SERVICOS DE PETROLEO CONSTELLATION SA ,MUMBAI vs. DCIT (INTERNATIONAL TAXATION), CIRCLE-4(2)(1), MUMBAI

The assessee is in appeal before us, challenging the final assessment order, passed in pursuance of the direction of the Hon’ble DRP.

The learned Authorised Representative (ld. AR for short) for the assessee contended that the service tax paid by the assessee after duly collecting from the customers to the government would not form part of the aggregate income as per clauses (a) and (b) of sub section (2) of section 44BB of the Act. The ld. AR relied on the decision of Hon'ble High Court of Uttarakhand in the case of DIT (IT) & others vs. Schlumberger Asia Services Limited in of 2012 vide order dated 12.04.2019 / [2019] 414 ITR 1 (Uttarakhand)(FB), Hon’ble Delhi High Court in the case of DIT vs. Mitchell Drilling International (P) Ltd. [2016] 380 ITR 130 (Delhi) and the decision of the co-ordinate bench in the case of ACIT Int. Taxation vs. McDermott International & 2374/Del/2023 vide order dated 09.02.2024), where the said issue is said to have been covered in favour of the assessee. The ld. AR also relied on the CBDT Circular No. 1/2014 dated 13.01.2014 and CBDT Circular No/4/2008supporting the assessee’s contention.

The learned Departmental Representative (ld. DR for short), on the other hand, controverted the said argument and filed a detailed written submission dated 10.06.2024.

We have heard the rival submissions and perused the materials available on record. The Revenue’s case is that section 44BB of the Act being a deeming provision having a non obstante clause which excludes the charging section 28 of the Act and there upon the computation methodology provided in the subsequent sections, is a special provision inclusive of the charging provision and the computation of income for non residence engaged in the business of providing services or facilities in connection with or supplying plant and machinery for hire used for extraction or production of mineral oil.

The assessee in the present case comes under the purview of the said provision which is an undisputed fact, except to the extent that the service tax collected by the assessee from its customers for the services provided by it on account of activities pertaining to exploration of mineral oils ought not to have been excluded from the aggregate amount while computing the profit and gains as per sub section 2 of section 44BB of the Act. Further, the Revenue’s contention is that whether or not there is a profit element in such receipt is immaterial for determination of the aggregate amount as per sub section 2 of section 44BB of the Act and stated that the service tax must be included in the total receipts while computing profit under the said provision. The Revenue further contended that it is immaterial whether the liability of service tax is on the assessee or on total receipts for computation of profits u/s. 44BB of the Act. The ld. A.O. reiterated that whether or not there is a profit element embedded in the said receipt, is irrelevant so far as the receipt pertains to the business of exploration and mineral oil activities of the assessee, thereby negating theory of element of profit. The ld. A.O. relied on the decision of the Hon'ble Apex Court in the case of Sedco Forex International Inc.(supra) on the issue of mobilization fee whether would be a receipt for computation of profits and gains u/s.44BB of the Act and further discussed on the expression ‘amounts’ specified in sub section (2) of section 44BB of the Act which cannot be interpreted as ‘income’ only. The ld. A.O. also placed reliance on the decision of Hon'ble High Court of Uttrakhand in the case of CIT vs. Halliburton Offshore Service Inc. [2008] 169 Taxman 138 (Uttrakhand) in support of his contention. The ld. DR stated that section 145A of the Act provides for method of valuation where the assessee can include the GST/service tax paid on the credit side on the P & L account and can debit the same in the P & L account on payment of the said amount and further stated that if the service tax amount is not an income element, it should not have been included in the P & L account at the very first instance.

Per contra, the assessee’s contention is that the GST/service taxes are statutory taxes which are to be paid to the government where the assessee is duty bound to collect the same from the service recipient and deposit the same to the Government Authority, relied on the CBDT Circular No. 1/2014 dated 13.01.2014 and CBDT Circular No/4/2008 which is reproduced hereunder for ease of reference:

The matter has been examined afresh. In exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

The matter has been examined by the Board. As per the provisions of 194-I, tax is deductible at source on income by way rent paid to any resident. Further rent has been defined in 194-I as 'rent' means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,- (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d) machinery; or (e) plant; or (f) equipment; or (A.Y. 2021-22) Servicos De Petroleo Constellation SA vs. DCIT(IT) (g) furniture; or (h) fittings, whether or not any or all of the above are owned by the payee; 3. 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 (TDS) 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.

These instructions should also be brought to the notice of the officers responsible for conducting internal audit and adherence to these should be checked by the auditing parties. [F.No.275/73/2007-IT(B)] 12. The assessee also placed reliance on the following decisions: 1. DIT vs. M/s. Schulumberger Asia Services Limited 317 ITR 156 2. Pr. CIT(IT) vs. Boskalis International Dredging International CV (ITA No. 55 of 2017) 3. DIT vs. Mitchell Drilling International Pvt. Ltd. (94 CCH 0031) 4. ACIT vs. McDermott International Management (ITA Nos. 2373 & 2374/Del/2023 vide order dated 09.02.2024)

In the above factual matrix of the case, it is observed that the CBDT Circulars mentioned by the assessee has been controverted by the Revenue on the ground that the said Circulars pertain to resident payees only where the charging section 28 and the computation sections are applicable for determining the profits and gains of business and profession and the same does not apply in case of a non resident tax payers when there is a special provision exclusively for this purpose. We do not find force in the argument of the Revenue on this aspect for the reason that the Hon'ble Delhi High Court in the case of DIT vs. Mitchell Drilling International (P) Ltd. (supra) has also dealt with this issue and has decided in favour of the assessee as herein under:

From the above it is pertinent to point out that though the CBDT Circulars is a clarification on the issue of excluding service tax component while computing the income of the assessee who is a resident, the intention of the said Circular nevertheless is to exclude the service tax component while deducting TDS on the rent paid or payable for the purpose of computing the income of the assessee. This, in our view, would also be applicable in the present case where the assessee being a non resident is given the benefit of special rate of tax as per section 44BB of the Act where the intention of the legislature is only to tax the assessee @ 10% on the amount paid or payable to the assessee, received on account of the business activity of the assessee. The word ‘amount’ here cannot be interpreted to mean the GST/service tax which is collected by the assessee from its customers and paid to the Government. The CBDT Circular mentioned above has categorically excluded the service tax component, while computing the income of the while computing the profit and gains of a non resident, engaged in the business of exploration, etc. of mineral oils. Furthermore, it is to be noted that section 44BB of the Act is a special provision for computing the profits and gains in connection with the business of exploration, etc. of mineral oils which evidences that for the purpose of computing the profit and gains of the assessee, the natural corollary would be from the receipts which are in the nature of income that has to be considered for the said purpose and not the service tax that the assessee was duty bound to collect from its customers in addition to the charges for the services rendered by it.

With regard to the reliance placed by the assessee in the decision of the Hon'ble High Court of Uttrakhand in the case of M/s. Schulumberger Asia Services Limited (supra), which was in line with the issue in the present case as to whether the service tax collected by the assessee was to be included in the amount paid or payable for computation of presumptive tax as per section 44BB(1) and (2) of the Act, it was held that the reimbursement of service tax should not be included in the aggregate amount while calculating the profits and gains as per section 44BB of the Act. It is also observed that the said decision has relied on the decision of the Full Bench judgment of the Hon’ble High Court of Uttrakhand at Nainital in DIT (IT) & others vs. Schlumberger Asia Services Ltd. in of 2012 dated 12.04.2019 (2019) 414 ITR 1 (Uttrakhand) (FB) which has held this issue in favour of the assessee and the relevant extract of the said decision is also cited herein under for ease of reference:

As shall be elaborated later in this order, service tax is a tax levied on services, and cannot be treated as the Service itself. It is difficult, therefore, to accept the submission of the revenue that the amount reimbursed by the ONGC, towards service tax paid earlier by the assessee to the Government, should be included in the amount paid to the assessee on account of provision of services and facilities. 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. On a plain and literal reading of clauses (a) and (b) of Section 44BB of the Act, it is clear that reimbursement of service tax ought not to be included in the aggregate of the amounts specified in clauses (a) and (b) of Section 44BB(2), as it is not an amount received by the assessee on account of services provided by them in the prospecting, extraction or production of mineral oils.

It is observed that the Revenue has challenged the above said decision on the ground that it could not be appealed before the Hon'ble Apex Court due to the low tax effect and, therefore, has not attained finality, the subsequent decision by the Hon'ble High Court of Uttrakhand in case of CIT vs. M/s. Vantage International Management Co.

In the result, the appeal filed by the assessee is allowed.