the business of prospecting for mineral oils or foreign companies who received fees for technical services from an Indian concern. The proviso would be rendered useless if it is held that the section 44BB deals with all sorts of services, including technical or managerial. Instruction No. 1862, dated 22-10-1970 applies to those who are engaged in the drilling operations and not to those who carry out seismic surveys as no mining or like project is undertaken by such persons who carry out seismic surveys. The existence of a separate and specific provision for computing income by way of FTS or Royalties is not covered under section 44BB in view of the clarification through amendment to sections 44BB and 44DA with effect from 1-4-2011, as the intention of the Legislature was to exclude the income in the nature of FTS or Royalty from the purview of section 44BB as per the ratio laid down by the Hon’ble Supreme Court in the case of Sedco Forex International Drill Inc. v. CIT[2005] 279 ITR 310/ 149 Taxman 352. In the case of CIT v. Foramer France[2009] 317 ITR 18 / 181 Taxman 262, the Hon’ble High Court of Uttarakhand has clearly laid down that services which are technical in nature are not covered under section 44BB. The receipts on account of acquisition and processing of 2D and 3D seismic data are covered under section 9(1)(vii ) of the Act as the receipts are to be examined under sections 5 and 9 of the Act. The presumptive sections are neither charging section nor do they elaborate the nature of income in the hands of the assessee. The revenue contends that the entire mobilization/demobilization revenues should be included in the ‘gross receipts’ for the purposes of taxation in view of the decisions in the cases of CIT v. Atwood Oceanics Pacific Ltd.[2010] 8 taxmann.com 177 /[2011] 196 Taxman 325 (Uttarakhand), CIT v. R&B Falcon Drilling Co.[2009] 181 Taxman 62 (Uttarakhand) and CIT v. Sundowner Offshore International (Burmuda) Ltd.[2009] 183 Taxman 365 (Uttarakhand).

5. In terms of the contract, the applicant is to provide vessels and seismic crew at the area of operations to acquire the 2D geophysical survey in the MB/KK blocks offshore India to BHP Billiton. The vessels are to be equipped with hardware and software to process the seismic data. The survey work is to be carried out 24×7 hours a day, seven days a week and without shut down for holidays. The cost of maintenance of the vessels, catering and accommodation services on board the seismic vessels is to be borne by the applicant. It is therefore obvious that the applicant is engaged in the business of providing services or facilities in connection with extraction or production of oil, a mining activity. It could also be said that the applicant is supplying plant and machinery for hire to be used in the prospecting of mineral oil. The activities undertaken are recognised by BHP Billiton in connection with the extraction or production of oil. The activities being mining, the services rendered goes out of the purview of section 9(1)(vii) of the Act. The executive understanding of Explanation 2 to section 9(1)(vii) is also explained in CBDT’s Instruction No. 1862 in the similar manner. This Authority is of the view that as section 44BB is a special, specific and exclusive provision, even where the profits arising from business specified therein fall within the ambit of fees for technical services, the provision should prevail for the purposes of computation. (Refer Geofizyka Torun Sp. zo. O’s case (supra). The issued raised by the revenue have been discussed at length in the said ruling. Regarding the Revenue’s contention that the provisions of section 44BB would not apply in view of insertion of section 44DA by the Finance Act, 2010 with effect from 1-4-2011, it is pointed out that section 44DA applies where royalty or fees for technical services is received by a foreign company in pursuance of an agreement with an Indian concern, whereas in the present case the parties involved are two foreign companies. This we are saying without addressing the question whether the receipts in the hands of the applicant qualifies as fees for technical services, as we find that the services provided by the applicant are not technical services.

Question No. 1 is answered in the affirmative.

6. As regards the second Question, the learned Advocate on behalf of the applicant submits that section 4 of the Act provides that income-tax shall be charged in respect of the total income of the previous year. Total income under section 2(45) of the Act means the total amount of income referred to in section 5 computed in the manner laid down in the Act. Unless the income is subjected to tax under section 5, it cannot be computed in the manner provided in the Act. The income can be subjected to tax in India only if it accrues or arises in India or is deemed to accrue or arise in India. Thereafter, under Explanation to section 9(1)(i), income of the business in which all the operations are not carried out in India, only such part of income as is reasonably attributable to the operations carried out in India would be the income deemed to accrue or arise in India. Applying the above stated law the applicant is of the view that any receipt can be subjected to tax under section 44BB only if it is chargeable to tax under the Act. The learned Advocate submitted that mobilization and demobilization revenues to the extent attributable to journey of the vessel outside India should be excluded from the computation of income under section 44BB. The Revenue’s contention in this behalf, in which reference has been made to a number of decisions of Hon’ble High Court of Uttarakhand, is based on the fact that the receipts are held to be in a nature of fees for technical services.

7. Once an assessee opts to come under section 44BB(1) of the Act, the provision itself deems its profits and gains as 10 per cent of the aggregate of the amounts specified in sub-section (2). Sub-section (2)(a) specifies that that aggregate amount is the amount paid or payable whether in or out of India to the assessee on account of provision of services in India. In the scenario, there is no scope for splitting up the amount payable to the assessee. If the assessee wants to seek such a splitting up it has to go under section 44BB(3) of the Act.

8. Section 44BB does not close its doors to an applicant who desires to know which part of its income accrues or arises in India and how much. The applicant can exercise its rights provided it opts to get the income taxed under section 44BB(3) of the Act. The scheme of computation of income under this section does not provide any leeway to apply both the sub-sections (1) and (3) of section 44BB to the income arising from the business activities falling under the ambit of section 44BB(1) of the Act. Even if part of the income falls under ‘Royalties’ or ‘Fees for technical Services’, there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged under section 44BB. We are of the view that if the applicant desires to know the answers to the two issues, then it has to first exercise the option to get its income computed under section 44BB(3). In view thereof, we answer the Question No. 2 by saying that the entire mobilization/demobilization revenues received by the applicant with respect to seismic data acquisition and/or processing would be taxable in India at an effective rate of 4.223 per cent.

[Citation : 338 ITR 161]

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