DCIT, CIRCLE- II, INTL. TAXATION, DEHRADUN vs. R & B FALCON (A) PTY LTD., DEHRADUN

PER B.R.R.KUMAR, ACCOUNTANT MEMBER :

Both appeals have been filed by the revenue against the order of the ld. CIT(A)-2, Noida, dated 09.05.2017.

is includable in the gross revenue for computing profits under

presumptive provisions of section 44BB of the I.T. Act, 1961 or not ?

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consideration and have gone through the entire material available on

record. The contention of the ld. AR at the outset has been that the

core issue as culled out in grounds of appeal stands settled in favour

of the assessee and against the Revenue by Co-ordinate Bench of

Tribunal in the case of assessee itself for preceding assessment year

in the identical facts and circumstances of the case. The ld. DR

though relied on the order of the Assessing Officer, but could not

controvert the above contention of the assessee regarding the issue

having been covered by the decision of coordinate Bench of Tribunal.

We have gone through the above referred order of Tribunal and find

that the core issue involved in this case is covered in favour of the

assessee in the similar facts and circumstances.

under consideration, it had offered revenues to taxation on

account of ongoing contract entered with ONGC Ltd. The

assessee, in its return of income, had claimed that the taxable

revenues were to be computed in terms of section 44BB of the

Income Tax Act, 1961.During the course of assessment

proceedings, the Assessing Officer found that an amount of

Rs.****** received on account of service tax had not been

added to the gross revenue chargeable to tax u/s 44BB of the

Act. It was the assessee’s contention that statutory charges

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cannot form part of the amount for the purpose of deemed

profit u/s 44BB of the Act. As per the assessee, service tax

was in the nature of reimbursement and hence not includible

in gross receipts for the purpose of taxation. The assessee

contended that it had acted only as a collection agency for the

Government for collection of service tax and as such, the

collections on account of service tax could not be considered

as income generating receipts in the hands of the assessee. It

was further contended before the Assessing Officer that any

receipt unconnected with the business of exploration,

exploitation of oil etc. could not form part of the taxable

receipts u/s 44BB of the Act. However, the Assessing Officer

was of the opinion that for the purpose of presumptive

determination of the assessee’s profit, the quantum of amount

received from the customers against its service tax obligation

had to be essentially considered as part of the receipt and,

accordingly, a sum of Rs. ***** was added back for the

purpose of calculating the gross receipts on which the

presumptive tax rate had to be applied.

provision for computing profits and gains of the non-resident

assessee engaged in the business of exploration, etc., of

mineral oils. Sub-section (1) provides that in respect of such

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an assessee, notwithstanding anything contained in sections

28 to 41 and sections 43 to 43A, an assessee shall be deemed

to have earned ten per cent profit on the amount mentioned in

sub-section (2) received by him. It was submitted by the Ld.

DR that Section 44BB is a complete code in itself. It provides

by a legal fiction to be the profits and gains of the non-

resident assessee engaged in the business of oil exploration at

the rate of 10 per cent of the aggregate amount specified in

sub-section (2). He submitted that the Hon'ble Uttrakhand HC

has consistently held in a number of cases that the aggregate

amount received be included in total income for taxation under

section 44BB:

included in aggregate amount brought to tax under section

44BB because:

(i) Section 44BB is a self contained code providing for

computation of profits at a fixed percentage of

gross receipts of the assessee and all the

deductions, exemptions and exclusions from

income are deemed to have been allowed;

(ii) It is open to those who want to claim deductions,

exemptions and exclusions in assessment to opt to

proceed under section 44BB (3).

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(iii) Once the receipts are offered to tax u / s 44BB (1)

& (2), which provides for computation of profits on

gross basis, there is no scope for computing or

recomputing the profits by excluding any element

of receipts from the total turnover as the same

would amount to defeating the very purpose of

providing for a scheme of simpler mode of

computation of profits and obviating the need for

accounting for individual receipts or payments.

sub-section (2) of section 44BB clearly shows that the amount

paid to the assessee on account of provision of services and

facilities in connection with the extraction or production of

mineral oil, whether paid in or outside India, are to be

included. It was submitted by the Ld. DR that the service tax

receipt squarely falls within the principle enunciated in

Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542

(SC) wherein it was laid down that sales tax charged forms

part of the trading receipts and is as such liable to be assessed

to income tax. The Ld. DR submitted that since then the courts

have consistently held similarly for all kinds of taxes or

government receipts (that were received by the assessee

during the relevant PY) that these are taxable receipts and he

relied on the following judicial pronouncements:

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CITATION TAX / RECEIPT [1997] 228 ITR 112 (All) Jagdish Prasad Nigam Excise Duty [2006] 154 TAXMAN 266 (ALL) Mohan Shramic Central Sales Tax Udyog Ltd and Local Sales Tax [2012] 28 TAXMANN.COM 94 (CAL) Poddar Projects Surcharge is part Of rent [2013] 35 taxmann.com 565 (Allahabad) UP Hotels Luxury Tax [1982] 9 Taxman 173 (Punj_Har) Kunjpura Kiln Royalty (payable to government) [2006] 154 Taxman 274 (Allahabad) Rampur Distillery Export Duty [2015] 58 taxmann.com 206 (Bombay) Ovira Logistics Service Tax.

case laws, the receipt of service tax from ONGC is definitely

connected with the business of exploration and / or extraction

of oil and needs to be included in the aggregate amount to be

brought to tax under section 44BB. He further submitted that

it is not precise to categorize service tax receipt merely as a

statutory liability. It is also to be categorised as contractual

liability whereby the 'service receiver' agrees to bear this

expense and accordingly pays the 'service provider'

(assessee). It was submitted that it is the practice in the oil

and gas industry to contractually bind the 'service receiver' to

bear this expense. Thus, it is a matter of contract (implicit or

explicit) between the parties because it is improbable /

impossible that 'service receiver' will agree to reimburse a

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liability which is specifically that of the service provider

(assessee).

tax is covered by the decision of the Hon'ble Delhi High Court

in the case of DIT vs Mitchell Drilling International Pty. Limited

in I.T.A. No. 403/2013 wherein the Hon'ble Delhi High Court in

its decision dated 28.09.2015 has dealt the issue at length. He

submitted that in view of the recent judgment of the Hon’ble

Delhi High Court in Mitchell Drilling (Supra), the issue is

covered in the favour of the assessee.

perused the records. It is seen that the issue of excludability

of service tax in the gross receipts is squarely covered by the

judgment of the Hon'ble Delhi High Court in the case of

Mitchell Drilling International Pty Limited (supra) wherein the

Hon'ble Delhi High Court has held that service tax being

statutory levy should not form part of gross receipts as per

provisions of section 44BB of the Act. The relevant

observations of the Hon'ble High Court are as under:- “8

“44BB. (1) Notwithstanding anything to the contrary contained

in sections 28 to 41 and sections 43 and 43A, in the case of an

assessee, being a non-resident, 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

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prospecting for, or extraction or production of, mineral oils, a

sum equal to ten per cent of the aggregate of the amounts

specified in sub-section (2) shall be deemed to be the profits

and gains of such business chargeable to tax under the head

"Profits and gains of business or profession" :

Provided that this sub-section shall not apply in a case where

the provisions of section 42 or section 44D or section 44DA or

section 115A or section 293A apply for the purposes of

computing profits or gains or any other income referred to in

those sections.

(2) The amounts referred to in sub-section (1) shall be the

following, namely:—

(a) the amount paid or payable (whether in or out of India) to

the assessee or to any person on his behalf on account of the

provision of services and facilities in connection with, or supply

of plant and machinery on hire used, or to be used, in the

prospecting for, or extraction or production of, mineral oils in

India; and

(b) the amount received or deemed to be received in India by

or on behalf of the assessee on account of the provision of

services and facilities in connection with, or supply of plant

and machinery on hire used, or to be used, in the prospecting

for, or extraction or production of, mineral oils outside India.”

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excludes the application of Sections 28 to 41 and Sections 43

and 43A to assessments under Section 44 BB. It introduces

the concept of presumptive income and states that 10% credit

of the amounts paid or payable or deemed to be received by

the Assessee on account of “the provision of services and

facilities in connection with, or supply of plant and machinery

on hire used, or to be used, in the prospecting for, or

extraction or production of, mineral oils in India” shall be

deemed to be the profits and gains of the chargeable to tax.

The purpose of this provision is to tax what can be legitimately

considered as income of the Assessee earned from its business

and profession.

(2) (a) and the expression ‘amount received or deemed to be

received’ in Section 44 BB (2) (b) is qualified by the words ‘on

account of the provision of services and facilities in connection

with, or supply of plant and machinery.’ Therefore, only such

amounts which are paid or payable for the services provided

by the Assessee can form part of the gross receipts for the

purposes of computation of the gross income under Section 44

BB (1) read with Section 44 BB (2).

service tax collected by the Assessee and passed on to the

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Government from the person to whom it has provided the

services can legitimately be considered to form part of the

gross receipts for the purposes of computation of the

Assessee’s ‘presumptive income’ under Section 44BB of the

Act.

of Rs. 32,986 was collected and kept by the Assessee in a

separate ‘sales tax collection account’. The question

considered by the Supreme Court was:

‘Whether on the facts and in the circumstances of the case the

sum of Rs. 32,986 had been validly excluded from the

assessee's business income for the relevant assessment

year?”. However, there the Assessee did not deposit the

amount collected by it as sales tax in the State exchequer

since it took the stand that the statutory provision creating

that liability upon it was not valid. In the circumstances, the

Supreme Court held that the sales tax collected, and not

deposited with the treasury, would form part of the Assessee’s

trading receipt.

concerned with the constitutional validity of the Madras

General Sales (Definition of Turnover and Validation of

Assessments) Act, 1954 on the ground that the word turnover

was defined to include sales tax collected by the dealer on

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inter-state sales. Upholding the validity of the said statute the

Supreme Court held that “the expression ‘turnover’ means the

aggregate amount for which goods are bought or sold,

whether for cash or for deferred payment or other valuable

consideration, and when a sale attracts purchase tax and the

tax is passed on to the consumer, what the buyer has to pay

for the goods includes the tax as well and the aggregate

amount so paid would fall within the definition of turnover.”

Since the tax collected by the selling dealer from the

purchaser was part of the price for which the goods were sold,

the legislature was not incompetent to enact a statute

pursuant to Entry 54 in List II make the tax so paid a part of

the turnover of the dealer.

aforementioned decisions were rendered in the specific

contexts in which the questions arose before the Court. In

other words the interpretation placed by the Court on the

expression “trading receipt’ or ‘turnover’ in the said decisions

was determined by the context. The later decision of the

Supreme Court in CIT v. Lakshmi Machine Works (supra)

which sought to interpret the expression ‘turnover’ was also in

another specific context. There the question before the

Supreme Court was “whether excise duty and sales tax were

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includible in the ‘total turnover’ which was the denominator in

the formula contained in Section 80 HHC (3) as it stood in the

material time?”

The Supreme Court considered its earlier decision in

Chowringhee Sales Bureau (supra) and answered the question

in the negative. The Supreme Court noted that for the

purposes of computing the ‘total turnover’ for the purpose of

Section 80 HHC (3) brokerage, commission, interest etc. did

not form part of the business profits because they did not

involve any element of export turnover. It was observed: “just

as commission received by an assessee is relatable to exports

and yet it cannot form part of ‘turnover’, excise duty and

sales-tax also cannot form part of the ‘turnover’.” The object

of the legislature in enacting Section 80 HHC of the Act was to

confer a benefit on profits accruing with reference to export

turnover. Therefore, "turnover" was the requirement.

“Commission, rent, interest etc. did not involve any turnover.”

It was concluded that ‘sales tax and excise duty’ like the

aforementioned tools like interest, rent etc. ‘also do not have

any element of ‘turn over’’.

Court approved the decision of the Bombay High Court in CIT

v. Sudarshan Chemicals Industries Ltd. (supra) which in turn

considered the decision of the Supreme Court in George Oakes

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(P) Ltd. (supra). In the considered view of the Court, the

decision of the Supreme Court in Lakshmi Machines Works

(supra) is sufficient to answer the question framed in the

present appeal in favour of the Assessee. The service tax

collected by the Assessee does not have any element of

income and therefore cannot form part of the gross receipts

for the purposes of computing the ‘presumptive income’ of the

Assessee under Section 44 BB of the Act.

Uttarakhand in DIT v. Schlumberger Asia Services Ltd (supra)

which held that the reimbursement received by the Assessee

of the customs duty paid on equipment imported by it for

rendering services would not form part of the gross receipts

for the purposes of Section 44 BB of the Act.

computing the ‘presumptive income’ of the assessee for the

purposes of Section 44 BB of the Act, the service tax collected

by the Assessee on the amount paid t it for rendering services

is not to be included in the gross receipts in terms of Section

44 BB (2) read with Section 44 BB (1). The service tax is not

an amount paid or payable, or received or deemed to be

received by the Assessee for the services rendered by it. The

Assessee is only collecting the service tax for passing it on to

the government.

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explicit by the CBDT itself in two of its circulars. In Circular No.

4/2008 dated 28th April 2008 it was clarified that “Service tax

paid by the tenant doesn't partake the nature of "income" of

the landlord. The landlord only acts as a collecting agency for

Government for collection of Service Tax. Therefore, it has

been decided that tax deduction at source) under sections

194-I of Income Tax Act would be required to be made on the

amount of rent paid/payable without including the service tax.’

In Circular No. 1/2014 dated 13th January 2014, it has been

clarified that service tax is not to be included in the fees for

professional services or technical services and no TDS is

required to be made on the service tax component under

Section 194J of the Act.

negative i.e. favour of the Assessee and against the Revenue.”

DIT International Taxation Vs M/s Schlumberger Asia Services

Ltd. in ITA No. 40 of 2012 vide order dated 12.04.2019 held

that the amount reimbursed to the assessee (service provider)

by the ONGC (service recipient), representing the service tax

paid earlier by the assessee to the Government of India, would

not form part of the aggregate amount referred to in clauses

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(a) and (b) of sub-section(2) of Section 44BB of the Act. The

Hon’ble Court is clearly spelt that even otherwise, it is not

every amount paid on account of provision of services and

facilities which must be deemed to be the income of the

assessee under Section 44BB . It is only such amounts,

which are paid to the assessee on account of the services and

facilities provided by them, in the prospecting for or extraction

or production of mineral oils, which alone must be deemed to

be the income of the assessee.

as laid down by the Hon'ble Delhi High Court and Hon’ble

Uttarakhand High Court , we hold that the service tax receipts

donot form part of receipts for computation of income in the

section 44BB of the Income Tax Act.

*Binita* Dated : 24/11/2021 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A), New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.