|CORAM:||Pinaki Chandra Ghose J, Ranjan Gogoi J|
|SECTION(S):||44BB, 44D, 9(1)(vii)|
|GENRE:||Domestic Tax, International Tax|
|CATCH WORDS:||Fees for technical services, mining services|
|DATE:||July 1, 2015 (Date of pronouncement)|
|DATE:||July 4, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 44BB vs. 9(1)(vii)/44D: The "pith and substance" test has to be applied to determine the dominant purpose of each agreement. If the dominant purpose is mining, the income is assessable only u/s 44BB and not as "fees for technical services" u/s 9(1)(vii) & 44D|
The Supreme Court had to consider the following question: “Whether the amounts paid by the ONGC to the non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as “fees for technical services” under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act or will such payments be taxable on a presumptive basis under Section 44BB of the Act”? HELD by the Supreme Court:
(i) The Income Tax Act does 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 and Regulation) Act 1948. 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 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(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 7th 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 relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works 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 44BB or Section 44D of the Act.
(ii) 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 44BB and not Section 44D of 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.
(iii) 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 agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. 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 44BB and not Section 44D of the Act (Circular No. 1862 dated 22.10.1990 referred)
It is very considered judgement by hon SC, though credit goes to Arvind Datar for really bringing out the pith and substance, as he both a seasoned taxation expert besides a very good in appreciation of Constitutional principles in regard 7th schedule falling on Entries concerned, as the founders of the Indian Constitution were then equally well versed besides British founders of Government of India Act 1935 and thus the their contributions are progressively sharpened and very well polished every time the tenets are sharpened further at the mill of justice by proper ingredients.
You cannot expect Revenue men could be so well sharpened though CBDT in 1990 issued the relevant circular by due considerations of facts in mining matters, after all every department has a role in law making as that has to follow the principles of contracts when read with relevant products manufacturing or extracting.
Parliament is indeed an august body but law makers sitting there time to time vary a lot every time a new lok sabha or rajya sabha are formed besides the the quality of public servants every time either preceding or succeeding indeed contributed to the development of the Nation, after all development is the ‘most slowest’ process in the history of development process anywhere in the world, if one carefully reads the history that way Dr.S.Radhakrishnan rightly called Parliamentary democracy itself is a process of Historical Determinism, being a most erudite scholar human developmental philosophy himself so he was considered be the top most Eastern Philosopher while Lloyd George was Considered the great in Christian philosophy though both contributed to the comparative philosophies immensely.
Philosophy is needed to develop even Constitutional Jurisprudence besides the Taxation jurisprudence and also the Interpretative jurisprudence that only strengthens the governance in such a way man to realise never hurry but be patient to ‘Stand and Stare’ what WH Davis made a clarion call to human kind in his great poem then..
I am glad to find the Bench is proved itself good enough to meet the new perceptional angles in Taxation Laws in terms of Art.265… to ensure .. ‘Tax has to follow the procedure as laid down law’ means holistically means not only tax statutes but ever statute of parliament need be tested on the anvil of principles laid down in the Constitution of India duly manicured or beautifully expanded by the judicial interpretative jurisprudential doctrines duly applied by Apex Court as a Justicious body.
In this connection i have to mention here how the advice and consent in theory and practice was developed in USA was well written by Justice Roger J. Miner of USCA, IIND CIRCUIT , in a paper he read in the USA while interpreting Article II , Section ii of the Constitution on the way President of US nominate judges, by and with the advice and consent of the Senate, appoint federal judges who would exercise judicial powers conferred under the authority of Article III of the Constitution… please read that paper that would enhance the knowledge of judicial development that is what is taking place…
thanks to patiently read my small piece. thanks once agn