SC rules on presumptive taxation; activities inextricably linked with prospecting, extraction or production of mineral oil eligible for presumptive taxation

 

This Tax Alert summarizes a recent decision of the Supreme Court (SC) in the case of Oil and Natural Gas Corporation Ltd. The Taxpayer was treated as a “representative assessee” on behalf of various nonresident (NR) companies (FCos) with which the Taxpayer had entered into separate agreements for availing of diverse services. The services rendered by the FCos to the Taxpayer included various services, such as provision of personnel with expertise and experience in operation and management of an oil rig, engineering and technical support, processing of seismic data, consultancy and training service, analysis of data, geological and feasibility study, inspection and repair service etc.

 

The issue was whether the income of the FCos from such services is governed by the scheme of presumptive taxation provided under the Indian Tax Laws (ITL). The SC held that the services rendered by the FCos were inextricably linked with prospecting, extraction or production of mineral oil and, hence, were mining and related/ancillary services, so as to get excluded from the definition of fees for technical services (FTS) as provided under the ITL. Accordingly, the FCos would be governed by the provisions of presumptive taxation under the ITL.

 

There is a plethora of decisions which has analyzed the scope of the expression “mining or like project”. However, the Courts have been taking divergent views and there was no consensus on its interpretation.

 

The present SC decision is a welcome step in this regard. It has given a broad interpretation to the expression “mining or like project” and has taken a view that, as long as the activities contemplated by an agreement with an NR are inextricably linked to prospecting, extraction or production of mineral oil, the benefit of presumptive taxation should be available. It also held that where the dominant purpose of the agreement is for prospecting, extraction or production of mineral oil, the consideration will be covered by the presumptive taxation provision, though there may be certain ancillary works contemplated thereunder.