Supreme Court of India
SEDCO FOREX INTERNATIONAL INC. THROUGH IT'S CONSTITUTED ATTORNEY MR. NAVIN SARDAversusCOMMISSIONER OF INCOME TAX. MEERUT & ANR.
- Citation
- 2017 INSC 1060
- Decided
- 30 October 2017
- Disposal
- Disposed off
- Bench
- A K SIKRI
Holding
Mobilisation fees paid under the contracts are deemed profits and gains under Section 44BB and taxable in India, while reimbursement for tool loss is not covered by Section 44BB and is not taxable.
Summary
The Supreme Court examined whether mobilisation fees paid to non‑resident oil‑exploration companies under contracts with ONGC constitute "profits and gains" taxable under Section 44BB of the Income Tax Act, 1961. The Court held that such fees fall within clause (a) of Section 44BB(2), are deemed income under Sections 5 and 9, and are taxable at the prescribed 10% presumptive rate. Conversely, a reimbursement for loss of tools was held not to be covered by Section 44BB and therefore not taxable. The Court clarified that Section 44BB, while a special computation provision, cannot override the charging provisions of Sections 4, 5 and 9. All appeals by the assessees were dismissed, and the revenue’s appeal concerning the tool‑loss reimbursement was also dismissed.
Issues considered
- The scope and interpretation of Section 44BB(2) – whether amounts paid as mobilisation fees are covered by sub‑clause (a).
- Whether Section 44BB overrides the charging provisions of Sections 4, 5 and 9 of the Act.
- Whether reimbursement of tool‑loss expenses falls within Section 44BB and is taxable.
- The applicability of the territorial system of taxation to non‑resident income arising from services rendered outside India.
Legislation cited
- Income Tax Act, 1961s. 115A, s. 2(24), s. 2(45), s. 28, s. 29, s. 293A, s. 30, s. 31, s. 32, s. 33, s. 34, s. 35, s. 36, s. 37, s. 38, s. 39, s. 4, s. 40, s. 41, s. 42, s. 43, s. 43A, s. 44AA, s. 44AB, s. 44BB, s. 44D, s. 44DA, s. 5, s. 5(2), s. 9, s. 9(1)(i)
Subjects
Section 44BBnon‑resident taxationdeemed profits and gainsoil explorationmobilisation feepresumptive taxationIncome Tax Act 1961territorialitycharging provisionstaxability of reimbursement
Judgment
[2017] II S.C.R. 399
SEDCO FOREX INTERNATIONAL INC. THROUGH IT'S A
CONSTITUTED ATTORNEY MR. NAVIN SARDA
v.
COMMISSIONER OF INCOME TAX. MEERUT & ANR.
(Civil Appeal No. 4906 of20 I 0) B
OCTOBER 30. 2017
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
Income Tax Act, 1961:
s.4488 - Scope and illlerpretation - s.4488 starts. with non- c
obstante clause, and the formula contained therein for computation
of income is to be applied irrespective of the provisions of ss.28 to
41 and ss.43 and 43A of the Act - For assessment under this
provision, a sum equal to 10% of the aggregate of the. amounts
specified in sub-section "(2) shall be deemed lo be the profits and
0
gains of such business chargeable to tax under the head 'profits
and gains of the business or profession' - Sub-section (2) mentions
two k)nd~ of amounts which shall he deemed as pl·ofits and gains or
the business chargeable to tax in- India - Silb-clause (a) thereof
relates to amount paid or payable to the assessee or any person on
his behalf on account of provision of services and facilities in E
connection with, or supply of plant and machinery on hire used, or
to be used in the prospecting f01; or extraction or production of.
mineral oils in India - Tims, all amounts pertaining to the said
activity which are received oi:i account of provisions of service;;
andfacilities in connection with the said facility are treated as profits
F
and gains of the business. - This clause clarifies that the amount so
paid .v!wl! be taxable whether these .are received in India or outside
India - Clause (b) deals with amount received or deemed lo be
received in India in ·connection with such services and facilities as
stipulated therein - Thus, whereas clause (a) mentions the amount
which is paid ar payable, clause (b) deals with the amounts which G
are received or deemed to be received in India - In respect of amount
paid or payable under clause (a) of sub-section (2), it is immaterial
wheiher these are paid in India or outside India -On the other hand,
amount received or deemed to be received have to be in India.
H
399
400 SUPREME COURT REPORTS (2017] ll S.C.R.
A s.44BB - Special provision for calculating profits and gains
in connection with business of exploration of mineral oils -Assessee-
Non-resident company entered into contract with ONGC for hire of
their rig for can:ving out oil exploration activities in India - Payment
of mobilisation fees for mobilisationimovement of rig from foreign
soil/country to the off shore side al 11Iumbai - Whether said amount
B
received is to be i11cluded for comp11tatio11 of deemed profits a11d
gains of the business chargeable to tax under s.44BB of the Act -
Held: Clause (a) and (b) of sub-section (2) of s.44BB stipulates
that the amount paid 1111der the said contracts as mobilisation fee
on account of provision of services a11d facilities in connection with
c the extraction etc. of mineral oil in India and against the supply of
plant and machinery on hire used for such extraction, clause (a) is
attracted - Thus, this provision contained in s.44BB has to be read
i11 co11ju11ction with ss.5 and 9 of the Act a11d ss.5 a11d 9 of the Act
cannot be read in isolation - The said amo1111t paid to the assessees
D as mobilisation fee is treated as profits and gains of business a11d,
therefore, it would be "income" as per s.5 - This provision also
treats this i11c:ome as eamed in India, fictionally, thereby salisfyi11g
the test of s.9 of the Act as well - Circular 110.495 dated September
22 1987 issued by CBDT.
s.44BB - Assessee-Non-residen/ company entered into
E co11tracls with ONGC for hire of their rigfor carrying out oil
exploration activities i11 India - Reimbursement of cost of tools lost
in hole by ONGC - Taxability of - Held: Not taxable - This amount
is not covered by sub-section (2) of s.4488 of the Act as ONGC had
lost certain tools belonging to the assessee, and had compens.ated
F for the said loss by payi11g the amount in question.
Disposing of the appeals, the Court
HELD: 1.1 Indian Income Tax Act, admittedly, follows a
territorial system of taxation. As per this system only that income
of a non-resident is taxable in India which is attributable to
G operations within the Indian Territory. Therefore, in the first
instance it is to be seen whether a particular income arises or
accrues or deem to arise or accrue within India. In order to seek
this answer, the principles contained in Section 9 have to be
applied. Only when it becomes an income taxable in India as per
H Section 9, in case of non-resident, the question of computation of
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 401
CONSTITUTED ATTORNEY v. CIT, MEERUT
the said income would arise. Section 4 is the charging section A
for levying a tax on the income of any person under the Act and
provides that income-tax shall be levied at the rates provided by
the Finance Act on the 'total income' of the previous year of every
person. The scope of the total income of any person, which could
be subjected to tax under the provisions of the Act, is defined
B
under Section 5 of the Act and dependent upon the residential
status of the persons. Section 5(1) provides the scope of 'total
income' in the case of residents, whereas Section 5(2) provides
the scope of 'total income' in the case of non-residents' As per
Section 5(2) of the Act, subject to the provisions of this Act, the
'total income' of any previous year of non-resident includes; c
Income which is received or deemed to be received in India in
such year or on behalf of such person; or Income which 'accrues
or arises' or is deemed to accrue or arise to him in India during
such year. [Paras 38, 391[428-8-D, E-F]
1.2 Section 9 enumerates the income which is deemed to D
accrue or arise in India. There are two broad categories of
taxability of income provided under this Section, i.e., Business
Income and income from interest or royalty or fees for technical
services (FTS). Section 9(I)(i) provides that income is to be
deemed to have accrued or arising in India if the income is
accruing directly or indirectly through any business connection E
in India or from any property in India or from any asset or source
of income in India or any capital asset situated in India (referred
as business income). Explanation l(a) to Section 9(l)(i) of the
Act provides an exclusion in the case of operations which are not
carried out in India. The explanation provides that the income of F
the business deemed under this clause to accrue or arise in India
shall be only that part of the income as is reasonably attributable
to the operations carried out in India. Thus, business income
earned by non-resident is chargeable to tax in India only to the
extent reasonably attributable to the operations carried out in
India. (Paras 40, 41](428-G-H; 429-A-C] G
2. Section 44BB(2) makes certain receipts as "deemed
income" for the purposes of taxation in the sald provision.
Therefore, aid of this. provision is to be necessarily taken to
determine whether a particular amount will be "income" within
H
402 SUPREME COURT REPORTS [2017] l l S.C.R.
A the meaning of Section 5 of the Act. Likewise, Section 4488(2)
also acts as guide to determine whether a particular income is
attributed as income occurred in India. Section 4488 of the Act
provides for special provision for computing profits and gains.
However, that would not mean that ifthe income is to be computed
under this provision, a go-by to Sections 5 and 9 of the Act is to
B
be given. Sections 4, 5 and 9 of the Act are to be kept in mind
even in those cases where assessment is done under Section
4488 of the Act. The argument of the assessees that Section
4488 is only a computation provision, is also not entirely justified.
In the first blush, assessees may appear to be correct in their
c contentions that Section 44BB falls in Chapter IV of the Act.
Insofar as computation of income from 'Profits or Gains of
Business or Profession' is concerned, it has to be computed as
per the provisions of Sections 28 to 430(2). However, certain
provisions are made for providing special mechanism for
computing the income on presumptive basis in case of non-
D
resident and it includes Section 4488 as well. [Paras 42, 43,
44J[429-C-E; 430-G-H; 43I-A]
Union of India & Am: v. A. Sanya.vi Rao & Ors. (1996)
3 SCC 465 : [1996] 2 SCR 570 - relied on.
E 3. Clause 3.2 of the Agreement dated September 3, 1985
pertains to providing the Shallow Dash Water Jack Up Rig against
which payment was made to the asscssees. This Clause says
that the assessees shall be paid 'mobilisation fee' for the
mobilisation of drilling unit from its present location in Portugal
to the well location designated by ONGC, offshore Mumbai, India.
F Fixed amount is agreed to be paid which is mentioned in the said
Clause. The said mobilisation fee was payable to the assessees
after the jacking up of the drilling at the designated location and
ready to spud the well. After the said operation, assessees were
required to raise invoice and ONGC was supposed to make the
G payment within 30 days of the receipt of this invoice. Insofar as
Clause 4.2 of Agreement dated July 12, 1986 is concerned, it
related to mobilisation of drilling unit. Here again, •mobilisation
fee' was payable for the mobilisation of the drilling unit from the
place of its origin to the port of entry (Kandla Port, Mumbai).
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 403
CONSTITUTED ATTORNEY v. CIT, MEERUT
What follows from the above is that a fixed amount of mobilisation A
fee was payable under the said contracts as "compensation".
Contracts specifically describe the aforesaid amounts as 'fee'.
[Paras 46](431-D-G]
4. Section 44BB starts with non-obstantc clause, and the
formula contained therein for computation of income is to be B
applied irrespective of the provisions of Sections 28 to 41 and
Sections 43 and 43A of the Act. It is not in dispute that asscssces
were assessed under the said provision which is applicable in
the instant case. For assessment under this provision, a sum
equal to 10% of the aggregate of the amounts specified in sub-
section (2) shall be deemed to be the profits and gains of such c
business chargeable to tax under the head 'profits and gains of
the business or profession'. Sub-section (2) mentions two kinds
of amounts which shall be deemed as profits and gains of the
business chargeable to tax in India. Sub-clause (a) thereof relates
to amount paid or payable to the assessec or any person on his D
behalf on account of 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 Iiulia. Thus, all amounts pertaining to the said
activity which arc received on account of provisions of services
and facilities in connection with the said facility arc treated as E
profits and gains of the business. This clause clarifies that the
amount so paid shall be taxable whether these are received in
India or outside India. Clause (b) deals with amount re.ceived or
deemed to be received in India in connection with such services
and facilities as stipulated therein. Thus, whereas clause (a) F
mentions the amount which is paid or payable, clause (b) deals
with the amounts which arc received or deemed to be received
in India. In respect of amount paid or payable under clause (a) of
sub-section (2), it is immaterial whether these arc paid in India
or outside India. On the other hand, amount received or deemed
to be received have to be in India. A bare reading of the clauses G
shows that the amount paid under the said contracts as
mobilisation fee on account of provision of services and facilities
in connection with the extraction etc. of mineral oil in India and
against the supply of plant and machinery on hire used for such
H
404 SUPREME COURT REPORTS [2017] l I S.C.R.
A extraction, clause (a) stands attracted. Thus, this provision
contained in Section 44BB has to be read in conjunction with
Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot
be read in isolation. The said amount paid to the assessees as
mobilisation fee is treated as profits and gains of business and,
therefore, it would be "income" as per Section 5. This provision
B
also treats this income as earned in India, fictionally, thereby
satisfying the 'test of Section 9 of the Act as well. [Paras 47,
48J1432-A-HJ
5. The Tribunal has rightly commented that Section 44BB
of the Act is a special provision for computing profits and gains in
c connection with the business of exploration of mineral oils. Its
purpose was explained by the Department vide its Circular No.
495 dated September 22, 1987, namely, to simplify the computation
of taxable income as number of complications were involved for
those engaged in the business of providing services and facilities
D 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 etc. Instead of going into the nitigrities of such
computation as per the normal provisions contained in Sections
28 to 41 and Sections 43 and 43A of the Act, the Legislature has
simplified the procedure by providing that tax shall be paid @
E 10% of the 'aggregate of the amounts specified in sub-section
(2)' and those amounts arc 'deemed to be the profits and gains of
such business chargeable to tax...'. It is a matter of record that
when income is computed under the head 'profits and gains of
business or profession', rate of tax payable on the said income is
F much higher. However, the Legislature provided a simple
formula, namely, treating the amounts paid or payable (whether
in or out of India) and amount received or deemed to be received
in India as mentioned in sub-section (2) of Section 44BB as the
deemed profits and gains. Thereafter, on such deemed profits
and gains {treating the same as income), a concessional flat rate
G of 10% is charged to tax. In these circumstances, the AO is
supposed to apply the provisions of Section 44BB of the Act, in
order to find out as to whether a particular amount is deemed
income or not. When it is found that the amount paid or payable
{whether in or out of India), or amount received or deemed to be
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 405
CONSTITUTED ATTORNEY v. CIT, MEERUT
received in India is covered by sub-section (2) of Section 44BB A •
of the Act, by fiction. created under Section 44BB of the Act, it
becomes 'income' under Sections 5 and 9 of the Act as well. In
the the instant case, the amount which is paid to· the assessees is
towards mobilisation fee. It docs not mention that the same is
for reimbursement of expenses. In fact, it is a fixed amount paid B
which may be less or more than the expenses incurred. Incurring
of expenses, therefore, would be immaterial. It is also to be
borne in mind that the contract in question was indivisible. [Paras
49, 50](433-A-G]
6. In revenue's appeal preferred by the Director of Income
Tax against the judgment of the High Court, the computation of C
income of the assessee was done under Section 44BB of the Act.
However, the amount which was sought to be taxed was
reimbursement of cost of tools lost in hole by ONGC. It is, thus,
clear that this was not the amount which was covered by sub-
section (2) of Section 44BB of the Act as ONGC had lost certain D
tools belonging to the assessee, and had compensated for the
said loss by paying the. amount in question. [Para 51][434~B-D]
Saipem S.PA. v. Deputy Commissioner of Income Tax
88 ITD 213 (Del); Commissioner of Income Tax v. F.Y
Khambaty (1986) 159 ITR 203; Anglo-French Textile E
Company, Ltd., by Agents Mis Best & Company, Ltd.,
Madras v. Commissioner of Income Tax, Madras (1954)
25 ITR 27 (SC); lshikawajma-Harima Heavy Industries
Ltd. v. Director oflncome Tax, Mumbai (2007) 288 ITR
408 (SC) : (2007) 3 sec 481 : (2007] 1 SCR 112;
Carboranduin & Co. v. CIT, Madras (1977) 108 ITR F
335 (SC); Commissioner of Income Tax, Madras v. Best
and Company (Private) Ltd., Madras (1966) 60 ITR
11 (SC); Commissioner of Income Tax and Anr. v.
l~vundai Heavy Industries Co. Ltd. (2007) 7 SCC 422
: [2007) 7 SCR 288; State Bank of Travancore v. G
Commissioner of Income Tax, Kera/a (1986) 158 ITR
102 (SC); Avasarala Technologies Limited v. Joint
Commissioner of Income Tax, Special Range I,
Bangalore (2015) 14 SCC 732; Commissioner ofIncome
Tax Bihar and Orissa, Patna v. Ashoka Marketing Co.
H
406 SUPREME COURT REPORTS [2017] ll S.C.R.
. A {1972) 4 sec 426-- referred to.
Case Law Reference
88 ITD 213 {Del) referred to Para 11
[19961 2 SCR 570 relied on Para 17
(1986) 159 ITR 203 referred to Pura 18
B
{1954) 25 ITR 27 {SC) referred to Para 18
[2007) 1 SCR ll2 referred to Para 18
{1977) 108 !Tit 335 {SC) referred to Para18
(1966) 60 ITR 11 (SC) referred to Para 18
c 120071 7 SCR 288 referred to Para 23
(1986) 158 ITR 102 (SC) referred to Para 23
{2015) 14 sec 132 referred to Para 28
(1972) 4 sec 426 referred to Para 28
D CIVIL APPELLATE JuRISDICTION: Civil Appeal No. 4906
of2010.
From the Judgment and Order dated 28.09.2007 of the High Court
ofUttarakhand at Nainital in Income Tax Appeal (!TA) No. 280 of2001
WITH
E C. A. No.4908, 4910, 4911,4907, 4913, 4920, 4919, 4921,4916,
4918,4917,4925,4924,4922,4923,4909,5935,5934,4914,4915,8595
and4926 of2010
C. A. Nos. 5154, 5152, 5153 and 5155 of201 I
C. A. Nos. 2166 and 3695 of 2012
F
C. A. Nos. 2631, 4543, 8627, 9188, 8665, 267 and268 of2013
C. A. Nos. 5005, 6573 and 6651 of 2014
C. A. Nos. 5437, 10294, 10295 and 10296 of2016
G C.A. No. 17388, 17389, 17390, 17391, 17392, 17393,435, 10382,
10385, 10383, 10384, 10386, 17394, 12365 and 12366 of2017.
Porns F Kaka, Ajay Vohra, Sr. Advs. Ms. Ka vita Jha, Ms. Shivani
Khamlckar, Udit Narcsh, Manish Kanth, Divesh Kanth, Rustom B.
Hathikhanwala, Rohit Jain, Vaibhav Kulkarni, K.K. Mohan,Arijit Prasad,
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 407
CONSTITUTED ATTORNEY v. CIT, MEERUT
D. L. Chidananda. Ritin Rai, Ms. Sadhna Sandhu, Shirin K.hajuria, A
Ms. A nil Katiyar, Ms. Rashmi Malhotra, Rupesh Kumar, Ms. Gargi
Khanna. B. V. Balaram Das, Ms. Kavita Jha, Ms. Geetanjali Mohan,
Manish Kanth, Divesh Chawla. V. Lakshmikumaran, Jay Savla, Karan
Sachdev, Ms. Renuka Sahu, Aditya Bhattacharye, Prabhat Chaurasia.
Jasdeep Singh Dhillon, L Badri Narayanan, Advs. with them for the B
appearing parties.
The Judgment of the Court was delivered by
A. K SIKRI, J. I. Leave granted in SLP(C) No. 2955 of 2012,
SLP(C) No. ll560 of2014, SLP(C) No. 20000 of2015, SLP(C) No.
22343 of2012, SLP(C) No. 22833 of 2012, SLP(C) No. 39683 of2013 c
and SLP(C) No. 21939 of2017.
2. In all these appeals filed by different appellants (hereinafter
referred to as the 'assessees') except Civil Appeal No. 3695 of2012
which is filed by Director oflncome Tax (Revenue). the question oflaw
which arises for consideration is identical and pertains to the scope and D
interpretation of Section 44BB of the Income Tax Act, 1961 (hereinafter
referred to as the •Act').
3. For computation of profits and gains of a business, to make it
exigiblc to tax under the Act, provisions contained in Chapter IV, from
Sections 28 to 41, 43 and 43A of the Act-apply. However, in those cases E
where the assessec is a non-resident and specifically engaged in the
business of exploration etc. of mineral oil, special mechanism is provided
in Section 44BB of the Act for computation of profits and gains, on
which the tax is charged. It, however, gives choice to such non-resident
asscssccs to opt for computation formula provided under Section 44BB
or to be covered by normal computation mechanism contained in Sections F
28 to 41, 43 and 43A of the Act. Section 44BB of the Act stipulates that
a sum equal to 10% 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'. Thus, concessional rate of I 0% is charged as tax, which is G
admittedly much less than the normal tax rate payable on profits and
gains of business or profession. However, this tax @l 0% is on the
aggregate of the amounts specified in sub-section (2) which are "deemed"
· profits and gains of such business. Thus, insofar as calculation of profits
and gains of the business under Section 44BB of the Act is concerned,
H
408 SUPREME COURT REPORTS (2017] l l S.C.R.
A on which l 0% tax 1s payable, it is worked out on fictional basis by adopting
the formula laid down in sub-section (2). Sub-section (2) mentions those
amounts aggregate whereof is to be treated as deemed profits and gains
of such a busmess.
4. At this juncture. we reproduce the provisions of Section 44BB
B of the Act, as reading of this provision is necessary before spelling out
the nature of dispute which had arisen in these appeals. This section
reads as under:
"44BB. Special provision for computing profits and gains
in connection with the business of exploration, etc., of
c mineral ails.
( 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
D on hire used, or to be used, in the prospecting for, or extraction or
production of, mineral oils, a sum equal to ten per cent of the
aggregate of the amounts specified in sub-section (2) shall be
deemed to be the profits and gains of such business chargeable to
"tax under the head "Profits and gains of business or profession" :
E Provided that this sub-section shall not apply in a case where
the provisions of section 42 or section 44D or section 44DA or
section l l 5Aor 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:-
F
(a) the amount paid or payable (whether in or out oflndia) 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
extrnction or production of, mineral oils in India; and
G
(b) the amount received or deemed to be received in India by or
on behalf of the assessec 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 outside India.
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 409
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
(3) Notwithstanding anything contained in sub-section (I), an A
assessee may claim lower profits and gains than the profits and
gains specified in that sub-section, ifhe keeps and maintains such
books of account and other documents as required under sub-
section (2) of section 44AA and gets his accounts audited and
furnishes a report of such audit as required under section 44AB,
B
and thereupon the Assessing Officer shall proceed to make an
assessment of the total income or loss of the assessee under sub-
section (3) of section 143 and determine the sum payable by, or
refundable to, the asscssee.
Explanation.-For the purposes of this section,-
c
( i) "planf' includes ships, aircrnft, vehicles, drilling units, scientific
apparntus and equipment, used for the purposes of the said business;
(ii) "mineral_ oil" includes petroleum and natural gas."
5. A bare reading ofthe aforesaid provision brings out the following
salient features thereof: D
(a) Sub-section (I) is a non-obstante clause, starting with the
expression 'notwithstanding anything to the contrary contained
;n Sections 28 to 41 and Sections 43 and 43A'. Thus, once we
apply this special provision for computation ofprofits and gains,
provisions for computation of such profits as contained in E
Sections 28 to 41 and Sections 43 and 43A of the Act stand
excluded.
(b) In order to attract the provisions ofScction 44BB of the Act,
two conditions are to be specified, namely, (i) assessee has to
be a non-resident; and (ii) assessee should be engaged in the F
business of exploration etc. in mineral oils of the nature
specifically spelled out in the provision.
(c) Choice is given to such an asscssce under sub-section (3) of
the Act to either claim lower profits and gains than the profits
and gains specified in sub-section (2) and covered by normal G
provisions of computing profits and gains of business or
profession, subject to fulfilling the conditions of audit etc. ~s
mentioned therein or to be governed by Section 44BB of the
Act.
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4IO SUPREME COURT REPORTS [2017] I J S.C.R.
A ( d) In case the twin conditions mentioned above. are satisfied ' the
assessee can take the benefit ,,f paying the tax as per the
provisions of Section 4488 on "deemed profits and gains" of
its business and such profits and gains are to be calculated as
per the formula provided in sub-section (2) thereof. Pertinently,
it is a 'deemed' provision for calculating profits and gains of
8
business or profession, which means that such profits and gains
arc to be arrived at fictionally, as per provisions contained in
sub-section (2).
(c) Sub-section (2) mentions the amounts which are to be added
up, and·thc aggregate of those amounts is deemed to be profits
c and gains on which 10% tax is charged as component of
income tax.
6. Coming to the /is that is involved in these appeals, it may be
seen that sub-section (2) mentions two kinds of amounts which are to be
treated as profits and gains of the business. In clause (a) of sub-section
D (2), the amount referred to arc those which arc paid or payable to the
assessee 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 extrnction or production of, mineral oils in
India. It is immaterial whether the said amount is paid or payable in
E India or out oflndia. Second kind of amounts mentioned in clause (b) of
sub-section (2) arc those sums which arc received or deemed to be
received by or on behalf of the assessee on account of provision of
services and facilities in connection with, or supply ofplant and machinery
on hire used or to be used in the prospecting for, extraction or production
ofmincrnl oils outside India. Herc, however, only those sums which arc
F paid or payable in India are to be included.
7. The asscssccs herein had entered into contracts primarily with
Oil and Natural Gas Commission (ONGC), a public sector company, for
hire of their rig for carrying out oil exploration activities in India. For this
purpose, they were paid mobilisation fee as well, for and on account of
G mobilisation/movement ofrig from foreign soil/counlly to the off-shore
side at Mumbai (India). The issue that has fallen for consideration is as
to whether aforesaid amount received is to be included for computation
of deemed profits and gains of the business, chargeable to tax under
Section 4488 of the Act. Right from the Assessing Officer (AO) till the
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 411
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
High Court, all the fora have answered this question in affi1mative holding A
that this amount is to be included for computing profits and gains of the
businesses of the assessees.
8. Civil Appeal Nos. 4906 of2010, 4907 of2010, 4915 of2010
filed by Sedco Forcx International Inc., Mis Transocean Offshore Inc.,
Mis Sedco Forex International Drilling Inc. respectively were taken up B
as lead matters and, therefore, for the sake of brevity, we recapitulate
the factual matrix from the said appeals, as it would suffice for answering
the question involved.
9. During the years umlerconsideration, the asscssees are engaged
in executing the contracts all over the world including India in connection c
with exploration_ and production of mineral oil. The assessees are
companies incorporated outside India and, therefore, non-resident within
the meaning of Section 6 of the Act. The assessecs entered into
agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid
agreements provided for the scope of work along with separate
considerMion for the work undertaken. Since the dispute is about D
mobilisation charges, clauses in respect thereof are as.under:
"Operating Rate - Receipts for undertaking drilling operations
computed by per day rates provided in the contract. The operating
rates shall be payable from the time the drilling unit is jacked-up
and ready at the location to spud the first well. E
Mobilisation-charges for the transport of the drilling unit from a
location outside India to a location in India as may be designated
by ONGC."
In addition to the above, assessees also received amounts from
F
the operator towards reimbursement of expenses like catering, boarding/
lodging, fuel, customs duty, the supply of material etc., with which we
are not concerned.
l 0. The assessces filed their return of income declaring income
from charter higher of the rig. The same was offered to tax under G
Section 44BB of the Act. In the case of Scdco Forex International Inc.,
the lk~sessee did not include the amount received as mobilisation charges
to the gross revenue for the purpose of computation under Section 44BB
of the Act. Jn the case of Transocean Offshore Inc., the assessec
included l % of the mobilisation fees. The mobilisation fees were offered
H
412 SUPREME COURT REPORTS (2017) l l S.C.R.
A to tax on a l % deemed profit basis on the ratio of the CBDT Instruction
No. 1767 dated July I, 1987.
11. The AO included the amounts received for mobilisation!
demobilisation to the gross revenue to arrive at the "profits and gains"
for the purpose of computing TAX under Section 44BB of the Act. The
B Commissioner of Income Tax (Appeals) [hereinafter referred to as the
'CIT(A)'J confirmed the action of the AO. The Income Tax Appellate
Tribunal (hereinafter referred to as the '!TAT') in the case of Sedco
F orex International Inc. dismissed the appeal of the assessee and the
action of the AO was upheld insofar as the mobilisation charges were
concerned. In the case of Transocean Offshore Inc., the !TAT upheld
c the view taken by the assessee and directed the AO to assess the profits
on mobilisation charges at l % of the amount received. This was done
following the Circular ofCBDT Instruction No. 1767 dated July 1, 1987
and decision of the third Member in the case of Saipem S.P.A. v. Depu(v
Commissioner of Im·ome Tax'. The High Com1 has held that the
D mobilisation charges reimbursed inter alia even for the services rendered
outside India were taxable under Section 4488 of the Act as the same
is not governed by the charging provisions of Sections 5 and 9 of the
Act. Even on the issue of reimbursement in M/s. Sedco Forex
International Drilling Inc. (Civil Appeal No. 4915 of 2010), the High
Court followed its earlier judgments dated September 20, 2007 and May
E 22, 2009 to hold that reimbursement of expenses incurred by the asscssee
was to be included in the gross receipts, and taxable under Section 44BB
of the Act.
12. From the aforesaid briefnarration of fact~. it may be discerned
that following three types of payments were given by the ONGC to the
F asscssees:
(i) Mobilisation/demobilisation advance.
(ii) Custom duty reimbursement.
(iii) Operational charges reimbursement.
G
13. The High Court has held that these payments be also included
as amounts received for computation of aggregate of amounts specified
in sub-section (2) as deemed to be the profits and gains of the businesses
of the assessees, chargeable to tax under the said provision.
'88 rm 213 (Dell
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 413
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
J4. Mr. Porns F. Kaka, learned senior advocate appearing in some A
of these appeals submitted that the aforesaid amounts were, in fact,
towards reimbursement of expenses actually incurred by the assessees.
According to him, the work undertaken was, in fact, the obligation of the
ONGC and it was for ONGC to provide such facilities/material under
the contract. Stili the assessees performed the said task at the request
B
of the ONGC and ONGC simply reimbursed these expenses which did
not have any profit element. It was emphasised by Mr. Kaka that insofar
as the asscsse~~Scdco Forcx International Inc. is concerned, the
expenditure incurred on mobilisation was much higher than the actual
payment received. Thus, this assessee had, in fact, suffered loss on this
transaction. He also pointed out that the agreement separately provided c
for consideration/remuneration for mobilisation and demobilisation of
dri Hing unit and reimbursement of cost incurred on behalf of the operator
of ONGC. It was submitted that as this was the nature of the amount
received, namely, reimbursement of expenses without there being any
profit clement, it could not be treated as 'amount' within the meaning of D
sub-section (2) of Section 44BB of the Act.
15. Explaining the taxation of income scheme enumerated under
Sections 4. 5 and 9 of the Act, Mr. Kaka submitted that globally the tax
systems can be classified broadly into two models; Worldwide and I
Territorial syst~m. India follows a territorial system of taxation specially
qua business income of non-residents, which is taxed only as it is E
attributable to operations within the Indian territory. This, according to
him, was clear from the conjoint reading of Sections 4, 5 and 9 of the
Act. Section 4 is the charging section for levying a tax <in income of any
person under the Act which provides that income tax shall be levied at
the rates provided by the Finance Act on the 'total income' of the previous F
year. Scope of total income is provided under Section 5 of the Act
which deals with total income ofresidents as well as non-residents. The
learned senior counsel pointed out that insofar as non-residents arc
concerned. total income as per Section 5(2) of the Act is the income
which is recci vcd or deemed to be rccei ved in India in such year or on
behalf of such person; or income which accrues or arises or is deemed G
to accrue or arise in India during such year. He, thus, argued that in
respect of non-residents only that income which is received or deemed
to be rccci vcd in India or which accrues or arises or deemed to accrue
or arise in India is taxable. In order to locate the income which is deemed
H
414 SUPREME COURT REPORTS [2017] l I S.C.R.
A to accrue or arise in India, Section 9 is the concerned provision. Section
9 acknowledges principle of attribution of income under the Act. Section
9 lays down two broad categories of taxable of income i.e. (a) business
income; and (b) income from interest or royalty or fees for technical
scrvic1.::s. Insofar as business income is concerned, it becomes taxable
and only that income becomes chargeable to tax in India which is
B
attributable lo operations carried out in India. Insofar as second category,
namely, income in the nature of interest, royalty or fees for technical
services is concancd. such income would be deemed to accrue or arise
in India, irrespective of situs of the services. The learned senior counsel
argued that insofar as payment for mobilisation which was received by
c the assessce is concerned. it is neither income receipt nor deemed to be
received in India. It is in respect of services outside India and, therefore,
docs not accrue or arise or deemed to accrue or arise under Section 5
read with Section 9 of the Act.
16. Proceeding fu11her on the aforesaid line of argument, he
D submitted that, in the first instance, it has to be determined that income
accrues or arises or is deemed to accrue or arise in lndia. Only when
that is established, the next step is to compute the total income based on
other provisions of the Act and here Chapter IV of the Act which deals
with computation of income from 'Profits and Gains of Business or
Profession' gets triggered. It was submitted that, no doubt, Sections
E 44B, 44BB, 44BBB etc. provide for special mechanism for computing
the income in the case ofnon-rcsidents on presumptive basis. However,
cwn when the income is to be computed under any of these provisions,
first pre-requisite is to find out as to whether a particular income has
accrued or arisen or deemed to accrue or arise in India. If that threshold
F is not met, the question of treating such payments as 'income', merely
because the income is to be computed under special provision, is of no
conscc1ucnce. Mr. Kaka also referred to Circular No. 495 dated
September 22, 1987 issued by the Central Board of Direct Taxes (CBDT)
which. aecordingto him, explains the Legislature intent behind inserting
Section 44BB in the Act. According to the circular, the computation of
G taxable income of a non-resident asscsscc engaged in the business of
exploration etc. of mineral oils in accordance with the general mode of
computation under Sections 28 to 43A involved a number of
complications. As a measure of simplification, Scction 44BB was inserted
by the Finance Act, I 987 with retrospective effect from April l, 1983
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 415
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
for determination of income of such tax payers on a presumptive basis, A
at 10'% of the amounts mentioned in sub-section (2) thereof. Relevant
portion of that circular is as under:
"2.1.1 A numbcrofcomplications are involved in the computation
of taxable income of a taxpayer engaged in the business of
providing services and facilities in connection with or supply of B
plant and machinery on hire, used or to be used in the exploration
for and exploitation of mineral oils. With a view to simplifying the
provisions, the Amending Act has inserted a new Section 44BB
which provides for determining of the income of such taxpayers
at JO percent of the aggregate of certain amounts which have
b~en specified. This amount will include the amounts received or
c
due to be received in India on account of such services or facilities
or supply of plant and machinery."
17. After arguing that the provisions have to be read in the aforesaid
manner, proposition advanced by the learned senior counsel is that Section
44BB of the Act is only a computation provision and does not override D
Sections 4 and 5 of the Act. For this purpose, he referred to the judgment
of this Court in U11io11 of India & Anr. v. A. Sa11yasi Rt10 & Ors.'
wherein Section 44AC of the Act has been interpreted in a similar mimner
holding that Section 44AC read with Section 206C is the only machinery
provision and not charging Section. E
18. Towing the aforesaid line of argument, another submission of
Mr. Kaka was that since Section 44BB is a computation provision under
the head ·income', it cannot override the charging section. For this
purpose, he relied upon the judgment of Bombay High Court in
Commissioner of l11co111e Tt1x v. F.Y. Kllambaty 3• Mr. Kaka also F
rclicfupon the followingjudgmcnts:
(a) A11glo-Fl'e11ch Textile Co111pt111y, Ltd.. by Age11ts Mis Best
& Co111p1111y, Ltd., Madras v. Co111111issio11er ofI11co111e Tt1x,
Mt1drt1.~ 4
(b) /s/1ikaw"j111t1-H11ri111t1 Heavy /11dustries Ltd. v. Director G
of l11co111e Tax, Mumbai'
'\I9%J 3 sec 465
3 (1986) 1591TR203
'(1954) 25 ITR 27 (SC)
'(2007) 288 ITR 408 (SC)~ (2007) 3 sec 481)
H
416 SUPREME COURT REPORTS [2017) I l S.C.R.
A (c) Ct1rborand11111 & Co. v. CIT, Mmlra.\~
( d) Commissioner of Income Tax, Madras v. Best and
Compt111y (Prfrate) Ltd., Madras'
l 9. He also cited judgments on the proposition that CBDT Circulars
arc binding on tax authorities; reimbursement of actual expenses docs
B not represent income and, therefore, cannot be taxed; and normal concept
of income cannot be taken away by presumption provisions.
20. In nutshell, as can be seen from the aforesaid arguments, the
proposition advanced by learned senior counsel arc as follows:
(a) Principle ofapportionment between India and outside India is
c a basic principle of income tax law. Where payments are
made to a non-resident outside India, for services rendered
out~ide India, namely mobilization charges forclrilling rigs from
a foreign location to a location in India, the same is not
chargeable to tax in India under Sections 5 and 9 of the Act
and the same cannot be made chargeable to tax under Section
D
4488 of the Act.
(b) A computation provision like Section 44BB cannot override
the charging provisions of Sections 4 and 5. It is so stated in
the instruction No. 1767 dated July l. 1987 issued by the
CBDT. The understanding of the CBDT is binding on the
E Revenue.
(c) The charges were reimbursed for services rendered outside
India. Services rendered outside India cannot be chargeable
to tax under the Act. There should be sufficient territorial nexus
between the rendering of services and the territorial limits of
F the Act to make the income taxable.
( d) Where the actual expenditure i neurred by the assessee for the
mobilization of the rigs was higher than the amount reimbursed,
there cannot be any income chargeable to tax under the Act.
( c) Reimbursement ofactual expenditure, which was the obligation
G of the operator/company cannot he included in receipts under
Section 44BB of the Act as the income tax is levied on income.
Further, the fact of such reimbursements being devoid ofany
profit element has not been disputed by the Revenue.
' ( 1977) I 08 !TR 335 (SC)
'(1966) 60 !TR 11 (SC)
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 417
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
21. Mr. Vohra, learned senior counsel appearing for the appellant A
Pride Foramer S.A. (Civil Appeal No. 4543 of 2013) stated that the
appellant in the said case is a non-resident company incorporated in the
Republic ofFrancc. It also entered into contract with ONGC for hire of
its rig for carrying out oil exploration activities by ONGC 'n India. The
rig was located in Singapore and accordingly, under the contract, B
mobilization fees ofUS$1 million (equivalent to Rs.4,31,10,000/-) was
payable by ONGC to the appellant for and on account of mobilization/
movement of rig from Singapore to the offshore site at Mumbai. In
case of delay, liquidated damages @0.5% of operating day rate subject
to a maximum of 5% of the annual operating charges was payable by
the appellant to ONGC. In Assessment Year 2000-0 l, during the year C
under consideration, the appellant received outside India, net mobilization
charges of US$ 6,42,300 (equivalent to Rs.2, 76,89,533/-) after deduction
of liquidated damages for delay, for mobilization from Singapore to the
offshore site (in India).
22. On the aforesaid facts, he submitted that net mobilization D
charges received outside India could not be taxed in India, more so,
when these were in the nature of reimbursement of expenses on account
of mobilization/movement of rig from Singapore to the offshore site at
Mumbai. His primary contention was that before this payment could be
included while making computation under Section 44BB of the Act. it
had to be 'income' which is taxable in India in the first instance. His E
submissions on the scheme of Sections 4, 5 and 9 of the Act were the
same as that of Mr. Kaka, already noted above. Additionally, he submiUcd
that insofar as Section 44BB of the Act is concerned, it only provides a
simplified computation mechanism for computing profits and gains in
case of non-resident assessee engaged in activities relating to business F
of exploration of mineral oil etc. Thereby, overriding the normal
computation mechanism contained in Sections 28 to 41, 43 and 43A of
the Act. His emphasis was that this provision docs not override charging
provisions as contained in Section 4 read with Sections 5 and 9 of the
Act, thereby bringing to tax an amount which is not at all taxable under
the provisions of the Act. In addition to Circular No. 495 dated September G
22. 1987 (already noted above), he also relied upon Instruction No. 1767
dated July I, 1987 issued by CBDTexplainingthe computation ofbusiness
income in case of a contractor engaged in business of exploration of oil
where pmt of the activities are carried out in India and part of the activities
arc carried on outside India. It has been stated as under: H
418 SUPREME COURT REPORTS [2017] ll S.C.R.
A "3. On these facts, it is clear that income accruing or arising to
the non-resident contractor should be apportioned between the
various activities carried on by it, some of which would be within
India and some outside. Where the ownership in the platform,
tcnninal, treatment plant or other facilities passed outside India,
the non-resident will be taxable only in respect of the activities
'B
performed in India by way of installation. hook-up and
commissioning etc., of the facilities acquired by the Indian
enterprises engaged in oil exploration or production ... "
23. In support of the aforesaid submissions, Mr. Vohra relied upon
the followingjudgmcnts:
c (i) Co111111issio11er of Income Ttu and Anr. v. Hyundai Heavy
/11dustries Co. Ltd. 8
(ii) State Bank of Trava11core v. Co111111issioner oflllcome Tax,
Kera/a'
24. To summarise. proposition advanced by Mr. Vohra are as under:
D
(i) Mobilization fee was in respect of activities carried outside
India prior to coming into existence of the PE in India and,
therefore, this mobilization fee was not taxable at all, in view
ofArticle 7 of Double Taxation Avoidance Agreement (DTAA)
between India and France, the relevant portion whereof is as
E under:
"l. The profits of an enterprise of one of the Contracting States
shall be taxable only in that Contracting State unless the
enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the
F enterprise carries on business as aforesaid, the profits of the
enterprise may be taxed in the other Contracting State but
only so much of them as is attributable to that permanent
establishment.. .."
(ii) In case the payment is held liable to tax in India, then the same
G has to be computed in terms of Sections 4, 5 and 9 read with
Section 44BB of the Act. In that situation, only the mobilization
fee pertaining to voyage within the territorial waters oflndia
can be subjected to tax.
'(2007 i 1 sec 422
9
H (1986) I581TR 102(SC)
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 419
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
(iii)Without prejudice to the aforesaid, it is alternatively submitted A
that since the appellant only received mobilization fee amounting
to Rs.2,76,89,533/-(equivalentto US$ 6,42,300), after deduction
of liquidated damages, the AO erred in bringing to tax the gross
amount ofUS$1 million under Scction44BB oftbeAct.
25. Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates B
appearing for some other assessees treaded the same path by adopting
same line of arguments.
26. Mis. Chidananda and Arijit Prasad, learned advocates appearing
for the Revenue put up an emphatic defence to the j udgrnent of the High
Court which has accepted the position taken by the Revenue. It was
argued that assessce Scdco, which is a non-resident company, had entered
c
into a composite/indivisible contract with ONGC to provide a drilling unit
to carry out drilling operations. A finding of fact to this effect i.e. a
composite/indivisible contract was entered into, was arrived at by the
!TAT and. therefore, matter had to be proceeded on that basis.
Submission was that, as per this contract, it was the obligation of the D
assessee to mobilise its resources for the purpose of drilling operations.
According to them, since the payments were made by ONGC to the
assessce in terms of indivisible contract for the purposes of drilling
operations, it was not open to the assessee to claim that mobilisation fee/
charges and it should not be included in the aggregate receipts for the
E
purposes of Section 44BB of the Act and their plea that they are not
actual charges but expenses in the nature of reimbursement by ONGC
was not permissible. It was submitted that though, mobilisation fee/
charges have been separately indicated in the said contract, the payments
have been made by ONGC for supply of drilling unit including the rigs,
for operating these rigs and for providing experts and other personnel F
for operating the rigs etc. Therefore, it is a misnomer to term payment
of mobilisation fee/charge as 'reimbursement'. They are payments made
pursuant to an indivisible contract. Assuming, for the purposes of argument
that it amounts to reimbursement, the same will not make any difference
for the reason that parties may agree to divide the total amount as a
G
direct payment by way of fees and some part of the consideration by
way of expenses, but this arrangement between the parties would not
alter the character of receipts. A receipt will remain as such and will not
partake the character of an expenditure. According to the learned counsel,
the mobilisation fee/charges paid by ONGC to assessee amounts to income
chargeable to tax. H
420 SUPREME COURT REPORTS [2017] ll S.C.R.
A 27. For this purpose, reliance was placed on the definition of
"income" as contained in Section 2(24) of the Act which defines the
said expression in an inclusive manner. Attention was also drawn to
Section 2(45) of the Act which defines "total income" to mean total
income referred to in Section 5, computed in the manner laid down in the
Act. It was, thus. argued that income had to be computed as per the
B
provisions of the Act. Even Section 4 of the Act, which is a charging
section. clearly points out that income tax is to be paid 'in respect of the
total income of the previous year'. Likewise, Section 5 of the Act which
deals with 'scope of total income' includes all income from whatever
the source derived. It was submitted that, in this hue, Section 9 which
c deals with income deemed to accrue or arise in India, had to be looked
into. According to the learned counsel, the assessec had business
connection in India through the equipment owned by it, operating in India
and its employees, experts etc. working in India. Its assets are employed/
used in India and the source of income is in India. Therefore, the
ingredients of Section 9( 1)(i) arc fulfilled. Thus, asscssce has territorial
D
nexus in India. Further, in a given case, if the assessee fulfils these
requirements and a DTAA applies, this will also constitute a Permanent
Establ ishmcnt (PE) through which an assessce operates its business in
India. Further, the rigs/equipment are mobilised for its business operations
in India and that source of income is in India, therefore, the question of
E apportionment. Thus. the mobilisation fee/charges paid by ONGC to
asscssce is an income chargeable to tax from a conjoint reading of
Sections 4. 5 and 9. Therefore, the submission of the asscssee that Section
44BB seeks to tax an event which the charging sections does not seek
to tax is incorrect.
F 28. Adverting to the provisions of Section 44BB of the Act which
finds place in Chapter IV dealing with 'computation of income' in respect
of business or profession, it was submitted that the scope and effect of
Section 44BB has been explained in Departmental Circular No. 495
dated September 22, 1987. It has been mentioned in the said circular
that a number of complications were involved in the computation of
G wxable income ofa taxpayer engaged in the business of providing services
and facilities in connection with or supply of plant and machinery on
hire. used or to be used in the exploration for and exploitation of mineral
oils. Section 44BB was introduced with a view to simplifying the relevant
provisions which provide for determining the income of such taxpayers
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 421
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
at I 0 per cent of the aggregate of certain amounts, which have been A
specified in the said section. It was submitted that Section 44BB provides
for "presumptive income determination". It is a complete code in itself
for determining the taxable income 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 on hire used, or to
B
be used, in the prospecting for, or extraction or production of, mineral
oils. It replaces Sections 28 to 41 and Sections 43 and 43A (which
otherwise mandates assessee to maintain accounts, claim and prove
expenses). Only the receipts are taken into account. Even ifthe actual
profits and gains of the asscssee arc more than 10%, only I 0% is
presumed to be its income. Thus, 10% is the income and the rest 90% c
is allowed as expenditure/allowable claims of the assessee. Assuming
that Section 44BB was not on the statute book, assessee would have
shown mobilisation fee as receipt and claimed the actual expenditure
and arrived at the net taxable income. Now, Section 44BB presumes
that only 10% of the aggregate receipts is income and the remaining D
90% is expenditure. It was also argued that in the case of presumptive
income determination like Section 44BB. items of expenditure cannot be
claimed separately, otherwise it would lead to double deduction as Section
44BB presumes that only 10% of the aggregate receipts is income and
the remaining 90% is expenditure. It was pleaded that when all the
authorities including the final fact finding authority as well as the High E
Court have recorded their concurrent findings on consideration ofrelevant
material, this Court may not disturb those findings. Reliance was placed
on Amsm·lt/a Technologies Limited v. Joi11t Commis.•io11er ofJ11co111e
Tltx, Sped11/ Ra11ge 1, Ha11gafore 10 and Commissioner of lncome
7lrx Hilr11r mid Orissa, Pat11a v. Aslroka Marketi11g Co. 11
F
29. Before we appreciate the rival submissions made by counsel
for the parties on both sides, it would be apposite to go into the raiso11
d'etre behind the orders of the ITAT as well as the High Court.
30. The !TAT in its order has taken note of the relevant clauses of
the agreements entered into between ONGC and assessec (Scdco) G
pertaining to mobilisation and mobilisation fee. Clause 3.2 of the
Agreement dated September 3, 1985 relating to providing the Shallow
Dash Water Jack Up Rig covering this aspect reads as under:
"(20t5) 14 sec 732
"(1972) 4 sec 426
H
422 SUPREME COURT REPORTS [2017] ll S.C.R.
A "'Mobilisation
Operator shall pay to Contractor a mobilisation fee of eight hundred
thousand United States Dollars (US $ 800,000) ("Mobilisation
Fee") for the mobilisation of the Drilling Unit from its present
location in Setubal, Portugal to the first well location designated
B by Operator, Offshore Bombay. India. Operator will notify
Contractor no later than fifteen ( 15) days from the execution of
this Agreement if it desires to mobilize the Drilling Unit to another
location offshore India and no additional costs shall be charged to
Operator for mobilisation to such other location. In the event that
Operator desires to mobilize the Drilling Unit to another location
c offshore India and it fails to notify Contractor by such date, any
additional costs incurred by Contractor for such mobilisation in
excess of the Mobilisation Fee shall be borne by the Operator.
Contractor shall invoice Operator for payment of the Mobilization
Fee after the Drilling Unit is jacked-up on the first well location
D and ready to spud the well. Operator shall make payment to
Contractpr no later than thirty (30) days atier receipt of the
invoice.'~
31. Clause 4.2 of the Agreement dated July 12, 1986 relating to
Mobilisation of the Drilling Unit (including Rig 21) is also reproduced
E hereunder:
'"Mobilismion and Mobilisation Fee
('ontractor shall notify Operator when it is prepared to commence
mobilisation of the Drilling Unit from Muscat, Oman. Within thirty
days of receipt of Contractor's notice of readiness, Operator shall
F instruct Contractor to commence mobilisation. and Contractor shall
forthwith ship the Drilling Unit to the port of entry (Kandla or
Bombay).
Contractor shall be compensated for the mobilisation of the Drilling
Unit from its place of origin by a mobilisation fee payable within
G thirty days following the commencement date."
32. It also noted that apart from the aforesaid mobilisation fee
stipulated in the aforesaid two contracts, the ONGC had undertaken to
pay compensation based on operating rate of US$ 24,550 per 24 hours
a day for all operating time and US $ 24,060 as non operating rate per
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 423
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
day relating to Sedco 252 Rig. Similarly operating rate - RI and stand A
by rnte - R2 was also separately stipulated in the other contract dated
July 12, 1986 relating to Rig-21 etc.
33. Thereafter, the !TAT pointed out that even as per the assessee,
there was no dispute about the applicability of Section 44BB of the Act
in relation to payments made by the ONGC under the aforesaid B
agreements by way of operating charges and other payments made by
ONGC to the assessee except in relation to mobilisation fee and
reimbursement of certain other expenses as according to the assessee,
these payments were not in the nature offee (income) but reimbursement
of expc•nscs only. This argument is dealt with by the !TAT, taking note
of the provisions of Section 44BB of the Act. The ITAT concluded that C
it was a special provision for computing profits and gains in connection
with the business of exploration of mineral oils, effect whereof was
explained in Departmental Circular No. 495 dated September 22, 1987.
It fmther noted that agreements between ONGC and the assessee were
indivisible in nature as per which entire payments had been agreed to be D
made by ONGC for supply of drilling unit including the rigs, for operating
those rigs, and for providing experts and other personnel for operating
those rigs. Therefore, all these payments were deemed to be the profits
and gains of business for the purposes of Section 44BB of the Act and
10% thereof was to be treated as income chargeable to tax. Section
44BB of the Act does not provide that separate consideration mentioned E
in the Agreement for transportation of the drilling units/rigs from their
present location to the designated location in India would be excluded
from the correct amount of gross receipts on which I 0% profit rate is
required to be applied. The !TAT held that the mobilisation fee paid by
ONGC to the assessee had no nexus with the actual amount incurred by F
the asscssce for transportation of drilling units/rigs and, therefore, it could
not be said that this payment was made for reimbursement of actual
expenditure.
34. This is the summary of the rationale given by the lTAT in
support of its conclusion, as can be seen from the following detailed G
discLL~sion:
"2.14 The aforesaid Sec. 44BB making a special provision for
computing profits and gains in conrwction with the business of
exploration of mineral oils has been inserted by the Finance Act,
H
424 SUPREME COURT REPORTS [2017] I I S.C.R.
A 1987 with retrospective effect from I" April, 1983. The scope
and effoct of new Sec. 44BB was explained in Departmental
Circular No. 495 dated 22"' September, 1987. It has been
mentioned in the said Circular that a number of complications
were involved in the computation of taxable income of a taxpayer
~ngaged in the business of providing services and facilities in
B
c·onncetion with or supply of Plant & Machinery on hire, used or
to be used in the exploration for and exploitation of mineral oils.
Section 44BB was introduced with a view to simplifying the
relevant provisions which provide for determining the income of
such tax-payers at IO'Yo of the aggregate of certain amounts, which
c have been specified in the said Section. The provisions of Section
441313 were amended by the Finance Act, 1988 withrctrospective
effect w.e.f. I" April, 1983 which clarifies that applicability of
Section 44138 will be restricted to the cases of only non-resident
tax-payers. It is clear from the language used in Section
44BB(2)(a) that the amount referred to in Section 44BB(I) on
D
which profits have to be ealculated@l0% will be the aggregate
of amounts paid or payable to the taxpayer or to any person on his
behalf whether in or out oflndia on account of the provisions of
such services or facilities.
2.15 A perusal of the relevant Agreements executed between
E the appellant company and ONGC clearly reveals that both the
Agreements arc indivisible contracts. It is true that mobilisation
fee and operating charges have been separately indicated in the
said Agreements but the entire payments have been agreed to be
mude by ONGC for supply of the Drilling Unit including the Rigs,
F fi.ir operating these Rigs, and for providing experts and other
personnel for operating those rigs etc. Section 44BB specifically
provides that the aggregate of the amounts referred to in sub-
sc·ction (2) of Section 44BB will be adopted as the basis for
calculating profits @I 0%, which shall be deemed to be the profits
and gains of such business chargeable to tax under the head
G "Profits & Gains of Business or Profession". It docs not provide
that separate consideration mentioned in the Agreement for
transportation of the Drilling Unit/Rig from their present location
to the designated location in India will be excluded from the
aggr~gate amount of gross receipts on which I 0% profit rate is
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 425
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.)
required to be applied. ONGC has made the entire payment A
including the mobilisation fee, opemting charges, daily hire on non
operating days etc. for availing the services and facilities and the
supply of Plant & Machinery on hire agreed to be provided by the
appellant company to ONGC. The mobilisation fee paid by ONGC
to the appe Hant company has no nexus with the actual amount
B
incurred by the appellant company for tmnsportation of the Drilling
Unit/Rigs to the specified drilling location in India. Even if the
actual expenditure incurred by the appellant company would have
been substantially less, ONGC was liable to pay the fixed amount
of mobilisation fee stipulated in the respective Agreements."
35. Before the High Comt, argument of the assessee was that c
amount of mobilisation charges cannot be included in the amount referred
to under sub-section (2) of Section 44BB of the Act as the mobilisation
charges represent reimbursement of expenses incurred for transportation
of drilling units ofrigs from outside India to designated drilling places in
India and the payment has also not been made in India. In support of his D
submission, apatt from other judgments, heavy reliance was placed on
the decision of this Court in lsllikawajima-Harima Heavy llldustries
Ltd. case. The High Court noted that in the said case, the assessee was
a Japancsc company, inter alia. engaged in the business of construction
of storage tanks as also engineering etc. It formed consortium along
with fow other Japanese companies and one subsidiary company of the E
Japanese company. This consortium had entered into an agreement
with an Indian company on January 19, 2001 for setting up a Liquefied
Naturnl Gas (LNG) receiving, storage and degasification facility at Dahej
in the State of Gujarat. A supplementary agreement was also entered
by the parties on March 19, 2001. It was a turnkey project. At the same F
time, role and responsibility of each member of the consortium was
scparntely specified and each of the members of the consortium was to
receive separate payments. Insofar as appcllant-asscssee is concerned,
it. was to develop, design, engineer and procure equipment, materials
and supplies to reject and construct storage tanks of 5 MMTPAcapacity,
with potential expansion of lOMMTPA capacity at .the specified G
tempcrnturc. i.e., 200 degree celsius. The arrangement also included
marine facilities (jetty and island breakwater) for transmission and supply
of LNG to purchaser; to test and commission facilities relating to receipt
and unloading, storage and regasification of LNG and to send out
H
426 SUPREME COURT REPORTS [2017] I I S.C.R.
A rcgasified LNG by means ofa turnkey fixed lump sum price time certain
engineering procurement, construction and commission contract. The
contract indisputably involved: (i) offshore supply, (ii) offshore services,
(iii) onshore supply, (iv) onshore services and (v) construction and
erection. The price was payable for offshore supply and offshore
services in US dollars, whereas that of onshore supply as also onshore
B
services and construction and erection partly in US dollars and partly in
Indian rupees.
36. The High Court noted that while determining the tax liability
of the said foreign company, this Court had taken into consideration
Section 5(2). Section 9(l)(i) and Section 9(l)(vii) of the Act and
c considered the question of imposition of tax on income arising from a
business connection of the asscssce. Holding that income is not taxable
in India. the Court premised the conclusion, inter alia, on the ground that
as per dause (a) of Explanation I to Section 9(1 )(i) of the Act, only such
pa11 of income as is attributable to the operations carried out in India, is
D taxabh: in India and further that sufficient territorial nexus between the
rendition of services and territorial limits of India is necessary to make
the income taxable. As far as offshore supply and otlshore services in
US$ are concerned, it was done outside the territory of India and the
payment was also made to the assessee (a foreign company) in US$
outside India, said payment was not taxable as it was not "income"
E
arising from a business connection of the said asscssce.
37. The High Court, after taking note of the aforesaid judgment,
has held that it is not applicable in the instant case. Reason given is that
in Is/lilwwajima-Harima Heavy l11d11stries Ltd., the Court had dealt
with the assessment of a non-resident company on its income as per the
F provisions of Sections 5 and 9 of the Act and these sections arc not
attracted in the instant case, as the same is governed by Section 44BB
of the Act. This is the material distinction, in the opinion of the High
Court, the manner in which the same is discussed needs to be reproduced.
Thus, wc hereby quote the relevant portion of the said discussion:
G ....... TI1ereforc, section 5 and section 9 both are aimed a the income
for the wxability under section 4 of the Act, while section 44BB
docs not take into Accow11 the income for calculating the aggregate
amount t calculate 10 percent profit and gains. Profit and gains is
u type of income to be taxed under a legal fiction, i.e., @10 percent
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 427
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
of the amow1t specified in sub-section (2) of section44BB. Section A
44BB is a special provision relating to non-resident assessee who
is providing 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 or outside India.
The section is a complete code in itself. Thus, the reliance placed
B
by Sri Porus Kaku, learned Counsel for the assessee, is misplaced
as we have observed that the amount referred in sub-section (2)
of Section 44BB are four types of amounts and all the four types
of amounts are mutually inclusive and has to be taken into account
either all of them or any of them and its clauses themselves provide
that whether the payment is made inside India or outside India. c
17.ln tl1e present case, a finding has been recorded by the !TAT
that it was not in dispute before the Tribunal that the payment
was made to the appellant company outside India and the
mobilization fee as claimed by the assessee was paid to the
appellant by ONGC has no nexus with the actual amount incurred D
by the appellant company for transp01tation of drilling units of rigs
to the specified drilling locations in India. Hence, the mobilization
fee is not the reimbursement of expenditure. ONGC was liable
to pay a fixed sum as stipulated in the contract regardless of actual
expenditure which may be incurred by the asscssce company for
the purpose. In view of the fictional taxing provision contained E
under Section 44BB. the Assessing Officer was right in adding
the amount of Rs. 99,04,000/- for the Assessment Year 1986-87
and amount worth Rs. 64.64,530/- for the Assessment Year 1987-
88 received by the asscsscc towards mobilization charges for the
purpose of imposing income tax and CIT (Appeals) and !TAT F
were also right in upholding the order of the Assessing Officer."
38. We fed that High Cowt may not be entirely correct in law in
excluding the provisions of Sections 5 and 9 in those cases where the
assessmcnl is opted by the assesscc under Section 44BB of the Act.
Submissions of learned counsel for the assessees arc justified to the G
extent that Section 44BB of the Act is a special provision providing
computation mechanism for computing profits and gains in case of non-
resident asscssce engaged in activities relating to business of exploration
of mineral oil etc. At the same time Sections 4,5 and 9 of the Act which
deal with charging section, total income and income of non-resident which
H
428 SUPREME COURT REPORTS [2017] l 1 S.C.R.
A arises or deem to arise in India cannot be sidetracked. These are the
provisions which bring a particular income within the net ofincome tax.
Therefore, it is imperative that a pa11icular income is covered by the
charging provisions contained in Section 5 of the Act. Indian Income
Tax Act, admittedly, follows a territorial system of taxation. As per this
system only that income of a non-resident is taxable in India which is
B
attributable to operations within the Indian Territory. Therefore, in the
first instance it is to be seen whether a pa11icular income arises or accrues
or deem to arise or accrue within India. In order to seek this answer, the
principles contained in Section 9 have to be applied only when it becomes
an income taxable in India as per Section 9, in case of non-resident, the
c question of computation of the said income would arise. To recapitulate
the scheme of the Act in this behalf, it may be stated that Section 4 is the
charging section for levying a tax on the income of any person under the
Act and provides that income-tax shall be levied at the rates provided by
the Finance Act on the 'total income' of the previous year of every
person. The expression 'total income' has becndcfincd in Section 2(45)
0
of the Act to mean the total amount of income referred to in Section 5
computed in the manner laid down under the Act.
39. The s~ope of the total iocome of any person, which could be
subjected to tax under the provisions of the Act, is defined under Section
5 of the Act and dependent upon the residential status of the persons.
E
Section 5(1) provides the scope of'total income' in the case ofresidents,
whereas Section 5(2) provides the scope of'total income' in the case of
non-residents. As per Section 5(2) of the Act, subject to the provisions
of this Act, the 'total income' of any previous year of non-resident
includes:
F Income which is received or deemed to be received in India
in such year or on behalfof such person; or
Income which 'accrues or arises' or is deemed to accrue or
arise to him in India during such year.
G 40. Section 9 enumerates the income which is deemed to accrue
or arise in India. There are two broad categories oftaxability of income
provided under this Section, i.e., Business Income and income from interest
or royalty or fees for technical services (FTS).
41. Section 9(1 )(i) provides that income is to be deemed to have
H accrued or arising in India i !'the income is accruing directly or indirectly
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 429
CONSTITUTED ATTORNEY v. CIT, MEERVT [A. K. SIKRI, J.]
through any business connection in India or from any property rn India A
or from any asset or source of income in India or any capital asset
situated in India (referred as business income).
Explanation !(a) to Section 9( I )(i) of the Act provides an exclusion
in the case of operations which arc not carried out in India. The
explanation provides that the income of the business deemed under this B
clause to accrue or arise in India shall be only that part of the income as
is reasonably attributable to the operations carried out in India. Thus,
business income earned by non-resident is chargeable to tax in India
only to the extent reasonably attributable to the operations carried out in
India.
c
42. It is. however, pertinent to point out that Section 44BB(2)
makes certain receipts as "deemed income" for the purposes of taxation
in the said provision. Therefore, aid of this provision is to be necessarily
taken to determine whether a particular amount will be "income" within
the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also
acts as guide to determine whether a particular income is attributed as D
income occurred in India. Section 44BB of the Act provides for special
provision for computing profits and gains. However, that would not
mean that if the income is to be computed under this provision, we have
to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of
the High Court may not be correct. Law in this behalf is settled by the E
judgment of this Court in A. S1111yasi R1w case as can be discerned
from the following discussion in the said judgment.
"We arc further of the view that the basis ofa charge relating to
income tax is laid down in Sections 4 to 9 of the Act. Section 4 is
the charging section. Income-tax is levied in respect of the total F
income of the previous year of every person. Section 5 deals
with the scope oftotal income. Section 6 deals with the residence
in India. Section 7 deals with the income deemed to be received.
Section 8 deals with dividend income. Section 9 deals with the
income deemed to accrue or arise in India.
G
xxx xxx xxx
The crucial words in Section 9(1) to the effect that "all income
accruing or arising. whether directlv or indii~c1/v, through or
(rom cmv business co1111ec1ion" occurred in Section 42 of the
Income Tax Act, 1922 as well. The said section came up for
H
430 SUPREME COURT REPORTS [2017] ll S.C.R
A consideration before this Court in Ang/o-Fr~nch Textile Co.
Ltd. v. C/T[(l953) 23 ITR 101. ..
xxx xxx
The counsel for the revenue Dr. Gaurishankar vehemently
contended before us that Section 44AC read with Section 206C
B are only machinery provisions and not charging sections. We see
force in this pica. The charge for the levy of the income that
accrued or arose is laid by the charging sections, viz., Sections 5
to 9 and not by virtue of Section 44AC or section 206C. ..
xxx .'(XX xxx
c
However, the denial of relief provided by sections 28 to 43C to
the particular businesses or trades dealt with in Section 44AC
calls for a different consideration. Even, according to the revenue,
the provisions (sections 44AC and 206C) arc only 'machinery
provisions'. lfso, why should the normal reliefs afforded to all
D asscssees be denied to such traders? Prima facie, all asscssces
similarly placed under the Income Tax Act are entitled to equal
treatment. In the matter of granting various reliefs provided under
sections 28 to 43C, the assessees carrying on business are similarly
placed and should there be a law, negativing such valuable reliefs
E to a p:uticular trade or business, it should be shown to have some
basis and fair and rational. It has not been shown as to why the
persons carrying on business in the particular goods specified in
section 44AC arc denied the reliefs available to others. No pica
is put forward by the revenue that these trades are distinct and
different even for the grant of reliefs under Sections 28 to 43C.
F The denial of such relicfa to trades specified in section 44AC.
available to other asscssccs, has no nexus to the object sought to
be achieved by the Legislature. (emphasis supplied)"
43. Having corrected the position in law, by emphasising that
Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases
G where assessment is done under Section 44BB of the Act, we arc oflhc
opinion that the argument of the assessees that Section 44BB is only a
computation provision, is also not entirely justified.
44. ln the first blush, assessecs may appear to be correct in their
contentions that Section 44BB falls in Chapter IV of the Act. Insofar as
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 431
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. S!KRI, J.]
computation of income from 'Profits or Gains of Business or Profession' A
is concerned, it has to be computed as per the provisions of Sections 28
to 430(2). However, certaiff provisions are made for providing special
mechanism for computing the income on presumptive basis in case of
non-resident and it includes Section 44BB as well.
45. Having put the law in prospective, we need to examine as to B
whether mobilisation charges received by the assessees can be treated
as 'income' under Section 5 of the Act and would fall within the four
. corners of Section 9, namely, whether it can be attributed as having
arisen or deemed to arise in India. Argument of the learned counsel
appearing for the assessees is that the amount was received by way of
reimbursement of expenses for the operation carried outside India and C
the payment was also received outside India. It is on this premise, entire
edifice is built to argue that it is not an "income" and, in any case, not
taxable in India at the hands of the assessecs which are foreign entities.
46. We have already reproduced above Clause 3 .2 of the
Agreement dated September 3, 1985 and Clause 4.2 of the Agreement D
dated July 12, 1986. Clause 3.2 of the Agreement dated September 3,
1985 pertains to providing the Shallow Dash Water Jack Up Rig against
which payment was made to the assessees. This Clause says that the
assessccs shall be paid 'mobilisation fee' for the mobilisation of drilling
unit from its present location in Portugal to the well location designated E
by ONGC, offshore Mumbai, India. Fixed amount is agreed to be paid
which is mentioned in the said Clause. The aforesaid mobilisation fee
was payable to the assessccs after the jacking up of the drilling at the
designated location and ready to spud the well. After the aforesaid
operation, asscssces were required to raise invoice and ONGC was
supposed to make the payment within 30 days of the receipt of this F
invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 is
concerned, it related to mobilisation of drilling unit. Here again,
'mobilisation fee' was payable for the mobilisation of the drilling unit
from the place of its origin to the port of entry (Kandla Port, Mumbai).
What follows from the above is that a fixed amount of mobilisation fee G
was payable under the aforesaid contracts as "compensation". Contracts
specifically describe the aforesaid amounts as 'fee'. In this hue, we
have to consider as to whether it would be treated as "income" under
Section 5 of the Act and can be attributed as income earned in India as
per Section 9 of the Act. For this purpose, Section 44BB(2) has to be
invoked. H
432 SUPREME COURT REPORTS [2017] l 1 S.C.R.
A 4 7. Section 44BB starts with non-obstantc clause. and the fonnula
contained therein for computatton of income ts tu be applied irrespective
of the provisions of Sections 28 to 4 J and Sections 43 and 43A of the
Act. It is not in dispute that assessecs were assessed under the said
provision which is applicable in the instant case. For assessment unucr
this provision, a sum equal to i 01/'0 of the aggregate of the an1ounts
B
specified in sub-scctwn (2) shall be deemed to be the profits and gains
of such business chargeable to tax under the head 'profits and gains of
the business or protcssion ·.Sub-section (2) mentions two kinds of amounts
which shall be deemed as profits and gains of the business chargeable to
tax in India. Sub-clause (a) thereof relates to amount paid or payable to
c the assessce or any person on his behalf on account of 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. Thus. all amounts pertaining to the
aforesaid activity which arc received on account of provisions of services
and facilities in connection with the said facility arc treated as prolits
D
and gains of the business. This clause clarifies that the amount so paid
shall be taxable whether these arc received in India or outside India.
Clause (bl deals with amount received or deemed to be received in
India in connection with such services and facilities as stipulated therein.
Thus. whereas clause (a) mentions the amount which is paid or payable,
E clause (b) deals with the amounts which arc received or deemed to be
received in India. In respect of amount paid or payable under clause (a)
of sub-scdion (2), it is immaterial whether these arc paid in India or
outside India. On the other hand. amount received or deemed to be
rccciwd have to be in India.
F 48. From the bare reading of the clauses, amount paid under the
aforesaid contracts as mobilisation foe on account of provision of services
and facilities in connection with the extraction etc. of mineral oil in India
and against the supply of plant and machinery on hire used for such
extraction, clause (a) stands attmctcd. Thus, this provision contained in
Section 44BB has to be read in conjunction with Sections 5 and 9 of the
G Act and Sections 5 and 9 of the Act cannot be read in isolation. The
aforesaid amount paid to the asscssces as mobilisation fee is treated as
pro tits and gains of business and, therefore, it would be "income" as per
Section 5. This provision also treats this income as earned in India,
fictionally, thereby satisfying the test of Section 9 of the Act as well.
H
SEDCO FOREX INTERNATIONAL INC. THR. IT'S 433
CONSTITUTED ATTORNEY v. CIT, MEERUT [A. K. SIKRI, J.]
49. The Tribunal has rightly commented that Section 44BB of the A
Act is a special pcovision for computing profits and gains in connection
with the business of exploration of mineral oils. Its purpose was explained
by the Department vidc its Circular No. 495 dated September 22, 1987,
namely, to simplify the computation of taxable income as number of
comp Iications were involved for those engaged in the business ofproviding
B
services and facilities in connection with, or supply ofplant and machinery
on hire used or to be used in the prospecting for, or extraction or production
of, mineral etc. Instead of going into the nitigrities of such computation
as per the normal provisions cont<tincd in Sections 28 to 41 and Sections
43 and 43A of the Act, the Legislature has simplified the procedure by
providing that tax shall be pai<l@I 0% of the 'aggregate of the amounts c
specified in sub-section (2)' and those amounts are 'deemed to be the
profits and gains of such business chargeable to tax ... '. It is a matter of
record that when income is computed under the head 'profits and gains
of business or profession', rate of tax payable on the said income is
much higher. However, the Legislature provided a simple formula,
D
namely, treating the amounts paid or payable (whether in or out oflndia)
and amount received or deemed to be received in India as mentioned in
sub-section (2) of Section 44BB as the deemed profits and gains.
Thereafter, on such deemed profits and gains (treating the same as
income), a concessional flat rate of l O'Yo is charged to tax. In these
circumstances, the AO is supposed to apply the provisions of Section E
44BB of the Act, in order to find out as to whether a particular amount
is deemed im:omc or not. When it is found that the amount paid or
payable (whether in or out oflndia), Cir amount received or deemed to
be received in India is covered by sub-section (2) of Section 44BB of
the Act, by fiction created under Section 44BB of the Act, it becomes
F
'income' under Sections 5 and 9 of the Act as well.
50. It is stated at the cost ofrepetition that, in the instant case, the
amount which is paid to the asscssces is towards mobilisation fee. It
docs not mention that the same is for reimbursement of expenses. In
fact, it is a fixed amount paid which may be less or more than the expenses
incurred. Incurring of expenses, therefore, would be immaterial. It is G
also to be borne in mind that the contract in question was indivisible.
Having regard to these facts in the present case as per which the case
of the asscssccs get covered under the aforesaid provisions, we do not
find any merit in any of the contentions raised by the assessees.
H
434 SUPREME COURT REPORTS [2017) I I S.C.R.
A Therefore, the ultimate conclusion drawn by the AO, which is upheld by"
all other Authorities 1s correct, though some of the observations of the
High Court may not be entirely correct which have been straightened by
us in the above discussion. For our aforesaid reasons, we uphold the
conclusion. Resultantly, all the appeals oftbe assessees arc dismissed.
B 51. In this batch of appeals, Civil Appeal No. 3695 of2012 is the
solirnry appeal wl)ich is preferred by the Director of Income Tax, New
Delhi (Revenue) against the judgment oftbe High Court ofUttarakhand.
The computation of incom,· of the assessce was done under Section
44BB of the Act. However, the amount which was sought to be taxed
was reimbursement of cost of tools lost in hole by ONGC. It is, thus,
c clear that this was not the amount which was covered by sub-section
(2) of Section 44BB of the Act as ONGC had lost certain tools belonging
to the asscsscc, and had compensated for the said loss by paying the
amount in question. On these facts, conclusion of the High Court is
correct. Even otherwise, the tax effect is Rs.15, 12.344/-. Therefore,
D Civil Appeal No. 3695 of2012 filed by the Revenue is dismissed.
Dl'.,. ika Gujral Appeals disposed of.
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