The Madras High Court has held that where reimbursement to a non-resident company under a Production Sharing Contract (PSC) is genuinely on a cost-to-cost basis and duly substantiated with particulars in terms of the PSC, the application of Section 44BB of the Income Tax Act is not called for. However, where the assessee claims a consolidated amount under the head “reimbursement of expenses” without furnishing break-up details and without seeking determination under Section 195(2), such claim is unsustainable, and the assessee cannot avoid deduction of tax at source under Section 195 of the Income Tax Act.
The Court clarified that the ‘arm’s length’ clause in the Production Sharing Contract does not, by itself, establish absence of income. Accordingly, on the facts found by the ITAT, the assessee had not substantiated the alleged reimbursements with particulars or break-up, and therefore the Tribunal was justified in sustaining the demand under Sections 201(1) and 201(1A) of the Income Tax Act.
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The Division Bench comprising . Justice G. Jayachandran and Justice R. Sakthivel examined the statutory framework, including Sections 42, 44BB, 90, 195 and 201 of the Income-tax Act, and Appendix C of the Production Sharing Contract (PSC). It noted that Article 3.1.4 of the PSC contemplated actual cost for services, and, in the case of affiliates, charges were to be equal to the actual cost, shall not include any element of profit, and shall not be higher than the most favourable prices charged by the affiliate to third parties for comparable services under similar terms and conditions. The Bench also noted that, for assessees involved in prospecting for mineral oil, the special provisions under Sections 42, 44BB and 195, read with the approved PSC, govern deductions and computation.
The Bench observed that if the terms of the PSC restrict reimbursement of expenditure on a cost-to-cost basis, the application of Section 44BB is not called for. However, if the assessee makes a consolidated claim of expenses under the head “reimbursement” without break-up details, the assessee is not entitled for relief without determination by the Commissioner under Section 195(2). The Bench further observed that the ‘arm’s length’ principle in Article 1.8 of the PSC is not a Rule of Presumption, and the assessee, in its profit and gain statement as well as return of income, has to provide details about the nature of expenditure which can be taken as reimbursement.
The Bench found that, in the present case, the assessee had, for the first time before the High Court, submitted that the expenses incurred by CEAL related to geological and geophysical services, seismic processing, petroleum engineering, information technology and communication services. The Bench held that the assessee had failed to satisfy the Assessing Officer by placing expenditures under those individual heads and obtaining determination of taxability, which is mandatory under Section 195(2). It also held that a consolidated amount claimed as deduction under the head “Reimbursement of Expenses” to the non-resident parent company under the PSC is impermissible.
The Bench also rejected the alternate plea under the DTAA. It observed that, during the relevant assessment years under consideration, the benefit of double taxation relief was restricted to Foreign Governments and not to consortium of private parties having contracted with the Government of India and ONGC. Accordingly, the attempt to take umbrage under the DTAA was held to be a misconceived claim made to defeat the legal right of the Revenue.
Briefly, on October 28, 1994, the Union of India and ONGC entered into a Production Sharing Contract with private companies for exploitation of petroleum resources. Command Petroleum (India) Pvt Ltd., an Australian company, was later taken over by Cairn Energy, and Vedanta Limited became successor-in-interest to Cairn India Limited, the assessee/appellant. In the course of assessment proceedings, the Assessing Officer found that certain payments had been made to the assessee’s non-resident parent company in respect of expenditure incurred by the parent in connection with the assessee’s business activity in India, but tax had not been deducted at source under Section 195. Consequently, the assessee was held liable under Sections 201(1) and 201(1A) of the Income Tax Act.
The assessee claimed that the amounts paid to the non-resident parent company under heads such as time cost wages, consultant costs reimbursement, financing documentation drafting, IT and communication, taxation consultants and international travel expenses were reimbursements without any element of profit and hence not chargeable to tax. The Department, on the other hand, contended that these remittances were in fact “fees for technical service” or “normal service charges”, and that if the assessee considered only a portion to be chargeable, it ought to have sought determination under Section 195(2) of the Income Tax Act.
