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Oil India Ltd. v. Commissioner Of Income-Tax.
Factual and Procedural Background
Nowsco Well Services Ltd., a non-resident firm, entered into a contract with Oil India Limited for mineral oil exploration in the Mahanadi basin. Under the agreement Oil India undertook the liability to pay income-tax which otherwise would have been payable by the non-resident firm. Oil India filed returns (as agent of the non-resident) indicating that section 44BB of the Income-tax Act applied to the tax paid on behalf of the non-resident.
The Income-tax Officer rejected that contention and treated the tax paid by Oil India as business profit of the non-resident, including it in total income. On appeal, the Commissioner (Appeals) held that the tax paid formed part of the consideration for services and that only ten per cent would be taken as income under section 44BB; the Commissioner (Appeals) also held it was not assessable as a perquisite under section 28(iv). The Department appealed to the Tribunal and the assessee filed a cross-objection. The Tribunal allowed the Department's appeal, holding that the tax liability paid by Oil India was an independent liability and the entire amount was taxable income of the non-resident. The assessee then moved the Tribunal under section 256(1), which referred two questions to this Court for opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the income-tax borne by Oil India Limited in respect of contracts with the non-resident is not taxable as income of the non-resident?
- If the answer to question No. (i) is in the negative, whether the entire or ten per cent of tax borne by Oil India Limited should be taken as income of the non-resident considering the provisions of section 44BB and other sections of the Income-tax Act, 1961?
Arguments of the Parties
Assessee's Arguments (Dr. Pal)
- On a plain reading of the agreement, the tax paid by Oil India, which would otherwise have been payable by the non-resident, is a benefit or perquisite and thus taxable as profits of business; however, because Parliament inserted section 44BB (with retrospective effect from 1 April 1983), the special computation rule applies and the entire amount will not be taxable.
- Alternatively, if the payment is held taxable, by operation of section 44BB only ten per cent of that amount can be held chargeable to tax pursuant to the deeming provision in section 44BB(1).
- Further argued (with reference to section 44BB(2)) that the amounts to be aggregated under subsection (1) are those listed in clauses (a) and (b) of subsection (2), and since a perquisite is not included there, the entire amount would be non-taxable (this contention was advanced but ultimately rejected by the Court).
Revenue/Department's Arguments (Mr. Ray)
- The payment by the Indian firm towards the tax liability of the non-resident must be treated as an independent income or income from other sources of the non-resident, and therefore taxable in full; accordingly, the Tribunal's conclusion that the entire amount is taxable was correct.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax, Orissa v. American Consulting Corporation, Rourkela… [1980] 123 ITR 513 | Held that, under circumstances identical to the present case, a payment by an Indian party of tax which a non-resident would otherwise have paid was a perquisite arising from the non-resident's business and therefore taxable as profits of business (under section 28(iv)). | The Court applied the ratio of this authority to the present facts, concluding that the tax liability met by Oil India Ltd. is a perquisite arising from the business of oil exploration and therefore is income of the non-resident firm. |
Court's Reasoning and Analysis
The Court examined the character of the payment made by Oil India under the agreement and the relevant statutory provisions: the definition of "income" in section 2(24), the charging section in section 5, the heads of income in section 14, and the definition of profits and gains of business or profession in section 28 (specifically section 28(iv), which treats the value of any benefit or perquisite arising from business as chargeable).
The Court rejected the Revenue's contention that the tax payment was an independent income of the non-resident. On analysis, the payment bears the character of a perquisite arising from the business of exploration of mineral oil because the non-resident entered the agreement, agreed to certain remuneration, and the Indian firm agreed to discharge the non-resident's income-tax liability. The Court relied on the prior bench decision in Commissioner of Income-Tax, Orissa v. American Consulting Corporation, which involved an identical agreement and reached the same characterization.
The Court then addressed the effect of section 44BB, a special provision enacted to simplify computation of profits in connection with mineral oil exploration. Because section 44BB contains a non-obstante clause, it displaces the application of section 28 for computation purposes: once the payment is characterized as income (a perquisite), its taxable quantum must be determined under section 44BB(1), which deems income at ten per cent of the specified aggregate. The Court considered and rejected the assessee's contention based on section 44BB(2) that perquisites are excluded from the amounts to be aggregated; instead the Court held that having characterized the payment as a perquisite, it is nonetheless taxable only in accordance with section 44BB(1), and therefore only ten per cent of the amount is to be treated as profits of business chargeable to tax.
In short: (a) characterization — the tax paid by Oil India on behalf of the non-resident is a perquisite arising from the business of oil exploration and therefore is income of the non-resident; (b) computation — because section 44BB is a special code for such businesses, computation is governed by section 44BB(1), which results in only ten per cent of the aggregate being deemed taxable income rather than the entire sum.
Holding and Implications
Core Ruling: The references are answered as follows:
- (i) The tax liability of the non-resident firm, which has been undertaken and paid by Oil India Limited, is a perquisite arising from the non-resident's business of oil exploration and is taxable as such.
- (ii) The computation of that income must be made under section 44BB(1) of the Income-tax Act; accordingly, only ten per cent of the said amount is deemed to be the profits of such business chargeable to tax, and not the entire sum.
Consequences: The Tribunal's conclusion that the entire amount paid by Oil India is taxable as an independent receipt is set aside to the extent that computation must follow section 44BB(1), limiting the taxable portion to ten per cent. The decision resolves the referred questions between the parties but does not purport to lay down a new statutory principle beyond applying the established precedent and the special computation rule in section 44BB.
G.B Patnaik, J.:— The Income-tax Appellate Tribunal has referred the following two questions for the opinion of this court which arises out of the second appellate order of the Tribunal:
“(i) Whether, on the facts and in the circumstances of the case, the income-tax borne by Oil India Limited in respect of contracts with non-resident is not taxable as income of the non-resident?
(ii) If the answer to question No. (i) is in the negative, whether the entire or ten per cent, of tax borne by Oil India Limited should be taken as income of the non-resident considering the provisions of section 44BB and other sections of the Income-tax Act, 1961?”
2. The aforesaid two questions arise under the following circumstances. Nowsco Well Services Ltd., a non-resident firm, had entered into an agreement with Oil India Limited, in connection with mineral oil exploration activity in the Mahanadi basin. Under the contract, the Indian firm, namely, Messrs. Oil India Limited, had undertaken the liability to pay the income-tax which is otherwise payable by the non-resident firm. Messrs. Oil India Limited filed the necessary income-tax return as an agent of the non-resident firm. In the return it was indicated that as the non-resident firm had rendered its services in connection with mineral oil exploration activities, the provisions of section 44BB of the Income-tax Act would apply in respect of the tax paid by Oil India Ltd. under the agreement in question.
3. The Income-tax Officer, however, did not accept the contention and treated the amount which had been paid by Oil India towards income-tax as the business profit of the non-resident firm and included the same in the total income and determined the tax liability. The assessee being aggrieved by the said order preferred an appeal to the Commissioner of Income-tax (Appeals). The appellate authority came to the conclusion that the tax paid by the Indian firm towards the liability of the non-resident firm formed part of the consideration for services rendered by the said non-resident firm and, therefore, under section 44BB of the Income-tax Act, ten per cent, of the said amount would be taken as income. The appellate authority further held that the amount paid by the Indian firm towards tax cannot be assessed as perquisite under section 28(iv) of the Income-tax Act. The appellate authority accordingly directed the Income-tax Officer to recompute the tax liability. Against the appellate order, the Department filed second appeal before the Tribunal. The assessee also filed cross-objection. While the stand of the Department before the Tribunal was that the amount paid by the Indian firm towards the tax liability of the non-resident firm must be held to be a receipt in the hands of the non-resident and as such taxable, the stand of the assessee was that the entire amount is non-taxable by virtue of the application of section 44BB of the Act. The Tribunal, however, rejected the contention of the assessee and dismissed the cross-objection, but allowed the appeal of the Department on a finding that the liability of income-tax of the non-resident is not payment for the services rendered by them for exploring oil, but it is an independent liability and, therefore, the entire amount should be considered as taxable income. The assessee thereafter moved the Tribunal under section 256(1) of the Income-tax Act and the Tribunal having referred the questions as already stated, the matter has come before us.
4. Dr. Pal, appearing for the assessee, contends that on a plain reading of the agreement between the parties, the conclusion is irresistible that the tax paid by Oil India which would have been otherwise paid by the non-resident firm is nothing but a benefit or perquisite and as such would be taxable as profits of business. But special provision for computing such profits in connection with the business of exploration of mineral oil having been made by Parliament by insertion of section 44BB by the Finance Act of 1987 with retrospective effect from April 1, 1983, the entire amount of tax paid will not be taxable and the Tribunal committed gross error of law in holding that this is an independent receipt in the hands of the non-resident and, therefore, the same is taxable. Dr. Pal alternatively contends that even if the amount would be held to be taxable, by the application of section 44BB, only ten per cent, of the same can be held to be chargeable to tax by virtue of the deeming provision under sub-section (1) of section 44BB.
5. Mr. Ray, learned standing counsel for the Department, on the other hand, contends that the payment made by the Indian firm towards the tax liability of the non-resident firm must be held to be an independent income or income from other sources and, therefore, the Tribunal rightly held the entire amount to be taxable.
6. The correctness of the rival submissions would depend upon an examination of some provisions of the Income-tax Act as well as the terms and conditions of the agreement under which the Indian firm undertook the liability of making all payments towards income-tax for which the non-resident firm would have otherwise been liable and as to what would be the character of such payment. Learned standing counsel, with reference to the definition of “income” in section 2(24) and the charging section under section 5 as well as the different heads of income defined in section 14, contends that the income-tax paid by the Indian firm which would have otherwise been paid by the non-resident firm must be held to be an income from other sources of the non-resident firm and, therefore, is liable to be taxed. There is no dispute that the non-resident firm had entered into an agreement with the Indian firm and carried on the business of exploration of oil in the Mahanadi basin. Under the terms of the agreement, apart from payments to be made to the non-resident firm by the Indian firm, it was also stipulated that the entire tax liability would be borne by the Indian firm. It is this payment made by the Indian firm towards tax liability of the non-resident firm which is the subject-matter of dispute. On examining the definition of “income” in section 2(24) as well as the heads of income as indicated in section 14, it is difficult for us to accept the contention of the Revenue that it would be an independent income of the non-resident firm. On the other hand, it would be profits or gains of business under the head “D” in section 14 of the Income-tax Act. Section 28 defines as to what income shall be chargeable to income-tax under the head “Profits and gains of business or profession”. Section 28(iv) which came into the statute book by the Finance Act of 1964 with effect from April 1, 1964, provides:
“(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.”
7. The non-resident firm having entered into an agreement with the Indian firm and having taken up the business of exploration of mineral oil in the Mahanadi basin and having agreed to be paid a particular sum as indicated in the agreement, and the Indian firm having taken up the liability of paying the entire income-tax dues payable by the non-resident firm, the same will partake of the character of a perquisite arising from the business of exploration of mineral oil. This question has already been decided by a Bench of this court under similar circumstances in the case of Commissioner Of Income-Tax, Orissa… v. American Consulting Corporation, Rourkela…Opp. Party., [1980] 123 ITR 513 and the agreement in that case is identical with the agreement in the case in hand. This court ultimately came to hold that it was a perquisite which arises to the non-resident firm and as such is taxable as profits of its business. But by the date of the aforesaid judgment, the special provision of computation as contained in section 44BB had not been engrafted and, on the other hand, section 28(iv) had been engrafted and the court answered the question accordingly. But with regard to the characteristic of the payment, the ratio of the aforesaid case would apply with full force to the present case and, consequently, it must be held that the tax liability met by Oil India Limited is a perquisite which the non-resident firm had been granted under the agreement and, therefore, it is taxable as profits of business.
8. The further question that would arise is whether section 44BB of the Act would apply or not. Section 44BB is a special provision for computing profits and gains in connection with the business of exploration of mineral oil. Parliament engrafted the aforesaid provision in the Income-tax Act as a measure of simplification providing for determination of income of such taxpayers at ten per cent, of the aggregate of certain amount. By virtue of section 44BB and because of the non obstante clause, section 28 of the Act will have no application. In other words, the value of the perquisite arising from the business will have to be computed as provided in section 44BB(1) when the business is exploration of mineral oil. Dr. Pal, appearing for the assessee, however, contends that in view of sub-section (2) of section 44BB, the amount referred to in sub-section (1) has to be such amount as contained in clauses (a) and (b) of sub-section (2) and obviously, therefore, a perquisite arising from the business not being included therein, the entire amount will be non-taxable. It is difficult to accept this contention since once it is held that the payment thus made towards the income-tax liability of the non-resident firm by the Indian firm is a perquisite arising from the business of oil exploration, it must be held to be an income of the non-resident firm, but would be taxable only in accordance with section 44BB(1) and consequently only ten per cent, of the said income would be deemed to be the gains of such business chargeable to tax and not the entire amount, as has been held by the Tribunal. In the aforesaid premises, our answers to the questions posed are:
(i) On the facts and in the circumstances of the case, the tax liability of the non-resident firm which has been undertaken by the Indian firm and has been paid by the Indian, firm would be a perquisite arising from the business of oil exploration under the agreement entered into by the non-resident firm with the Indian firm and would be taxable as such.
(ii) The computation of the same will have to be made under sub-section (1) of section 44BB and, therefore, only ten per cent, of the same would be deemed to be the profits of such business chargeable to tax and not the entire sum.
9. These batch of references are answered accordingly.
P.C Naik, J.:— I agree.
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