Saipem S.P.A. vs Deputy Commissioner Of … on 24 December, 2003

ORDER

K.C. Singhal, Judicial Member

1. The only issue arising out of this appeal is whether the sum of 9,50,000 US $ received by the assessee in Indian currency can be included in the total receipts while computing the income under Section 44BB.

2. The assessee is a non-resident company having its registered office at Milano Corso, Venezia – 16. It carried on the business in the field of exploration of mineral oils etc. It entered into an agreement with ONGC in 1984 for offering one land drilling rig on charter hire for exploratory drilling in the Krishna Godawari Bassein area. Under the agreement, the assessee was to receive a fixed sum of 9,50,000 US $ towards mobilisation and transportation of the drilling rig from Sharjehan, UAE to Vishakhapatnam Port. It was claimed before the Assessing Officer that the amount received was in the nature of reimbursement charges which were not taxable in view of Section 5 read with Section 9. This contention of the assessee was rejected by the Assessing Officer since in his view Section 44BB covered all payments whether in the form of reimbursement or in the nature of other payments. Accordingly, this amount was brought to tax under Section 44BB.

3. The matter was carried before the CIT(A) before whom the same contentions were raised on behalf of the assessee. On behalf of the Assessing Officer it was submitted that the issue was covered in favour of the revenue by the decision of the Tribunal Delhi Bench in ITA No. 3413/ Delhi/88 dated 20-6-1990 wherein it was held that mobilisation and demobilisation charges were taxable under Section 44BB. Following the said decision of the Tribunal, the CIT(A) confirmed the order of the Assessing Officer on this aspect. Aggrieved by the same, the assessee is in appeal before the Tribunal.

4. The learned counsel for the assessee Mr. Vohra has vehemently assailed the order of CIT(A) by contending that the mobilisation charges cannot be brought within the net of taxation in view of Section 5(2) inasmuch as this amount was neither received in India nor accrued or had arisen to the assessee in India during the year under consideration. At the direction of the Bench, the counsel for the assessee has furnished evidence to the effect that the ONGC had paid the amount to the assessee outside India, that is, in Italy. In support of his contention, he has relied on the order of the Tribunal, Mumbai Bench in the case of Jindal Drilling Leasing [IT Appeal No. 6452 (Bom.) of 1991 dated 30-4-1998] wherein it has been held that mobilisation charges in respect of voyage outside the territorial water of India are not taxable in view of Section 5 read with Section 9. The copy of the order is placed on the record. On the other hand, the ld. DR has strongly supported the order of the CIT(A) by relying on the decision of Tribunal, Delhi Bench referred to by the CIT(A).

5. Rival contentions of the parties have been considered carefully. The decision of the Tribunal, Delhi Bench relied upon by the ld. DR, in our view, does not help the revenue. In that case, the Assessing Officer did not include the receipts towards mobilisation charges in the total income of the assessee. The order of the assessment was considered to be erroneous and prejudicial to the interest of revenue by the CIT under Section 263 and accordingly directed the Assessing Officer to include the same under Section 44BB. The matter was carried before the IT AT wherein it was held that such payments arose out of the contract and, therefore, were directly connected with the business of the assessee. Further there was profit element inasmuch as the fix amount had been received by the assessee irrespective of the expenditure incurred. Accordingly, it was held that the mobilisation charges were taxable in the hands of the assessee under Section 44BB read with Section 28(iv). The issue with which we are concerned was neither raised before nor considered by the Tribunal. Therefore, the ratio of that case cannot be applied to the present case.

6. On the other hand, the issue before us is squarely covered by the decision of the Tribunal, Mumbai Bench relied upon by the assessee’s counsel wherein it has been clearly held that mobilisation charges in respect of transportation of rig outside the territorial water of India were not taxable in view of Section 5 read with Section 9. Consequently, it was also held that only the mobilisation charges in respect of transportation of the rig in the course of Indian water were taxable under Section 44BB. According to the Bench, the entire receipts could not be brought in the net of taxation. The relevant observations of the Bench are being reproduced for the benefit of this order:

On a close reading of Sections 44BB, 4 and 5(2), it is evident that what is taxable in India in the case of a non-resident is the income which is accrued or has arisen whether actually or is deemed under the statute or which is received in India. This concept is, in fact, adopted for arriving at the total earning of a non-resident by Sub-section (2) of Section 44BB, which, as aforesaid, takes in its ambit only those receipts which are paid or payable either in India or elsewhere for services rendered in India and in case the services are rendered outside India, the receipt by the non-resident in India. The terms “paid” or “payable” are used with reference to payer’s point of view, but if these are translated into the recipients point of view they are to be read as received or receivable for the services rendered in India. In other words, it is the hire charges which are received by the non-resident or which are accrued or arisen to him for the services rendered in India. Nothing is received by the assessee in India as stated by the learned counsel of the assessee before the Assessing Officer and which is not controverted by the revenue. We have, therefore, to see whether anything had accrued or has become payable to the assessee for services rendered in India. As stated above, the ship was given on hire by the assessee in U.S.A. It had a voyage from USA to India and as held by the CIT(A), only 385 nautical miles out of 11998 nautical miles was the voyage in India. Income from transporting the rig has accrued to the assessee or has arisen to it only when the transportation has taken place and that transportation was both in India as well as outside India. Accrual of income in India would, therefore, be only for that portion of the voyage which pertained to the travel in India. The balance amount would accrue and is payable to the non-resident for the transportation outside India and, therefore, the receipts thereof would not be covered by the provisions of Section 44BB of the Act.

6. We can look at the issue from a different angle also. Let us examine the case that the entire income on hire charges has accrued or has become payable to the assessee when the goods are delivered in India. Of course, the entire accrual of the charges in that case would be in India and has to be taken as part of consideration for computing the 10 per cent of the income under Section 44BB of the Act. But the assessee, being a non-resident, can be assessed only on that portion of the income which relates to the operations carried out in India; The Explanation to Section 9(1) provides for leasing the mechanism, though it is applicable only in a case where the income is deemed to accrue to a non-resident under Section 9 and may not be strictly applicable to the income actually accrued under Section 5(2) of the Act. But as held by the Supreme Court in the case of Anglo-French Textile Co. 25 ITR 27 that the apportionment of income, profits or gains between these arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42(3) of the 1922 Act (corresponding to Section 9 of the 1961 Act), but on general principles of apportionment of income, profits or gains depending whether the income, profits or gains could be said to arise or accrue. Therefore, in these circumstances, in our opinion, even though the entire receipts by the assessee may be subject to the determination of 10 per cent profit under Section 44BB of the Act, the taxable portion thereof would have to be the amount that relates to the proportionate operations carried out in India and that, as aforesaid, would be relating to the voyage of 140 nautical miles out of the 11990 nautical miles for which the hire charges were received by the assessee. In these circumstances, in our opinion, the CIT(A) was justified in directing that only the proportionate income le. 185/11990 would be taxable in India. The order of the CIT(A), therefore, does not call for any interference and is accordingly upheld.

7. In view of the above discussion, we hold that mobilisation charges in respect of the transportation of rig outside the territorial water of India are not taxable. The order of the GIT(A) is, therefore, set aside and the Assessing Officer is directed to include in the total income only that portion of the profit which is relatable to the receipts attributable to the transportation of rig in the territorial water of India while computing the income under Section 44BB.

8. In the result, appeal of the assessee is partly allowed.

R.S. Syal, Accountant Member

1. I have carefully perused the order passed by my learned brother in which he has directed the Assessing Officer to include in the total income only that portion of the profit which is relatable to the receipts attributable to the transportation of rig in the territorial water of India while computing the income under Section 44BB. I find myself unable to concur with this view. Despite discussion I could not convince him on my line of reasoning. As such, I am constrained to make a separate order. Facts of the case and arguments have been mentioned at paras 1 to 4 of the proposed order which need not be repeated for the sake of brevity. ,

2. Precisely the issue raised in this appeal relates to the taxability of US $ 9,50,000 received by the assessee on account of mobilisation and transportation charges from Sharjah, U.A.E. to Vishakapatnam Port in India. The Assessing Officer held that the entire amount liable to be included in the receipts for the purposes of taxation under Section 44BB. The ld. CIT(A) echoed the action of the Assessing Officer relying on the order of the Delhi Bench in the case of Nippon Kokan KK [IT Appeal No. 3413 (Delhi) of 1988]. The assessee is aggrieved against this order in the present appeal.

3. The main plank of the marathon arguments of the ld. counsel for the assessee was that Section 44BB is only a computation section and the scope of total income is to be determined only in accordance with, the provisions of Section 5(2). Taking the Bench through the provisions of Section 5(2) the ld. counsel contended that it has two Clauses, namely, (a) & (b). It was submitted that Clause (a) deals with the inclusion of only that income in the total income of the non-resident which is received or deemed to be received in India. Evidence was placed on record to the effect that the amount in question was paid by ONGC in Italy. It was, therefore, submitted that Clause (a) of Sub-section (2) was not applicable to the facts of the present case. Coming to the Clause (b) of Section 5(2), the ld. counsel contended that the income which accrues or arises or is deemed to accrue or arise in India is liable to be included in the total income of the non-resident. He stated that the case of the assessee could, at the most, be considered to be falling under Clause (b) of Sub-section (2). The attention of the Bench was drawn towards Section 9(1) which deals with the incomes which are deemed to accrue or arise in India. It was urged that Explanation (a) to Section 9(1)(i) provides that in the ease of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Placing reliance on this Explanation, the ld. counsel for the assessee urged that only that part of the profit which is relatable to the receipts attributable to the transportation of rig in the territorial water of India could be included in the total income, while computing the income under Section 44BB. For this proposition, the ld. counsel placed reliance on the order of the Mumbai Bench ‘E’ in the case of Jindal Drilling Leasing (supra), a copy of which was placed at pages 18 to 24 of the paper book. The ld. counsel contended that the order of the CIT(A) was based on the decision of the Delhi Bench of Tribunal in Nippon Kokan KK’s case (supra) which was not relevant to the issue under consideration. The copy of the said order of Delhi Bench was placed at pages 25 to 37 of the paper book. The sum and substance of the submissions advanced on behalf of the assessee was that Section 44BB is controlled by Section 5(2) read with Section 9 and even though the entire receipts were subject to the determination of 10% provided under section

44BB, the taxable amount was only that portion thereof which related to the proportionate operations carried out in India.

4. In the opposition the ld. DR supported the order of the CIT(A) and his submissions were reiteration of the reasons recorded by the CIT(A) for dismissing assessee’s appeal. In particular, the ld. DR stated that Section 44BB is special provision and Section 5 read with Section 9 has no role to play when the income is computed under Section 44BB. It was further pointed out that the decision of the Delhi Bench of Tribunal, which was relied upon by the ld. CIT(A), was squarely applicable to the facts of the case for the reason the identical issue was involved therein as is in the present appeal.

5. Having heard the rival submission and perused the relevant material in the light of precedents cited at the Bar, it is clear that there is no controversy about the applicability of Section 44BB on the assessee in respect of mobilisation charges. The dispute centres only around the extent of such mobilisation charges which would be put to tax. Whereas the case of the assessee is that Section 44BB cannot be read in isolation and it has to be construed in the light of Section 5(2) read with Section 9 and if so read only that portion of the profit which is relatable to receipts attributable to the transportation of rig in the territorial water of India is taxable while computing the income under Section 44BB. On the other hand the plea of the department, in this regard, is that the entire amount of mobilisation charges is liable to be included while computing the income under Section 44BB and is accordingly chargeable to tax and further Section 5(2) read with Section 9 has nothing to do and cannot be considered to be applicable when the income is computed under Section 44BB. So the first thing to be decided is as to whether Section 5(2) read with Section 9 are applicable to Section 44BB or not. For that it is necessary to consider the provisions of Section 5(2) which are as under:-

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which –

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

6. There is no dispute about the fact that ordinarily the income of a nonresident is to be computed according to the mandate of Section 5 which provides that the income which is received or is deemed to be received in India and also the income which accrues or arises or is deemed to accrue or arise in India is liable to be included in the total income of the nonresident. But the question arises that would Section 5(2) hold the field even if any special/deeming provision has been enacted such as Section 44BB in the Act? The answer to this question can be found from the language of Section 5(2) itself which starts with the expression “subject to the provisions of this Act”. It ergo shows that Section 5(2) does not have an overriding effect over other sections of the Act and it has to be harmoniously construed in conjunction with other special provisions. It is worthwhile to mention at this juncture that the expression “subject to the provisions of this Act” came up before Kerala High Court in CIT v. Fertilizers & Chemicals (Travancore) Ltd. [1987] 166 ITR 823′ and their Lordships held that it was the special provision which should be adhered to while assessing the income earned by a non-resident. It was laid down as under:-

However, it is pertinent to note that the total income is determined “subject to the provisions of the Income-tax Act”. The charge in respect of the total income is expressly declared to be “in accordance with and subject to the provisions of this Act”. These expressions “in accordance with” and “subject to the provisions of this Act” make it clear that the assessment of the income of a non-resident accrued or arisen in India through an agent, shall be subject to and in accordance with the provisions contained in Chapter XV of the Income-tax Act. They are special provisions and, therefore, they should be adhered to while assessing the income earned by a non-resident through an agent, in the hands of the agent.

7. The inevitable conclusion that follows is that the special provisions such as Section 44BB in question are not controlled or hit by Section 5. If any special provisions have been enacted, obviously, Section 5 would lean in favour of such other special provisions.

8. The next issue which arises for consideration is as to whether Section 44BB contains any special provision or not. For this it is necessary to advert to the provisions of Section 44BB as under:-

44BB. (1) Notwithstanding anything to the contrary contained in Sections 28 to 41 and Sections 43 and 43A, in the case of an assessee (being a non-resident) engaged in the business of providing services or facilities in connection with or supplying plant and machinery or 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 Section 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.

(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 be received in India by or on behalf of the assessee on account of the provisions 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 outside India.

Explanation.- For the purpose 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.

9. On dissection of this section, the necessary ingredients, which are relevant for the purpose, as contained in Sub-section (1) are as under:-

(i) in the case of an assessee being a non-resident,

(ii) a sum equal to 10% of the aggregate of the amounts specified in Sub-section (2),

(iii) shall be deemed to be the profits and gains of such business,

(iv) chargeable to tax under the head ‘Profits and gains of business or profession’.

[Emphasis supplied]

Similarly the important components of Sub-section (2), relevant for the purpose, are as follows:-

(v) the amount paid was payable (whether in or out of India),

(vi) on account of the provisions of services and facilities in connection with or supply of plant and machinery on hire, and

(vii) used or to be used in the prospecting for or extraction or production of mineral oils in India.

[Emphasis supplied]

10. When these parts of Section 44BB are analysed, it becomes explicitly clear that Section 44BB contains special provisions, inasmuch as it deems 10% of the amount specified in Sub-section (2) to be the profits and gains of such business (ii and iii) above, which are to be charged to tax (iv above). As regards the aggregate of the amount liable to be included for application of 10% rate, it is made clear that it would be the amount due to the assessee whether in or out of India (v above) for supply of plant and machinery on hire to be used for extraction of oil in India (vi & vii above). From the above it becomes patent that the amount liable to be considered for Sub-section (2) is one which is received or receivable on account of supply of plant and machinery which is to be used in India. The condition for inclusion in the aggregate amounts under Section 44BB(2) is the end destination, namely, the place where such plant and machinery is to be used. If it is to be ultimately used in India, then the entire hire charges for the plant and machinery are includible. There is no stipulation in Sub-section (2) to the effect that only that portion of the mobilisation charges is includible for charging to tax which covers the distance covered in India. It has also been made explicitly clear that in order to be included in Sub-section (2), it is totally irrelevant that the amount is paid to the assessee in or out of India. It is the admitted position, as is clear from the written submissions also, that the assessee hired out its drilling rig to ONGC for exploratory drilling in India only. It, therefore, boils down that Section 44BB contains special provisions by virtue of which 10% of the qualifying amounts are deemed to be profits of the business which are chargeable to tax. Deeming provisions create a fiction by assuming a particular state of affairs. The law is trite and no authority is needed to be cited for the proposition that the deeming provisions override the general provisions. Seen in this light, it is difficult to digest the contention of the ld. counsel for the assessee that even though the entire receipts by the assessee may be subject to the determination of 10% profits under Section 44BB but the taxable portion would be only that amount which relates to the distance covered in India, for the simple reason that Section 44BB contemplates that 10% of the aggregate receipts would be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

11. As Section 44BB is a special provision, I am of the considered opinion that it is not controlled by the provisions of Section 5(2) which section itself is “subject to the provisions of this Act” and hence Section 5(2) cannot restrict or expand the scope of Section 44BB. Once it is held that Section 5(2) is not applicable to Section 44BB, the contention of the ld. AR regarding the applicability of Explanation (a) to Section 9(1)(i) itself fails because Section 5(2) specifies, inter alia, the inclusion of “income deemed to accrue or arise in India” in the total income of the non-resident and Section 9, in turn, deems certain incomes to accrue or arise in India. To put it differently Section 9 only explains the meaning of one of the expressions used in Section 5 and therefore only supplements it and is not a separate provisions independent of Section 5. If Section 5 itself is held to be inapplicable, there cannot be any question of considering the applicability of Section 9 separately.

12. Now I will proceed to deal with the contention of the learned AR to the effect that the order of the Delhi Bench of Tribunal in Nippon Kokan KK’s case (supra), which formed the basis of the impugned order, is on a different issue and hence is not relevant to the issue under consideration. In that case the Assessing Officer framed assessment without segregating the mobilization and de-mobilization charges. The CIT while exercising his revisionary power under Section 263 held the order of the Assessing Officer to be erroneous and prejudicial to the interests of the revenue, inter alia, on this issue also. The Tribunal upheld the order of the CIT by observing that since profits in its case were to be determined by application of net profit rate, the receipts for moblisation of rigs or vessels from place of its origin outside India to the ONGC’s location at the offshore in Bombay High were required to be included in the total receipts of the nonresident company before applying net profit rate. Vide para 9 of its order it was held:-

9. The only point that requires our consideration is mobilisation and demobilisation fees/reimbursement of expenses. In our opinion, there is error in the order passed by the Assessing Officer in not considering these receipts. The CIT has clearly pointed out in the impugned order that agreement with Geo Physical Services Inc. shows that there was clear indication that ONGC would pay fees or lumpsum for mobilization or demobilisation charges or such charges at the moving rate. Similarly, the agreement with Dowell Schlumberger SA show that the ONGC had undertaken to clear from the port/airport authorities customs of equipment and spares etc. imported into India for ONGC’s work and that cost incurred by the non-resident company for transportation of equipment in India from point of origin to ONGC’s location and back to point of origin would be reimbursed by ONGC.

From the above extracted finding of the Tribunal’s order it is clear that the entire mobilisation charges from the point of origin outside India to the ONGC’s location in India were held to be includible in the receipts for applying the profit rate as per the prescription of Section 44BB. The facts of the instant case are on all fours with the order passed by the Delhi Bench, relied upon by the CIT(A), and I am unable to find out even a single distinguishing feature. Hence it is manifest that the submission of the ld. counsel that the aforecited order of the Tribunal is not applicable is sans merits and deserves the fate of rejection.

13. There are number of orders of the Delhi Benches available on this issue. The recent order in this sequence is that of “B” Bench of Delhi Tribunal in the case of Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 for assessment years 1989-90 to 1992-93 where this issue was discussed in paras 20 to 23 by holding that 10% of the entire mobilisation charges, including the portion towards the travel outside India were liable to be taxed. In this case the application of the provisions of Sections 4 & 5 vis-a-vis Section 44BB was also considered by the Bench. This order in the case of Sedco Forex is based on the earlier Tribunal order of the same assessee dated 23-3-1999 for assessment year 1988-89 in ITA No. 4562/D/91 wherein this issue was exhaustively dealt with. The facts of that case are identical with the facts of the instant case under consideration. In that case, the assessee (hereinafter called SFI) was paid fee by ONGC for mobilisation of drilling unit from their location outside India, namely, Setubal, Protigal, to the location designated by ONGC, namely, Offshore Bombay or other drilling unit of ONGC (Kandala or Bombay). Payment was made to SFI outside India. The Assessing Officer held the entire mobilisation fee received by SFI as includible for determining its income under Section 44BB. The first appellate authority confirmed Assessing Officer’s action. It was contended on SFI’s behalf before the Tribunal that even if entire mobilisation charges were held to be includible in the amount of gross receipts for the purpose of computing 10% profits under Section 44BB, only a reasonable proportion of that 10% profit could be included as attributable to services rendered in India. Reliance was placed on Circular No. 1767 dated 1-7-1987 and the provisions of Sections 4 & 5 read with Section 9. The Tribunal, in an elaborate decision, confirmed the order of the CIT(A) and finally held as under:-

2.18 In view of the aforesaid facts and circumstances, we are of the considered opinion that the mobilisation fee paid by O.NGC to the appellant company has rightly been included in the aggregate amount of payments received by the appellant company from ONGC for the purposes of computing the profit @ 10% chargeable to tax under the head Profits and Gains of business under Section 44BB of the Act. The inclusion of such amount of mobilisation fee for computing income under Section 44BB does not in any manner go beyond the charging Sections 4 and 5 of the Act. A special provision, namely, Section 44BB has been introduced for determination of taxable income of the nonresident taxpayers engaged in such business. The presumptive income of 10% on the aggregate payments made under such agreements cannot be said to be beyond the scope of charging Sections 4 and 5. The various judgments relied upon by the ld. counsel for the assessee does not in any manner, support such a contention, where only 10% of the aggregate payments are deemed to be income chargeable to tax under the head “Profits & gains of business” by virtue of such special provisions of Section 44BB of the Act. We are also unable to accept the assessee’s contention that only a reasonable portion of 10% income determined under Section 44BB in relation to mobilisation fee should be taxed, as income attributable to services rendered in India in the process of mobilisation of drilling unit is very small. Reliance placed by the ld. counsel on the circular issued by the Board does not in any manner support his contention. The said circular does not relate to Section 44BB but it relates to determination of taxable income of a foreign contractor engaged in the execution of turnkey project involving part of the work to be carried out in India as well as outside India, for a lump sum consideration. The said circular cannot authorise the Assessing Officer to adopt a different mode of determination of taxable income in the case of a non-resident tax payer, which arises from agreements specifically covered by the special provisions contained in Section 44BB of the Act.

In reaching this conclusion the Tribunal noted that similar view was taken in earlier orders of the Tribunal in ITA No. 3310/D/88,ITANos. 3413,3414, 3486 dated 20 June, 1990 and ITA No. 3366/D/88 dated 30 June, 1990 by holding that the entire mobilisation fees was includible for computing the profits @ 10% chargeable to tax under Section 44BB of the Act.

14. In view of the legal position discussed above, I do not find any infirmity in the order of the CIT(A) because he has followed the view of the Delhi Bench of the Tribunal. The judicial discipline requires that while sitting at Delhi, the consistent view of Delhi Benches should be followed. I am of the considered opinion that the contention of the ld. counsel for the assessee that the mobilisation charges in respect of transportation of the rig outside the territorial waters of India are not taxable, is devoid of merits. I therefore, hold that the total amount of hire charges of US $ 9,50,000 towards mobilisation of drilling rigs are includible in the receipts under Section 44BB and accordingly chargeable to tax.

15. In the result, the appeal stands dismissed.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

Since there is difference of opinion between the Members in the captioned appeal, the following question is referred to the Hon’ble President of the Tribunal under Section 255(4) of the Income-tax Act, 1961:

Whether on facts and in law, the mobilisation charges, received by the assessee outside India, attributable to the transportation of rigs outside territorial waters of India are chargeable to tax under Section 44BB read with Section 5(2) of the Income-tax Act, 1961?

THIRD MEMBER ORDER

R.M. Mehta, Vice President

1. The following points of difference has been referred to me under Section 255(4) of the Income-tax Act, 1961:-

Whether on facts and in law, the mobilization charges, received by the assessee outside India, attributable to the transportation of rigs outside territorial waters of India are chargeable to tax under Section 44BB read with Section 5(2) of the Income-tax Act, 1961?

2. The facts pertaining to the point at issue are well set out in the order passed by the ld. Judicial Member and in respect of which the ld. Accountant Member has not expressed any dissent but for purposes of making the present order a self-contained one, I summarize these as under.

3. The assessee in this case is a non-resident company having its Registered Office at Milano Corso Venezia. It carried on the business pertaining to the exploration of mineral oils etc. In the year 1984, the company entered into an agreement with ONGC for offering one Land Drilling Rig on charter basis for exploratory drilling in the Krishna-Godavari Basin area. Under the agreement between the parties, the assessee was to receive a fixed sum of US $ 9,50,000 towards mobilization and transportation of the drilling rig from Sharjah, UAE to the Vishakapatnam port. Before the Assessing Officer, the assessee claimed that the amount received was in the nature of reimbursement charges and not taxable in view of the provisions of Section 5 read with Section 9. This contention of the assessee was rejected by the Assessing Officer as in his opinion Section 44AB covered all payments whether these be reimbursement or these were payments of any other nature. In view of this the sum of US $ 9,50,000 was brought to tax under Section 44BB.

4. The matter was carried in appeal before the CIT(A) and at which stage reliance on behalf of the Revenue was placed on the decision of the Delhi Bench of the Tribunal in the case of ONGC as agent of Nippon Kokan KK ‘s case (supra) wherein according to the Department the view had been taken that mobilization and demobilization charges were taxable under Section 44BB. Following the aforesaid decision of the Tribunal, the CIT(A) confirmed the view taken by the Assessing Officer.

5. Being aggrieved, the assessee moved the Tribunal, where the matter was contested at length by both sides, the stand of the assessee being that mobilization charges could not be brought to tax in view of the provisions of Section 5(2) of the Income-tax Act, 1961. It was contended that the amount in question was neither received in India and nor had it accrued or had arisen to the assessee in India during the previous year under consideration. On the direction of the Bench, the assessee’s counsel furnished evidence to the effect that the amount had been paid to the assessee outside India i.e. in Italy. In support of the stand that the amount was not taxable in India, reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of Jindal Drilling Leasing (supra) wherein it had been held that mobilization charges in respect of cartage outside the territorial waters of India were not taxable in view of the provisions of Section 5 read with Section 9 of the Income-tax Act, 1961. As against the aforesaid, the ld. DR on behalf of the Revenue relied on the decision of the Delhi Bench of the Tribunal supra referred to in the order of the CIT(A).

6. The ld. Judicial Member who wrote the initial order at the outset observed that the decision of the Delhi Bench of the Tribunal relied upon by the ld. DR did not help the Revenue’s case as the facts as also the issues adjudicated upon were different. To emphasize, the Assessing Officer in that case did not include the receipts towards mobilization charges in the total income of the assessee and the CIT in proceedings under Section 263 took the view that the order of the Assessing Officer was erroneous and prejudicial to the interest of Revenue. He accordingly directed the Assessing Officer to include the same under Section 44BB. On the matter being carried before the Tribunal, it was held that such payments arose out of the contract and, therefore, directly connected with the assessee’s business. The further view expressed by the Tribunal was that there was an element of profit since a fixed amount had been received by the assessee irrespective of the expenditure incurred. The Bench on the aforesaid facts took the view that the mobilization charges were taxable in the hands of the assessee under Section 44BB read with Section 28(iv). It was categorically observed by the ld. Judicial Member that the issue with which the present Bench was concerned was neither raised before the Delhi Bench in the decision cited and nor considered by them. He accordingly took the view that the ratio of this decision could not be applied to the present case.

7. The Ld. Judicial Member at this stage referred to the decision of the Mumbai Bench of the Tribunal relied upon by the assessee’s counsel viz., the case of Jindal Drilling Leasing (supra) and which according to him squarely covered the point at issue. In referring to the facts of the Mumbai Bench decision, the ld. Judicial Member observed that it had been clearly held in that case that mobilization charges in respect of the transportation of rig outside the territorial waters of India were not taxable in view of the provision of Section 5 read with those of Section 9. It was held in that case accordingly that the mobilization charges in respect of the transportation of the rig in the Indian waters were taxable under Section 44BB. According to the Mumbai Bench, the entire receipts could not be brought to tax in India. The Ld. Judicial Member in his order reproduced the relevant observations of the Mumbai Bench of the Tribunal and these would be treated as part of the present order passed by me under Section 255(4).

8. In the final analysis, the ld. Judicial Member took the view that the mobilization charges in respect of the transportation of the rig outside the territorial waters of India were not taxable and he accordingly set aside the order of the CIT(A) directing the Assessing Officer to include in the total income only that portion of the profit which was relatable to the receipts attributable to the transportation of the rig in the territorial waters of India while computing the income under Section 44BB.

9. The ld. Accountant Member however did not concur with the view taken by the Ld. Judicial Member and he proceeded to write thereafter a separate order. He at the outset reproduced the submissions of both the sides, the contention of the assessee’s counsel being that Section 44BB was only a computation section and the scope of total income was to be determined only in accordance with the provisions of Section 5(2). In referring to Clause (a) of the said section, it was submitted that only that income could be included in the total income of a non-resident which was received or deemed to be received in India. The Ld. Accountant Member accepted that the assessee had placed on record relevant evidence, which showed that the amount in question was paid by ONGC in Italy. A reference thereafter was made by the assessee’s counsel to Clause (b) of Section 5(2) with the contention that the income which accrued or arose or was deemed to accrue or arise in India was liable to be included in the total income of the non-resident and according to him the assessee’s case at the most could be considered to be falling under Clause (b) of Sub-section (2).

10. Thereafter the ld. Accountant Member referred to the provisions of Section 9(1) and which were referred to by the assessee’s counsel or the proposition that Explanation (a) to Section 9(1)(i) provided that in the case of a business of which all the operations are not carried out in India but the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Placing reliance on the said explanation, the ld. counsel for the assessee urged that only that part of the profit which was relatable to the receipts attributable to the transportation of the rig in the territorial waters of India could be included in the total income while computing the income under Section 44BB. The plea of the assessee in other words as noted by the Ld. Accountant Member was that Section 44AB was controlled by Section 5(2) read with Section 9 and even though the entire receipts were subject to the determination of 10% profit under Section 44BB, the taxable amount was only that portion thereof which related to the proportionate operations carried out in India. The stand of the Revenue on the other hand as noted by the ld. Accountant Member was that Section 44BB was a special provision and Section 5 read with Section 9 had no role to play when the income was computed under Section 44BB. The decision of the Delhi Bench of the Tribunal supra was heavily relied upon.

11. The ld. Accountant Member in considering the aforesaid submissions at the outset took the view that the provisions of Section 44BB were special provisions and these were not controlled or hit by Section 5. In referring to the language of Section 5(2) and which started with the expression “subject to the provisions of this Act” and placing reliance on the judgment of the Hon’ble Kerala High Court in the case of Fertilizers & Chemicals (Travancore) Ltd. (supra), the ld. Accountant Member took the view that provisions of Section 5 would lean in favour of the special provisions viz., those of Section 44BB.

12. The Ld. Accountant Member proceeded to analyze the provisions of Section 44BB to ultimately come to the conclusion that the said section contained special provisions inasmuch as they deemed 10% of the amount specified in Sub-section (2) to be the profits and gains of such business which was to be charged to tax. Further, according to the Ld. Accountant Member the aggregate of the amount liable to be included for application of 10% rate would be the amount due to the assessee whether in or outside India for the supply of plant and machinery on hire to be used for extraction of oil in India. According to the ld. Accountant Member, it became patent from reading the relevant provisions that the amount liable to be considered for Sub-section (2) was the one, which was received or receivable on account of supply of plant and machinery which was to be used in India and the condition for inclusion in the aggregate amount under Section 44BB was the end destination viz., the place where the plant and machinery was to be used and if it was to be ultimately used in India then the entire hire charges were includible. According to the Ld. Accountant Member there was no stipulation in Sub-section (2) to the effect that only that portion of the mobilization charges was includible for purposes of tax and which covered the distance falling in the territory of India. Further, according to the Ld. Accountant Member, it was totally irrelevant whether the amount was paid to the assessee in or out of India. In conclusion, the ld. Accountant Member took the view that Section 44BB contained special provisions and according to him deeming provisions over-rode the general provisions. It was reiterated by the ld. Accountant Member that the provisions of Section 44BB were not controlled by the provisions of Section 5(2), and the further view expressed by the Ld. Accountant Member was that when Section 5 itself was held to be inapplicable then there could be no question of considering the applicability of Section 9 separately.

13. In coming to the decision of the Delhi Bench of the Tribunal in the case of Nippon Kokan KK (supra), which was relied upon by the Revenue, the Ld. Accountant Member at pages 16 and 17 of his separate order took the view that there were no distinguishing features vis-a-vis the facts of the assessee’s case and the said order of the Tribunal was squarely applicable. The Ld. Accountant Member also referred to another unreported decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. (supra) where according to the Ld. Accountant Member the question of mobilization charges was considered and adjudicated upon in favour of the Revenue. The ld. Accountant Member found the facts of the assessee’s case as being identical to those considered by the Tribunal in the case of Sedco Forex International Drilling Inc. (supra).

14. In the final analysis, the ld. Accountant Member confirmed the view taken by the CIT(A) observing that the CIT(A) had followed the view of the Delhi Bench of the Tribunal and judicial discipline required that sitting at Delhi the consistent view of the Delhi Benches should be followed. He accordingly took the view that the mobilization charges in respect of the transportation of the rig outside the territorial waters of India, the total amount involved being US $ 9,50,000 were includible for purpose of taxation under Section 44BB of the Income-tax Act, 1961.

15. Before me both the parties argued at length, the ld. counsel for the assessee reiterating his verbal submissions by a written note/synopsis. In reiterating the arguments advanced before the Division Bench and placing reliance on the view expressed by the Ld. Judicial Member, the ld. counsel put forward the following broad propositions vide written communication filed before the Bench :-

The scheme of taxation of income under the Income-tax Act, 1961 (“the Act”) is summarised hereunder:

Section 1 provides that the provisions of the Act shall apply to the whole of India. Sections 4 and 5 are the charging sections of the Act. Section 4 brings to charge total income of every person of the previous year at the rates provided in the relevant Finance Act. The scope of 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 is dependent upon the residential status of the person.

Section 5 separately defines the scope of total income of a person who is resident in India and a person who is a non-resident. Under Sub-section (2) of Section 5 of the Act, the total income of a non-resident person has been restricted to the following :

(a) all incomes which are received or are deemed to be received in India in any previous year by or on behalf of such persons; and/ or

(b) all incomes which accrue or arise or are deemed to accrue or arise to such person in India during the previous year.

It is trite law that no income can be brought to tax unless it falls within the scope of charging section. Their Lordships of the Supreme Court in the case of CIT v. Ajax Products Ltd. 55 ITR 741 held that the subject is not to be taxed unless the charging provisions clearly impose an obligation.

The provisions of Section 5 of the Act start with the expression ‘Subject to other provisions of the Act’. The legislative intent behind making the provisions of Section 5 subject to other provisions of the Act is that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in Section 5 of the .Act, such section may prevail. For example, although an income may fall within the four corners of the charging sections, namely, Sections 4 & 5, the provisions of Section 10 of the Act may, however, operate to exclude all or any part of such income from the total income. Thus, the benefit conferred by way of deduction/allowance/exemption under any of the provisions shall operate to confer such benefit to the assessee although such income falls within the scope of total income as defined in Section 5 of the Act.

The aforesaid view finds support from the commentary of the learned authors Kanga & Palkhiwala in their book ‘Law and Practice of Income-tax’ (refer page 38 of paper book) and the decision of the Bombay High Court in the case of CIT v. F.Y. Khambaty 159 ITR 203. .

Chapter IV-D, containing Sections 28 to 44D of the Act, lays down the mode of determining the income chargeable under the head ‘Profits and gains of business or profession’. Section 29 provides that the income chargeable under the head ‘Profits and gains of business or profession’ shall be computed in accordance with the provisions contained in Sections 30 to 43D of the Act.

The computation of taxable income of a non-resident engaged in the business of exploration, etc., of mineral oils in accordance with the general mode of computation under Sections 28 to 43A of the Act involved a number of complications. Therefore, as a measure of simplification, provisions of Section 44BB were by the Finance Act, 1987 with retrospective effect from 1-4-1983. The said section overrides the general mode of computation of income chargeable under the head ‘Profits and gains of the business or profession’ as provided in Sections 28 to 43A of the Act.

Section 44BB of the Act provides that in the case of a person engaged in the business of exploration of mineral oil, tax shall be levied at the presumptive rate of 10% of the aggregate of the amounts set out in Sub-section (2) thereto. The taxation of income on presumptive basis has to be followed, notwithstanding the general mode of computation of income under the head ‘Profits and gains of business or profession’.

On a close reading, Sub-section (2) of Section 44BB, it is seen that the amounts made liable to tax therein are in line with the scope of total income as provided in Sub-section (2) of Section 5 of the Act.

Clause (a) of Sub-section (2) of Section 44BB of the Act provides that the presumptive rate of taxation shall be applied on the amounts paid or payable on account of provisions of services and facilities in India in connection with the business of exploration, etc., of mineral oils etc. Under Clause (b) amounts received or deemed to be received in India on account of provisions of services and facilities outside India are to be considered. Thus, Clause (a) of Section 5(2) and Clause (b) of Section 44BB(2) brings within their ambit incomes/amounts, which are received or are deemed to be received in India. Similarly, Clause (b) of Section 5(2) and Clause (a) of Section 44BB(2) deals with incomes/amounts accruing in India (whether received in or out of India).

Thus, making a departure from general mode of computation of income chargeable under the head ‘Profit and gains of business or profession’, as a matter of convenience, the provisions of Section 44BB of the Act provides that tax shall be levied on a presumptive rate of 10% on the aggregate of the following amounts :

(a) Amounts accruing in India (whether received in or out of India) on account of rendering of services/utilization of facilities in India;

(b) Amounts received or deemed to be received in India on account of rendering of services/utilization of facilities outside India.

In view of the aforesaid, the provisions of Section 44BB are not, in our respectful submission, in conflict with the provisions of Section 5 of the Act.

To construe the provisions of Clause (a) of Sub-section (2) of Section 44BB of the Act to include entire charges in connection with, or supply of plant and machinery if the ultimate destination of its use is in India, even though such charges/amount falls outside the scope of total income, would, in our respectful submission, be doing injustice to the language of the section and the scheme of taxation under the Act.

Even otherwise, it is the respectful submission of the appellant that the provisions of Section 44BB, which is merely a computation provision cannot override the charging sections. The provisions of Section 5 lays down the broad parameters under which any income must fall so as to bring it to tax under the provisions of the Act. The computation/ machinery provisions are merely intended to effectuate the charge. The machinery provisions cannot qualify the charging sections so as to make the latter otiose. This view is fortified by the decision of the Mumbai High Court in the case of CIT v. Standard Motor Co. Ltd. 119 ITR 573, affirmed by the Apex Court in 201 ITR 391.

The Supreme Court in the case of State Bank of Travancore v. CIT158 ITR 102 held that for the content of taxable income, one has to refer to the substantive provisions of the Act, mainly Section 5 read with the other relevant sections. His Lordship, Hon’ble Justice Sabyasachi Mukherjee, agreed with the majority view to the extent of the said principle of law laid down by the Hon’ble Apex Court and observed as under :

The material provisions in regard to the computation of income of an assessee under the head ‘Profits and gains of business’ are to be found in Sections 28(i); 29 and 145(1) but these have to be read subject to Section 5 of the Act…

Though these provisions provide for charging the income by way of profits and gains of business and prescribe the manner of computation, the question as to at what point of time its chargeability arises is answered by Section 5 of the Act which states that the total income of a resident assessee from whatever source derived becomes chargeable either when it is received by him or when it accrues or arises to him during the previous year….

[Emphasis supplied] (page 114)

The Special Bench of the Hyderabad Tribunal in the case of DCIT v. Nagarjuna Investment Trust Ltd. 65 ITD 17 also held likewise.

It is further pertinent to mention that the provisions of Section 44BB have be amended by the Finance Act, 2003, w.e.f. 1-4-2004, inserting a new Sub-section (3) thereto. The newly inserted Sub-section (3) provides that the assessee may claim lower profits and gains than the profits and gains specified in Sub-section (1) provided that the assessee complies with certain conditions, viz., maintenance of books of account, getting the accounts audited, etc. In that case, the presumptive rate of taxation as laid down in Sub-section (1) of Section 44BB shall not apply and the income of the non-resident assessee shall be computed in accordance with the normal provisions of the Act.

A non-resident assessee may, thus, w.e.f. assessment year 2004-05, compute his income from the business of exploration, etc., of mineral oils in accordance with the general mode of computation of income chargeable under the head ‘Profits and gains of business or profession’. The amendment made by the Finance Act, 2004 further reinforces the contention of the appellant that the provisions of Section 44BB are merely machinery/computation provisions.

It would not be out of context to state that the interpretation sought to be canvassed by the Revenue to include mobilisation charges for transportation of rigs outside the territorial waters of India within the ambit of Section 44BB(2)(a) of the Act will result in discrimination between an assessee paying taxes on presumptive basis under Sub-section (1) and the assessee computing income as per the general mode of computation. In the case of the former, the mobilisation charges would be includible but in the case of the latter the same will not be included.

To summarize, mobilisation charges for transportation of rigs outside the territorial waters of India are not liable to tax in India under any provision of the Act due to following :

(a) the said mobilisation charges do not fall within the scope/ambit of the total income as defined in Section 5(2) of the Act;

(b) Sub-section (2) of Section 44BB is in line with the scope of total income as defined in Section 5(2) of the Act and do not include such charges;

(c) even otherwise, the provisions of Section 44BB are merely computation/machinery provision, which cannot override Section 5, the charging section of the Act to include an amount/income falling outside the purview of the charging section.

16. It would also like to mention that in one of the initial hearings of the Third Member reference, a written note had been filed wherein the broad propositions were set out along with the discussion on numerous reported decisions and an attempt was also made to distinguish those judgments which had been relied upon by the Ld. Accountant Member in arriving at the decision that he did. The aforesaid broad propositions are also being reproduced hereunder :-

The issue for consideration is – whether the mobilisation and transportation charges in respect of the transportation of rig outside the territorial waters of India and also received outside India, not falling within the scope of total income under Section 5 of the Income-tax Act, 1961 (“the Act”), are chargeable to tax under Section 44BB of the Act?

To answer the aforesaid, the primary question, which arises for consideration is – whether the provisions of Section 44BB override the provisions of Section 5 of the Act?

The learned Accountant Member has (page 15 of the judgment) laid emphasis on the expression “subject to provisions of this Act” as used in Section 5(2) of the Act to hold as under :

It ergo shows that Section 5(2) does not have an overriding effect over other sections of the Act and it has to be harmoniously construed in conjunction with other special provisions.

The Learned Member has, in this regard, relied upon the decision of the Kerala High Court in CIT v. Fertilizer & Chemicals (Travancore) Ltd. 166ITR823.

With respect, Section 5 is the charging provision and no income can be brought to tax unless it falls within the scope of the charging section. It is trite law that the subject is not to be taxed unless the charging provision clearly imposes the obligations, as held in following :

CIT v. Ajax Products Ltd. 55 ITR 741 (SC)

CWT v. Ellis Bridge Gymkhana229 ITR 1 (SC)

The Learned Authors of Kanga & Palkhiwala in their book ‘Law and Practice of Income-tax’ have on page 208 observed as under (Page 38 of the paper book):

The definition of total income is “subject to the provisions of this Act”. The result is that while income cannot be taxed, generally speaking, unless it falls within Section 5, it is not necessarily to be taxed because it falls within the section; any other section may operate to save from taxation income which is within the purview of this section.’ [Emphasis supplied]

Their Lordships of the Bombay High Court in the case of CIT v. F. Y. Khambaty 159 ITR 203, 207 observed as under :

It appears to us that the expression “subject to” used in the opening portion of both the Sub-sections (1) and (2) of Section 5 has to be read keeping in mind that Section 5 is intended to explain the scope of total income. Therefore, what the use of the said expression shows is that in considering what is total income under Section 5, one has to exclude such income as is excluded from the scope of total income by reason of any other provision of the Income-tax Act and not that the other provisions of the Income-tax Act override the provisions of Section 5 as suggested by Mr. Jetley. If we were to give the provisions of Section 5, the interpretation sought to be placed on them by Mr. Jetley, the result would be that in the case, for example, of a non-resident assessee, having some taxable income in India, even the income earned by his wife and minor sons who are not resident in India from a partnership business carried on abroad and not controlled from India in which the assessee is a partner would be liable to be included in the total income of the assessee and liable to be taxed in India. We find it difficult to believe that the Legislature had any such intention in mind in enacting the provisions of Section 5 and Section 64. Accepting the submission of Mr. Jetley; in our view, would amount straining the plain language of Section 5 to bring about an illogical and unjust result and there is no warrant for us to do so.

[Emphasis supplied]

Further reliance, in this regard, placed on the following :

CIT v. Nippon Yusen Kaisha 233 ITR 158 (Cal.) pg. 162.

The decision in Fertilizer & Chemicals Ltd. (supra), relied upon by the Learned Accountant Member, does not with respect, lay down the proposition that the scope of total income is not restricted to incomes specifically provided therein and that Section 5 does not have an overriding effect over other sections of the Act, as has been observed by the learned AM.

Section 44BB is merely a computation provision laying down a special mode of computing ‘Profit and gains of the business’ in connection with business of exploration etc. The said section merely overrides the operation of Sections 28 to 41 and Sections 43 and 43A of the Act and does not override the provision of Section 5 of the Act, which is the charging section of the Act.

Reliance, in this regard, is placed on following:

Memorandum Explaining the Finance Bill, 1987: 165 ITR 161 (St.) (Pages 39-40 of paper book)

Circular No. 495 dated 22-9-1987: 168 ITR 87, 98 (St.) (Page 41 of paper book)

Oil India Ltd. v. CIT 212 ITR 225, 229 (Ori.)

‘Section 44BB is a special provision for computing profits and gains in connection with the business of exploration of mineral oil. Parliament engrafted the aforesaid provision in the Income-tax Act as a measure of simplification providing for determination of income of such taxpayers at ten per cent of the aggregate of certain amount.’

CIT v. ONGC 124 Taxman 292 (Raj.) (Pages 42-47 of paper book)

Canara Bank v. Joint CIT 84 ITD 310 (Bang.)

The Bombay High Court in the case of CIT v. Standard Motor Co. Ltd. 119 ITR 573, 582-583 held that Section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax and the provisions of Section 5(2)(b), though by merely looking at the wording of Section 145(1), it may appear that in all cases the method of accounting must be followed. It was further held that Section 145 is only a machinery provision and cannot qualify the charging section so as to make the latter otiose.

The decision of the Bombay High Court in the case of Standard Motor Co. (supra) has been affirmed by the Apex Court in the case reported as Standard Triumph Motor Co. Ltd. v. CIT 201 ITR 391.

The Special Bench of Hyderabad Tribunal in the case of Dy. CIT v. Nagarjuna Investment Trust Ltd. 65 ITD 17 also held likewise. The Tribunal held that the provisions of Section 145 cannot override Section 5 of the Act. If an income has neither accrued nor received within the meaning of Section 5 of the Act, whatever Section 145 may say, such income cannot be charged to tax even though a book-keeping entry has been made recognising such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year. Section 145 determines the mode of computing the taxable income. It does not affect the range of taxable income or the ambit of taxation. The computation provisions cannot enlarge or restrict the content of taxable income. The range of taxable income or ambit of taxation is to be determined in accordance with the charging provisions.

The Learned Accountant Member has, on page 15, observed that Section 44BB contains special provision by virtue of which 10% of the qualifying amounts are deemed to be profits of the business which are chargeable to tax. It has been further observed’ that deeming provisions create a fiction by assuming particular state of affairs.

Legal fiction in Section 44BB has been created only for the purpose of laying down a special procedure for computing income under the head ‘Profits and gains of the business’. The same cannot be extended to hold that it overrides Section 5, the charging section, to bring to tax an income, which is beyond the purview of Section 5 of the Act.

It is trite law that legal fiction should not be extended beyond its object and purport. Reliance is placed on the following decisions:

CIT v. Mother India Refrigeration Industries (P.) Ltd. 155 ITR 711 (SC)

CIT v. Ajax Products Ltd. 55 ITR 741 (SC)

CIT v. Quantas Airways Ltd.

The decision of Mumbai Bench of Tribunal in the case of Jindal Drilling Leasing (Pages 18 – 24 of paper book) is direct authority on the issue under consideration wherein it has been held that mobilisation charges in respect of voyage outside the territorial waters of India are not taxable in view of Section 5 read with Section 9 of the Act.

The Learned Accountant Member has, on pages 18 and 19, relied upon the decision of the Delhi Tribunal in the case of Sedco Forex International v. Dy. CIT in ITA No. 4562/D/91 reported in 72 ITD at page 415.

The decision of the Delhi Tribunal in the case of Sedco Forex (supra) does not deal with the issue under consideration. The decision of the Mumbai Tribunal in the case of Jindal Drilling (supra) is directly on the issue and fully applicable to the facts of the case.

17. In the course of the submissions before us over and above the aforesaid written propositions, the ld. counsel contended that the decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. (supra) had not been confronted to the assessee. It was further emphasized that the Income-tax Act did not have any extra territorial operation and the same applied only to the income earned in India and not outside. Further, according to the ld. counsel, Section 44BB could not be extended to bring to tax the income which had accrued in India since all that it provided was that the computation provisions of Sections 28 to 41, 43 and 43A were to be excluded and in proceeding further the ld. counsel contended that Section 44BB was not in conflict with Section 5(2). It was emphasized that as per Clause (a) it was only the income pertaining to the services provided in India, which could be taxed and any other interpretation would be in conflict with Section 5, which was the charging section. The further submission was to the effect that Section 44BB was inserted only as a measure of simplification and it was not meant to over-ride Section 5 or bring to tax the income which accrued or had been earned outside India. In conclusion, it was urged by the ld. counsel that Section 44BB would apply only to that income which pertained to the journey in India of the rig since Section 44BB(2) spoke of “services rendered in India” and income from services rendered outside India was not taxable. The ld. counsel reiterated reliance on the decision of the Mumbai Bench of the Tribunal in the case of Jindal Drilling Leasing (supra) and also placed reliance on an unreported decision of the same Bench and this is being the case of Dy. CIT v. Sonal Off-shore Drilling Inc. [IT Appeal No. 7414 (Bom.) of 1994 dated 29-10-2002].

18. The ld. DR on the other hand vehemently supported the order passed by the ld. Accountant Member and subsequent arguments advanced were a reiteration of the reasons recorded by the ld. Accountant Member in taking a decision in favour of the Revenue. According to the ld. DR the mobilization charges became payable in a lump sum at the port of entry i.e. Vishakapatnam (India) and this clearly indicated that a debt was created in favour of the assessee only after the equipment had reached India from outside. According to the ld. DR there could be no bifurcation of the amount up to the stage of entry into Indian waters and the journey thereafter. It was further emphasized that if the accrual took place in India then the income was also taxable in India.

19. The further submissions were to the effect that Section 44BB contained special provisions and Section 5 was subject to the other provisions of the Act which included Section 44BB. According to the ld. DR the argument raised by the assessee if accepted would negate the provisions of Section 44BB and it was not only a machinery provision as contended on behalf of the assessee but a charging provision as well. A reference was made to the provisions of Section 172(2) which according to the ld. DR were identically worded and in the decision in Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307 (SC) at 310 Section 172 had been treated as a charging section.

20. The further submission was to the effect that the services were to begin from Sharjah, UAE and end at Vishakapatnam (India) and these could not therefore be curtailed to a place up to 200 nautical miles outside India. According to the ld. DR, the contract between the parties got completed in India and not outside and therefore the entire amount would become taxable under Section 44BB which was a special provision overriding the general provision. Further, according to the ld. DR the provisions of the statute were to be interpreted in a harmonious manner and it could not involve the segregation of the amount in question, which was a lumpsum payment to the assessee by the ONGC.

21. In conclusion and in support of the order passed by the Ld. Accountant Member, the ld. DR placed reliance on numerous judgments viz. CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC), Poona Electric Supply Co. Ltd. v. OT[1965] 57 ITR 521 (SC), CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146′ (AP), CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 at 699 (Guj.) (FB), Fertilisers & Chemicals (Travancore) Ltd. ‘s case (supra), Gosalia Shipping (P.) Ltd.’s case (supra), CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 at 400 (SC), CWT v. Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust[1977] 108 ITR 555 (SC),ML. Vasudeva Murthy & Sons [ 1992] 198 ITR 426 (Kar.), CIT v. Indian Molasses Co. (P.) Ltd. [ 1989] 176 ITR 473’ (Cal), Standard Triumph Motor Co. Ltd. v. CIT[ 1993] 201 ITR 3912 (SC), Asstt. CIT v. Interocean Shipping (I) (P.) Ltd. [1994] 51 ITD 582 (Delhi), ONGC v. IAC[1989] 29 ITD 422 (Delhi), Barendra Prosad Ray v. ITO [1981] 129 ITR 2953 (SC), Anglo-French Textile Co. Ltd. v. CIT[1953] 23 ITR 101 (SC), Sedco Forex Internatinal Drilling Inc. ‘s case (supra), Lloyd Helicopters International (P.) Ltd., In re [2001] 249 ITR 1624 (AAR – New Delhi), General Insurance Corporation of India v. CIT[1999] 240 ITR 139s (SC), CIT v. Oil & Natural Gas Commission [2002] 255 ITR 4136 (Raj.), Oil India Ltd. v. CIT [1995] 212 ITR 2257 (Ori.), Seth Pushalal Mansinghka (P.) Ltd. v. CIT [1967] 66 ITR 159 (SC), Emil Webber v. CIT [1993] 200 ITR 4838 (SC) and Performing Right Society Ltd. v. CIT [1977] 106 ITR 11 (SC).

22. Another argument advanced by the ld. DR was that the view expressed by the Delhi Benches be followed in order to maintain consistency and lastly he sought to distinguish the various judgments relied upon on behalf of the assessee as according to him these were different both on facts and in law.

23. In reply, the ld. counsel for the assessee submitted that the applicability of Section 44BB was not in dispute but the question for consideration was “up to what extent”. Section 5(2) according to the ld. counsel defined the parameters of the income taxable in India and although the accrual was not in dispute the extent thereof was. Further, according to the ld. counsel, the observations of the ld. authors in the commentary of Kanga & Palkhivala did not support the Revenue’s case and further the various decisions relied upon by the ld. DR did not advance the Revenue’s case. A specific reference was made to CIT v. Quantas Airways Ltd. [2002] 256 ITR 849 (Delhi), Visakhapatnam Port Trust’s case (supra) and Smt. Kamalini Khatau’s case (supra).

24. In coming to the provisions of Section 172(2) and 172(3), the ld. counsel emphasized that these provided a mechanism for taxing a ship owner before he left India and in 222 ITR 739 (sic), Their Lordships of the Hon’ble Supreme Court had explained the working of Section 172 but the view expressed as also the interpretation of the said provisions did not in any way lessen the merits of the assessee’s case. The further submission was to the effect that it was not Section 5 which was subject to the provisions of Section 44BB but the position was the other way round. “According to the ld. counsel the amount had first of all to be brought within the ambit of Section 5(2) and it was only thereafter that provisions of Section 44BB came into operation. The question of a PE i.e. Permanent Establishment according to the ld. counsel was not relevant for purposes of deciding the point at issue as was the view expressed by the ld. DR.

25. In coming to the case of Sedco Forex International Drilling Inc. (supra) relied upon by the ld. DR, the stand of the ld. counsel was that the question raised in the present appeal was not under consideration in that case as it was either the entire income being taxable in India or outside. Further, according to the ld. counsel, the consistency principle was to apply provided the facts were identical but which in the present case were not. In conclusion, it was urged that Rule 10 ,of the Income-tax Rules supported the view taken by the ld. Judicial Member to bifurcate the receipts between the distance up to the entry point into India and the journey thereafter up to Vishakapatnam port. The various decisions relied upon by the ld. DR were sought to be distinguished by the ld. counsel.

26.1 have examined the rival contentions and have also minutely perused the orders passed by the ld. Members constituting the Division Bench. The authorities cited at the bar by both the sides have also been taken into account.

27. At the outset, I would like to mention that the Judicial Member in his order has followed the view taken by the Mumbai Bench of the Tribunal in the case of Jindal Drilling Leasing (supra) and produced the relevant extract from the said decision. It is observed by the Mumbai Bench on reading Sections 44BB, 4 and 5(2) that what is taxable in India in the case of a non-resident is the income, which has accrued or has arisen whether actually or deemed under the statute or which is received in India. According to the Mumbai Bench the aforesaid sections denote a concept for arriving at the total earning of a non-resident and vis-a-vis Sub-section (2) of Section 44BB it takes into its ambit only those receipts which are payable or paid either in India or elsewhere for services rendered in India. The Mumbai Bench has further considered the issue both with reference to payer’s point of view as also the point of view of the recipient. In considering the facts of those cases and which apparently are identical to the one being considered in the present case, the ship had a voyage from United States of America to India and out of the total of 11,998 nautical miles, the voyage in India was only 385 nautical miles. The Bench ultimately on considering the relevant provisions of the Act took the view that the income from transporting the rig had accrued to the assessee or had arisen to it only when the transportation had taken place and that transportation was both in India as also outside India. Further according to the Bench, accrual of income in India was therefore to be only for that portion of the voyage which pertained to the travel in India and the balance would accrue to the non-resident for transportation outside India and therefore the receipts on this account would not be covered by the provisions of Section 44BB of the Act.

28. In following the view taken by the Mumbai Bench of the Tribunal in the aforesaid decision cited supra, the ld. Judicial Member opined that mobilization charges in respect of the transportation of the rig outside the territorial waters of India were not taxable and he, therefore, set aside the order of the CIT(A) and directed the Assessing Officer to include in the total income only that portion of the profit which was relatable to the receipts attributable to the transportation of the rig in the territorial waters of India while computing the income under Section 44BB. The Ld. Judicial Member distinguished the decision of the Delhi Bench of the Tribunal which had been followed by the CIT(A) in deciding against the assessee and vide para 5 of his 6rder, he observed that in that case, the Assessing Officer did not include the receipts towards mobilization charges in the total income of the assessee and the Commissioner in proceedings under Section 263 directed the Assessing Officer to include the same under Section 44BB. In further elaborating the facts of that case, the ld. Judicial Member took the view that the issue which was concerned in the present appeal was neither raised and nor considered by the Delhi Bench of the Tribunal.

29. As against the aforesaid, ld. Accountant Member has taken the view that provisions of Section 44BB are special provisions and these would have to lean in favour of Section 5. The further view expressed by the ld. Accountant Member is that sitting at Delhi, the CIT(A) is expected to follow the view of the Delhi Bench of the Tribunal and this is what judicial discipline requires. In my opinion, the legal position is somewhat different to the one highlighted by the Ld. Accountant Member. Section 44BB is no doubt described as a “Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils” but the terms “Notwithstanding anything to the contrary” refer to Sections 28 to 41 and Sections 43 and 43A. In other words, Section 44BB is no doubt a Special Provision but only with reference to the system of computation of the taxable income, which was earlier being done by Sections 28 to 41 etc. It cannot replace, supersede or “lean” in favour of Section 5 which in my opinion is the charging section whereby the scope of total income of an assessee whether it be of a resident or it be of a non-resident is worked out. It would be necessary in every case whether it be that of a resident or that of a non-resident of first of-all decide as to whether a particular receipt or an item of income is liable to be included in the total income vis-a-vis Section 5 and if it is to be so included, then the question would arise as to how the taxable part thereof is to be computed and at this stage Section 44BB steps in and the said section having replaced the earlier system of computing the income which was by resort to provisions of Sections 28 to 41 etc. ‘ :..’.-

30. In the present case, admittedly the rig has travelled all the way from Sharjah in UAE to the Vishakhapatnam port in India and it is not disputed at any stage of the proceedings that the ONGC had paid the amount to the assessee outside India i.e. in Italy. In other words, the journey outside India is substantial and much more than the journey of the rig within the Indian waters. The ld. Accountant Member in para 6 of his order accepts that “ordinarily” the income of a non-resident is to be computed according to the mandate of Section 5 i.e. that income which is received or is deemed to be received in India as also income which accrues or arises or is deemed to accrue or arise in India but in the same para he proceeds to hold that the provisions of Section 44BB being special provisions are not controlled or hit by Section 5. In my opinion, the decision taken by the ld. Accountant Member renders otiose/redundant the provisions of Section 5 inasmuch as all assessees engaged in the business of exploration of mineral oils would have their income computed for taxation purposes only with reference to Section 44BB and the entire exercise of deciding the question of accrual of income or the place of accrual would become inoperative. There would be no need to refer to the provisions of Section 5 or for that matter Section 9.

31. In considering the background leading to the introduction of Section 44BB this was never the intention of the Legislature and provisions of Sections 5 and 9 were always meant to operate and remain effective on the statute book. I would have no hesitation in observing that the view of the ld. Accountant Member has been substantially guided by the opinion formed by him that provisions of Section 44BB are special provisions and these must override those of Section 5. He has relied heavily on the decision of the Delhi Bench of the Tribunal in the case of Nippon Kokan KK (supra) which was followed by the CIT(A) and the further view expressed by the ld. Accountant Member was that judicial propriety required the CIT(A) to follow the view of the Delhi Bench of the Tribunal. In my opinion, the CIT(A) in deciding an issue can refer to the decisions rendered by different Benches of the Tribunal wherever they sit and the decision of the Delhi Bench of the Tribunal vis-a-vis the CIT(A) sitting at Delhi does not operate in the same manner as a judgment of the jurisdictional High Court. Further, if the decision of the Delhi Benches was the only one available at that point of time then the CIT(A) committed no error in following the said decision but when the matter has travelled to the Tribunal, then- the ld. Members of the Division Bench were at liberty to follow the view that they thought was proper and in the present case if there were two views one of the Mumbai Bench of the Tribunal and another of the Delhi Bench then the appropriate course would have been to refer the matter to a Special Bench. Further, the ld. Judicial Member has distinguished the decision of the Delhi Bench of the Tribunal whereas the ld. Accountant Member has taken the view that the said decision is squarely applicable. The ld. Accountant Member has further in para 13 of his separate order referred to the decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. (supra) but it is the categorical submission of the ld. counsel appearing on behalf of the appellant before me that this was never confronted to the assessee during the course of the hearing and this factual submission has also not been challenged by the ld. DR on behalf of the Revenue. At pages 19 and 20, the relevant extract from the decision of the Delhi Bench in the case of Sedco Forex International Drilling Inc. (supra) has been extracted and the ld. Members have taken the view that Section 44BB contains special provisions and these do not go beyond the scope of the charging Sections 4 and 5. In my opinion, the manner in which the relevant provisions of the Act more so those of Section 44BB have been interpreted in the case of Sedco Forex International Drilling Inc. (supra) has rendered inoperative the provisions of Sections 4 and 5 which have been accepted even in the case of Sedco Forex International Drilling Inc. (supra) to be charging sections.

32. The position as has now emerged before me is that there are two decisions of the Delhi Benches of the Tribunal taking a view in favour of the Revenue i.e. the cases of Sedco Forex International Drilling Inc. (supra) and the case of Nippon Kokan KK(supra) and on the other side are two decisions of the Mumbai Bench of the Tribunal, the first being the case of Jindal Drilling Leasing (supra) and the other being the decision of the same Bench in the case of Sonal Offshore Drilling Inc. (supra). The former decision has in fact been followed in the latter decision of the Mumbai Bench of the Tribunal and CBDT instruction No. 1767 dated 1-7-1987 has also been taken into account at page 2 of the said decision. Those instructions pertain to the percentage of work which pertains to activities performed in India and which would be subject to tax in India. In going by the accepted legal proposition that when there are two views, then the view which is favourable to the assessee should be followed, I am inclined to agree with the two decisions of the Mumbai Bench of the Tribunal but along with my own reasoning.

33. A number of decisions have been cited by both sides in support of their respective view points and I would now like to deal with some of these more so the ones cited on behalf of the assessee and which aptly support the view point canvassed. Their Lordships of the Hon’ble Supreme Court in the case of CIT v. Ajax Products Ltd. [ 1965] 55ITR 741 held that a subject was not to be taxed unless the charging provisions clearly imposed the obligation. A similar view was taken in CWT v. Ellis Bridge Gymkhana [1998] 229 ITR 1 (SC). The ld. Accountant Member followed the decision of the Hon’ble Kerala High Court in Fertilisers & Chemicals (Travancore) Ltd. ‘s case (supra) for emphasizing the effect of the expression “subject to the provisions of this Act”. In my opinion, the impact of the aforesaid judgment was not in the manner in which it has been interpreted by the ld. Accountant Member and I would therefore refer to a decision of the Bombay High Court in the case of CIT v. F.Y. Khampaty [1986] 159 ITR 203’ wherein Their Lordships have observed as under:-

It appears to us that the expression “subject to” used in the opening portion of both the Sub-sections (1) and (2) of Section 5 has to be read keeping in mind that Section 5 is intended to explain the scope of total income. Therefore, what the use of the said expression shows is that in considering what is total income under Section 5, one has to exclude such income as it excluded from the scope of total income by reason of any other provision of the Income-tax Act and not that the other provisions of the Income-tax Act override the provisions of Section 5 as suggested by Mr. Jetley. If we were to give the provisions of Section 5, the interpretation sought to be placed on them by Mr. Jetley, the result would be that in the case, for example, of a non-resident assessee, having some taxable income in India, even the income earned by his wife and minor sons who are not resident in India from a partnership business carried on abroad and not controlled from India in which the assessee is a partner would be liable to be included in the total income of the assessee and liable to be taxed in India. We find it difficult to believe that the Legislature had any such intention in mind in enacting the provisions of Section 5 and Section 64. Accepting the submission of Mr. Jetley, in our view, would amount to straining the plain language of Section 5 to bring about an illogical and unjust result and there is no warrant for us to do so.

[Emphasis supplied]

34. The ld. authors Kanga & Palkhivala in their commentary at page 208 observed as under:-

The definition of total income is ‘subject to the provisions of this Act’. The result is that while income cannot be taxed, generally speaking, unless it falls within Section 5 it is not necessarily to be taxed because it falls within the section; any other section may operate to save from taxation income which is within the purview of this section.

[Emphasis supplied]

35. With reference to the aforesaid, I accept the argument of the ld. counsel that Section 5 is the charging provision and no income can be brought to tax unless it falls within the scope of the said section and the use of the expression “subject to other provisions of the Act” in Section 5 would mean that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in Section 5 of the Act such section would prevail. To emphasise, the provisions of Section 44BB visa-vis the legislative intent only mean that these replace the system of computation of income earlier envisaged by application of the provisions of Sections 28 to 41 and Sections 43 and 43 A of the Act but the provisions of Section 5 of the Act, which is the charging section would remain intact and these by no maxim of interpretation would be superseded by the provisions of Section 44BB. As per Circular No. 495 dated 22-9-1987 reported in 168 ITR 87 (St.) Section 44BB was no doubt described as a special provision for computing profits and gains in connection with the business of exploration of mineral oil but these were a measure of simplification providing for determination of income of such taxpayers at 10% of the aggregate of a certain amount.

36. The Special Bench of the Tribunal at Hyderabad in the case of Dy. CIT v. Nagarjuna investment Trust Ltd. [1998] 65ITD 17 took the view that the provisions of Section 145 cannot override Section 5 of the Act. If an item of income had neither accrued and nor had it been received within the meaning of Section 5 of the Act, then whatever Section 145 may say, such income could not be charged to tax even though a book-keeping entry has been made recognizing such hypothetical income, which in law and on fact did not really accrue or arise or was received in the previous year. Further according to the Special Bench decision, the computation provisions could not enlarge or restrict the content of taxable income and the range of taxable income or the ambit of taxation was to be determined in accordance with the charging provisions.

37. I would further refer to the following decisions for the legal proposition that a legal fiction cannot be extended beyond its object and purport:-

CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711′ (SC)

Ajax Products Ltd. ‘s case (supra)

Quantas Airways Ltd. ‘s case (supra).

38. In disposing of the present reference, I have also taken into account the various other decisions cited on behalf of the assessee by its counsel and those relied upon by the ld. DR in support of the Revenue’s case. I must state categorically that the latter set of decisions does not advance the Revenue’s case and these are therefore held to be distinguishable on facts and in law.

39. In the final analysis, I considering the facts of the case as also the legal position vis-a-vis the decisions cited before me opine that the view taken by the ld. Judicial Member is the correct one and I, therefore, approve of the same.

40. The matter may now be listed before the Division Bench for passing appropriate orders in accordance with the majority view.