K.C. Singhal, Judicial Member - (1.) THE main issue arising in this appeal relates to the applicability of the provisions of Section 44BB of Income-tax Act, 1961 (Act).
(2.) Briefly stated the facts are these: The assessee is a foreign company having its head office in USA. During the financial year 1995-96, it had received a contract from Gas Authority of India Ltd. (GAIL) for laying of pipelines through horizontal directional drilling across the Chambal and the Yamuna river. The total contractual receipts in the year under consideration amounted to Rs. 12,98,22,970/-. By invoking the provisions of Section 44BB, the assessee offered the net income at Rs. 1,29,82,297/- by applying the presumptive rate of 10% of the total receipts. The assessee was asked to explain as to how the provisions of Section 44BB were applicable to the present case. The explanation of the assessee before the AO was (i) that the pipelines laid by the assessee was to be used for the purpose of transportation of natural gas which falls within the meaning of 'mineral oil' for the purpose of Section 44BB (ii) that GAIL was processing the natural gas to produce LPG, propane, pentane etc. and thus, it was engaged in the business of production of mineral oils. Thus, it was submitted that the assessee was covered by the provisions of Section 44BB as it was providing services to GAIL which was engaged in the business of production of mineral oil. The assessee also relied on the definition of natural gas as provided in the Petroleum Tax Guide, 1998 as well as the definition of the word "production" provided in the said guide. Not satisfied with the said explanation of the assessee, the AO held that provisions of Section 44BB were not applicable to the present case by observing as under: "I am in total disagreement with the assessee's contention that M/s GAIL is in the business of production of "mineral Oils" as used in Section 44BB. The expression used in Section 44BB is "engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used; or to be used, in the prospecting for, or extraction or production of, mineral oils". According to the rule of noscitur a sociis, the word 'production' would take colour from the associated words and expressions i.e. "prospecting and extraction" and will have to be given a restricted meaning analogous to the associated words. The words, prospecting, extraction and production of mineral oils are therefore to be read together. CBDT Circular No. 495 dated 22.9.87, gives the scope and effect of the introduction of the new Section 44BB as follows: "A number of complications are involved in the computation of taxable income in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration or exploitation of mineral oils. With a view of simplifying the provisions of the Finance Act, 1987, has inserted a new Section 44BB." The explanatory note of the CBDT read with the provisions of Section 44BB makes it amply clear that the services which qualifies for consideration Under Section 44BB are for exploration and exploitation of mineral oils. The word "production" as used in Section 44BB is to be read along with the word "Extraction and Exploration". The intention of Section 44BB was not to give the benefit to all subsidiary processes and sub-processes and manufacturing activities involved with refining of mineral oils after the initiate stale of their production from the oil wells. If the assessee's contention is to be accepted, then all foreign companies involved with setting up of refineries, gas, crackers plant, LPG plants etc. would also qualify Under Section 44BB. This was never the intention of the said section which was intended only for foreign company engaged in the basic business of extraction and prospecting of mineral oils. It is only at that stage that the word production has been used. In other words, production within the mine precinct. Coming down to the business activities of the GAIL, there is no doubt that M/s GAIL was in the business of production of LPG in the F.Y. 95-96 and 96-97. However, the major business of GAIL was that of transportation of natural gas through HBJ pipelines and its subsidiaries. M/s GAIL was not in the business of exploration or prospecting of natural gas. It was not owning any oil fields or gas fields. This part of the business was, and is still being handled by ONGC. M/s GAIL was buying its entire stock of natural gas from ONGC and transporting the same through its HBJ pipeline to its various clients who are then using the gas as raw material or as fuel. A very small part of the activities of the GAIL was with regard to the production of LPG. The assessee company was laying GAIL's pipeline under the Chambal and the Yamuna rivers crossings. It may be mentioned that GAIL has no LPG plant after these river crossings. All of GAIL's LPG plants are before the above mentioned river crossings. Hence, it is clear that GAIL is not in the business of prospecting or production of mineral oils. The main business of GAIL is with regard to transportation of natural gas, and it was to facilitate this part of the business of GAIL that the assessee company was providing its services. Keeping in view these facts, it is clear that the business of the assessee company does not satisfy the conditions of Section 44 BB and hence, the provisions of that section are not applicable." Proceeding further, the AO invoked the provisions of Section 144 since proper books of accounts were not produced before the AO. Finally, the best judgment was made on the total income of Rs. 5,73,63,187/- being estimated profit at 30% of the gross receipts of Rs. 19,12, 10,624/- as determined by him.
(3.) ON appeal, the CIT(A) confirmed the legal finding of the AO to the effect that the provisions of Section 44BB were not applicable to the facts of the present case. It was observed by him that process of production was already completed before the gas passed through the pipeline. Further, the gas which was then transported from one point to the other did not lost its basic identity/composition and the only temporary change that occurred was sweetening of the product to prevent corrosion. The process of manufacture/production was not carried out at this stage at all. Accordingly, the services provided by the assessee did not fall within the ambit of Section 44BB. He also confirmed the finding of the AO regarding the applicability of the provisions of Section 144. However, he was of the view that the net profit rate applied by the AO at 30% was on higher side and accordingly, he reduced the same to 20%. Still aggrieved the assessee is in appeal before the Tribunal.;