D)“Whether, Appellate Tribunal Is Justified In Law In Placing Reliance In Cases Of Cit v. The Facts, Giving Rise To This Tax Appeal, Are As Under

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/TAX APPEAL NO. 771 of 2008 ========================================================== THE DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) VersusNIKO RESOURCES LTD. ==========================================================Appearance:MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1MR TANVISH BHATT, LD.ADV. For M/S WADIAGHANDY & CO(5679) for the Opponent(s) No. 1========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALAandHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 13/01/2020 ORAL ORDER (PER : HONOURABLE MR.JUSTICE BHARGAV D. KARIA) 1.This tax appeal is at the instance of Revenue under Section 260-A of the Income-Tax Act, 1961 (hereinafter referred to as the ‘Act’)and is directed against the order dated 19.10.2004, passed by the Income-Tax Appellate Tribunal, “A” Bench, Ahmedabad in ITA No.2757/Ahd/2003. 2.This Court, by order dated 23[rd] March, 2009, admitted the appeal and has framed the following substantial questions of law: “(A) “Whether on the facts and circumstances of the case, Appellate Tribunal is justified in law in holding that the assessee’s case is covered u/s 44BB and not u/s 44D r.w.s.115A of I.T. Act, 1961 ?” (B) “Whether on the facts and circumstances of the case, Appellate Tribunal is justified in law in holding that the Indian permanent establishment of company cannot be classified as “Indian Concern” in context of sec.44D r.w.s.115A of I.T. Act, 1961 as the company is incorporated Canada ?” (C)“Whether meaning of an “Indian concern” in section 44D r.w.s. 115 A should be taken as a business carried out in India which may include a business carried on in India even by a nonresident?” (D)“Whether, Appellate Tribunal is justified in law in placing reliance in cases of CIT Vs Craigmore Land and Produce Co. Ltd. [110 ITR 730 MADRAS HC] and CIT vs Dorr Oliver (I) Ltd. [209 ITR 691 Bombay HC], which are related Super Profit tax Act1963 and in no way related to special provision for computing income by way of royalties etc. in the case of foreign companies u/s 44D of I.T. Act1961 ?” 3.The facts, giving rise to this Tax Appeal, are as under: 3.1. The respondent-Niko Resources Limited, a company incorporated in Canada entered into joint venture for business of joint exploration and development of oil and gas field in five fields in Gujarat with Gujarat State Petrochemical Corporation Limited (for short “GSPCL”). 3.2. The respondent-Niko Resources Limited entered into a contract with HUB International Limited for providing supervising staff for drilling operation in the oil field in the contract area in India. 3.3. The respondent submitted an application, under Section 195(2) of the Act, for deduction of the tax at source (for short “TDS”) from the payment to be made to HUB International Limited at the rate of 4.2% on the ground that the income received by the HUB International Limited would be assessed under Section 44BB of the Act which provides for special provision for computing profits and gains in connection with the business of exploration, etc. of mineral oils. 3.4. The Assessing Officer, while disposing of the application filed by the respondent under Section 195(2) of the Act, held that as amount payable by the respondent to HUB International Limited would be “Fee for Technical Services”, the respondent was required to deduct TDS as per the provisions of Section 44D read with Section 115A of the Act, at the rate of 21% including surcharge. 3.4. The Assessing Officer, while disposing of the application filed by the respondent under Section 195(2) of the Act, held that as amount payable by the respondent to HUB International Limited would be “Fee for Technical Services”, the respondent was required to deduct TDS as per the provisions of Section 44D read with Section 115A of the Act, at the rate of 21% including surcharge. 3.5. The Assessing Officer, while arriving at the aforesaid conclusion, held that as the HUB International Limited has provided drilling supervisor who would supervise the drilling activities and drilling related staffs etc., the services provided to the respondent by HUB International Limited are technical in nature and payment made for the same would be covered by the definition of “fees for technical service” as per Explanation (a) to Section 9(1)(vii) of the Act. 3.6. The Assessing Officer further held that the respondent is an “Indian concern” as the payment has been made jointly by the respondent and GSPCL to HUB as per the joint operating agreement between them. The respondent was therefore, directed to deduct the TDS at the rate of 21% and not at the rate of 4.2%. 3.7. The respondent being aggrieved by the order passed by the Assessing Officer, preferred an appeal before the CIT (Appeal), who allowed the appeal holding that the provisions of Section 44D of the Act would not be applicable to the facts of the case and the income received by the HUB International Limited, would be chargeable to tax under Section 44BB of the Act and therefore, the respondent would be liable to deduct TDS at the rate of 4.2% and not at the rate of 21%. The CIT (Appeal) has observed as under: “I have considered the facts of the case.ItisseenthatHUB InternationalLtd.Canada,in pursuance of an agreement signed between appellant and HUB provided the technical services including rendering of service of technical or other personnel. Further, fees for technical services were paid directly by appellant to HUB International. For applicability of section 44D, it is necessary that fees for technical services should be received by the foreign company from an Indian concern in pursuance of an agreement entered into with the Indian concern. Ina the appellant’s case agreement is clearly signed between HUB and appellant which C/TAXAP/771/2008 ORDER is not an Indian concern and fees are also directly paid by appellant to HUB. As appellant is not an Indian Company section 44 D will not be applicable. The Assessing Officer’s argument that the appellant has been authorized on behalf of joint venture to enter into an agreement with the HUB, and that the expenses are jointly shared by the appellant and GSPCL, and therefore section 44 D will be applicable, is not convincing and is over-stretched. Further, the ITAT Delhi Bench decision relied upon by the appellant is clearly applicable in this case, whereas the decision of advance ruling authority relied upon by the Assessing Officer is not applicable. Therefore, I am of the view that appellant’s case is covered under section 44 BB and not under section 44 D r.w.s. 9(i)(vii) and 115 A.TheAssessingOfficer is, therefore,directedtoapply withholding tax @ 4.2.% and not 21% for the purpose of deducting tax at the source. ” 3.8. Being aggrieved and dissatisfied, the Revenue preferred an appeal before the Appellate Tribunal. The Appellate Tribunal, by the impugned order, dismissed the appeal holding that the respondent cannot be considered as an Indian concern and for fees for technical services paid to HUB International Limited, the provisions of Section 44BB of the Act would be applicable. The Tribunal, after considering the provisions of Section 44BB and Section 44D, has come to the conclusion that only because the assessee has been authorized on behalf of the joint venture agreement and that expenditure were jointly shared by the assessee and GSPCL, Section 44D of the Act cannot be made applicable. The Tribunal in paragraph No.7 of the impugned order has observed as under: “7.On perusal of the provision of section 44 D, it is evident that it is a special provision for computing income by way of royalty in the case of a foreign company and it provides that the deduction admissible u/s. 28 to 44 D in computing the income by way of royalty or fees for technical services received from Govt. or an Indian Company in pursuance of income by way of royalty or fees for technical services received from Govt. or an Indian concern in pursuance of an agreement made by the foreign company with Govt. or with the Indian concern before 1[st] day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount and in other cases, no deduction is to be allowed if the agreement is after 31.03.1976. Admittedly, the assessee has not received any income from the Govt. or from any Indian concern. In the present case, HUB International Ltd. is a Canadian concern and had an agreement with the assessee, a company in corporation in Canada. The fees for technical services are paid directly by the assessee to HUB International. Apparently, therefore, the provisions of section 44 D would not be applicable. The assessee’s case would be covered by the provisions of section 44 BB, which provides for special provision for computing profits and gains in connection with the business of exploration, etc. of mineral. As per this section, the non-resident company being a non-resident engaged in the business of providing services, or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The assesseehasprovideddrilling services to HUB International in the natureofprovisionfor technical/supervisorystafffor exploration and development of oil and gas in India. The observations of the Assessing Officer that the assessee has been authorized on behalf of joint venture into an agreement and that expenditure were jointly shared by the assessee and GSPL and, therefore, section 44 D is applicable, is not correct. In view of the decision of the Madras High Court in the case of CIT Vs Craigmore Land & Produce Co. Ltd., 110 ITR 730, and the decision of the Bombay High Court in the case of CIT Vs Dorr Oliver (I) Ltd., 209 ITR 691, which clearly supports the claim of the assessee that the assessee company cannot be classified as an Indian concern. In these facts and circumstances, we do not find any reason to interfere with the order of the CIT(A). Accordingly, we uphold his order.” expenditure were jointly shared by the assessee and GSPL and, therefore, section 44 D is applicable, is not correct. In view of the decision of the Madras High Court in the case of CIT Vs Craigmore Land & Produce Co. Ltd., 110 ITR 730, and the decision of the Bombay High Court in the case of CIT Vs Dorr Oliver (I) Ltd., 209 ITR 691, which clearly supports the claim of the assessee that the assessee company cannot be classified as an Indian concern. In these facts and circumstances, we do not find any reason to interfere with the order of the CIT(A). Accordingly, we uphold his order.” 4. Similar issue was considered by the Supreme Court in case of Oil & Natural Gas Corporation Limited V/s Commissioner of Income Tax & Another in Civil Appeal No. 731 of 2007 and other allied matters decided on 1[st ]July,2015. The Supreme Court was considering the issue as to whether the amount paid by ONGC to the non-resident/foreign companies for providing various servicesinconnectionwithprospecting /extraction /production of mineral oil would be chargeable to tax under section 44D read with Explanation to section 9(i)(vii) of the Act or under section 44BB of the Act. The Supreme Court has held as under: “11.It is also urged on behalf of the appellantsthatthe instruction/Circular dated 22.10.1990 issued by the CBDT was binding on the primary authority on the ratio of the decision of this Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Others[1]. It has been further pointed on behalf of the appellants that even under the provisions of Section 3D of the Oil Fields (Regulation and Development) C/TAXAP/771/2008 ORDER Act1948 a mining lease means a lease granted for the purposes of searching for, winning, working, getting, making merchandisable, carrying away or disposing of mineral oils or for the purpose connected therewith and such a lease includes an exploring or prospecting lease. Reference has also been made to the Petroleum and Natural Gas Rules, 1959 framed under Section5of the aforesaid Act. Under Rule 4 of the said Rules no person can prospect for petroleum except pursuant to a Petroleum Exploration License (PEL) granted under the Rules and no person can mine petroleum except in pursuance of a Petroleum Mining License (PML) granted under the Rules. It is pointed out that under Rule 7 of the Rules of 1959 a petroleum mining license (PML) entitles the licensee to carry out construction and maintenance in and on such land, works, buildings, plants, waterways, roads, pipelines etc. as may be necessary for full enjoyment of the PML. On the said basis it is argued that rendering any service in connection with prospecting and extraction is an integral part of mining and that the expression “mining” in the Explanation 2 to Section 9(1)of the Income Tax Act, in the absence of any definition under theIncome Tax Act, has to be understood as per the provisions of the Oil Fields (Regulation and Development) Act, 1948 read with the Petroleum and Natural Gas Rules, 1959. 12.Opposingthecontentions advanced on behalf of the appellants, Shri Gurukrishna Kumar, learned senior counsel for the Revenue has urged that the opinion of the Attorney General relied upon and the CBDT Circular has no relevance to the present case inasmuch as the agreements between ONGC and the non-resident companies made it abundantly clear that what is paid to the non-resident company are fees for technical services rendered. Though such services may have some connection with the prospecting, extraction or production of mineral oil, the primary service rendered by C/TAXAP/771/2008 ORDER 12.Opposingthecontentions advanced on behalf of the appellants, Shri Gurukrishna Kumar, learned senior counsel for the Revenue has urged that the opinion of the Attorney General relied upon and the CBDT Circular has no relevance to the present case inasmuch as the agreements between ONGC and the non-resident companies made it abundantly clear that what is paid to the non-resident company are fees for technical services rendered. Though such services may have some connection with the prospecting, extraction or production of mineral oil, the primary service rendered by C/TAXAP/771/2008 ORDER the non-resident companies on the basis of the agreements is not for prospecting, extraction or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned counsel for the revenue has even suggested that if it is held that the High Court ought to have examined each agreement or contract to find out its real purpose and intent the revenue would have no objection if the matters are remanded for a complete exercise to be made on the above basis. 13.The Income Tax Actdoes not define the expressions “mines” or “minerals”. The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development andRegulation) Act1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7[th]Schedule to the Constitutiontounderstandthe exclusion of mineral oils from the definition of minerals in Section3(a)of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section3(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 7[th] 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 relatingtoprospectingand explorationofmineraloils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly C/TAXAP/771/2008 ORDER C/TAXAP/771/2008 ORDER amount to a mining activity or a mining operation. Viewed thus, it is theproximityoftheworks 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 44BBor Section 44Dof 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 44BBand notSection 44Dof 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. ………..Details of contracts……. 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 agreementisforprospecting, C/TAXAP/771/2008 ORDER extraction or production of mineral oils though there may be certain ancillary works contemplated there under. 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 44BBand not Section 44Dof the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal.” 5. In view of the aforesaid legal proposition, in the facts of the present case, payment made by respondent to HUB International for providing supervising drilling operations in oil fields, may be “Fees for technical services” but the dominant purpose of payment of fees for technical services was for exploration and development of Oil and Gas in India. 6. Therefore, there is no infirmity in the impugned order of the Tribunal, holding that the provisions of Section 44D of the Act is not applicable in the facts of the present case and from the payment made to HUB International Limited, respondent would be liable to deduct TDS at the rate of 4.2%, under the provisions of Section 44BB of the Act. 7. At this stage, the learned advocate Mr. Varun Patel submitted that Question (B) with regard to status of the respondent as to whether it may be considered as “Indian Concern” in context of section 44D of the Act may not be answered and be decided in appropriate case. 6. Therefore, there is no infirmity in the impugned order of the Tribunal, holding that the provisions of Section 44D of the Act is not applicable in the facts of the present case and from the payment made to HUB International Limited, respondent would be liable to deduct TDS at the rate of 4.2%, under the provisions of Section 44BB of the Act. 7. At this stage, the learned advocate Mr. Varun Patel submitted that Question (B) with regard to status of the respondent as to whether it may be considered as “Indian Concern” in context of section 44D of the Act may not be answered and be decided in appropriate case. 8. In view of aforesaid and concurrent finding of facts by the CIT (Appeal) and the Appellate Tribunal that the amount paid by the respondent to the HUB International Limited would be covered by Section 44BB and not under section 44D r.w.s. 115A of the Act, Question (A) is answered in favour of assessee and against tribunal and the Questions (B), (C) and (D), framed in this Tax Appeal are not answered in view of answer to Question (A). Accordingly,the appeal stands dismissed. No order as to costs. (J. B. PARDIWALA, J) PALAK (BHARGAV D. KARIA, J)