2005 (6) TMI 24 - HC - Income Tax

Whether Tribunal was legally correct in holding that there is no scope of grossing up and that the income determined on notional basis in accordance with section 44BB was not liable to be grossed up under section 195A? - whether the concept of multiple stage grossing up of income is applicable to the deemed profits derived by the NRC under section 44BB. Whether that concept can be applied by the Department to compute income falling under section 44BB? Department s contentino that in the case of tax protected contracts section 195A was attracted and therefore the Department was entitled to compute the deemed profits derived by the NRC by applying the method of multiple stage grossing up of income doesn t have any merit Further the fact that TDS is deductible under section 195A from the sum payable does not mean that the contractor is assessable for that receipt. - We answer this question in the affirmative i.e. in favour of the assessee and against the Department.

Summary

Issues:
1. Interpretation of section 44BB of the Income-tax Act, 1961.
2. Applicability of section 195A in computing deemed profits.
3. Concept of multiple stage grossing up of income.
4. Tax deduction at source under section 195A.
5. Comparison of single stage and multiple stage grossing up of income.

Analysis:
1. The main issue in this case revolves around the interpretation of section 44BB of the Income-tax Act, 1961, specifically concerning the computation of deemed profits derived by a non-resident company (NRC) engaged in oil exploration. The court emphasized that section 44BB is a standalone provision dealing with the computation of deemed profits at a fixed percentage of aggregate receipts, and it does not allow for multiple stage grossing up of income as contended by the Department.

2. The court delved into the applicability of section 195A in the context of computing deemed profits under section 44BB. It clarified that section 195A primarily deals with tax deduction at source and recovery of tax, and it does not serve as a basis for applying the concept of multiple stage grossing up of income to profits derived by the NRC from oil exploration under section 44BB.

3. The concept of multiple stage grossing up of income was thoroughly examined by the court. It rejected the Department's argument that in cases of tax-protected contracts, section 195A should be invoked to compute deemed profits through multiple stage grossing up. The court highlighted that section 44BB is a comprehensive provision within Chapter IV of the Income-tax Act, distinct from the provisions related to tax collection and recovery under Chapter XVII.

4. Regarding tax deduction at source under section 195A, the court clarified that the mere fact that TDS is deductible from payments does not automatically render the contractor liable to tax on those receipts. The court emphasized that the mechanism for tax recovery outlined in section 195A does not equate to the income being chargeable to tax, especially in cases where contractors may have carried forward losses or suffer losses from other contracts.

5. To illustrate the difference between single stage and multiple stage grossing up of income, the court provided a detailed example involving the payment to a non-resident technician and the corresponding tax implications borne by ONGC. By comparing the income and tax calculations under both approaches, the court reinforced its decision in favor of the assessee, dismissing the appeal and highlighting that there is no merit in the Department's argument for multiple stage grossing up of income.

In conclusion, the judgment clarifies the legal interpretation of sections 44BB and 195A of the Income-tax Act, emphasizing the limitations on applying multiple stage grossing up of income and the distinction between provisions related to computation of business income and tax collection.