DCIT (INTERNATIONAL TAXATION),CIRCLE-2, DEHRADUN vs. TRANSOCEAN OFFSHORE INTERNATIONAL VENTURE LTD., MUMBAI

The only issue involved in this case is that whether service tax is includable in the gross revenue for computing profits under presumptive provisions of section 44BB of the I.T. Act, 1961 or not ?

We have heard the rival submissions on the issue under 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

The assessee is a non-resident company .During the year 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 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 ITA No.4653.Del.2017 4 Transocean Offshore International Venture Ltd. 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.

The Ld. DR submitted that Section 44BB makes a special 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 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- ITA No.4653.Del.2017 5 Transocean Offshore International Venture Ltd. 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:

The Ld. DR submitted that service tax receipts need to be included in aggregate amount brought to tax under section 44BB because:

The Ld. DR submitted that in view of the above mentioned 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 liability which is specifically that of the service provider (assessee).

We have heard the rival submissions and have also 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 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" :

Section 44BB begins with a non obstante clause that 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 ITA No.4653.Del.2017 10 Transocean Offshore International Venture Ltd. extraction or production of, mineral oils in India” shall be deemed to be the profits and gains of the chargeable to tax.

It is in this context that the question arises whether the service tax collected by the Assessee and passed on to the 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.

In Chowringhee Sales Bureau (supra) sales tax in the sum of Rs. 32,986 was collected and kept by the Assessee in a ITA No.4653.Del.2017 11 Transocean Offshore International Venture Ltd. separate ‘sales tax collection account’. The question considered by the Supreme Court was:

The decision in George Oakes (P) Ltd. (supra) was 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 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 ITA No.4653.Del.2017 12 Transocean Offshore International Venture Ltd. amount so paid would fall within the definition of turnover.”

In the considered view of the Court, both the 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 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?”

In CIT v. Lakshmi Machine Works (supra), the Supreme 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 (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 ITA No.4653.Del.2017 14 Transocean Offshore International Venture Ltd. for the purposes of computing the ‘presumptive income’ of the Assessee under Section 44 BB of the Act.

The Court concurs with the decision of the High Court of 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.

The Court accordingly holds that for the purposes of 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.

The Court further notes that the position has been made 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 ITA No.4653.Del.2017 15 Transocean Offshore International Venture Ltd. 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.

The question framed, is therefore, answered in the negative i.e. favour of the Assessee and against the Revenue.”

Further Hon’ble High Court of Uttarakhand in the case of DIT International Taxation Vs M/s Schlumberger Asia Services Ltd. in 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 (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 ITA No.4653.Del.2017 16 Transocean Offshore International Venture Ltd. 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.

Therefore, respectfully following the ratio of the judgment 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.

In the result, appeal of the revenue is dismissed. Order pronounced in open court on this 12th day of November, 2021.