2003 (9) TMI 65 - HC - Income Tax

Section 44BB versus Section 195A- non-resident - profits and gains in connection with the business of oil exploration section 44BB provides both for chargeability of tax and computation. Therefore, it is a complete code by itself. Section 44BB imposes tax on notional income and that notional income has to be computed in accordance with section 44BB. Therefore, there is no need to refer to section 28(iv) -Section 195A comes under Chapter XVII which deals with collection and recovery of tax whereas section 44BB comes under Chapter IV which deals with computation of business income. Therefore, section 195A will not assist the Department in applying the concept of multiple stage grossing up of income to the profits derived by the NRC from oil exploration falling under section 44BB - Tribunal is right in holding that multiple grossing up of income was permissible

Issues Involved:
1. Applicability of multiple stage grossing up of income under section 44BB read with section 195A of the Income-tax Act.
2. Relationship and potential conflict between section 44BB and section 28(iv) of the Income-tax Act.
3. Interpretation and application of tax provisions to "net of tax" contracts.

Issue-wise Detailed Analysis:

1. Applicability of Multiple Stage Grossing Up of Income:
The primary question was whether the Tribunal was correct in holding that multiple stage grossing up of income was not applicable to notional income under section 44BB read with section 195A of the Income-tax Act. The Department argued that section 44BB does not override section 28(iv) and that the liability undertaken by ONGC to pay tax on behalf of the non-resident company (NRC) constituted a benefit that should be added to the income of the assessee. The Department further contended that section 195A contemplates multiple stage grossing up of income in tax-protected contracts.

However, the Tribunal and the High Court found that section 44BB is a special provision for computing profits and gains in connection with oil exploration and begins with a non-obstante clause, making it a complete code by itself. The Court held that section 44BB imposes tax on notional income and that notional income has to be computed in accordance with section 44BB, thereby negating the need to refer to section 28(iv). The Court also clarified that section 195A, which deals with collection and recovery of tax, does not assist in applying the concept of multiple stage grossing up of income to the profits derived under section 44BB.

2. Relationship and Potential Conflict Between Section 44BB and Section 28(iv):
The Department argued that section 44BB does not supersede section 28(iv) and that the benefit derived from ONGC paying the tax on behalf of the NRC should be added to the income under section 28(iv). The Court, however, emphasized that section 44BB is a special provision that deals with notional income and provides a complete mechanism for computation and chargeability of tax. The Court concluded that section 44BB overrides section 28(iv) in the context of computing income from oil exploration activities.

3. Interpretation and Application of Tax Provisions to "Net of Tax" Contracts:
The Court examined the nature of "net of tax" contracts, where ONGC agreed to bear the tax liability of the NRC. The Department's position was that in such contracts, the benefit to the NRC should be computed using multiple stage grossing up of income. The Court, however, found that whether the contract is tax-protected or not, the benefit remains constant. The Court illustrated this with an example showing that under single stage grossing, the benefit was Rs. 200, while under multiple stage grossing, the Department calculated it as Rs. 250. The Court ruled that section 44BB, being a complete code by itself, does not support the Department's method of multiple stage grossing up of income.

Conclusion:
For the reasons stated, the High Court answered the question in the affirmative, in favor of the assessee and against the Department. The appeal was dismissed with no order as to costs. The Court concluded that section 44BB provides a comprehensive mechanism for computing notional income and overrides section 28(iv). Section 195A, which deals with tax recovery, does not apply to the computation of deemed profits under section 44BB. The Court also noted that the Department had accepted the assessee's position for all assessment years after 1994-95, reinforcing the consistency of the Tribunal's interpretation.

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