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TMI Blog2019 (4) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... tment : Mr. H.M. Bhatia, Senior Standing Counsel JUDGMENT RAMESH RANGANATHAN, C.J. In Halliburton Offshore Inc. (2008) 300 ITR 265 (Uttarakhand), the assessee, a non-resident company, was rendering service to the ONGC, in terms of Section 44BB of the Act; and the amount reimbursed by the ONGC to the assessee, towards freight and transportation charges actually incurred by the assessee in respect of equipment, was added by the assessing officer to the total income of the assessee, in arriving at its profits and gains at 10 per cent, under Section 44BB of the Act. On its jurisdiction being invoked, a Division Bench of this Court held that the ITAT had fallen in error in not appreciating the difference between "amount" and "income"; the amount paid or received referred to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under Section 2(24) of the Income Tax Act; Sections 5 and 9 dealt with income, accrued income, and deemed income; Section 4 was the charging Section of the Act; the definition, as well as the incomes referred in Section 5 and 9, were for the purpose of imposing income-tax under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the learned counsel for the assessee, the Tribunal held that these three receipts were liable to be included, and to be subjected to tax, under Section 44BB of the Act. With regards reimbursement of the cost of tools lost in the hole, for which the assessee was reimbursed by the ONGC as per the contract, the Tribunal held that the matter was not res integra; reimbursement for loss of tools was a capital receipt; in Schlumberger Asia Services Ltd.2, the Division Bench of this Court had held that capital receipts were not required to be taken into account while computing the assessee's income under Section 44BB of the Act; and the said amount could not be subjected to tax under Section 44BB of the Act. 4. In its order in ITA No. 41 of 2009 dated 26.12.2013, a Division Bench of this Court observed that Section 44BB of the Income Tax Act, dealt with amounts paid or payable; it did not contemplate reduction of the amount paid or payable on account of any liability to be incurred by the payee for the same, statutory or otherwise; in Schlumberger Asia Service Ltd.2 it was held that the payment made excluded the amount of customs duty payable; and, accordingly, that part of the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjected it to tax under Section 44BB of the Act. After the assessees invoked the jurisdiction of the CIT (Appeals), the jurisdiction of the Tribunal was invoked against the order passed by the CIT (Appeals), and there against the jurisdiction of this Court, under Section 260-A of the Act was invoked. On the Division Bench expressing its inability to agree with the opinion of the earlier Division Bench in Schlumberger Asia Services Ltd. (2009) 317 ITR 156, the question referred to the Full Bench for its opinion is:- "Whether the amount reimbursed to the assessee by ONGC, representing the service tax paid by the assessee to the Government of India, should be included in computing the aggregate amount referred to in subsection (2) of Section 44BB of Act?" 7. Elaborate submissions were put forth by Mr. Porus Kaka, learned Senior Counsel assisted by Mr. Pullack Raj Mullick, Mr. Manish Kant and Mr. Shailesh Kumar, learned counsel for the assessees; and Mr. Chetan Joshi, learned counsel for the appellant in ITA Nos. 60 and 61 of 2014. Written arguments were also submitted on behalf of the assessees. Mr. Hari Mohan Bhatia, learned Senior Standing Counsel for the Income Tax Department, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory of India. It must, therefore, be ascertained whether a particular income arises or accrues or is deemed to arise or accrue within India. (Sedco Forex International Inc. (2017) 399 ITR 1 (SC). Section 2(24) of the Act, which defines 'Income', is an inclusive definition. It brings within its ambit clauses (i) to (xviii) thereunder, and in clause (i) are included profits and gains, and in clauses (v) to (ve) any sum chargeable to tax under Section 28 or 41. Section 4 of the Act relates to charge of income tax. Section 5 relates to the scope of total income and Section 9 relates to income deemed to accrue or arise in India. Section 9 creates a legal fiction and requires income accruing or arising, whether directly or indirectly, through or from any business connection in India, to be deemed to accrue or arise in India. The explanation thereto defines 'business connection'. 11. Chapter IV of the Act relates to computation of total income. Section 14, thereunder, classifies all income, for the purposes of charge of income-tax and computation of total income, under five heads i.e. A.- Salaries; C.- Income from house property; D.- Profits and gains of business or profession; E.-Capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egate 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. (3) Notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned in Subsection (2) of Section 44BB, as the deemed profits and gains. Thereafter, on such deemed profits and gains (treating the same as income), a concessional flat rate of 10% is charged to tax. (Sedco Forex International Inc. (2017) 399 ITR 1 (SC). 16. Once Section 44BB applies then two conclusions follow. The first is that 10% of the receipts by the foreign resident is chargeable to tax, and the other is that 90% of the receipts of that foreign resident as well as receipts/gains, other than those mentioned in Section 44BB, is not chargeable to tax. (Hyundai Heavy Industries Co. Ltd. (2007) 7 SCC 422). A concessional rate of 10% is charged as tax, which is much less than the normal tax rate payable on profits and gains of business or profession. However, this tax @10% is on the aggregate of the amounts, specified in sub-section (2), which are "deemed" profits and gains of such business. Profits and gains of the business under Section 44BB of the Act, on which 10% tax is payable, are computed on a fictional basis by adopting the formula laid down in subsection (2). Sub-section (2) mentions those amounts, aggregate whereof is to be treated as deemed profits and gains of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regate of the amounts, specified in sub-section (2), is deemed to be the profits and gains of such business. When a statute enacts that something shall be deemed to have been done, which in fact and in truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to. After ascertaining the purpose, full effect must be given to the statutory fiction and it should be carried to its logical conclusion, and to that end it would be proper and even necessary to assume all those facts on which alone the fiction can operate, (Levy, Re, ex p Walton. Hill v. East and West India Dock Co. 1884 (9) AC 448; Shanmugha Vilas Cashewnut Factory AIR 1953 SC 333; American Home Products Corpn. (1986) 1 SCC 465; Vallabhapuram Ravi AIR 1985 SC 870; S. Appukuttan AIR 1988 SC 587; Parayankandiyal Eravath Kanapravan Kalliani Amma (1996) 4 SCC 76 and Ali M.K. v. State of Kerala (2003) 11 SCC 632), for if you are bidden to treat an imaginary state of affairs as real you must surely, unless prohibited from doing so, also imagine as real the consequence and incidents which, if the putative state of affairs had, in fact, existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or production of, mineral oils in India. 21. In examining this question, it must be borne in mind that a provision in a fiscal statute, such as Section 44BB, should be literally construed, and no other aid of interpretation can be resorted to. If the language is unambiguous, it must be enforced. It is, normally, not the concern of Courts to examine its reasonableness or consider its consequences or whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous. There is no equity about a tax. There is no intendment. There is no presumption as to a tax (Cape Brandy Syndicate v. IRC (1921) KB 64). The subject is not to be taxed by inference or by analogy, but only by the plain words of the statute applicable to the facts and circumstances of his case. (J.K. Steel Ltd. AIR 1970 SC 1173; Inland Revenue Commissioners (1936) 19 Tax Cases 490). If the meaning of the provision is reasonably clear, Courts have no jurisdiction to mitigate harshness. (Canadian Eagle Oil Co. Ltd v. R 1945 (2) ALL ER 499; IRC v. Ross & Coulter (Bladnock Distillery Co. Ltd.) 1948 (1) ALL ER 616 and M/s Gouri Shankar Modern Rice Mill Judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld interpret the provisions in favour of a tax-payer, and against the Revenue. In case of doubt or dispute, the construction should be made in favour of the taxpayer and against the Revenue. (Manish Maheshwar (2007) 3 SCC 794; Sneh Enterprises (2006) 7 SCC 714; J. Srinivasa Rao 2006 (13) SCALE 27; Naga Hills Tea Co. Ltd. (1973) 4 SCC 200; Petron Engineering Construction (P) Ltd. AIR 1989 SC 501; Madho Pd. Jatia (1967) 4 SCC 92; Vegetable Products Ltd. (1973) 1 SCC 442; and Kulu Valley Transport Co. (P) Ltd. (1970) 2 SCC 192). In interpreting a fiscal statute, the Court cannot proceed to make good deficiencies if there be any. It must interpret the Statute as it stands and, in case of doubt, in a manner favourable to the taxpayer, (C.A. Abraham v. ITO, Kottayam AIR 1961 SC 607; J.K. Steel Ltd. AIR 1970 SC 1173), and not the one that imposes a burden on him. (Central India Spg., Wvg. & Mfg. Co. Ltd. AIR 1958 SC 341). 24. Bearing these principles in mind, let us now examine the scope of sub-section (2) of Section 44BB. While clause (a) thereof mentions the amount which is paid or payable, clause (b) deals with the amounts which are received or deemed to be received in India. In respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action or production of, minerals in India." 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 Encyclopedic Dictionary, "On account of" is defined to mean 'in 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. 28. As the expression 'amount paid or payable' in Section 44BB(2)(a), and the expression 'amount received or deemed to be received' in Section 44BB(2)(b), is qualified by the words 'on account of the provision of services and faciliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and, thereunder, notwithstanding anything contained in any other provision of the Act (which would include Section 44BB), a deduction, otherwise allowable under the Act, in respect of (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him. Explanation (2) of Section 43B provides that, for the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. 31. In terms of clause (a) of Section 43B, an assessee can claim deduction, towards tax or duty, only in the previous year in which it is actually paid. The assessee can claim deduction, under Section 43B(a), only on actual payment of tax and duty, in computing its income u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, reimbursement of service tax is not the amount paid to the assessee on account of services and facilities provided in terms of Section 44BB, and such an amount cannot be included in computing the deemed income of the assessee. Since the benefit of deduction of tax can be claimed by the assessee in view of Section 43B(a), only in computing its income under Section 28, and the provisions of Section 44BB would prevail notwithstanding anything contained in, among others, Section 28 also, Section 43B(a) has no application in computing the presumptive income under Section 44BB of the Act. (II) CAN SERVICE TAX BE PASSED ON TO THE SERVICE RECEPIENT : 33. Sri H.M. Bhatia, learned Senior Standing Counsel for Income Tax, would submit that service-tax is a duty levied on the services rendered, and on the service provider; payment of service-tax is linked to the provision of services; if there is no service, there would be no service-tax; a service provider is required to pay service tax, to the Central Government, on the gross value of the services provided by him; the service tax paid by him to the government is a statutory payment; he is allowed to recover the same from his customers; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to the ONGC. 35. The primary source of revenue for the State are direct and indirect taxes. Central excise duty is a tax on the goods produced in India whereas customs duty is a tax on imports. (All India Federation of Tax Practitioners (2007) 7 SCC 527; Pearey Lal Bhawan Association (2011) 23 STR 213 (Delhi). The Central Government derived its authority, from the residuary Entry 97 of the Union List, to levy tax on services. The legal backup for the Finance Act, 1994 was provided by the introduction of Article 268A in the Constitution by the Constitution (Eighty-eighth Amendment) Act, 2003 which stated that tax on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. (All India Federation of Tax Practitioners (2007) 7 SCC 527. 36. Tax falls on the activity which is the subject-matter of service tax. Under the Act, the taxable event is each exercise undertaken by the service-provider. The principle of equivalence equates 'service tax' to Central Excise Duty, one taxes the provision of services, and the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, liable to pay service tax under Chapter V or the Rules made thereunder, shall, within such time and in such manner and in such form as may be prescribed, make an application for registration to the Superintendent of Central Excise. Section 70 relates to furnishing of returns, and sub-section (1) thereof stipulates that every person, liable to pay service tax shall himself assess the tax due on the services provided by him, and shall furnish to the Superintendent of Central Excise a return in such form and in such manner and at such frequency as may be prescribed. 39. Section 73A(1) stipulates that any person who is liable to pay service tax, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service, from the recipient of taxable service as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government. Section 73A(2) stipulates that where any person, who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain provisions of the Central Excise Act, which include Sections 12A and 12B. Section 12-A of the Central Excise Act provides that, notwithstanding anything contained in the Act, or any other law for the time being in force, every person who is liable to pay duty of excise on any goods shall, at the time of clearance of the goods, prominently indicate in all the documents relating to assessment, sales invoice, and other like documents, the amount of such duty which will form part of the price at which such goods are to be sold. Section 12-B provides that every person who has paid the duty of excise on any goods under the Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such duty to the buyer of such goods. Although there is no explicit provision to that effect, enabling the service provider to pass on the service tax component, there is sufficient internal indication in the Act, through Section 83 of the Finance Act read with Section 12A and Section 12B of the Central Excise Act, suggesting that the levy is an indirect tax, which can be collected from the user. (Pearey Lal Bhawan Association (2011) 23 STR 213 (Delhi). 43. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x on "service", and does not form part of the consideration paid for the services rendered, much less services rendered in connection with the prospecting, extraction or production of mineral oils. Reimbursement of service tax by the service recipient to the service provider, representing the amount of tax already paid by the service provider to the Government, would not constitute a part of the amount received for the services rendered by the service provider-assessee to the service recipient-ONGC, much less a part of the amount received for services rendered by the assessee in the prospecting for or the extraction or production of mineral oils. (III) SECTION 44BB(3) : ITS SCOPE : 46. Sri H.M. Bhatia, learned Senior Standing Counsel for Income Tax, would submit that, assuming that there was no provision like Section 44BB in the Statute, the assessee would have shown reimbursement of service-tax as receipt in its financials, and would have claimed payment of service tax as expenses; the same option has been provided by Section 44BB(3) of the Act which specifies that, if the assessee claims an income less than 10% of the gross receipts, it should maintain books of accounts, and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profession" in Chapter IV of the Act. In case the assessee exercises its option under Section 44BB (3), it is entitled to claim deduction under Section 43B (a) for the service tax paid by it to the Government, and add the amount received as reimbursement of service tax in its receipts. It is unnecessary for us to examine whether or not receipt of such an amount would constitute income as, in any event, it cannot be deemed to be the presumptive income of the assessee under Section 44BB, as the said amount has not been paid by the ONGC to the assessee for providing services in connection with the prospecting, extraction or production of mineral oils. (IV) CIRCULARS ISSUED BY THE CBDT: ITS EFFECT: 50. Sri Poras Kaka, learned Senior Counsel appearing on behalf of the assessee, would submit that the Delhi High Court in Mitchell Drilling International (P) Ltd. (2016) 380 ITR 130 (Delhi), has noted that, qua service tax obligations and provisions, the position has been made explicit by the CBDT itself in two of its circulars i.e. Circular No. 4/2008 dated 28th April 2008, and Circular No. 1/2014 dated 13th January 2014; and Circulars issued by CBDT are binding on the tax authorities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship may not be caused to the assessee, and the fiscal laws may be correctly applied. (UCO Bank (1999) 237 ITR 889; Keshavji Ravji and Co. (1990) 2 SCC 231; Azadi Bachao Andolan (2003) 263 ITR 706; and Ellerman Lines Ltd. (1971) 82 ITR 913 (SC). Bearing these aspects in mind let us now examine the effect of Circulars dated 28.04.2008 and 13.01.2014 issued by the CBDT in the context of deduction of tax at source under Sections 194-I and 194-J of the Act respectively. 54. Section 194-I of the Act relates to rent, and thereunder any person, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, deduct income-tax thereon at the specified rate. In its Circular No.04 of 2008 dated 28.04.2008, the CBDT noted that representations had been received seeking clarification as to whether the TDS provisions, under Section 194-I of the Act, would be applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax). The CBDT then referred to the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service tax component. 56. Tax is required to be deducted at source, under Section 194-I of the Act, with respect to income paid by way of rent. Likewise tax is required to be deducted at source under Section 194-J by the service recipient when fees are paid towards professional or technical services rendered by the service provider. It is only because service tax, on such payment, was not "income" has the CBDT, in its Circulars dated 28.04.2008 and 13.01.2014, directed that tax should be deducted at source only on the net amount, paid towards rent or as fees for services rendered by the service provider, i.e. the total amount paid less service tax. The Circulars issues by the CBDT reflect its understanding that service tax paid by the assessee is not "income". While it is true that, unlike "income" computed in terms of Sections 28 to 43D under Chapter IV of the Act, Section 44BB(2) is a special provision and requires ten percent of the gross receipts to be treated as income, the amount so determined is nonetheless the presumptive income of the assessee and should be deemed to be its income in terms of Sections 4, 5 and 9 of the Act. The circulars issued by the CBDT does support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no appeal is filed. Likewise policy decisions are taken not to prefer appeals where the revenue involved is below a certain amount. Similarly, where the effect of the decision is revenue neutral, there may not be any need for preferring an appeal. All these certainly provide the foundation for making a departure. (J.K. Charitable Trust (2009) 308 ITR 161 (SC). Where different High Courts have taken different views, and some of the High Courts have decided in favour of the revenue, the same is a just cause for the revenue to prefer an appeal. (C.K. Gangadharan (2008) 304 ITR 61 (SC); J.K. Charitable Trust (2009) 308 ITR 161 (SC). If the fact situation changes then the revenue can certainly prefer an appeal notwithstanding that, for some years, no appeal was preferred. However if the fact situation is the same, then no appeal can be preferred. (C.K. Gangadharan (2008) 304 ITR 61 (SC). 60. In Kaumudini Narayan Dalai (2001) 249 ITR 219 (SC), the Supreme Court held that, if the Revenue did not accept the correctness of the judgment in Pradip Ramanlal Sheth (1993) 204 ITR 866 (Guj), it should have preferred an appeal thereagainst; and it was not open to the Revenue to accept that judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench judgment of the Delhi High Court in Mitchell Drilling International Pvt. Ltd. (2016) 380 ITR 130 (Delhi). 62. Except to state that the said judgment needs re-consideration, no justifiable cause has been shown as to why this Court should take a view different from that of the Delhi High Court, in Mitchell Drilling International Pvt. Ltd. (2016) 380 ITR 130 (Delhi), more so when the Division Bench of the Delhi High Court has taken a view similar to that of a Division Bench of this Court in M/s Schlumberger Asia Services Ltd. (2009) 317 ITR 156. As the revenue has not been able to show just cause for this Court to take a different view, we see no reason to differ with the Division Bench judgment of the Delhi High Court that reimbursement of service tax is not an amount paid to the assessee on account of providing services and facilities in connection with the prospecting for, or extraction or production of, mineral oils in India. (VI) OTHER CONTENTIONS: 63. As we have, for reasons aforementioned, held in favour of the assessee and against the Revenue, it is unnecessary for us to examine the submission of Sri Poras Kaka, learned Senior Counsel appearing on behalf of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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