AAR : The income derived by the applicant be construed to be in the nature of ‘Fees for technical services’ under section 9(1)(vii) of the Act

Authority For Advance Rulings (Income Tax), New Delhi

Spectrum Geo Ltd., In Re

Assessment Years : 2009-10 And 2010-11

Section : 9

P.K. Balasubramanyan, Chairman

A.A.R. No. 954 Of 2010

August 1, 2012

RULING

1. The applicant is a company formed and registered under the laws of the United Kingdom. It is a wholly owned subsidiary of a company incorporated in Norway.

2. The Oil and Natural Gas Corporation of India (ONGC) award a contract to a company based in the United Arab Emirates (UAE), for undertaking a Seismic survey on the Cauvery and Krishna Godavari basin. The UAE company carried out the seismic data acquisition on board its vessals. That company entered into an agreement with the applicant for the processing of the acquired seismic data. In terms of that agreement the applicant had to render to the UAE company during the period from December, 2007 to June 2008 on board its vessals the processing and reprocessing the raw data obtained from it, interpreting the processed data and preparing data packages of the processed data and providing them to that company. For this purpose, the data processing analyst alongwith the required hardware and software were present on board the vessels of the UAE Company.

3. The applicant approached the concerned authority under the Income-tax Act for determination of the withholding rate of tax. The applicant was not given the benefit of rate of taxation on the basis of the applicability of section 44BB (1) of the Act. In that context, the applicant approached this Authority for advance rulings on the questions posed by it.

4. By order dated 16.12.2011, this Authority, after hearing both sides, allowed the application under section 245R(2) of the Act for rendering rulings on the following questions:

i. Whether on stated facts and in law, can the income derived by the applicant be construed to be in the nature of ‘Fees for technical services’ under section 9(1)(vii) of the Act?

ii. Whether on the stated facts and in law, can the income derived by the applicant be construed to be in the nature of ‘Royalty’ under section 9(1)(vi) of the Act?

iii. Notwithstanding the answer to (1) and (2), whether on the stated facts and in law the income derived by the applicant ought to be computed in accordance with provisions of Section 44BB of the Act?

The question whether devising of any scheme for avoidance of tax was involved was also reserved to be considered.

5. It is submitted on behalf of the applicant that even if the services rendered by the applicant are taken to be technical services, the consideration received by it under the contract with the UAE company would not be fees for technical services in terms of section 9(1)(vii) of the Act since it will come under the exception contained in Explanation (2) to that section, namely, ‘does not include consideration for any construction, assembly, mining or like project, undertaken by the recipient…….’ since the services were rendered in connection with exploration for oil. It is further contended that even if it is treated as fees for technical services, it is covered by section 44BB(1) of the Act and the proviso to that provision has no application. It is pointed out that the income derived by the applicant related to the assessment years 2009-10 and 2010-11 and the amendment to the proviso to section 44BB(1) of the Act with effect from 1.4.2011 had no application. It is also pointed out that in any event, section 44D, section 44DA and section 115A had no application, since the applicant, a non-resident, was not deriving any income from the Government or an Indian concern, but was receiving income from a UAE company. Since the services provided by the applicant are in connection with prospecting for mineral oils, section 44BB(1) of the Act squarely applied.

6. On behalf of the Revenue, it is argued that the applicant is only a sub-contractor of a sub-contractor of ONGC engaged in exploration and extraction of oil and such a sub-contractor is not entitled to rely on section 44BB(1) of the Act since the services provided cannot be said to be in connection with prospecting for oil. It is submitted that the consideration received by the applicant in this case would be fees for technical services under Explanation (2) to section 9(1)(vii) of the Act and the exception contained therein is not attracted since the applicant is not deriving the income from mining or like activity undertaken by it. It has not undertaken any mining or like project. It was merely rendering some services to a sub- contractor of a person who has undertaken the activity. Therefore, the consideration received by the applicant is fees for technical services and is liable to be assessed as such. Section 44BB(1) is not attracted, especially in the context of the proviso thereto.

7. The first question posed for ruling is whether the income derived by the applicant can be construed to be in the nature of ‘fees for technical services’. As noticed, the argument on the side of the applicant is that the income falls under the exception in Explanation (2) to section 9(1)(vii) of the Act and hence comes out of the definition of ‘fees for technical services’. Explanation (2) to section 9(1)(vii) of the Act describes fees for technical services as meaning any consideration for rendering of any managerial, technical or consultancy services including the providing of services of technical or other personnel. It is clear on the facts as set out by the applicant that the applicant has provided technical personnel for analyzing the data gathered and rendered to the UAE Company, technical and consultancy services. But what is contended is that since rendering of the services relates to a mining or like project undertaken by ONGC which had contracted with the UAE Company for collection and analysis of seismic data, the exception in Explanation (2) to section 9(1)(vii) would apply, to take the consideration received by the applicant out of the definition. The argument on the side of the Revenue is that the exception would apply only in the case of a person who has under taken a mining or like project and the applicant has certainly not undertaken any mining or like project. Even the UAE Company, with which the applicant has a contract, has also not undertaken any mining or like project. In other words, what is contended is that the exception would apply to an applicant or assessee who has undertaken the mining project itself and not to its sub-contractor who has only undertaken some activities in connection with the mining project.

8. As I read the exception clause in Explanation (2) to section 9(1)(vii) in juxtaposition to Section 44BB(1) of the Act, it is clear that the expressions used in the exception clause in Explanation (2) and in section 44BB(1), significantly differ. Whereas in one it is a mining or like project undertaken by the recipient of the income in the other, it is only the providing of services or facilities in connection with the prospecting for or extraction or production of mineral oils by an assessee engaged in that business. The applicant, on its own showing, is engaged in the business of providing services or facilities in connection with the prospecting for oil but clearly the applicant cannot be said to have undertaken a mining or like project or the work of prospecting for extraction or production of mineral oil. I am, therefore, satisfied that the exception contained in Explanation (2) to section 9(1)(vii) of the Act is not attracted in the case of the applicant. “Mining or like project undertaken by the reci
pient” are words of significance and there is no warrant for whittling down the importance of those words especially understood in the context of the language used in section 44BB(1) of the Act. Since the consideration received by the applicant is for rendering technical or consultancy services, on question no. 1, it has to be ruled that the income derived by the applicant has to be construed to be in the nature of ‘fees for technical services’ in terms of section 9(1)(vii) of the Act.

9. Question no. 2 raised is whether the consideration received by the applicant has to be deemed to be ‘royalty’ under section 9(1)(vi) of the Act. There was no argument on this question by either side. On the other hand, the Revenue itself in its objection suggested that the consideration received would be fees for technical services to be dealt with as such. In this state of the record and the stand adopted by the parties. I do not think it prudent to give a ruling on this question. I leave open this question especially in the light of my ruling on question no. 1, that the income derived by the applicant is ‘fees for technical services’.

10. Question no. 3 for the ruling is whether the income derived by the applicant from the contract from UAE company is liable to be assessed under section 44BB(1) of the Act. It is the contention of the applicant that the services rendered by it are services ‘in connection with’ the prospecting for mineral oils and hence falls squarely under section 44BB(1) of the Act. The contention on the side of the Revenue is that if the services rendered are technical in nature, they have to be out of section 44BB(1) of the Act even if the technical services were in connection with prospecting or extraction of mineral oil.

11. Whatever ambiguity there might be in section 44BB(1) of the Act on this aspect, that stands clarified by the proviso to that sub-section. The proviso makes it clear that those cases where the provisions of sections 44, 44D, 44DA, Section 115A or section 293A of the Act apply for the purpose of computing the profits or gains or any other income referred to in those sections, they are out of section 44BB(1) of the Act. In other words, as far as technical services are concerned even when they are rendered in connection with mining activity, they would not be eligible to be assessed under section 44BB(1) of the Act if they come within sections 44D, 44DA or section 115A of the Act. As observed by Lord Watson in West Derby Union v. Metropolitan Life Assurance Society [1897] A.C. 647, “there may be and are many cases in which the terms of an Intelligible proviso may throw considerable light on the ambiguous import of the statutory words.” These observations were noticed by the Supreme Court in Hindustan Ideal Insurance Co. Ltd. v. Life Insurance Corporation of India 1963 (2) SCR 56 wherein the learned Judge said “There is no doubt that where the main provision is clear its effect cannot be cut down by the proviso. But where it is not clear, the proviso which cannot be presumed to be a surplusage can properly be looked into to ascertain the meaning and scope of the main provision”. Reading section 44BB(1) with the proviso, it seems to be clear that the income liable to be assessed under the specific sections mentioned in the proviso, are to be taken out of the ambit of section 44BB(1) of the Act. This supports the conclusion reached above.

12. The inquiry now is whether the income derived by the applicant from performing its contract with the UAE Company would be assessable to tax as „fees for technical services under section 44D, 44DA, or 115A of the Act. Admittedly, the income derived by the applicant is from a UAE company and not from the Government or an Indian concern. In other words, income derived by the applicant is from a non-resident company or foreign company. On the wording of these sections, the income cannot be brought within their purview, because they only speak of income by way of fees for technical services received from Government or an Indian concern. On this short ground, the contention of the Revenue that the income derived by the applicant is independently assessable under section 115A or 44DA of the Act, has to be rejected. Since income derived by the applicant, is from an activity in connection with the prospecting for mineral oils and from a foreign company, the applicant would be entitled to claim to be assessed under section 44BB(1) of the Act. The ruling, therefore, on question no. 3 is that the income derived by the applicant are to be computed in accordance with the provisions of section 44BB(1) of the Act.

13. Accordingly, the ruling is pronounced.

[Citation : 346 ITR 422]

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