SEADRILL INTERNATIONAL LIMITED ,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX-INTERNATIONAL TAXATION-4(2)(1), MUMBAI

This appeal by the assessee is against the final order of assessment passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) by the Assistant Commissioner of Income Tax (International Tax), Ward-4(2)(1), Mumbai [for short 'the AO] dated 23.10.2023 for the AY 2021-22. The assessee raised various grounds contending the following issues:

The assessee is a company incorporated in Hong Kong. The assessee has set up of project office in India for which it had obtained certificate of establishment of place of business in India from Ministry of Corporate Affairs. The assessee is engaged in rendering offshore drilling services to Oil and Gas Exploration and production companies globally. The assessee was engaged by Reliance Industries Ltd. for rendering drilling, side tracking, testing, completing and plugging oil well and exploration services. The assessee filed the return of income for AY 2021-22 on 14.03.2022 declaring total income at Rs. 27,52,60,013/-. Since the assessee has undertaken work in connection with extraction of / production of mineral oils it is claimed by the assessee that it qualifies for taxation as per section 44BB of the Act at a deemed profit of 10% of gross revenues. The assessee's case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. During the course of assessment, the Assessing Officer called on the assessee to furnish the details of all receipts including reimbursement received under its contracts. The AO further called on the assessee to give reasons if any sum has been excluded from its total receipts used for computing deemed profit under section 44BB of the Act. The assessee in response to the notice submitted that a sum of Rs. 34,43,50,596/- received as Goods & Service Tax (GST) received as part of invoices has been excluded from the total receipts used for computing deemed profit under section 44BB of the Act. The assessee further submitted that the amount received on account of GST is a statutory levy collected on behalf of the Government which is deposited into the Government A/c and therefore the same is excluded from the total receipts since it does not have any profit element. The assessee relied on the decision of Hon'ble Uttarakhand High Court in the case of DIT Vs. M/s Schulumberger Asia Services Ltd. [317 ITR 156].

The AO did not accept the submissions of the assessee and held that as per the provisions of section 44BB(2) of the Act the amount paid or payable (whether in or out of India) to the assessee on account of provision of services and facilities in connection with extraction or production of mineral Oil in India should be included and therefore GST which is charged on the revenue should also be included. The AO further held that the GST collected by the assessee is with respect to the services specified under section 44BB of the Act and that the section does not provide for any specific exclusion from the receipts towards the services rendered. The AO placed reliance on the decision of the Hon'ble Supreme Court in the case of Sedco Forex International Inc. vs. CIT (Civil Appeal No. 4906 of 2010 dated 30.10.2017) in this regard. The AO also held that section 145A of the Act which provides for method of determination of income chargeable under the head "Profits & Gains of Business or Profession" mentions that for the purpose of valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fees. Therefore the AO in the draft assessment order added 10% of the GST component being a sum of Rs. 3,44,35,060/- to the profit declared by the assessee under section 44BB of the Act. The Dispute Resolution Panel (DRP) confirmed the addition made by the AO. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO as per the directions of the DRP.

The ld. AR submitted that GST is a statutory levy collected by the assessee on behalf of Government which needs to be mandatorily deposited to the Government A/c and thus devoid of any profit element. The ld. AR further submitted that the GST element is separately shown in the invoices raised by the assessee (page 79 of the appeal set) which substantiates the fact that GST is a separate levy collected by the assessee. The ld. AR also submitted that since the GST is collected and deposited into the Government A/c there is no element of profit included in the levy and therefore it cannot be included as the income for the purpose of section 44BB of the Act. It is also argued by the ld. AR that GST is a statutory levy and therefore, is not an income paid or payable / received or deemed to be received for provision of services or facilities for extraction or production of mineral oil in India by the assessee for the purpose of section 44BB of the Act. The ld. AR placed reliance on the decision of the Co-ordinate Bench in the case of Orient Overseas Container Line Ltd. (ITA No. 3278/Mum/2023 dated 24.10.2024) wherein the Co-ordinate Bench has held that GST cannot be considered as part of receipt for the presumptive tax under section 44B of the Act. The ld. AR argued that the ratio laid down by the Co-ordinate Bench in the context of section 444B of the Act is also applicable to section 44BB of the Act and in this regard submitted the following table in support of the said claim.

We heard the parties and perused the material on records. The assessee is engaged in the business of rendering offshore drilling services to Oil & Gas exploration and production companies globally. Since the work undertaken by the assessee is in connection with extraction of or production of mineral oils, the assessee filed the return of income by declaring a deemed profit of 10% of gross revenues as per the provisions of section 44BB of the Act which reads as under:

For the purpose of receipt under section 44BB of the Act the assessee excluded a sum of Rs. 34,43,50,596/- being the GST component on the invoices raised by the assessee. The AO held that the GST amount cannot be excluded for the purpose of computation of income under section 44BB of the Act and accordingly made addition towards 10% of GST. The DRP upheld the addition made by the AO. The contention of the Revenue is that the GST should be considered as part of the amount paid or payable and should be included in the total receipts as per section 44B(2) of the Act. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of Sedco Forex International Inc. (supra). The revenue is also contending that section 145A of the Act which provides for the method of computing income under the head "Profit & Gains of Business or Profession" mentions that tax has to be included for valuation of purchases, inventory, sale of goods of services. The assessee is contending that GST is a statutory levy and cannot be considered as the income for the purpose of section 44BB of the Act. The assessee is also contending that the amount of GST collected is deposited into the Government account and there is no profit element in GST for it to be considered as the income of the assessee.

We notice that the Co-ordinate Bench while considering a similar issue of inclusion of GST for the purpose presumptive tax under section 44B of the Act in the case of Orient Overseas Container Line Ltd. (supra) has held that “16. Thus, in our view adding GST component to the deemed income which has to be computed directly on specified amounts i.e. amount paid or payable on account of carriage of goods shipped which is revenue element only. For the earlier regime of service tax prior to GST, there were various judicial precedents which upheld exclusion of service tax while computing the provision u/s.44B or other similar provisions. For instance, following judgments have been brought to our notice before us wherein the Hon‟ble Courts has approved the exclusion of service tax.

In the result, Income Tax Appeal is dismissed.

Full Bench of Hon‟ble High Court of Uttarakhand in case of DIT v. Schlumberger Asia Services Ltd. [2019] 414 ITR 1 (Uttarakhand) (FB) held that service tax paid earlier by the assessee to Government of India is not on account of provision of services in connection with exploration and production of mineral oil, hence would not form part of aggregate taxable amount referred to in clauses (a) and (b) of sub-section(2) of section 44BB Relevant extract of the ruling is as under:- "27. The word 'on account of has been defined in the Random House Dictionary of the English Language to mean "by reason of; because of, for the sake of. In the Reader's Digest Great Encyclopaedic Dictionary, "On account of is defined to mean on consideration of, because of. In Collins English Dictionary "On account of" is defined to mean as 'because of, by reason of. D. Ramanatha Aiyer: The Law Lexicon defines "on account of to mean "because of, by reason of, towards payment of (1) concerning (2) because of". It is only if the service tax reimbursed to them by the ONGC, which was paid by the assessee to the Government earlier, is held to be a payment in consideration of the services and facilities provided by the assessee, in connection with the prospecting. extraction and production of mineral oils in India, would it then fall within the ambit of sub-section (2) of Section 44BB.

Apart from that in the case of the assessee itself the Tribunal have consistently has been holding that service tax being in the nature of statutory payment does not involve any element of profit therefore, cannot be included in the gross receipts.

The case of the department before us is that the judgments rendered in the context of service tax could not be applicable under the new GST. We find that though GST has replaced by erstwhile service tax law to provide a single tax of supply of goods and services right from manufacture to consumer. For the sake of ready reference Section 68 of erstwhile Service Tax law and Section 49 of CGST Act, the comparison is given herein below. Service Tax GST Section Section 68 relates to CGST Act, 2017 (1) Every deposit made 68 of payment of service tax. towards tax, interest, Finance Sub-section (1) thereof penalty, fee or any Act, stipulates that every other amount by a 1994. person, providing person by internet taxable service to any banking or by using person, shall pay service credit or debit cards or tax at the rate specified NEFT or RTGS or by in section 66B of such other mode and Finance Act 2012 in subject to such such manner, and within conditions and such period, as may be restrictions as may be prescribed. prescribed, shall be Notwithstanding credited to the anything contained in electronic cash ledger sub-section (1), in of such person to be respect of [such taxable maintained in such services as may be manner as may be notified by the Central prescribed.

On perusal of the comparison of the relevant provision of service tax law and GST law it can be seen that both are indirect taxes and is recovered by the service provider on behalf of assessee and as an agent of the Government as such rates are specified and thus, the provision under the service tax law are similar to provision of GST law and therefore, in our opinion the judicial precedents delivered in respect of erstwhile tax law would apply mutatis mutandis to the GST laws also.

Otherwise also it would be quirk of a fate that tax collected on behalf of the customer is again to be held as part of taxable income of the assessee who is collecting GST. The assessee is taxable person under the GST laws and shows GST separately in the invoice raised on the customers. We have perused the copy of the sample invoice produced before us at our direction wherein, it is seen that service charge is indicated separately and CGST is levied on such service charge is also indicated separately. If the GST services have been indicated in the invoice separately then it cannot be included for purpose of taxation while computing the income. For instance there are various TDS provisions and CBDT has clarified through various circulars that if GST services are indicated separately in the invoice then no tax would be deducted at GST components. By way of illustration following circulars have been referred to before us under various Sections:- Sr.No. Circular No. Relevant Section Circular No. 5 of 2023 Section 194BA Circular no. 20 of 2023 Section 194-O Circular no. 12 of 2022 Section 194R Circular no. 13 of 2022 Section 194S Circular no. 13of 2021 Section 194Q 22. If we accept the contention of the revenue, then it would lead to a situation where calculation of tax of reimbursement of taxes would tantamount to collection of tax on taxes. Section 44B(2) of the Act provides for deemed taxation on amount paid or payable / received on account of 'carriage' of goods, passengers, etc. Further, the Explanation thereto clarifies that the amounts in connection with the carriage would include 'demurrage charges', 'handling charges" and other amounts of a 'similar nature". Thus, what is sought to be included u/s 44B are the charges' recovered from the consignor of the cargo/ customer as a consideration for transportation from a port in India to outside India and vice versa. 23. GST being a mandatory 'statutory levy‟ cannot be said to be in the nature of 'charges' by the shipping Company towards the carriage. The incidence of GST is on account of taxability of services under the relevant parliamentary statute i.e., GST laws and not on account of the business activities as envisaged in Sections 44B(2)(i) and 44B(2)(ii) of the Act. Otherwise, including GST in gross receipts for purpose of section 44B would be akin to charging income tax on GST i.e., tax on tax, which would promote cascading effect which cannot be the intent of legislation.

Further, a service provider acts in a fiduciary capacity out of statutory obligation casted upon it, while collecting service tax/GST on the behalf of exchequer and the same is ultimately deposited with the exchequer, hence there cannot be any iota of doubt that the impugned GST is not in the nature of specified income under Section 44B.

Thus, reliance placed by the Hon‟ble DRP members in the case of Sedco Forex International Inc. (supra) to treat 'GST similar as 'reimbursement of mobilization charges is misplaced and incorrect. In the case of Sedco Forex International Inc. fixed mobilization charges were agreed between the parties, which could be more or less than the actual expenditure. Thus, 'reimbursement of mobilization charges' cannot be equated with pure reimbursement which has no element of income.

The core argument of the department before us and by the ld. DRP is that amendment in the provisions of Section 145A of the Act brought by Finance Act 2018, since it includes “services” within its code therefore, income has to be computed in accordance with Section 145A and any taxes levied under services is included and for that heavy reliance has been placed on the judgment of Hon‟ble High Court of Bombay in the case of Knight Frank (India) Pvt. Ltd (Bombay High Court) [2016] 72 taxmann.com 300 (Bombay). However the Hon‟ble Court held that Section 145A restricts its ambit only to valuation of purchase and sale of goods in inventory and would not apply to service tax billed on rendering of service as service tax billed has no relation to any goods nor does it have anything to do with bringing goods to a particular location. Section 145A which is for the method of accounting which starts with ‘for the purpose of determining the income chargeable under the head 'Profits and gains of business or profession', being a general provision, would not apply to the special provisions of section 44B of the Act. Further, the words "For the purpose of determining the income chargeable under the head "Profits and gains of business or profession..." in section 145A signifies that the essence of section is to compute income under the head profits and gains of business or profession which is computed as per provisions of Section 29 of the Act. On the contrary, provisions of Section 44B (1) starts with a non obstante clause "Notwithstanding anything to the contrary contained in sections 28 to 43A...". Since Section 44B overrides the provisions of Section 29 of the Act, therefore in our opinion Section 145A is not applicable for computing deemed income under Section 44B.

Thus, the decision of the Hon‟ble Bombay High Court will not be applicable in this case same was not rendered in the context of Section 44B and in any case in so far as the observation of the Hon‟ble High Court that any tax or levy cannot be part of turnover receipts unless it is not paid, is not applicable in the case of the assessee. It has been brought to record that assessee discharged its GST liability of Rs.96,51,49,085 through payment of tax to the Government Treasury and input tax credit and this has been demonstrated from the copies of form GSTR 9 and annual GST re- conciliation statement.

Further, ld. DRP members also relied on CBDT Circular No. 10/2017 dated March 23, 2017 which discusses on the applicability of ICDS on determination of turnover by noncorporate taxpayers covered under presumptive taxation like Sections 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. and stated that the service receipts and sales in the instant case are to be valued inclusive of taxes, as per ICDS guidelines. Relevant extract of Circular is hereunder:- "Question 3: Does ICDS apply to non-corporate taxpayers who are not required to maintain books of account and/or those who are covered by presumptive scheme of taxationlikesections44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act? Answer: ICDS is applicable to specified persons having income chargeable under the head Profits and gains of business or profession' or 'Income from other sources. Therefore, the relevant provisions of ICDS shall also apply to the persons computing income under the relevant presumptive taxation scheme. For example, for computing presumptive income of a partnership firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining he receipts or turnover, as the case may be."

Thus, reliance placed by the DRP on the aforesaid Circular is not valid since Delhi High Court in the case of Chamber of Tax Consultants v. Union of India [2017] 87 taxmann.com 92 (Delhi) held that the aforesaid Circular was ultra vires the provisions of the Act and liable to be struck down. Also, the amendment was introduced vide Finance Act 2018 to bring certainty on the issue of applicability of ICDS and not to validate the circular. Even otherwise, in the aforesaid Circular, CBDT has also clarified that where there is a conflict between ICDS which is a general provision and specific provisions, specific provision shall prevail.

Before us, the plea was taken that if GST is to be added to the amounts paid on account of taxes, then deduction of such GST is also required to be given u/s.43B. Though the provision of Section 44B overrides Section 28-43A of the Act, but other sections including Section 43B are not specifically over ridden by Section 44B. This issue has been decided by the Hon‟ble Uttarakhand High Court in the case of DIT v. Schlumberger Asia Services Ltd. [2019] 414 ITR 1 (Uttarakhand) (FB) wherein it has held that the benefit of deduction of tax can be claimed by the assessee in view of section 43B(a), while computing its income under section 28, and the provisions of section 43B would prevail notwithstanding anything contained in, among others. Thus, it has been stated that invoking the provisions of Section 43B under Section 44B shall force the assessee to prepare a memorandum account wherein the specified amounts are credited and adjusted by GST due to Section 145A and correspondingly, GST discharged before the due date of filing of tax return specified under Section 139 of the Act is debited to such account. However, preparation of such memorandum account is neither required under the Act nor can replace the express provisions of Section 44B of the Act. We therefore, find merits in such contention of the ld. Counsel that if it is held that Section 145A are applicable for computing deemed income u/s.44B and GST is added to the specified amounts and provisions of Section 29 are invoked, then deduction of GST paid should be allowed while computing income under the head „profits and gains‟ of business or profession as per Section 43B. Even otherwise also Section 44B over rights Section 28-43A and 43B and therefore, in case if department seeks to add GST on the turnover for the purpose of calculating the profit u/s.44B, then, deduction u/s.43B has to be allowed if it is paid on or before the due date and similarly it can be disallowed once GST has not been paid within the due date. However, this is purely academic, contention which has been raised because we have already held that for the purpose of Section 44B only specified amount mentioned in the sub-Section 2 of Section 44B alone is the subject matter of computation of profit @7.5% and Section 145A has no applicability. Thus we hold that while computing income u/s.44B, GST cannot be included and all the judgments relied upon by the assessee by the Hon‟ble High Court and Hon‟ble Supreme Court and the Tribunal will apply in this year also. Thus, in our opinion, the minority view of the single member of the DRP is to be upheld that GST cannot be included while computing deemed income u/s.44B, accordingly, this issue is decided in favour of the assessee.”

The ld DR did not controvert the contention that Section 44B and section 44BB are similarly worded and that the ratio laid down by the coordinate bench in the above case will apply to assessee's case also since the issue contended is identical. We notice that the Co-ordinate Bench in the above decision has held that GST should not part of gross receipts for computing presumptive income under section 44B of the Act the reasons as listed below –

We further notice that the coordinate bench in the above case has distinguished the case laws relied on by the lower authorities in assessee's case. It is also noticed that the assessee in the present case has relied on judgments as have been considered by the coordinate bench in the above case.

In view of these discussions and the facts in assessee's case being identical to Orient Overseas Container Line Ltd. (supra), in our considered view the ratio laid down by the Co-ordinate Bench, the above case is applicable in assessee's case in the context of section 44BB of the Act also. Accordingly, we hold that the AO is not correct in treating the GST element which is collected as a separate item in the invoice as a statutory levy which is collected and deposited into the Government A/c, as income for the purpose of section 44BB of the Act. Therefore, the AO is directed to delete the addition made in this regard. The grounds raised

In result the appeal of the assessee is allowed.