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Tax Implications for Offshore Service Providers
Neetu Vinayek, Partner, Tax and Regulatory and Neetu Singh, Senior Manager, Tax and Regulatory The Indian domestic tax law contains a special tax regime in section 44BB of the Income-tax Act for non-resident service provider engaged in the business of providing services or facilities in connection with prospecting for, exploration or production of mineral oils. The authors delve over the amendments made to the section 44B in 2010.

The search for new hydrocarbon reservoir becomes challenging with passage of time. It is imperative that the service providers who play vital role in the entire oil and gas supply chain, in providing solutions to such challenges shall be given favourable tax regime in the country.

The Indian domestic tax law contains a special tax regime for non-resident service provider engaged in the business of providing services or facilities or supplying plant and machinery on hire in connection with prospecting for, exploration or production of mineral oils. The special regime as given in section 44BB of the Income-tax Act, 1961 provides for computation of income on presumptive basis. As per the provision, 10 per cent of the gross receipts (i.e. aggregate of amount received) shall deem to be business income resulting in an effective tax rate of 4 per cent (10 per cent of gross receipt tax rate of 40 per cent).

The above provision was introduced in year 1987 (with retrospective effect from 1 April 1983) with an objective to simplify the computation mechanism for non-resident service provider and prevent them from the hassle of maintaining books of accounts etc. However, the non-resident service provider has the option to claim lower profit (instead of paying tax on presumptive basis) provided such service provider keep and maintain books of accounts and other documents, get accounts audited, furnish tax audit report and be subject to compulsory scrutiny assessment.

The Finance Act 2010 made an amendment in Section 44BB to exclude the applicability of section 44BB where such non-resident service provider earns income by way of fee for technical services.

The issue which emerged after the insertion of aforesaid amendment was whether the services rendered by non-resident in relation to exploration and production of mineral oil can be classified as ‘fee for technical services’. In recent times, there have been a considerable debate and certain judgments have also been pronounced where it has been held that services rendered in connection with exploration and production of mineral oil would be covered within the ambit of special tax regime and shall not be regarded as fee for technical services.

The Authority of Advance Ruling (AAR) in case of Geofizyaka Torun SP ruled that seismic services provided by this polish company is definitely in connection with oil exploration and that section 44BB would apply. The AAR also held that section 44BB being a specific and special provision, income from services rendered in connection with the prospecting for or exploration of mineral oil must be computed under that section.

Relying on the above decision AAR delivered the same ruling in case of M/s Wavefield Inseis ASA and Seabird Exploration FZ LLC. In recent rulings of OHM Limited and Global Geophysical Services Limited also the AAR held that technical or consultancy services rendered in relation to prospecting and extraction of mineral oil will be governed by section 44BB. The view of AAR is consistent with their earlier ruling of Geofizyaka.

Most of these judgements were passed relying on instruction no 1862 dated 22 October 1990 issued by Central Board of Direct Taxes after obtaining opinion of the Attorney General of India. In this regard, it is important to mention that as per the provisions of the Income-tax Act 'fee for technical services' is defined to include consideration for any managerial, technical or consultancy services but excludes consideration for 'mining projects' and 'like projects'. It is this instruction which clarifies that the expression 'mining project' and 'like project' occurring in the definition of 'fee for technical services' would cover the rendering of allied services such as imparting of training in relation to exploration activities and, therefore such services cannot be characterised as 'fee for technical services'.

This instruction has also been relied upon by the Income Tax Appellate Tribunals in a number of cases to conclude that Section 44BB applies to cases in which the services (including technical services) are rendered in relation to the prospecting for or exploration of mineral oil.

Hence, it can be argued that the income of non-resident service providers, which do not fall within the meaning of fee for technical services, continue to be eligible for taxation on presumptive basis under Section 44BB.

The sector is so technology-centric almost all services in relation to the prospecting for or exploration of mineral oil are of a technical nature. However, by virtue of reference to the CBDT instruction as mentioned it is possible to take a view that such income may not fall within the definition of fee for technical services due to exclusionary clause available for ‘mining or like project’.

But, the Delhi Income Tax Appellate Tribunal in its recent ruling in case of CGG Veritas Services SA has taken a stand contrary to AAR’s view. The ruling has gone beyond the issue of examining the nature of services and made an observation that the words ‘mining and like project’ in exclusionary clause of definition of fee for technical services are qualified by the words ‘undertaken by the recipient’. Therefore, in order to fall under the exclusionary limb of the definition the activities of ‘mining or like project’ (i.e. extraction of mineral oil/ores from earth) need to be undertaken by the recipient assessee himself. This ruling is being challenged before the High Court so it will be interesting to see how it will unfold.

It is the need of an hour that there shall prevail tax environment which is free from uncertainties and ambiguities in deciding upon the tax regime of the offshore service providers who play vital role in entire oil and gas supply chain.