The Finance Bill 2010 proposes to amend certain sections of the Income Tax Act relating to income of non-residents providing services or facilities in connection with prospecting for or production of mineral oil. The Memorandum explaining the Finance Bill states that the amendments are proposed due to certain judicial pronouncements. In other words, the amendments are intended to nullify the rulings recently pronounced by the Authority for Advance Rulings in the above matter.
The controversy in respect of income arising from providing services or facilities in connection with mineral oil arises because under different circumstances the aforesaid income can fall in any one of the following categories:
1. As per Section 44BB, in case of a non-resident who is engaged in the prospecting for or extraction or production of mineral oil, income shall be computed @ 10 per cent of the aggregate of the amount received by the non-resident from the provision of such services or facilities. Thus, section 44BB provides for computation of income on presumptive basis. The effective rate of tax will be about 4 per cent of the gross receipts.
2. Section 115A provides the rate of tax for “fees for technical services.” Where the provision of services falls in the category of technical services, section 115A may become applicable and accordingly tax will be charged @ 10 per cent of the gross receipts.
3. Section 44DA also provides for computing income by way of fees for technical services but only where the technical services are connected with the permanent establishment of the non-resident. The profits shall be taxed under the head “profits and gains of business or profession” @40 per cent.
It is undoubtedly true that the provisions of Section 44BB, 44DA & 115A are somewhat overlapping. Hence the legal controversy.
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In a recent case of Geofizyka Torun SP. Z.O.O. (320 ITR 268) a Polish company provided geophysical services to
International Oil and Gas Industry. The non-resident referred the matter to Authority for Advance Rulings to decide whether its income would fall within the ambit of section 44BB and accordingly income will be taxed on a presumptive basis. The view of the Department was that the income would fall u/s.44DA and tax will be payable on net profits as per books of accounts.
The Authority however, held that the case of the applicant neatly fits into section 44BB and all the ingredients of that section are satisfied. To attract section 44BB, (a) the non-resident must be engaged in the business of providing services or facilities; (b) such provision of services/facilities must be “in connection with” the prospecting for or extraction or production of mineral oil. Both these ingredients are present in relation to the activities undertaken by the Polish company in India.
The authority observed that “section 44BB being a more specific provision, that provision should prevail for the purposes of computation.”
Similar view has been taken by the Authority in several other cases.
It appears that the interpretation given by the AAR does not suit the government because if the provisions relating to presumptive tax are applied, the tax liability of the non-resident will be considerably lower. It is obvious that the amendment is not directed to remove doubts; the real intent is to charge more tax from non-residents.
It is really unfortunate that amendments are made in law to disturb the settled position. As the learned author Palkiwala wrote in his legendary book on Income-tax: “The avalanche of ill-conceived changes and complications, which may be compendiously called ‘legal litter’, is mainly responsible for the poor quality of our tax administration.”
Now that the new Direct Taxes Code is under finalisation, the government should respect the sane advice of Palkiwala that “taxes are the life-blood of any government, but it cannot be over-emphasised that the blood is taken from the arteries of the taxpayers and, therefore, the transfusion has to be accomplished in accordance with the principles of justice and fair play.”
(Author is a Sr. Partner in S S Kothari Mehta & Co)
E-mail: hp.agrawal@sskmin.com