The ruling in brief

The Supreme Court has ruled that services provided by non-residents which are inextricably linked with Oil and Gas exploration and production activities are taxable  under section  44BB, a special provision under the Income-tax code. The ruling was given in the case of Oil & Natural Gas Corporation, which had contested the cases as a “representative” for foreign companies.

The Supreme Court rejected the stand of the Revenue that the services ought to be taxed under Section 44D, a special provision which applied to Taxation of technical services fees earned by non-residents.

[Note – Section 44D has since been replaced by another provision – section 44DA. Refer last para for our comments on applicability of the ruling in current context  – skip next section, if you have a phobia for legalese]

Ruling De-brief

Taxation of overseas service providers to the Oil & Gas industry has been plagued by the overlap between two provisions under the Indian Tax code – Section 44BB and Section 44D/DA. Taxability under Section 44BB is considered more favorable as it deems 10% of gross receipts as the income of the foreign service provider, thereby leading to a low effective tax rate of a tad over 4%.

The Revenue stand was that “technical services” are caught in the net of section 44D. The statute also provides for section 44D to over-ride the provisions of Section 44BB. However, the scope of “technical services” under section 44D is defined to mean the same as that under section 9, which excludes consideration for “mining or like project…”.

The issue therefore boiled down to whether services provided to an Oil & Gas operator would constitute  consideration for “mining or like project” and stood excluded from scope of “technical services”

Reliance on CBDT Circular

The Taxpayer relied on a CBDT circuar No. 1862, dated 22.10.1990  which clarified that rendition of services like training and carrying out drilling operations for exploration /exploitation of oil and natural gas  would also be covered within the phrase “mining or like project” and therefore fall outside the ambit of “technical services”.

“Pith and Substance” doctrine of Interpretation 

The Revenue authorities sought to dilute the impact of the Circular by contending that ONGC had contracted for various services of a technical nature and the services availed by it had only a “remote connection” to the carrying on of Oil & Gas exploration and drilling.

However, the Supreme Court , adverting to a list of such services which covered a wide range of assistance [like drilling, furnishing of personnel for operation of rigs, capping of wells, Data analysis and studies, consultancy, laboratory testing and simulation,  technical opinions and advise reviews, inspection and training etc., ] took the view that the “pith and substance” of agreements was to render services that were inextricably linked to exploration and production of Oil & Gas. The Supreme Court therefore concluded that the said services were covered within the ambit of Section 44BB.

Applicability of the ruling in the current context

It may be noted that Section 44D has since been replaced by Section 44DA. Section 44DA specifically provides that 44BB shall not apply to income referred to in Section 44BB. However, the definition of “Technical services” referred to under section 44DA is the same as that under erstwhile provisions of Section 44D.  Therefore, it is our view that the ruling would also apply in the current context.