FINANCE Act, 1976 introduced clauses (v), (vi) and (vii) in section 9(1) of the Income-tax Act extending the rule of deemed accrual in India to income from interest, royalty and fees for technical services on the basis of source principle. The Memorandum explaining the provisions of Finance Bill stated that “The existing provisions in the Income-tax Act [section 9(1)] which provide that certain incomes will be deemed to accrue or arise in India are couched in general language. The absence of a clear-cut source rule sometimes creates uncertainty about the chargeability of certain types of incomes in the case of non-residents. In order to avoid any doubt or dispute in regard to accrual of income by way of interest, royalty and fees for technical services in the case of non-residents, it is proposed to make certain provisions in the Income-tax Act clearly specifying the circumstances in which such income shall be deemed to accrue or arise in India….. The terms “royalty” and “fees for technical services” have been defined for the purposes of the section.” (102 ITR st 188-89). The provisions were made prospective by making them not applicable to agreements made prior to 31.3.1976. Sections 44D and 115A were also introduced by the above Finance Act.

The Memorandum stated that “The determination of the taxable income on net basis in the case of non-resident taxpayers, however, creates certain practical difficulties. The non-resident tax payer is not always sure of the type and extent of expenses which would be admissible under our tax laws and the nature of evidence which he will be called upon to produce in support of his claim for expenses. Income-tax Officers are also handicapped as, in the absence of account books of the foreign taxpayer which are kept outside India, they are not in a position to carry out any worthwhile scrutiny of these claims…….In view of the practical difficulties experienced in determining the net income in such cases, it is proposed to provide that ... income by way of royalties … and fees for technical services received by foreign companies under approved agreements will be charged to tax at the flat rate of 40 per cent of the gross amount of such income.” (page -186-87). However, the Explanatory Circular (CBDT Circular No. 202 dated 5.7.1976) on the Finance Act clarified that “Any consideration received for any construction, assembly, mining or like project undertaken by the recipient has been excluded from the definition of fees for technical services on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly, it will not be fair to tax such consideration in the hands of a foreign company on gross basis or to restrict the expenditure incurred for earning the same to 20 per cent of the gross amount as provided in section 44D. Consideration for any construction, assembly, mining or like project will, therefore, be chargeable to tax on net basis.”

Section 44BB was introduced by Finance Act, 1987, with retrospective effect from 1.4.1983. Memorandum explaining the provisions (165 ITR st 161-62) stated that “The computation of the taxable income of a taxpayer engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire, used or to be used in the exploration for, and exploitation of, mineral oils involves a number of complications. As a measure of simplification, the Bill seeks to insert a new section 44BB in the Income-tax Act providing for determination of income of such tax payers at ten per cent of the aggregate of certain amounts. The amounts in respect of which the provisions will apply would be the amounts paid or payable to the tax payer or to any person on his behalf whether in or out of India, on account of provision of such services or facilities or supplying plant and machinery for the aforesaid purposes…… The aforesaid amendment will not, however, apply to any income to which the provisions of sections 42, 44D, 115A or 293A of the Income-tax Act apply.” It is not understandable prima facie as to why an exception was carved out of the provision in respect of technical services envisaged in sections 42, 44D,115A and 293A, because ‘services and facilities in connection with …. prospecting for, or extraction or production of, mineral oils exploration for and exploration of mineral oils' are predominantly technical in nature. If technical services are excluded from the ambit of the provision of section 44BB, nothing much will remain in the truncated provision. The only mundane reason, which one can think of, is that at the relevant time fees for technical services was taxed at the rate of 30 per cent on gross basis, while section 44D proposed a tax rate of 10 per cent only.

In 1990, CBDT had sought opinion of the Attorney General of India in a case where ONGC had entered into a contract with a foreign company for provision of services of expatriate supervisory staff and personnel with expertise and experience in operation and management of an oil rig, and ONGC was utilizing the services of these personnel for manning, assisting in operation and management of off-shore oil and gas exploration, whether such services constitute technical services as defined in Explanation 2 to section 9(1)(vii) and whether the consideration for such services should be assessed under section 44D read with section 115A or under section 44BB of the Act. Attorney General was of the view that the primary object of the contract or its pith and substance was for off-shore drilling and exploration of oil and gas. The operations carried on by the contractor and its personnel in terms of the contract mainly relate to drilling, exploration etc of oil and natural gas. Petroleum and natural gas are mineral oils and as such minerals and oil drilling and oil extraction will fall under ‘mining projects'. Even otherwise they will be covered by ‘like projects'. He was of the view that since the pith and substance of the contract, namely, drilling, exploration, etc. of oil and natural gas, falls within the ambit of “mining of like project”, a matter which is excluded from the definition of “fees for technical services” by the latter part of Explanation 2 to section 9(1)(vii), the fact that a part of the contract involves payments which fall within the earlier part of the Explanation does not detract from the position that the contract is one relating to “mining or like project”. Accordingly, payments made under the said contract are outside the purview of the definition of “fees for technical services”. CBDT accordingly issued an Instruction No. 1862 dated 22.10.1990 to state that prospecting for, or extraction or production of, mineral oil are covered under “mining or like project” occurring in Explanation 2 and it would include rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. Accordingly consideration for such services will be assessable under section 44BB and not sections 44D and 115A.

The Attorney General of India was right in his opinion that a project of prospecting for or extraction or production of mineral oil will fall under the phrase “mining or like project” occurring in Explanation 2 to section 9(1)(vii). But he was most probably not correct in coming to the view that any technical service rendered in connection with mining or like project is excluded from the definition of technical service. The exclusion in the definition of technical service is in respect of “any construction, assembly, mining or like project undertaken by the recipient”. The recipient should undertake to carry out the project himself and not merely render any technical service in connection with the project. In fact when he carries out the project himself, he utilizes his own technical expertise in carrying out the project, he does not merely provide technical advice or ancillary technical service to someone else, who is carrying out the project. In the former case, the whole receipt for carrying out the project is in the nature of business receipt, while in the latter he receives consideration for technical services provided to another who is carrying out the project.

The above issue was carried before various benches of the ITAT by the assessee and also by the Tax Department. ITAT benches had mainly relied on the CBDT Instruction and the opinion expressed by Attorney General to hold that exploration and extraction of mineral oil is a ‘mining or like project' and any technical services rendered in connection with such projects fall outside the scope of technical services as defined in Explanation 2 and will fall under section 44BB.

Finance Bill, 2010 has, by way of rationalization, sought to introduce the term “section 44DA'' in the proviso to section 44BB (1) with effect from 1.4.2011(section 44DA was introduced from 1.4.2003). However, in the Memorandum explaining the provisions of the Finance Bill, the Department sought an opportunity to advance the correct interpretation of section 44BB, which was buried under the Attorney General's opinion, CBDT Circular and ITAT decisions. It was, however, not strictly necessary to do so, to explain the amendment. It was stated that “Combined effect of the provisions of section 44BB, 44DA and 115A is that if the income of a non-resident is in the nature of fees for technical services, it shall be taxable under the provisions of either section 44DA or section 115A irrespective of the business to which it relates. Section 44BB applies only in a case where consideration is for services and other facilities relating to exploration activity which are not in the nature of technical services. However, owing to judicial pronouncements, doubts have been raised regarding the scope of section 44BB vis-à-vis section 44DA as to whether fee for technical services relating to the exploration sector would also be covered under the presumptive taxation provisions of section 44BB. In order to remove doubts and clarify the distinct scheme of taxability of income by way of fee for technical services, it is proposed to amend the proviso to section 44BB so as to exclude the applicability of section 44BB to the income which is covered under section 44DA.”

An opinion, expressed in the Memorandum explaining the proposed amendment, regarding an already existing legislative provision cannot nullify the pronounced judicial decisions on the interpretation of the legislative provision. A suitable legislative amendment only can, if at all, nullify a judicial decision. So the proposed amendment in Finance Bill, 2010 read with the memorandum explaining the proposed provisions is of no consequence in interpretation of the provisions of section 44BB, rather the CBDT Instruction No. 1862 and the various judicial decisions should hold the field.

As assumed earlier, most probably the Legislature in 1987 had sought to maintain the distinction between technical services as defined in section 9(1)(vii) and ‘services and facilities in connection with exploration for and exploration of mineral oils' because of the difference in tax rates under sections 44BB and 115A. The gross receipts were to be taxed at the rate of 10 per cent under section 44BB, while fees for technical services were to be taxed on gross basis at the rate of 30 per cent. From 1.6.2005, the rates of tax under section 44BB and 115A are the same, i.e., 10 per cent. Presently there seems to be no reason for such overlap between sections 44BB and 115A. Under both the provisions services can be rendered in or out of India so long as the services are rendered in connection with any business of mineral oil exploration etc in India. In any case section 115A can always apply if section 44BB is found to be not applicable. There seems to be a strong case for removal of the proviso to sub-section (1) of section 44BB in the present scenario.