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Taxation Entitlement For Non-residents In Mineral Oil Industry
Taxand India explores the case which prompted this decision.
OHM Limited (OHM), a company incorporated under the laws of United Kingdom, was engaged in the business of providing geophysical services to the oil and gas exploration industry. OHM was awarded contracts by 2 companies, namely Petro Gas E&P LLC and CGGVeritas Services SA, for procuring data, processing and interpreting the data in respect of offshore exploration in India.
OHM sought lower withholding tax under the provisions of section 44BB of the Income Act (at the effective tax rate of 4.223%). This claim was rejected by the relevant authorities, and the order was issued determining the tax withholding at the rate of 10% (plus applicable surcharge and cess) on a gross basis. OHM disagreed and sought further consideration from the AAR who decided the contracts would be taxable deemed on a profit basis.
The Revenue contended the AAR's decision before the Delhi High Court. The Delhi High Court upheld the AAR's decision and further held that section 44BB is a specific section governing the taxability of non-residents engaged in providing services / facilities in connection with the mineral oil industry and would continue to apply even after exclusion of section 44DA from section 44BB of the Act.
The controversy surrounding the applicability of the deemed profit basis of taxation for the non-resident oilfield service providers under the provisions of section 44BB of the Income Act was started in 2007. Amidst the uncertainties and multi-level litigation, this decision of the Delhi High Court is a welcome decision as it affirms the taxation on a deemed profit basis under section 44BB to the non-resident oilfield service providers (not necessarily engaged in the actual exploration / extraction activity) and re-establishes that the position should not change by the exclusion of section 44DA from section 44BB of the Act by the Finance Act 2010.