Page 1

1

                                                                    NON-REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL  NO. 731 OF 2007

OIL & NATURAL GAS CORPORATION LIMITED         ...APPELLANT (S)

VERSUS

COMMISSIONER OF INCOME TAX & ANR.  ... RESPONDENT (S)

WITH CIVIL APPEAL NOs.729 OF 2007, 733 OF 2007,  736 OF 2007, 737 OF 2007, 738 OF 2007, 740 OF 2007, 741 OF 2007, 6008 OF 2007, 6016 OF 2007, 6023 OF 2007, 925 OF 2008, 1239 OF 2008, 1240 OF 2008, 1514 OF 2008, 1515 OF 2008,  1516 OF 2008, 1517 OF 2008, 1518 OF 2008, 1519 OF 2008, 1520 OF 2008, 1521 OF 2008, 1522 OF 2008, 1523 OF 2008, 1524 OF 2008, 1527 OF 2008, 1528 OF 2008, 1529 OF 2008, 1531 OF 2008, 1532 OF 2008, 1533 OF 2008, 1535 OF 2008, 2008 OF 2008, 2012 OF 2008, 4321 OF 2008, 7226 OF 2008, 7227 OF 2008, 7230 OF 2008, 2794 OF 2009, 2795 OF 2009, 2796 OF 2009, 2797 OF 2009, 1722 OF 2010 AND CIVIL APPEAL NO. 6174 OF 2010  

J U D G M E N T RANJAN GOGOI, J.

1. The issue that arise for consideration in this group of appeals

is common and may be summarized as follows.

Page 2

2

“Whether  the amounts paid by the ONGC to

the non-resident assessees /foreign companies

for  providing  various  services  in  connection

with  prospecting,  extraction or  production of

mineral  oil  is  chargeable  to  tax  as  “fees  for

technical  services”  under  Section  44D  read

with Explanation 2 to  Section 9(1)(vii)  of  the

Income  Tax  Act  or  will  such  payments  be

taxable on a presumptive basis under Section

44BB of the Act”?

2. The  appellant-ONGC has  been  assessed  in  a  representative

capacity on behalf of the different foreign companies with whom it

had executed separate agreements for services to be rendered by

such  companies  in  connection  with  prospecting,  extraction  or

production of mineral oils by ONGC.   

3. The  primary/assessing  authority  took  the  view  that  the

assessments should be made under Section 44D of the Act and not

Section 44BB of the Income Tax Act (hereinafter referred to as the

‘Act’).  The Appellate Commissioner and the Income Tax Appellate

Tribunal  disagreed  with  the  views  of  the  assessing  authorities

leading to the institution of separate appeals before the High Court

Page 3

3

of Uttrakhand in respect of each of the assessments made for the

years in question.   The High Court  considered the  facts  of  Civil

Appeal No. 731 of 2007 (Income Tax Appeal No. 239 of 2001 before

the High Court) as the lead case and on the grounds and reasons

assigned in the impugned order dated 15.12.2005, the High Court

overturned the view taken by the Appellate Commissioner and the

learned  Tribunal  and  held  the  payments  made  to  be  liable  for

assessment under Section 44D of the Act.  Aggrieved, the ONGC

has filed the present group of appeals.   

4. We have heard Shri Arvind P. Datar, learned senior counsel

appearing for the appellant and Shri Guru Krishna Kumar, learned

senior counsel for the Revenue.

5. As the facts of Civil Appeal No. 731 of 2007 corresponding to

I.T.A. No. 239 of 2001 has been considered in detail by the High

Court  and the  view expressed in  the  said  proceeding  have  been

followed in all the other appeals before the High Court, it may be

necessary to notice in detail the said facts arising in the appeal in

question.   

6. The  appellant-ONGC and a non resident/foreign company one

M/s. Foramer France had entered into an agreement by which the

non-resident  company  had agreed  to  make available  supervisory

Page 4

4

staff and personnel having experience and expertise  for operation

and management of drilling rigs Sagar Jyoti and Sagar Pragati for

the assessment year 1985-86 and the drilling rig Sagar Ratna for

the assessment year 1986-87.  Faced with the different views taken

by the  authorities  under  the  Act,  as  mentioned  above,  the  High

Court  proceeded  to  analyse  the  different  clauses  of  the  contract

between the parties.  A consideration of such analysis made by the

High Court would go to show that it had come to light before the

High  Court  that  the  contract  between  the  parties  visualized

operation  of  the  oil  rigs  including  drilling  operations  by  the

personnel  made available under the contracts/agreements, which

fact  was further stated on affidavit  before the High Court  by an

authorized official of the ONGC in the following terms. “That under the said agreement, Foramer was required, through its personnel listed in  Exhibit-A  to  the  said  agreement,  to carry out inter-alia the drilling operations specified in clause 4.3 to 4.10 of the said agreement.”

Despite the above,  the High Court took the view that  under  the

agreement  payment  to  M/s.  Foramer  France  was required to  be

made at the rate of 3450 USD per day and that the contract clearly

Page 5

5

contemplated rendering of technical services by  personnel of the

non-resident  company.   Specifically,  taking  the  view  that  the

contract  did not  mention that  the  personnel  of  the  non-resident

company was also carrying out the work of drilling of wells and as

the company had received  fees for rendering service the payments

made were liable to be taxed under the provisions of Section 44D of

the Act.  As already noticed, in the rest of the appeals before the

High Court the aforesaid decision dated 15.12.2005 passed in I.T.A.

No. 239 of 2001 was followed on the basis that the facts in all the

appeals were similar to those involved in I.T.A. No. 239 of 2001. 7. It will be convenient and in fact necessary for the purposes of

present  adjudication  to  take  a  careful  note  of  the  provisions  of

Sections 44BB, 44D and also clause (vii) of Explanation 2 to Section

9(1) of the Income Tax Act,  1961 (hereinafter for short the ‘Act’).

“44BB.  Special  provision for  computing  profits  and gains in connection with the business of exploration, etc., of mineral oils.-  (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 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

Page 9

9

1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976.]”

“9.     (1)  (vii) income  by  way  of  fees  for  technical services payable by—

(a) the Government ; or (b) a  person who is  a  resident,  except  where

the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees  are  payable  in  respect  of  services utilised in a business or profession carried on  by  such  person  in  India  or  for  the purposes of making or earning any income from any source in India :

[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical  services  payable  in  pursuance  of  an agreement made before the 1st  day of  April,  1976, and approved by the Central Government.]

[Explanation 1.—For  the  purposes  of  the  foregoing proviso, an agreement made on or after the 1st day of April,  1976,  shall  be  deemed  to  have  been  made before  that  date  if  the  agreement  is  made  in accordance  with proposals  approved by the Central Government before that date.]

[Explanation     2.—For the purposes of this clause, "fees for  technical  services"  means  any  consideration

Page 10

10

(including  any  lump  sum  consideration)  for  the rendering of any managerial, technical or consultancy services  (including  the  provision  of  services  of technical  or  other  personnel)  but  does  not  include consideration for any construction, assembly, mining or  like  project  undertaken  by  the  recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]

(2)  Notwithstanding  anything  contained  in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution  or  to  a  person  who,  having  been appointed before the 15th day of August, 1947, to be a  Judge  of  the  Federal  Court  or  of  a  High  Court within the meaning of the Government of India Act, 1935,  continues  to  serve  on  or  after  the commencement  of  the  Constitution  as  a  Judge  in India.

[Explanation.—For  the  removal  of  doubts,  it  is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or  arise  in  India  under  clause  (v)  or  clause  (vi)  or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, — (i)  the  non-resident  has  a  residence  or  place  of business or business connection in India; or (ii) the non-resident has rendered services in India.]”  

8. A careful reading of the aforesaid provisions of the Act goes to

show  that  under  Section  44BB(1)  in  case  of  a  non-resident

providing services or facilities in connection with or supplying plant

Page 11

11

and machinery  used or  to  be  used in  prospecting,  extraction or

production of mineral oils the profit and gains from such business

chargeable to tax is to be calculated at a sum equal to 10% of the

aggregate  of  the  amounts  paid  or  payable  to  such  non-resident

assessee as mentioned in Sub-section (2).    On the  other  hand,

Section 44D contemplates that if the income of a foreign company

with which the government or an Indian concern had an agreement

executed before 1.4.1976 or on any date thereafter the computation

of  income  would  be  made  as  contemplated  under  the  aforesaid

Section 44D.  Explanation (a) to Section 44D however specifies that

“fees  for  technical  services”  as  mentioned  in  Section  44D would

have  the  same  meaning  as  in  Explanation  2  to  Clause  (vii)  of

Section 9(1).  The said explanation as quoted above defines “fees for

technical  services”   to  mean  consideration  for  rendering  of  any

managerial, technical or consultancy services.  However, the later

part  of  the  explanation  excludes  from  consideration  for  the

purposes  of  the  expression  i.e.  “fees  for  technical  services”  any

payment received for construction, assembly, mining or like project

undertaken  by  the  recipient  or  consideration  which  would  be

chargeable under the head “salaries”.  Fees for technical services,

Page 12

12

therefore,  by  virtue  of  the  aforesaid  explanation  will  not  include

payments made in connection with a mining project. 9. Before the High Court, a Circular No. 1862 dated 22.10.1990

having a bearing on the subject was placed for consideration by the

appellant-assessee.  The aforesaid instruction may be conveniently

reproduced herein below. “Subject: Definition of “fees for technical services” in Explanation to Section 9(1)  (vii)  of the Income Tax Act, 1961  whether prospecting for or extraction of production  of  mineral  oil  are  “mining” operations-clarification regarding.

The expression “fees for technical services” has been defined in Explanation 2 to Section 9(1) (vii) of the Income Tax Act, 1961  as under:

“Explanation 2.—For  the  purposes  of  this  clause, "fees for technical services" means any consideration (including  any  lump  sum  consideration)  for  the rendering of any managerial, technical or consultancy services  (including  the  provision  of  services  of technical  or  other  personnel)  but  does  not  include consideration for any construction, assembly, mining or  like  project  undertaken  by  the  recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

2.  The  question  whether  prospecting  for,  or extraction  or  production  of,  mineral  oil  can  be termed  as  ‘mining  operations,  was  referred  to  the Attorney  General  of  India  for  his  opinion.  The Attorney General has opined that such operations are mining  operations  and  the  expressions  ‘mining project’ or ‘like projects’ occurring in Explanation 2 to Section 9(1) (ii) of the Income Tax Act would cover rendering of services like imparting of training and

Page 13

13

carrying  out  drilling  operations  for  exploration  or exploitation of oil and natural gas.

3. In view of the above opinion, the consideration for such services will not be treated as fees for technical services for the purpose of Explanation 2 to Section 9(1) (vii) of the Income-tax Act, 1961.  Payments for such services to a foreign company, therefore, will be income  chargeable  to  tax  under  the  provisions  of section 44BB  of the Income-tax Act, 1961 and not under the special  provision for the taxation of fees for technical services contained in section 115A read with section 44D of the Income-tax Act, 1961.

4.  A  copy  of  the  statement  of  the  case  dated 16.3.1990  (without  annexures)  and  a  copy  of  the Attorney  General’s  opinion  dated  13.5.90  are enclosed.

5. These instructions may brought to the notice of all the officers in your region. [F.No.500/6/89-FTD dt.22.10.90 from CBDT]”

10. Before  us  the  opinion  of  the  learned  Attorney  General  has

been  placed  by  the  learned  counsel  for  the  appellants  at  great

length to contend that the views expressed by the learned Attorney

which had been accepted by the CBDT were based on an exhaustive

consideration  of  the  provisions  of  the  Mines  Act,  1952  and  the

Mines and Minerals (Regulation and Development) Act, 1957 read

with the relevant Entries in the Union and the State List in the 7th

Schedule to the Constitution of India.  It is urged that the eventual

Page 14

14

test is one of pith and substance of the agreement, namely, whether

the  works  contemplated  or  services  to  be  rendered  under  the

agreement is directly and inextricably linked with the prospecting,

extraction or production of mineral oil.  It is submitted on behalf of

the appellants that the agreements in question satisfy the above

test for which purpose the appellants have categorized the different

contracts under 8 heads which may be conveniently set out at this

stage hereinbelow. 1. Carrying out seismic surveys and drilling for oil

and gas  

2. Services  starting/re-starting/enhancing production of oil and gas from wells  

3. Services  for  prospecting  for  exploration  of  oil and or gas  

4. Planning and supervision of repair of wells  

5. Repair,  Inspection  or  Equipment  used  in  the exploration, extraction or production of oil and gas  

6. Imparting Training  

7. Consultancy in regard to exploration of oil and gas  

8. Supply, Installation, etc. of software used for oil and gas exploration”

11. It  is  also  urged  on  behalf  of  the  appellants  that  the

instruction/Circular  dated  22.10.1990  issued  by  the  CBDT  was

Page 15

15

binding on the primary authority on the ratio of the decision of this

Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and

Others1.  It has been further pointed on behalf of the appellants

that  even  under  the  provisions  of  Section  3D  of  the  Oil  Fields

(Regulation and Development)  Act  1948 a mining  lease means a

lease granted for the purposes of searching for, winning, working,

getting,  making  merchandisable,  carrying  away  or  disposing  of

mineral  oils  or  for  the  purpose  connected  therewith and such a

lease includes an exploring or prospecting lease.  Reference has also

been made to the Petroleum and Natural Gas Rules, 1959 framed

under Section 5 of  the aforesaid Act.   Under Rule 4 of  the said

Rules no person can prospect for petroleum except pursuant to a

Petroleum Exploration License (PEL) granted under the Rules and

no person can mine petroleum except in pursuance of a Petroleum

Mining License (PML)  granted under the Rules.  It is pointed out

that under Rule 7 of the Rules of 1959 a petroleum mining license

(PML)  entitles  the  licensee  to  carry  out  construction  and

maintenance  in  and  on  such  land,  works,  buildings,  plants,

waterways,  roads,  pipelines  etc.  as  may  be  necessary  for  full

enjoyment of the PML.  On the said basis it is argued that rendering

1 (1981) 4 SCC 173

Page 16

16

any  service  in  connection  with  prospecting  and  extraction  is  an

integral  part  of  mining  and  that  the  expression  “mining”  in  the

Explanation 2 to Section 9(1) of the Income Tax Act, in the absence

of any definition under the Income Tax Act, has to be understood as

per the provisions of the Oil Fields (Regulation and Development)

Act, 1948 read with the Petroleum and Natural Gas Rules, 1959.

12. Opposing  the  contentions  advanced  on  behalf  of  the

appellants, Shri Gurukrishna Kumar, learned senior counsel   for

the Revenue has urged that  the opinion of  the Attorney General

relied upon and the CBDT Circular has no relevance to the present

case  inasmuch  as  the  agreements  between  ONGC  and  the

non-resident companies made it abundantly clear that what is  paid

to  the  non-resident  company  are  fees  for  technical  services

rendered.  Though such services may have some connection with

the prospecting, extraction or production of mineral oil, the primary

service rendered by the non-resident companies on the basis of the

agreements  is  not  for  prospecting,  extraction  or  production  of

mineral oil but various ancillary services like training of personnel

etc.  which  may  have  a  somewhat  remote  connection  with  the

business of prospecting, exploration or production of mineral oils.

Learned counsel for the revenue has even suggested that if it is held

Page 17

17

that  the High Court  ought  to  have examined each agreement  or

contract to find out its real purpose and intent the revenue would

have  no  objection  if  the  matters  are  remanded  for  a  complete

exercise to be made on the above basis.

13. The Income Tax Act does not define the  expressions “mines”

or  “minerals”.   The  said  expressions  are  found  defined  and

explained in the Mines Act, 1952 and the Oil Fields (Development

and Regulation)  Act  1948.   While  construing  the  somewhat  pari

materia  expressions  appearing  in  the  Mines  and  Minerals

(Development and Regulation) Act 1957 regard must be had to the

provisions of Entries 53 and 54 of List I and Entry 22 of List II of

the 7th Schedule to the Constitution to understand the exclusion of

mineral oils from the definition of minerals in Section 3(a) of the

1957 Act.  Regard must also be had to the fact that mineral oils is

separately defined in Section 3(b) of the 1957 Act to include natural

gas and petroleum in respect  of  which Parliament  has  exclusive

jurisdiction under Entry 53 of List I of the 7th Schedule and had

enacted  an  earlier  legislation  i.e.  Oil  Fields  (Regulation  and

Development) Act, 1948.  Reading Section 2(j) and 2(jj) of the Mines

Act, 1952 which define mines and minerals and the provisions of

the Oil Fields (Regulation and Development) Act, 1948 specifically

Page 18

18

relating to prospecting and exploration of mineral oils, exhaustively

referred to earlier, it is abundantly clear that drilling operations for

the purpose of production of petroleum would clearly amount to a

mining  activity  or  a  mining  operation.   Viewed  thus,  it  is  the

proximity of the works contemplated under an agreement, executed

with a non-resident  assessee or  a foreign company,  with mining

activity  or  mining  operations  that  would  be  crucial  for  the

determination of the question whether the payments made under

such  an  agreement  to  the  non-resident  assessee  or  the  foreign

company is to be assessed under Section  44BB or Section 44D of

the Act.  The test of pith and substance of the agreement commends

to us as reasonable for acceptance.  Equally important is the fact

that the CBDT had accepted the said test and had in fact issued a

circular  as  far  back  as  22.10.1990  to  the  effect  that  mining

operations and the expressions “mining projects” or “like projects”

occurring in Explanation 2 to Section 9(1) of the Act would cover

rendering  of  service  like  imparting  of  training  and  carrying  out

drilling  operations  for  exploration  of  and  extraction  of  oil  and

natural gas and hence payments made under such agreement to a

non-resident/foreign company  would  be  chargeable  to  tax  under

the provisions of Section 44BB and not Section 44D of the Act.   We

Page 19

19

do not see how any other view can be taken if the works or services

mentioned under a particular agreement is directly associated or

inextricably connected with prospecting, extraction or production of

mineral oil.  Keeping in mind the above provision, we have looked

into each of the contracts involved in the present group of cases

and find that the brief description of the works covered under each

of the said contracts as culled out by the appellants and placed

before the Court is correct.  The said details are set out below.   

S. No. Civil Appeal

No.

Work covered under the contract

1. 4321 Drilling  of  exploration  wells  and  carrying out seismic surveys for exploratory drilling.

2. 740 Drilling, furnishing personnel for manning, maintenance  and  operation  of  drilling  rig and training of personnel.

3. 731 Drilling, furnishing personnel for manning, maintenance  and  operation  of  drilling  rig and training of personnel.   

4. 1722 Furnishing supervisory staff with expertise in  operation  and  management  of  Drilling unit.

5. 729 Capping  including  subduing  of  well,  fire fighting.

6. 738 Capping  including  subduing  of  well,  fire fighting.

Page 20

20

7. 1528 Analysis  of  data  to  prepare  job  design, procedure  for  execution  and  details regarding monitoring.

8. 1532 Study  for  selection  of  enhanced  Oil Recovery  processes  and conceptual  design of Pilot Tests.

9. 1520 Engineering and technical support to ONGC in  implementation  of  Cyclic  Steam Stimulation in Heavy Oil Wells.

10. 2794 Assessment and processing of seismic data along  with  engineering  and  technical support in implementation of Cyclic Steam Stimulation.

11. 1524 Conducting reservoir stimulation studies in association with personnel of ONGC.

12. 1535 Laboratory  testing  under  simulated reservoir conditions.

13. 1514 Consultancy  for  optimal  exploitation  of hydrocarbon resources.

14. 2797 Consultancy  for  all  aspects  of  Coal  Bed Methane.

15. 6174 Analysis  of  data  of  wells  to  prepare  a  job design.

 16. 1517 Geological study of the area and analysis of

seismic  information  reports  to  design  2 dimensional seismic surveys.

17. 7226 Opinion  on  hydrocarbon  resources  and foreseeable potential.

18. 7227 Opinion  on  hydrocarbon  resources  and foreseeable potential.

19. 7230 Opinion  on  hydrocarbon  resources  and

Page 21

21

foreseeable potential.

20. 6016 Opinion  on  hydrocarbon  resources  and foreseeable potential.

21. 6008 Evaluation  of  ultimate  resource  potential and  presentations  outside  India  in connection  with  promotional  activities  for Joint Venture Exploration program.

22. 1531 Review  of  sub-surface  well  data,  provide repair plan of wells  and supervise repairs.

23. 733 Repair  of  gas  turbine,  gas  control  system and  inspection  of  gas  turbine  and generator.

24. 741 Repair and inspection of turbines.

25. 737 Repair,  inspection  and  overhauling  of turbines.

26. 736 Inspection, engine performance evaluation, instrument calibration and inspection of far turbines.

27. 1522 Replacement of choke and kill consoles on drilling rigs.

28. 1521 Inspection of gas generators.

29. 1515 Inspection of rigs.

30. 2012 Inspection of generator.   

31. 1240 Inspection  of  existing  control  system  and deputing engineer to attend to any problem arising in the machines.

32. 1529 Inspection of drilling rig and verification of reliability of control systems in the drilling rig.

Page 22

22

33. 2008 Expert advice on the device to clean insides of a pipeline.

34. 2795 Feasibility  study  of  rig  to  assess  its remaining  useful  life  and  to  carry  out structural alterations.

35. 925 Engineering analysis of rig.   

36. 1519 Imparting training on cased hold production log evaluation and analysis.

37. 1533 Training on well control.

38. 1518 Training  on  implementation  of  Six  Sigma concepts.

39. 1516 Training  on  implementation  of  Six  Sigma concepts.

40. 6023 Training on Drilling project management.

41. 2796 Training  in  Safety  Rating  System  and assistance  in  development  and  audit  of Safety Management System.   

42. 1239 To  develop  technical  specification  for  3D Seismic API modules of work and to prepare bid packages.

43. 1527 Supply  supervision  and  installation  of software which is used for analysis of flow rate  of  mineral  oil  to  determine  reservoir conditions.   

44. 1523 Supply,  installation  and  familiarization  of software for processing seismic data.

The above facts would indicate that the pith and substance of

each  of  the  contracts/agreements  is  inextricably  connected  with

Page 23

23

prospecting, extraction or production of mineral oil.  The dominant

purpose of each of such agreement is for prospecting, extraction or

production of  mineral  oils  though there may be certain ancillary

works  contemplated  thereunder.   If  that  be  so,  we will  have  no

hesitation  in  holding  that  the  payments  made  by  ONGC  and

received by the non-resident assessees or foreign companies under

the  said  contracts  is  more  appropriately  assessable  under  the

provisions of Section 44BB and not Section 44D of the Act.  On the

basis of the said conclusion reached by us, we allow the appeals

under consideration by setting aside the orders of the High Court

passed in each of the cases before it and restoring the view taken by

the  learned  Appellate  Commissioner  as  affirmed  by  the  learned

Tribunal.

14. Consequently, all the appeals are allowed with no order as to

the costs.  

…….…………………………...J.                   [RANJAN GOGOI]

         …………………………….……J.    [PINAKI CHANDRA GHOSE]

NEW DELHI; JULY 01, 2015.