M/S Dewan Chand Ram Chandra ... vs Union Of India
2014 Latest Caselaw 1369 Del

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

+              WRIT PETITION (CIVIL) NO. 597/1996

                                     Reserved on: 3rd January, 2014
%                                 Date of Decision: 14th March, 2014

M/S DEWAN CHAND RAM CHANDRA INDUSTRIES P. LTD.
                                           ....Petitioner
            Through Mr. Rabindra Kapoor, Advoctae.

               Versus

UNION OF INDIA                                    ...Respondent
              Through           Mr. Sanjeev Sabharwal,
                                Sr. Standing Counsel.

CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA

SANJIV KHANNA, J.

Petitioner is a company with limited liability. Petitioner

responded to the tenders floated by Oil and Natural Gas Commission

(ONGC) and on acceptance, was awarded contracts for deployment of

work over rigs and other auxiliary operation services in the oil fields

in the western region. Three identical contracts were executed by the

petitioner with ONGC under the heading "Charter Hiring of one work

over rig".

2. The petitioner with prior approval of Government of India

entered into a loan agreement with State Bank of India, Singapore to

avail of a foreign currency loan of 9,00,000/- USD and Rupee loan of

Rs.1,92,00,000/-. The loan was taken to finance the purchase of three

work over rigs for drilling activities in relation of the said contract.

3. As per paragraph 10.3 of the loan agreement dated 21 st July,

1994 with State Bank of India, Singapore, the petitioner was liable to

pay principal, interest and other sums as required in full without

deduction of tax, fee, duty premiums and any other charge

whatsoever imposed by revenue authorities and in the event, the

petitioner was compelled to make any such payment or deduction, the

petitioner as the borrower was required to bear and pay the additional

sum as necessary to ensure that the bank received payment in full in

respect of the principal, interest or otherwise.

4. By letter dated 25th July, 1994, the petitioner applied for

exemption under Section 10(15)(iv)(c) of the Income Tax Act, 1961

(Act, for short) with the Central Board of Direct Taxes (CBDT). The

CBDT by their letter dated 3rd August, 1994 asked the petitioner to

clarify whether it was an "industrial undertaking" under the Act, to

which the petitioner responded vide letter dated 11th August, 1994.

5. By letter dated 9th September, 1994, the petitioner was directed

to show cause why their application should be approved as the

petitioner was engaged in giving on hire the equipments but was not

engaged in manufacturing or processing activities. The application

was rejected by letter dated 17th October, 1994 on the ground that the

petitioner was not an industrial undertaking which only means an

undertaking engaged in manufacturing or processing of goods. It was

observed that the petitioner was not engaged in manufacture or

processing of goods but was only supplying equipment to be used in

the manufacturing process. It is obvious that the reasoning given in

the letter dated 17th October, 1994 was wrong as it did not take into

account the Explanation to Section 10(15)(iv)(c) of the Act which we

have reproduced hereinafter. Thereupon, the petitioner made a

detailed representation dated 1st March, 1995 referring to their earlier

letter dated 17th November, 1994 explaining that the petitioner was

engaged in the process of drilling of oil and was covered by part (c)

of Explanation to Section 10 (15)(iv) and hence was an "industrial

undertaking". Detailed submissions in support were made. This was

followed by letter dated 14th June, 1995 in which reference was made

to the Oil Fields (Regulation and Development) Act, 1948, meaning

of the term "Mine" and "Mining Lease" in the said Act and dictionary

meaning of the term "Mining" etc. Petitioner also explained the work

undertaken by them, which was in nature of work over rigs.

6. The respondents by their letter dated 23rd May, 1995 rejected

the application for review but recorded that submissions, if any, may

be made in writing within 15 days of receipt of the letter. The said

letter records that duties of the petitioner had been mentioned in

chapter 2 of the agreements and work over/servicing to be undertaken

was also specified in the said chapter. It was observed that the

contracts entered into by the petitioner, dealt with performance

services which were ancillary to the work of ONGC and the petitioner

was not per se engaged in mining. Petitioner created conditions

favourable for mining operations which were then performed by

ONGC. Repair of the wells by casing leakages and body cement jobs

and bottom cleaning and fishing operations did not by themselves

amount to be engaged in mining activities. Operations undertaken by

the petitioner were such that they aided the operator i.e. ONGC, who

was actually engaged in mining operations. Processes undertaken by

the petitioner resulted in enhancing production but this did not mean

that the petitioner were themselves engaged in mining. This was

followed by another letter dated 31st July, 1995 stating that the

petitioner‟s contention had been reexamined but were not acceptable.

Petitioner was not an industrial undertaking as defined in Explanation

to Section 10(15)(iv) of the Act as the petitioner was not engaged in

mining but was only carrying on activities, that helped in actual

mining operations carried on by ONGC.

7. During the course of hearing before us, we have asked the

respondents to examine and verify whether any other party

undertaking similar work has been granted benefit under Section

10(15)(iv)(c) of the Act. Respondents have filed letter dated 19th

December, 2013 written by Ministry of Finance, Department of

Revenue, Foreign Tax & Tax Research Division-II, stating that

benefit of Section 10(15)(iv)(c) was available for money borrowed

and debt incurred before 1st June, 2001. The record pertaining to

exemption under the said Section was very old and as per the record

available no case pertaining to exemption for work over rigs was

found.

8. Section 10(15)(iv)(c) of the Act along with Explanation

applicable at the relevant time read as under:-

"10. In computing the total income of a previous year of any person, any income falling withinin any of the following clauses shall not be included:-

               1 to 14          ......

               15.     ................

               (i)       ................
               (ii)      ................
               (iii)     ................
               (iv)      Interest payable
               (a)       ................


                (b)    ................



               (c)     by an industrial undertaking in India on any

moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India or raw materials or components or capital plant and machinery (to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regarding to the terms of the loan or debt and its repayments.);

(Explanation:-

For the purposes of this sub-clause, the expression "Industrial Undertaking" means any undertaking which is engaged in

(a) the manufacture of processing of goods; or

(b) the business of generation or distribution of electricity or any other form of power ;or (ba) the business of providing telecommunication services; or

(c) Mining; or

(d) The construction of ships; or (da) the business of ship-breaking; or

(e)The operation of ships or aircrafts or construction or operation of rail systems;"

(Explanation quoted above is as it existed prior to 1.4.1996)

9. Sub-clause (c) to Section 10(15)(iv) applies when an industrial

undertaking in India incurs debt or borrows money in a foreign

country for purchase outside India of raw material, components or

capital plant and machinery to the extent to which the interest does

not exceed the amount of interest calculated at the rate approved by

the Central Government in this behalf. The requirement of sub-clause

(c) is that the interest should be payable by an industrial undertaking

located in India for money borrowed or debt incurred in a foreign

country in respect of specified items. There is no dispute that the

petitioner had purchased capital plant and machinery in form of work

over rigs and had incurred debt for which it had to pay interest in a

foreign country. But, the question is whether the petitioner was an

industrial undertaking within the meaning of sub-clause (c) to Section

10(15)(iv). The expression „industrial undertaking‟ has been defined

in the Explanation enacted for the said purpose. The Explanation

stipulates that „industrial undertaking‟ means any undertaking which

was engaged in mining.

10. The short question is whether the petitioner was an undertaking

which was engaged in mining. The words „engaged‟ and „mining‟

have not been defined in the Act and have to be read and interpreted

as they are understood in normal parlance. The word „mining‟ in

common parlance means working on mines for ores, oil and other

minerals. „Mining‟ as defined in Black‟s Law dictionary, Sixth

Edition means process or business of extracting from earth precious

or valuable metals, either in their native state or in their ores.

Extracting or excavating mineral oils could be included in the term

„mining‟. The petitioner in the writ petition has referred to the

expression „mining‟ as defined in the Oil Fields (Regulation &

Development) Act, 1948 etc. However, we do not think it necessary

to refer to the definition clause in a particular enactment which has

not been made applicable to the Act. We have no doubt in our mind

that extracting mineral oil could be covered within the meaning of

mining activities. An industrial undertaking having oil fields and

excavating or winning oil from oil fields would be engaged in mining.

(The question whether extraction of gas is mining is not an issue in

the present case and has not been examined).

11. The expression used in the Explanation as noticed above is that

a person who was „engaged in mining‟ was treated as an industrial

undertaking for the purpose of clause (c) to Section 10(15)(iv) of the

Act. The word „engaged‟ is rather ambiguous as was observed by

the Supreme Court in Regional Provident Fund Commissioner vs.

S.K. Manufacturing Co.. AIR 1962 SC 1536. In the said case, it was

held that while dealing with a provision/clause capable of two

constructions, it might not be easy to make a choice particularly,

when both constructions would lead to some anomaly. While

interpreting the expression „a person engaged in any business‟, it was

held that it shall mean to be engaged mainly or usually in that

business. This was a common sense view consistent with current and

accepted denotation to the words „engaged in‟. Primary and

dominant purpose as the decision signifies is encompassed in the

word "engaged". This decision only partly helps us understand and

interpret the word "engaged" or the expression "engaged in".

12. In Hindustan Lever Ltd. vs. Ashok V. Kate AIR 1996 SC 285,

Supreme Court referred to Black‟s Law Dictionary to interpret the

term „engaged‟ and held that it means : to employ or involve one‟s

self to take part in; or embark upon. It was further held:

"30. In Stroud's Judicial Dictionary, 5th Edition, at page 847, the term "engaged in discharging" has been dealt with as under:

A lighter or craft is "engaged in discharging" ballast or goods, within an exemption from dock dues, if she goes to the place of discharge in the dock with the real intention of discharging there, although, from the place getting too full to take the ballast or goods, the vessel has to depart without making any discharge London & India Docks Co. v. names Steam Tug, Etc., Co. (1909) A.C. 15

31. It becomes, therefore, obvious that if an employer is alleged to be engaged in discharging any employee then even before the actual order of discharge is passed he can be said to be engaged in such discharge if it is shown that an attempt is made towards such a discharge with an intention to ultimately discharge the employee."

13. In the said case, the expression „engaged‟, was held would

include not only finished, complete or continuous action but also an

incomplete continuous action. The said word means more than a

single act or transaction and it involves some continuity of action. It

connotes to take part in or to be employed in the said continuous

transaction. It refers to involvement of oneself or employment in

specified activities in relation to which the expression is used. Thus,

significantly the word „engaged‟ does not refer to the entire or the

whole but even part thereof or participating in the specified activity.

14. An industrial undertaking will be engaged in mining if the

activities undertaken by the said undertaking are an integral and an

inseparable part and substantial or predominantly devoted to mining.

In such an event, the undertaking in question is engaged in mining,

even when the said undertaking does not itself extract minerals, ores

or oil. The words „engaged in‟ tends to broaden the meaning attached

to the activities specified in the Explanation to mean and include the

said activities which would be continuous and should be integral and

directly associated with mining.

15. It is necessary and important to give wide interpretation while

interpreting the expression „engaged in ..... mining‟ as it would

further the legislative intent and the purpose behind enacting Section

10(15)(iv)(c) of the Act. Mining activities are normally capital

intensive and involve specialization. An undertaking may deal with

specific aspects of mining, which are integral and necessary for

extracting minerals, ores or oil. A narrower interpretation could be

contrary and negate the legislative purpose behind using the

expression „engaged‟. A narrow interpretation that the undertaking

must extract minerals/oils and an undertaking though involved and

exclusively dealing with a part of mining, would not be treated as an

undertaking engaged in mining would be contrary to the legislative

intent and purpose which can be gathered and is luminescent from the

wide scope and ambit of the Explanation. A word or expression used

in a legislative provision should be interpreted in the context in which

the expression or the word is used to be in consonance and to further

the legislative intent. The word „engaged‟ if it includes as held by us

to mean „part of‟ would include activities which are integral and

directly connected with mining but may not by themselves result in

earning of income by the said undertaking by way of winning or

extraction. Extraction itself may be undertaken by a third person

though the acts/actions facilitates and are associated with mining.

Mining itself is complex and capital intensive and may require inter

play and activities by several persons which may be involved in

different parts/aspects of mining and accordingly paid for the part

played or activities undertaken by them. The said undertaking would

be "engaged in mining".

16. Having interpreted the term „engaged in mining‟ in this

manner, we will now examine the factual matrix and whether the

petitioner was engaged in mining i.e. whether the activities of the

petitioner could be considered to be an integral part of mining.

17. As already noticed above, the petitioner had purchased or

acquired capital equipment in the form of work over rigs and for this

purpose had obtained loan from State Bank of India, Singapore in

foreign currency and Indian rupees. Work over rig is a rig which

undertakes repair of terminally unsuitable oil wells. Oil wells can

become unoperational, damaged due to operational factors such as

corrosions, mal-functioning etc. There are also cases of decline in

productivity as the reservoir cannot support stable flow through the

earlier wide bore. Before any work over, the well must be killed and

thereafter the work over specialist takes over to carry out intensive

operation which often requires skills of no lesser capacity than

drilling a rig. The work over begins by removing the well head and

possible flow line etc and then it is completed by adopting various

methods including setting up new packer or running new tubing

down to the top of the old. Such operations are complex and have to

be planned well in advance.

18. It would be important here to reproduce the work which were

assigned to the petitioner as per the contract which reads :

"A. Completion Jobs :

                i)     Single Horizon Completion
               ii)    Dual/Multiple horizons completion.
               iii)   Completion with artificial lift system.
               iv)    Gravel pack completion.

               B.       Work-over for :
               i)       Water Shut off.
               ii)      Gas Shut off.
               iii)     Improving production by stimulations
               i.e. acidizing, fracturing etc.

               C.     Repairs of Well for:
               i)     Casing leaks.
               ii)    Bad cement jobs.

               D.     Services job :
               i)     Bottom Clearing
               ii)    Transfer of well to new horizon.
               iii)   Fishing operations.

               E.     Any other job that may come up
               during work over/servicing of wells."

19. The contract also stipulates that completion job includes

preparation of well for production after the well has been cased,

cemented and serviced. Each productive horizon is to be completed

by making permanent contact between it and bore well by installing

tubing and the appropriate equipment for controlling fluid flow etc.

Looking at the nature of the contract undertaken and for which the

petitioner had obtained the loan, we have no doubt in our mind that

the petitioner was engaged in mining i.e. the activities of the

petitioner were integral to and directly related to mining of oil.

20. Learned counsel for the respondents has relied upon Industrial

Fuel Marketing Co. vs. Union of India AIR 1983 Calcutta 253 in

which reference was made to Mines and Minerals (Regulation and

Development) Act, 1957 and it was opined that the expression „any

operation‟ undertaken for the purpose of winning of minerals would

include coal particles which had come out from the washeries with

the water overflowing from the slurry ponds kept for this purpose and

deposited on the river beds belonging to the State of Bihar and on the

adjoining fields of private persons. A single Judge of Calcutta High

Court held that the word „win‟ means to get the ore etc. and does not

necessarily means minerals by extracted by excavation of earth or

soil. It would include every activity by which mineral was obtained,

irrespective of whether such activity was carried on the surface or on

the bowels of the earth. Therefore, narrow meaning to the word

„winning‟ was not justified. The said decision is not applicable to the

facts of the present case as we are interpreting the word and

expression „engaged in mining‟.

21. Reference was also made to the decision of M-1 Overseas Ltd.

in re (2012) 349 ITR 166 (AAR). In the said case, the applicant had

moved an application before the Authority for Advance Rulings on

the question whether earning from mud engineering activities

rendered in connection with exploration or extraction of mineral oil

were covered under Section 44 BB of the Income Tax Act. The

question raised in the said case was whether the applicant therein

rendering technical services and therefore, payment made was fee for

technical services under Explanation 2 to Section 9(1)(vii) of the Act.

The said Explanation to Section 9(1)(vii) stipulated that consideration

for any construction, assembly, mining or like project undertaken by

the recipient would not fall or treated as fee for technical services. It

was observed that the petitioner was not undertaking a mining or like

project as it was not extracting or winning any ore or oil but was only

rendering services in connection or in relation to the mining project.

Reference was made to earlier decisions of the AAR reported in

(1998) 234 ITR 371 (AAR) and (2012) 346 ITR 549 (AAR). The

said decisions proceed on the basis of language of Explanation 2 and

the expressions used therein, "construction, assembly, mining or like

project undertaken by the recipient". The recipient, therefore, should

have undertaken the mining or like project and merely rendering a

service to the third party undertaking the mining project did not

qualify and come under the exception. It was accordingly held that

the consideration/fee was taxable as fee for technical service. The

said decision does not deal with or answer the question or issue raised

in the present writ petition as language of the Explanation to Section

10(15)(iv)(c) is entirely different. We have held that the expression

„engaged in mining‟ would not only include the actual winning or

extraction of minerals or oils but also activities which are an integral

part of mining.

22. The last question relates to the relief. As per the petitioner,

they have already paid tax at source of Rs.2,11,836/-, Rs.3,15,329/-

and Rs.2,28,921/- on 1st/8th March, 1995, 25th September, 1995 and

19th March, 1996, respectively. Therefore, in all Rs.7,56,086/- stands

paid as tax at source on the payments made to State Bank of India,

Singapore. The petitioner claims that no certificate for tax deducted

in Form 16A was issued to the State Bank of India, Singapore. On

19th September, 1996, the Court passed an interim order and on

further payments upto 5th October, 1998 no tax at source was

deducted. Petitioner in terms of the interim order has given an

undertaking that in case the writ petition stands dismissed they would

be liable to pay tax due on subsequent installments with interest as

per the Act. The respondent will verify the assessments made in the

case of State Bank of India, Singapore within a period of eight weeks

from the date when this order is communicated and in case the said

Bank has not taken credit of the tax paid at source, the said amount

will be refunded to the petitioner with interest @ 8% p.a. from the

date of filing of the writ petition till payment. The payment, if due,

would be paid within 16 weeks from the date of communication of

this decision. As we are allowing the writ petition, TDS would not be

deductible on further payments. The writ petition is accordingly

disposed of. No costs.

(SANJIV KHANNA) JUDGE

(SANJEEV SACHDEVA) JUDGE MARCH 14th, 2014 NA/kkb/VKR