TII Instant Update - 2017-TII-INSTANT-ALL-498

CASE LAWS

2017-TII-38-SC-INTL

SEDCO FOREX INTERNATIONAL INC Vs CIT: SUPREME COURT OF INDIA (Dated: October 30, 2017)

Income tax - Sections 2(24) & (45), 5(2), 6, 9(1)(i) & 44BB(2) - CBDT Instruction No 1767 & Circular 495 of 1987

Keywords: Computation provision - charging sections - charter hire - DTAA - Deemed income - exploration of mineral oil - Indivisible - gross revenue - mobilisation charge - non-obstante clause - PE - Special provision - Territorial system - total income.

The assessees are non-resident within the meaning of Section 6 of the Act. The assessees entered into agreements with ONGC & Enron Oil and Gas India Ltd. The agreements provided for the scope of work along with separate consideration for the work undertaken. The assessees filed their return of income declaring income from charter higher of the rig. The same was offered to tax under Section 44BB of the Act. In the case of Sedco Forex International Inc., the assessee did not include the amount received as mobilisation charges to the gross revenue for the purpose of computation under Section 44BB of the Act. In the case of Transocean Offshore Inc., the assessee included 1% of the mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed profit basis on the ratio of the CBDT Instruction No. 1767 dated July 1, 1987.

The AO included the amounts received for mobilisation/demobilisation to the gross revenue to arrive at the “profits and gains” for the purpose of computing TAX under Section 44BB of the Act. The Commissioner of Income Tax (Appeals) confirmed the action of the AO. The ITAT in the case of Sedco Forex International Inc. dismissed the appeal of the assessee and the action of the AO was upheld insofar as the mobilisation charges were concerned. In the case of Transocean Offshore Inc., the ITAT upheld the view taken by the assessee and directed the AO to assess the profits on mobilisation charges at 1% of the amount received. This was done following the Circular of CBDT Instruction No. 1767 dated July 1, 1987 and decision of the third Member in the case of Saipem S.P.A. v. Deputy Commissioner of Income Tax1. The High Court held that the mobilisation charges reimbursed even for the services rendered outside India were taxable under Section 44BB of the Act as the same was not governed by the charging provisions of Sections 5 and 9 of the Act. Even on the issue of reimbursement in M/s. Sedco Forex International Drilling Inc. (Civil Appeal No. 4915 of 2010), the High Court followed its earlier judgments to hold that reimbursement of expenses incurred by the assessee was to be included in the gross receipts, and taxable under Section 44BB of the Act.

After hearing the parties, the Apex Court held that,

+ we feel that High Court may not be entirely correct in law in excluding the provisions of Sections 5 and 9 in those cases where the assessment is opted by the assessee under Section 44BB of the Act. Submissions of the counsels for the assessees are justified to the extent that Section 44BB of the Act is a special provision providing computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the Act which deal with charging section, total income and income of non-resident which arises or deem to arise in India cannot be sidetracked. These are the provisions which bring a particular income within the net of income tax. Therefore, it is imperative that a particular income is covered by the charging provisions contained in Section 5 of the Act;

Whether, within the territorial system of taxation, only such income is to be taxed which is attributable to operations within the pertinent territory - YES: SC

+ Indian Income Tax Act, admittedly, follows a territorial system of taxation. As per this system only that income of a non-resident is taxable in India which is attributable to operations within the Indian Territory. Therefore, in the first instance it is to be seen whether a particular income arises or accrues or deem to arise or accrue within India. In order to seek this answer, the principles contained in Section 9 have to be applied only when it becomes an income taxable in India as per Section 9, in case of non-resident, the question of computation of the said income would arise. To recapitulate the scheme of the Act in this behalf, it may be stated that Section 4 is the charging section for levying a tax on the income of any person under the Act and provides that income-tax shall be levied at the rates provided by the Finance Act on the ‘total income’ of the previous year of every person. The expression ‘total income’ has been defined in Section 2(45) of the Act to mean the total amount of income referred to in Section 5 computed in the manner laid down under the Act;

+ the scope of the total income of any person, which could be subjected to tax under the provisions of the Act, is defined under Section 5 of the Act and dependent upon the residential status of the persons. Section 5(1) provides the scope of ‘total income’ in the case of residents, whereas Section 5(2) provides the scope of ‘total income’ in the case of non-residents. As per Section 5(2) of the Act, subject to the provisions of this Act, the ‘total income’ of any previous year of non-resident includes:

- Income which is received or deemed to be received in India in such year or on behalf of such person; or

- Income which ‘accrues or arises’ or is deemed to accrue or arise to him in India during such year;

+ section 9 enumerates the income which is deemed to accrue or arise in India. There are two broad categories of taxability of income provided under this Section, i.e., Business Income and income from interest or royalty or fees for technical services (FTS);

+ section 9(1)(i) provides that income is to be deemed to have accrued or arising in India if the income is accruing directly or indirectly through any business connection in India or from any property in India or from any asset or source of income in India or any capital asset situated in India (referred as business income);

+ Explanation 1(a) to Section 9(1)(i) of the Act provides an exclusion in the case of operations which are not carried out in India. The explanation provides that the income of the business deemed under this clause to accrue or arise in India shall be only that part of the income as is reasonably attributable to the operations carried out in India. Thus, business income earned by non-resident is chargeable to tax in India only to the extent reasonably attributable to the operations carried out in India;

Whether if income is to be computed u/s 44BB(2), a special provision in the I-T Act, the provisions of Ss 5 & 9 are to be given a go-by - NO: SC

+ it is, however, pertinent to point out that Section 44BB(2) makes certain receipts as “deemed income” for the purposes of taxation in the said provision. Therefore, aid of this provision is to be necessarily taken to determine whether a particular amount will be “income” within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act provides for special provision for computing profits and gains. However, that would not mean that if the income is to be computed under this provision, we have to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High Court may not be correct;

+ having corrected the position in law, by emphasising that Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases where assessment is done under Section 44BB of the Act, we are of the opinion that the argument of the assessees that Section 44BB is only a computation provision, is also not entirely justified;

+ assessees may appear to be correct in their contentions that Section 44BB falls in Chapter IV of the Act. Insofar as computation of income from ‘Profits or Gains of Business or Profession’ is concerned, it has to be computed as per the provisions of Sections 28 to 43D(2). However, certain provisions are made for providing special mechanism for computing the income on presumptive basis in case of non-resident and it includes Section 44BB as well;

+ having put the law in perspective, we need to examine as to whether mobilisation charges received by the assessees can be treated as ‘income’ under Section 5 of the Act and would fall within the four corners of Section 9, namely, whether it can be attributed as having arisen or deemed to arise in India. Argument of the counsels appearing for the assessees is that the amount was received by way of reimbursement of expenses for the operation carried outside India and the payment was also received outside India. It is on this premise, entire edifice is built to argue that it is not an “income” and, in any case, not taxable in India at the hands of the assessees which are foreign entities;

+ the Agreement provides the Shallow Dash Water Jack Up Rig against which payment was made to the assessees. The Clause states that the assessees shall be paid ‘mobilisation fee’ for the mobilisation of drilling unit from its present location in Portugal to the well location designated by ONGC, offshore Mumbai, India. Fixed amount is agreed to be paid which is mentioned in the said Clause. Such mobilisation fee was payable to the assessees after the jacking up of the drilling at the designated location and ready to spud the well. After the operation, assessees were required to raise invoice and ONGC was supposed to make the payment within 30 days of the receipt of this invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 is concerned, it related to mobilisation of drilling unit. Here again, ‘mobilisation fee’ was payable for the mobilisation of the drilling unit from the place of its origin to the port of entry (Kandla Port, Mumbai). What follows from it is that a fixed amount of mobilisation fee was payable under such contracts as “compensation”. Contracts specifically describe the aforesaid amounts as ‘fee’. In this hue, we have to consider as to whether it would be treated as “income” under Section 5 of the Act and can be attributed as income earned in India as per Section 9 of the Act. For this purpose, Section 44BB(2) has to be invoked;

+ section 44BB starts with non-obstante clause, and the formula contained therein for computation of income is to be applied irrespective of the provisions of Sections 28 to 41 and Sections 43 and 43A of the Act. It is not in dispute that assessees were assessed under the said provision which is applicable in the instant case. For assessment under this provision, a sum equal to 10% of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘profits and gains of the business or profession’;

+ from the bare reading of the clauses, amount paid under the aforesaid contracts as mobilisation fee on account of provision of services and facilities in connection with the extraction etc. of mineral oil in India and against the supply of plant and machinery on hire used for such extraction, clause (a) stands attracted. Thus, this provision contained in Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. Such amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the Act as well;

Whether the fixed sum payable towards mobilisation fee whether in India or outside India is covered by the fiction created u/s 44BB, it also becomes 'income' under Ss 5 & 9 of the Act - YES: SC

+ the Tribunal has rightly commented that Section 44BB of the Act is a special provision for computing profits and gains in connection with the business of exploration of mineral oils. Its purpose was explained by the Department vide its Circular No. 495 dated September 22, 1987, namely, to simplify the computation of taxable income as number of complications were involved for those engaged in the business of providing services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral etc. Instead of going into the nitigrities of such computation as per the normal provisions contained in Sections 28 to 41 and Sections 43 and 43A of the Act, the Legislature has simplified the procedure by providing that tax shall be paid @10% of the ‘aggregate of the amounts specified in sub-section (2)’ and those amounts are ‘deemed to be the profits and gains of such business chargeable to tax...’. It is a matter of record that when income is computed under the head ‘profits and gains of business or profession’, rate of tax payable on the said income is much higher. However, the Legislature provided a simple formula, namely, treating the amounts paid or payable (whether in or out of India) and amount received or deemed to be received in India as mentioned in sub-section (2) of Section 44BB as the deemed profits and gains. Thereafter, on such deemed profits and gains (treating the same as income), a concessional flat rate of 10% is charged to tax. In these circumstances, the AO is supposed to apply the provisions of Section 44BB of the Act, in order to find out as to whether a particular amount is deemed income or not. When it is found that the amount paid or payable (whether in or out of India), or amount received or deemed to be received in India is covered by sub-section (2) of Section 44BB of the Act, by fiction created under Section 44BB of the Act, it becomes ‘income’ under Sections 5 and 9 of the Act as well;

Whether when a fixed sum is paid to the assessee as fixed fee and the agreement does not mention that the same is for reimbursement of expenses, such income falls within the four walls of the provisions of Sec 44BB - YES: SC

+ in the instant case, the amount which is paid to the assessees is towards mobilisation fee. It does not mention that the same is for reimbursement of expenses. In fact, it is a fixed amount paid which may be less or more than the expenses incurred. Incurring of expenses, therefore, would be immaterial. It is also to be borne in mind that the contract in question was indivisible. Having regard to these facts in the present case as per which the case of the assessees get covered under the said provisions, we do not find any merit in any of the contentions raised by the assessees. Therefore, the ultimate conclusion drawn by the AO, which is upheld by all other Authorities is correct, though some of the observations of the High Court may not be entirely correct which have been straightened by us in the above discussion. For our aforesaid reasons, we uphold the conclusion. Resultantly, all the appeals of the assessees are dismissed.

Assessees' appeals dismissed