The income-tax appellate tribunal (ITAT) has turned down the income-tax departments appeal to tax money received by a French company in lieu of expenses incurred towards supply of goods and services during its drilling operation for state-run oil major ONGC.

The order, which categorised such receipts as reimbursements, is likely to favour non-resident companies operating on behalf of domestic exploration and production (E&P) companies by substantially cutting down their tax liability.

Rejecting the departments appeal to tax money received by Pride Foramer France SAS as pay-back from ONGC for expenses incurred on food, equipment and communication charges, the tribunal held that those expenses did not pertain to the drilling activity.

While receipt of mobilisation fee is taxable for foreign firms, ITAT held the reimbursements were part of its prior contractual obligation with ONGC and there were no records to show that there was an element of profit embedded in the reimbursements received.

The French company was conducting drilling operations under various contracts with ONGC. Calculating its tax liability for the assessment year 2002-03, the company left out receipts of Rs 34.73 lakh spent on food and services provided to ONGC employees. It was claimed the money was spent on getting daily dry fruit packets for ONGC employees as also providing them communication facilities.

Supply of dry fruits and recovery of communication expenses specifically do not find mention in Sub-section 2 of Section 44BB of the Income-Tax Act as these activities have nothing to do with the activity of prospecting for or extraction or production of mineral oils in or outside India, the tribunal said.