The Dehradun Bench of the Income Tax Appellate Tribunal (ITAT) has held that consultancy and advisory services relating to field development plans, reservoir management, and petroleum sector activities were intrinsically connected with the exploration and production of mineral oil and therefore fell within the special presumptive taxation regime under Section 44BB of the Income Tax Act.
The Tribunal clarified that merely because services involve technical expertise does not automatically make them Fees for Technical Services (FTS). Where the services are directly connected with oil and gas exploration activities, Section 44BB continues to apply. Essentially, the Tribunal ruled that income from offshore supply contracts cannot be taxed in India where the goods were supplied outside India, title and risk passed abroad, payment was received outside India, and no operations relating to such supplies were carried out in India.
Interest earned on income-tax refunds was held to be effectively connected with the assessee’s Permanent Establishment (PE) in India. As a result, the benefit of the concessional treaty rate under Article 11 of the India-US DTAA was unavailable, added the Tribunal.
Briefly, Halliburton Offshore Services Inc., a non-resident company engaged in providing various oil and gas exploration and production-related services such as drilling fluids, coring, cementing, logging, perforation, drilling software, consultancy, and other support services, filed its return by offering its contract receipts to tax under Section 44BB of the Income-tax Act at the presumptive rate applicable to businesses connected with mineral oil exploration. It also offered interest received on income-tax refunds at 15% under Article 11 of the India-US DTAA.
During assessment, the Assessing Officer treated certain consultancy receipts, particularly services relating to field development plans and assistance to the Directorate General of Hydrocarbons (DGH), as Fees for Technical Services (FTS) taxable under Sections 44DA/115A instead of Section 44BB. The Assessing Officer also taxed offshore supply receipts in India and subjected interest on income-tax refunds to tax at the maximum marginal rate.
The Commissioner (Appeals) granted substantial relief to the assessee by holding that the consultancy receipts were also taxable under Section 44BB and that offshore supply receipts were not taxable in India. However, the Commissioner upheld the taxation of refund interest as business income.
The Division Bench comprising Satbeer Singh Godara (Judicial Member) and Naveen Chandra (Accountant Member) observed that the assessee’s activities were directly connected with the prospecting, exploration, extraction, and production of mineral oil. It reiterated that where services are inextricably linked to oil and gas exploration and production activities, the receipts fall within the special scheme of Section 44BB and cannot be characterized as FTS merely because they involve technical expertise or consultancy.
On the refund-interest issue, the Tribunal examined Article 11 of the India-US DTAA and noted that the assessee admittedly had a Permanent Establishment (PE) in India. It observed that where the debt claim giving rise to interest is effectively connected with the PE, Article 11’s concessional rate ceases to apply, and the income is governed by Article 7 dealing with business profits.
Regarding offshore supplies, the Tribunal found that the goods were supplied outside India, title and risk passed outside India, ONGC directly imported the goods, inspection was conducted abroad, payment was received outside India, and no operational activity relating to such supplies was carried out in India. Consequently, no income from those transactions could be attributed to India.
