The Supreme Court judgment in the ONGC case is a landmark tax litigation win for non-resident oil and gas service providers
“Victory is sweetest when you’ve known defeat,” goes a quote by Michael Forbes, the American entrepreneur and publisher of Forbes Magazine. The non-resident oil and gas service providers operating in India may share this sentiment, because they had been denied their claim for availing the deemed income regime of taxation prescribed under section 44BB of the Income-tax Act, 1961, by lower tax authorities, before emerging triumphant in their appeal on this issue before the Supreme Court.
The deemed income regime under section 44BB of the Act was introduced with the intention of eliminating the difficulties involved in computing the income of the non-resident oil and gas service providers.
Under this section, 10% of the gross receipts of a non-resident from provision of services in connection with or hire of plant and machinery for use or to be used in prospecting, extraction or production of mineral oil in India, is deemed to be its taxable income. The deemed income regime under section 44BB excludes fees for technical services (FTS)/royalties from its purview.
However, the annals of Indian income tax contain many instances of beneficial provisions being denied by tax authorities on account of stricter interpretation of such provisions. In the case of the non-resident oil and gas service providers, tax authorities have denied the benefits of section 44BB on many grounds, one of which is that the services rendered by the non-resident service providers are technical in nature and consequently the income from such services is taxable as FTS, which is excluded from the purview of section 44BB.
The stand adopted by tax authorities begets a question: Whether the non-resident oil and gas service providers can avail the deemed income regime under section 44BB at all since most services rendered by these providers pertain to complex oil and gas operations and thus are, intrinsically, technical in nature?
Recently, the Supreme Court examined this issue in a batch of appeals filed by ONGC. The Indian oil behemoth acted as a representative taxpayer of the non-resident oil and gas service providers with whom it had entered into separate contracts for rendering of various services (drilling, seismic surveys, inspection, testing, training, supply and installation of software, data analysis, etc) in connection with prospecting, extraction or production of mineral oil in India.
The appeals involved a common issue as to whether the receipts earned by the non-resident oil and gas service providers under contracts with ONGC for rendering these services were taxable under section 44BB or as FTS under section 44D of the Act (which deals with the taxation of royalties/FTS in respect of contracts entered into with the government or Indian concern before April 1, 2003)?
The Supreme Court, after analysing the relevant provisions of the Mines Act, 1952, the Oil Fields (Regulation and Development) Act, an instruction dated October 22, 1990, issued by the Central Board of Direct Taxes, and the contracts entered into by the non-resident oil and gas service providers, held that the receipts earned by them were taxable under section 44BB on the following grounds:
* The proximity of the work contemplated by the non-residents with the mining activity or mining operations would be crucial in determining if the payments made to the non-residents are to be assessed under section 44BB or section 44D of the Act.
* The pith and substance of the contract would be the determinative test for the applicability of section 44BB/44D of the Act.
* The pith and substance of each of the contracts under appeal suggests that the services thereunder were inextricably connected with prospecting, extraction or production of mineral oil. The Supreme Court also noted that the dominant purpose of each of the contracts is prospecting, extraction or production of mineral oil, although there may be certain ancillary work contemplated under aforesaid contracts.
This decision represents the light at the end of a very dark tunnel of litigation faced by the non-resident service providers to the Indian oil and gas industry. However, one may bear in mind that this decision was rendered in the context of section 44D of the Act which dealt with taxation of FTS in respect of contracts entered into with the government of India or Indian concern prior to April 1, 2003. It remains to be seen whether the principles enunciated by the Supreme Court apply in the context of section 44DA which succeeded section 44D and which specifically excludes the application of section 44BB to the income covered within its ambit.
Shailesh Monani is partner and Gaurish Zaoba is manager, Tax & Regulatory Services, PwC India. Views are personal