The Income Tax Appellate Tribunal (ITAT), Dehradun Bench, has held that consultancy services closely connected with oil exploration and extraction qualify for taxation under Section 44BB of the Income-tax Act, 1961. It also ruled that offshore equipment supplies cannot be taxed in India where no Indian operations relating to those supplies are established.
However, the bench of Satbeer Singh Godara (Judicial Member) and Naveen Chandra (Accountant Member) rejected the taxpayer’s claim for a concessional 15% treaty rate on income-tax refund interest, holding that the interest was attributable to its Indian permanent establishment (PE) and taxable as business profits.
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The company provided various services to the oil and gas industry, including drilling fluid services, coring, completion, tubing and perforation, liner hanger services, open-hole logging, cementing, drilling software and annual maintenance services.
Its activities also included consultancy for field development plans and assistance to the Directorate General of Hydrocarbons in preparing the National Data Repository.
The company filed its return on February 15, 2021, declaring income of approximately ₹202.58 crore. The dispute concerned the classification of certain service revenues, taxation of offshore equipment supplies and the rate applicable to interest received on an income-tax refund.
The Assessing Officer treated certain consultancy and repository-related receipts as fees for technical services under the provisions concerning Sections 115A/44DA, instead of accepting their taxation under Section 44BB. The taxpayer also challenged a 25% profit estimate applied to the disputed receipts.
The Commissioner of Income Tax (Appeals), Noida-2, granted relief on service revenues and offshore supplies but upheld taxation of refund interest as business income at the maximum marginal rate. Both parties appealed.
The department argued that the consulting services did not qualify for the treatment available to activities connected with prospecting for, extraction or production of mineral oil.
It also relied on statutory amendments and contended that receipts falling within Section 44DA could not be assessed under Section 44BB merely because they related to oil exploration.
The taxpayer relied on the Supreme Court’s decision in ONGC v. CIT and earlier tribunal decisions in its own case. It maintained that the disputed services were inextricably linked with oil and gas exploration and production.
The tribunal followed the earlier decisions and held that revenues from all the services in dispute, including field development consultancy and assistance in preparing the National Data Repository, were taxable under Section 44BB.
It further noted that the Revenue had not rebutted the taxpayer’s submission that Section 44BB treatment had been accepted for several earlier assessment years and that no appeal had been filed before the High Court against those favourable tribunal orders.
Accordingly, the bench dismissed the Revenue’s grounds concerning service income and allowed the taxpayer’s first two grounds.
A separate issue concerned offshore supplies of cementing units and batch mixers to Oil and Natural Gas Corporation (ONGC). The taxpayer had excluded offshore sales of approximately ₹264.90 crore from the receipts used for its Section 44BB computation.
The appellate authority examined invoices, packing lists, transport documents, bills of entry and inspection certificates. These showed that ONGC imported the goods directly in its own name and was the port and ultimate consignee.
Third-party inspection took place outside India before shipment, when the equipment was already in its final form.
The tribunal noted that the Assessing Officer had not controverted the taxpayer’s submission that title and risk passed to ONGC outside India and that payment was received outside India. ONGC also arranged transit insurance and was responsible for lodging any claim for damage during transportation.
Neither the Assessing Officer nor the departmental representative established an Indian business connection or involvement of the taxpayer’s Indian PE in those particular supplies.
Following the Supreme Court’s decision in Ishikawajima-Harima Heavy Industries, the tribunal upheld the finding that the offshore supply transactions could not be taxed in India because all parts of those transactions took place outside India.
The finding was specific to the offshore supplies and the absence of attributable Indian operations.
The taxpayer had received ₹6,83,75,838 as interest on an income-tax refund under Section 244A and offered it to tax at 15% under Article 11 of the India–US Double Taxation Avoidance Agreement (DTAA).
The Assessing Officer instead applied the maximum marginal rate of 40%.
The tribunal examined Article 11(5), which makes the concessional interest provisions inapplicable where the interest is attributable to a PE in the source country. In that situation, the business profits provisions of Article 7 apply.
The bench followed the jurisdictional Uttarakhand High Court’s decision in B.J. Services, which concerned comparable provisions of the India–UK treaty. It also noted that the taxpayer had not disputed the existence of its Indian PE during the relevant year.
The tribunal reasoned that the tax originally deducted or paid arose from the company’s core business activities conducted through that PE. Interest subsequently received on a refund of that tax retained its connection with those activities.
Consequently, the interest was taxable as business profits under Article 7 at the applicable rate under Indian income-tax law, instead of the 15% rate claimed under Article 11(2)(b). The taxpayer’s third ground was dismissed.
The tribunal partly allowed the taxpayer’s appeal and dismissed the Revenue’s appeal in full.
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