Pacific Crest Pte Ltd, Noida V. DCIT Circle-2(2)(2) International Taxation, New Delhi

ITA 661/DEL/2021

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The case involves M/s. Pacific Crest Pte. Ltd., a non-resident corporate entity from Singapore, which appealed against the final assessment order that treated certain receipts as royalty under section 9(1)(vi) read with section 115A of the Income-tax Act, 1961. The receipts were from hiring vessels to Larson & Toubro Ltd. and Polarcus DMCC for activities related to the prospecting for, or extraction or production of mineral oils. The primary legal contention was whether these receipts should be taxed as royalty or under section 44BB, which provides a presumptive taxation scheme for non-residents engaged in such activities without the need for a Permanent Establishment (PE) in India. The Tribunal, after considering the submissions and relevant legal provisions, concluded that the receipts should be taxed under section 44BB, thereby excluding them from the definition of royalty under Explanation 2(iva) to section 9(1)(vi).

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300595 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 01-01-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 06-06-2021
• Other Referred Cases: Western Geco International Ltd. [TS-943-ITAT-2022 (Del)], Larsen & Toubro Ltd. [TS-124-HC-2022(Bom)], M/s. SBS Marine Ltd. Vs. ADIT [2015-TII-26-ITAT-DEL- INTL], Valentine Maritime (Gulf) LLC Vs. ADIT, [2017] 78 taxmann.com 109 (Mumbai \\u2013 Trib.), CIT Vs. M/s. SBS Marine Ltd. & Anr. [ITA No.36 of 2015 & Anr., dated 6 th August, 2015]
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Permanent establishment; TDS; Capital Gains; FORM 26AS
• Section: 147; 148; 28; 2; 142(1); 195; 144C; 44BB; 43; 115A; 44DA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.661/Del/2021 Assessment Year: 2012-13 M/s. Pacific Crest Pte. Ltd., C/o- Nagia & Co. LLP, A-109, Sec.-136, Noida. Vs. DCIT, Circle-2(2)(2), International Taxation, New Delhi PAN :AAFCP6343R (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: Captioned appeal by the assessee is against the final assessment order dated 10.04.2021 passed under section 147/143(3) read with section 144C of the Income-tax Act, 1961 (in short ‘the Act’) pertaining to assessment year 2012-13, in pursuance to the directions of learned Dispute Resolution Panel (DRP). Appellant by Sh. Amit Arora, CA Sh. Vishal Misra, CA Department by Ms. Rashmita Jha, CIT(DR) Date of hearing 02.01.2023 Date of pronouncement 31.03.2023 ITA No.661/Del/2021 AY: 2012-13 2 | P a g e 2. Ground No. 1 is a general ground, hence, does not require adjudication. 3. In ground no. 2, the assessee has challenged the addition of Rs.23,85,90,034/- as royalty under section 9(1)(vi) read with section 115A of the Act. 4. Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of Singapore and is a tax resident of Singapore. From System Generated Information (AIR), the Assessing Officer noticed that though, in the year under consideration, the assessee had received certain payment from Larson & Toubro Ltd. and Polarcus DMCC, on which tax under section 195 of the Act has been withheld, however, the assessee has not filed any return of income. Being of the view that income chargeable to tax has escaped assessment, the Assessing Officer reopened the assessment under section 147 of the Act by issuing a notice under section 148 of the Act. As observed by the Assessing Officer, even in response to the notice issued under section 148 of the Act, the assessee did not file any return of income. It is observed by the Assessing Officer, the assessee did not respond to the notices issued under sections 142(1) and 133(6) of the Act. Ultimately, the Assessing Officer issued a show- ITA No.661/Del/2021 AY: 2012-13 3 | P a g e cause notice to the assessee in terms of section 144(1)(b) of the Act calling upon the assessee to explain why the assessment should not be completed to the best of judgment under section 144 of the Act. In absence of any reply to the said show-cause notice, the Assessing Officer proceeded to complete the assessment by treating the receipts of Rs.23,85,90,034/- as royalty/Fee for Technical Services (FTS) and brought to tax by applying the provisions of section 115A of the Act. Accordingly, he proposed the draft assessment order. 5. Against the draft assessment order, the assessee raised objections before learned DRP. Before learned DRP, the assessee submitted that it had given on hire vessels (ships) to Larson & Toubro Ltd. and Polarcus DMCC for use or to be used in prospecting for, or exploration or production of minerals oils by the concerned parties. It was submitted, since, the receipts from giving on hire the vessels are in connection with the activities of prospecting for, or extraction or production of mineral oils, they will be taxable under section 44BB of the Act on presumptive basis. After considering the submissions of the assessee and evidences furnished, learned DRP called for a report of the Assessing Officer. After examining the report of the Assessing ITA No.661/Del/2021 AY: 2012-13 4 | P a g e Officer and other materials on record, including submissions of the assessee, learned DRP observed that as per Explanation 2(iva) to section 9(1)(vi) of the Act, the use or right to use any industrial, commercial or scientific equipment comes within the definition of royalty. Thus, learned DRP held that as per the aforesaid provision, the amount received by the assessee is in the nature of royalty. Proceeding further, learned DRP held, though, section 44BB is a special provision in the statute to tax income from the business of prospecting for, or exploration and production of mineral oils, however, it will be applicable only in case the non-resident is having a Permanent Establishment (PE) in India. Learned DRP observed, since, the assessee did not have any PE in India, section 44BB would not be applicable. For the very same reason, learned DRP held, even, section 44DA would not apply. Thus, ultimately, learned DRP held that the receipts are in the nature of royalty in terms of Explanation 2(iva) to section 9(1)(vi) of the Act, hence, taxable in terms of section 115A of the Act. In terms with the directions of learned DRP, the Assessing Officer completed the assessment. 6. Before us, learned counsel appearing for the assessee reiterated the stand taken before learned DRP. Drawing our ITA No.661/Del/2021 AY: 2012-13 5 | P a g e attention to the charter hire agreement with Polarcus DMCC and Larson & Toubro Ltd., learned counsel submitted, the vessels were given on hire to the concerned parties for seismic support duties and transportation of coated pipes respectively in connection with prospective for, or exploration or production of mineral oils. Thus, he submitted, the receipts are squarely covered under section 44BB of the Act. In support of such contention, learned counsel relied upon the following decisions: 1. Western Geco International Ltd. [TS-943-ITAT-2022 (Del)] 2. Larsen & Toubro Ltd. [TS-124-HC-2022(Bom)] 3. M/s. SBS Marine Ltd. Vs. ADIT [2015-TII-26-ITAT-DEL- INTL] 4. Valentine Maritime (Gulf) LLC Vs. ADIT, [2017] 78 taxmann.com 109 (Mumbai – Trib.) 5. CIT Vs. M/s. SBS Marine Ltd. & Anr. [ITA No.36 of 2015 & Anr., dated 6 th August, 2015] 7. Learned Departmental Representative strongly relied upon the observations of learned DRP. 8. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The short issue arising for consideration is, whether the disputed receipts are taxable as business profits of the assessee under section 44BB of the Act or are in the nature of royalty as defined in Explanation 2 (iva) to section 9(1)(vi) of the Act. It is evident, ITA No.661/Del/2021 AY: 2012-13 6 | P a g e while framing the draft assessment order, the Assessing Officer, though, has brought the receipts to tax under section 115A of the Act, however, he has not specified the exact nature of receipts, whether royalty or FTS. However, learned DRP has characterized the receipts to be in the nature of royalty in terms of Explanation 2(iva) to section 9(1)(vi) of the Act. 9. Keeping in perspective the aforesaid facts, we will proceed to examine the nature and character of receipts and their taxability under the Act. On perusal of the charter hire agreement between the assessee and Polarcus DMCC kept in the paper-book, it is observed that the vessel was given on hire for seismic support duties in the east coast of India and the vessel is to be operated by assessee’s personnel/employees. It is further observed, the requirement of the vessel is for drilling, testing, completing and abandoning single bore hole, including any site, track thereof which is defined as well. Similarly, assessee has entered into charter hire agreement with Larson & Toubro Ltd. for a vessel to transport coated pipes in west coast India. As per the terms of the agreement, the vessel was required for offshore use either in well, which is defined to mean drill, test, complete and abandon a single bore hole, including in site track thereof or offshore site, ITA No.661/Del/2021 AY: 2012-13 7 | P a g e which is defined as the area within three nautical miles of an offshore unit from or to which the owners (assessee) are requested to take their vessels by the charterer. Though, learned DRP has alleged that the assessee has not produced any supporting evidence which could indicate that assessee’s vessels were hired by the concerned parties for use or to be used in prospecting for, or exploration or extraction or production of mineral oils, however, the agreements clearly vindicate assessee’s stand that the vessels were given on hire for use or to be used in prospecting for, or extraction or production of mineral oils. At this stage, it is necessary to look to the provision contained under section 44BB of the Act, which is reproduced below: “Insertion of new section 44BB 11. In the Income-tax Act, after section 44B, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1983, namely: — Special provision for computing, profits and gains in connection with the business of exploration, etc., of mineral oils. '44BB (1) Notwithstanding .anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee 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, a sum equal to ten per cent. 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 business or profession": Provided that this sub-section shall not apply in a case where the provisions of secti6h 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. ITA No.661/Del/2021 AY: 2012-13 8 | P a g e (2) The amounts referred to in sub-section (1) shall be the following, namely:— (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of 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 oils in India; and (b) the amount received or deemed to He received in India by or on behalf of the assessee on account of the provision of services facilities 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 oils outside India. Expanation,—For the purposes of this section— (i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said Business; (ii) "mineral oil" includes petroleum and natural gas.'. 10. As could be seen from the heading of the said provision, it is a special provision for computing profits and gains in connection with the business of exploration, extraction, production of mineral oils. The provision starts with a non-obstante clause overriding anything contrary contained under section 28 to 41 and 43 and 43A of the Act. Further, the provision applies to a non-resident engaged in the business of providing services or facilities in connection with prospecting for, or extraction or production of mineral oils. It also applies to a non-resident supplying plant and machinery on hire for use or to be used in prospecting for, or extraction or production of mineral oils. The provision provides, a non-resident having income from the aforesaid activities would be subject to tax at 10% on gross basis. Explanation under section ITA No.661/Del/2021 AY: 2012-13 9 | P a g e 44BB defines plant to mean ships, aircrafts, vehicles, drilling units, scientific apparatus and equipments used for the purposes of business mentioned under section 44BB(1) of the Act. Proviso to section 44BB(1) restricts the applicability of the provisions where the provisions of section 42, section 44D, section 44DA or section 115A or section 293A are applicable for the purposes of computing profits or gains. It is evident, learned DRP brought to tax the receipts under section 115A of the Act primarily for two reasons; firstly, the receipts are in the nature of royalty in terms of Explanation 2(iva) to section 9(1)(vi) and, secondly, the assessee has no PE in India. 11. Insofar as the first reasoning of learned DRP is concerned, no doubt, the expression ‘royalty’ has been defined only under section 9(1)(vi) of the Act. Even, section 115A read with Explanation refers to the definition of royalty as defined in Explanation 2 to section 9(1)(vi) of the Act. As stated earlier, Explanation 2 to section 9(1)(vi) defines the term royalty. In the facts of the present case, undisputedly, learned DRP has treated the receipts as royalty in terms of Explanation 2(iva), which reads as under: ITA No.661/Del/2021 AY: 2012-13 10 | P a g e “Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) ................... (ii) .................. (iii) .................... (iv) .................. (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;” 12. As could be seen from the aforesaid definition of royalty, it is in two limbs. Though, in the first limb, the use or right to use any industrial, commercial or scientific equipment is treated as royalty, however, the second limb carves out an exception by providing that the amounts referred to in section 44BB of the Act cannot be treated as royalty. In our considered opinion, while treated the receipts as royalty, learned DRP has overlooked the exception provided in the second limb of Explanation 2(iva) to section 9(1)(vi) of the Act. Thus, once the receipts are covered under section 44BB of the Act, automatically, they are excluded from the definition of royalty as provided under Explanation 2(via) to section 9(1)(vi) of the Act. Since, in the facts of the present case, the receipts in dispute are for giving on hire vessels for use or to be used in prospecting for, or exploration or production of mineral oils, which is an activity covered under section 44BB of ITA No.661/Del/2021 AY: 2012-13 11 | P a g e the Act, it cannot be treated as royalty under Explanation 2(iva) to section 9(1)(vi) of the Act. At this stage, it is necessary to examine whether the activities of seismic duties and transport of coated pipes would be covered under the provisions of section 44BB. In our view, the language employed in section 44BB is wide enough to encompass the aforesaid activities. In fact, the decisions relied upon by learned counsel for the assessee clearly support the aforesaid view. In case of Valentine Maritime (Gulf) LLC Vs. ADIT, the Coordinate Bench has held that receipt from giving on hire tugs and barges to be used in prospecting for, or extraction or production of mineral oils would come within section 44BB of the Act. The same view was expressed by Hon’ble Bombay High Court in case of Larson & Toubro Ltd. (supra). In case of Western Geco International Ltd. (supra), the Hon’ble Third Member has expressed the view that the seismic data services and mining projects are inextricably linked to activities covered under section 44BB of the Act. Thus, keeping in view the ratio laid down in these decisions, we hold that the receipts are covered under section 44BB of the Act. The second reasoning of learned DRP is since the assessee did not have any PE in India, section 44BB would not apply. On a careful reading of section 44BB of the Act, ITA No.661/Del/2021 AY: 2012-13 12 | P a g e we do not find any such requirement as has been pointed out by learned DRP. Section 44BB applies to a non-resident entity carrying on business in connection with prospecting for, or extraction or production of mineral oils. The provision, unlike section 44DA, does not put any mandatory condition of existence of PE for the applicability of the provision. 13. In the aforesaid view of the matter, we do not agree with the view expressed by the Assessing Officer and learned DRP. Accordingly, we direct the Assessing Officer to tax the receipts under section 44BB of the Act. This ground is allowed. 14. In ground no. 3, the assessee has raised the issue of double counting of the revenue. 15. We have considered rival submissions and perused the materials on record. It is the case of the assessee that as per Form 26AS for financial year 2011-12 relevant to the assessment year under dispute, the actual receipts of the assessee are to the tune of Rs.11,92,95,017/-. Whereas, the Assessing Officer has taken double the amount for the purpose of taxation. It is observed, after considering the submission of the assessee, learned DRP has observed that on perusal of Form 26AS, prima facie, it appears to be a case of double counting of revenue. ITA No.661/Del/2021 AY: 2012-13 13 | P a g e However, the assessee was directed to provide complete copy of bank statements and summary reconciliation sheets submitted before them to the Assessing Officer for enabling the Assessing Officer to undertake the reconciliation exercise. However, in the final assessment order, the Assessing Officer has repeated the addition of Rs.23,85,90,034/- with the following observations: “However, the assessee has failed to provide any documents in this regard to reconcile the revenue till date. The assessee has failed to provide the bank statements and the summary reconciliation sheet as directed by the DRP before this office till date. In absence of any documents, it is not possible for this office to reconcile the revenue earned by the assessee. In view of the above, the revenue is taken at Rs.23,85,90,034/-“ 16. As could be seen from the aforesaid observations of the Assessing Officer, he has alleged that the assessee failed to provide the bank statements and summary reconciliation sheets in terms with the direction of learned DRP. Considering the fact that the assessee itself has furnished copy of bank statements and summary reconciliation sheets before learned DRP, we do not see any reason, why they could not be furnished before the Assessing Officer. 17. Be that as it may, we direct the assessee to furnish requisite documents before the Assessing Officer, in which case, the Assessing Officer shall examine them and rectify the mistake of ITA No.661/Del/2021 AY: 2012-13 14 | P a g e double addition, in case it is there. However, the assessee must be provided an opportunity of being heard before deciding the issue. 18. In ground no. 5, the assessee has raised the issue of not granting credit of TDS amounting to Rs.57,12,356/- by the Assessing Officer . 19. Having heard the parties, we direct the Assessing Officer to factually verify assessee’s claim and allow credit of TDS in accordance with law. 20. Ground no. 6 relates to levy of interest under section 234A and 234B. This ground, being consequential in nature, does not required adjudication. 21. Ground no. 7, being premature at this stage, is dismissed. 22. In the result, the appeal is partly allowed. Order pronounced in the open court on 31 st March, 2023 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 31 st March, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi