AIT-2011-141-ITAT
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : C : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI A.K. GARODIA,
ACCOUNTANT MEMBER
ITA No.3909/Del/2010
Assessment Year : 2007-08
G & T Resources (Europe) Ltd.,
C/o F-04 & 05, Triveni Commercial
Complex, Sheikh Sarai Phase-I, New
Delhi.
PAN : AABCG9877F
(Appellant)
DDIT, International Taxation,
Dehradun.
Vs.
(Respondent)
Assessee by : Shri K. Sampath, Advocate & Shri S. Kochhar, AR
Revenue by : Shri Sudesh Garg, Sr. DR
Date of Judgment: 25.03.2011.
AIT Head Note: The assessee in the present case has forgone its claim regarding
assessability of the segment of spare supplied @ 1% and has only pressed the
application of 44BB on that segment. In other words, the assessee has accepted the
application of 10% net profit rate on the segment relating to supply of spares. It
means that on entire payments received by the assessee from ONGC, the assessee has
accepted the application of Section 44B i.e., net profit rate of 10% on presumptive
basis. Therefore, in our opinion, the entire receipts of the assessee are assessable @
10% as described in Section 44 BB.(Para 12)
O R D E R
PER I.P. BANSAL, JUDICIAL MEMBER
This is an appeal filed by the assessee under the provisions of Section 253 (1) (d) of the IT
Act, 1961, against the order passed by the Assessing Officer u/s 143 (3) read with Section
144C of the Income-tax Act, 1961 (the Act). The grounds of appeal read as under:1. That, on the facts and in the circumstances of the case and in law, the learned Dy.
Director has erred in applying an arbitrary rate of 25% profit on sale of
spares/supplies.
www.allindiantaxes.com
Page 1
2. As the sale of spares/supplies has taken place entirely outside the country in the
United Kingdom, the same should not be taxed in India.
3. Without prejudice to Ground No.1, the learned Deputy Director has erred in both
facts and law in estimating profit of 25% which is exceptionally high as only profits
attributable to the transaction will be taxed in India.
4. The appellant craves leave to supplement, to cancel, to amend, to add/or
otherwise to modify any or all the ground(s) of appeal stated hereinabove, at a later
stage.
2. The assessee is a non-resident entity entering into turnkey basis contracts with ONGC
which have been listed in the assessment order in para 2 as follows:S.No
.
1.
2.
3.
4.
5.
6.
7.
Contract Agreement No.
MR/B&S/MM/KKT/ASS-Cranes/243/03-04/LT-06/PC-23 for “Revamping of 4 Nos.
American Aero Make Cranes Installed at BPB (East), BC, BPB (West) & BLQ-2
Platforms of ONGC” on Turnkey basis.
MR/MH/CMC/OEM/DAMAGED-BOOM-SM/2005/05001
for
replacement
of
damaged boom of SM Deck Crane on OEM and Turnkey basis installed at IC complex
MR/MH/MM/LSTK/RO/OEM/DAMAGE BOOM/110/2005/Y15OS05001/P-B- 4006
for replacement of damaged boom selection of SS Deck Crane on Turnkey Basis
installed at SH Complex.
MR/MH/MM/LSTK/AB/OEM/PATRIOT/CRANES/2004/Y15AL04003/PAPERBOOK
-3007 for repair/revamping overhauling and servicing of pedestal/patriot make
deck cranes on OEM and Turnkey Basis installed at BHS (North) and SLQ (South)
Platform.
MR/MH/MM/LSTK/AB/OEM/PATRIOT/CRANES/GROUPII/2004/Y15AL04004/P
APER-BOOK-3008 dt.11/11/2005.
MR/MH/MM/LSTK/RO/OEM/DAMAGED BOOM/110/2005/Y1505s05001/PAPERBOOK-4006 dt.07/03/2006.
MR/MH/MM/LSTK/CG/OEM/SK-NQd-SHD/CRANES/LT-33/PAPER-BOOK-4004
for repair/revamping of 3 Nos. American Aero make Deck Cranes on OEM and
Turnkey basis installed at Group-1 (SK & SHD Deck Cranes Nos.) and Group H (NQD
Deck Crane-1 No.)
3. In the computation of income, the total receipts of the contracts amounting to Rs.
6,76,73,525/- were bifurcated into two portions; one relating to supply of material of Rs.
5,17,60,664/- and the other sum of Rs. 1,59,12,861/- relating to services rendered by the
assessee with regard to repair/revamp of cranes installed at rigs. On the component of
spares, the assessee had returned income @ 1% of the gross receipts by taking resort to
Notification F.No.484/3/87-FTD, Government of India, MoF, Department of Revenue
(Foreign Tax Division), New Delhi, July, 1987. On the other portion, the income was offered
@ 10% of the gross receipts by making reference to Section 44BB on presumptive basis
and, in this manner, the income returned was calculated at Rs. 21,08,893/-. The Assessing
www.allindiantaxes.com
Page 2
Officer though accepted the claim of the assessee u/s 44BB (2) in respect of total receipts
of Rs. 1,59,12,886/- pertaining to receipts on account of repair/revamp of cranes installed
at rigs, but has rejected the claim of the assessee regarding assessment of 1% of gross
receipt relating to spare parts used in such spares. The Assessing Officer has referred to
Section 9(1)(i) of the Act and has computed the income of the component @ 25% and has
assessed income on that component at Rs. 1,29,40,166/-and, in this manner, the income of
the assessee has been assessed at a total sum of Rs. 1,45,31,452/- in place of returned
income of Rs. 21,08,893/-. The assessee has filed objections u/s 144C and vide order dated
4th June, 2010, DRP has upheld the action of the Assessing Officer by observing that the
assessee has not been able to give any convincing basis as to why 10% should be applied and
not 25% as applied by the Assessing Officer considering that the said income is not covered
u/s 44BB (1). Learned Assessing Officer has passed the impugned order in pursuance of
directions issued by the DRP u/s 144C of the Act. The assessee is aggrieved, hence, has
raised the aforementioned grounds of appeal.
4. At the outset, it was submitted by learned AR that the assessee has forgone its claim of
being assessed @ 1% and now it is the case of the assessee that its entire receipts should
be made subject to provisions of Section 44BB (1) and, thus, the application of rate of 25%
on the component relating to user of spare parts is, thus, bad as none of the provisions of
the Act support such computation of income @ 25%. To support the contention that supply
of spares in case of turnkey contract is also subject to provisions of Section 44AB, learned
counsel has relied on various judgements inter alia including the decision of Hon’ble
Uttaranchal High Court in the case of CIT vs. B.J. Services Co. Middle East 300 ITR 392
(Uttaranchal) the copy of which is placed at pages 37-38 of the paper book. Reading from
para 2-8, it was submitted by him that supply of spare parts in a turnkey contract of repair
will also be covered under the provisions of Section 44BB of the Act and, therefore, the
applicable rate of net profit will be @ 10%. For the sake of convenience para 2 and 8 from
the said order are being reproduced below:“2. Facts, in brief, are that return of income was filed by a non-resident company
M/s B.J. Services Co. Middle East, disclosing Rs.3,27,770/- for computing the
amount referred under Sub-section (2) of Section 44BB of the Act, which was 5 per
cent of the total receipts towards handling charges on the original cost. It was
found from the return filed by the assessee that total amount received by the
assessee for supply of spare parts to the Oil & Natural Gas Corporation (for short,
ONGC) was Rs.69,45,264. The A.O., therefore, took into account the total amount
received by the non-resident company for supply of spare parts to ONGC under
Sub-section (2) of Section 44BB for determining the profits and gains and imposed
the tax @ 10 per cent under Sub-section (1) of Section 44BB of the Act.”
……………………………………………………………………………………
……………………………………………………………………………………
8. Sub-section (1) of Section 44BB specifically provides that aggregate of amounts
specified in Sub-section (2) shall be taken into account, 10 per cent of which shall
be deemed to be profits and gains. Sub-section (2) provides that amounts referred
www.allindiantaxes.com
Page 3
shall be amount paid or payable to the assessee (whether in or out of India) and the
amount received or deemed to be received in India 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. Explanation appended to Section 44BB provides that for the purpose of
this section, plant includes ships, aircrafts, apparatus and equipments used for the
purpose of said business and mineral oils include petroleum and natural gas. Thus,
the amount received by the assessee on account of supply of spare parts is squarely
covered under Section 44BB. Therefore, the A.O. was right in calculating the 10 per
cent of total amount of Rs.69,45,264, which was received by the assessee
nonresident company from the ONGC. The claim of the assessee that the amount of
Rs.66,17,495 could not be included for the purpose of calculating the amount
referred to in Sub-section (2) of Section 44BB as it was reimbursement while the
assessee himself has claimed 5 per cent handling charges on the original cost of
material i.e., spare parts. Therefore, Rs.69,45,264 was the cost of spare parts and
was duly received by the assessee non-resident company and hence was an amount
referred to under Sub-section (2) of Section 44BB of the Act as it was a receipt
during the course of business.
5. Thus, it was pleaded by learned AR that the assessee may be granted appropriate relief.
He submitted that there is no doubt that on the other component the Assessing Officer
has himself accepted the claim of the assessee regarding application of Section 44BB (1) of
the Act.
6. On the other hand, it was submitted by learned DR that since the assessee is not
pressing his claim regarding application of 1% rate, his submission is that the contracts
obtained by the assessee from ONGC were having two components and, for this purpose, he
referred to the computation of income submitted by the assessee in which such bifurcation
was made. The one relating to supply of spare parts and the other relating to the services
rendered in that regard. He submitted that supply of spares is not covered as such by the
provisions of Section 44BB of the Act and, hence, it should have been treated separately
from the services rendered by the assessee as envisaged in Section 44BB of the Act. He,
therefore, supported the case of the Assessing Officer that only with regard to the
services rendered by the assessee Section 44BB will be applicable and in respect of supply
of spare parts this Section will not apply and the Assessing Officer will be free to assess
the income of the assessee as per normal provisions of the Act. In this manner, learned DR
supported the order of the Assessing Officer and CIT (A) vide which 25% net profit rate
has been applied on the component relating to supply of spares as the same has rightly been
assessed under the provisions of Section 9(1)(i) being income accruing or arising to the
assessee through or from any business connection in India.
7. We have carefully considered the rival submissions in the light of the material placed
before us. It is undisputed that the assessee has received composite payments with regard
to turnkey contracts listed in the assessment order. These contracts are with ONGC and
the name of the work contract of the assessee in one of the contracts is “Revamping of 4
Nos. American Aero Make Cranes Installed at BPB (E), BC, BPB (W) & BLQ-2 Platforms of
www.allindiantaxes.com
Page 4
ONGC.” In the other contracts also the nature of work is same. Clause 3 defines the scope
of work which inter alia provides as under:“3.0 SCOPE OF WORK
3.1 Contractor’s scope of work shall be on turn key basis for
repair/replacement/Servicing/overhauling of 4 Nos. Cranes Installed at BPB(E),
BPB(W), BC & BLQ-2 platforms at Bassien & Satellite. The crane is to be get load
tested after commissioning at site and duly certified by third party at rated
capacity. The third party inspection agency shall be arranged by the Contractor.
Testing loads shall be provided by ONGC. The number of manpower to be deputed at
offshore for overhauling of crane shall be restricted to 6 to 9 person per crane.”
……………………………………………………………………………………
……………………………………………………………………………………..
3.6
The
Contractors
scope
of
work
shall
also
include
the
dismantling/cutting/removal of existing materials at BPB(E), BPB (W), BC & BLQ-2
platforms and loading on OSV (OSV will be arranged by ONGC). The cranes have to
be revamped on turnkey basis including but not limited to replacing AND/OR
servicing the listed spare parts. If during the revamping process replacement of
additional optional items become necessary to complete all the four cranes, the
same will be carried out by the Contractor.”
7.1 Clause 4 defines the scope of supply which defines contractor’s scope of supply as
under:4.0 SCOPE FO SUPPLY
4.1 CONTRACTORS SCOPE OF SUPPLY
The procurement and supply in sequence and at appropriate time of all materials and
consumables shall be entirely the Contractor’s responsibility and his quoted price
for execution shall be inclusive of all these items which include, but not limited to
the following.
a) All spares and assemblies/sub-assemblies along with optional items required to
make the cranes fully operational at rated capacity and fit for certification are
attached at Appendices I to IV under Annexure-III of the tender.
b) All structural and sea fastening materials, lifting and installation materials and
equipments.
c) All industrial gases like oxygen, acetylene or inert gses and all types of welding
machines, electrodes, torches, brazing rods, flux, etc. for welding purposes.
www.allindiantaxes.com
Page 5
d) PTFE tape and other jointing compounds for sockets threads and gaskets for
flanges.
e) Grease, cleaning oils, other solvents, chemicals required for cleaning and greasing
of lines, adhesives, etc.
f) Paints, thinner and painting materials, painting equipment, including equipments
enquire for surface preparation and other consumables.
g) Hardware and blinds wherever required.
h) Equipment/materials required for load testing, excluding the Test weigh loads.
i) Any other item not specified but required for the completion of works.
j) Structural Steel, M.S. Plates, Flats/Pipes, etc. required for fabrication of
supports, trays, structures, etc. as required to complete the works. Installation,
assembly mechanical completion, commissioning, third party inspection and
certification agency to be approved by ONGC along with all the required accessories
at platform.
k) If any material is falling short or require replacement, the same shall be air
freighted to complete the job as per operational reason and the cost will be borne
by the contractor.”
7.2 Clause 4.2 defines ONGC scope of supply which read as under:“4.2 ONGC’S SCOPE OF SUPPLY
a) Provide water, diesel, electricity, compressed air.
b) Portable fire extinguishers, fire water supply through FWP or OSV during hot
work period if required.
c) Provide boarding and lodging at offshore platform for contractor’s personnel as
specified in contract.
d) Provide transportation facility free of cost to & for man and material by
OSV/Helicopter between Nhava/ONGC Helibase Mumbai to BPB/BLQ-2 platform
and vice versa.
e) Compressed air shall not be available at BC.”
7.3 Clause 5 defines repairs and replacements as under:“5.0 REPAIRS AND REPLACEMENT
www.allindiantaxes.com
Page 6
The contractor shall assume the entire responsibility for the protection of the
structure and repair of all damages to the structure of its components resulting
from contractor’s negligence, accidents, inferior workmanship, or any other reason
of evident fault by the Contractor and in including, but not limited to weather.
Contractor shall be responsible for any work performed by the contractor on
materials which do not meet the provision of the applicable specifications. Further,
Contractor shall remove and replace all such materials which are incorporated in the
structure (s) without prior written approval of the company.
8. Annexure – C defines contract price schedule copy of which is placed at page 75 of the
paper book which is a sum of US $ 14,63,526.58 which read as under:ANNEXURE-C
CONTRACT PRICE SCHEDULE
CONTRACT
NO.
MR/B&S/MM/KKT/AA-CRANES/243/03-04/LT-06/PC-23
FOR
“REVAMPING OF 4 NOS AMERICAN AERO MAKE CRANES INSTLALED AT BPB (EAST),
BC, BPB (WEST) & BLQ-2 PLATFORMS OF ONGC” ON TURNKEY.
Lump sum price for “Revamping of 4 nos. American Aero
make cranes installed at BPB (East), BC BPB (West) &
BLQ-2 platforms, as per enclosed scope of work on
turnkey basis. The scope of work shall include but not
limited to Dismantling & Replacement with new parts/subassemblies/assemblies,
supply
of
parts/assemblies/subassemblies, servicing and greasing of
items, installation & commissioning of cranes, providing
manpower including OEM representative for complete
execution of
work along
with
mobilization &
demobilization, tools & Tackles, overhauling/rebuilding of
Engines and also including third party inspection charges.
The lump sum price shall also be inclusive of all taxes,
duties (excluding customs duty), levies, insurance, service
tax and corporate tax to complete the job on turnkey
basis.
LUMPSUM PRICE
US $ 1,463,526=58
(United States Dollar One
million Four hundred and sixty
three thousand Five hundred
twenty six and cents fifty
eight only)
Note:
1. The above lumpsum price includes Corporate Tax and Service tax shown below:
1.
Corporate Tax @ 41% by applying a profit rate of 1%
in respect of supply
www.allindiantaxes.com
US $ 3,788=75
Page 7
2.
3.
of spares.
Corporate Tax @ 41% by applying a profit rate of
11.5% in respect on
installation cost
Service Tax @ 8% on installation & commissioning
US $ 22,407.00
US $ 38,018=24
9. A cumulative reading of all these clauses will show that the supply of components is
indivisible part of entire contract. ONGC is certainly engaged in the activity of prospecting
for, or extraction or production of mineral oils and any amount received by the assessee
being a non-resident engaged in the business of providing services or facility in connection
with, or supplying plant and machinery on hire, used or to be used in such activity shall be
governed by the provisions of Section 44BB. For one component of the contract, the
Assessing Officer himself has agreed for application of Section 44BB and the assessee has
been charged to tax by taking 10% net profit on that component. The assessee may have
bifurcated the contract price into two segments; one relating to supply of services and the
other relating to supply of spares, but that may have been done by the assessee for lower
tax. But that does not mean that Section 44BB will not be applicable to the activity carried
on by the assessee being a nonresident assessee.
10. In the case of CIT vs. B.J. Services Co. Middle East (supra), the assessee being a nonresident company had disclosed income of Rs. 3,27,770/- under the provisions of subsection (2) of Section 44BB of the Act which was 5% of the total receipts towards handling
charges on the original cost. The assessee was supplying the spare parts to the ONGC which
was a sum of Rs. 69,45,264/-. The Assessing Officer applied 10% rate as per the provisions
of Section 44BB (2). The CIT (A) held that the assessee was entitled to deduction of Rs.
66,17,495/- as the same was received as cost of material, etc. and was an actual
reimbursement of expenses of such material incurred by the assessee in execution of the
contract with ONGC and the same was on actual basis and was not in any way on a fixed
percentage basis. The Tribunal upheld the order of the CIT (A). On these facts, it was
decided by the Hon’ble High Court as under:“8. Sub-section (1) of Section 44BB specifically provides that aggregate of amounts
specified in Sub-section (2) shall be taken into account, 10 per cent of which shall
be deemed to be profits and gains. Sub-section (2) provides that amounts referred
shall be amount paid or payable to the assessee (whether in or out of India) and the
amount received or deemed to be received in India 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. Explanation appended to Section 44BB provides that for the purpose of
this section, plant includes ships, aircrafts, apparatus and equipments used for the
purpose of said business and mineral oils include petroleum and natural gas. Thus,
the amount received by the assessee on account of supply of spare parts is squarely
covered under Section 44BB. Therefore, the A.O. was right in calculating the 10 per
cent of total amount of Rs.69,45,264, which was received by the assessee nonresident company from the ONGC. The claim of the assessee that the amount of
Rs.66,17,495 could not be included for the purpose of calculating the amount
www.allindiantaxes.com
Page 8
referred to in Sub-section (2) of Section 44BB as it was reimbursement while the
assessee himself has claimed 5 per cent handling charges on the original cost of
material i.e., spare parts. Therefore, Rs.69,45,264 was the cost of spare parts and
was duly received by the assessee non-resident company and hence was an amount
referred to under Sub-section (2) of Section 44BB of the Act as it was a receipt
during the course of business.”
11. In that case, even supply of spare parts have been treated to be assessable under the
provisions of Section 44BB (1)of the Act.
12. The assessee in the present case has forgone its claim regarding assessability of the
segment of spare supplied @ 1% and has only pressed the application of 44BB on that
segment. In other words, the assessee has accepted the application of 10% net profit rate
on the segment relating to supply of spares. It means that on entire payments received by
the assessee from ONGC, the assessee has accepted the application of Section 44B i.e., net
profit rate of 10% on presumptive basis. Therefore, in our opinion, the entire receipts of
the assessee are assessable @ 10% as described in Section 44 BB.
13. In view of above discussion, the appeal filed by the assessee is partly allowed in the
manner aforesaid. As ground No.2 of the assessee was not pressed and during the course of
discussion the assessee has agreed for the application of Section 44BB on the entire
contract receipts.
14. In the result, the appeal filed by the assessee is partly allowed in the manner aforesaid.
The order pronounced in the open court on 25.03.2011.
www.allindiantaxes.com
Page 9