The Madras High Court has held that where reimbursements to a non-resident under a Production Sharing Contract are genuinely on a cost-to-cost basis and the Production Sharing Contract (PSC) restricts any profit element, Section 44BB of the Income Tax Act may not automatically apply. However, the assessee must substantiate the claim with proper break-up and particulars of the expenditure.
The Court held that a mere consolidated claim under the label of reimbursement is insufficient. If the payer contends that the whole or part of the remittance is not chargeable to tax, the proper statutory course is to seek determination under Section 195(2) of the Income tax Act. In the absence of such substantiation and determination, remittances to the non-resident may be treated as sums chargeable, attracting withholding obligations and consequences under Sections 201(1) and 201(1A). The Court also held that, on the facts of these assessment years, the assessee could not successfully invoke DTAA protection as an alternate defence.
The Division Bench comprising Dr. Justice G. Jayachandran and Justice R. Sakthivel reviewed Sections 42, 44BB, 90, 195 and 201 of the Income Tax Act together with Appendix C of the PSC, and observed that in matters concerning prospecting, extraction or production of mineral oil, both the special statutory provisions and the terms of the PSC approved under Section 42 have relevance. The Bench noted that where the PSC genuinely restricts reimbursement to a cost-to-cost basis without any profit element, the mere nomenclature of reimbursement is significant, but relief depends on proper substantiation of the nature and components of the expenditure.
The Bench reiterated that reimbursement without any profit element may not constitute taxable income, and that tax deduction under Section 195 is linked to sums chargeable under the Act. At the same time, the Bench emphasized that if the assessee considers that the whole of the remittance is not chargeable, Section 195(2) provides the statutory safeguard for determination of the chargeable portion.
On the facts, the Bench found against the assessee because the claim had been made as a consolidated amount under the head “reimbursement of expenses” without proper particulars or break-up before the Assessing Officer. It specifically noted that the assessee attempted before the High Court, for the first time, to explain that the expenses related to geological and geophysical services, seismic processing, petroleum engineering, information technology and communication services, but had failed to place those expenditures under individual heads before the tax authorities and obtain determination of taxability under Section 195(2).
The Bench further observed that the arm’s length clause in Article 1.8 of the PSC was not a rule of presumption by itself, and that the assessee had to disclose sufficient details in its profit and gain statement and return of income regarding the nature of expenses claimed as reimbursement. Since that was not done, the Tribunal’s factual conclusion that the claim was unsustainable did not warrant interference. The Bench also held that the alternate reliance on DTAA was misconceived for the relevant assessment years, observing that the benefit of double taxation relief was then restricted to foreign governments and not to consortiums of private parties contracting with the Government of India and ONGC.
Briefly, the core issue was whether payments made by the assessee to its non-resident parent company, Cairn Energy Asia Limited, and certain third parties, described as reimbursement of expenses connected with petroleum operations under the Production Sharing Contract, attracted tax and consequently required deduction of tax at source under Section 195 of the Income Tax Act. The assessee contended that these were pure reimbursements on a cost-to-cost basis, with no profit element, and therefore not chargeable to tax in India; it also raised an alternate plea based on the India-Australia DTAA.
The assessment proceedings revealed that the assessee had made remittances to its non-resident parent company in respect of expenditure incurred in connection with the assessee’s Indian business activities, but had not deducted tax at source. The Assessing Officer therefore treated the assessee as liable under Sections 201(1) and 201(1A). The Commissioner of Income Tax (Appeals) upheld the assessment and the ITAT substantially affirmed that view, framing the common issue as whether the provisions of Section 44BB applied to all payments made by the assessee to non-residents.
Appearances:
Srinath Sridevan, Senior Advocate, for M/s. M.V. Swaroop, Gayathri, B. Devadharshini, Hredai, Thivakkaran Rajagopalan, Sankar, for Appellants/ Assessee
- Ramana Kumar, Senior Standing Counsel (IT) and Avinash Krishnan Ravi, Junior Standing Counsel, for Respondents/ Revenue