High Court Of Uttarakhand
CIT vs. Enron Expat Services Inc.
Section 42, 44BB, 90(2), DTAA between India & USA, art. 7(1), DTAA between India & USA, art. 7 (3)
Asst. Year 1996-97, 2000-01, 2001-02, 2002-03
B.C. Kandpal, ACTG. C. J. & B.S. Verma, J.
IT Appeal No. 89 of 2007
11th September, 2009
Counsel Appeared :
Ajay Vohra & S.K. Posti, for the Appellant : Arvind Vashisth, for the Respondent
JUDGMENT
B.S. Verma, J. :
These appeals, preferred under s. 260A of the IT Act, 1961, are directed against the judgment and orders dt. 9th Feb., 2007 in ITA No. 4756/Del/2005 and 9th March, 2007 in ITA No. 2141/Del/2005 and the consolidated judgment and order dt. 5th Sept., 2008 in ITA Nos. 394/Del/2005, 380/Del/2005, 381/Del/2005, 382/Del/2005 respectively passed by the Tribunal, New Delhi.
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 Tribunal dt. 9th Feb., 2007 and 9th March, 2007 respectively as well as the order passed by the Commissioner of Income-tax (Appeals) [for short “the CIT(A)”] and to restore the order of the AO in each case.
Appeal Nos. 2 of 2009, 5 of 2009, 6 of 2009 and 7 of 2009, for the respective assessment years, have been preferred by the assessees with the prayer to allow the appeals and for setting aside the consolidated order passed by the Tribunal in ITA Nos. 380/Del/2005, 381/Del/2005, ITA No. 394/Del/2005 and 382/Del/2005, by which Appeal Nos. 380/Del/2005, 381/Del/2005 and 382/Del/2005 were partly allowed and Appeal No. 394/Del/2005 was dismissed.
Since the common issue in all these appeals relates to taxability of amounts received by the aforesaid assessees from the consortium between the Government of India, Oil and Natural Gas Commission Ltd. (ONGC), Reliance Industries Ltd. 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.
The brief facts giving rise to the appeals filed by the Revenue are that the assessee, a nonresident company, filed its return of income declaring nil income for the respective assessment years, which was processed under s. 143(1) of the IT Act, 1961 (hereinafter referred to as “the Act”). The assessee-non-resident company 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 & Gas India Ltd. for providing expatriate technicians for the 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 s. 142(1) of the Act, to show cause as to why the receipts be not assessed under s. 44BB of the Act. The assessee-company, in its reply, contended that the company has rendere, the service on cost-tocost basis to EOGIL in terms of the 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 assesseecompany is not taxable in India in view of art. 7(3) of the Double Taxation Avoidance Agreement (DTAA) with the USA.
In IT Appeal No. 89 of 2007 and IT Appeal No. 130 of 2007 filed by the Revenue/appellants, learned counsel for the appellants raised the following questions of law :
“(1) Whether the Tribunal was legally correct in upholding the decision of the CIT(A) 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 Export Services Inc. (EESI) was not a member of consortium/joint venture and it was only an affiliate of Enron Oil & Gas India Ltd. (EOGIL). Hence, the terms and condition of the production sharing contract were not applicable to the EESI at all ?
(2) Whether the Tribunal was legally correct in upholding the decision of the CIT(A) that principle of res judicata is not applicable to the income-tax proceedings when the AO had taken cognizance of the facts existing in the assessee’s own case in earlier assessment years whereas this Court while deciding the appeal of the Department in CIT vs. ONGC as agent of Foramer France in IT Appeal No. 239 of 2001 had also taken due cognizance of the preceding assessment year ?”
7. In IT Appeal Nos. 2 of 2009, 5 of 2009, 6 of 2009 and 7 of 2009 filed by the assessees, the following question of law was framed : “Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the income in question was taxable in India, without appreciating that in terms of art. 7(1) of the Indo-US Double Taxation Avoidance Agreement, only profits attributable to the PE of the appellant could be subjected to tax in India ?”
8. Sri Arvind Vashisth, learned counsel for the Revenue, has contended that the provisions of s. 42 of the Act have no application in the case of assessees before this Court for the reason that the said assessees are not members of the profit sharing contract. The Enron Expat Services Inc. is an affiliate company of Enron Oil & Gas India Ltd. (EOGIL) which as operator of the joint venture along with RIL and ONGC for the contract of development of Panna Mukta and Mid and South Tapti Oil Fields availed of the services of its affiliate Enron Export Services Inc. in the form of availing of the services of its employees. The AO has rightly held that the assessee-company has itself offered the gross contractual revenue at deemed profit rate of 10 per cent under s. 44BB for the asst. yr. 1997-98 and the income was assessed accordingly. The income for the asst. yr. 1998-99 was assessed under the provisions of s. 44BB especially because profit element is involved and gross revenues received by the assessee- company were offered to tax at deemed profit rate of 10 per cent in the first asst. yr. 1997-98. Learned counsel for the Revenue further contended that the Tribunal was not legally correct in holding that the principle of res judicata is not applicable to income-tax proceedings when the AO has taken cognizance.
9. Learned counsel for the Revenue has relied upon the following case law : (1) CIT vs. Halliburton Offshore Services Inc. (2007) 213 CTR (Uttarakhand) 547 : (2008) 300 ITR 265 (Uttarakhand); and (2) Sedco Forex International Inc. vs. CIT (2008) 214 CTR (Uttarakhand) 192 : (2008) 299 ITR 238 (Uttarakhand).
10. We have gone through the said case law. The said case law does not deal with the present controversy. These are applicable where admittedly the assessees were residents of a country with which India does not have DTAA and the services were not provided to the production sharing contract which was approved in terms of s. 42 of the Act. As regards the applicability of s. 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 the provisions of the relevant DTAA, the provisions of section do not come into play.
11. Sri Ajay Vohra and Sri S.K. Posti, learned counsel appearing on behalf of the assessee, contended that the assessee-company has rendered the services on 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 art. 7(3) of the DTAA with the 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 cl. 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 service’s basis without any element of profit. Charges, therefore, shall not exceed charges for comparable 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.”
12. It is not disputed that the Government of India, ONGC, Reliance Industries Ltd. and EOGIL entered into a contract dt. 22nd Dec., 1994, for exploration of oil with respect to contract area identified as Panna and Mukta fields. The PSC was laid before both Houses of Parliament and approved in terms of s. 42 of the IT Act, 1961.The said s. 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, 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 under s. 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.”
13. The taxability of the share of income of each member of the production sharing contract has to be determined in terms of s. 42 which overrides other provisions of the Act. In other words, s. 42 is a separate code in itself and the taxability of each member of the production sharing contract has, therefore, to be determined in terms of the provisions of the production sharing contract read with the said section, notwithstanding contrary provisions in the Act. Another Division Bench of this Court in the case of CIT vs. Enron Oil & Gas India Ltd. (2008) 218 CTR (Uttarakhand) 411 : (2008) 305 ITR 68 (Uttarakhand) has laid down the aforesaid proposition of law. The observations made by the Division Bench in its judgment at p. 74 are reproduced hereunder : “Sec. 42 of the IT 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 s. 42 of the aforesaid Act. It is clear from art. 1.6.1 of the accounting procedure, quoted above, set out in Appendix C to the production sharing contract (PSC) that expenditure incurred in foreign exchange by the co- venturer 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.”
14. The aforesaid view taken by the Division Bench of this Court has been affirmed by the Hon’ble Supreme Court in the case reported as CIT vs. Enron Oil & Gas India Ltd. (2008) 218 CTR (SC) 641 : (2008) 12 DTR (SC) 186 : (2008) 305 ITR 75 (SC). It is an admitted fact that the production sharing contract subject of consideration before this Court and the Hon’ble Supreme Court in the above referred to case is the same production sharing contract being considered in these appeals.
It has also been contended on behalf of the assessee that in terms of s. 3.1.4(b) of Appendix C of the production sharing contract (PSC), no profit can be charged by any affiliate company. The provisions of s. 3.1.4(b) of the production sharing contract are being reproduced hereunder : “3.1.4. Charges for services . . . (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 s. 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 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.”
17. The term “affiliate” is defined in art. 1.2 of the production sharing contract 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 per cent (50 per cent) 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 per cent (50 per cent) and the term ‘controlled’ shall have a corresponding meaning.”
18. 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 specifically s. 3.1.4(b), the assessees/entities are obligated to provide services to EOGIL, which is one of the members and operators 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.
19. 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 s. 90(2) of the Act. The provision of s. 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-s. (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.”
20. Sub-s. (2) of s. 90 of the Act clearly states that where there is a DTAA, the provisions of the Act can be applied only to the extent to 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 s. 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 s. 44BB of the Act, invoked by the AO, had no application, once the assessees were to be assessed under the provisions of the DTAA.
21. Article 7 of the DTAA deals with the taxation of business profits which reads as under [(1991) 187 ITR (St)
102], 109 : “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 PE 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 PE; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that PE; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that PE. (2) Subject to the provisions of para (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE 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 PE 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 PE is incapable of determination or the determination thereof presents exceptional difficulties, the profits, attributable to the PE 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. (3) In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE, 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 PE), whether incurred in the State in which the PE 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 PE 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 PE, likewise, no account shall be taken, in the determination of the profits of a PE for amounts charged (otherwise than towards reimbursement of actual expenses), by the PE, 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.” A perusal of para (1) of art. 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 PE in India. Para (3) of art. 7 provides that in determining the profits attributable to the 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 and 4757/Del/2005 dt. 9th Feb., 2007 require no interference.
The submission of the learned counsel for the Revenue that the matter is covered against the assessees by the decisions reported in CIT vs. Halliburton Offshore Services Inc. (supra) and Sedco Forex International Inc. vs. CIT (supra) is totally incorrect because of the fact, as held above, the present controversy did not arise for determination by this Court in these appeals.
The principle of res judicata shall not operate on legal issues. The Tri-bunal has held that no objection seems to have been taken by the IT authorities on the basis of estoppel. The Tribunal also referred to the judgment passed by the Delhi High Court in CIT vs. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303 (Del), in which the Delhi High Court has held that there is no estoppel in the IT 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 from it, it is incumbent on the IT 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 the 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 s. 44BB cannot operate as estoppel against it.
The learned Tribunal in its judgment has rightly held that there is no material to which the AO has drawn attention to show that the debit notes issued were not for reimbursement of the expenses but included something more as profit or income. Further, the affiliate companies of EOGIL are prohibited under cl. 3.1.4(b)(i) of the production sharing contract from charging the members of the consortium anything more than the actual cost of the services.
As has been discussed above, in terms of article 3.1.4.b of Appendix C of the production sharing contract the assessee cannot charge a profit from the joint venture as it is an affiliate of EOGIL. The production sharing contract has been passed by both the Houses of Parliament as required under s. 42(1) of the Act. The assessees have clearly substantiated the fact that there is no element of profit, therefore, in terms of art. 7 of the DTAA between India and the USA, the assessees cannot be taxed.
The contention raised by the learned counsel for the Revenue that the assessees had offered the receipts under s.
44BB in the respective year does not find favour, because the principle of res judicata is not to be applied in income-tax proceedings.
In view of the discussion made above the questions raised in these appeals are answered in favour of the assessees and against the Revenue. The finding recorded by the CIT(A) as well as by the Tribunal, that there is no element of profit, therefore, in terms of art. 7 of the DTAA between India and the USA, the assessees cannot be taxed, does not suffer from any illegality. The appeals filed by the Revenue have no force and the same are liable to be dismissed. The appeals filed by the assessees are liable to be allowed.
Accordingly, IT Appeal No. 89 of 2007 and IT Appeal No. 130 of 2007 filed by the Revenue are dismissed and IT Appeal Nos. 2 of 2009, 5 of 2009, 6 of 2009 and 7 of 2009 filed by assessees are allowed.
[Citation : 327 ITR 626]
